BRIEFING PAPER
Number 04814, 1 September 2016
The UK competition
regime
By Antony Seely
Inside:
1. The purpose of competition
law
2. Reforming the UK
competition regime
3. Recent developments
www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary
Number 04814, 1 September 2016
Contents
Summary
3
1.
The purpose of competition law
5
2.
Reforming the UK competition regime
12
3.
3.1
3.2
Recent developments
The NAO’s review of the competition regime
Consultation on options to refine the regime
20
20
23
Cover page image copyright: CRI-8021 by UK Parliament/Mark Crick image. Licensed under CC BY 2.0 /
image cropped.
2
3
The UK competition regime
Summary
Competition law seeks to curb practices that would undermine or restrict competition to
the detriment of consumers: the abuse of a dominant market position by a firm, anticompetitive agreements between firms, and, mergers or takeovers which, if allowed,
would result in a substantial lessening of competition. This note gives an introduction to
the purpose of competition law and a summary of the institutional arrangements in this
country for enforcing it.
In the UK the responsibility for enforcing competition law lies with the independent
competition authority: the Competition & Markets Authority (CMA). The CMA was
established from the merger of the Office of Fair Trading (OFT) and the Competition
Commission (CC), and took on these duties from 1 April 2014. 1
The legislative framework for the UK regime is established by the Competition Act 1998
and the Enterprise Act 2002, as amended by the Enterprise and Regulatory Reform Act
2013 which created the CMA. 2 This gives the Government very limited powers to
intervene in either the assessment of mergers or the investigation of markets.
As a consequence, in most cases, public concerns about instances of anti-competitive
behaviour or the implications of a merger or takeover should be referred directly to the
CMA. Individuals may report any issues relating to a market not working well, unfair
terms in a contract, or any issues related to anti-competitive practices to the CMA using a
standard form, published on Gov.uk. The CMA has detailed guidance on its work
regarding mergers, markets, and cartels & other anti-competitive behaviour.
The individual sectoral regulators – Ofcom, Ofgem, etc – have concurrent powers to start
enquiries in their respective fields – communications, gas & electricity, etc. Since 1 April
2015 the Financial Conduct Authority has had concurrent competition powers for the
provision of financial services. Its role is not covered in depth in this note, though
guidance on the FCA’s role is collated on the organisation’s site. 3
The prohibition in UK competition law of the abuse of a dominant position and anticompetitive agreements is underpinned by equivalent provisions in EU law (specifically,
Articles 101 & 102 of the Treaty). Similarly the national competition authorities of the
Member States operate within the context of the EU-wide regime, so where markets or
mergers have an EC-wide dimension, the lead competition authority is the European
Commission. Guidance on the scope of the Commission’s responsibilities, and its ongoing
work, is on its site.
The CMA does not take the lead in enforcing consumer protection law. Alongside the
changes to the competition regime which have been made in the last three years, the
Government has also reformed the institutional arrangements for advising consumers on
their rights, and enforcing legislation for their protection: these responsibilities are now
the work of the Citizen’s Advice Bureau, and local authorities Trading Standards services
1
2
3
CMA press notice, New competition authority to make markets work well for consumers, business and the
economy, 1 April 2014
Parliament’s Bill pages collates material on the passage of this legislation, including the Library paper
prepared for its Second Reading (Library Research paper 12/33, 7 June 2012), and a summary of the Bill’s
scrutiny in Committee (Library Research paper 12/56, 3 October 2012).
In addition the general principles to the FCA’s role were set out in a speech given by the director of
competition at the FCA, Deb Jones, in November 2014: FCA press notice, The FCA’s new competition
powers: what do they mean for the financial services industry?, 21 November 2014
Number 04814, 1 September 2016
(TSS) respectively. 4 That said, the CMA has the lead role in investigating and prosecuting
cases relating to the legislation to prevent unfair terms in consumer contracts. 5
In February 2016 the National Audit Office published a review of the UK competition
regime, to consider early evidence of the CMA’s performance and risks to achieving value
for money. While it concluded that the regime as a whole was “more coherent” it raised
concerns that there were “still too few successful enforcement cases, and business
awareness of competition law could be improved,” adding, “the regime has further to go
to ensure that value for money is achieved .” 6
In the CMA’s initial response to the report Chief Executive, Alex Chisholm, said, “we are
committed to increasing both the number and the speed of our competition enforcement
cases, while maintaining our emphasis on fairness and rigour … Elsewhere we are
delivering a multi-sector compliance programme across the regions, to raise awareness
amongst small and medium-sized enterprises (SMEs) of competition law and of our role in
enforcing it.” 7 At this time the CMA released a draft version of its 2016/17 annual plan
inviting comments. A final version was published in March. 8 Respondents expressed
“particular support for the increased focus on swift and effective enforcement of
competition and consumer law, complemented by activities to raise awareness of, and
promote compliance with, the law.” 9
In the Queen’s Speech on 18 May the Government announced that during the 2016/17
Session it would introduce a Better Markets Bill, to “open up markets, boost competition,
give consumers more power and choice and make economic regulators work better.” One
element of the Bill covers the environment for competition, specifically:
•
•
•
to speed up the decision making process for competition investigations and make
the whole process easier for businesses and better for consumers.
to give the competition authorities more powers to take on anti-competitive
behaviour.
to improve the landscape for economic regulation. 10
On 25 May the Department for Business, Innovation & Skills launched separate
consultation exercises on these measures, including a paper on the competition regime –
setting out possible changes to the CMA’s assessment of markets and markets, and to its
powers to enforce antitrust and competition laws, as well as changes to the functions and
jurisdiction of the Competition Appeal Tribunal. Implementation of these proposals could
require primary legislation, secondary legislation, and changes in practice and procedure. 11
The consultation closed on 24 June and the Government has stated it will publish a
response “by autumn 2016 setting which, if any, of the options we intend to take
forward.” 12
4
5
6
7
8
9
10
11
12
For details see, New consumer landscape, Commons Briefing Paper SN6759, 19 November 2013. The
OFT’s historical site has guidance for consumers and businesses on the best route for any complaint.
For details see, CMA, Consumer Protection: guidance on the CMA’s approach to use of its consumer
powers, CMA7, March 2014
NAO press notice, The UK competition regime, 5 February 2016
CMA press notice, CMA welcomes NAO report, 5 February 2016
Competition and Markets Authority annual plan 2016 to 2017, March 2016
CMA Annual Plan 2016/17 consultation : Summary of responses, March 2016 para 1.2
Cabinet Office, Queens Speech 2016 – Background Notes, May 2016 p24
BIS press notice, Better Markets Bill to arm consumers with more power and choice, 25 May 2016
BIS, Options to refine the UK competition regime: a consultation, May 2016 p35
4
5
The UK competition regime
1. The purpose of competition
law
Competition is … a process of rivalry between firms seeking to
win customers’ business over time by offering them a better deal.
Rivalry creates incentives for firms to cut price, increase output,
improve quality, enhance efficiency, or introduce new and better
products because it provides the opportunity for successful firms
to take business away from competitors, and poses the threat that
firms will lose business to others if they do not compete
successfully. 13
Competition law seeks to curb practices that would undermine
competition. A standard guide to its scope and application in the UK
and across the EU gives a summary of the four main areas that the law
is concerned with:
•
anti-competitive agreements: agreements that have as their
object or effect the restriction of competition are unlawful, unless
they have some redeeming virtue such as the enhancement of
economic efficiency. In particular agreements between
competitors, for example to fix prices, to share markets or to
restrict output - often referred to as horizontal agreements - are
severely punished, and in some systems of law can even lead to
the imprisonment of the individuals responsible for them.
Agreements between firms at different levels of the market known as vertical agreements - may also be struck down when
they could be harmful to competition: an example would be
where a supplier of goods instructs its retailers not to resell them
at less than a certain price, a practice often referred to as resale
price maintenance. As a general proposition, vertical agreements
are much less likely to harm competition than horizontal ones.
•
abusive behaviour: abusive behaviour by a monopolist, or by a
dominant firm with substantial market power which enables it to
behave as if it were a monopolist, can also be condemned by
competition law. An example would be where a dominant firm
reduces its prices to less than cost in order to drive a competitor
out of the market or to deter a competitor from entering the
market so that it can subsequently charge higher prices, a
phenomenon known as predatory pricing.
•
mergers: many systems of competition law enable a competition
authority to investigate mergers between firms that could be
harmful to the competitive process: clearly if one competitor were
to acquire its main competitor the possibility exists that consumers
would be deprived of choice and may have to pay higher prices as
a result. Many systems of competition law provide that certain
mergers cannot be completed until the approval of the relevant
competition authority has been obtained.
•
public restrictions of competition: the State is often
responsible for restrictions and distortions of competition, for
13
OFT/CC, Merger Assessment Guidelines OFT1254/CC2, September 2010 para 4.1.2
Number 04814, 1 September 2016
example as a result of legislative measures, regulations, licensing
rules or the provision of subsidies. Some systems of competition
law give a role to competition authorities to scrutinise 'public'
restrictions of competition and to play a 'competition advocacy'
role by commenting on, and even recommending the removal of,
such restrictions. 14
The authors – Whish and Bailey – go on to examine several theories as
to why competition should be a central goal for public policy,
concluding that “competitive markets seem, on the whole, to deliver
better outcomes than monopolistic ones, and there are demonstrable
benefits for consumers … there is probably a greater global consensus
on the desirability of competition and free markets today than at any
time in the history of human economic behaviour.” 15 The Department
for Business, Innovation & Skills (BIS) has noted that, “competition laws
have become increasingly prevalent internationally as their value has
been recognised: today some 112 jurisdictions have competition laws,
with more proposing to adopt them in the new few years.” 16
The legislative framework for the UK’s competition regime is provided
by the Competition Act 1998 and the Enterprise Act 2002, as amended.
(More details on the development of the law through these two central
pieces of legislation are given in two Library papers, written when these
provisions were introduced. 17) In its White Paper which preceded the
introduction of the second of these Acts, the then Labour Government
argued for the central importance of competition for ensuring that
markets work effectively – to the benefit of consumers, producers and
the economy as a whole:
Vigorous competition between firms is the lifeblood of strong and
effective markets. Competition helps consumers get a good deal.
It encourages firms to innovate by reducing slack, putting
downward pressure on costs and providing incentives for the
efficient organisation of production. As such, competition is a
central driver for productivity growth in the economy, and hence
the UK's international competitiveness. 18
A similar argument was made in the consultation document which the
Coalition Government published in March 2011, when it first proposed
to reform the UK competition regime by merging the OFT and the CC:
Competition is the lifeblood of a vibrant economy and
fundamental to growth. Open and competitive markets:
14
15
16
17
18
•
make businesses more efficient and innovative;
•
help small businesses to grow and enter new markets;
Richard Whish & David Bailey, Competition Law (7th edition), 2012 pp 2-3
op.cit. p18
BIS, A Competition Regime for Growth: impact assessment, March 2011 p10; in turn
the department cite, Kovacic W., ‘Dominance, duopoly and oligopoly: the United
States and the development of global competition policy’, Global Competition Review,
December 2010 (Vol. 13 ISS 11).
Competition Bill [HL], Library Research paper 98/53, 28 April 1998 & Enterprise Bill,
Library Research paper 02/21, 4 April 2002
Department for Trade & Industry, A World Class Competition Regime, Cm 5233, July
2001 para 1.1
6
7
The UK competition regime
•
drive lower prices and better products, services and choice
for consumers;
•
enhance productivity and economic resilience. 19
The department’s impact assessment published as part of the 2011
consultation discussed how some economists have tried to quantify
these benefits. While there is a strong evidence base which shows that
competition is effective in driving down prices and encouraging
innovation, it is harder to prove that competition law is an important
factor in improving productivity:
In the short term competition generates efficiency gains within
firms by forcing firms to allocate resources more efficiently and
putting downward pressure on costs. In the long term,
competition generates dynamic benefits as the best performing
firms expand, the worst performers exit and new firms enter the
market, leading to increased aggregate productivity. The static
benefits from increased allocative efficiency have been shown
empirically to be substantial, but it is widely believed that the
dynamic benefits exceed the static benefits.
Harris and Li (2007) 20 used data from 1996 to 2004 to examine
the factors affecting productivity growth. They found that 42%
of UK total factor productivity growth comes from reallocation
between firms, 37% from exit and entry of firms and 22% from
intra-firm productivity growth.
Competition also encourages innovation of new products and
production processes and R&D investment as firms need to remain
competitive in order to retain customers and survive. Griffiths et
al. (2006) 21 analysed the impact of the EU single market
programme. They found that competition increased innovation
by incumbents, but if anything decreased the incentive for new
firms to innovate. In addition, competition creates pressure for
management efficiency. Bloom and Van Reenen (2006) 22 found
that competition increases management quality but does not
reduce work-life balance, a trade off that has been argued.
Market forces can sometimes fail to deliver effective competition,
if for example, mergers lead to a high degree of concentration or
if high barriers to entry prevent new and innovative companies
from accessing markets. By setting the market frameworks, the
Government can therefore help to ensure markets are conducive
to productivity growth. Competition law facilitates open and
competitive markets and restricts and deters anti-competitive
behaviour. 23
Evidence on the impact of competition policy on productivity is
limited, as no OECD country has operated without competition
laws so the appropriate counterfactual is not available.
Nevertheless the suggestion is that competition policy has a
19
20
21
22
23
A Competition Regime for Growth, March 2011 para 1.1
Harris, R.I.D. and Li, Q. (2007) Firm Level Empirical Study of the Contribution of
Exporting to UK Productivity Growth. Report to UK Trade and Investment.
Griffith, R., Harrison, R. and Simpson, H. (2006), ‘The link between product market
reform, innovation and EU macroeconomic performance’, European Economy
Economic Papers No. 243.
Bloom, Nick and van Reenen, John (2006), ‘Management practices, work-life balance
and productivity: A review of some recent evidence’, Oxford review of economic
policy, Vol. 22.
Whilst acknowledging some markets are subject to natural monopolies, competition
law prevents these firms from abusing a dominant position.
Number 04814, 1 September 2016
significant positive impact on total factor productivity. Empirical
work suggests that there is a negative relationship between
market power and productivity, with a 10% increase in price
mark-ups resulting on average in a 1.3 to 1.6% loss in total factor
productivity growth (Disney et. al, 2003 24 and Nickell, 1996 25). 26
In 2012 the Department cited more recent academic work to suggest
that “good competition policy has a strong impact” on productivity.
The relationship is “particularly strong for specific aspects of
competition policy related to its institutional set up and anti-trust
activities (rather than merger control).”27 The authors concede their
work “contributes to the still very limited empirical literature that
evaluates the effectiveness of competition policy.” They go on to
underline certain shortcomings in the analysis: first, it does not assess
the net benefits of the regime – taking into account the costs of
enforcing competition law. Second, their approach did not consider the
impact of individual aspects of a national regime – such as the size of
sanctions imposed by national authorities. 28
More recently in October 2015 the OECD published a series of papers
from individual countries, taking views on the impact of competition on
job creation, as part of a global forum on this issue. The UK’s
submission concluded, “in the long run, we believe that effective
competition supports economic growth, and hence creates
opportunities for employment”:
However we recognise that the short-term and within-market
impacts of competition on jobs can be ambiguous, and that this
can sometimes lead to criticism of procompetitive interventions.
Against that backdrop, it is important to articulate the potentially
beneficial longer term or wider effects of competition which,
ultimately, can support employment, for example in terms of
expanding output and stimulating the development of new
markets. 29
In the past the competition authorities have produced some estimates
of the financial benefits of the UK’s regime to consumers – though, as
noted in the Competition Commission’s 2011 annual report, these are
not precise numbers:
Although some of the benefits flowing from our work are hard to
quantify and attribute accurately, the CC aims to quantify where
possible the direct financial benefits to consumers that we
achieve. The CC and the OFT have estimated direct financial
benefits to consumers of £465 million for the market investigation
24
25
26
27
28
29
Disney, R., Haskel, J. and Heden, Y. (2003), ‘Restructuring and Productivity Growth in
UK Manufacturing’, Economic Journal, Vol. 113.
Nickell, S.J. (1996), ‘Competition and Corporate Performance’, Journal of Political
Economy, Vol. 104.
A Competition Regime for Growth: impact assessment, March 2011 p9
Buccirossi et al., (2011), Competition policy and productivity growth: An empirical
assessment, Düsseldorf Institute for Competition Economics p29, p1. (This is cited in,
BIS, Growth, competition and the competition regime: response to consultation,
March 2012 p5, p21.)
op.cit. p5, p30
Does competition kill or create jobs? – contribution from the UK, September 2015
p6. In turn this report was based on an overview of the literature published by the
CMA: Productivity and competition: a summary of the evidence, July 2015
8
9
The UK competition regime
regime 30 and £127 million for mergers in 2010/11 (these are
annual estimates averaged over the three-year period 2008/09 to
2010/11 and include the work done by both the OFT and the CC).
In making these estimates, we recognize that our approach is
partial in its scope and subject to considerable uncertainties in its
application. At present we have no agreed methodology for
estimating the benefits of our regulatory work. 31
In June 2013 the OFT published estimates of consumers’ savings from
its own work, 32 which in turn were collated by the Department, which
put the direct savings made by consumers from the regime at £598m in
2012/13. 33 The Department published estimates in March 2015, which
gave a similar estimate of these savings:
The OFT and Competition Commission estimate that the
competition regime produced direct benefits to consumers of
around £575 million in 2013/14. This figure includes only direct
financial savings to consumers and does not account for wider
effects, such as any impact on productivity or the deterrence
effect of the OFT and CC’s work or the wider competition and
consumer regime.
The overall impact estimate is roughly the same as the £598
million in 2012/13. The indicator has fallen from £810m in
2011/12. This fall is the result of the high impact 2009/10
Groceries investigation dropping out of the three year rolling
average. The estimated benefits of competition enforcement have
risen slightly. Estimated merger benefits have stay roughly the
same. 34
During the proceedings of the Enterprise and Regulatory Reform Bill,
several witnesses expressed considerable scepticism about these figures,
though there was consensus that, even if the value of the competition
regime could not be quantified, competition brought considerable
benefits for the economy; as Professor Catherine Waddams (Professor
of Regulation, University of East Anglia) said, “[the impact of
competition on productivity] is something almost immeasurable, in
terms of the whole nature of the productivity of the economy … [but] I
think that there is no doubt that the historical evidence shows that
vigorous competition policy does have those benefits.” 35
Subsequently in July 2015 the CMA published estimates that put annual
direct benefits of £745m over the period 2012-15, putting ratio of
benefits to cost at 12:1. The department suggested that although the
estimates relied, in part, on assumptions, in their view the numbers
were on the conservative side:
30
31
32
33
34
35
The figure for the direct financial benefits to consumers from the market investigation
regime is different from those presented in the OFT’s Positive Impact report, for two
reasons. First, the OFT’s Positive Impact 2010/2011 took into account all of the OFT’s
market studies, including those where referral to the CC was not a possible option.
Secondly, the CC’s estimates include also references made by the sectoral regulators.
Competition Commission Annual Report and Accounts 2010/11, HC 1098 7 July
2011 pp10-11
Positive Impact 12/13, OFT1493, June 2013
The value of the consumer benefits of the competition regime, December 2013 p3
The value of the consumer benefits of the competition regime, March 2015 p4
PBC, 3rd sitting, 21 June 2012 cc106-7 Q243
Number 04814, 1 September 2016 10
Although necessarily relying in part on assumptions, 36 we regard
our estimates of direct financial benefit as being on the
conservative side. In general relatively cautious assumptions are
applied to the estimates and they exclude estimates of benefits
from a number of cases where the impact was difficult to quantity
in a sufficiently robust manner. In addition the focus on direct
financial benefits excludes many important wider impacts of the
competition regime including, for example, the deterrence of anticompetitive mergers and other types of anti-competitive
behaviour and the CMA’s wider impact on productivity and
growth. 37
In its survey of the competition regime published in early 2016, the
National Audit Office noted that there remains “no measure of the
competition regime’s impact on growth or productivity.” The report
gives some details of ongoing work by the CMA to estimate the
deterrence impact of its work, and the impact of the regime on
productivity:
The regime does not report its wider impacts on competition
(such as through deterrence) or on productivity and growth, and
these effects can be difficult to quantify.
The CMA has been working with the European Commission and
the Dutch competition authority to estimate the total benefits
(including both direct and indirect effects) of their work, and to
improve understanding of the deterrence effect. In September
2015, the three authorities organised a conference to examine
practical approaches to estimating deterrence effects and the
broader macroeconomic impact on productivity and growth,
concluding that further research was needed. 38 To improve
understanding of the wider impact of its interventions, the CMA is
currently undertaking research into the deterrence effect of
competition authorities’ work.
In September 2015, the CMA published a summary of existing
evidence on the relationship between competition and
productivity. 39 It found a strong theoretical and empirical link
between competition and productivity and evidence that
competition enforcement can have a positive impact on growth.
However, there is less evidence on the links between specific
competition interventions and growth, or on how competition is
evolving in different UK industries both of which are very difficult
to measure in practice. There is also limited evidence either in the
UK or internationally, on the relative effectiveness of different
tools in promoting growth and productivity (such as a market
investigation versus an enforcement action). A substantial
proportion of the CMA’s work is mandatory, limiting its choice of
which tools to use or its flexibility to choose its targets or respond
to changing circumstances. 40
36
37
38
39
40
Impact estimations are conducted immediately after cases are completed and are
therefore based only on information available during the case and on assumptions
regarding the expected impact of our interventions. On this basis the estimates are
considered to be ‘ex ante’ evaluations.
CMA impact assessment 2014 to 2015, July 2015 para 1.5-6
European Commission, Deterrence and macroeconomic impact of the work of
competition authorities, September 2015
CMA, Productivity and competition: a summary of the evidence, CMA 45, July 2015
The UK competition regime, HC737, February 2016 p7, p44
11 The UK competition regime
Whish and Bailey observe that competition law has been used to further
a variety of objectives by governments:
Historically there has not been one single, unifying, policy that
bound the development of EU and UK law together. In particular
competition policy does not exist in a vacuum: it is an expression
of the current values and aims of society and is as susceptible to
change as political thinking generally. Because views and insights
shift over a period of time, competition law is infused with
tension. 41
The authors identify several policy goals in this context:
•
•
•
•
consumer protection – with some suggestion that the competition
regime might prevent ‘unfair’ prices, be that for consumers or for
producers;
redistribution of economic power and wealth;
the protection of home companies against international competition;
and,
the integration of the Single European Market, which has been so
important in the context of the EU.
Further to the types of behaviour that competition law seeks to curb is
the question of the mechanism by which it is enforced – to put it
bluntly: who decides?
If there are to be competition authorities to decide on what is and
what is not acceptable business behaviour, what type of
institution should be asked to make these decisions (a court, a
commission, an individual?); how should individuals be appointed
to those institutions (by ministerial appointment, be election, by
open competition?); and how should those institutions themselves
be controlled (by judicial review, or by an appellate court?). 42
The institutional arrangements made in this country for enforcing
competition law are addressed in the next section of this note.
41
42
Competition Law (7th edition), 2012 p20
op.cit. p24
Number 04814, 1 September 2016 12
2. Reforming the UK competition
regime
The main elements of the UK competition regime are:
•
•
•
•
Market studies and market investigations: examining markets
which may not be working well for consumers, with powers to
impose remedies where an adverse effect on competition is
found;
Merger control: maintaining competitive pressures in markets by
prohibiting anti-competitive mergers between businesses or
otherwise remedying their potential adverse effects on
competition;
Anti-trust: enforcing legal prohibitions against anti-competitive
business agreements (including cartels) and the abuse of a
dominant market position. There is also a specific criminal cartel
offence against individuals who engage in certain forms of pricefixing and other forms of ‘hard core’ cartel activity;
Competition advocacy: promoting the benefits of competition
and challenging barriers to competition, such as those which
might result from existing or planned Government regulations.
Up to 1 April 2014, and the establishment of the Competition &
Markets Authority, the main competition institutions were as follows:
•
•
•
•
the Office of Fair Trading (OFT), responsible in particular for
antitrust enforcement and for the first phase of merger and
markets cases;
the Competition Commission (CC), responsible for second phase
merger and market investigations and, in appropriate cases, for
the imposition of remedies to any anti-competitive effects found;
regulators for such sectors as energy, water and
telecommunications, many of which have concurrent powers to
apply the anti-trust prohibitions and refer markets to the CC; the
CC also hears certain appeals against licence and energy code
modifications and price determinations in these sectors;
the Competition Appeal Tribunal (CAT), a specialised judicial
body, which hears appeals and decides certain cases involving
competition or economic regulatory issues.
The interactions between these institutions are illustrated below: 43
43
National Audit Office, Review of the UK’s Competition Landscape, March 2010 p9.
For more details see, BIS, A Competition Regime for Growth : a consultation on
options for reform, March 2011 pp125-145 (Appendix 1).
13 The UK competition regime
Notes
1 The Civil Aviation Authority has powers to make a market
reference of the Air Traffic Control Services market only.
2 The Secretary of State may also make a reference to the
Competition Commission on grounds of public interest.
3 The diagram omits the Supreme Court of the UK and the
European Court of Justice, both of which are in the judicial
structure which includes the Tribunal. It also omits the Northern
Ireland Authority for Utility Regulation.
4 The Court of Appeal’s jurisdiction only extends to England and
Wales. The equivalent court in Scotland is the Court of Session,
and in Northern Ireland, the Court of Appeal of Northern Ireland.
There have been two substantive changes to the regime in the last few
years: first, the OFT and the CC have been merged to create the
Competition & Markets Authority (CMA). Notably the ‘two stage’
approach to market and merger investigations that was a feature of the
OFT/CC relationship has been retained, ‘within’ the new single
authority. Second, three regulators have received competition powers:
Monitor (from April 2013), the Financial Conduct Authority and the
Payment Systems Regulator (from April 2015). The NAO’s 2016 report
on the competition regime provides an overview of these changes: 44
44
NAO, The UK competition regime, HC737, February 2016 p21. Appendix Three
(pp50-51) has more details on the eight sector regulators and their responsibilities.
Number 04814, 1 September 2016 14
15 The UK competition regime
The national competition regimes of European Union Member States
operate within the context of the EU-wide regime:
Articles 101 and 102 of the Treaty on the Functioning of the
European Union outlaw anti-competitive agreements and abuses
of a dominant market position when they may affect trade
between member states. They are enforced by the European
Commission and National Competition Authorities within their
jurisdictions, which have powers to investigate infringements, and
can impose fines on businesses that break the law. At the EU level
(and also in the UK) fines can be up to 10% of worldwide
turnover. Businesses can appeal against Commission decisions in
the European Courts.
The European Commission also considers larger merger cases.
Under the European Community Merger Regulation, the
European Commission assesses whether mergers between
enterprises above certain defined thresholds would create or
strengthen a dominant position which would significantly impede
effective competition. Member States have a formal role in the
process but the final decision is for the European Commission
alone. As with cases under Articles 101 and 102, the European
Commission’s decisions may be appealed to the European
Courts. 45
The Enterprise Act 2002 introduced a major change in the way decisions
to enforce the law are made, as it gave the primary responsibility to the
OFT and the CC, removing the decision-making powers of
Ministers, save in certain exceptional cases which give rise to a matter
of public interest:
The OFT was established as a body corporate under section 1 of
the Enterprise Act 2002. It succeeded the Director General of Fair
Trading (DGFT) established under the Fair Trading Act 1973. The
functions of the DGFT were transferred to the OFT under section
2 of the Enterprise Act 2002.
The CC is established under section 45 of the Competition Act
1998 and succeeded the Monopolies and Mergers Commission.
The Enterprise Act 2002 brought about a significant change in the
way that decisions on merger and market cases were made.
Under the previous Fair Trading Act merger and monopoly
regimes, the DGFT would advise the Secretary of State whether
the conditions for a reference for in-depth investigation appeared
to be satisfied. It was for the Secretary of State to decide, having
regard to that advice, whether such a reference should be made.
The function of the Monopolies and Mergers Commission/CC was
to investigate the merger or market that had been referred to it
and to report its findings to the Secretary of State, along with its
recommendations for remedial measures. The final decision on
what action should be taken was for the Secretary of State. The
Enterprise Act 2002 largely removed Ministers from the decision
making process. The decision to refer mergers or markets is taken
by the OFT. The CC then investigates and decides whether there is
a competition problem. If it finds that there is, it decides on the
45
A Competition Regime for Growth …, March 2011 pp17-18. For more detail on the
EU’s powers in this area see, HMG, Review of the Balance of Competencies between
the UK and the EU – competition and consumer policy, July 2014.
Number 04814, 1 September 2016 16
appropriate remedial measures for any competition issues
identified. 46
In addition, the 2002 Act established that in the performance of their
functions the OFT and the CC would be required to apply a
competition test – so that, in deciding whether a proposed merger
should be allowed to proceed, the authorities’ assessment is based on
whether the merger can be expected to lead to a substantial
lessening of competition:
The substantive test applied by the DGFT and then by the
Monopolies and Mergers Commission/CC, under the Fair Trading
Act regime was whether the merger operated against the “public
interest”. A public interest test also applied in monopoly cases. 47
In practice, successive Secretaries of State had applied the public
interest test as a competition based test. The Enterprise Act 2002
formalised this by making the substantive test a competition test.
As a result the substantive test in merger cases became whether
the merger gives rise to a substantial lessening of competition
within any market or markets in the UK for goods or services. The
substantive test in market investigations became whether there
are features of the relevant market that prevent, restrict or distort
competition in any market for goods or services in the UK or a
part of the UK. 48
In practice this focus on competition had been well-established before
the 2002 Act. In a report on takeovers and mergers published in
November 1991, the Trade and Industry Committee discussed the way
mergers had been assessed during the 1980s:
While the emphasis on competition as the main criterion comes
from the Fair Trading Act 1973, competition was given more
prominence in 1984 when the then Secretary of State for Trade
and Industry, Mr Norman Tebbit, announced that ‘references to
the Monopolies & Mergers Commission (MMC) 49 would be made
primarily, but not exclusively, on competition grounds, taking into
account the international dimension of competition.’ Since then
only six out of 74 references have been made to the MMC on
non-competition grounds. There have been only seven cases
since 1976 where the MMC has found the merger to be against
the public interest on non-competition grounds, and six of these
occurred before 1984. 50
Nevertheless, the requirement placed on the competition authorities to
assess matters from this perspective – without regard to other matters
of public concern – can be controversial. For example, in 2006 the CC
46
47
48
49
50
A Competition Regime for Growth …, March 2011 p125
The Fair Trading Act 1973 identified two types of monopoly that could be referred to
the CC for in-depth investigation: scale monopolies where one party accounted for
25% or more of a relevant market; and complex monopolies, where a number of
companies collectively accounted for 25% of more of a relevant market. The scale
monopoly provisions were considered to be redundant once the Chapter II prohibition
[now Article 102 of the Treaty], prohibiting abuse of dominance was introduced into
UK legislation. The current market investigation regime was intended to address
problem oligopolies, previously covered by the complex monopoly regime. In addition,
the market investigation regime can also sweep up scale monopoly issues that are not
capable of resolution by applying the Chapter II prohibition.
op.cit. pp125-6
The forerunner to the Competition Commission
Trade & Industry Committee, Takeovers and mergers, 27 November 1991, HC 90 of
1991-92 para 233. For more details see, Library Research paper 02/21 pp 38-41.
17 The UK competition regime
began a major review of the UK groceries market in the wake of serious
public concerns about the market power of the four leading
supermarkets. At the outset of its enquiry the Commission felt it
necessary to remind those making submissions of the statutory limits set
to its assessment:
The [Commission] is required to determine whether any feature,
or combination of features, of the market prevents, restricts or
distorts competition (under s134 of the 2002 Act). If this is so,
there will be an ‘adverse effect on competition’, and we will seek
to identify the detriment to consumers resulting from the adverse
effect on competition (which might take the form of higher
prices, less choice, lower quality of available products or lower
innovation than if competition was working effectively) ...
But we must distinguish competition issues from other issues of
public concern associated with grocery retailing which we have no
power to investigate or resolve. Unless they affect competition,
issues such as the environmental impact of the grocery supply
chain, the composition of the high street and its impact on
communities, rural land usage or employment conditions in
overseas suppliers are not things we can decide on. These issues
and public concern about them may interact with competition
issues and provide background and context for our investigation,
but our focus must be on the competition issues. 51
As noted, in general, Ministers have no direct involvement in the
competition regime – though they retain a residual role in the
application of a public interest test in relation to market investigations,
and, more substantively, the merger regime. 52 So, in the latter case, the
2002 Act allows for the Secretary of State to intervene in mergers only
where they give rise to certain specified public interest concerns:
specifically, issues of national security and certain media mergers, which
could threaten, for example, the plurality of views in the newspaper
sector. 53 In these cases the Secretary of State may make an assessment
of a merger purely on the grounds that it runs counter to the public
interest, without deferring to the ‘substantial lessening of competition’
test, or he may give regard to both tests in coming to a final decision.
(It is under these provisions that the bid made in June 2010 by Rupert
Murdoch’s NewsCorp for complete ownership of BSkyB first came to
Ministers’ desks. 54)
The Act allows the government to amend this list of public interest
considerations, to add further categories. This has been done once: in
October 2008 the Labour Government presented an Order to add the
category “the interest of maintaining the stability of the UK financial
system.” 55 This allowed the Secretary of State to intervene directly in
51
52
53
54
55
CC, Groceries market investigation: Statement of issues, June 2006 paras 4-5.
Arguably these tensions remain, illustrated in debates over the power of the
supermarkets, and how the government should respond to it; see, Supermarkets: The
Groceries Code Adjudicator, Library standard note SN6124, 12 November 2015.
see Appendix 1 to A Competition Regime for Growth …, March 2011; in particular,
pp132-135.
under section 58 of the Act. The Act also establishes limitations on certain mergers
between water companies.
For more details see, Media ownership & competition law: the BSkyB bid, Commons
Briefing Paper SN6028, 22 July 2011.
SI 2008/2645, which added this category to the list in s58 of the 2002 Act.
Number 04814, 1 September 2016 18
the takeover of HBOS, the UK’s largest mortgage lender, by Lloyds TSB.
Even though the OFT assessed that the deal could fail the competition
test and as such should be referred to the CC, the then Secretary of
State, Lord Mandelson, ruled out a reference on the grounds that it
would ensure the stability of the UK financial system and that these
benefits outweighed the potential for the merger to result in the anticompetitive outcomes identified by the OFT. 56
Since then, there has been some debate about the scope of Ministerial
power and whether a wider public interest test should apply in the
wake of concerns about the takeover of British companies by foreign
multinationals – in particular, in response to the takeover of Cadburys
by Kraft Foods in January 2010. Following a critical report into the
takeover by the BIS Committee, in July that year the Coalition
Government stated it had “no current plans” to extend Ministers’
powers in this area: “we are satisfied that the existing powers provide
the appropriate scope to take action to protect legitimate national
interests that might be affected as a result of a merger.”57
This remains the case. 58 The question of revising this test was debated,
briefly, during the proceedings on the Enterprise and Regulatory Reform
Bill in summer 2012. 59 In July 2013, in their report on the review of the
UK equity market by Professor John Kay, the BIS Committee noted
Professor Kay’s scepticism about the benefit of some large takeovers,
and argued that the Government should look more closely at the impact
that foreign takeovers had had on the British economy. 60 In its response
the Government argued that “attracting investment to the UK from
around the world is a vital element of the Government’s strategy to
ensure sustainable long-term growth”, but that it would review the
impact of foreign ownership of UK businesses during 2014:
The Government has always welcomed long-term foreign
investment in Britain and continues to do so. Inward investment
by foreign companies can benefit the UK bringing in new ideas,
technologies and skills, stimulating productivity and growth in UK
business and opening up markets for trade. Attracting investment
to the UK from around the world is a vital element of the
Government’s strategy to ensure sustainable long-term growth.
Professor Kay agreed with this analysis when he argued against a
general hostility to foreign ownership, acknowledging the
continued importance of open markets for growth.
The Government has a variety of powers to engage in specific
merger activity, set out in Part 3 of the Enterprise Act. The
Government already uses these powers in exceptional cases to
56
57
58
59
60
For details see, Decision by Lord Mandelson … not to refer to the … merger
between Lloyds TSB Group plc and HBOS plc, Commons Library Deposited Paper
Dep2008-2685, 3 November 2008.
Government Response to the Business, Innovation and Skills Committee’s Report on
“Mergers, Acquisitions and Takeovers: The Takeover of Cadbury by Kraft”, Cm 7915
July 2010 pp5-6.
The issue is examined at length in a second Library paper: Mergers & takeovers: the
‘public interest test’, Commons Briefing Paper SN5374, 1 September 2016.
Public Bill Committee, 12th sitting, 10 July 2012 cc512-24
The Kay Review of UK Equity Markets and Long–Term Decision Making, HC 603 of
2013-14, 25 July 2013 (see pp47-53).
19 The UK competition regime
ensure UK interests are protected, such as where there may be
national security issues …
The Economic and Social Research Council (ESRC), which funds
independent, high quality research on economic and social issues
and is itself funded by the Government, commissioned a survey of
the evidence on the impact on foreign ownership in 2011. 61 The
survey concluded that there are positive overall effects for UK
competitiveness and business performance, and an overall positive
effect on UK employment, from having an open economy. The
survey identified that the experience of individual companies and
communities vary and can involve both positive and negative
consequences from a takeover, depending on other factors
including the intentions of the acquiring company and the specific
circumstances in the company and industry sector.
Given the importance of the subject matter, the Government will
update this research in its progress report [on implementing
Professor Kay’s wider recommendations regarding UK equity
markets] in summer 2014. 62
In October 2014 the Coalition Government published a report on its
progress, in which it confirmed that, “following extensive discussions
with the [Takeover Panel – which regulates the procedures for
takeovers], the Government has accepted the Panel’s advice that there
is no need for additional sanctions over and above those that are
already available to the Panel.” 63
In the last few months there has been some speculation that the
present Government might reconsider reforming these rules – though
no proposals have been published. 64 On 18 July the newly appointed
Prime Minister, Theresa May, announced the creation of new
Department for Business, Energy & Industrial Strategy, to be responsible
for “helping to ensure that the economy grows strongly in all parts of
the country, based on a robust industrial strategy.” 65 Again, no formal
proposals have been published, though what is known about the
Government’s emerging strategy is examined in a second Library
briefing paper. 66
61
62
63
64
65
66
Economic and Social Research Council (ESRC) Evidence Briefing: Foreign ownership
and consequences for British business, January 2011
Government Response to the Committee's Third Report of Session 2013–14, HC 762
of 2013-14, 4 November 2013 paras 67-8, 77-8, 80
Implementation of the Kay Review: Progress Report, 27 October 2014 para 2.110
PQ HL1371, 15 August 2016
HCWS94, 18 July 2016. A description of the new Department’s responsibilities was
set out in a Cabinet Office paper published at this time.
Industrial strategy, Commons Briefing paper CBP7682, 30 August 2016.
Number 04814, 1 September 2016 20
3. Recent developments
3.1 The NAO’s review of the competition
regime
In February 2016 the National Audit Office published a review of the UK
competition regime, to consider early evidence of the CMA’s
performance and risks to achieving value for money. While it concluded
that the regime as a whole was “more coherent” it raised concerns that
there were “still too few successful enforcement cases, and business
awareness of competition law could be improved,” adding, “the regime
has further to go to ensure that value for money is achieved .” 67
One striking finding in the report was that business awareness of both
the competition authorities and also competition law itself is low, and in
the NAO’s view, this may potentially harm compliance:
In a CMA survey of UK industry conducted in late 2014, 68 only
23% of businesses felt they knew competition law well,
compared to 45% who had never heard of competition law or did
not know it at all well. As a new organisation, awareness of the
CMA was also low; in 2014, the year when the CMA began
operating fully, more than twice as many businesses believed the
defunct Office of Fair Trading to be responsible for enforcing
competition law than the CMA (75% versus 32%).
The CMA is taking steps to improve awareness through,
for example, advocacy work with both public and private sector
bodies following enforcement cases. 69
Looking at the three broad areas of the CMA’s remit, the NAO found
that the regime faced big challenges to increase the number of
enforcement decisions made to counteract anti-competitive
behaviour:
Successful high-profile enforcement action builds the credibility of
a competition authority, clarifies the law and deters anticompetitive behaviour. The low caseflow we identified in 2010 70
has continued, with the Office of Fair Trading and the CMA
making 24 decisions and the regulators just eight since 2010. The
UK competition authorities issued only £65 million of competition
enforcement fines between 2012 and 2014 (in 2015 prices),
compared to almost £1.4 billion of fines imposed by their German
counterparts.
The CMA faces significant barriers in increasing its flow of
competition cases, although recent activity means it now has 12
ongoing cases. Its enforcement work is not mandatory, does not
have statutory deadlines, and faces a stringent regime of judicial
oversight. The CMA prosecuted its first criminal cartel case in
2015; one company director pleaded guilty to price fixing in
advance of trial, while two others were acquitted. 71
67
68
69
70
71
NAO press notice, The UK competition regime, 5 February 2016
CMA, UK businesses’ understanding of competition law, May 2015
The UK competition regime, HC737 pf 2015-16, February 2016
See, Review of the UK’s Competition Landscape, March 2010 – specifically, Part Two
“Enforcing the Competition Act”.
HC737, February 2016 p9
21 The UK competition regime
Stakeholders interviewed as part of the inquiry “considered the low
number of decisions a key failing of the UK competition regime so far”:
The flow rate of cases has not increased since our 2010 report,
remaining at around four per year at the primary competition
authority, with no infringement decisions by the regulators … The
level of fines imposed for competition breaches is also low – £65
million (at 2015 prices) between 2012 and 2014 …
To help build a flow of cases, the CMA has a pipeline function
alongside its intelligence-gathering capability. Together with the
enhanced concurrency arrangements, this has led to a total of 19
ongoing cases across the regime in December 2015 …
A principal source of intelligence is ‘leniency’, where a business
applies for leniency from potential fines in return for information
that leads to enforcement action. For instance, in 2007, Virgin
Atlantic applied for leniency from fines for agreements that it had
with British Airways to coordinate their surcharge prices on certain
of their long-haul flight routes. The CMA receives a comparable
number of applications to its European peers, but few leniency
applications have been converted into successful cases …
The reasons for this are not currently well understood.
Furthermore, many stakeholders and legal practitioners we spoke
to think there are strong incentives for businesses to litigate if
they lose a case, which can lead to risk aversion in the
competition authorities. One stakeholder told us that the UK was
the best jurisdiction in the world to defend a competition case;
this was consistent with the views of several other interviewees.
Competition Act enforcement cases, unlike mergers or market
investigations, do not have any statutory deadlines and are at risk
of being squeezed by activities that do. Several interviewees told
us that, in their view, the CMA’s competition enforcement work
has a lower profile with their competition staff than, for example,
the two current large market investigations. 72
Turning to the other two aspects of the competition regime, the NAO
found that the CMA had taken an innovative approach in assessing
mergers, that, the authors argued, could improve its effectiveness:
[The CMA] has made all of its initial merger decisions within its
statutory deadline of 40 working days. Stakeholders were positive
about the quality and continuity of the CMA’s merger teams, and
told us that they valued having early discussions with decisionmakers. The CMA is expanding the practice of clearing cases with
remedies in phase 1 without the need to go for a more detailed
and resource-intensive phase 2 review, and is making efficiency
gains from using some of the same people on both phase 1 and
phase 2 investigations. It has also developed case law, in particular
winning three significant recent legal challenges in this area. 73
Third, on markets, the CMA had placed on significant emphasis on
investigations, with two ongoing high-profile inquiries, and this had
implications for the regime as a whole:
The CMA’s ability to investigate an entire market can have big
effects; for instance, a 2009 market investigation by the
Competition Commission resulted in BAA selling Edinburgh,
Stansted and Gatwick airports. The CMA is currently investing
72
73
HC 737, February 2016 para 2.11-15
HC737, February 2016 p9
Number 04814, 1 September 2016 22
16% of its front-line competition resources in two high-profile
market investigations into energy and retail banking, and
businesses are also incurring substantial unmeasured costs. There
is major public and parliamentary interest, with a parliamentary
hearing already dedicated to the retail banking inquiry. The ability
of the CMA to present a credible market analysis and formulate
effective remedies if appropriate will have a significant effect
on its reputation. 74
The report went on to make a number of recommendations for
government, and for the CMA. In the former case the authors argued
that the Government should “report regularly the full cost of the regime
on a consistent basis”, and “encourage greater flexibility of resourcing
and a more coherent approach across the regime.” In conjunction with
the CMA, the authors suggested that the Department for Business,
Innovation & Sills should “develop indicators of the competitive health
of UK markets, such as their profitability and the level of entry and
exit”, to “help in assessing the success of the competition regime, and
could also provide warning signs of emerging competition problems.” 75
Turning to the CMA, the authors argued that if caseflow failed to
increase significantly, it should “assess the fundamental reasons for low
enforcement caseflow, and consider the case for removing any
legislative or institutional barriers.” More widely than this, the authors
recommended that the CMA should increase its existing efforts to
improvement awareness and improve caseflow, as well as formally
reviewing the costs of its two major market investigations. Finally, the
CMA and the regulators should “develop further their understanding of
consumer behaviour to inform proposed remedies.” 76
In the CMA’s initial response to the report Chief Executive, Alex
Chisholm, said, “we are committed to increasing both the number and
the speed of our competition enforcement cases, while maintaining our
emphasis on fairness and rigour … Elsewhere we are delivering a multisector compliance programme across the regions, to raise awareness
amongst small and medium-sized enterprises (SMEs) of competition law
and of our role in enforcing it.” 77 At this time the CMA released a draft
version of its 2016/17 annual plan inviting comments. A final version
was published in March. 78 Respondents expressed “particular support
for the increased focus on swift and effective enforcement of
competition and consumer law, complemented by activities to raise
awareness of, and promote compliance with, the law.”79
74
75
76
77
78
79
ibid.
HC737, February 2016 p11
HC737, February 2016 pp11-12
CMA press notice, CMA welcomes NAO report, 5 February 2016
Competition and Markets Authority annual plan 2016 to 2017, March 2016
CMA, CMA Annual Plan 2016/17 consultation : summary of responses, March 2016
para 1.2
23 The UK competition regime
3.2 Consultation on options to refine the
regime
In the Queen’s Speech on 18 May 2016 the Government announced
that during the 2016/17 Session it would introduce a Better Markets
Bill, to “open up markets, boost competition, give consumers more
power and choice and make economic regulators work better.” One
element of the Bill covers the environment for competition, specifically:
•
•
•
to speed up the decision making process for competition
investigations and make the whole process easier for businesses
and better for consumers.
to give the competition authorities more powers to take on anticompetitive behaviour.
to improve the landscape for economic regulation. 80
On 25 May the Department for Business, Innovation & Skills launched
separate consultation exercises on these measures, including a paper on
the competition regime – setting out possible changes to the CMA’s
assessment of markets and markets, and to its powers to enforce
antitrust and competition laws, as well as changes to the functions and
jurisdiction of the Competition Appeal Tribunal. Implementation of
these proposals could require primary legislation, secondary legislation,
and changes in practice and procedure. 81
The consultation closed on 24 June and the Government has stated it
will publish a response “by autumn 2016 setting which, if any, of the
options we intend to take forward.” 82 To date, no further details have
been published.
80
81
82
Cabinet Office, Queens Speech 2016 – Background Notes, May 2016 p24
BIS press notice, Better Markets Bill to arm consumers with more power and choice,
25 May 2016
BIS, Options to refine the UK competition regime: a consultation, May 2016 p35
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