On 23 May 2012, the Liberal Democrat Business Secretary Vince Cable introduced the Enterprise and Regulatory Reform Bill (the Bill) to Parliament. The press release that accompanied publication of the Bill described it as "a central element in the Government’s aim for strong, sustainable and balanced growth, powered by investment, exports, technology and enterprise." The Bill aims to achieve this goal through changes to the law in a number of areas. This advisory only considers Part 3 and Part 4 of the Bill, which implement the changes to UK competition law announced by Government on 15 March. The 217 page Bill also includes wide-ranging measures that seek to improve employment law; reduce legislative burdens; provide further protections for certain forms copyright and rights in performances; give shareholders binding votes on payments to company directors; and set up a UK Green Investment Bank.
As noted in our previous advisory (Client Advisory - UK Government Confirms Changes to UK Competition Regime), the reforms to the competition law regime to be implemented by the Bill represent a major re-casting of the UK regime, particularly with respect to its institutional and procedural framework. The most eye-catching move is to merge the Office of Fair Trading (OFT) and the Competition Commission (CC) into a single Competition and Markets Authority (CMA). The dual agency structure, with the OFT undertaking initial reviews and the CC undertaking in-depth merger and market investigations, has been a central feature of the UK competition regime since 1973. As a result, the creation of the CMA, which is due to be completed by April 2014, will have a knock-on effect in a number of areas.
On introducing the Bill, Vince Cable said, "The measures in the Enterprise and Regulatory Reform Bill will help make Britain one of the most enterprise-friendly countries in the world. It will improve our Employment Tribunals, reform and strengthen competition enforcement, scrap unnecessary red tape and help ensure that people who work hard and do the right thing are rewarded." On the other hand, the (Labour) Shadow Business Secretary Chuka Umunna has stated that the reforms fail to provide a "compelling vision" for economic growth. While much of this could be dismissed as run of the mill political point-scoring, it is notable that the current competition regime is essentially the product of the last Labour government. The desire of the current Conservative/Liberal Democrat coalition to rearrange the institutional furniture may not be unrelated to this fact.
Part 3 of the Bill lays out the detailed practical, structural and institutional reforms that will be necessary in order to merge the two existing bodies into the CMA. It is noteworthy that the government has sought to preserve the best aspects of the current dual agency system, meaning that CMA processes will in operate in a similar way to how they do now. In particular, the CMA will draw on a panel of independent members (as the CC does now) for final decisions on the type of cases that that are currently handled by the CC, whereas the CMA staff and its board are likely to be responsible for decisions on issues that currently handled by the OFT. In practice, however, the resulting authority is likely to look and feel more like the OFT than the CC.
The most controversial aspect of the reforms is the proposed change to the criminal cartel regime, which is contained in Part 4. It is currently a criminal offence, under section 188(1) of the Enterprise Act 2002 (EA), for individuals to engage in conduct that will usually amount to a serious infringement of competition law, such as price-fixing, market-sharing and bid-rigging. Conviction can lead to up to five years' imprisonment. Under the current provision, prosecutors must prove that an individual has acted dishonestly for the offence to be committed. The OFT had complained that this requirement makes it harder for it to bring prosecutions, on the basis that it must prove both that the person involved acted dishonestly, by the standards of a reasonable person, and that they knew that they were doing so. Given that cartel conduct only recently became a criminal offence, there is some uncertainty as to how a jury would apply this test in practice. However, there has not yet been a single trial in which this has been tested, with the OFT basing its argument on legal advice that it has apparently received when considering whether to prosecute in past cases.
Despite objections to this move from practitioners, government accepted the OFT's argument and the Bill accordingly deletes the word "dishonestly" from s.188 EA. Since the wording of s.188 encompasses any agreement under which prices are collectively set or output limited, irrespective of the effect on competition or any efficiency justifications, removal of the dishonesty requirement will mean that the offence potentially catches a range of normal commercial arrangements involving collective price setting or a moderation of competition, including syndicated loans, the insurance subscription market and joint venture agreements containing mutual non-competes within the field of the JV. The formalistic approach of the new statutory definition of the offence, which includes no alternative mens rea ('guilty mind') test suitable for distinguishing legitimate from illegitimate conduct, creates a real risk that participation in such activities could become a criminal offence, even though they are compliant with the civil competition law. In effect, participation in such activities risks becoming a strict liability offence.
Government has sought to head off criticism of this move by introducing a new defence, under which the offence will not be committed if customers have been given "relevant information" about the agreement prior to agreeing to buy affected products or services. Relevant information is defined as: the names of the undertakings to which the arrangement relate; a description of why it is, or it might be, that the arrangement causes s.188(1)EA to apply; the products and services to which the arrangement relate and any such other information the Secretary of State may specify by Order. Although this is an improvement on the government's original proposal to recognise this defence only where details were published in the London Gazette, it still threatens to impose significant burdens on business. It also does not remove the basic problem that the scope of the offence has been substantially increased, without its replacement by an appropriate alternative capable of distinguishing legitimate from illegitimate conduct. This is highly unsatisfactory for an offence that was originally designed to target individually culpable involvement in hard-core anticompetitive activity.
Government has also held out the prospect of providing "prosecutorial guidance", under which the CMA would undertake not to prosecute parties to legitimate commercial arrangements, particularly where there has been an "inadvertent failure" to notify customers. In offering this guidance, Government is explicitly drawing on practice in the US, under which prosecution is reserved for hardcore, per se violations of antitrust law, notwithstanding the fact that, on the face of the relevant statutes, the substantive test for civil and criminal infringements is the same. This does not entirely remove concerns, however. In the first place, the absence of a prosecution would not prevent commission of the offence in the first place, with its implications under the far-reaching UK money laundering disclosure rules and Proceeds of Crime Act. In addition, it is not possible under US law for an agreement to be a criminal antitrust offence without also constituting a civil antitrust law infringement. Such an outcome would be possible under the new UK cartel offence, as currently drafted.
In addition to the changes to the cartel offence, the Bill sets out a number of procedural changes, many of which are designed to reduce procedural delays and improve the robustness of decision-making. (The OFT has recently been downgraded by the well-regarded Global Competition Review international survey of competition authorities, partly on the basis of the excessive length of its competition investigations and the OFT's recent defeat in a high-profile appeal case.) Other changes are designed to improve coordination with sectoral regulators and to give the CMA enhanced powers to request information from parties.
In the merger control field, a new 40 working day statutory time limit is proposed for phase one reviews, which are currently not subject to a strict timetable in most cases. As with the current regime, the decision-makers at phase one and two will remain separate. While this may reduce the efficiency benefits of undertaking the entire review process within one agency, this is a price worth paying, given the benefits of a fresh hearing of the issues during a second phase review. There is likely to be a degree of continuity in the case team between phases, which should help speed up the process at the start of phase two, without leading to a risk of confirmation bias at the final decision stage.
A further portion of the Bill is dedicated to introducing a new procedure to enable the CMA to consider public interest issues alongside competition issues in market investigations, in cases where the Secretary of State considers that this is desirable. Although initially such political intervention will be possible only in cases involving national security, new grounds for intervention can be added by government at any time. On the basis of experience under the current public interest procedure for mergers, which saw the integrity of the financial system added as grounds for intervention, this is a real possibility. The new markets intervention procedure may prove to be an attractive route for political interference in what has, until now, been an enforcement tool based on competition considerations alone and it is to be hoped that it will not be misused.
The Bill passed its second reading in the House of Commons on 11 June, after limited debate. It is now being considered by a Public Bill Committee, after which it will move to the report stage and third reading, before being passed to the House of Lords. Although the Committee has received written and oral evidence from a number of expert sources, including a previous head of the OFT, it is not yet clear how far concerns raised over aspects of the Bill, in particular the changes to the cartel offence noted above, have been taken on board. This is a complex, technical area of the law and it is perhaps unsurprising that the potentially far-reaching changes contained in the Bill have not received a great deal of attention from MPs or the wider public, particularly given the speed with which the Bill is being pushed through Parliament. The Committee's report, which is due on 17 July, is awaited with interest.