On 25 April, the Enterprise and Regulatory Reform Act 2013 (the Act) received Royal Assent, marking the culmination of a two year process to reform important aspects of UK competition law. When the Act was published on 2 May, lawyers finally had the opportunity to assess the full extent of the changes that will be made to the competition law regime, after almost a year of parliamentary debate. (While the 284 page Act contains a range of other measures loosely related to the Government’s over-arching growth agenda, such as targeted reforms to employment law and changes to copyright laws, this update will focus on its competition law aspects.)
The key change arising from the Act will be the merger of the two UK competition authorities, the Office of Fair Trading (OFT) and Competition Commission (CC), to form a new Competition and Markets Authority (CMA). In addition, the Act introduces important changes to investigative procedures in antitrust cases (concerning suspected anticompetitive agreements and abuse of dominance), merger control procedure, the scope of the criminal cartel offence and the conduct of market investigations. The CMA’s explicit focus on competition will lead to the transfer of most of the OFT’s existing consumer protection responsibilities to other bodies.
Creation of the CMA
The decision to merge the OFT and CC marks a departure from the UK’s long-established institutional system, which is based on having one competition authority for first phase investigations of mergers and markets (as well as antitrust investigations) and another, entirely separate authority, for in-depth investigations, as well as certain regulatory appeals. The two authorities have evolved differently, to reflect their different roles, with the OFT developing an administrative structure more similar to that of a Ministerial government department or the European Commission’s Competition Directorate General, in which key decisions are ultimately taken by the Chief Executive or senior officials, whereas the CC operates largely through ad hoc case-specific teams of officials and panels of part-time independent members, with decisions being taken by the members themselves.
The main benefit of the current system is that in-depth reviews are conducted by an entirely new team of investigators and decision makers, reducing the risk of ‘confirmation bias’ (the tendency for case teams to focus on strengthening their own case, rather than questioning its premise, as an investigation progresses). The downside is that the move to a new agency can extend the process, as a new case team has to get up to speed with the facts, and can make it harder for the authorities to allocate scarce resources between cases efficiently. There is also some inevitable duplication of resources, since each authority requires its own senior management and teams of experts and each has separate premises.
While achieving cost-savings through the removal of such duplication appears to have been the main driver of the original decision by Government to merge the authorities, as part of its now largely forgotten ‘bonfire of the quangos’, this objective has been rather overwhelmed by the complexity of the process of merging the authorities and the knock-on effect of the merger on the surrounding legislative framework. In addition, Government took the opportunity offered by primary legislation to tweak a number of aspects of the competition law regime, apparently in a bid to improve the efficiency of enforcement in a number of areas and hence to facilitate more active enforcement.
The Act’s primary provisions dealing with the merger are limited to providing for the creation of the new authority, which is required to “seek to promote competition, both within and outside the United Kingdom, for the benefit of consumers”, and abolishing the OFT and CC. Further details are provided in Schedule 3 of the Act, which provides for the creation of a board, which will be responsible for running the organising and taking key decisions (or delegating them to staff), and a ‘panel’. The latter will serve as a pool of suitable individuals for allocation to groups, which will serve as the decision-makers in in-depth merger and market investigations. Interestingly, the Act specifically provides that groups must reach decisions independently of the CMA Board, even though the same individuals may sit on both.
It is clear from this structure that the CMA will combine aspects of the current OFT and CC structures, with the board largely reflecting the OFT’s current function and the panel mirroring the CC’s current structure. In fact, the consequential amendments contained in the Act carry over the existing two-agency terminology, whereby the OFT ‘refers’ merger and markets to the CC for in-depth investigation, will continue within the new CMA, with the CMA being under a duty to “make a reference to its chair for the constitution of a group” if it considers that an in-depth investigation is justified. How this set-up will work in practice, including how the CMA will be structured, how it will select cases and how it will reach decisions, has been largely left to the new CMA management to decide. It will be particularly interesting to see whether the CMA decides to use its panel members for decision-making in areas beyond those currently handled by CC groups, including in antitrust cases (where the CC currently has no role).
The CMA is due to come into existence (albeit in skeleton form) on 1 October this year, in advance of it formally taking over from the OFT and CC on 1 April 2014. At the time of writing, only the Chair designate and Chief Executive have been named (Lord David Currie and Alex Chisholm, respectively), while five non-executive director posts were publicly advertised in March. Although it is expected that the CMA will be staffed mainly by transferring employees over from the OFT and CMA, the new authority will need to rebuild its senior team, following recent departures of the OFT’s long-standing Chief Economist Amelia Fletcher and head of cartel enforcement Ali Nikpay (to academia and private practice, respectively). It is likely that the period between October and next April will see senior officials at the OFT and CC becoming increasingly involved in their new roles at the CMA, while at the same time attempting to carry out their remaining functions at the legacy authorities, with live case work switching over only on 1 April next year. Although both authorities have promised to hand over an active case load to the CMA, there is bound to be some impact on current cases, particularly in more discretionary areas such as antitrust enforcement.
Although, when announcing its decision to reform UK competition law, the Government expressed dissatisfaction with the relatively small number of antitrust cases being brought by the OFT, and the duration of those investigations that are launched, the extent of the Act’s reforms in this area is relatively modest. The key changes comprise the introduction of a new CMA power to “ask questions” of individuals who manage or work for an undertaking under investigation for infringement of competition law, or did so in the past, as well as a new power to fine individuals or companies that fail to respond to an information request.
Taken together, these changes could prove to be powerful tools to assist the CMA with gathering information expeditiously. In particular, the ability to require key individuals to attend its premises to be formally interviewed could, used properly, enable the CMA to avoid some of the problems that have arisen from the OFT’s current, more paper-based evidence collection process, in which key facts that fundamentally undermine the OFT’s case have come to light only when witnesses have been cross-examined during the appeal of an infringement decision.
Although the Government’s threat of imposing statutory time limits on antitrust investigations has not been carried out, the Act does give the Secretary of State the option of introducing such time limits by order at some time in the future, if investigations are still taking too long. Ominously for the CMA, the Act obliges the Secretary of State to undertake a review of the operation of the UK antitrust regime, and report to Parliament, within five years.
Following Government criticism of the relative lack of competition law enforcement by sectoral regulators, the Act provides for the CMA to have the ability to take over an antitrust investigation from a sectoral regulator, without yet specifying the circumstances in which this may arise. The Act also gives the Secretary of State the power to remove a sectoral regulator’s competition law powers altogether, and transfer responsibility for the enforcement of competition law in its sector to the CMA, should he consider that this is “appropriate”.
Having rejected the case for radical change to the current UK merger control regime, beyond the abolition of the dual agency review process, the Government has limited itself to a small number of incremental improvements in this area. As a result, the UK will continue to have a voluntary merger notification regime, under which mergers need not be notified before completion but may be investigated if the target generates annual revenues in the UK of at least £70 million or the parties together supply or consume at least 25% of a specified product or service in the UK or a substantial part of it. The CMA will, however, gain wider information gathering powers, as well as expanded powers to prevent the completion of a merger, or to undo any integration that has taken place. In addition, the Act introduces a new statutory time limit, under which the CMA must decide whether to subject a merger to an in-depth investigation within 40 working days of the start of its review, and makes detailed changes to the way in which merger remedies are negotiated, proposed and implemented.
The criminal cartel offence
As indicated in a previous note, the most controversial aspect of the Act is the removal of the dishonesty requirement from the criminal cartel offence. Since 2003, it has been a criminal offence in the UK for two or more individuals dishonestly to agree to implement specified arrangements between undertakings. The “arrangements” so specified include arrangements to fix the price for the supply of a product or service in the UK, to “limit or prevent” supply or production, to divide supplies or customers and to rig bids. On conviction, an individual found guilty of committing the cartel offence may be sentenced to up to five years’ imprisonment and/or an unlimited fine.
The requirement that individuals must have acted dishonestly for the offence to be committed was designed to ensure that only the most serious forms of anticompetitive conduct were criminalised, reflecting the perceived need for a high threshold of individual culpability (reflected in the offence’s mens rea or ‘guilty mind’), before such a punitive criminal conviction could be imposed. So far, there has not been a single conviction under the cartel offence, except for one case in which the defendants pleaded guilty before the UK court pursuant to a plea bargain entered into with the United States Department of Justice. The Government accepted the OFT’s argument that this was, at least in part, due to the difficulty of proving the presence of dishonesty to the requisite legal standard and the Act therefore deletes the word “dishonesty” from the definition of the offence.
The impact of this change is potentially dramatic, since it effectively makes any agreement between individuals for undertakings to engage in certain, defined types of arrangement a strict liability offence, irrespective of the individuals’ intention or the arrangements’ impact on competition. Arrangements that can involve a degree of collective price setting or production limitation include, for example, syndicated loan agreements, insurance subscription markets, IP collecting societies, credit card interchange arrangements and technology licences. While there has been extensive analysis of the extent to which such arrangements may restrict competition, and hence infringe civil competition law, they are clearly a long way from the type of ‘hard core’ cartel activity that was the intended target of the criminal offence.
The understandable criticism of such a development has resulted in the creation of a number of new defences, which were increased during the passage of the bill through Parliament. As enacted, it will be a defence if an individual charged with the offence can show that:
- customers were given “relevant information” about the arrangements in question prior to agreeing to buy the affected products or services or that such information was published before the arrangements were implemented;
- he or she did not intend that the nature of the arrangements concerned would be concealed from customers before entering into the agreement in question;
- he or she did not intend, at the time of the making of the agreement, that the nature of the arrangements would be concealed from the CMA; or
- he or she took reasonable steps to ensure that the nature of the arrangements would be disclosed to professional legal advisers for the purposes of obtaining advice before their making or implementation.
The Act also provides for CMA to publish guidance on the “principles to be applied in determining, in any case, whether proceedings for an offence … should be instituted”.
The new defences do little to resolve the underlying flaw with the offence, as amended, namely the failure to take sufficient account of the intentions of the individuals concerned in defining the scope of the prohibited conduct or of the effect of the conduct on competition. As a result, while the defences should help reduce the chance that perfectly legitimate conduct will be caught by the offence, they do not remove it altogether. They also raise a number of questions regarding practical implementation. For example, in what circumstances will individuals be viewed as “concealing arrangements from the CMA”, given that in most cases there would be no reason to tell the CMA about a routine commercial agreement? Perhaps the best thing that can be said for these amendments is that they are a good example of how not to define a criminal offence.
Market investigation references
Unusually, the UK competition law regime empowers the competition authorities to investigate entire markets, and to impose remedies to address any concerns identified, in circumstances where no market participant has engaged in conduct that would amount to an infringement of a competition law prohibition. The Act makes relatively few changes to this aspect of the regime, with the main changes being to extend the powers of the Secretary of State to initiate or intervene in market investigations on public interest grounds and to enable the CMA to investigate issues across markets, rather than being limited to investigating only one market at a time. Although the list of specific public interest considerations remains limited to national security, this list can be extended by the Secretary of State at any time. As a result, this change introduces a clear risk of greater ministerial intervention in, and hence politicisation of, the market investigation regime.
The Act also provides a statutory framework for the early stages of a market investigation for the first time, including the introduction of compulsory evidence gathering powers, and reduces the standard timetable for an in-depth market investigation from 24 to 18 months.
Now that the shape of the Act is finally settled, the focus of Government, the authorities and the wider competition law community will switch to implementation, in the run-up to the CMA opening its doors next April (or rather, changing the sign on the door of the CC’s offices, where the CMA will be based). We can therefore expect to see a wave of consultations in the year ahead, on a wide range of matters including merger procedures, antitrust investigations, guidance for cartel offence prosecutions and new market investigation procedures. Companies and their advisers will need to respond to these consultations, as they arise.
The focus of staff at the OFT and CC is also likely to switch to their roles and responsibilities in the new organisation, which may have a knock-on impact on current enforcement. Given the extent of the institutional and procedural changes introduced by the Act, a period of disruption and uncertainty seems inevitable. Only time will tell whether the short term costs of these changes are outweighed by the hoped for longer-term benefit of a more effective UK competition law regime.