12^th ANNUAL LINKLATERS/DTI COMPETITION LAW SEMINAR

Friday 2 November 2001

The work of the Reporting Side of the Competition Commission

Dr D J Morris, Chairman, Competition Commission

Introduction

1. This conference will cover an ambitious programme of topics. This is both commendable and understandable. Competition policy is now a very high priority in the UK; is developing at an extraordinarily fast rate; and in all sorts of unforeseen ways. For 10 years, from 1988 to 1997 there was only rather desultory consideration of change, with energies going into other aspects of competitiveness, privatisation (though that had a major impact on the work of the Competition Commission) and issues of our international standing in business terms.

2. Since then we have seen

3. In preparing this presentation I initially identified 22 main issues arising from these changes which will have some bearing on the work of the Reporting Side of the Competition Commission. You will be happy to know that, in the next 15 minutes I will briefly address four of them. In each case I will have regard to the European context which is the theme of this conference. But I shall be very happy to then answer questions on any of these changes, or any matters arising which those present would like to pursue.

The Reporting Side of the Competition Commission

4. However, given the turbulent background, and given the title of my presentation, I should say by way of background, that the Reporting Side of the Competition Commission (essentially the old MMC) is alive and well and in rather good shape. The period since 1998 has seen 46 inquiries by the Reporting Side of the Competition Commission, ie on average one a month throughout the period. Bearing in mind the future determinative role of the Reporting Side, it is worth noting that Ministers sought to vary remedies significantly in only four of these, in two cases to no effect as the Competition Commission’s recommended solution came about anyway. Another was a newspaper merger where the Competition Commission will not, in any event, be determinative. Thus in only one case have results been different, and even this was a decision to back a minority rather than majority recommendation. One other case was, in the end, slightly amended as a result of judicial review. Moreover, the Competition Commission has started to make some ex post estimates of the economic welfare gains of its inquiries. These are currently internal and rather rudimentary, but we are planning to set up a process for more thorough, independent assessment. This work nonetheless suggests sizeable gains and I hope in due course that this will be confirmed.

The New Regime

5. My first main point, again bearing in mind the current turbulence of change, is that, emerging from all this, and very much by design rather than default, is what I would suggest is a coherent, systematic structure which can deliver a powerful and effective policy, in a fair and impartial manner. This is summarised in the accompanying diagram.

6. The essential components are:

7. Where economic theory and experience has led, as in the 1998 Act, to certain conduct being prohibited ex ante, then it is logical that the front line authorities should deal with cases, impose penalties where appropriate and therefore have the Competition Commission as an explicit appeals mechanism in the form of its Appeal Tribunals under Sir Christopher Bellamy. Equally, where individual decisions are disputed as not consistent either with a front line authority’s powers or the regime, in the sense of licences, rules, statutory duties, etc, the Appeal Tribunals provide an appropriate appeals mechanism with the necessary expertise.

8. The so-called Reporting Side of the Competition Commission (a name which surely needs to change after the Enterprise Bill is passed) operates on a different aspect of competition policy, and in a different context. These are:

All are relevant; none is definitive, and a prohibition regime is not the right means to tackle uncompetitive, as opposed to anti-competitive, behaviour. Instead the OFT, as the relevant front line authority can, either in response to complaints, or through the new Markets, Policy and Initiatives division under Jonathan May, act as a searchlight across sectors, identifying potential problem areas for a full investigation by a separate, independent and determinative body.

9. Consistent with this logic, disputed regulators’ licence amendments proposals go to the Reporting Side for determination. Though this process can have a strong flavour of an appeal mechanism, once again there is no question of companies having breached prohibitions, acted in illegal fashion or in a manner warranting fines. I believe, therefore, that the UK is in the process of finalising a powerful, systematic, coherent regime in terms of both the legislation and institutional arrangements.

10. The obvious European point is to what extent the reforms of the Enterprise Bill and the overall approach I have described are compatible with the proposed modernisation of Articles 81 and 82, in particular draft Article 3 on the ambit of these Articles. This is a matter which will come up under later presentations and I will not therefore comment except to say that, provided one or two practical details are properly addressed, there should be no clash between the modernisation proposals and the new regime. I now turn to three more detailed aspects of the reforms.

Competition and Consumers

11. A key aspect is a change in the tests to be applied, scrapping the public interest test of the FTA, replacing it in the case of mergers with a substantial lessening of competition (SLC) test and a comparable but appropriately worded test for market investigations. The debate leading up to this, and the justification for such a test will by now be very familiar to an audience such as this, and I will not go over this territory.

12. There is however the European dimension. Adoption of the SLC test reflects what I would regard as a preference for best-practice over immediate harmonisation with the ECMR. I and others have argued for some time, though not it must be said with great conviction or credibility that, in our following a number of major competition regimes around the world in adopting the SLC test, this could, in time, lead to a change in Europe and convergence on best-practice. The mechanisms of achieving this are no doubt difficult; but recent debate in various states in Europe, and even at Brussels, suggests that this is not now an unrealistic goal.

13. One other point of some significance is the role of consumer interests in the new regime. In the overwhelming majority of cases, of course, consumers’ interests are best served by direct, thorough-going, intense competition; and the primary SLC test, unlike Section 84 of the FTA, makes no explicit reference to consumers. If a merger will substantially lessen competition then it fails the test, and the Competition Commission will proceed to consider remedies. Only at that stage will it be possible to consider any other consumer benefits, ie of a sort not necessarily promoted by competition, or even benefits damaged by competition.

14. It might be thought that this re-opens the regime to the full panoply of public interest considerations which were admissible under the FTA, but that will not be the case. First, and most obviously, it is only consumers, or intermediate customers, in the particular marketplace whose interests could come in at this point. Wider, non-market based benefits, externalities, broader environmental issues, social, employment or other producer considerations are excluded – not because they are unimportant but because they are not the proper focus of a merger regime. Second, such gains will need to be significant, fairly immediate, likely, and not achievable without the merger. Vague possibilities or aspirations will not meet these conditions. Third, less obvious but in fact very important, the Competition Commission will have decided and said publicly that a merger has failed the competition test. If the merger is nonetheless to be allowed through on the grounds of offsetting consumer benefits, the members will feel the need to be both explicit and robust on that latter decision. It will not be possible just to say that, having weighed up a number of considerations put to the Competition Commission on balance it approves the merger. That said, the Competition Commission is currently exploring how best it can incorporate a consumer perspective into its proposed new remedies unit which will come into force with the new Act. This is designed specifically to augment the remedies stage, given that the Competition Commission’s remedies will, in normal circumstances, be final.

15. This does not, of course, exhaust the consumer element in the new regime, far from it. A role for so-called ‘supercomplainants’ is envisaged—indeed it has in shadow form already been embraced—involving designated consumer bodies which can play a role in the new regime in relation to both the 1998 Act and market investigations. This proposal, along with criminalisation was one of the three main aspects which business organisations most objected to, in what was otherwise a cautious welcome to the proposed reforms. I believe that it was seen as potentially undermining a clear, properly delineated institutional structure for competition policy – all the more important if its impact is to be increased – with companies perhaps seeing it as open season for any consumer complaint, however unreasonable, to force its way forward. That certainly is to be avoided. But if i) only a limited number of established reputable bodies are so designated; and ii) complaints must still go to the OFT to be assessed, rather than acted on directly; with iii) the OFT certainly having to respond publicly within a specified period but nonetheless quite able to reject and therefore drop, misconceived complaints, then I do not myself see that this should have such consequences for business.

16. Above and beyond consumer interests there will be EPIs – exceptional public interest gateways. If invoked, ministers re-enter the arena and decide a case. Here again, some have thought that this might, in effect, re-open the whole FTA public interest approach. This cannot be absolutely ruled out. But the new Bill is now taking shape rapidly; national security issues to date, as far as I know, remain the only basis for an EPI from the start; and the process of creating new EPIs remains daunting – not so much the need for Parliamentary approval itself, though that is a significant hurdle, as the fact that the introduction of a new criterion will be a very public affair, warranting a very clear case. That, I believe is the right way forward.

Competition and Regulatory Restrictions

17. Next, separate but not unrelated, is the proposed new responsibility placed on the Competition Commission to report on any regulations, governmental or otherwise which, during the course of an inquiry, it becomes apparent are having anti-competitive effects which could outweigh the actual benefits of the regulations. I emphasise ‘actual’ benefits rather than ‘intended’ because there should be no presumption that regulations necessarily achieve what they are intended to achieve, and in other cases may not in fact be necessary to achieve the stated objective. This proposal mimics but extends the regime already put in place in last year’s Financial Services and Markets Act, under which the OFT may refer to the Competition Commission any FSA rules or guidance which it considers may be having unduly anti-competitive effects, for the Competition Commission to assess. Under the FSMA, recommendations will go to the Chancellor but he has indicated that he would not, other than very exceptionally, seek to modify those recommendations.

18. In relation to regulations generally, under the proposed Enterprise Act, there would be no presumption that the Competition Commission’s recommendations would be acted upon; but it is envisaged that the Secretary of State would have to respond publicly within a limited time period, which means that the issues cannot easily get lost, and will create a spur or momentum for action which in time could provide a significant boost for enterprise in the economy. Moreover, bearing in mind the European dimension, there appears to be nothing to restrict this new Competition Commission duty to UK generated regulation. Clearly, if a Competition Commission report of this nature is in relation to, for example, European based regulation, then, if persuasive, this can only help position the UK government’s thinking and stance in relation to relevant international negotiations; but this is still important, and there clearly are precedents for the Reporting Side of the Competition Commission’s analysis to help shape thinking on European-wide issues—most recently in relation to cars.

Procedures

19. The final aspect I will cover relates to procedure. The reforms proposed will entail a number of changes in the process of inquiries, but let me focus on one key one. I have said publicly that I intend, when the new regime comes in, that the Competition Commission will publish provisional conclusions on the primary competition test before proceeding, where appropriate, to a remedies stage. At the moment the Competition Commission publishes hypothetical remedies prior to any decision on the public interest. Many who have appeared before the Competition Commission have said that they would prefer the two stages to be discrete. I should emphasise that there is no legal reason for this. Mr Justice Moses in his judgement in the Interbrew judicial review made it clear that there was no difficulty in companies having to consider possible remedies on a ‘conditional’ basis. Suggestions that have appeared from time to time, therefore, that the intention to introduce a provisional conclusions stage was a response to the Interbrew judgement are an unfortunate case of post hoc ergo propter hoc.

20. Why then the change? The reason is that giving a clear indication of the problem that remedies are likely to have to solve, before going on to consider these remedies, has a clear logic; I have no objection in principle to such a regime; and the majority of those in front of the Competition Commission would clearly prefer it. Hence the intention to change. Again there is a European aspect in that, while not necessarily identical to the European Commission’s Statement of Objections, it will clearly in large measure serve the same purpose—indeed much of the pressure for change in the UK has, I suspect, come from the European example.

21. The more interesting question, to my mind than "Why the change?" is this—given such a stance why not make the change now, instead of waiting for the new regime, given that no legislation is necessary to bring the change about? (I note in passing that if Interbrew had been the reason then the change would have had to occur straight away.)

22. The answer, initially at least, lies in timetables. Reporting side inquiries operate to very tight timetables. There is scope for extension but, particularly in mergers, this is very rarely used, and rightly so in my view. Industry wants competition cases settled quickly (at least when speaking generally—the message becomes more ambiguous in relation to specific inquiries) and for good reasons. On occasion the UK regime is unfavourably compared to Brussels in this respect, though the evidence is far from clear. Be that as it may, speed is of the essence. But, there are also good reasons for thinking, and indeed good evidence to suggest that publishing provisional conclusions, if unaccompanied by other changes, could very substantially lengthen inquiries, quite possibly by many months. There is therefore a real danger of the Competition Commission adopting procedures and facing deadlines, each of which are desirable in themselves but which are simply not compatible. If this were to happen it could create a substantial bias against proper enforcement of the regime intended by the government.

23. It will therefore be necessary first to introduce a detailed timetable at the outset of an inquiry, encompassing a provisional conclusions stage, which would require both the Competition Commission and the parties to meet stringent deadlines. This will be most problematic in the case of mergers, because the deadlines are shortest. So, where a proposed, or indeed completed merger, fails the competition test, it should aid the process, again to some extent reflecting European practice, if the merger is presumed prohibited unless, in the time available, parties can establish to the Competition Commission’s satisfaction that a lesser alternative is adequate and justified.

24. In practice this is often thought to involve a process of negotiation; at present, much to some companies’ chagrin, the Competition Commission has no powers to negotiate a settlement, nor any means to make the outcome of any such process binding. This situation should change for the better once the Competition Commission becomes determinative, though I am not sure that negotiation is quite the right description. Rather I envisage a process of proposals primarily from the parties, though the Competition Commission as now, may initiate its own proposals, and discussion of those before a final decision is made. I therefore live in hope that there will be gains all round—greater certainty and transparency within realistic deadlines-—but this will require considerable thought in the coming months.

25. In this context it is sometimes suggested that most if not all hearings should be joint ones, with an adversarial procedure between the competing sides. It will not surprise you that this primarily comes from the legal profession or US practitioners. I myself am not necessarily adverse to this, and it does of course apply, although within a tightly constrained framework, as between the parties to an appeal to the Competition Commission Appeal Tribunals; but the key, of course, is that there are at least two clearly definable parties; both, one might add, sufficiently well resourced to make this fair and impartial. In many reporting side cases (I haven’t checked but I suspect the great majority) these conditions do not apply. Frequently, in as far as there is an ‘other side’ this is the generality of consumers. They may or may not have a relevant body to speak for them. Some such bodies may be representative, others not. Even if there is such a body, it will rarely be in a position to mount the necessary legal representation; and such procedures unavoidably increase time scales. This does not rule out ever using such procedures, but I am sceptical that they could become a significant element in the work of the reporting side. Irrespective of this consideration, this is an area—with substantial hearings held directly as between parties and Competition Commission members—where we are some long way ahead of European practice.

Conclusion

26. All these and many other aspects of the changes (I have not, for example even touched on criminalisation) have important knock-on consequences, for resources and recruitment to name but two. As I said at the beginning I am happy to take questions on any aspect of the Competition Commission’s work and its future. But I hope I have said (just) enough to indicate:

i) substantial change is in the pipeline;

ii) the legal and institutional framework emerging provides a coherent and sensible way to develop a powerful but at the same time impartial and timely competition regime;

iii) the two sides of the Competition Commission will play distinct but complementary roles, along with the front-line regulators, in providing a comprehensive competition regime.