Speech given by CMA Chief Executive, Alex Chisholm, at the Whitehall & Industry Group Breakfast Briefing.
When I accepted in February the kind invitation of the Whitehall & Industry Group to speak today on the first 2 years of the Competition and Markets Authority (CMA), I had no notion of this being a valedictory address. But then in Whitehall, as in Industry, much can change in 3 months. And the fact that I now know I am leaving the CMA to become Permanent Secretary at the Department for Energy and Climate Change (DECC) doesn’t really change what I want to say – except that I have added a short section at the end on some of the harder nuts yet to be cracked, which will now fall to my successors.
First, although we are a young agency, it has been a busy and productive 2 years. So let me very briefly summarise some of the key achievements of the CMA in the first 2 years since it took up its powers from the Office of Fair Trading (OFT) and the Competition Commission (CC). When I have done this, I want to do something a bit more interesting which is to try to consider the CMA’s work from the perspective of our multiple stakeholders, namely: consumers; small business; big business; other government departments; taxpayers and (not least) the CMA’s staff.
That is a broad canvas and I have just 20 minutes, so I will have to be selective and keep things at a fairly high level.
I want to highlight today 6 key achievements of the CMA to date:
Merger of OFT and CC to create the CMA. Mergers can be messy and expensive. This one has gone smoothly, at low cost and without disruption to our output. I am most grateful for all colleagues, past and present, and most especially Corporate Services staff, for helping to achieve this.
Capability of the CMA. We have been able to retain and recruit a very talented and highly trained and motivated group of professionals. Add to that the new structures, business processes and organisational ethos we have been able to create, and we now have an agency of formidable capability.
Strategies and priorities. The strategy adopted by the CMA board in October 2013 is still serving us well, approaching 3 years later. We have chosen to focus our efforts on big high-value markets where we can make a difference for every consumer and every enterprise across the UK: energy, banking, legal services, transport and healthcare. We have delivered recommendations on passenger rail and buses, finished our first big pharmaceutical case, and we are close to completion of our work on energy and banking, and working towards a final decision on our second major pharmaceutical case. Our legal services market study started just in January and is on track to complete before the end of the calendar year.
Active enforcement. We set out to step up the scale, throughput and impact of our enforcement work, to make deterrence more effective and encourage a high level of compliance with the law. In the past year we successfully concluded 7 competition cases and 8 consumer cases, with fines totalling around £47 million, and also secured 2 guilty pleas in 2 criminal cartel cases. In the past 6 months alone we opened a further 10 new competition enforcement cases, which as far as we can see, is a level of activity that is without precedent in recent history of competition enforcement in the UK. Now the test is to see these cases through to successful conclusions, including where necessary in the appeal courts. (In this regard we are encouraged by the fact that the CMA has been successful in 15 of the 19 civil cases across our portfolio brought before the courts.)
Efficient merger control. In the past there have been questions about the ability of the UK authorities to handle cases at sufficient speed, and to manage the process in a way that is transparent and reasonably predictable and efficient. We took this on, and the progress we have made is demonstrated in the table below.
2014/15 2015/16 % of phase 1 investigations completed in 40 days 100 100 % of less complex merger cases cleared within 35 working days 23 74 % of phase 1 investigations with formal pauses to statutory deadlines 17 12 Average number of working days across all phase 1 cases 37 34 % mergers found not to qualify 12 3
Outcomes for the economy. The analysis we published last July shows the very positive impact of competition on productivity and growth across the UK economy. The CMA has produced well over £1 billion in direct consumer benefits over the last 2 years.
Moving on to consider our work from the perspectives of different stakeholders…
The first stakeholder is the consumer, indeed it is the consumer who benefits from all of our work.
There are a couple of consumer questions of our time that I want to highlight for you briefly this morning.
The digital marketplace is very exciting – but as a consumer, can I trust what is on offer? The CMA has put a lot of effort into researching the way in which digital platforms function, the role of online reviews and how consumer data is processed, and we have published our findings. We have also taken firm enforcement action to ensure that online reviews are genuine and not the result of unacknowledged payments or blatant fakery. This will help to ensure that consumers can continue to use online reviews to help inform their ecommerce choices – as 27 million of us do every year.
I’m a busy person who values my leisure time – as a consumer, do I need to bother with switching my service provider? In the course of our energy and banking investigations we have published 100s of pages of evidence relevant to this question. More handily, I gave a short speech in January on the subject of disengaged or ‘sleepy’ consumers. In all of this we reach the same basic conclusion: yes, it does matter – the consumer does need to bother. The consumer that sits back and declines to shop around and exercise choice will typically pay more – sometimes a lot more – for vital services such as energy and banking.
Remember also that some consumers find it more difficult than others to shop around, particularly if the best deals are to be found online. So we need to help all consumers, including those who are vulnerable in some way, to engage with the market and get the best deals. By engaging more fully in this way consumers will strengthen the competitive process whereby firms are under pressure from rivals to innovate and perform better to satisfy choosy customers. That is why the CMA energy and banking inquiry groups have proposed such an ambitious set of remedies for helping consumers to engage more effectively in the market.
Considering now the small business
I think our key insight here – powerful if unoriginal – is that small businesses, and especially so-called microbusinesses, with 10 employees or fewer, are as economic agents much more like consumers than they are like bigger businesses. They don’t have the resources to do a lot of research or information processing, they don’t have any buyer power vis-à-vis major suppliers, and they often lack confidence in their choices – especially when confronted by the sort of gobbledegook we have sometimes seen from utility providers.
And in terms of outcomes, as customers these small businesses often get worse deals than individual consumers, as we have found in our energy and banking market investigations. So there is a strong case for saying that measures to help inform, empower and protect consumers should also be extended to assist small businesses, at least in these regulated sectors.
Our second key finding when we adopt the perspective of the small businessperson is a disappointing one – and that is for the most part they don’t really get competition law. ‘Isn’t it all a bit complicated and theoretical and something more for big companies to be worrying about?’ We know this is a typical attitude because we did a major survey of over 1,200 small businesses and found that just 23% of them are confident in their knowledge of competition law, and 20% have no knowledge of it at all.
This is concerning, not least because it is so much in the interests of small businesses to be aware of competition law. As customers, small businesses benefit from the downward pressures on price, and upward pressures on quality and innovation, that vigorous competition brings – and so they should know their rights when their suppliers try to frustrate competition by infringing competition laws. And as providers of goods and services, small businesses need to know how to comply with competition law, so as to avoid the sanctions and other adverse consequences that come from breaking those laws.
Our response to this has been two-fold. First, to step up our efforts to follow through on our competition enforcement cases, to make sure everybody else in that particular industry can draw the necessary conclusions. So for example after fining a group of estate agents in Hampshire for making localised agreements not to advertise their fees and discounts in a local newspaper, thus reducing competition on fees, we made very sure the message that such agreements are illegal went out loud and clear to every estate agent in the country with a mass of publicity and warning letters and trade press articles.
Secondly, to develop some innovative ways to make it easier for small business people to understand what competition law requires and why it is in their interests to follow it – not least as potential victims rather than transgressors. I have been a small business man myself – and I won’t pretend that the competition law yearbook was my weekly reading back then. So we need to make it easier and more intuitive. When you go online, do take a look at the 60-second guides and YouTube videos and animations we’ve put out there for the small business community, with the help of the Federation of Small Businesses and co.
How about the perspective of big business?
One veteran businessman said to me once they could bear anything except not knowing. One could interpret this as a sign of control-freakery, but I think it contains a strong kernel of truth that big businesses and their investors and lenders really don’t appreciate uncertainty. So at the CMA we work hard to tell people what we are going to do, what we are doing, and what we have done; and why.
We also put immense effort into our consultative processes, whether it be published consultation papers, formal hearings, workshops, bilateral meetings, the so-called ‘put-back’ process whereby those who provided information get to check for confidentiality and accuracy pre-publication, and the ‘access to file’ procedure in our enforcement work whereby the companies under investigation can review all the evidence we have gathered. This comes at a considerable administrative cost, but does have the great merit of helping to build understanding and confidence in our work, correcting any errors that might otherwise creep in, and – critically – ensuring fairness in procedure. And this all contributes to the precious stock of certainty.
Another way we can add to that certainty is in our role as the appeal body for disputes between economic regulators and regulated firms. The regulatory appeals we have conducted in the electricity, water and telecoms sectors have been some of our most important work, albeit passing relatively unnoticed by many of our other stakeholders. To understand the value of our role in regulatory appeals, consider how the UK utility sector needs to attract tens of billions of capital over the next few years, much of it debt.
In this light it is heartening to hear, as we did from the chief executive of one of the electricity distribution companies, that the CMA’s decision in the electricity appeal was “important for the confidence of investors”. And interesting also to note the view of one of the debt rating agency, Moody’s, that “the existence and judicious use of an appeals mechanism contributes to the stability and predictability of the regulatory regime”.
And thereby, of course, contributes to keeping the cost of capital low, which benefits us all from lower bills.
We also hear voices from businesses of all sizes to urge us to minimise regulatory burdens. Well at the CMA we really get this point – and we act on it. We initiated a review of all the merger and market remedies inherited from our predecessors, and found over half of these had been in place for over 10 years, and some went back 20 years or even 30 years. Do you remember what the economy was like in the 1980s? Pretty different to today, right? And yet there are still these legally binding undertakings, left lying around in the economy, like so much litter on a hillside, or plastic bags in the oceans. So we have been able to remove over 70% of the historic undertakings reviewed to date.
This brings me to my fourth perspective point: other government departments
And with my impending move to DECC, perhaps something to which I should have especial regard!
We are an independent body, without a ministerial head. But we are a government department and we work a lot with other departments and public authorities to try to ensure the overall framework of policy is pro-competitive – and at least not actively harmful to competition.
One high-profile intervention we made last year was to criticise the plans from Transport for London which would have imposed excessive and harmful rules on companies like Uber offering competition and choice in London’s mini-cab market.
But I think the most striking example of our cross-government advocacy is our passenger rail services project. I’m not breaking any great secrets when I say we were not asked by the Department for Transport to undertake this work, and at the outset they had some concerns about how realistic our proposals would be, and about potential adverse side-effects for their important franchising programme. It is a tribute to the skilful and painstaking work of the CMA team who undertook this project that they were able to publish in March this year a set of reform proposals that were both bold in envisaging more head-to-head competition on inter-city routes, but sufficiently detailed and thought-through to command the respect of the department, the rail regulator and industry and passenger groups. The government welcomed our report and we will work with them to explore how the recommendations could be potentially implemented.
More competition on rail may help to reduce costs for taxpayers as well as paying customers, if it spurs improvements in productivity and capacity utilisation.
That is true of quite a lot of our work.
Indeed as part of the performance framework set by the Department for Business, Innovation and Skills (BIS) and HM Treasury, we are obliged to deliver £10 in directly measurable consumer welfare for every £1 we spend – a ratio the Taxpayers’ Alliance would no doubt like to see replicated across government!
Let me give 2 specific examples of how the CMA’s work benefits UK taxpayers. In public procurement, we have not only struck against hardcore cartels for manufactured products such as galvanised steel tanks and concrete pipes – products which are purchased by public authorities for public services, such as schools, hospitals and other commercial and public building works – we have also helped to train public procurement agencies in how to detect cartel activity.
Our pharmaceutical enforcement cases also have the potential to bring considerable benefits to taxpayers. We issued a statement of objections in the phenytoin case and a final decision in the paroxetine case, in each case alleging anti-competitive conduct in the relevant markets, which are worth hundreds of millions of pounds a year. The phenytoin case is not yet subject to a final decision and the paroxetine case is on appeal, so we will have to see how these play out. Where infringements are found in cases involving pharmaceutical companies, and these stand up on appeal, the NHS can bring follow-on claims for damages to recover any excess costs sustained, as it did in the OFT’s Gaviscon case.
My sixth and final perspective is that of the CMA’s hard-working and talented staff
In the early days of the merger of OFT and CC to create the CMA, there was for most staff, coming in from the legacy bodies, undoubtedly a sense of trying out the new ‘coat’ of the CMA, to see whether it ‘fitted’. Having built commitment to the culture and personnel and identity of the legacy body, most staff wanted to see what the new body looked like before transferring that commitment. Over the course of our first years together, I sincerely believe we have earnt that confidence and our staff have decided the CMA merits that transfer of commitment.
The feedback we get from colleagues at the CMA is our people love the work – they find it interesting, testing, worthwhile. But they also want to be utilising their current skills and developing new ones. So we have put a lot of effort into our academy for enhancing the professional skills of staff, and into the processes by which we form, manage and recognise high-performing professional teams. That is critical to our offer to staff. Our progress in this endeavour has shown through in our staff survey results and our Investor in People award.
So viewed from each of the 6 perspectives, the CMA can be seen to have been working effectively to promote competition, in the interests of consumers, business and the economy. I am very proud of what we have been able to achieve so far.
Let me end by looking ahead. While we have made a strong start, there is much still to do.
The immediate challenge is to see through what we have started with the big market investigations into energy and retail banking, the 2 handfuls of Competition Act 1998 cases, the 5 phase 2 merger cases, and the review of historic remedies.
We will also need to engage with BIS, HM Treasury and the competition community in ongoing efforts to fine-tune the legal framework governing the operation of the competition regime. But the big 3 challenges – the harder nuts to crack – that I see ahead for the CMA are:
Changes to the landscape of consumer enforcement – with the National Audit Office review likely to be a catalyst here.
Challenges to the primacy of competition analysis when sensitive mergers give rise to calls for public interest interventions.
As the Competition and Markets Authority, embedding a competition culture right across the UK economy, so that it is part and parcel of how every business and every consumer understands and interacts with the market.
These challenges will be for my successors. I am lucky to be able to hand over to Andrea Coscelli, a consummate competition professional.
For myself, I will treasure the experience of establishing the CMA and running it during its formative period, and sincerely hope to bring with me to DECC the forward-looking market awareness, and commitment to performance and continual improvement, that have been such features of our time at the CMA.