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BRIEFING PAPER

Number 04814, 1 September 2016

The UK competition regime

By Antony Seely

Inside: 1. The purpose of competition

law 2. Reforming the UK

competition regime 3. Recent developments

Number 04814, 1 September 2016 2

Contents Summary 3

1. The purpose of competition law 5

2. Reforming the UK competition regime 12

3. Recent developments 20 3.1 The NAO’s review of the competition regime 20 3.2 Consultation on options to refine the regime 23

Cover page image copyright: CRI-8021 by UK Parliament/Mark Crick image. Licensed under CC BY 2.0 /

image cropped.

3 The UK competition regime

Summary Competition law seeks to curb practices that would undermine or restrict competition to the detriment of consumers: the abuse of a dominant market position by a firm, anti-competitive agreements between firms, and, mergers or takeovers which, if allowed, would result in a substantial lessening of competition. This note gives an introduction to the purpose of competition law and a summary of the institutional arrangements in this country for enforcing it.

In the UK the responsibility for enforcing competition law lies with the independent competition authority: the Competition & Markets Authority (CMA). The CMA was established from the merger of the Office of Fair Trading (OFT) and the Competition Commission (CC), and took on these duties from 1 April 2014.1

The legislative framework for the UK regime is established by the Competition Act 1998 and the Enterprise Act 2002, as amended by the Enterprise and Regulatory Reform Act 2013 which created the CMA.2 This gives the Government very limited powers to intervene in either the assessment of mergers or the investigation of markets.

As a consequence, in most cases, public concerns about instances of anti-competitive behaviour or the implications of a merger or takeover should be referred directly to the CMA. Individuals may report any issues relating to a market not working well, unfair terms in a contract, or any issues related to anti-competitive practices to the CMA using a standard form, published on Gov.uk. The CMA has detailed guidance on its work regarding mergers, markets, and cartels & other anti-competitive behaviour.

The individual sectoral regulators – Ofcom, Ofgem, etc – have concurrent powers to start enquiries in their respective fields – communications, gas & electricity, etc. Since 1 April 2015 the Financial Conduct Authority has had concurrent competition powers for the provision of financial services. Its role is not covered in depth in this note, though guidance on the FCA’s role is collated on the organisation’s site.3

The prohibition in UK competition law of the abuse of a dominant position and anti-competitive agreements is underpinned by equivalent provisions in EU law (specifically, Articles 101 & 102 of the Treaty). Similarly the national competition authorities of the Member States operate within the context of the EU-wide regime, so where markets or mergers have an EC-wide dimension, the lead competition authority is the European Commission. Guidance on the scope of the Commission’s responsibilities, and its ongoing work, is on its site.

The CMA does not take the lead in enforcing consumer protection law. Alongside the changes to the competition regime which have been made in the last three years, the Government has also reformed the institutional arrangements for advising consumers on their rights, and enforcing legislation for their protection: these responsibilities are now the work of the Citizen’s Advice Bureau, and local authorities Trading Standards services

1 CMA press notice, New competition authority to make markets work well for consumers, business and the

economy, 1 April 2014 2 Parliament’s Bill pages collates material on the passage of this legislation, including the Library paper

prepared for its Second Reading (Library Research paper 12/33, 7 June 2012), and a summary of the Bill’s scrutiny in Committee (Library Research paper 12/56, 3 October 2012).

3 In addition the general principles to the FCA’s role were set out in a speech given by the director of competition at the FCA, Deb Jones, in November 2014: FCA press notice, The FCA’s new competition powers: what do they mean for the financial services industry?, 21 November 2014

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(TSS) respectively.4 That said, the CMA has the lead role in investigating and prosecuting cases relating to the legislation to prevent unfair terms in consumer contracts.5

In February 2016 the National Audit Office published a review of the UK competition regime, to consider early evidence of the CMA’s performance and risks to achieving value for money. While it concluded that the regime as a whole was “more coherent” it raised concerns that there were “still too few successful enforcement cases, and business awareness of competition law could be improved,” adding, “the regime has further to go to ensure that value for money is achieved .”6

In the CMA’s initial response to the report Chief Executive, Alex Chisholm, said, “we are committed to increasing both the number and the speed of our competition enforcement cases, while maintaining our emphasis on fairness and rigour … Elsewhere we are delivering a multi-sector compliance programme across the regions, to raise awareness amongst small and medium-sized enterprises (SMEs) of competition law and of our role in enforcing it.”7 At this time the CMA released a draft version of its 2016/17 annual plan inviting comments. A final version was published in March.8 Respondents expressed “particular support for the increased focus on swift and effective enforcement of competition and consumer law, complemented by activities to raise awareness of, and promote compliance with, the law.”9

In the Queen’s Speech on 18 May the Government announced that during the 2016/17 Session it would introduce a Better Markets Bill, to “open up markets, boost competition, give consumers more power and choice and make economic regulators work better.” One element of the Bill covers the environment for competition, specifically:

• to speed up the decision making process for competition investigations and make the whole process easier for businesses and better for consumers.

• to give the competition authorities more powers to take on anti-competitive behaviour.

• to improve the landscape for economic regulation.10

On 25 May the Department for Business, Innovation & Skills launched separate consultation exercises on these measures, including a paper on the competition regime – setting out possible changes to the CMA’s assessment of markets and markets, and to its powers to enforce antitrust and competition laws, as well as changes to the functions and jurisdiction of the Competition Appeal Tribunal. Implementation of these proposals could require primary legislation, secondary legislation, and changes in practice and procedure.11 The consultation closed on 24 June and the Government has stated it will publish a response “by autumn 2016 setting which, if any, of the options we intend to take forward.”12

4 For details see, New consumer landscape, Commons Briefing Paper SN6759, 19 November 2013. The

OFT’s historical site has guidance for consumers and businesses on the best route for any complaint. 5 For details see, CMA, Consumer Protection: guidance on the CMA’s approach to use of its consumer

powers, CMA7, March 2014 6 NAO press notice, The UK competition regime, 5 February 2016 7 CMA press notice, CMA welcomes NAO report, 5 February 2016 8 Competition and Markets Authority annual plan 2016 to 2017, March 2016 9 CMA Annual Plan 2016/17 consultation : Summary of responses, March 2016 para 1.2 10 Cabinet Office, Queens Speech 2016 – Background Notes, May 2016 p24 11 BIS press notice, Better Markets Bill to arm consumers with more power and choice, 25 May 2016 12 BIS, Options to refine the UK competition regime: a consultation, May 2016 p35

5 The UK competition regime

1. The purpose of competition law Competition is … a process of rivalry between firms seeking to win customers’ business over time by offering them a better deal. Rivalry creates incentives for firms to cut price, increase output, improve quality, enhance efficiency, or introduce new and better products because it provides the opportunity for successful firms to take business away from competitors, and poses the threat that firms will lose business to others if they do not compete successfully.13

Competition law seeks to curb practices that would undermine competition. A standard guide to its scope and application in the UK and across the EU gives a summary of the four main areas that the law is concerned with:

• anti-competitive agreements: agreements that have as their object or effect the restriction of competition are unlawful, unless they have some redeeming virtue such as the enhancement of economic efficiency. In particular agreements between competitors, for example to fix prices, to share markets or to restrict output - often referred to as horizontal agreements - are severely punished, and in some systems of law can even lead to the imprisonment of the individuals responsible for them. Agreements between firms at different levels of the market - known as vertical agreements - may also be struck down when they could be harmful to competition: an example would be where a supplier of goods instructs its retailers not to resell them at less than a certain price, a practice often referred to as resale price maintenance. As a general proposition, vertical agreements are much less likely to harm competition than horizontal ones.

• abusive behaviour: abusive behaviour by a monopolist, or by a dominant firm with substantial market power which enables it to behave as if it were a monopolist, can also be condemned by competition law. An example would be where a dominant firm reduces its prices to less than cost in order to drive a competitor out of the market or to deter a competitor from entering the market so that it can subsequently charge higher prices, a phenomenon known as predatory pricing.

• mergers: many systems of competition law enable a competition

authority to investigate mergers between firms that could be harmful to the competitive process: clearly if one competitor were to acquire its main competitor the possibility exists that consumers would be deprived of choice and may have to pay higher prices as a result. Many systems of competition law provide that certain mergers cannot be completed until the approval of the relevant competition authority has been obtained.

• public restrictions of competition: the State is often

responsible for restrictions and distortions of competition, for

13 OFT/CC, Merger Assessment Guidelines OFT1254/CC2, September 2010 para 4.1.2

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example as a result of legislative measures, regulations, licensing rules or the provision of subsidies. Some systems of competition law give a role to competition authorities to scrutinise 'public' restrictions of competition and to play a 'competition advocacy' role by commenting on, and even recommending the removal of, such restrictions.14

The authors – Whish and Bailey – go on to examine several theories as to why competition should be a central goal for public policy, concluding that “competitive markets seem, on the whole, to deliver better outcomes than monopolistic ones, and there are demonstrable benefits for consumers … there is probably a greater global consensus on the desirability of competition and free markets today than at any time in the history of human economic behaviour.”15 The Department for Business, Innovation & Skills (BIS) has noted that, “competition laws have become increasingly prevalent internationally as their value has been recognised: today some 112 jurisdictions have competition laws, with more proposing to adopt them in the new few years.”16

The legislative framework for the UK’s competition regime is provided by the Competition Act 1998 and the Enterprise Act 2002, as amended. (More details on the development of the law through these two central pieces of legislation are given in two Library papers, written when these provisions were introduced.17) In its White Paper which preceded the introduction of the second of these Acts, the then Labour Government argued for the central importance of competition for ensuring that markets work effectively – to the benefit of consumers, producers and the economy as a whole:

Vigorous competition between firms is the lifeblood of strong and effective markets. Competition helps consumers get a good deal. It encourages firms to innovate by reducing slack, putting downward pressure on costs and providing incentives for the efficient organisation of production. As such, competition is a central driver for productivity growth in the economy, and hence the UK's international competitiveness.18

A similar argument was made in the consultation document which the Coalition Government published in March 2011, when it first proposed to reform the UK competition regime by merging the OFT and the CC:

Competition is the lifeblood of a vibrant economy and fundamental to growth. Open and competitive markets:

• make businesses more efficient and innovative;

• help small businesses to grow and enter new markets;

14 Richard Whish & David Bailey, Competition Law (7th edition), 2012 pp 2-3 15 op.cit. p18 16 BIS, A Competition Regime for Growth: impact assessment, March 2011 p10; in turn

the department cite, Kovacic W., ‘Dominance, duopoly and oligopoly: the United States and the development of global competition policy’, Global Competition Review, December 2010 (Vol. 13 ISS 11).

17 Competition Bill [HL], Library Research paper 98/53, 28 April 1998 & Enterprise Bill, Library Research paper 02/21, 4 April 2002

18 Department for Trade & Industry, A World Class Competition Regime, Cm 5233, July 2001 para 1.1

7 The UK competition regime

• drive lower prices and better products, services and choice for consumers;

• enhance productivity and economic resilience.19

The department’s impact assessment published as part of the 2011 consultation discussed how some economists have tried to quantify these benefits. While there is a strong evidence base which shows that competition is effective in driving down prices and encouraging innovation, it is harder to prove that competition law is an important factor in improving productivity:

In the short term competition generates efficiency gains within firms by forcing firms to allocate resources more efficiently and putting downward pressure on costs. In the long term, competition generates dynamic benefits as the best performing firms expand, the worst performers exit and new firms enter the market, leading to increased aggregate productivity. The static benefits from increased allocative efficiency have been shown empirically to be substantial, but it is widely believed that the dynamic benefits exceed the static benefits.

Harris and Li (2007)20 used data from 1996 to 2004 to examine the factors affecting productivity growth. They found that 42% of UK total factor productivity growth comes from reallocation between firms, 37% from exit and entry of firms and 22% from intra-firm productivity growth.

Competition also encourages innovation of new products and production processes and R&D investment as firms need to remain competitive in order to retain customers and survive. Griffiths et al. (2006)21 analysed the impact of the EU single market programme. They found that competition increased innovation by incumbents, but if anything decreased the incentive for new firms to innovate. In addition, competition creates pressure for management efficiency. Bloom and Van Reenen (2006)22 found that competition increases management quality but does not reduce work-life balance, a trade off that has been argued.

Market forces can sometimes fail to deliver effective competition, if for example, mergers lead to a high degree of concentration or if high barriers to entry prevent new and innovative companies from accessing markets. By setting the market frameworks, the Government can therefore help to ensure markets are conducive to productivity growth. Competition law facilitates open and competitive markets and restricts and deters anti-competitive behaviour.23

Evidence on the impact of competition policy on productivity is limited, as no OECD country has operated without competition laws so the appropriate counterfactual is not available. Nevertheless the suggestion is that competition policy has a

19 A Competition Regime for Growth, March 2011 para 1.1 20 Harris, R.I.D. and Li, Q. (2007) Firm Level Empirical Study of the Contribution of

Exporting to UK Productivity Growth. Report to UK Trade and Investment. 21 Griffith, R., Harrison, R. and Simpson, H. (2006), ‘The link between product market

reform, innovation and EU macroeconomic performance’, European Economy Economic Papers No. 243.

22 Bloom, Nick and van Reenen, John (2006), ‘Management practices, work-life balance and productivity: A review of some recent evidence’, Oxford review of economic policy, Vol. 22.

23 Whilst acknowledging some markets are subject to natural monopolies, competition law prevents these firms from abusing a dominant position.

Number 04814, 1 September 2016 8

significant positive impact on total factor productivity. Empirical work suggests that there is a negative relationship between market power and productivity, with a 10% increase in price mark-ups resulting on average in a 1.3 to 1.6% loss in total factor productivity growth (Disney et. al, 200324 and Nickell, 199625).26

In 2012 the Department cited more recent academic work to suggest that “good competition policy has a strong impact” on productivity. The relationship is “particularly strong for specific aspects of competition policy related to its institutional set up and anti-trust activities (rather than merger control).”27 The authors concede their work “contributes to the still very limited empirical literature that evaluates the effectiveness of competition policy.” They go on to underline certain shortcomings in the analysis: first, it does not assess the net benefits of the regime – taking into account the costs of enforcing competition law. Second, their approach did not consider the impact of individual aspects of a national regime – such as the size of sanctions imposed by national authorities.28

More recently in October 2015 the OECD published a series of papers from individual countries, taking views on the impact of competition on job creation, as part of a global forum on this issue. The UK’s submission concluded, “in the long run, we believe that effective competition supports economic growth, and hence creates opportunities for employment”:

However we recognise that the short-term and within-market impacts of competition on jobs can be ambiguous, and that this can sometimes lead to criticism of procompetitive interventions. Against that backdrop, it is important to articulate the potentially beneficial longer term or wider effects of competition which, ultimately, can support employment, for example in terms of expanding output and stimulating the development of new markets.29

In the past the competition authorities have produced some estimates of the financial benefits of the UK’s regime to consumers – though, as noted in the Competition Commission’s 2011 annual report, these are not precise numbers:

Although some of the benefits flowing from our work are hard to quantify and attribute accurately, the CC aims to quantify where possible the direct financial benefits to consumers that we achieve. The CC and the OFT have estimated direct financial benefits to consumers of £465 million for the market investigation

24 Disney, R., Haskel, J. and Heden, Y. (2003), ‘Restructuring and Productivity Growth in

UK Manufacturing’, Economic Journal, Vol. 113. 25 Nickell, S.J. (1996), ‘Competition and Corporate Performance’, Journal of Political

Economy, Vol. 104. 26 A Competition Regime for Growth: impact assessment, March 2011 p9 27 Buccirossi et al., (2011), Competition policy and productivity growth: An empirical

assessment, Düsseldorf Institute for Competition Economics p29, p1. (This is cited in, BIS, Growth, competition and the competition regime: response to consultation, March 2012 p5, p21.)

28 op.cit. p5, p30 29 Does competition kill or create jobs? – contribution from the UK, September 2015

p6. In turn this report was based on an overview of the literature published by the CMA: Productivity and competition: a summary of the evidence, July 2015

9 The UK competition regime

regime30 and £127 million for mergers in 2010/11 (these are annual estimates averaged over the three-year period 2008/09 to 2010/11 and include the work done by both the OFT and the CC). In making these estimates, we recognize that our approach is partial in its scope and subject to considerable uncertainties in its application. At present we have no agreed methodology for estimating the benefits of our regulatory work.31

In June 2013 the OFT published estimates of consumers’ savings from its own work,32 which in turn were collated by the Department, which put the direct savings made by consumers from the regime at £598m in 2012/13.33 The Department published estimates in March 2015, which gave a similar estimate of these savings:

The OFT and Competition Commission estimate that the competition regime produced direct benefits to consumers of around £575 million in 2013/14. This figure includes only direct financial savings to consumers and does not account for wider effects, such as any impact on productivity or the deterrence effect of the OFT and CC’s work or the wider competition and consumer regime.

The overall impact estimate is roughly the same as the £598 million in 2012/13. The indicator has fallen from £810m in 2011/12. This fall is the result of the high impact 2009/10 Groceries investigation dropping out of the three year rolling average. The estimated benefits of competition enforcement have risen slightly. Estimated merger benefits have stay roughly the same.34

During the proceedings of the Enterprise and Regulatory Reform Bill, several witnesses expressed considerable scepticism about these figures, though there was consensus that, even if the value of the competition regime could not be quantified, competition brought considerable benefits for the economy; as Professor Catherine Waddams (Professor of Regulation, University of East Anglia) said, “[the impact of competition on productivity] is something almost immeasurable, in terms of the whole nature of the productivity of the economy … [but] I think that there is no doubt that the historical evidence shows that vigorous competition policy does have those benefits.”35

Subsequently in July 2015 the CMA published estimates that put annual direct benefits of £745m over the period 2012-15, putting ratio of benefits to cost at 12:1. The department suggested that although the estimates relied, in part, on assumptions, in their view the numbers were on the conservative side:

30 The figure for the direct financial benefits to consumers from the market investigation

regime is different from those presented in the OFT’s Positive Impact report, for two reasons. First, the OFT’s Positive Impact 2010/2011 took into account all of the OFT’s market studies, including those where referral to the CC was not a possible option. Secondly, the CC’s estimates include also references made by the sectoral regulators.

31 Competition Commission Annual Report and Accounts 2010/11, HC 1098 7 July 2011 pp10-11

32 Positive Impact 12/13, OFT1493, June 2013 33 The value of the consumer benefits of the competition regime, December 2013 p3 34 The value of the consumer benefits of the competition regime, March 2015 p4 35 PBC, 3rd sitting, 21 June 2012 cc106-7 Q243

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Although necessarily relying in part on assumptions,36 we regard our estimates of direct financial benefit as being on the conservative side. In general relatively cautious assumptions are applied to the estimates and they exclude estimates of benefits from a number of cases where the impact was difficult to quantity in a sufficiently robust manner. In addition the focus on direct financial benefits excludes many important wider impacts of the competition regime including, for example, the deterrence of anti-competitive mergers and other types of anti-competitive behaviour and the CMA’s wider impact on productivity and growth.37

In its survey of the competition regime published in early 2016, the National Audit Office noted that there remains “no measure of the competition regime’s impact on growth or productivity.” The report gives some details of ongoing work by the CMA to estimate the deterrence impact of its work, and the impact of the regime on productivity:

The regime does not report its wider impacts on competition (such as through deterrence) or on productivity and growth, and these effects can be difficult to quantify.

The CMA has been working with the European Commission and the Dutch competition authority to estimate the total benefits (including both direct and indirect effects) of their work, and to improve understanding of the deterrence effect. In September 2015, the three authorities organised a conference to examine practical approaches to estimating deterrence effects and the broader macroeconomic impact on productivity and growth, concluding that further research was needed.38 To improve understanding of the wider impact of its interventions, the CMA is currently undertaking research into the deterrence effect of competition authorities’ work.

In September 2015, the CMA published a summary of existing evidence on the relationship between competition and productivity.39 It found a strong theoretical and empirical link between competition and productivity and evidence that competition enforcement can have a positive impact on growth. However, there is less evidence on the links between specific competition interventions and growth, or on how competition is evolving in different UK industries both of which are very difficult to measure in practice. There is also limited evidence either in the UK or internationally, on the relative effectiveness of different tools in promoting growth and productivity (such as a market investigation versus an enforcement action). A substantial proportion of the CMA’s work is mandatory, limiting its choice of which tools to use or its flexibility to choose its targets or respond to changing circumstances.40

36 Impact estimations are conducted immediately after cases are completed and are

therefore based only on information available during the case and on assumptions regarding the expected impact of our interventions. On this basis the estimates are considered to be ‘ex ante’ evaluations.

37 CMA impact assessment 2014 to 2015, July 2015 para 1.5-6 38 European Commission, Deterrence and macroeconomic impact of the work of

competition authorities, September 2015 39 CMA, Productivity and competition: a summary of the evidence, CMA 45, July 2015 40 The UK competition regime, HC737, February 2016 p7, p44

11 The UK competition regime

Whish and Bailey observe that competition law has been used to further a variety of objectives by governments:

Historically there has not been one single, unifying, policy that bound the development of EU and UK law together. In particular competition policy does not exist in a vacuum: it is an expression of the current values and aims of society and is as susceptible to change as political thinking generally. Because views and insights shift over a period of time, competition law is infused with tension.41

The authors identify several policy goals in this context:

• consumer protection – with some suggestion that the competition regime might prevent ‘unfair’ prices, be that for consumers or for producers;

• redistribution of economic power and wealth;

• the protection of home companies against international competition; and,

• the integration of the Single European Market, which has been so important in the context of the EU.

Further to the types of behaviour that competition law seeks to curb is the question of the mechanism by which it is enforced – to put it bluntly: who decides?

If there are to be competition authorities to decide on what is and what is not acceptable business behaviour, what type of institution should be asked to make these decisions (a court, a commission, an individual?); how should individuals be appointed to those institutions (by ministerial appointment, be election, by open competition?); and how should those institutions themselves be controlled (by judicial review, or by an appellate court?).42

The institutional arrangements made in this country for enforcing competition law are addressed in the next section of this note.

41 Competition Law (7th edition), 2012 p20 42 op.cit. p24

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2. Reforming the UK competition regime

The main elements of the UK competition regime are:

• Market studies and market investigations: examining markets which may not be working well for consumers, with powers to impose remedies where an adverse effect on competition is found;

• Merger control: maintaining competitive pressures in markets by prohibiting anti-competitive mergers between businesses or otherwise remedying their potential adverse effects on competition;

• Anti-trust: enforcing legal prohibitions against anti-competitive business agreements (including cartels) and the abuse of a dominant market position. There is also a specific criminal cartel offence against individuals who engage in certain forms of price-fixing and other forms of ‘hard core’ cartel activity;

• Competition advocacy: promoting the benefits of competition and challenging barriers to competition, such as those which might result from existing or planned Government regulations.

Up to 1 April 2014, and the establishment of the Competition & Markets Authority, the main competition institutions were as follows:

• the Office of Fair Trading (OFT), responsible in particular for antitrust enforcement and for the first phase of merger and markets cases;

• the Competition Commission (CC), responsible for second phase merger and market investigations and, in appropriate cases, for the imposition of remedies to any anti-competitive effects found;

• regulators for such sectors as energy, water and telecommunications, many of which have concurrent powers to apply the anti-trust prohibitions and refer markets to the CC; the CC also hears certain appeals against licence and energy code modifications and price determinations in these sectors;

• the Competition Appeal Tribunal (CAT), a specialised judicial body, which hears appeals and decides certain cases involving competition or economic regulatory issues.

The interactions between these institutions are illustrated below:43

43 National Audit Office, Review of the UK’s Competition Landscape, March 2010 p9.

For more details see, BIS, A Competition Regime for Growth : a consultation on options for reform, March 2011 pp125-145 (Appendix 1).

13 The UK competition regime

Notes

1 The Civil Aviation Authority has powers to make a market reference of the Air Traffic Control Services market only.

2 The Secretary of State may also make a reference to the Competition Commission on grounds of public interest.

3 The diagram omits the Supreme Court of the UK and the European Court of Justice, both of which are in the judicial structure which includes the Tribunal. It also omits the Northern Ireland Authority for Utility Regulation.

4 The Court of Appeal’s jurisdiction only extends to England and Wales. The equivalent court in Scotland is the Court of Session, and in Northern Ireland, the Court of Appeal of Northern Ireland.

There have been two substantive changes to the regime in the last few years: first, the OFT and the CC have been merged to create the Competition & Markets Authority (CMA). Notably the ‘two stage’ approach to market and merger investigations that was a feature of the OFT/CC relationship has been retained, ‘within’ the new single authority. Second, three regulators have received competition powers: Monitor (from April 2013), the Financial Conduct Authority and the Payment Systems Regulator (from April 2015). The NAO’s 2016 report on the competition regime provides an overview of these changes: 44

44 NAO, The UK competition regime, HC737, February 2016 p21. Appendix Three

(pp50-51) has more details on the eight sector regulators and their responsibilities.

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15 The UK competition regime

The national competition regimes of European Union Member States operate within the context of the EU-wide regime:

Articles 101 and 102 of the Treaty on the Functioning of the European Union outlaw anti-competitive agreements and abuses of a dominant market position when they may affect trade between member states. They are enforced by the European Commission and National Competition Authorities within their jurisdictions, which have powers to investigate infringements, and can impose fines on businesses that break the law. At the EU level (and also in the UK) fines can be up to 10% of worldwide turnover. Businesses can appeal against Commission decisions in the European Courts.

The European Commission also considers larger merger cases. Under the European Community Merger Regulation, the European Commission assesses whether mergers between enterprises above certain defined thresholds would create or strengthen a dominant position which would significantly impede effective competition. Member States have a formal role in the process but the final decision is for the European Commission alone. As with cases under Articles 101 and 102, the European Commission’s decisions may be appealed to the European Courts.45

The Enterprise Act 2002 introduced a major change in the way decisions to enforce the law are made, as it gave the primary responsibility to the OFT and the CC, removing the decision-making powers of Ministers, save in certain exceptional cases which give rise to a matter of public interest:

The OFT was established as a body corporate under section 1 of the Enterprise Act 2002. It succeeded the Director General of Fair Trading (DGFT) established under the Fair Trading Act 1973. The functions of the DGFT were transferred to the OFT under section 2 of the Enterprise Act 2002.

The CC is established under section 45 of the Competition Act 1998 and succeeded the Monopolies and Mergers Commission.

The Enterprise Act 2002 brought about a significant change in the way that decisions on merger and market cases were made. Under the previous Fair Trading Act merger and monopoly regimes, the DGFT would advise the Secretary of State whether the conditions for a reference for in-depth investigation appeared to be satisfied. It was for the Secretary of State to decide, having regard to that advice, whether such a reference should be made.

The function of the Monopolies and Mergers Commission/CC was to investigate the merger or market that had been referred to it and to report its findings to the Secretary of State, along with its recommendations for remedial measures. The final decision on what action should be taken was for the Secretary of State. The Enterprise Act 2002 largely removed Ministers from the decision making process. The decision to refer mergers or markets is taken by the OFT. The CC then investigates and decides whether there is a competition problem. If it finds that there is, it decides on the

45 A Competition Regime for Growth …, March 2011 pp17-18. For more detail on the

EU’s powers in this area see, HMG, Review of the Balance of Competencies between the UK and the EU – competition and consumer policy, July 2014.

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appropriate remedial measures for any competition issues identified.46

In addition, the 2002 Act established that in the performance of their functions the OFT and the CC would be required to apply a competition test – so that, in deciding whether a proposed merger should be allowed to proceed, the authorities’ assessment is based on whether the merger can be expected to lead to a substantial lessening of competition:

The substantive test applied by the DGFT and then by the Monopolies and Mergers Commission/CC, under the Fair Trading Act regime was whether the merger operated against the “public interest”. A public interest test also applied in monopoly cases.47 In practice, successive Secretaries of State had applied the public interest test as a competition based test. The Enterprise Act 2002 formalised this by making the substantive test a competition test. As a result the substantive test in merger cases became whether the merger gives rise to a substantial lessening of competition within any market or markets in the UK for goods or services. The substantive test in market investigations became whether there are features of the relevant market that prevent, restrict or distort competition in any market for goods or services in the UK or a part of the UK.48

In practice this focus on competition had been well-established before the 2002 Act. In a report on takeovers and mergers published in November 1991, the Trade and Industry Committee discussed the way mergers had been assessed during the 1980s:

While the emphasis on competition as the main criterion comes from the Fair Trading Act 1973, competition was given more prominence in 1984 when the then Secretary of State for Trade and Industry, Mr Norman Tebbit, announced that ‘references to the Monopolies & Mergers Commission (MMC)49 would be made primarily, but not exclusively, on competition grounds, taking into account the international dimension of competition.’ Since then only six out of 74 references have been made to the MMC on non-competition grounds. There have been only seven cases since 1976 where the MMC has found the merger to be against the public interest on non-competition grounds, and six of these occurred before 1984.50

Nevertheless, the requirement placed on the competition authorities to assess matters from this perspective – without regard to other matters of public concern – can be controversial. For example, in 2006 the CC

46 A Competition Regime for Growth …, March 2011 p125 47 The Fair Trading Act 1973 identified two types of monopoly that could be referred to

the CC for in-depth investigation: scale monopolies where one party accounted for 25% or more of a relevant market; and complex monopolies, where a number of companies collectively accounted for 25% of more of a relevant market. The scale monopoly provisions were considered to be redundant once the Chapter II prohibition [now Article 102 of the Treaty], prohibiting abuse of dominance was introduced into UK legislation. The current market investigation regime was intended to address problem oligopolies, previously covered by the complex monopoly regime. In addition, the market investigation regime can also sweep up scale monopoly issues that are not capable of resolution by applying the Chapter II prohibition.

48 op.cit. pp125-6 49 The forerunner to the Competition Commission 50 Trade & Industry Committee, Takeovers and mergers, 27 November 1991, HC 90 of

1991-92 para 233. For more details see, Library Research paper 02/21 pp 38-41.

17 The UK competition regime

began a major review of the UK groceries market in the wake of serious public concerns about the market power of the four leading supermarkets. At the outset of its enquiry the Commission felt it necessary to remind those making submissions of the statutory limits set to its assessment:

The [Commission] is required to determine whether any feature, or combination of features, of the market prevents, restricts or distorts competition (under s134 of the 2002 Act). If this is so, there will be an ‘adverse effect on competition’, and we will seek to identify the detriment to consumers resulting from the adverse effect on competition (which might take the form of higher prices, less choice, lower quality of available products or lower innovation than if competition was working effectively) ...

But we must distinguish competition issues from other issues of public concern associated with grocery retailing which we have no power to investigate or resolve. Unless they affect competition, issues such as the environmental impact of the grocery supply chain, the composition of the high street and its impact on communities, rural land usage or employment conditions in overseas suppliers are not things we can decide on. These issues and public concern about them may interact with competition issues and provide background and context for our investigation, but our focus must be on the competition issues.51

As noted, in general, Ministers have no direct involvement in the competition regime – though they retain a residual role in the application of a public interest test in relation to market investigations, and, more substantively, the merger regime.52 So, in the latter case, the 2002 Act allows for the Secretary of State to intervene in mergers only where they give rise to certain specified public interest concerns: specifically, issues of national security and certain media mergers, which could threaten, for example, the plurality of views in the newspaper sector.53 In these cases the Secretary of State may make an assessment of a merger purely on the grounds that it runs counter to the public interest, without deferring to the ‘substantial lessening of competition’ test, or he may give regard to both tests in coming to a final decision. (It is under these provisions that the bid made in June 2010 by Rupert Murdoch’s NewsCorp for complete ownership of BSkyB first came to Ministers’ desks.54)

The Act allows the government to amend this list of public interest considerations, to add further categories. This has been done once: in October 2008 the Labour Government presented an Order to add the category “the interest of maintaining the stability of the UK financial system.”55 This allowed the Secretary of State to intervene directly in

51 CC, Groceries market investigation: Statement of issues, June 2006 paras 4-5.

Arguably these tensions remain, illustrated in debates over the power of the supermarkets, and how the government should respond to it; see, Supermarkets: The Groceries Code Adjudicator, Library standard note SN6124, 12 November 2015.

52 see Appendix 1 to A Competition Regime for Growth …, March 2011; in particular, pp132-135.

53 under section 58 of the Act. The Act also establishes limitations on certain mergers between water companies.

54 For more details see, Media ownership & competition law: the BSkyB bid, Commons Briefing Paper SN6028, 22 July 2011.

55 SI 2008/2645, which added this category to the list in s58 of the 2002 Act.

Number 04814, 1 September 2016 18

the takeover of HBOS, the UK’s largest mortgage lender, by Lloyds TSB. Even though the OFT assessed that the deal could fail the competition test and as such should be referred to the CC, the then Secretary of State, Lord Mandelson, ruled out a reference on the grounds that it would ensure the stability of the UK financial system and that these benefits outweighed the potential for the merger to result in the anti-competitive outcomes identified by the OFT.56

Since then, there has been some debate about the scope of Ministerial power and whether a wider public interest test should apply in the wake of concerns about the takeover of British companies by foreign multinationals – in particular, in response to the takeover of Cadburys by Kraft Foods in January 2010. Following a critical report into the takeover by the BIS Committee, in July that year the Coalition Government stated it had “no current plans” to extend Ministers’ powers in this area: “we are satisfied that the existing powers provide the appropriate scope to take action to protect legitimate national interests that might be affected as a result of a merger.”57

This remains the case.58 The question of revising this test was debated, briefly, during the proceedings on the Enterprise and Regulatory Reform Bill in summer 2012.59 In July 2013, in their report on the review of the UK equity market by Professor John Kay, the BIS Committee noted Professor Kay’s scepticism about the benefit of some large takeovers, and argued that the Government should look more closely at the impact that foreign takeovers had had on the British economy.60 In its response the Government argued that “attracting investment to the UK from around the world is a vital element of the Government’s strategy to ensure sustainable long-term growth”, but that it would review the impact of foreign ownership of UK businesses during 2014:

The Government has always welcomed long-term foreign investment in Britain and continues to do so. Inward investment by foreign companies can benefit the UK bringing in new ideas, technologies and skills, stimulating productivity and growth in UK business and opening up markets for trade. Attracting investment to the UK from around the world is a vital element of the Government’s strategy to ensure sustainable long-term growth. Professor Kay agreed with this analysis when he argued against a general hostility to foreign ownership, acknowledging the continued importance of open markets for growth.

The Government has a variety of powers to engage in specific merger activity, set out in Part 3 of the Enterprise Act. The Government already uses these powers in exceptional cases to

56 For details see, Decision by Lord Mandelson … not to refer to the … merger

between Lloyds TSB Group plc and HBOS plc, Commons Library Deposited Paper Dep2008-2685, 3 November 2008.

57 Government Response to the Business, Innovation and Skills Committee’s Report on “Mergers, Acquisitions and Takeovers: The Takeover of Cadbury by Kraft”, Cm 7915 July 2010 pp5-6.

58 The issue is examined at length in a second Library paper: Mergers & takeovers: the ‘public interest test’, Commons Briefing Paper SN5374, 1 September 2016.

59 Public Bill Committee, 12th sitting, 10 July 2012 cc512-24 60 The Kay Review of UK Equity Markets and Long–Term Decision Making, HC 603 of

2013-14, 25 July 2013 (see pp47-53).

19 The UK competition regime

ensure UK interests are protected, such as where there may be national security issues …

The Economic and Social Research Council (ESRC), which funds independent, high quality research on economic and social issues and is itself funded by the Government, commissioned a survey of the evidence on the impact on foreign ownership in 2011.61 The survey concluded that there are positive overall effects for UK competitiveness and business performance, and an overall positive effect on UK employment, from having an open economy. The survey identified that the experience of individual companies and communities vary and can involve both positive and negative consequences from a takeover, depending on other factors including the intentions of the acquiring company and the specific circumstances in the company and industry sector.

Given the importance of the subject matter, the Government will update this research in its progress report [on implementing Professor Kay’s wider recommendations regarding UK equity markets] in summer 2014.62

In October 2014 the Coalition Government published a report on its progress, in which it confirmed that, “following extensive discussions with the [Takeover Panel – which regulates the procedures for takeovers], the Government has accepted the Panel’s advice that there is no need for additional sanctions over and above those that are already available to the Panel.”63

In the last few months there has been some speculation that the present Government might reconsider reforming these rules – though no proposals have been published.64 On 18 July the newly appointed Prime Minister, Theresa May, announced the creation of new Department for Business, Energy & Industrial Strategy, to be responsible for “helping to ensure that the economy grows strongly in all parts of the country, based on a robust industrial strategy.”65 Again, no formal proposals have been published, though what is known about the Government’s emerging strategy is examined in a second Library briefing paper.66

61 Economic and Social Research Council (ESRC) Evidence Briefing: Foreign ownership

and consequences for British business, January 2011 62 Government Response to the Committee's Third Report of Session 2013–14, HC 762

of 2013-14, 4 November 2013 paras 67-8, 77-8, 80 63 Implementation of the Kay Review: Progress Report, 27 October 2014 para 2.110 64 PQ HL1371, 15 August 2016 65 HCWS94, 18 July 2016. A description of the new Department’s responsibilities was

set out in a Cabinet Office paper published at this time. 66 Industrial strategy, Commons Briefing paper CBP7682, 30 August 2016.

Number 04814, 1 September 2016 20

3. Recent developments

3.1 The NAO’s review of the competition regime

In February 2016 the National Audit Office published a review of the UK competition regime, to consider early evidence of the CMA’s performance and risks to achieving value for money. While it concluded that the regime as a whole was “more coherent” it raised concerns that there were “still too few successful enforcement cases, and business awareness of competition law could be improved,” adding, “the regime has further to go to ensure that value for money is achieved .”67

One striking finding in the report was that business awareness of both the competition authorities and also competition law itself is low, and in the NAO’s view, this may potentially harm compliance:

In a CMA survey of UK industry conducted in late 2014,68 only 23% of businesses felt they knew competition law well, compared to 45% who had never heard of competition law or did not know it at all well. As a new organisation, awareness of the CMA was also low; in 2014, the year when the CMA began operating fully, more than twice as many businesses believed the defunct Office of Fair Trading to be responsible for enforcing competition law than the CMA (75% versus 32%).

The CMA is taking steps to improve awareness through, for example, advocacy work with both public and private sector bodies following enforcement cases.69

Looking at the three broad areas of the CMA’s remit, the NAO found that the regime faced big challenges to increase the number of enforcement decisions made to counteract anti-competitive behaviour:

Successful high-profile enforcement action builds the credibility of a competition authority, clarifies the law and deters anti-competitive behaviour. The low caseflow we identified in 201070 has continued, with the Office of Fair Trading and the CMA making 24 decisions and the regulators just eight since 2010. The UK competition authorities issued only £65 million of competition enforcement fines between 2012 and 2014 (in 2015 prices), compared to almost £1.4 billion of fines imposed by their German counterparts.

The CMA faces significant barriers in increasing its flow of competition cases, although recent activity means it now has 12 ongoing cases. Its enforcement work is not mandatory, does not have statutory deadlines, and faces a stringent regime of judicial oversight. The CMA prosecuted its first criminal cartel case in 2015; one company director pleaded guilty to price fixing in advance of trial, while two others were acquitted.71

67 NAO press notice, The UK competition regime, 5 February 2016 68 CMA, UK businesses’ understanding of competition law, May 2015 69 The UK competition regime, HC737 pf 2015-16, February 2016 70 See, Review of the UK’s Competition Landscape, March 2010 – specifically, Part Two

“Enforcing the Competition Act”. 71 HC737, February 2016 p9

21 The UK competition regime

Stakeholders interviewed as part of the inquiry “considered the low number of decisions a key failing of the UK competition regime so far”:

The flow rate of cases has not increased since our 2010 report, remaining at around four per year at the primary competition authority, with no infringement decisions by the regulators … The level of fines imposed for competition breaches is also low – £65 million (at 2015 prices) between 2012 and 2014 …

To help build a flow of cases, the CMA has a pipeline function alongside its intelligence-gathering capability. Together with the enhanced concurrency arrangements, this has led to a total of 19 ongoing cases across the regime in December 2015 …

A principal source of intelligence is ‘leniency’, where a business applies for leniency from potential fines in return for information that leads to enforcement action. For instance, in 2007, Virgin Atlantic applied for leniency from fines for agreements that it had with British Airways to coordinate their surcharge prices on certain of their long-haul flight routes. The CMA receives a comparable number of applications to its European peers, but few leniency applications have been converted into successful cases … The reasons for this are not currently well understood.

Furthermore, many stakeholders and legal practitioners we spoke to think there are strong incentives for businesses to litigate if they lose a case, which can lead to risk aversion in the competition authorities. One stakeholder told us that the UK was the best jurisdiction in the world to defend a competition case; this was consistent with the views of several other interviewees. Competition Act enforcement cases, unlike mergers or market investigations, do not have any statutory deadlines and are at risk of being squeezed by activities that do. Several interviewees told us that, in their view, the CMA’s competition enforcement work has a lower profile with their competition staff than, for example, the two current large market investigations.72

Turning to the other two aspects of the competition regime, the NAO found that the CMA had taken an innovative approach in assessing mergers, that, the authors argued, could improve its effectiveness:

[The CMA] has made all of its initial merger decisions within its statutory deadline of 40 working days. Stakeholders were positive about the quality and continuity of the CMA’s merger teams, and told us that they valued having early discussions with decision-makers. The CMA is expanding the practice of clearing cases with remedies in phase 1 without the need to go for a more detailed and resource-intensive phase 2 review, and is making efficiency gains from using some of the same people on both phase 1 and phase 2 investigations. It has also developed case law, in particular winning three significant recent legal challenges in this area.73

Third, on markets, the CMA had placed on significant emphasis on investigations, with two ongoing high-profile inquiries, and this had implications for the regime as a whole:

The CMA’s ability to investigate an entire market can have big effects; for instance, a 2009 market investigation by the Competition Commission resulted in BAA selling Edinburgh, Stansted and Gatwick airports. The CMA is currently investing

72 HC 737, February 2016 para 2.11-15 73 HC737, February 2016 p9

Number 04814, 1 September 2016 22

16% of its front-line competition resources in two high-profile market investigations into energy and retail banking, and businesses are also incurring substantial unmeasured costs. There is major public and parliamentary interest, with a parliamentary hearing already dedicated to the retail banking inquiry. The ability of the CMA to present a credible market analysis and formulate effective remedies if appropriate will have a significant effect on its reputation.74

The report went on to make a number of recommendations for government, and for the CMA. In the former case the authors argued that the Government should “report regularly the full cost of the regime on a consistent basis”, and “encourage greater flexibility of resourcing and a more coherent approach across the regime.” In conjunction with the CMA, the authors suggested that the Department for Business, Innovation & Sills should “develop indicators of the competitive health of UK markets, such as their profitability and the level of entry and exit”, to “help in assessing the success of the competition regime, and could also provide warning signs of emerging competition problems.”75

Turning to the CMA, the authors argued that if caseflow failed to increase significantly, it should “assess the fundamental reasons for low enforcement caseflow, and consider the case for removing any legislative or institutional barriers.” More widely than this, the authors recommended that the CMA should increase its existing efforts to improvement awareness and improve caseflow, as well as formally reviewing the costs of its two major market investigations. Finally, the CMA and the regulators should “develop further their understanding of consumer behaviour to inform proposed remedies.”76

In the CMA’s initial response to the report Chief Executive, Alex Chisholm, said, “we are committed to increasing both the number and the speed of our competition enforcement cases, while maintaining our emphasis on fairness and rigour … Elsewhere we are delivering a multi-sector compliance programme across the regions, to raise awareness amongst small and medium-sized enterprises (SMEs) of competition law and of our role in enforcing it.”77 At this time the CMA released a draft version of its 2016/17 annual plan inviting comments. A final version was published in March.78 Respondents expressed “particular support for the increased focus on swift and effective enforcement of competition and consumer law, complemented by activities to raise awareness of, and promote compliance with, the law.”79

74 ibid. 75 HC737, February 2016 p11 76 HC737, February 2016 pp11-12 77 CMA press notice, CMA welcomes NAO report, 5 February 2016 78 Competition and Markets Authority annual plan 2016 to 2017, March 2016 79 CMA, CMA Annual Plan 2016/17 consultation : summary of responses, March 2016

para 1.2

23 The UK competition regime

3.2 Consultation on options to refine the regime

In the Queen’s Speech on 18 May 2016 the Government announced that during the 2016/17 Session it would introduce a Better Markets Bill, to “open up markets, boost competition, give consumers more power and choice and make economic regulators work better.” One element of the Bill covers the environment for competition, specifically:

• to speed up the decision making process for competition investigations and make the whole process easier for businesses and better for consumers.

• to give the competition authorities more powers to take on anti-competitive behaviour.

• to improve the landscape for economic regulation.80

On 25 May the Department for Business, Innovation & Skills launched separate consultation exercises on these measures, including a paper on the competition regime – setting out possible changes to the CMA’s assessment of markets and markets, and to its powers to enforce antitrust and competition laws, as well as changes to the functions and jurisdiction of the Competition Appeal Tribunal. Implementation of these proposals could require primary legislation, secondary legislation, and changes in practice and procedure.81

The consultation closed on 24 June and the Government has stated it will publish a response “by autumn 2016 setting which, if any, of the options we intend to take forward.”82 To date, no further details have been published.

80 Cabinet Office, Queens Speech 2016 – Background Notes, May 2016 p24 81 BIS press notice, Better Markets Bill to arm consumers with more power and choice,

25 May 2016 82 BIS, Options to refine the UK competition regime: a consultation, May 2016 p35

BRIEFING PAPER Number 04814, 1 September 2016

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