UK competition law reforms announced
March 2012

Cartel criminal offence

In the most significant change to the substance of competition law, the Government is proposing that the criteria defining the criminal offence on cartels should be amended - making it easier to secure convictions.

Since 2003, it has been a criminal offence for an individual (for example, a director, a manager or an employee such as a salesperson) to agree with another person to make or implement certain types of seriously anti-competitive arrangement between businesses - namely (in broad terms) horizontal price fixing, limits on production or supply, market sharing or bid-rigging. An individual who is convicted can face up to five years’ imprisonment and/or a personal fine.

Until now the offence has only been committed if the individual concerned has acted “dishonestly”. Although there is case law on the meaning of “dishonesty”, it has not always been obvious how this applies in the context of anti-competitive agreements and arrangements. Since 2003, there has only been one successful prosecution under the legislation, in the “marine hoses” cartel in 2008, when three former Dunlop executives were jailed - but that was largely on the back of a USA criminal case. There was also the spectacular collapse, in May 2010, of the prosecution of four former British Airways executives for allegedly colluding with Virgin to co-ordinate fuel surcharge price rises.

The Government now proposes to remove the “dishonesty” criterion, so that the offence is committed even where “dishonesty” is not established, in the hope that this change will make it easier to bring prosecutions, so deterring the most serious kinds of anti-competitive behaviour. Critics of the Government’s proposed reform have pointed out that the collapse of the prosecution in the British Airways case had nothing to do with the difficulty of establishing “dishonesty”, but resulted from procedural failures on the part of the prosecuting competition authority, the OFT. Nevertheless, the Government believes that, more generally, the difficulty of establishing “dishonesty” may have inhibited the UK authorities, since 2003, from pursuing a larger number of cases under the cartel offence.

In place of the “dishonesty” criterion, the Government wishes to define the offence so as to exclude cases where details of the arrangement have been published before implementation. This reflects the notion that “secret” arrangements are more harmfully anti-competitive than those made public; for example, as a matter of general competition law, in a competitive tender it is legitimate for competing companies jointly to submit a single bid if they make the fact of their collusion known to the buyer, but it is unlawful “bid-rigging” for competitors to collude in submitting a bid while concealing that fact from the buyer.

However, the medium for publication which the Government is proposing seems bizarre. The Government envisages that it would be necessary to specify the format for publication “which could be in the London Gazette or a similar publication”. If customers are made aware of an arrangement, it seems an unnecessarily burdensome requirement that the parties to the arrangement should have to place a notice in the London Gazette (an official UK Government daily publication that lists insolvencies, the award of honours, and so on) in order to be exempt from prosecution. Moreover, it is hard to see that this requirement would have the desired practical effect; in many cases, publication in the London Gazette seems unlikely to bring the arrangement to the attention of customers.

Finally, in the context of the cartel offence, the Government has decided to continue to give both the UK competition authority and the Serious Fraud Office concurrent powers to prosecute.

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Merger control - no compulsory notification

This is the dog that didn’t bark. The Government had contemplated changing the UK merger control system - that is, scrutiny by the UK competition authorities of mergers and acquisitions - to introduce a system of compulsory notification. However, in its March 2012 announcement, the Government has decided not to do this - and to retain the current voluntary system.

By way of background, the UK merger control system is unusual in this respect. M&A transactions coming within the jurisdiction of the EU Merger Regulation must be notified to the European Commission, and may not be completed (closed) or otherwise implemented until the European Commission has given clearance. Similarly, in most national merger control systems, there is compulsory notification to the national competition authority, and the transaction may not be completed or implemented until that competition authority grants clearance.

Under the UK merger control system, by contrast, notification has always been voluntary, and there has been no prohibition on parties completing or implementing a transaction without clearance. (Of course, if a particular transaction is also subject to merger control in other jurisdictions, those other jurisdictions might well prohibit completion of the transaction without clearance.) This does not mean that there is no possibility of notifying under the UK system. Indeed, in many cases in the UK, the parties do submit notifications with a view to obtaining clearance prior to completion, particularly where the transaction potentially raises competition concerns. This is because if they complete without clearance the acquirer bears the risk that the UK competition authorities will subsequently investigate the transaction and perhaps prohibit it, in which case the acquirer will be forced to on-sell the acquired target (thus bearing double transaction costs, and probably only obtaining a low “fire-sale” price).

The point is that, under the UK system, parties have had the option of not notifying, and of completing without having obtained UK competition clearance. This may be of real practical value in certain circumstances. For example, if the transaction raises no material competition concerns, notification represents an unnecessary regulatory burden (it is also an unnecessary burden and cost for the competition authority, which more efficiently devotes its resources to cases raising real competition issues). Also, even if there are potential competition concerns, the voluntary system gives the parties the flexibility to allocate risk between themselves; an acquirer may choose, as part of the commercial deal, to assume the risk, particularly for example in a contested bid situation where this might give the acquirer a relative advantage (in timing, etc) over rival bidders.

In 2011, when the Government was consulting on UK competition reforms, it put forward the possibility of introducing a compulsory notification system. One reason for this was a concern that when unnotified transactions which raise real competition issues do come to be considered by the competition authorities, if they have already been completed and implemented it is difficult to “unscramble” them and the prejudice to competition has already occurred. Nevertheless, in its March 2012 announcement, the Government has decided to retain the voluntary notification regime, but to strengthen it to meet the “unscrambling” problem, regarding this as “the most proportionate response” to that problem.  (See next section on the strengthening measures that the Government has decided on.)

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Merger control - other measures

The Government, while rejecting compulsory notification, is proposing other changes to improve and strengthen the UK merger control regime. These include:

• “Hold-separate” powers: The new competition authority, the Competition and Markets Authority or CMA (a unified body replacing the two existing authorities, the OFT and Competition Commission), will have the power, at its discretion, to suspend all implementing steps for anticipated and completed transactions under UK merger control jurisdiction. This is intended to address the “unscrambling” problem described in the previous section.
  • The CMA will be able to exercise these powers both at the “Phase 1” initial examination and at the “Phase 2” subsequent full investigation.
  • The powers will include the possibility of ordering a reversal of action that has already taken place, for example recreating separate business units or functions within a merged entity.
  • The legislation will specify the type and range of measures that the CMA could take.
  • Parties breaching an order will face substantial fines (of up to 5 per cent of group worldwide turnover) and/or the possibility of a court order to ensure compliance.
• Phase 1 time limit: There will be a statutory time limit of 40 working days (eight weeks, plus public holidays) from notification to the Phase 1 decision. This replaces the current non-statutory target. It also supplants the current “merger notice” system, under which a Phase 1 decision was guaranteed within a maximum 30 working days (six weeks, plus public holidays) if the notifying party used a special notification form.
• Time limits for negotiating remedies: There will be statutory time limits for negotiating “conditional clearance” remedies, both at Phase 1 (called “undertakings in lieu” of a full Phase 2 investigation) and at the end of a Phase 2 investigation.
• Merger fees: Fees payable by the parties for consideration by the authorities of merger cases will be considerably increased, as follows:

• “Small business exemption”: The Government sees advantages in exempting transactions between small businesses altogether from UK merger control. This exemption would apply where the acquirer has a worldwide turnover below £10 million, and the target has a UK turnover below £5 million. However, the Government says that it “does not see this reform as a high priority at this time”.

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Market investigations

This is a mechanism, which exists in UK competition law but is not known in most other competition law systems, under which the UK competition authorities can examine how well a market functions, and can require changes in that market to remedy any anti-competitive features. By contrast with the (UK and EU) prohibitions on anti-competitive agreements and abuses of a dominant position, the market investigation system is entirely “forward-looking”: the authorities can require changes for the future, but do not impose penalties for past practices.

Under the existing system, the OFT conducts a “Phase 1” initial market study to see whether there is a concern and, if there is, refers it to the Competition Commission for a full “Phase 2” market investigation lasting up to two years. This system will essentially remain, except that the CMA will be responsible for both Phase 1 and Phase 2. Other changes are:

• Investigations across several markets: It will be possible for the CMA, in a single investigation, to look at practices across several markets - for example, extended warranties on different types of consumer goods.
• “Public interest” issues: If the CMA launches a Phase 2 investigation, the Government will have powers to require the CMA to investigate certain public interest issues alongside the purely competition issues which the CMA would already be investigating. The public interest issues will be: (i) national security (the only consideration currently specified in the legislation) or (ii) any additional public interest issue that may be specified by Parliamentary Order.
• Time limits: A series of new statutory time limits will be introduced, including:
  • The Phase 1 market study must be limited to one year (and the CMA will have to consult on whether to launch a Phase 2 investigation within six months of the start of the Phase 1 market study).
  • The maximum length of the Phase 2 full market investigation will be reduced from two years to 18 months (with a power to extend it to two years in special circumstances).
• No “super-complaint” right for small businesses: In its consultation in 2011, the Government had contemplated allowing bodies representing SMEs (small and medium-sized enterprises) to have the right, currently enjoyed by designated consumer groups, to make a “super-complaint” about practices in a market; a super-complaint requires the competition authority to give priority to consideration of the issue. In its March 2012 announcement, the Government has decided against this move, having been persuaded by objections that it could be abused by businesses as a mechanism to do down their competitors.

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The antitrust regime: the prohibitions on anti-competitive agreements and abuse of a dominant position

Both UK and EU competition law include prohibitions on businesses engaging in (i) agreements and arrangements restrictive of competition or (ii) unilateral abuse of a dominant market position. Until now, the OFT has had the power to take enforcement action against infringements of those EU or UK prohibitions in the UK. These prohibitions are sometimes referred to collectively as the “antitrust” regime.

The new CMA will now assume those enforcement powers.

Widespread concerns have been expressed about the fact that, in an investigation of alleged infringement of the prohibitions, a single authority (the OFT currently, and the CMA in future) is simultaneously investigator, prosecutor, judge and jury. It is alleged that this can result in unfairness to the accused business (even if unintentionally). The concern is that the authority, when investigating and unearthing evidence about the suspected breach, will form an impression that the accused party is at fault, and that this will prejudice its subsequent adjudication of the merits of the case - so-called “confirmation bias”. Such concerns were highlighted in a number of cases, including most recently, in December 2011, the Competition Appeal Tribunal’s overruling of the OFT’s decision in the “tobacco” pricing case; the OFT had investigated a number of cigarette manufacturers and supermarkets for alleged infringements of the prohibition on anti-competitive agreements, had reached a decision that there were indeed infringements, and had imposed substantial fines. The Competition Appeal Tribunal’s judgment, quashing the OFT’s decision and fines, was critical of the OFT’s methodology, and came close to suggesting that there had been confirmation bias¹.

In its consultation on possible reforms, the Government considered various ways of addressing concerns about fairness and “confirmation bias”, including the possibility of a US-style prosecutorial system under which the competition authority investigating the alleged infringement (the OFT now, the CMA in future) would not itself make the final decision on the infringement, but would have to “prosecute” its case before an independent court or judicial tribunal which would make the final decision. An alternative, less radical, approach would have involved different teams within the CMA carrying out the separate functions of a “Phase 1” investigation and a “Phase 2” adjudication.

In the end, the Government has opted for a much more modest solution. Full responsibility for UK enforcement of the prohibitions will remain within one competition authority (the CMA), and concerns about confirmation bias will be addressed through incremental reforms of the existing procedures. The current OFT is being asked to consider (i) an expanded role for the Procedural Adjudicator (an internal official who considers disputes with the parties about procedural fairness), and to “investigate further means of bolstering the separation of decision-making from investigation so that independence of mind is encouraged and the risk of confirmation bias reduced”, while consulting the Competition Commission and “other stakeholders” on these issues. This outcome may be seen as a “victory” for the OFT, which had lobbied against more far-reaching changes.

Other proposals for changing the procedures on the prohibitions (the “antitrust” regime) include:

• Speeding up procedures: Accepting the OFT’s proposals that each case should have a published timetable, and asking the OFT to consider further how to make this more robust.
• Penalties for non-compliance with an investigation: There are currently criminal offences for non-compliance, and the Government had considered supplementing these with a power to allow the CMA to impose civil penalties (fines) on parties not complying with requirements. In the end, the Government has decided that the CMA should not have both criminal and civil powers in this respect; rather, the Government has proposed removing the criminal sanctions, and replacing them with the power to impose civil fines (except for obstructing an officer in the exercise of powers to enter premises, in which case criminal penalties will remain).
• Warrants for entry by force: In the course of an investigation of a suspected infringement, the OFT (and, in future, the CMA) has “dawn raid” powers to enter premises with a view to searching for relevant documents and other evidence. However, to enter premises by force, the OFT has needed to obtain a warrant from the High Court. The CMA will now be able to obtain such a warrant from the Competition Appeal Tribunal.
• Announcing investigations: The CMA will be able to publish notices announcing that it is engaged in an investigation of a cartel or other anti-competitive practice (as the European Commission currently does). Absolute privilege from libel proceedings will attach to such an announcement, so long as it is confined to a simple statement of the procedural status of the investigation.
• Antitrust fees: In its consultation in 2011, the Government had put forward the possibility of imposing fees on businesses under investigation for infringement of the prohibitions. Faced with strong opposition, the Government has decided not to introduce a power to impose such fees.;

¹In paragraph 85 of its judgment, the Tribunal - referring to the evidence of a witness on whom the OFT had relied - said: “If the OFT had tested the evidence more stringently, … it might have become clear sooner that her evidence as to how the agreement between Sainsbury and Imperial worked did not appear to be consistent with the OFT’s findings in the Decision. The OFT might have been able at that point to consider the implications of [the witness’s] evidence for the strength of its case.” Cases 1160/1/1/10 etc Imperial Tobacco and Others v OFT [2011] CAT 41.

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Institutional change: the Competition and Markets Authority (CMA)

The two existing competition authorities - the Office of Fair Trading or OFT (which is currently responsible for Phase 1 merger examinations and market studies, and for investigations under the prohibitions) and the Competition Commission (which is currently responsible for Phase 2 merger investigations and market investigations) - will be amalgamated into a single unitary competition authority, the Competition and Markets Authority or CMA.

The advantages of such a move have widely been seen as creating a single, stronger “advocate” for competition policy both within the UK and on the international stage, and possibly also leading to some costs savings through the removal of certain duplication between the work of the OFT and the Competition Commission.

On the other hand, concerns were expressed that, in the field of merger control and market investigations, having a single body conducting both Phase 1 and Phase 2 would remove the proper “separation of powers”, and could lead to the kind of problems about confirmation bias that have been alleged in the context of the prohibitions (the “antitrust” regime).

The Government has addressed this concern by requiring that, within the CMA, there will be an “executive” group responsible for Phase 1 merger examinations and market studies, and for decisions in Phase 2 merger and market investigations (and in appeals against sector regulators’ decisions) to be taken by “panels made up of independent members drawn from a pool with relevant expertise”. It is plausible that the nature and composition of these Phase 2 “panels” will not be very different from the existing Competition Commission, although possibly with the requirement of a greater time commitment from panel members.

Executives involved in Phase 1 cases will not have any role as decision makers at Phase 2.

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Institutional change: the sector regulators

Currently, the economic regulators of various sectors (generally formerly nationalised industries that were privatised in the 1980s and 1990s) - such as Ofgem for gas and electricity, Ofwat for water, Ofcom for telecoms, and the ORR for rail - have powers to apply the EU and UK competition law prohibitions (concurrently with the OFT) in their particular sectors, in addition to their powers to apply direct regulation to their sectors through price controls, the enforcement of licence conditions, and so on.

After considering various options for changing the competition law powers of the sector regulators, the Government has decided on a number of proposals:

• Concurrent competition powers to remain: The sector regulators will retain the power to apply the EU and UK competition law prohibitions concurrently with the CMA.
• Primacy of competition law: Indeed, the sector regulators will have a statutory requirement to consider, before using their direct regulatory powers to promote competition, whether the use of their powers under the competition prohibitions is more appropriate.
• Role of the CMA: The CMA and the sector regulators will be asked to work together more closely, and greater information sharing about competition cases will be required between the CMA and sector regulators.
• Annual CMA reports: The CMA will be obliged to report annually on the use of concurrent competition powers in the regulated sectors.

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Further information

For further information on the proposed UK competition reforms, and on any other matters of UK or EU competition law, please feel free to contact:

Michael Grenfell - Partner
Email: michael.grenfell@nortonrose.com
Tel: 020 7444 3597
Mobile: 07770 650118

Martin Coleman - Partner, Global Head of Antitrust, Competition and Regulatory
Email: martin.coleman@nortonrose.com
Tel: 020 7444 3347
Mobile: 07770 650075

Peter Scott - Partner
Email: peter.scott@nortonrose.com
Tel: 020 7444 3834
Mobile: 07725 3504

Mark Jones - Partner
Email: mark.jones@nortonrose.com
Tel: 020 7444 3104
Mobile: 07909 684891

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