The Enterprise and Regulatory Reform Bill (the Bill) was put before Parliament following the announcement in September 2010 by the newly formed coalition government that the status of the Office of Fair Trading (the OFT) and the Competition Commission (the CC) was under review. That review formed part of the so-called bonfire of the ‘quangos’.
The Department for Business Innovation and Skills (BIS) provided some answers to how the pieces of the UK competition law enforcement regime would be ‘reassembled’ in its response to a consultation on 15 March 2012 (the BIS Response). This response revealed modest imposed adjustments to the competition regime, including an intention to keep separate certain aspects of the decision making processes which are currently split between the OFT and the CC, and to keep the voluntary nature of notifications under the merger control regime.
BIS has expressed the intention to speed up the timetables across the various procedures that the new Competition and Markets Authority (the CMA) will deploy. These include changing the time limits to market investigation references; imposing a more rigid timetable on merger control notifications (although this may well increase the length of time the CMA takes to consider Phase I notifications); changing aspects of criminal cartel enforcement to make it easier to make successful prosecutions; and changes to the concurrency of sectoral regulation, which is intended to reduce the procedural reliance by sectoral regulators on regulatory powers rather than competition law enforcement.
The main changes to the competition regime are: the structural merger of OFT and the Competition Commission to form the Competition Market Authority; new powers in market investigations; a single merger notification procedure with higher fees; procedural changes in antitrust cases; increased scope of the criminal cartel offence; and concurrent powers for sectorial regulators and the CMA.
The Competition and Markets Authority
The Bill, as expected, revealed that the competition functions of the OFT and the CC would be merged to create the CMA.1
The CMA will be constituted as a Non-Ministerial Department in order to be, and be seen as, a completely independent body. It will also have its primary duty in statutory form - Clause 18 of the Bill states that the general duty of the CMA will be to “seek to promote competition, both within and outside the UK for the benefit of consumers”.
The chair of the CMA and the CMA Board will be appointed by the Secretary of State and will, as announced on 17 July 2012, be Lord Currie. The CMA Board will effectively replace the current functions of the OFT Board and the Council of the CC. The CMA Board will be responsible for the overall strategy and performance of the CMA and for particular decisions, including phase 1 mergers and markets decisions and antitrust cases. The new Board will also be responsible for making rules of procedure and may issue guidance.
A CMA panel of independent experts will also be responsible for phase 2 mergers and market investigation decisions. This panel will also have a role in determining regulatory appeal/references. Thus the panel will replace many of the current roles of the CC. As is currently the case with the CC, individual members of the panel will be selected to form groups for specialist functions. The chair of the CMA will be responsible for the selection of the groups which must consist of at least three members of the panel. The Bill specifically provides that the CMA groups must act independently of the CMA Board, although clearly a degree of independence that currently exists with the separation of the OFT and CC will be lost given the role that the Chair of the CMA will now play.
The proposed changes to the market investigation regime have the declared aim of ensuring that the CMA delivers faster results than the OFT/CC procedure without compromising the quality of decision making or causing undue uncertainty in markets. The two complementary procedures of a phase 1 market study and a phase 2 market investigation will continue. Under the terms of the Bill:
- The CMA will be able to investigate practices across markets (rather than, as is the case at present, just within markets). The aim, as with the current regime, is to ensure that markets as a whole are working well
- The Secretary of State will have the power to request the CMA to investigate wider public interest issues alongside competition issues at phase 2 market investigations and to propose remedies which address any adverse effect on competition or public interest issues
- The two phase review will be retained, but the CMA will be required to adhere to deadlines on whether to open a detailed phase 2 investigation and to complete all market studies (including publication of the study). Thus the CMA would have 6 months to consult on whether to open a phase 2 market investigation and 12 months to complete a market study if an investigation is not thought appropriate
- The completion of phase 2 market investigations will be reduced from 24 to 18 months, extendable by 6 months in special circumstances, with six months to implement phase 2 remedies (extendable by 4 months)
- The duty of the CMA to consult on decisions not to open a phase 2 market investigation will be removed, unless any person expressly asks for a reference to be made
- Schedule 8 of the Enterprise Act 2002 will be amended enabling the CMA to require parties to publish certain non-price information and to appoint and remunerate an independent third party to monitor and/or arbitrate on the implementation of remedies
The merger regime will retain the flexibility of parties choosing whether to make a pre-merger notification. Noteworthy changes proposed by the Bill include:
- Enhanced interim powers for the CMA, including a new power to reverse pre-emptive actions in completed and anticipated mergers. This is potentially a significant change to the UK merger regime and follows progressive steps by both the OFT and the CC to tighten up parties engaging in tactical measures to pre-empt outcomes of merger reviews
- Extended investigation powers so that the CMA will have a single set of powers that can be used across the whole of the merger investigation process
- Financial penalties of up to 5% of aggregate group worldwide turnover for taking integration measures in breach of CMA orders (in addition to the current power to obtain a court order to ensure compliance with interim measures)
New statutory time limits with a single notification process:
- The CMA will now have 40 working days for a phase 1 investigation, with a power of extension when it considers that a relevant person has failed (with or without reasonable excuse) to comply with any requirement of a notice,2 or if the European Commission is considering a request made by the UK3 (the CMA may extend the initial period by no more than 20 working days where an intervention notice is in force)
- A 12 week time limit following the publication of the final report to implement remedies for phase 2 cases, extendable by 6 weeks for special reasons (note that there is no change to the statutory time limit for phase 2 investigations)
- a five working day time limit for the parties to offer undertakings in lieu, with a further 10 working days for the CMA to consider whether to pursue the undertakings and a further 50 working days to negotiate, consult and accept the undertakings. (The CMA may extend the 50 working day period by no more than 40 working days if it considers that there are special reasons for doing so); and
- the amendments to schedule 8 of the Enterprise Act 2002, as at 2.1(f) above.
Merger fees are also being increased to approximately 60% of cost recovery from 6 October 2012. For larger transactions where the entity being acquired is more than £120 million, the fee will increase from £90,000 to £160,000.
This increase rivals the most expensive merger fee, which is currently in the US at $280,000 (approx. £175,000), but only for those transactions valued at $682.1 million or more (approx. £420 million). The new merger fees are also in stark contrast to other Member States such as France, where merger fees are not applied.
The creation of a single notification process, rather than the choice of the administrative procedure and statutory notice, has the potential to remove an important element of flexibility within the current UK merger regime that allows the OFT a significant degree of discretion in what information to require for an administrative notification. This loss of flexibility risks increasing the costs of preparing a notification at the same time as increased fees.
Changes to the antitrust regime have the declared intention of achieving greater efficiency without reducing parties’ rights. Steps have already been taken to bring about some procedural changes ahead of the passage of the Bill. Thus in response to BIS led initiatives following its consultation in preparation for the Bill, the OFT is making the following changes:
- Putting in place robust challenge procedures to ensure that a case-specific timetable in antitrust cases is appropriate and sufficiently challenging and that an adequate explanation is given when these timescales are not met
- Putting in place an expanded role for the Procedural Adjudicator and the clarification of its investigative procedures, with the central aim of bringing about processes that give confidence to business, in order to reduce the likelihood of judicial challenge
- Investigating further means of ensuring the separation of decision-making from investigation so that the risk of confirmation bias is reduced (the Bill will allow for the use of panellists in antitrust cases, see further below)
- Continuing work on improving its project management capabilities and making proposals for embedding an excellent project management culture and skills
Other notable changes to the antitrust regime in the Bill include:
- The introduction of civil sanctions for competition investigations and the removal of criminal sanctions for a failure to comply with an investigatory measure (except in the case of obstructing an officer in the exercise of powers to enter premises)
- The introduction of legislation allowing warrant applications to be made to the Competition Appeal Tribunal (CAT)
- Allowing the CMA to obtain evidence from individuals in antitrust investigations through oral hearings rather than in writing
- Allowing the CMA to publish a notice regarding the existence of an antitrust investigation, the parties involved and the subject matter of the investigation, in line with the practice of the European Commission
- A requirement that, when fixing a penalty, the CMA must have regard to the seriousness of the infringement concerned and the desirability of deterring both the undertaking concerned and others from breaching the requirements of Chapter 1 (and Chapter 2) of the Competition Act 1998 (or Articles 101 or 102 of the Treaty on the Functioning of the European Union)
- Changing the law on interim measures from a “serious, irreparable damage” threshold to a “significant damage” threshold, in order to encourage greater use of interim measures
The government hopes that a lower threshold for interim measures will increase their use by the OFT and CMA. The only interim measures direction issued to date was to the London Metals Exchange (the LME) in 2006, but this was subsequently withdrawn. In the LME’s appeal to the CAT, the LME had submitted that the OFT had not established the requisite elements for the use of interim measures, including the “serious and irreparable damage” threshold.
The full merits system is being retained and the CMA will continue to be subject to proper scrutiny. The Secretary of State will also report on the antitrust regime within five years from the coming into force of the provisions transferring the functions from the OFT to the CMA.
The Criminal Cartel Offence
The main change to the criminal cartel offence, currently provided for in section 188 of the Enterprise Act 2002, is the removal of the “dishonesty” element of the offence. The offence will apply to all cartel arrangements, except where the parties have agreed to publish details of those arrangements in a specified medium before they are implemented.
The reason for the change is to make the offence easier to enforce, as there have only been two cases prosecuted since 2003. The mental elements of the offence (intention to enter into an agreement and the intention as to the operation of the arrangements in question) will still be required, so the Government believes this addresses concerns that the offence will lack a strong element of moral culpability. It is also intended that the advance publication of an agreement should be an important element as to whether the cartel offence is triggered. In part, these proposed changes are said to bring the cartel offence closer to the standard of individual culpability in the Bribery Act 2010.
The removal of the “dishonesty” element in the cartel has already drawn considerable reaction from bodies such as the Confederation of British Industry and comment within Parliament. It remains to be seen the extent to which the current proposal in the Bill remains intact through its passage in the House of Lords.
Concurrency and Sector Regulators
The concurrency powers of the sector regulators have been retained. However, in order to address the concern over the lack of cases brought by the sector regulators under these powers, the following changes are proposed:
- Sector regulators with concurrent powers will be required to consider whether it would be more appropriate to proceed under the Competition Act 1998, rather than exercising their regulatory powers
- The Secretary of State will have the power to require that arrangements be made for the sharing of information between the CMA and the relevant regulatory sector in concurrent cases and will also have the power to subscribe circumstances in which the CMA may exercise its functions in respect of a case rather than the regulator
- The CMA will be obliged to report annually on the use of concurrent competition powers.