ANNUAL CBI COMPETITION CONFERENCE

WEDNESDAY 11 NOVEMBER 1998

"THE ROLE OF THE COMPETITION COMMISSION"

BY DR DEREK MORRIS, CHAIRMAN, MONOPOLIES AND MERGERS COMMISSION

The new Competition Act, which received Royal Assent this week, represents a major advance in competition policy in the UK. It strengthens policy significantly, brings UK policy much closer to that of Europe, and potentially will impinge on many businesses in the UK.

It is therefore very timely that the CBI has organised a conference on these developments, and I welcome the opportunity to contribute to it.

Previous sessions have covered the provisions of the new Act in some detail and I will not seek to re-visit the two new prohibitions. Instead I will focus on the new Competition Commission, its structure and role, and on the relationship between the new Act and the rest of the competition policy framework.

But let me first say for the avoidance of any doubt that I welcome the Competition Act as an overdue and significant toughening of UK competition law. By giving consumers and competitors new rights, the reforms will sharpen the effectiveness of national competition law. A more competitive framework should enable efficient companies to flourish and offer better prices and quality to consumers. In turn, this will contribute to the Government’s competitiveness initiatives.

The new Act, being based on a prohibition system, involves the possibility of companies being found to have acted illegally, and being fined significant sums of money. This is potentially very serious for companies, both financially and in terms of reputation. It therefore brings about a need for appropriate safeguards for those whose interests may be directly affected. The Act provides such a safeguard via an appeal mechanism, the appeal being to a body that is independent from the DGFT and the regulators. The Appeal Tribunal will be part of the new Competition Commission, and it is essential that the Competition Commission command the confidence of both government and industry – in its legal authority, in its thoroughness and in its fairness and impartiality.

Competition Commission structure

The Competition Commission comes into being on 1 April next year. It will have two vital but distinct roles. It will, as I have said, hear appeals against decisions made by the Director General of Fair Trading or the sectoral regulators under the prohibition provisions of the new Act. It will also take over the functions of the Monopolies and Mergers Commission – including Fair Trading Act inquiries into mergers and monopolies, and regulatory inquiries involving appeals by utilities against licence amendments.

There will be two panels of members, one to deal with appeals (the appeals panel) and the other to carry out the functions currently carried out by the MMC (the reporting panel). There will be a recruitment exercise for members of the appeals panel, the numbers of which have not yet been decided. Existing MMC members will automatically become members of the reporting panel, though there will be provision for cross membership between the two panels.

A tribunal drawn from members of the appeals panel will hear each appeal. Tribunals will be appointed by a new President of the Appeal Tribunals, with each comprising a legally qualified Chairman (that is the President or another) plus two other members. As Chairman of the Commission, I will continue to appoint inquiry groups from the reporting panel, to deal with mergers, monopolies, regulatory disputes etc.

Management functions will be handled by a Council of the Competition Commission comprising myself as its Chairman, the President of the Appeal Tribunals, the Commission Secretary, and such others as the Secretary of State may wish to appoint, initially the Deputy Chairmen of the MMC.

The Presidency of the Appeal Tribunals will be crucial in all this. The post will, in my view, be one of the most interesting and challenging positions in the legal profession. His or her role will include responsibility for the working of the appeals system. For this to operate successfully, tribunals will have to act in an independent, impartial and fair manner; they will need rigorously to probe the arguments put to them; they will need to reach judgements that are legally robust; they will need to act consistently with developing EU jurisprudence; and they will need to reach judgements that are economically sound.

Appeals can be against a range of decisions by the DGFT under the new Act, including decisions that a prohibition has been breached, against fines, against interim orders, against a decision to exempt an agreement, or against a decision not to exempt an agreement, and in relation to any conditions imposed or duration of exemptions. There is also provision for appeals by third parties with a significant interest in certain cases (for example against a decision that a prohibition has not been breached). A notice of appeal must specify the grounds of appeal and must indicate to what extent the appellant contends there was an error of law or fact, or improper exercise of discretion. And the tribunal must determine the appeal on the merits by reference to the grounds of appeal. This does not mean a new investigation but it does mean that substantive matters, the DGFT’s reasoning, use of evidence and the like may be the basis of appeal.

Beyond this framework specified in the Act, the way in which the tribunals will work will be determined by rules of procedure. These will need careful thought. The Secretary of State for Trade and Industry is responsible for drawing up the rules of procedure through a statutory instrument laid before Parliament. The DTI will, therefore, take the lead in the consultation process. The President of the Appeal Tribunals will naturally be fully involved in this exercise.

As the President has yet to be appointed, and the consultation process has not yet started there is little I can say about what the rules of procedure will contain. There are a number of obvious outcomes which will need to be achieved:

The CBI will no doubt have views on how best these are achieved which it will wish to submit in the consultation process.

As noted earlier, the new regime will retain the FTA, and I will next say a little about the logic of that, and the relationship between the FTA and the new Act.

I will focus on Chapter II, because Chapter I replaces the Restrictive Trade Practices Act which increasingly was seen as cumbersome and lacking teeth. This is perhaps a little hard on the RTP Act and RTP Court, which played a major role in the wholesale dismantling of restrictive agreements of many sorts in the late 50s and 60s. But there were problems (in being based on the form rather than effects of restrictions and in its lack of sanctions to deter restrictions) both of which the new Act addresses.

But what of the Chapter II prohibitions in relation to the Fair Trading Act? This is an area that needs slightly more comment.

The FTA regime is based on the OFT having a function similar in some ways to a prosecutor, identifying cases where there appears to be good grounds for thinking that significant detriment to competition, efficiency, or consumer welfare is occurring. The MMC then investigates fully and makes decisions on whether there are adverse effects or not.

That separation of the ‘prosecutorial’ function from MMC judgements is important in bolstering the fairness, integrity and credibility of the system. It is significant in this respect that the MMC never chooses its own cases.

But before the Competition Act, there was a clear and major weakness in the law – there were some types of conduct, quite apart from restrictive agreements, for example discrimination or predatory pricing, which could seriously damage or even eliminate companies. In principle, the 1980 Competition Act was designed to deal with this, but it has proved relatively ineffective. Investigation by the MMC could lead to castigation, but there were no effective sanctions or penalties and, in any event, it was often all much too late in the day to do anything.

There are often difficulties in pinning down precisely whether conduct is, for example, predatory or, more generally, abusing a dominant position. But over the years, a broad understanding of the major forms of such conduct has emerged and can in principle be identified in advance as damaging. There will doubtless be others and the prohibitions are thus couched in terms of the effect they have on competition. The new Act then provides for the DGFT to fine companies if they breach the prohibitions.

The point of rehearsing this is in order to point out that abusive types of conduct are not the same as structural issues, by which I mean market concentration, barriers to new entry and the like. This is so for two reasons:

These two factors suggest that it is right to keep these two strands of competition policy distinct. Certainly they have to be consistently applied in terms of underlying economic, industrial and financial criteria. The structure of the Competition Commission is evidence of the perceived need for that. But there is, I believe, a clear logic in maintaining the existing approach on structural issues. While there will always be borderline cases, in general it should be clear whether an issue is a possible breach of a conduct prohibition or symptomatic of a more general structural problem.

This seems to be most evidently the case on mergers and so-called complex monopolies – a terrible term but essentially covering problems arising from oligopoly, or unavoidable parallelism of behaviour. A market with a relatively small number of large companies may, indeed normally will, exhibit clear signs of competitive activity. This may be genuine, intense competition; or it may be peripheral and in a form which does not really work to the consumers’ benefit. But only investigation will tell. Illegality of conduct is not the issue.

The situation with scale monopoly is somewhat less clear, because it might be argued that, if a scale monopoly causes a problem, then it would usually result from abuse of dominance. The government has recognised this by issuing guidance that, outside of the regulated industries, the scale monopoly provision would only be used if the Chapter II prohibition had been applied and in some sense failed – for example if fines did not lead to a change of behaviour but just to higher prices to cover the fine.

It probably will be sensible to monitor this. Guidance of this sort is essential as a safeguard, but it will be useful in due course to check that it is effective in avoiding double jeopardy, and doesn’t leave significant gaps in the regime. But my conclusion is that, with only that one possible caveat there is a clear logic to the regime, with a long overdue toughening of one major element, but without excessive regulation which might inhibit the proper interplay of market forces.

There are four other important aspects of the comparison between the reporting side and the appeals side, between the existing regime and the new. First, the reporting side, like the MMC, will investigate and report. The Appeals Tribunals will not have an investigatory function. As I have said, it will decide on whether the DGFT has erred in fact or law. There is a question as to whether new material can be introduced. The relevance of some material may not be apparent until a company sees the DGFT’s judgement. Clearly there will have to be scope within the procedures for any such new material to be challenged. But investigative analysis of the type required of the MMC is not envisaged.

Second, there is the question of ministerial discretion. On the reporting side there are some decisions that are final, including water industry price controls, references under the Broadcasting Act and any cases where the MMC finds no adverse effects.

Aside from these, an adverse finding leads to recommended remedies, but it is for the Secretary of State to decide whether and what remedies to implement, though historically, in the overwhelming majority of cases, it is the remedies, very largely or exactly, which the MMC recommended that have been implemented. The decisions of the appeals tribunal will not be subject to any such discretion. This is therefore a significant difference.

This discretionary role for the Secretary of State has been the focus of some debate both in the past and more recently. Some have felt that removal of discretion, at either the referral stage or the remedies stage or even both would in some ways clarify matters and leave matters less open to what they perceive as the possibility of undue political influence in competition issues.

Others have argued that the matters at issue must, unavoidably, for good or bad, bear upon the livelihood and well-being of various groups in society, and hence should not be divorced from the elected government, with its responsibility for such matters and its ultimate accountability to the electorate.

Another alternative proposed by the IPPR is that the Secretary of State should retain discretion to vary the remedies of the MMC and the reporting side of the Competition Commission, but only in exceptional circumstances and only on the basis of a full and public statement on the reasons.

I have no comment on the relative strengths of the various arguments and proposals. My responsibility is to ensure effective implementation of whichever regime the government of the day determines, and in any event there are clearly merits on both sides of the debate. My point is that the appeals tribunals will be different, will be subject to European jurisprudence and not UK governmental discretion.

A third important aspect is that the criteria of Chapters I and II are essentially to do with competition; they prohibit action which will prevent, distort or restrict competition or abuse a dominant position. The reporting side retains the public interest enshrined in Section 84 of the Fair Trading Act. The latter has, over the years since 1973, been subject to a number of criticisms – incompatible ones as it happens – but criticisms nonetheless. One is that it is too broad: Section 84 allows the MMC to take into account such matters as it thinks appropriate; and, when specifying matters which in particular should be considered, brings in issues, such as exports and the distribution of employment which some think quite inappropriate. Such views tend to suggest that restricting the criteria to competition would be preferable.

Others would prefer a more fundamentalist reform, arguing that the only reasonable criterion is economic efficiency – lower costs, better quality, higher productivity and the like. This sounds reasonable and in general may well coincide with a competition criterion given that most nowadays accept that a key driver of economic efficiency is effective competition. But they are not, it must be stressed, the same. A merger which provides significant cost savings increases economic efficiency, but it may also increase concentration and permit higher prices and substantially higher profits. Society may gain in all sorts of ways from this improved efficiency, through more investment perhaps, more research and development and innovative activity, through higher dividends to shareholders and higher pensions as some of these flow through to pension funds etc. But competition has declined, prices are higher, and often the costs of entry to the market are raised. Some would see this as an unacceptable outcome.

Directly opposed to this is the view, often voiced, that policy has not been sufficiently sensitive to the needs and interests of consumers, and that the consumer’s interest should be the driving force, the prime or even only criterion of policy. There can be little doubt that consumer interests have been a growing pre-occupation, perhaps more in the US than here, but nonetheless a major new force in society which many feel needs more explicit recognition in competition policy. Here again there are good reasons to think that in most cases competition and the consumer interest will normally go hand in hand; but there can be cases where they might diverge, and so there is legitimate debate about the criteria to be used.

On all this I have just two observations. First, this is a very live issue, perhaps implicitly rather than explicitly but nonetheless very important. To illustrate, the reporting side retains the public interest criterion; the appeals side has competition criteria; the government’s ongoing initiative on competitiveness is at heart driving at the need to increase economic efficiency in the UK; and the recent White Paper on regulatory reform envisages a new primary statutory duty on regulators to promote the consumer’s interest.

My second observation is that any new initiatives in this area, for example reform of Section 84 of the FTA would be bound to include competition and the consumer interest in any reformulation. I happen to think both are essential, but that’s not really relevant; the main point is that I think this would be inevitable. But these are two of the five criteria already specified in Section 84 (and a third is innovation and entry through competition) and, more important still, these two in practice have been the criteria actually used in the overwhelming majority of MMC cases. So a change might be conceptually important but, in practice much more modest in impact.

The final aspect in comparing the MMC and the new Appeals Tribunal is more prosaic but nonetheless of great importance, not least to industry, and that relates to timescales. Companies not infrequently are concerned about the time, cost and effort involved if they are referred to the MMC. One cannot but have sympathy with that. The MMC has dramatically reduced the time taken for different types of inquiry, despite coping with a higher throughput of cases and recently declining resources – we expect productivity gains from ourselves no less than from companies appearing on front of us – and it is right, indeed desirable, that companies should think long and hard before embarking on action that could lead to an MMC reference. MMC inquiry timescales also generally compare well with those of other competition authorities. But I am nonetheless aware that an MMC reference is not the whole of the process to which, for example, merging firms are subject, and even minor delays can be very frustrating or worse.

The appeals mechanism is explicitly a judicial one and experience in the US, the UK and more generally in Europe suggests that judicial processes typically take longer, quite often very much longer than an MMC reference, even including preliminary examination by the OFT and consideration by the Secretary of State once the MMC’s report is submitted.

What then can be expected of the Appeals Tribunal? At present no definitive answers can be given, because it will depend on the Rules of Procedure and more specifically on the case management aspects of those rules. All that can be said at present, but not unimportant is that an ability to deal with cases within a reasonable time-frame, while not compromising its thoroughness or fairness will inevitably be one of the factors which industry will use to evaluate the efficiency and effectiveness of the new regime, and this will no doubt emerge in the consultation process.

One final point. The strengthened regime will only command respect if the Competition Commission is seen to be independent, fair, thorough and consistent. As the MMC approaches its 50^th anniversary it is not inappropriate to ask how it, as precursor to the Competition Commission, has fared in these terms. There is some survey evidence that companies do regard the MMC as fair and thorough even including many of those who have failed to persuade an MMC panel of their position. And I am heartened by the fact that where companies, consumer groups, politicians or commentators perceive, justifiably or otherwise, there to be problems, they will call for an MMC inquiry in what I take to be reasonable confidence and unspoken expectation that the issue will be looked at thoroughly and fairly. Recent analysis of MMC reports by economists at the University of East Anglia suggest, despite a case-by-case approach, a very high degree of consistency in the MMC’s public interest judgements. Although, therefore, it is not remotely newsworthy, in the way that alleged inconsistency, bias or worse is newsworthy, the record of the MMC for those prepared to analyse it is, I suggest, encouraging, and should afford some assurance for those who will come before the Competition Commission in the future.

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