UK Government Announces Merger between the Country’s Two Competition Authorities

March 19, 2012

On March 15, 2012, the UK Government published its response to a consultation relating to the possible reform of the UK’s competition regime ("Response").[1] In the Response, the Government announced its intention to merge the competition functions of the Office of Fair Trading ("OFT") and the Competition Commission ("CC") to create a single, independent entity, the Competition and Markets Authority ("CMA"). The CMA will be independent of the Government, although the CMA’s CEO and Board will be accountable directly to Parliament. To ensure independence and transparency whilst maintaining accountability, the CMA will be constituted as a Non-Ministerial Department ("NMD").

It is planned that this new regulatory body will be fully functional by April 2014 and will have responsibility for reviewing mergers, conducting market investigations and sector inquiries, instigating cartel and abuse of dominance cases, as well as having specific functions in relation to the UK’s regulated utility industries.

In proposing the reforms set out below, the Government has decided to strengthen the "primacy" of general competition law. An example of the primacy likely to be afforded to competition law is that, under the proposed reforms, sectoral regulators will be required unequivocally to consider whether the use of their antitrust powers is more appropriate before using their sectoral powers to promote competition. Moreover, the Secretary of State will have the power to request the CMA to investigate public interest issues alongside competition issues in order to put the UK’s competition regime at the heart of inquiries currently undertaken by ad hoc ‘commissions’. This approach is designed to enable the faster implementation of competition remedies. It will also harmonise the approach adopted for the "public interest markets" regime with that adopted under the "public interest mergers" regime, where CC panels can be required to consider public interest issues alongside competition issues.

Having brought together the two long-standing competition authorities, the Government may now turn to reforms to existing competition laws and introduce further measures to strengthen the enforcement regime. The Government believes that the proposed reforms will ensure that competition is improved in such a way that does not cause prolonged uncertainty and which delivers faster results for consumers.

In order to make it easier for the new CMA to tackle anti-competitive conduct and to deter firms from behaving anti-competitively, it is likely that the Government will focus initial reforms on the enforcement powers of the CMA.

Specific Proposed Reforms

Reforming the criminal cartel offence

The reform of the criminal cartel offence is a high priority for the Government, which stated in a recent consultation paper that it intended to boost the ability of the OFT to prosecute any individual involved in cartel activities.[2]

At present, the use of criminal sanctions under section 188 of the Enterprise Act 2002 against individual employees involved in cartel arrangements is very limited. In part, this is because, in order to secure a conviction, the OFT must prove that the individual[s] not only knowingly participated in cartel conduct but also acted dishonestly. Proof of "dishonesty" is notoriously difficult to establish in commercial cases.

In the Response, the Government expresses its opinion that the inclusion of the "dishonesty" element in the cartel offence is likely to inhibit the prosecution of cases. Accordingly, the Government has decided to introduce legislation to amend section 188 to remove the "dishonesty" element of the offence.

The proposed reforms clarify that the cartel offence will not be satisfied if the parties have agreed to publish details of the arrangements before they are implemented. According to the Response, publication would need to take place in a suitably accessible form, in a medium to be specified in the amending legislation. However, the amended provisions of the current cartel offence are still likely to require proof of the "intention" to enter into an agreement and an intention as to the operation of arrangements in question.

Reform of financial penalties

In the Response, the Government states its intention to draft legislation so that the level of financial penalties reflects the seriousness of the relevant antitrust infringement, the need for deterrence and the need for the Competition Appeal Tribunal ("CAT"), the UK’s specialist antitrust appeal court, to have regard to the statutory guidance on the appropriate amount of any penalty.

Moreover, the Government has decided to adopt legislation to allow the competition authorities to have the power to impose civil financial penalties (in place of criminal sanctions) on parties who do not comply with certain formal requirements during investigations. Given its position that enforceability and deterrence are the cornerstones of the proposed reforms, the proposed changes to financial penalties are likely to be high on the Government’s list of priorities.

Responsibility for merger control and investigations

During the one-year consultation period some concern was expressed that the present two-stage decision making process undertaken in merger notification cases (with the OFT reviewing all notifications before making a decision whether to refer the transaction to the CC) and market investigation cases would be lost with the merging of two previously distinct regulatory bodies. However, in the Response the Government sets out that the separation of phase 1 and phase 2 decision-making in respective merger notification cases and market investigation cases, coupled with the ring-fencing of regulatory appeals, will be specified in the proposed legislation. For example, legislation will provide for phase 1 decisions in merger notification cases and market investigation cases to be the responsibility of the CMA’s Board. According to the Response, mechanisms for the delegation of decision-making in phase 1 (aside from decisions on whether to make a market investigation reference) will be specified in legislation to allow the CMA flexibility to adapt its decision-making processes over time to meet changing demands.

Moreover, it will be required that phase 2 decisions and decisions in regulatory appeals be taken by panels of experts, with the maximum terms of appointment for such panellists being prescribed, along with mechanisms for their appointment and removal. The CMA will also be required to publish procedural rules and guidance on its procedures and decision-making structures.

Strengthening the merger regime

At present, the UK operates a voluntary regime for the notification of mergers. The Government believes that the notification regime should be strengthened and has decided that the CMA should have a discretionary power to suspend all integration steps and to reverse integration steps that have already taken place. However, the Government makes no reference to any intention to move towards a mandatory notification regime. The Response also sets out plans to introduce an exemption from merger notification for small businesses, in particular where the target’s UK turnover does not exceed £5 million and the acquirer’s turnover does not exceed £10 million. However, the Response goes on to state that this proposed reform is not, at present, a high priority.

Statutory time limits for the merger review process

In the Response, the Government announced its decision to introduce a statutory time limit of forty working days in relation to phase 1 mergers. However, this time limit can be extended where the CMA has to wait for outstanding information from one or all of the parties. This situation is similar to the current ability of the OFT to "stop the clock" in phase 1 merger reviews. However, the Government has decided to make no change to the phase 2 statutory time limit of twenty-four weeks. The Government has also decided to introduce statutory time limits and to amend the process involved in the negotiation and agreement of undertakings in lieu of a reference to the CC. The introduction of statutory time limits for undertakings in lieu of a reference to the CC may place the relevant parties under increased pressure to divest business interests and/or make decisions without having enough time to fully understand the implications of those decisions. It is likely, however, that firms will be able to apply for an extension to any time limit imposed in instances where they can show that being made to make a decision within a certain timeframe will lead to detrimental effects on the business, the wider market and/or consumers. Further, the Government will introduce a twelve week statutory time limit from the publication of the final report in phase 2 cases for the implementation of remedies (capable of extension where the CMA has stopped the clock because it is waiting for information) or by six (6) weeks where special reasons exist that are particular to the case in question.

Recovery of public costs

Despite concern from companies consulted by the Government, the Response sets out that the Government will increase merger notification fees. The Response does not set out the specific proposals in relation to increased fees.

While the Government has decided that it will not introduce cost recovery in antitrust investigations, it has decided to introduce a system of one-way cost recovery in telecommunications pricing appeals in order to render such appeals consistent with the cost recovery principles adopted for other regulatory price appeals. However, telecommunications pricing appellants (and third parties intervening in such appeals) will be liable for the CMA’s costs to the extent that their arguments on appeal are unsuccessful.

In relation to the recovery of the costs incurred by the CAT, the Government is to pursue a policy of optimal cost recovery by which costs are recovered from the majority of litigants before the CAT, but with the CAT itself having a discretion to waive recovery in the interest of access to justice. The Government will consult separately on the detailed arrangements regarding how costs recovery will be achieved in practice.

Effects of the reforms on start-ups

In his 2011 Budget, the Chancellor of the Exchequer, George Osborne, announced a three-year moratorium to exempt start-ups from new domestic legislation (and regulation). As a result, start-ups will not be subject to the CMA’s new information-gathering powers for merger cases and market investigations before April 1, 2014. However, given the likely timescale for the proposed reforms, it is likely that start-ups will feel the same effects as larger firms.

Next Steps

As noted above, a number of the proposed reforms will be subject to changes in primary legislation. Where this is the case, the reforms will be subject to the delays inherent in the passage of legislation before Parliament. The Government will work in parallel with the competition authorities and other stakeholders to implement those reforms that are not subject to Parliamentary approval, and is to consult further on the recovery of CAT costs.

Conclusions

It is hoped by the Government that the merger of the two existing authorities will build on their respective existing strengths, affording the merged entity scope to make better use of public resources, increase accountability and transparency and enhance the overall certainty for businesses subject to UK competition law.

[1]   "Growth, competition and the competition regime: Government response to consultation", published 15 March 2012 (see http://www.bis.gov.uk/Consultations/competition-regime-for-growth?cat=closedwithresponse)