The coalition government was just six months old when it announced a ‘bonfire’ of 192 quangos, among them the Competition Commission and the Office of Fair Trading. Fast forward to 2013 and, albeit without much ministerial fanfare, the Competition and Markets Authority (CMA) has a CEO-designate, Alex Chisholm. He is preparing to lead a merged organisation set to be formally established on 1 October; the authority will assume full functions and powers in April 2014.
Opening the Law Society Competition Section’s annual conference recently, Chisholm acknowledged that the CMA does not yet have a board to consider and adopt strategy and policies.
Consultations presently ongoing under the aegis of the shadow authority will shape key aspects of competition regulation – an area that traditionally changes at a glacial pace. In contention is the regulator’s approach to controversial market investigations, merger clearance and new guidance on criminal cartels. Chisholm’s stated remit is to set out the CMA’s ‘contribution to delivering choice and growth’, interpreted as speeding up the regulator’s work on most tasks it undertakes, which include some deadlines now set out in legislation.
In the area of merger clearance, competition lawyers warn, it would have been difficult to ‘streamline’ decision-making without losing processes that are currently valued for their contribution to independent decision-making.
Dundas & Wilson partner Graeme Young, vice-chair of the Law Society Competition Section, notes that saving money here will only come ‘from the single organisational structure, and ease with which the CMA will be able to allocate resource to case teams investigating mergers’.
There are currently two phases to merger clearance, where it is necessary. At ‘Phase 1’, the OFT can undertake an initial study into a merger to see if there is a competition issue to be addressed. ‘Phase 2’ applies if the OFT decides to refer the matter to the Competition Commission for a more detailed study.
Since it has been confirmed that the CMA will retain the two-phase structure, Simmons & Simmons partner Tony Woodgate points out: ‘The CMA will have to work hard to find any measures that would streamline the process.’ At Phase 2 the CMA may, Woodgate notes, be able to ‘use some learning’ from a Phase 1 study. But to retain ‘important’ independent decision-making at Phase 2 – including the use of an independent panel of experts – there is a limit to how much can change with the introduction of the CMA.
Nicholas Levy, a partner at Cleary Gottlieb Steen & Hamilton, says ‘it was the right call to maintain the current regime’, leaving ‘the basic approach here untouched’. The two-stage process, he adds, providing ‘a fresh pair of eyes in phase 2’ is necessary: ‘While this risks some delay and duplication in phase 2 and generally contributes to a fairly long process, its benefits outweigh its costs.’
On market investigations, the same two-phase process applies. But here there is hope that a positive change can be made. As with mergers, Young notes: ‘Getting it right at Phase 1 will be key to the credibility and success of the regime.’ While some market investigations have been criticised as ‘fishing expeditions’, a perception referenced by government ministers, lawyers like Woodgate stop short of such accusations. ‘I wouldn’t go that far,’ he cautions, while adding: ‘Too many investigations are started without sufficient specificity as to what the regulator is looking for.’
Market investigations are controversial, he explains, ‘because companies subject to investigation have not broken any law’, and yet must undergo a process that is intense and ‘difficult to deal with’ for executives running those businesses. ‘Such investigations don’t always start with a rigorous hypothesis,’ he adds. ��These market studies can lead to interventions that produce real transformation in key markets, as has been achieved in the airports sector,’ Chisholm notes – referring to studies that led to BAA’s sale of Stansted. But in a large nod to past criticisms of market investigations, he adds: ‘We will need to use our market powers wisely.’
It is a point supported by competition lawyers like Levy, who argues: ‘The best antitrust agencies are those that have a clear idea of what cases they want to take and what sectors they want to investigate, and, with respect to any given investigation, identify at an early stage the key issues under review and the evidence they regard as being probative, or even determinative, of those issues.’
Chisholm cautions that under the new regime it will not be assumed that every market study ought to become a market investigation. The CMA will have less intrusive ways to resolve some of the issues a market study identifies. He adds he is ‘not interested in "fishing expeditions"’.
‘Ultimately,’ Levy believes, ‘it’s for the investigating agency to decide how much time it needs for any given investigation. It’s right that the legislation limits the duration of investigations.’ What the CMA must guard against, he argues, is the maximum period becoming ‘the norm’. ‘If market investigations become more common, the CMA should try to discipline itself to complete investigations more quickly,’ he adds. ‘This could be done by narrowing the issues under investigation at an earlier point in the inquiry, focusing only those issues, and preparing shorter and more focused reports.’
Chisholm has made only passing reference in current speeches to the need to ‘promote competition within the areas of sectoral regulation’. Arguably, though, this is one area where what he terms the ‘ambitious intentions of the reforms’ has not given him adequate means to deliver. ‘Enforcement allocation between the concurrent regulators and the CMA will need careful consideration,’ Woodgate explains. ‘With the exception of Ofcom, many practitioners take the view that enforcement by the concurrent regulators just isn’t at the right level.’
That may be because these regulators do not have sufficient competition law resources, but whatever the reason, the result is outcomes in the regulated industries that, as Woodgate puts it, ‘may not be the right outcomes in competition terms’. As a result, he believes improved co-operation with the concurrent regulators will be needed to give rise to the ‘efficiencies’ it is hoped the CMA can achieve.
‘In principle, there are advantages to having concurrent regulators deal with complex sectors, given the need for specialist sector-specific knowledge,’ Levy notes. But he adds that this is still an area that needs some attention. ‘The risks… are not trivial,’ he cautions. These include ‘regulatory capture or entrenched views on particular issues – and I think it’s right to keep the current system under review’.
Criminal enforcement in competition cases – specifically, tackling cartels – is set to change fundamentally, with the cartel offence no longer requiring the prosecution to show that cartelists acted ‘dishonestly’ in order to secure a conviction. The move follows dramatic failures, such as the withdrawal of criminal proceedings against current and former British Airways executives accused of price-fixing. Guidance is expected shortly from the OFT and is ‘urgently needed’, Young says, in connection with ‘the application of the new defences introduced to replace the dishonesty element of the offence, and how these are to be applied in practice’.
Michael O’Kane, head of business crime at Peters & Peters, hopes new guidance from the OFT will ‘do away with the requirement for an immunity applicant to waive privilege if required to’. He welcomes the OFT’s ‘desire to be more proactive in the early stages of investigations’ but cautions that clear guidance is needed on how this will work in the context of a global case, ‘where authorities in other jurisdictions require a different approach’. ‘Removing dishonesty from the cartel should make it easier for the CMA to bring cases. However, it potentially opens up a wider range of collusive activity to criminal investigation,’ he adds.
Young shares that concern, concluding that further guidance is also needed ‘as to the prosecution of the offence alongside civil enforcement under the Competition Act and EU competition law, which remains an extremely complex issue when advising clients’.
Chisholm is aiming to lead a ‘vibrant new authority that does justice to the ambitious intentions of the reforms’. As he told delegates at the Law Society conference, it is his aspiration to: ‘Operate the market and mergers regime effectively; improve anti-trust enforcement; promote competition within the areas of sectoral regulation; and play a strong central role in the new consumer landscape.’
The UK’s competition regime already has a good reputation internationally, so he has a great deal to build on. Woodgate notes that staff at both the Competition Commission and the OFT apply a ‘thoughtful’ approach to the transition ahead, but face substantial challenges, including opening new cases in the face of organisational upheaval.
The result is hardly set to resemble the radical change implied by the ‘bonfire’ rhetoric of 2010. As Young notes, with reference to high-impact investigations: ‘The law in this area has developed enormously in the last few years and there are simply no short cuts to getting it right.’ There is, he says, a related concern that there will be ‘pressure within the CMA to look to negotiate early resolution and settlement of cases, thereby avoiding full investigation of the issues and potentially lengthy appeals’. While some businesses would prefer this approach, Young says, ‘it does call into question issues around due process and transparency that will require careful reflection as the CMA begins to work through its caseload’.
Clearly, then, an area to watch post-merger. But after the day-to-day operational distractions that any merger brings, there is a chance that a better authority will emerge – provided that the relationship with the concurrent regulators can be addressed as the CMA comes into existence, and clarity can be provided around criminal enforcement.
The Law Society Competition Section provides competition practitioners with a range of opportunities to engage in dialogue and debate, including evening seminars in Brussels and London, an annual conference and an annual dinner. It is led by a committee of specialist practitioners for the benefit of practitioners, with the active involvement of representatives of relevant regulatory bodies. For more details, go to the website.