Balance of trade: lawyers shocked by breadth of government competition consultation

The coalition government’s consultation on the UK’s competition regime, published on 16 March, puts much more up for debate than competition lawyers, consumer bodies, or various business lobbies were expecting.

In addition to the headline proposal to create a single competition authority to replace the Office of Fair Trading (OFT) and the Competition Commission, there are tighter mandatory deadlines for competition investigations into cartels and markets; the introduction of mandatory notification for approval of mergers over £5m; dramatic changes to criminal liability tests; and the possibility that companies which are subject to anti-trust investigations may have to bear the investigator’s costs in addition to a fine for any breach.

Looking at the breadth of what is up for change, it is small wonder that responses from all quarters to the consultation’s publication – consumer, business and legal – offer only qualified approval.

Uncertain roots

It is unclear where such a bold consultation paper, entitled A Competition Regime for Growth: A Consultation on Options for Reform, comes from.

The most reasonable guess seems to be that it has several roots.

Comments by minister Edward Davey on the Department for Business, Innovation and Skills website suggest that the CBI is an instigator.

The consultation is billed as part of the strategy for growth, responding to CBI calls to cut ‘bureaucracy’, and the cost and uncertainty that merger, markets, or anti-trust investigations can cause.

And so the CBI’s official statement begins with an endorsement: ‘This consultation is a chance to make the system more efficient, open up markets even more and unlock investment to create growth.’

The spur to the consultation seems to have business-friendly roots that are fairly thinly disguised. Business secretary Vince Cable’s introduction notes: ‘The UK’s competition regime is internationally regarded as one of the best in the world.’ But Cable concedes: ‘I believe it can and should be even better’.

Why does he believe that it could be better? Here the evidence is a little vague. The consultation refers repeatedly to ‘commentators’ who doubt its efficacy. As one line runs: ‘Commentators have pointed to aspects of the regime which could work more effectively.’

‘Commentators’ are cited nine times in the paper. But who are these commentators? Twice Cable means the National Audit Office, which produced a report on the OFT and competition in 2010.

But referenced more often is a 2007 report for the then Department of Trade and Industry by KPMG – a peer review of the competition regime based on a survey of 301 replies.

That KPMG survey sounds as though it could be numerically credible, until one looks at the make-up of the sample. It is international, and divided into key jurisdictions between competition authority officials, competition economists, competition lawyers and corporate representatives. ‘Corporate representatives’ number just 23 people in the UK.

The KPMG survey has no replies from corporate representatives in comparator jurisdictions France, Italy, Belgium, Netherlands, Spain, Japan, Canada and Norway, but still uses its results to simultaneously declare the relative excellence of the UK competition regime, and as a basis for considering key reforms.

But if the KPMG study is a tenuous excuse for business-friendly reform, anyone who built up its importance for that reason, must, as a result, regret some policies that are now up for debate.

The speculation among competition lawyers is that Liberal Democrat ministers like Cable, annoyed at the inability of competition law to take the ‘public interest’ of some mergers into account, have forced the inclusion of proposals that the CBI does not welcome.

Mandatory regime

Chief among these is the prospect of ‘mandatory notification’ for mergers where a company with a turnover of £10m is seeking to take over a company with a turnover of over £5m.

This is not radical in EU terms, as Norton Rose competition associate Caroline Thomas confirms: ‘On the merger side, in the EU, we are unusual in not having a mandatory regime.’

But, she adds, it would be a significant change to the more liberal regime that the UK has developed, adding costs to mergers at the lower end of the market if businesses are charged for their own notification. ‘There is a real risk if this is mandatory,’ says Thomas.

Cleary Gottlieb Steen & Hamilton competition partner Maurits Dolmans concurs: ‘The proposal to introduce a mandatory merger regime will not necessarily be good for British business, as companies could be required to submit filings and pay merger fees in cases that raise no substantive concerns.’

Such fears derive from the £5m/£10m threshold, which many consider to be set too low – creating a disincentive to merge among companies whose unions would not threaten competition, but for whom merging would allow expansion and investment.

Speechly Bircham competition partner Robert Bell, who chairs the City of London Law Society’s competition committee, suspects a political motivation in the notification proposals.

‘I see the hand of the Lib Dems on this issue,’ he ventures. ‘On the Kraft-Cadbury merger, they wanted to be able to apply a public interest test, but failed to get that off the ground.

But this is a way to scrutinise some mergers. Mandatory notification licenses more intervention – but at increased cost to businesses, which will be scrutinised needlessly.’

Rupert Murdoch’s bid to take full control of BSkyB is another case in which opponents of the deal are trying to get ‘public interest’ considerations recognised, using competition law.

But for Liberal Democrat ministers with such an intention in mind, most competition lawyers the Gazette spoke to warn that in both of these cases competition law is not the ideal vehicle for the desired result.

The clearance for the Kraft-Cadbury merger was a European decision and would not have been touched by the UK authorities on competition grounds.

Consumer groups will note that many of their areas of concern also remain to be addressed in the government’s response to a simultaneous, but linked, consultation.

The role of the OFT in consumer enforcement may be devolved to local authorities’ trading standards functions. As John Holmes of consumer group Which? asks: ‘Do they have the expertise to recognise what is a competition problem?’

Which? is awaiting the outcome of this other consultation, but the further devolvement of consumer enforcement could be another barrier to an effective competition regime.

As the 2010 NAO report observed, the diffusion of competition knowledge and experience among regulators is one of the factors that prevents the competition regime from becoming more effective.

Worth a second look

More general backing is given to the idea that where mergers, markets or ­practices are to be investigated, transparency and a ‘fresh pair of eyes’ will be built in to the system.

The CBI’s director of competitive markets Matthew Fell argues: ‘Market investigations take a long time, are resource-intensive, and have a chilling effect on investment, so they should not be entered into lightly or used as fishing expeditions. Instead, they must be limited to clear failures of competition and be subject to strict timetables.’

The most obvious reason for merging the OFT and the Competition Commission is to create efficiencies of process in investigations, and to concentrate expertise, in such a way as to make quicker investigations possible, and the approach of the competition regime more consistent.

Unlike the possible devolvement of consumer enforcement to local authorities, this proposal is in line with NAO recommendations to improve the concentration of expertise and the ability of experts to communicate with one another easily.

What competition lawyers generally want to avoid is the replication of the European Commission’s ‘administrative’ approach, where the same body is prosecutor, judge and jury.

The independence of the Competition Commission from the OFT means it can bring fresh eyes to investigations the OFT refers to it. Businesses and their advisers value that independence.

Clifford Chance partner Greg Olsen, who chairs the Law Society’s competition section, tells the Gazette: ‘The case for combination of the institutions is strong and generally welcomed.

'It should mean the more efficient management of cases. Disquiet centres on the scale and consequences of the proposed reforms, especially the suggestion of a new hybrid merger clearance regime.’

The guarantee of fairness in procedure, suggested in the consultation paper, means that in merger and market investigations, there will be a ‘Phase 1’ and a ‘Phase 2’.

Under this model, Phase 2 would involve an independent tribunal comprising eminent business people, lawyers and economists, who would decide whether, on the evidence gathered so far, a full investigation should proceed.

Competition lawyers particularly like the idea that clients they advise would, at this stage, have direct access to the tribunal.

As Bell explains: ‘This would give business direct access to decision-makers and confidence in the transparency and fairness of the system. The government has clearly listened to our concerns on this point.’

Investigations currently take a long time to be resolved – and this is not just an issue that bothers businesses. It is also a problem identified by Which?’s Holmes: ‘It’s a problem that years of appeals and tribunals can follow a decision.

'For example, look at ways that the banks’ payment protection insurance investigation was handled. It took a long time to establish if there was a case or not.’

Consistency of approach is also an issue for Holmes, who cites the recent example of the Competition Appeals Tribunal’s (CAT) decision to cut fines for bid-rigging imposed by the OFT by 90%.

The process may be lengthened if the OFT appeals the CAT decision.

The consultation encompasses a wide range of potential changes, with the government looking at almost all aspects of the competition regime, including the criminal cartel offence.

• The OFT and the Competition Commission will be merged to form a single body – the Competition and Markets Authority.

• A separate consultation will consider whether consumer enforcement should be devolved to local authorities’ trading standards functions.

• SME bodies may be given the same ability to make the ‘super-complaints’ that begin a market investigation currently enjoyed by consumer group Which?.

• It is proposed that where a fine has been imposed in anti-trust investigations, the competition authorities should be given the power to recover the cost of the investigation from the companies involved.

• The merger control regime may be changed to make notification for competition approval mandatory for many mergers where the turnover of the target business is over £5m.

Richer case law

More controversial are passages in the consultation that echo points made in the 2010 NAO report. The NAO asserted that the absence of ‘richer case law’ was a factor that hampers the effectiveness of the UK’s competition regime.

Here the consultation paper hardly sounds in hock to a business lobby that would like to see fewer burdens from investigations. Bell highlights that the consultation document ‘states at several places the need to have more cases on market investigations, civil anti-trust prohibitions and the cartel offence’.

Market investigations could be prompted in future by extending the status of ‘super-complainant’, currently bestowed on consumer group Which?, among others, to small and medium-sized enterprises. ‘This is something the business community is not at all happy about given that these exercises are heavy on management time and another example of red tape,’ says Bell.

In relation to civil anti-trust prohibitions, the consultation notes that the UK has one of the lowest numbers of cases of any western economy and states that it wants to make sure this increases.

In relation to the cartel offence, Bell says: ‘There have in fact really been no successful contested cases under the cartel offence.’

The consultation references the 2008 Marine Hoses case, which saw executives jailed, but as Bell observes: ‘In Marine Hoses, the defendants pleaded guilty, and it was a plea bargain case transferred from the US. So there is definitely an appetite for a greater number of cases.’

The proposal that could provide a boost to case numbers here is a change to the relevant ‘offence elements’. With only two criminal cartel cases prosecuted since 2003, the government will consider four options for removing the need for a ‘dishonesty’ element in a case to bring a prosecution.

‘It’s hard though to know how well the "dishonesty" test worked,’ Thomas observes, ‘but it becomes quite wide if this is removed’.

Guardian Media Group’s group commercial legal director, Sarah Davis, queries whether the quest for ‘richer case law’ is the right approach: ‘It would always help to have more case law – but if you are getting more case law, there is an argument that the deterrent effect is not working.’

What businesses need most, Davis argues, is a degree of certainty on competition law matters, rather than more examples of successful prosecutions: ‘Businesses are very aware of the headline cases there have been, and the effect that being involved in a case has on a business’s credibility. They also know that there is personal liability for directors, who face a range of sanctions.’

Quality matters

The scope of the government’s consultation is huge and complex. As discussed, the headline aims of streamlining investigations, and the guarantees of ‘fairness’ can be seen as ‘business-friendly’.

But set against these are proposals on compulsory merger notifications; increased criminal liability; a desire for more prosecutions and investigations to create a ‘rich’ case law; and an increase in the number of bodies which can make a ‘super-complaint’.

But for all its breadth, there are some important things that changes in rules and structures cannot deliver. Jones Day competition partner Frances Murphy explains: ‘You can set obligations, have timetables, and set safeguards for fairness. But at the end of the day, the investigating team’s quality matters. They need the experience and the resources.’

She adds: ‘You need not just good competition lawyers, but also good economists, and people with commercial experience, and criminal law experience. Without all that, the quality of decision-making isn’t going to improve, and appeals will continue to go against decisions made.’

Davis regrets that there is no prospect of a return to the days of ‘informal guidance’ on the acceptability of a proposed merger to the competition authorities. ‘I’m not sure that mandatory notification gives you the same certainty that "informal guidance" used to give you,’ she says.

‘You knew that guidance was informal, but it was a pragmatic way of getting a steer. As a lawyer it is important to be able to take the temperature of the regulator.’

More information on the Law Society’s Competition Section, including a list of programme events, can be found at www.lawsociety.org.uk/competition or email TheLawSocietyCompetitionSection@lawsociety.org.uk.