On 15 March 2012, the UK’s Department for Business Innovation and Skills (“BIS”) announced its plans for the reform of the UK competition regime. These proposals were crystallised on 23 May 2012 in the Enterprise and Regulatory Reform Bill (the “Bill”).
The proposals set out in the Bill include amendments to the existing legal rules and certain procedures, as well as a major structural shakeup of the enforcement institutions, the Office of Fair Trading (“OFT”) and the Competition Commission (“CC”). As part of a wider rationalisation of UK governmental organisations, the OFT and CC are to be merged into a single entity, the Competition and Markets Authority (“CMA”) by April 2014.
This article highlights the main institutional and operational changes that will accompany this structural shift. It goes on to consider other key proposals contained in the Bill relating to merger control and the criminal “cartel offence”.
Institutional and operational changes - the CMA
Up until now, the OFT and CC have had distinct roles. The OFT is the primary enforcement body for behavioural competition law issues, and provides the first phase review for qualifying mergers. The CC steps in to provide a secondary, and often even more detailed review, of mergers and markets where the OFT has identified that competition concerns are likely to exist. The OFT exercises its behavioural enforcement powers concurrently with the various sectoral regulators, and the CC plays an additional role in those regulated sectors by acting as the focal point for regulatory appeals (e.g. price controls and licence disputes).
A key aim in merging the entities into the CMA is said to be the stream-lining of decision-making, and the elimination of duplication and inefficiencies. By concentrating decision-making within a single body, it is hoped that some of the burdens placed on businesses participating in competition-related reviews and investigations can be eliminated.
It is note-worthy however, the safeguards built into the merger of the OFT and CC mean that from an operational perspective, many procedures will remain, on the surface at least, very similar to how they currently operate. The CMA will retain the CC’s independent panel approach for those decisions currently taken by the CC, with decisions currently made by the OFT typically being the responsibility of the CMA’s Board.
In a similar vein, it is hoped that the OFT and CC’s reputation for independence will be safeguarded by, amongst other things, the CMA being designated as a “Non Ministerial Department” which is, therefore, explicitly free from ministerial influence.
The CMA is set to take on all the roles currently performed by the OFT and CC in the competition and regulatory sphere, but the destiny of its role with regard to consumer protection, a major area of OFT activity, has yet to be fully determined.
The CMA’s primary duty, which will be enshrined in legislation, will be to promote effective competition in markets across the UK economy for the benefit of consumers, thereby cementing its priorities and focus.
Merger control is one of the areas where both the OFT and CC play important, but distinct roles. Many commentators have expressed concern that the merger currently might impact the ability of the second phase review team to be completely independent from the CMA team that has concluded that there is a risk of the merger having a negative impact on competition during the first phase. The concern is that any blurring of responsibilities and loyalties between the teams may result in the outcome of the phase two review being a foregone conclusion.
The BIS proposal provides, however, that the decision-makers at phase one and phase two stages must remain entirely separate and independent. By utilising the same case management staff throughout, however, it is hoped that the process will be more streamlined, less burdensome, and will improve coherency. The proposal also tackles the current problem of delays and uncertainty in the timing or merger reviews, by establishing a fixed statutory time limit for all phase one merger reviews of 40 working days.
One change that is notably absent from the reform package, however, is any change to the voluntary nature of the UK merger control regime. Consequently, the CMA will not have the power to suspend completion of transactions pending the outcome of its review. The proposal does, however, strengthen existing powers to require merging entities to enter into “hold separate” undertakings from the outset of an investigation, as well as improving the ability of the CMA to take steps to unwind a merger which is blocked because it would result in a substantial lessening of competition in the affected markets.
Perhaps most significant for merging entities, is the commitment for the fees paid for a merger review to increase in October 2012. Already high, considering it is a voluntary regime, the new fees will range from £40k to £160k depending on the value of the target. Taken together, the incentives for not notifying will be strong. Presumably, Government must be thinking that what fails to be picked up at the merger stage, can still be regulated using the behavioural rules?
Criminal sanctions for hardcore cartel activity
The Enterprise Act 2002 (the “EA ‘02”) sets out the UK’s criminal law sanctions for hardcore cartel activity such as price-fixing, market-sharing and bid-rigging. It provides that “[a]n individual is guilty of an offence if he dishonestly agrees with one or more other persons” (emphasis added) to engage in hardcore cartel activity as defined in the EA ‘02 (the “Cartel Offence”).1
Despite much fanfare at its introduction in 2002, the Cartel Offence has so far proved to be a “zero” in terms of convictions. It may have acted as a deterrent in practice but prosecutions have been few and far between. In nearly ten years of operation, only two prosecutions have reached full trial stage: one was handed to prosecutors on a plate with defendants pleading guilty following a plea bargain with US prosecutors; the second case involving British Airways and aviation fuel surcharge collapsed shortly after coming to trial.
The Government has concluded that the Cartel Offence requires reform to improve its enforceability and increase deterrence. It has decided that it is necessary to amend the wording of the Cartel Offence by removing the dishonesty requirement. In the proposal BIS has stated that:
“Notwithstanding the lack of live evidence of difficulties arising during the course of a jury trial in a contested case, the Government has concluded that it is more likely than not that the inclusion of the ‘dishonesty’ element in the cartel offence is in fact inhibiting the OFT in prosecuting cases.”
Accordingly, once the legislation has been amended, prosecutors will no longer be required to prove dishonesty in prosecutions for the Cartel Offence. The Government has, however, decided to remove agreements which are “made openly” from the scope of the Cartel Offence. In order to take advantage of that exception, parties would need to make customers aware of the agreement by publishing, for example, relevant details in the London Gazette or another suitable publication. Section 188A of the Bill sets out in more detail three categories of circumstance in which the Cartel Offence will not be committed, largely based on the provision of “relevant information” to customers who would be impacted by the arrangements (e.g. the entity inviting bids).
Both the OFT and the Serious Fraud Office currently have jurisdiction to prosecute the Cartel Offence and this concurrent jurisdiction will be maintained when the CMA becomes operational. Similarly, the Government does not propose to alter the sanctions which may be imposed on conviction. These include, for a conviction on indictment, unlimited fines and/or custodial sentences of up to five years.
The Government is addressing a perceived obstacle to successful Cartel Offence prosecutions. This course of action would be understandable if a large number of prosecutions had failed in the past due to difficulties in proving dishonesty - a standard requirement for other criminal offences. In reality, the problems with the system have lain not with the rules themselves but with the enthusiasm and skill of those that have applied them.
Removing the “dishonesty” element may well create other problems for the authorities, for example with regard to whether the criminal courts will continue to have jurisdiction. More fundamentally, however, the change will not have the impact expected if the CMA fails to improve markedly on the performance of its predecessor in terms of coherent and effective enforcement.
1 The Cartel Offence constitutes a distinct offence from the civil law prohibitions set out in the Competition Act 1998 and the corresponding European Union legislation contained in Articles 101 and 102 of the Treaty on the Functioning of the European Union.©2013 Greenberg Traurig, LLP. All rights reserved.