What the new Competition and Markets Authority means for the UK market

Author: | Published: 26 Sep 2012
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On May 23 2012, the UK government published its long-awaited Enterprise and Regulatory Reform Bill. The bill introduces a range of proposed reforms to the UK's competition regime that may significantly alter the competition law landscape in the UK. The government intends to achieve the reforms through a package of legislation that will be put before parliament in the coming months. It is expected that the reforms will come into effect by April 2014 at the latest. Reforms to the general competition enforcement regime in the UK are being proposed almost concurrently with a UK government consultation on private damages actions entitled Private actions in competition law: a consultation on options for reform. This consultation is considering how to strengthen the rights of claimants to bring private actions for damages for breaches of competition law. Finally, measures are also being introduced which are designed to promote and enforce competition in financial services specifically.

Each of these reforms may have a material impact on the way in which companies operating in the UK conduct their business, particularly in the financial services sector.

The Competition and Markets Authority

As expected, the bill provides that the Office of Fair Trading (OFT) and the Competition Commission (CC) will merge to create a new regulator, the Competition and Markets Authority (CMA). The intention behind the merger is to create a single, stronger, enforcement agency for competition policy that will take more decisions than its predecessors. Concerns have been expressed that the removal of the two agency system increases the risk of so-called confirmation bias particularly in merger and market investigation cases, since phase I and phase II reviews would be conducted by the same agency. The UK government has sought to address these concerns through the composition and structure of the CMA by including the continued use of panels of experts in phase II investigations.

A perhaps more significant concern relates to the budget and resources of the new institution. Successfully managing the integration of the two bodies, while continuing to retain and attract talented staff may be challenging, at least in the short term. In July 2012, Lord Currie of Marylebone was appointed as Chair Designate to the CMA. Lord Currie was chairman of Ofcom until 2009 and currently chairs the International Centre for Financial Regulation. In his role as Chair Designate, Lord Currie will set out the CMA's vision and strategic direction.

Beyond these institutional reforms, the bill also proposes reform to some of the central features of the UK competition regime, notably: antitrust enforcement procedures; criminal cartel enforcement; market investigations; and merger control.

The reforms to each of these subject areas are discussed in turn below.

Antitrust enforcement

The UK government indicated it was concerned that antitrust enforcement under the Competition Act 1998 is a lengthy process. The UK government also expressed concerns that far fewer antitrust decisions are adopted in the UK than other EU countries. The UK government considered introducing a prosecutorial system but has decided instead to keep the current "administrative" regime for investigation and enforcement, albeit with some important modifications. Key modifications include greater publicity from the start of investigations, extending the CMA's information gathering powers and a lower threshold for the CMA to impose interim measures on parties subject to an investigation.

The CMA will, in future, publish a notice announcing that it is opening an investigation. This announcement can include the identity of the parties under investigation, the markets that could be affected, and the alleged anti-competitive conduct involved. This is similar to the approach adopted by the European Commission (EC).

Parties can therefore expect much greater publicity at the outset of antitrust investigations. However, if a case is later closed by the CMA, a notice must be published to confirm that the CMA is no longer investigating the matter. The initial announcement by the CMA will be covered by absolute privilege from libel proceedings insofar as the information contained in the announcement does not go beyond the details set out in the bill.

The CMA's powers during an investigation will also be extended. The CMA will, in future, be able to compel witnesses with a connection to a party under investigation to answer questions as part of that investigation. A connection is broadly defined to cover individuals involved (or having been) in the company's management or control or employment or otherwise working for it. The wording is intended to include volunteers and contractors.

Concerns have been raised about the defence rights of companies under investigation given that the CMA will only be obliged to inform such a company of an interview with an individual if the individual being questioned has a current connection with that company. This will allow the CMA to interview former employees of a company, under compulsion, without any notice to the company. Moreover, there is no provision in the bill for providing companies with access to witness transcripts. This limited access to the file is likely to complicate any attempts by a company to defend a case against it.

The OFT has powers to impose interim measures on companies under investigation before it has reached any concluded views on its investigation if it considers it necessary to act urgently to prevent serious harm to particular parties. Interim measures can have a significant direct impact on the strategic commercial decisions of a company. For example, in 2006 the OFT imposed interim measures on the London Metal Exchange (LME) following a complaint from a competitor. The OFT considered it had "reasonable grounds" for suspecting that the LME was abusing a dominant position and introduced measures to prevent the LME from opening at certain times of the day such that it could not be open for morning trading in Asia. On appeal, the interim measures were withdrawn. This remains the only example of interim measures to date.

The current legal test requires the OFT to show its measures were introduced to prevent the occurrence of "serious irreparable damage". The bill proposes to lower this threshold and refer to "significant damage". It remains to be seen how the CMA will apply this threshold. There is a real risk that the CMA could become more interventionist in its approach to interim measures and that competitors will seek to use the new low threshold strategically to their advantage.

Criminal cartel enforcement

The bill currently envisages a significant amendment to the criminal prosecution of individuals for their part in a cartel. Currently, a criminal offence is committed if the individual concerned has acted "dishonestly". The UK government intends to remove the requirement to prove dishonesty (ie, the mens rea element of the crime). The aim is to make it easier for the OFT to secure convictions in relation to the criminal offence and increase deterrence for the most serious kinds of anti-competitive behaviour.

In place of dishonesty, the bill proposes a defence to the criminal offence if customers have been given "relevant information" in advance. In order to be effective, publication of the "relevant information" will be in a form prescribed by the Secretary of State. The UK government has suggested that the publication of the "relevant information" could take place in the London Gazette or similar publication. This approach risks placing a significant burden on business and individuals to ensure that customers are given the "relevant information".

The removal of the dishonesty requirement will materially increase the risk of prosecutions for individuals agreeing to price-fixing or market sharing arrangements. Moreover, the requirement to publicise details of "arrangements" between actual or potential competitors may also affect significant areas of legitimate business activity such as joint ventures.

Market investigations

Despite concerns from the business community, the UK government continues to support the use of the wide-ranging market investigations which currently allow the CC to review features of markets that may restrict or distort competition but fall short of the prohibitions laid down in competition laws. The reforms to the market investigation regime principally concern the timetable and scope of such investigations.

Currently the OFT has no time limit for the conduct of market studies (phase I) or decisions to refer the markets under review to the CC (phase II). The bill proposes to impose a 12-month time limit on such market studies. If the market study is referred to phase II, the investigation must be completed within a further 18 months as opposed to the current two year timetable. The CMA will nevertheless have the power to extend the phase II timetable by six months if the CMA considers that there are "special reasons" for doing so.

The bill provides the CMA with the opportunity to conduct cross-market investigations in relation to particular types of conduct. Conduct or features that may impact a number of markets include secondary products at the point of sale such as payment protection insurance or extended warranties on different type of consumer goods. For example, the OFT is currently looking closely at the various forms of drip-pricing (ie the addition of various pricing add-ons or handling/administration charges).

The OFT currently has to rely on voluntary submissions of information during the initial stages of any market study until it considers it has the power to make a market investigation reference. In future, the CMA will have extended powers to call witnesses and documents once the CMA announces its intention to conduct a market study. The CMA will therefore have a single set of investigatory powers that can be used consistently across the whole market investigation process.

If a market study is referred to phase II, the Secretary of State will be able to ask the CMA to investigate public interest issues alongside competition issues raised by the decision to refer. The only public interest consideration to have been specified is national security. However, it will be possible to specify new public interest considerations at any time. This adds scope for the introduction of political issues into the market investigations regime in a much greater way than in the past.

Merger clearance

Although at one point a mandatory notification systems was mooted, the voluntary and non-suspensory merger control regime in the UK tests has been retained and the thresholds remain the same (ie target has turnover in the UK of £70 million or the merger creates or enhances a 25% share of supply). This means that it will still be possible for a purchaser to assume the competition risk, and complete a transaction before receiving clearance from the CMA.

However, the CMA will have greater scope to intervene to enforce business separation measures on completed deals. In particular, the CMA will be able to act if it has reasonable grounds to suspect that arrangements are in progress that, if carried into effect, will result in two or more companies ceasing to be distinct. The CMA will also be able to order the merging parties to unwind any pre-emptive action taken.

In addition, failure to comply with any such CMA orders may result in fines of up to 5% of the aggregate worldwide turnover of the company.

The CMA's use of these new powers will be critical to planning deals and the allocation of regulatory risk between the parties to future transactions in the UK.

These powers suggest that the UK merger control regime may be moving closer, in practice, to an EU-style mandatory regime.

Currently, the OFT must reach a final decision to refer a merger to the CC or clear it within 30 working days if the parties use a statutory merger notice or within a 40 working day non-statutory time limit if an informal submission is used. The statutory merger notice is only available for non-completed mergers and requires significant amounts of information to be provided in a specific format. The bill proposes a statutory initial 40 working days review period irrespective of whether the merger has been completed or the notification method used by the parties. If a merger notice is used, the 40 working days period begins once the CMA has received a satisfactory notification. If an informal submission is used, the review period begins once the CMA has received sufficient information to enable it to begin an investigation.

Given the equalisation of time limits, it is unclear whether parties will continue to use the merger notice procedure in future.

A new statutory and binding time limit will be introduced for negotiating merger remedies. Parties will be given a short five working day period to submit remedy proposals from the date of the CMA's decision that it intends to initiate phase II proceedings. The CMA can then consider and finalise any remedies during up to a further 45 working day period (which can be extended by up to 40 further working days). Therefore, the maximum phase I remedies period in the UK will now become equivalent to the phase II period in many other jurisdictions.

The bill extends the CMA's powers to require persons to give evidence and/or produce documents throughout the entire merger control process. This means that, from the outset of a merger investigation – even before the CMA has decided whether a possible merger falls within its jurisdiction – the CMA will be able to require any person to give evidence and / or produce documents under his or her control. These extended powers are backed up by the threat of large financial penalties.

A further reform of practical significance to many companies is the significant increase in filing fees for mergers reviewed by the CMA. These fees will come into effect in October 2012. Fees for transactions involving a target with UK turnover of at least £120 million will be subject to a fee of £160,000. This is significant by international standards. Even the minimum fee of £40,000, for the smallest deals, exceeds the filing fees charged in many other jurisdictions.

Competition law class actions

The government consultation includes proposals that are also likely to have a far-reaching impact on the antitrust risk exposure of companies operating in the UK. The proposals contained in the consultation include:

  • an opt-out collective action regime for private actions in competition law, which would allow consumers and businesses to bring a case collectively in the Competition Appeal Tribunal (CAT) to obtain damages for any loss cause by a competition law breach;
  • a possible rebuttable presumption of loss in cartel claims; prices would be presumed to have increased by 20 percent unless the defendant can prove otherwise; and
  • measures to encourage businesses, notably SMEs, to bring claims and promote speedy redress.

If adopted, the above measures would further encourage the growth of private actions for damages in the UK with the CAT set to become a centre for competition litigation across Europe. The impact on businesses could be significant and would increase the incentive for companies to ensure their compliance programmes are sufficiently robust.

Financial services regulatory reform

At the same time as reforms are being made to the competition law regime generally, there are also major reforms in relation to the UK financial services regulatory framework which have implications for the enforcement of competition law in the sector. The Independent Commission on Banking noted that competition has not been viewed as central to financial services regulation and this, among other things, has given rise to competition and consumer choice concerns.

Under the Financial Services Bill of May 25 2012 (FSB), the Financial Conduct Authority's (FCA) competition role appears to be stronger than that of the FSA's. One of the objectives of the FCA will be "promoting effective competition in the interests of consumers". The matters to which the FCA may have regard in considering the effectiveness of competition include, the needs of different consumers who use or may use banking services (including the need for information to facilitate an informed choice), the ease with which consumers can switch provider, the ease with which new entrants can enter the market, and how far competition is encouraging innovation.

However, unlike other sectoral regulators such as Ofcom, the FCA will not have the power to apply general UK competition law concurrently. Instead, the FCA can ask the OFT to consider whether a feature, or combination of features, of a market in the UK for financial services may prevent, restrict or distort competition in the UK. The FCA is likely to make such a referral if it considers it does not have sufficient powers itself to address the issue or where it considers the matter may benefit from competition expertise. The OFT (as drafted in the FSB) will be required to respond to such referrals within 90 days explaining how it proposes to respond to the request but it will be under no obligation to take any specified action.

Irrespective of how the FCA approaches its objective of promoting competition in financial services, the industry as a whole is expected to continue to be an enforcement priority for competition regulators both in the UK and the EU. Matters which have recently attracted the scrutiny of competition regulators include, among others:

The OFT's launch of a market study of the personal current account market. The market study will examine the switching process between banks, the transparency of personal current account charges and how to enable people to manage their accounts more effectively. In the next two years, the OFT also intends to consider the operation of payments systems and the banking market for small and medium-sized enterprises.

The EC investigation into possible price-fixing linked to alleged manipulation by some banks of interest rate benchmarks. The EU's Competition Vice-President Joaquín Almunia has stated that the "alleged rate rigging is a major competition concern". Almunia has warned that a finding that there has been a breach of competition rules, will result in action "to bring these practices to an end and prompt a change of culture in the banking sector."

The EC' investigation of interbank fees charged in respect of credit card transactions in which a supplementary Statement of Objections has been issued to Visa Europe. The EC considers that Visa's Multilateral Interchange Fees harm competition between acquiring banks and inflate the cost of payment card acceptance for merchants.

The EC's opening of two antitrust investigations concerning the credit default swaps (CDS) market. In the first case, the EC is considering whether investment banks and the leading provider of financial information in the CDS market, have colluded or may hold and abuse a dominant position in order to control such information. In the second case, the EC is investigating whether agreements between nine banks and ICE Clear Europe might create an incentive for the banks to use only ICE as a clearing house.

In sum, the UK competition law reforms are likely to have a material impact on the way in which companies operate in the UK. The impact may be most keenly felt by the financial services industry given, firstly, the desire for the FCA to take an increasingly high profile role in the promotion of competition and, secondly, the keen interest being taken by competition authorities in the UK and Europe in the financial services sector.

James Aitken

Freshfields Bruckhaus Deringer
65 Fleet Street
London EC4Y 1HT

T  +44 20 7936 4000
F  +44 20 7832 7001
E James.Aitken@freshfields.com

James Aitken is a partner at Freshfields. Much of his work involves dealing with fast-moving investigations, many of which involve behavioural issues with significant implications for the clients' commercial conduct and strategic objectives.

James has extensive experience working in the UK Competition Appeal Tribunal, enabling him to approach cases with practical insight gained from first-hand experience of seeing complex evidence and arguments tested. He also handles obtaining regulatory clearances for mergers, both before the EU Commission and UK Office of Fair Trading as well as coordinating obtaining necessary clearances worldwide.

He has particular experience of litigation challenges to regulatory decisions in court and the UK Competition Appeal Tribunal. Sectors he specialises in include financial services and institutions,; telecoms, media and technology; and, infrastructure and transport.

Timothy Lamb

Freshfields Bruckhaus Deringer
65 Fleet Street
London EC4Y 1HT

T  +44 20 7936 4000
F  +44 20 7832 7001

Timothy Lamb is an associate at Freshfields and has acted on a wide range of transactional and behavioural matters before the EU and UK competition authorities. His EU experience includes: merger control advice in the pharmaceutical, technology and mining sectors; state aid advice; and advice in relation to various EC antitrust investigations.

In the UK he has worked on the market investigation into aggregates, cement and ready-mix concrete; and merger control advice in the energy and publishing sectors.

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