Menu

Introducing the Competition & Markets Authority

Print publication

01/04/2014

Overview

Broadly speaking the competition regime will continue as before with the same basic rules (save in respect of the cartel offence which is discussed below) and with a two-stage process of merger and market investigations. However, the opportunity has been taken to reinforce the CMA’s powers.

The CMA’s powers

Certain changes introduced on 1 April 2014 will enhance the CMA’s investigatory powers and are designed to improve the effectiveness of the UK competition regime overall. They will increase regulatory risk for business in a number of areas. These include:

  • a new power to impose penalties on businesses and individuals that fail to cooperate with an investigation, for example to provide information within a particular timeframe. This replaces the OFT’s little used criminal enforcement powers
  • new compulsory interview powers, including the entitlement to use these during a “dawn raid”. The CMA has the power to impose fines on individuals who refuse to answer questions. At present, it is unclear how these powers will be exercised in practice; in particular, will an individual be able to exercise the privilege against self-incrimination? And will the CMA be able to use evidence obtained under compulsion?
  • the CMA will have to meet a lesser threshold before imposing interim measures. Whereas the OFT had to show that the measures were necessary to prevent “serious, irreparable damage”, henceforth, the CMA will only need to show that the interim measures are necessary to prevent “significant damage”
  • the CMA has proposed a new formal settlement procedure by which an undertaking may admit a competition infringement and receive a reduced penalty (a 20 per cent discount if before the Statement of Objections, 10 per cent if after) – to be at the CMA’s discretion. The expectation is that this should help to streamline the investigation procedure.

We are likely to see to see more interim measures, settlements, compulsory interviews – and more investigations generally and enforcement activity under the CMA. The only real constraint is going to be the allocation of staff – which helps to explain the high levels of interest in what the CMA’s priorities are likely to be. Two of these are likely to be tougher action against cartels and demanding more from the sectoral regulators.

Cartels

We are certainly likely to see more prosecutions of individuals for the cartel offence set out in section 188 of the Enterprise Act 2002 in view of the changes to the elements of that offence, which come into effect this April. Indeed, the CMA has identified cartels – along with merger control – as a particular priority.

The law currently requires “dishonest” participation in a cartel as between competitors (to do any of: fix prices; allocate markets/customers; rig contract bids; limit production/supply). The threshold of proving “dishonesty” is not an easy one to overcome and has caused criminal investigations to be abandoned. Now though the dishonesty requirement is to be removed. This should make it much easier for the prosecution to establish the criminal cartel offence. There will be a defence if the defendant can show that he/she either did not intend to conceal the nature of the arrangement; or informed the customer(s) in advance; or sought legal advice. Conviction of the offence can lead to a maximum sentence of five years’ imprisonment and/or an unlimited fine.

The new formulation of the offence will apply only to cartel activity that occurs after 1 April 2014, which means that any future prosecutions relating to cartel activity that occurred before that date will be made under the old regime.

The sectoral regulators

Alongside the CMA are UK sectoral regulators whose functions include the promotion of competition. Several of these regulators (such as Ofgem, Ofwat, and Ofcom, but with the exception of Monitor in the health sector) also have concurrent competition powers with the CMA. These regulators will have an explicit requirement to consider competition enforcement before using their own sector powers. To ensure there is co-ordinated (and active) enforcement of the competition law, a new UK Competition Network – effectively an “alliance” of the CMA and sectoral regulators – has been established under the CMA’s leadership. The CMA will have the power to take over a competition case from a sectoral regulator and investigate itself, and it will have responsibility for publishing regular updates on the extent to which the UK sector regulators are using their competition powers. Ultimately, the Secretary of State can remove a regulator’s competition powers if it feels that this new concurrency regime is not working properly.

An example of the OFT/CMA and a sectoral regulator working together can be seen from the work which has been undertaken by Ofgem and the OFT/CMA. They have been working jointly to assess whether the market for gas and electricity to households and small firms in the UK is sufficiently competitive. On 27 March 2014, Ofgem proposed referring the energy market to the CMA, so that the CMA can carry out a full market investigation.

Sectors in the spotlight

Which sectors can most expect to be on the CMA’s radar?

First, pharmaceuticals, an inheritance from the OFT. The OFT (and the European Commission) has been investigating patent settlement agreements, i.e. the practice of agreeing with generic competitors to delay product entry onto the market, thereby extending the patent holder’s monopoly.

Secondly, online retail. This issue has been steadily working its way up the list of regulatory priorities over the past year and Lord David Currie (Chairman of the CMA), in particular, has spoken about the need for enforcement action in this “critical area”. Pricing is the major concern here. Whilst there is a block exemption for vertical agreements (i.e. between parties at different levels of the supply chain), agreements will not be exempted where they contain a restriction on the buyer’s ability to determine resale prices. Recommended prices are permissible so long as such provisions do not have the effect of a fixed or minimum price – which can be a grey area.

As an indicator of regulatory resolve in this area, the OFT investigated the online retailer, Amazon’s platform, including its “price parity” requirements, which restricted sellers from offering lower prices on other online sales channels – the OFT investigation was a response to a large number of complaints from online sellers. The investigation closed when Amazon announced a change in its policy. The OFT also issued a Statement of Objections to Booking.com, Expedia and Intercontinental Hotels, in which it alleged that the two online booking companies had entered into separate arrangements with Intercontinental restricting their ability to discount the price of room-only hotel accommodation.

Finally, financial services. The principal regulator here is the Financial Conduct Authority, rather than the CMA, but with regulatory changes (e.g. the new Payments Systems Regulator) and ongoing investigations (e.g. the OFT’s market study into banking for SMEs) this sector is likely to remain very much in the spotlight.

From 1 April 2014, businesses can therefore expect renewed vigour in terms of enforcement activity, including criminal investigations, on the part of the CMA and greater use of its strengthened information gathering powers, especially in its priority enforcement areas. Now is the time for businesses to ensure compliance programmes are up to date, and that the managers are trained to respond to fast-moving investigations.

Contacts