It is a great pleasure and honour to have the opportunity to speak to this important Scottish Council for Development and Industry (SCDI) conference, and to explain the work of the Competition and Markets Authority (CMA), which I chair, and how its work contributes to economic growth throughout the United Kingdom, the focus of today’s conference. It is a pleasure to be back in Scotland: I and the senior team have been here on a regular basis since the creation of the CMA; the board met here in June last year and will be here again for a board meeting and associated meetings in mid-November. And on a personal note, this conference provided an opportunity for me to visit my son and his family, my 2 grandchildren, in Aberdeen yesterday.
The CMA was formed from the merger of the former Office of Fair Trading and the Competition Commission, and we took our powers in April last year, so we have been going just over 18 months. That is a short time in the cycle of our work. And surrounded by the historic buildings of the Royal Mile, I am reminded just how new the CMA is as an entity. This great historic city took a lot of hard work and time to build. I do not underestimate the work we still have to do to continue to build the CMA’s reputation, including here in Scotland.
As to our purpose, it is best summed up in the primary duty given to us under the statute that established us - the Enterprise and Regulatory Reform Act 2013. This is ‘to promote competition, both within and outside the United Kingdom, for the benefit of consumers’. Open markets and vigorous, effective competition means that businesses have to attract and retain customers by offering high quality goods and services at keen prices. That is true for businesses across the economy, including the rapidly developing markets online, which open up ever more possibilities for new ways to serve the consumer.
Today’s conference - Agile Regulation Shaping Economic Growth - is very timely and focused on an important set of issues. It gives me the opportunity to explain how competition benefits consumers, businesses and the economy, how applying a competition lens can support more effective regulation, and to discuss how we go about supporting this in Scotland and how you can help us.
But let me start with my main proposition, far from original and well-tested over time and across the globe: that competition is beneficial. It is beneficial in the interests of consumers, including business customers in B2B markets. It is beneficial in encouraging greater efficiency for businesses. It is beneficial not least in promoting economic growth and innovation. In July we published a report, drawing on the large corpus of international research that provides compelling evidence of the benefits of competition. This evidence shows that it is a key driver in delivering greater productivity and growth in the economy, key objectives for both the Scottish and UK governments. This is particularly important following the 2008 great recession and with the challenges that lie ahead in sustaining and improving our international competitiveness. There is more to be done on this: thus the World Economic Forum placed the UK 9th in 2014/15 - performing well but more to achieve.
The benefits of competition were well formulated by Adam Smith in The Wealth of Nations - he, of course, had a house on the Royal Mile some 100 metres from where we are today. Competitive, open markets work to ensure the allocative efficiency that was so obviously absent from centrally planned systems, as some of us who have studied the history of the former Soviet Union learnt all too well. Competitive markets help to ensure that resources are efficiently utilised and distributed, both in production and consumption. Of course, market processes are not perfect, for example in dealing with environmental issues: hence the need for some steering by government and regulators to which I will return.
But the key point is that competitive pressures from other suppliers, and even the threat of entry from potential new entrants to the market, gives businesses the incentive to be as efficient and competitive as possible. And the consequent efficiency gains get passed on as lower prices or better quality to consumers.
The evidence also shows that open, competitive markets, supported by robust competition policy, promote innovation and long term growth. Thus the Growth Commission at the London School of Economics identifies the strengthening of UK competition policy and consequent more effective competition as a key contributor to economic growth in the period up to the recent financial crisis. Brian Arthur provides the clearest way of thinking about this. He argues convincingly that technological progress most frequently takes the form of taking tested ideas and processes from different sectors and recombining them to produce something new and different. He refers to this as ‘recombinations’. Closed markets limit the number of agents positioned to be able to devise these recombinations; open, competitive markets democratises the process, allowing many more minds to be applied to the experimentation that is at the heart of the innovation process, and market processes test these innovations, allowing the successful few to come through as market winners. Such ideas lie at the heart of the most compelling modern theories of economic growth. And Brian Arthur’s view of the innovation process is well illustrated by the startling developments in the communications industry over the past couple of decades.
So competition policy and the work of the CMA is central to the economic growth agenda, both in Scotland, which is the focus of this conference, and in the rest of the UK. Let me now turn to regulation, the other main theme of this conference. Now it is important to make the point at the outset that the CMA is not a regulator in the usual sense of the word. Although we do intervene in markets, in ways that I will describe in a moment, we do so to make markets work more effectively, not to steer a particular outcome. Our philosophy is that open markets are the most effective regulator of economic activity, in the ways that I have already described.
It was for this reason that, when the UK government decided in 2015 to place an obligation on the UK economic regulators to have regard to the importance of promoting economic growth, this was not applied to the CMA. The added requirement would have complicated our legal remit to no good end. In contrast to us, other UK regulators have a range of other duties and obligations, sometimes very complicated, so the UK government’s intention of requiring them to consider the impact on longer-term growth when they juggle their portfolio of interventions may well be helpful – though of course it is still too early to judge the effects of this additional growth obligation. I’m aware that a similar steer has been given to devolved regulators here in Scotland - and I’m sure there will be debate and discussion during the conference about how sustainable economic growth is to be achieved through regulatory interventions.
The title of this conference refers to agile regulation, a term that is new to me, but which I very much like. To me, agility means fast-moving, essential in most business sectors, but especially in the rapidly changing world of digital communications and - technology. Agility means being in the right place at the right time, but getting out of the way when things change. Agility also means carrying little weight, avoiding the ponderous and over-rigid.
I also know that ‘agile’ has a particular meaning in the worlds of software development and project management, referring to short cycle iterations with continuous feedback loops - perhaps there might be learnings here for how regulators test and refine the impact of their interventions on businesses and consumers in rapidly changing markets.
In the regulatory context of course, we need not just agility of action but also agility of thinking. And agility is not the same as light-touch, nor power or speed.
I mention speed because even the kindest commentator on the competition authorities would not reach for this descriptor. It is true that we deal with mergers that require our approval in a timely and effective way, and have taken advantage of the move from 2 to 1 competition authorities to make the merger approval processes more effective and agile. With the exception of merger control, our processes take time. But with good reason. When dealing with breaches of competition law, a painstaking process of evidence collection, collation and assessment is required. When examining a market to consider how to make it work more effectively it is essential that all the evidence is considered and weighed. Thus, for example, our current market inquiry into the UK energy market has just been extended by up to 6 months to allow for full consideration of the substantial body of evidence that has been submitted in response to the inquiry’s provisional findings. That extension was the right decision, because it is more important to get the right answer to help fix a market that has not been working well, than to deliver the wrong answer earlier. And a major source of delay comes from subsequent litigation that can add years to the end-to-end process.
Let me illustrate this last point with 2 contrasting cases. The first was the landmark decision by the Competition Commission to require the break-up of the British Airports Authority, which led to the divestment of Gatwick and Stansted airports and importantly Edinburgh Airport, as well as placing reporting requirements on Aberdeen Airport. The 2-year market inquiry was followed by lengthy litigation that lasted several years. But in the end the transformation of the airport market occurred, to the lasting and ongoing benefit of UK air-travellers, as I can personally attest.
The second was the Telecoms Strategic Review carried out by the newly created Ofcom, which I had the privilege to chair. Launched right at the inception of Ofcom, it took 2 years to conclude in 2005. Because BT’s agreement and involvement was forthcoming, there was no subsequent litigation and the subsequent reforms - creating the network operator, Openreach, as a functionally separate part of BT - were implemented speedily. But in those prior 2 years, consumer groups called for speedy intervention and complained about Ofcom’s lack of response. However, the slow but agile thinking that went into that eventual reform delivered huge benefit to consumers throughout the UK including here in Scotland, much more than any quicker intervention could have done. Of course, such interventions are not perfect: other measures were required to address the problem of delivering broadband to remote rural areas, a particular problem here in Scotland but one shared with other rural communities in other parts of the United Kingdom. And nothing works forever: the broadband market has moved on with next generation broadband, which is why Ofcom is conducting a further strategic review a decade on from the conclusion of the first one.
Returning to the role of the CMA, our work falls into several categories. We enforce competition and consumer law, including prosecution for cartel behaviour. We enforce the merger regime, acting to prevent mergers that reduce competition in markets, either by blocking the merger or by receiving undertakings that allow the merger while mitigating the effects on competition. And we undertake market studies and market inquiries (of the type to which I have already alluded) which are not aimed at illegal anti-competitive behaviour, but rather to investigating key markets that are no working well and identifying remedies that can make the market work better for consumers. A key target is the delivery of £10 of consumer benefit for each £1 we cost. The latest independently validated estimate suggests that we have over the past 3 years exceeded that target, delivering more than 11-1. And of course, it’s not just private consumers who are the beneficiaries of our work: the public authorities, including government - and therefore taxpayers - also benefit. To give an example: we have done a lot of work helping public agencies to identify and frustrate bid-rigging behaviour, recently presenting to the procurement staff of the Scottish Government.
The CMA has had the good fortune to build on the strong track record of its predecessor bodies, But over the 18 months since we came into being, we have also been working hard to make ourselves more agile in what we do.
First, we have been reviewing the merger regime to make it smoother and faster, and less of a burden on business whilst no less rigorous in its application. And we have been concerned to ensure that the regime is not unduly onerous in the way it bears on small-scale mergers.
Second, we have been reviewing the spectrum of undertakings and remedies that are the legacy of past merger and market decisions. There are more than 200 such measures in place, and while they were right at the time they may no longer be so. So we have begun to review them - prioritising those most likely to be redundant and those where a strong case has been put to us for removal or reform. The aim is to sweep many away as no longer relevant and if they are still needed ensure they are fit for purpose. As just one example, we recently consulted on whether to launch a review of undertakings after FirstGroup approached us concerning Lowland Scotland bus services.
Third, we have our strengthened concurrency regime with the sector regulators: here in Scotland, that means the Financial Conduct Authority (FCA), Ofcom, Ofgem, Office of Rail and Road (ORR), and the Civil Aviation Authority (CAA). I mentioned earlier the difference between us, with our sole focus on making markets work well for consumers, and the wider range of duties that other regulators have. That is undoubtedly a real difference, but it is one that is a narrowing somewhat as a result of 2 things. First, sector regulators share competition powers concurrently with the CMA, and more and more sector regulators are appreciating the more lasting benefits of market solutions, running with the grain of competition (as I discussed earlier) rather than other regulatory interventions. Second the Enterprise and Regulatory Reform Act 2013 placed a stronger requirement on sector regulators to consider the use of competition policy first ahead of using their sector-specific powers, and gave the CMA a stronger remit to co-ordinate the use of competition policy in the regulated sectors - important since they account for some 25% of the economy. That is why we have created the UK Competition Network to co-ordinate competition policy between the regulators and the CMA. Its first year saw a useful uptick in competition cases, an early sign of change.
Fourth, we have been given a strengthened duty by the UK government to comment on forthcoming Westminster legislation from a competition perspective and we intend to act as an advocate for competition within government at all levels, including devolved administrations. It is early days to see how this work will evolve. But the BAA case, where the Competition Commission had to work long and hard to undo the effects of a flawed industrial structure created by privatisation, illustrates the importance of getting things right at the beginning. Our recent report on on-rail competition is an example of such advocacy. On certain key long distance lines, our report suggests that there could be real benefits to rail passengers in terms of quality of service and price, from great on-rail competition. These lines include the East and West Coast lines, of obvious importance to Scotland.
Let me conclude by talking about the important Scottish dimension of the CMA’s work. The CMA is working closely with partners in Scotland, including regular meetings with business representative groups, consumer groups and the Scottish Government. We welcome the Scottish Government’s commitment to carrying out an assessment of markets in Scotland which we are supporting with advice and information.
The Scotland Bill, as it stands, proposes devolution of some consumer and certain limited competition powers to the Scottish Government. Scottish ministers will have a power, similar to that held by UK government ministers, acting with the Secretary of State for Business, to require the CMA to carry out a market investigation in certain prescribed circumstances. We are committed to working with Scottish and UK governments to ensure that these provisions in the Scotland Bill can be implemented as Parliament intends.
Importantly while the CMA is an authority for the whole of the United Kingdom, focusing on markets across the country, in all our work we are sensitive to different legal systems and other important contextual factors in Scotland. Most of business work across nations and so do we, within the UK and internationally. But just as good business is sensitive to differences across the different nations of the UK, so are we.
Thus for example in our 2 market inquiries into energy and banking, 2 of the largest markets ever investigated by the competition authorities, we are looking at markets that matter for the whole of the UK, but are sensitive to particular Scottish circumstances. That is why both inquiries have made site visits to Scotland - the energy inquiry last September and banking in January this year. Hearings for both investigations have included participation by the main Scottish firms and with Scottish consumer groups. And our energy team recently gave evidence on their provisional findings and draft remedies to the Scottish Parliament committee considering Scotland’s Security of Supply. Factors relevant to Scotland are built into our prioritisation, planning, evidence-gathering, and the resulting analysis and recommendations. This has meant new ways of working with consumers and consumer bodies, businesses and their representative bodies and the Scottish Government (and other devolved administrations). We have welcomed the support from Scottish political interests as well as business and consumer stakeholders for our early focus on energy and banking.
The highly respected Fraser of Allander Institute has commented on the strengths of the Scottish economy that help to underpin a productive economy: for example, a high proportion of university graduates, major strengths in science, and high social capital. But it also notes weaknesses, including low spend on research and development (R&D), weak innovation and - most relevantly for the work of the CMA - a lack of competition in certain sectors, such as transport, utilities, catering, leisure and business banking.The CMA’s work intersects with some of these concerns. Thus we are examining the energy sector, while our market inquiry into retail banking importantly includes banking services for small and medium-sized enterprises (SMEs).
As a UK-wide institution, we need to be well networked and connected within the nations, which is why we have our office in Scotland and also in Wales and Northern Ireland. The staff in these offices play a key role intermediating between the CMA and the devolved nations: so, interpreting Scotland to the CMA and the CMA to the people of Scotland. But we do not rely on them alone - great though they are. That is why the board meets periodically in Scotland, Wales and Northern Ireland, holding not just a board meeting but also a series of meetings with local stakeholders. All my board colleagues say how valuable they find this wider engagement. As I said at the outset, we will be back in November as a full board. And I and executive colleagues are always keen to find other opportunities to come to speak and listen. Through these interactions, you will help to keep us agile and relevant to the needs of the Scottish people and economy. That focus is at the heart of our work.