On 16 March 2011, the Department for Business, Innovation and Skills (BIS) published for consultation details of the Government’s proposal to reform the competition regime in the UK.
Whilst the headline point remains the proposal to merge the competition functions of the Office of Fair Trading (OFT) and the Competition Commission (CC) into a single new authority (to be known as the Competition and Markets Authority or CMA), the consultation also covers potentially wide ranging and significant reforms to:
- The merger control regime;
- The anti-trust and market investigation regimes; and
- The criminal cartel regime.
Rationale for change
The existing UK competition regime is very highly regarded, both domestically and internationally, with BIS pointing to a number of independent assessments which consistently rank both the OFT and the CC in the top five agencies in the world. Clarity of analysis, the decision-making process and transparency and political independence are the crown jewels of the existing UK system.
However, there have been – and remain – some concerns over the time taken, particularly in the prosecution of anti-trust cases and market investigations. This has not only potentially reduced enforcement effectiveness, but has also led to increased burden on business, both in terms of direct costs and the indirect (but often significant) impact of a regime which is not operating to maximum efficiency.
To address this, the Government has committed to look at the structure of the existing regime, with a view in particular to improving the robustness of decisionmaking (including the time taken to reach decisions) and to streamline and strengthen the authorities. Clearly there are also cost-savings to be had in any combination of the staff functions of the two authorities through the removal of unnecessary duplication (although the Government and the authorities themselves deny that this is the primary driver for change).
The key challenge will be maintaining sufficient separation within the CMA to ensure a robust and independent Phase II investigation process, in particular without detracting from the quality and independence of the existing decision-making function at the CC.
Proposals to strengthen the merger regime are potentially the most radical, given that the Government is seeking views on whether to move away from the current voluntary notification regime and towards either a full mandatory, or hybrid regime.
The consultation hones in on the apparently central weakness of the existing regime, namely that it allows certain mergers to slip beneath the radar and to complete without any (or any effective) regulatory review – a report prepared by Deloitte for the OFT arrives at the remarkable statistic that for each merger either referred to the CC or in respect of which the OFT accepted undertakings in lieu of a reference, there will be another, unnotified, merger which raises at least similar competition concerns (albeit that the consultation recognises that these other mergers were largely smaller in size and given the lack of third party complaints, unlikely to have resulted in any, or any significant, irremediable competition harm).
Key proposals under consultation can be summarised as follows:
Whether to move towards a mandatory or form of hybrid regime
If not, how to strengthen interim measures to be applied in respect of completed mergers
If so, what appropriate jurisdictional thresholds should apply
Whether to introduce statutory timescales for both Phase I and Phase II reviews
The proposals on the nature of the regime (mandatory or voluntary) are particularly worthy of close scrutiny. It is possible that for straightforward cases involving larger companies, merger fees payable to the OFT could fall substantially from the present £90k to as little as £7.5.k under a full mandatory regime.
However, absent the introduction of a sufficiently simple short-form procedure for smaller mergers, this will inevitably result in increased costs and significant timing implications for many mergers which raise no competition issues and which are therefore not routinely notified to the OFT under the existing regime. Such a proposal cuts right across the Government’s commitment to reduce red tape as in all likelihood it will result in a significant and unwelcome additional administrative burden on business, which is likely to fall particularly heavily on small and medium enterprises.
Anti-trust and markets investigations
The Government’s proposals on changes to the anti-trust and markets regimes are centred largely around changes to increase the efficiency of investigations and the time taken to complete them.
On the anti-trust side, the most radical proposal would see the CMA adopting a US-style prosecutorial approach, bringing cases before the Competition Appeal Tribunal, who would ultimately decide both on infringement and penalties.
Proposals to reform the market investigation regime are more evolutionary, focusing on streamlining the process by reducing the timescales and increasing the potential scope of investigations by, for example, enabling the CMA to look into practices that cut across more than one market and giving a new remit to the CMA to look into public interest considerations alongside competition issues. This latter point would bring the markets regime into line with how the current merger regime operates.
The proposals to alter the nature of the existing cartel offence contained at section 188 of the Enterprise Act 2002 are undoubtedly aimed at making it easier for the CMA to bring and successfully prosecute criminal cartel cases – the Government is concerned to strengthen the deterrent effect of a regime which has seen only two prosecutions in eight years. The Government’s preferred option would result in the removal of the existing requirement to find ‘dishonesty’ but essentially offering companies an exemption (from the criminal element) where agreements are made ‘openly’. Given that most hard-core cartel offences are committed secretly, it should not reduce the ability of the CMA to prosecute where there is evidence of the most egregious behaviour, whilst removing the requirement to show dishonesty will bring the UK more into line with other jurisdictions such as the US.
The proposals announced for consultation potentially represent a significant sea-change in the UK competition regime (with effects likely to be more far-reaching than those arising from the introduction of the Enterprise Act in 2002). Given the excellent reputation enjoyed by both the OFT and the CC internationally at present, the challenge will be ensuring that the changes are properly managed as evolution and not revolution. Maintaining the independence of the second phase decision makers (a role currently conducted by CC Panel Members) will be critical in avoiding the pitfalls all too often apparent in Brussels. And whilst any proposals to streamline and improve the efficiency of the procedural aspects of cases are to be welcomed, very careful consideration must be given before tearing up the flexibility afforded under the current merger regime. We note in particular that a move towards a fully mandatory pre-merger notification regime is at odds with the Government’s stated commitment to remove red tape. In all likelihood, such a regime would add a significant layer of additional complexity on merger activity, with the burden falling particularly heavily on small businesses.