On 16 March 2011, the Department for Business, Innovation and Skills published the UK government's much-anticipated consultation paper on proposed reform of the UK competition regime.

The stated objective for the reform is "to maximise the ability of the competition authorities to secure vibrant, competitive markets that work in the interests of consumers and to promote productivity, innovation and economic growth". To achieve this broad objective, Government is making a number of proposals, which taken together are designed to:

  • improve the robustness of decisions and strengthen the regime;
  • support the competition authorities in taking forward high impact cases; and  
  • improve the speed and predictability for business of decisions.  

Behind these stated aims appears to be a feeling within Government that there is currently not enough enforcement of competition law and that such enforcement as there is takes too long. Although this is not necessarily a fair summary of the current situation, it is the perception that appears to inform much of the document. The 172 page consultation document includes a large number of detailed proposals, many of which are presented as a range of options. Some of these options are radical, with significant knock-on effects, whereas others are designed to address minor procedural and technical issues. Taken together, the proposed changes (which are not due to take effect until mid-2013) represent a fundamental revision of the UK competition regime.

Background

In October 2010, as part of its "bonfire of the quangos",1 the UK government announced that it intended to merge the two domestic competition authorities, namely the Office of Fair Trading (OFT) (which is the primary civil and criminal competition law enforcement body and undertakes first phase market and merger investigations) and the Competition Commission (CC) (which undertakes second phase market and merger investigations).

The government's official line is that financial savings are not the key driver for the reforms. However the reality is that many of the proposed changes are motivated by the need to cut costs and transfer the financial burden of the competition system to businesses.

The consultation paper, entitled "A Competition Regime For Growth", adds detail to this central proposal, as well as exploring the consequences of the institutional merger for the wider regime and including a large number of discrete changes to other aspects of the regime. The full consultation is available here. Given the number of proposals contained in the document, this note deals only with those with the widest potential impact.

Creation of a single competition authority

As noted above, merger and market reviews are currently subject to a two-phase, two-agency process, under which the initial review is undertaken by the OFT, which refers cases that merit a more detailed investigation, and potential remedial action, to the CC. This basic division of responsibilities dates back to the origins of the UK competition regime in the 1970s.

By merging the OFT and the CC into a single Competition and Markets Authority (CMA – a working title), Government hopes to streamline the current merger review and market investigation processes by reducing duplication and hence increasing the speed of reviews. The OFT's current powers in relation to consumer protection and enforcement will not be transferred to the CMA, but are likely to be divided between the Citizens Advice service, Trading Standards and the proposed new Financial Conduct Authority. This will be the subject of a separate consultation.

Although the merger of two authorities into one is, at first sight, a purely structural matter, much of the current competition regime is based on, and has grown up around, this structure. In particular, OFT and CC investigation and decision-making procedures are currently quite different, with the OFT adopting an administrative system, with decisions being taken by individual officials through a hierarchical structure, and the CC adopting a panel-based system, under which decisions are taken by a group of expert lay members assigned to an investigation, based on recommendations of permanent staff.

The potential impact of the proposed merger is clearest in the areas where responsibilities are currently split between the OFT and CC. Although Government intends to retain a two phase process for market and merger investigations, to maintain the benefits of the current system in providing a 'fresh pair of eyes' for second phase reviews, it is considering a range of options for shortening timescales, including the introduction of mandatory timetables for first phase reviews and reducing the overall timetable for second phase market investigations from 24 months to 18 months.

Government is also taking the opportunity offered by this consultation to put forward potentially radical changes in other areas where the CC currently has no role. In particular, it is looking at ways of making it easier for the new authority to bring cases against anticompetitive agreements (including cartels) and abuses of dominance. The concern is that the level of scrutiny to which such enforcement activity is currently subject by the Competition Appeal Tribunal (CAT) may deter the OFT and sectoral regulators from taking action against anticompetitive activity and leads to slow progress on those investigations that are brought.

The OFT has already implemented a number of procedural improvements to address concerns over the speed of cases, such as introducing more active case management and enforcing deadlines for the provision of information by parties more robustly. One option noted by the document is that the CMA should simply build on these.

Other options under consideration would reduce the role of the CAT, which currently has powers to undertake a full merits appeal of OFT decisions, to lighter touch oversight on judicial review grounds only. Given the need to ensure that companies' rights of defence are respected, government is considering creating an Internal Tribunal within the CMA, before which the CMA Executive would need to bring cases. Subsequent appeals to the CAT would be by way of judicial review. This option appears unlikely to streamline the process, as many cases are still likely to be subject to a CAT review. An alternative option, more radical, option would require the CMA to prosecute all antitrust cases before the CAT, which would itself decide on whether there has been an infringement and impose any penalty. This would require a complete overhaul in competition practice and procedures and would mark a clear departure from the current administrative model.

The merger control regime

The current UK merger regime is unusual, in that there is no requirement to notify mergers that qualify for review (essentially, all mergers where the target has UK revenues of at least £70m or that create or increase a UK or regional 'share of supply' of 25% or more). The result of the current regime is that, even though a relatively small number of transactions are reviewed, a high proportion of those that are reviewed and that raise concerns have been completed by the time of the review. Even though Government acknowledges that the UK merger regime is highly regarded internationally, it considers that the current system has drawbacks, including that anti-competitive mergers may escape review and that it can be difficult to apply appropriate remedies to completed mergers.

Proposals to reform focus on the voluntary nature of the notification regime. The least radical involves retention of the voluntary element but with greater powers to suspend integration or to require the reversal of any pre-emptive action that has taken place prior to notification.

More controversially, government is considering the introduction of a mandatory notification system, under which all mergers meeting a specified jurisdictional threshold would have to be notified and implementation would be suspended until approval is given. Although such a regime would reflect the norm in most other countries with merger control regimes, the jurisdictional thresholds proposed in the consultation paper are far lower than any other developed regime, namely target UK turnover of £5m and acquirer worldwide turnover of £10m. The introduction of a regime with such low thresholds would vastly increase the number of transactions notified and reviewed in the UK and hence substantially increase the burden on businesses. The government is also considering a 'hybrid' system, under which businesses will be required to notify mergers with a UK target turnover exceeding £70m and the CMA would retain the discretion to investigate mergers which would result in the creation or enhancement of at least a 25% share of supply of goods or services within the UK.

Government is also considering ways in which the review of mergers could be funded entirely from filing fees paid by the parties. Depending on the option adopted, this could see fees of over £200,000 being imposed on parties to the largest transactions.

The cartel offence

The criminal cartel offence is committed if an individual dishonestly agrees with another to engage in certain "hard core" cartel activity affecting the UK, such as price fixing. Since the introduction of the offence in 2002, only two cases have reached trial and only one led to convictions (and only then based on guilty pleas made pursuant to a US plea bargain). The consultation paper suggests that the requirement for prosecutors to prove dishonesty is one reason for this small number of cases, which Government suggests has resulted in a weak deterrent effect.

Government has put forward four options to address this. All remove the dishonesty requirement, with the stated preference being to remove the dishonesty element but redefine the offence so it does not apply to anticompetitive agreements that are made openly, for example by informing customers. Widening the offence in this way would increase the scope for overlap between the criminal and criminal regimes and would remove an important safeguard against over-zealous prosecution of individuals.

Government has invited views on the proposals by 13 June 2011 and has committed to responding in the Autumn. We will be responding to the consultation and would encourage those who are interested in making submissions on any aspects of the proposed reforms to contact us.