May 14, 2013
On May 2, 2013, the Enterprise and Regulatory Reform Act 2013 (the Act) was published after receiving Royal Assent on April 25, 2013. The Act amends the Competition Act 1998 and the Enterprise Act 2002 to introduce a number of important changes to the competition law regime in the United Kingdom, and follows a Government consultation launched in 2011 aimed at considering a wide range of options for reform in order to improve the speed and quality of competition law enforcement.
The principal changes introduced by the Act are as follows:
- The Competition and Markets Authority will be created to replace the two existing regulators (the Office of Fair Trading and the Competition Commission).
- For review of mergers and markets, the existing two-stage reviews will continue (although performed by different groups within the regulator), but will be subject to more clearly defined and streamlined timelines and enhanced powers to investigate and impose interim measures pending investigation.
- For antitrust enforcement, the Government has chosen not to switch to a prosecutorial model, although the Office of Fair Trading has revised its enforcement procedures, and the Act will enhance investigation powers and lower the threshold for adopting interim measures. The criminal cartel offence will no longer require proof of dishonesty, and various new defences will be introduced.
These developments are discussed in further detail below. In terms of timing, most of the competition provisions of the Act1 will come into force on a date to be determined by the Secretary of State, currently planned for either October 2013 or April 2014, although certain transitional arrangements have now entered into force to enable the new regulator to be established and to allow new draft enforcement guidelines to be prepared.
Creation of New Competition Regulator
The most dramatic change introduced by the Act is the abolition of the two current competition regulators – the Office of Fair Trading (OFT) and the Competition Commission (CC) – and the creation of a new single competition regulator to be known as the Competition and Markets Authority (CMA).
At present, the OFT conducts antitrust investigations and acts as a first-phase review body for the investigation of mergers and markets, while the CC conducts in-depth investigations of mergers and markets referred to it by the OFT that are considered to give rise to potential competition concerns, and conducts reviews of certain issues in regulated industries. The Government has chosen to replace these two bodies with the CMA, which the Government hopes will be able to allocate resources more efficiently across the range of competition enforcement activities. While there will be a single regulator, mergers and market investigations will continue to be subject to a two-stage review process (conducted by separate groups within the CMA), which is intended to reduce the risk of “confirmation bias” (i.e., where in-depth reviews are inherently biased towards confirming the initial allegations). Thus, the initial review will be conducted by a case team, and potentially problematic cases will be referred to a specially constituted group (drawn from a specialised independent panel of the CMA) for in-depth investigation.
The Government has chosen to retain the existing voluntary merger control regime in the United Kingdom – parties will continue to be able to choose whether to notify voluntarily and whether to complete a transaction prior to any notification, and the CMA will continue to be able to review mergers on its own initiative up to four months after completion. The Act will introduce a number of new time limits to provide greater predictability, and will also enhance the regulator’s investigative powers to better enable it to complete its reviews expeditiously. In particular:
- Timelines. The current non-binding 40-working-day administrative deadline for phase I merger review will become a 40-working-day binding statutory deadline (running from the time that the CMA confirms that it has sufficient information to begin its investigation), subject to possible extensions (up to 20 working days where documents or evidence are requested, and additional stop-the-clock extensions for failure to respond). The current phase II review period of 24 weeks (extendable by up to 8 weeks) will remain unchanged.
- Interim measures. To prevent parties from taking pre-emptive action (i.e., action that might prejudice the regulatory review process or impede the regulator’s ability to implement its merger decision), from the outset of a phase I review the CMA will be able to impose hold separate orders that will require parties to suspend all integration steps, thereby restoring the status quo that existed prior to the pre-emptive action or mitigating the effects of pre-emptive action. This will expand the current powers of the OFT, which are limited either to negotiating undertakings with the parties (which are time-consuming and will no longer be used by the CMA) or orders that can be used only in completed mergers. The CMA will also gain the power to impose financial penalties (of up to 5% of group worldwide turnover) on parties that breach hold separate orders, and will retain the existing power to seek a court order to enforce compliance with the hold separate orders.
- Investigative powers. The CC’s current powers to require witnesses to attend and to produce documents, and to impose fines for failure to comply with these obligations – which currently are available only in phase II – will be available to the CMA in both phase I and phase II merger reviews, and may also be used to monitor compliance with undertakings and to prevent pre-emptive action being taken that may prejudice the CMA’s investigation.
- Negotiation of remedies. There will be new time limits for the negotiation of remedies, which at present are not subject to any statutory time limits. Parties wishing to offer phase I undertakings in lieu of reference to a phase II investigation will need to do so within 5 working days following the phase I decision; the CMA will need to decide within 10 working days whether there are reasonable grounds for believing that the undertakings might be acceptable; if the CMA decides to further consider the proposed undertakings, it must decide whether to accept undertakings within 50 working days (which may be extended by up to 40 working days for special reasons (yet to be defined), and subject to stop-the-clock provisions for failure to respond). In phase II, the CMA must decide on remedies within 12 weeks following the phase II decision (extendable by up to 6 weeks for special reasons yet to be defined, and subject to stop-the-clock provisions for failure to respond).
A unique feature of the UK competition regime is the ability of the OFT and CC to investigate whether there are features of markets that may potentially distort competition, and to impose remedies to improve the functioning of markets. These powers enable the UK regulators to conduct detailed investigations of entire industry sectors, even in the absence of any particular allegations of anticompetitive conduct that may breach antitrust laws, and are considered by the Government to be an important tool to enable regulators to ensure that markets operate effectively for consumers.
However, the market investigation process has been criticised for being unduly complex and overly long (in-depth investigations can take up to 3–5 years) and the Act imposes shorter and more clearly defined timelines, and amends the regulator’s investigatory and enforcement powers. In particular:
- Phase I market studies must decide within 6 months whether an in-depth phase II review might be appropriate (in which case the CMA must conduct a public consultation on this question), and must decide within 12 months what action (if any) the CMA proposes to take, including whether it will make a phase II reference.
- Phase II market investigations will need to be completed within 18 months (extendable by up to 6 months), and any remedies will need to be finalised within 6 months (extendable by up to 4 months).
- Investigation and enforcement powers will be broadly aligned with those outlined above for merger review, to enable the CMA to benefit from a consistent set of enforcement powers across the mergers and markets regimes.
Antitrust (Non-Merger) Enforcement
Antitrust enforcement in the United Kingdom is based on the administrative model used by the European Commission, in which regulators investigate alleged “infringements” (violations) and impose infringement/fining decisions. However, UK regulators investigate relatively few antitrust infringements, and investigations tend to be quite long, in part because of the regulatory burden of establishing a case that will withstand an appeal on the merits.
To increase the efficiency and effectiveness of antitrust enforcement, the Government considered a range of alternatives, including whether to switch to prosecutorial enforcement (i.e., where regulators prosecute cases before the Competition Appeal Tribunal). Interestingly, while the Government acknowledged the potential benefits of a prosecutorial model, it chose not to pursue this approach in light of opposition from the existing regulators, fears of disrupting existing enforcement efforts, and a commitment from the OFT to adopt a range of procedural changes in its antitrust investigations.2 The Act, therefore, implements relatively few procedural changes, in particular:
- Investigative powers. The CMA will be able to require management and employees to answer questions in connection with an antitrust investigation of a company (subject to the safeguard that the information can be used against the individual only to establish an offence of providing false or misleading information), so that the CMA can obtain information both orally and in writing. This is similar to the current power to ask questions in connection with the criminal cartel offence.
- Fines. The CMA will be able to impose civil penalties (fines) for failure to comply with investigatory orders (such as obligations to produce documents or answer questions), similar to the penalty regime introduced for merger reviews. The existing criminal offences for non-compliance will be abolished, although intentional obstruction will remain a criminal offence.
- Warrants. The Competition Appeal Tribunal will have the power to issue warrants to enter premises to conduct document searches, in addition to the existing power of the courts to issue warrants.
- Interim measures. A lower threshold for the imposition of interim measures pending completion of an investigation will be introduced – the CMA will need to show a risk of “significant damage” rather than a risk of “serious and irreparable harm”. The Government anticipates that this will enable the CMA to make greater use of interim measures orders which have to-date rarely been used.
Perhaps the most significant non-procedural change to antitrust laws introduced by the Act is the revised definition of the “cartel offence” in section 188 of the Enterprise Act 2002, which currently provides that it is a criminal offence “dishonestly” to agree to implement arrangements between two or more undertakings to fix prices, restrict production or supply, allocate markets or customers, or engage in bid-rigging.3 The scope of the offence will be amended as follows:
- Removal of dishonesty requirement. The Act will abolish the requirement for dishonesty in an attempt to facilitate prosecutions. Dishonesty is a well-established principle in English law (e.g., in connection with theft and fraud) and was included in the cartel offence to avoid imposing criminal liability on individuals where the agreement was not contrary to the civil antitrust prohibitions (e.g., because efficiency benefits outweighed any potential anticompetitive effects). In practice, however, the dishonesty requirement created uncertainty and made prosecutions difficult.
- Defences. The Act will clarify that an offence is not committed where the arrangements have been publicized so that customers and others are aware of them. The Act will also introduce new defences if the individual did not intend for the arrangements to be concealed from customers or from CMA, or if the individual took reasonable steps to disclose the arrangements to legal counsel to obtain legal advice before implementing the agreement. Interestingly, this latter defence appears to require only that legal advice was sought, not that the individual was advised that the agreement was lawful.
- The competition provisions of the Act are set out in sections 25–58 and schedules 4–15.↵
- The OFT adopted revised guidance on its investigation procedures in October 2012 containing a number of procedural improvements. These include the use of collective decision-making by a group of senior OFT staff following a statement of objections in order to separate the initial investigation team from the decision-making team, publication of case opening notices and administrative timelines for the investigation, the use of more “state of play” meetings and enhanced oral hearings, opportunities for parties to comment on draft penalty statements, and more internal oversight by senior legal and economic staff on the progress of investigations.↵
- To establish “dishonesty”, the prosecution must show that the defendant’s actions were dishonest according to the ordinary standards of reasonable and honest people, and that the defendant realised that reasonable and honest people would regard the actions as dishonest.↵