The UK’s competition reforms may increase efficiencies and lower costs, but they could lead to far more individual cartel prosecutions and jeopardise the country’s respected dual-level system for investigations.
On March 15 the UK government announced that it would merge its two competition authorities to create a single body, the Competition and Markets Authority (CMA). The government has told the Office of Fair Trading (OFT) to consult on the detailed processes. The overall timetable expects the new structure to be in place by April 2014.
Here are the three biggest concerns created by the changes.
The merging of the two bodies has caused the most attention. The CMA’s overarching organisation will have a board structure of directors appointed by the government (like the OFT has now). But within that, commissioners will be appointed by the government separately from the board structure of the single body.
The UK government hopes a single body with a single set of staff will create greater flexibility and a more efficient way to handle cases. “Whether it is more efficient, time will tell,” said Paul Gilbert of Cleary Gottlieb Steen & Hamilton and former deputy director of competition policy at the OFT.
“The point on flexibility of staff is not a bad one, but the two organisations don’t have large staff numbers and they’re comparatively not hugely expensive bodies,” added Gilbert.
Peter Freeman, former chair of the Competition Commission (CC) and now at Cleary Gottlieb, believes the needed improvements could be carried out in the present structure.
“The merging is a political decision though, rather than an administrative improvement one – though it’s presented as an improvement,” he said.
However, Alastair Mordaunt, partner at Clifford Chance in London believes merger reviews ought to be quicker. “There should be less repetition than in the current system, which although thorough, is pretty impressively slow by international standards,” he said.
Fresh pair of eyes
The problem with creating these efficiencies, however, is that the case team will likely remain the same between phase I and phase II. With the same case team can the new body replicate the so-called fresh pair of eyes that the CC offers to merger enquiries?
Under the current two-tier structure, enforcement of competition rules is undertaken by the OFT and the CC. The OFT’s competition functions include investigating mergers at phase I as well as conducting antitrust investigations and market studies.
The CC, on the other hand, cannot initiate cases but conducts phase II merger enquiries in cases referred to it by the OFT. The CC also conducts market investigations and can remedy market-structure problems where it finds that competition is not working in a particular sector.
One of the prized elements of the UK regime was the CC’s so-called fresh pair of eyes. Each case that the commission took on from the OFT it started afresh. This second chance would be lost in the new regime.
According to some observers merging the two institutions into one may undermine the rigour and objectivity of the overall investigation, and increase the risk of the final decision being wrong.
“The criticism traditionally aimed at the EC that it is investigator, prosecutor, judge and jury in the mergers context has been less applicable in the UK,” said Mordaunt.
It is unclear whether the checks and balances of a two-tier system regime can be maintained within one. The government proposals imply that it will attempt to have separate decision-makers in phase I and phase II. Much of the discretion in implementing this will be left to the body.
The proposed changes also include abolishing the dishonesty test and replacing it with a new definition of agreements not made openly. Most lawyers IFLR spoke to criticised this move.
Although it is only aimed at individuals, the knock-on effect of legal fees and reputational damage on corporates could be substantial.
When the cartel offence was first introduced in 2002 there was debate over whether a dishonesty test should be included.
The UK has seen little success in prosecuting individuals using the test. The BA case failed to complete and the three convictions in the Marine Hose case were on the back of plea agreements entered into in the US.
It appeared difficult to force cases through because juries didn’t consider individuals had failed the test. “To me that sends a message,” said Luke Tolaini, partner at Clifford Chance in London. “Because juries don’t think it’s wrong doesn’t mean the UK should lower the bar in order to be able to put more people away.”
Tolaini said that although the CMA will bring more cases, some of them would be borderline. “As well as the traditional price fixing cases, they may feel emboldened to bring information exchange or concerted practice cases,” he said.
“It’s a significant development and not necessarily the right way to have gone,” said Tolaini.