The New Competition and Markets Authority: Aspirations and Challenges
Speech by Alex Chisholm, CEO-designate of the Competition and Markets Authority, which is due to be formally established on 1 October 2013.
Good evening and let me say how grateful I am to the UK Competition Law Association for the opportunity to speak tonight, before such a distinguished audience, and so early into my new role. I feel a particular honour in being invited to give the Burrell lecture, for which I know you have had some outstanding speakers in the past.
This is in fact my first speech since taking up my post, so let me say at once how delighted I am in to be in this position. In career terms, my appointment as Chief Executive to the Competition and Markets Authority brings me in some ways full circle, as when I first served as a British civil servant some 24 years ago, it was actually in the Office of Fair Trading, and it was at the OFT that I first began to learn the ways of competition law and policy. So it is super to have the opportunity at this much later stage in my career to return to the competition domain in the UK, to work at implementing a major reform to the framework of competition and consumer law, and to build a major new public agency, combining the Competition Commission and most of the Office of Fair Trading. Both David Currie, who will be the CMA’s Chairman, and I, have great ambitions for the new Authority, and great expectations for the positive impact it can have in making markets work as well as possible for consumers.
I should, however, keep in mind that I am but 4 weeks in post, and recall that I am Chief Executive Designate. Royal Assent for the enabling legislation creating the Competition and Markets Authority is understood to be imminent, but is not yet given, and the Authority is not due to come into formal existence until 1 October this year, and full functions and powers until 1 April 2014. The CMA does not yet have a Board to consider and adopt its strategies and policies, nor have we yet consulted with external stakeholders on various necessary matters. So what I will say this evening is an early and provisional take on the aspirations and challenges facing the CMA. That said, I have discussed its content with Lord Currie, and so this does at least represent our joint current best thinking.
I could talk about the range of possible reforms considered by the Government during its extensive consultation and review of the competition and consumer landscape, to which the Competition Law Association contributed. And certainly there were some interesting options explored, some of which would have involved a more radical recasting of the competition regime than has in fact been made. But in my position, and at this settled stage in the review process, I do not see much value in considering the road not taken – although we may in future years find cause to reopen some of these debates.
Instead I would like this evening to offer an initial appraisal of what we should want and expect to see from the new Authority, with the objectives, duties and powers as provided for in the Enterprise and Regulatory Reform Bill.
This is not the right time to give a detailed description of what is included in the ERR Bill, nor the Government’s policy statements in support of it. But it is worth drawing out a few headline points before I move on. In brief, the decision to create a single authority was driven by the opportunity to create efficiencies, remove duplication and to ensure that the competition regime has the functions and powers needed to tackle competition problems and encourage compliance. A single authority will be able to deploy resources more effectively and flexibly across its work. It will have useful new powers, for example in relation to information gathering and the use of interim measures in merger situations. It will face important safeguards, for separation between phases in the markets and mergers regimes, and between investigation and decision-taking in Competition Act cases. The Authority will be able to deliver decisions in a more timely way without reduction in quality – for example, statutory time limits for markets work have the potential to reduce the end-to-end length by up to a year. And the Government intends the CMA to provide a powerful single voice on competition issues both at home and internationally, as well as having an important interface with the sector regulators, putting in place new mechanisms for enhanced cooperation.
Overall the ambition is to strengthen what is already a strong and admired regime to one that is seen as truly world-class in quality, by maximising the benefits from combining the OFT and the CC into one organisation, by refocusing its priorities and refining its working practices, and by driving the competition agenda hard, so as to make a really worthwhile contribution to national economic performance.
But it is not all ambition, and not all going to be plain sailing. I will try to expose some of the challenges we face in establishing the new regime - issues on which I would particularly value feedback. I am genuinely keen to gather alternative perspectives and learn from the considerable accumulated national wisdom in competition matters, a fair portion of which is represented here tonight. And indeed this is one reason why I have agreed for the text of this talk to be published, to encourage people to come back to me on some of the issues raised with their own thoughts.
I am also bidden by your CLA officers, James Flynn and Sharon Horwitz, to make these remarks as personal and specific as possible, linking my hopes and expectations for the CMA to my previous professional experiences and accumulated values and insights.
Vigorous enforcement action
Let me begin with enforcement, as effective enforcement is the sine qua non of the work of any competition and consumer authority; is positively correlated to productivity and GDP growth; and is vital for us to get right within the CMA.
The CMA will be a strong outcomes-driven enforcement Authority, focused on achieving impact by the most appropriate means.
Our enforcement programme can be successful in a number of ways:
First, the Authority can bring successful criminal prosecutions before the Courts for the criminal cartel offence or certain consumer offences where guilty verdicts are obtained and the judge imposes appropriate sanctions, in effect endorsing the Authority’s decision to bring the case.
Secondly, we can take civil cases under the administrative procedure of the anti-trust legislation, and our decisions are either accepted by the parties, by settling or not appealing the decision, or are defended successfully by the Authority on appeal to the Competition Appeals Tribunal.
Thirdly, we can reach satisfactory outcomes by negotiation with parties following the initiation of an investigation, such as accepting undertakings in a consumer case or commitments in a competition case.
Fourthly, enforcement investigations will sometimes fall short of proceedings or a formal outcome, but end with a warning, or with the Authority in a position to issue useful guidance to firms and consumers on an enforcement matter.
Whichever the route taken, it is essential that the cases are well chosen, well managed, sufficient in number and variety, and completed reasonably quickly. Bringing a steady flow of cases through to timely and successful delivery is key to an effective competition regime and to maximising the benefits of deterrence. Recognising that it is far easier to open cases than to close them, we need to be rigorous and disciplined, in our approach to procedures and to evidence, in our case analysis and quality assurance, and where necessary in closing cases, to focus effort on the most promising cases. This prioritisation and scrutiny should not, however, deter us from bringing innovative or difficult cases when this is justified by the potential benefit to UK consumers and markets.
When competition law has been infringed, it is essential this leads to effective sanctions to punish the unlawful behaviour, and to deter both repeat offences and emulation by other firms. If this is not the case, then the many harmful effects associated with anti-competitive behaviour – increased prices, artificial scarcities, deterrence to new entry and innovation – are perpetuated. The law takes a strong view of the harm done by cartels and other competition and consumer infringements, providing for both heavy fines and, in the criminal cases, for incarceration, and as the enforcer of these laws, so too will the Competition and Markets Authority. There is also the risk of private damages actions by those who have suffered loss as a result of the infringement, and in certain circumstances directors can face disqualification.
We see an opportunity to promote a business environment in the UK in which any firm in any sector should know that they must abide by competition and consumer law, or face significant adverse consequences for their company, and for the executives involved. This is what it means to promote a ‘culture of compliance’ – something which we worked hard at, and I think with good success, in my previous role as head of the communications regulator in Ireland. Good progress has been accomplished on this front by the OFT, with considerable business and advisory input and engagement, and we can build on this. As many UK firms will be advised by CLA members, I hope you will take the CMA’s active enforcement message back to them, and help them to achieve a full compliance. In seeking to improve the enforcement of both consumer law and competition law, we recognise also the need to work constructively with Trading Standards Services, trade associations, other regulators, other government departments, the media, and the many other channels for positively influencing business behaviour.
As some of you may know, I have myself been a business executive, with experience ranging from a large multinational to both high- and low-tech start-ups, and this has helped me to appreciate fully a simple truth – that the vast majority of firms do actually want to comply with the law. To do so they need to know what the legal requirements are. And if they are under investigation, they want to know for what reason, where they stand in the process, and what opportunities they have to provide information and to argue their case. So, as well as being active in enforcement, we must be clear and effective in our communication of our actions, especially where interpretation of the law is required, or market practices are evolving, and make sure that companies are not left in the dark about where they stand within our enforcement process. Companies also need to know that the law is being applied energetically and even-handedly, and that if they bring evidence of unlawful behaviour to our notice we will act appropriately on this, and where necessary provide the protections available to whistle-blowers.
I recognise there is also a need for us to observe high standards in the fairness and thoroughness of our enforcement procedures. I think you will agree with me when I say the new decision-taking procedures adopted by the Office of Fair Trading in October last year, following an extensive public consultation in which many of the firms represented here tonight actively participated, provide a significant enhancement to the regime. We will need to monitor the working of the new procedures to see that they work in the way intended and provide the necessary safeguards, but in principle they look sound to me. The ERR Bill anticipates a further review of our processes. We can assess whether the creation of the new unified Authority provides an opportunity for further refinement, and we will consult on this in due course.
Decision-taking procedures are of course only one of the dimensions that can be adjusted to optimise an enforcement regime. Successful enforcement cases will need to be communicated correctly as part of a wider business compliance programme to maximise the deterrence leverage. The quality and quantity of resources, the techniques used for detection and accumulation of evidence, the training provided to case officers, the legal underpinning for information-gathering, the legal standards provided by the legislature, and scrutiny of previous decisions by the Courts and the CAT: these too are important ways to fine-tune the working of enforcement, all of which are being pursued by the OFT now, and will continue to be pursued within the CMA.
As an aside, since we are speaking of the OFT’s decision-making procedures, and the quality of resources, let me take this opportunity to thank those of you whose firms have generously allowed some of your brightest young competition lawyers to come on secondment to the OFT and the CC to help us undertake the transition to the new competition and consumer regime. Secondments of this kind recognise our common interest in ensuring the new regime achieves the higher quality, throughput and predictability envisaged by the Government’s review and the new legislation. And of course the secondees take a lot of learning as well as satisfaction from their time with us. So please let’s keep them coming!
Before I move on from the enforcement topic, let me emphasise that successful enforcement will not only be a matter for the CMA. We will inherit the well-established cooperation and transfer arrangements between the EC and UK authorities. We are watching with great interest the moves to provide for a wider application of private actions in cases of breaches of the competition law, in the UK and within the EC as a whole. And you will have seen the Government’s plans for the new consumer landscape, which is centred on a partnership structure between national and local consumer bodies, with the Trading Standards Services playing a bigger role in the enforcement of consumer law.
Furthermore, the new legislation, and the Government statements preceding it, envisage a step-up in the application of general competition policy and law in the areas covered by sectoral regulation. The new Authority and sector regulators will need to cooperate more closely, making best use of relevant sector and competition expertise. There is also scope for joint action, for cases being transferred, even for powers being removed in certain cases.
Clearly this multi-party enforcement machinery requires effective coordination, and a meeting of minds around the aims and methods of competition and consumer policy and the associated enforcement activity. Such congruence should not be taken for granted. Public institutions are alas not immune from the kind of rivalry and self-interested behaviour all organisations can show to each other without proper care and attention. Hence this regulatory coordination task needs to be an area of especial focus for the new Authority. David Currie and I have begun to explore with our counterparts in the sectoral regulators and the consumer bodies the scope for an enhanced regime here which is at once more cooperative and more fruitful, ensuring that the positive effects of competition and consumer protection are fully felt, and regimes evolve appropriately in line with market development.
Proactive markets programme
One advantage we have in our enforcement work is our parallel involvement in market studies and enquiries. Pace the views of some legal commentators, I see it as a source of strength that the new Authority will combine its responsibility for enforcement with a continuation of the UK markets regime. For that regime has proven remarkably useful and effective over many years, enabling the public authorities to enquire into, and where appropriate, devise remedies for, problematic markets where no explicit breach of competition law has been pre-identified, and without depending on a merger event. Competition problems are very often at the heart of market malfunctioning, but we know that competition problems can exist without there being unlawful activity. We also know that markets can malfunction for consumers even where competition appears reasonably effective. Indeed, our awareness of this latter phenomenon has perhaps intensified in recent years as the research findings of behavioural economists have educated us in the many cognitive biases and associated exposures we are liable to suffer as consumers, even when faced by a wide choice of products from a good number of alternative providers. And in our current straitened economic circumstances, where consumers can find themselves especially vulnerable to exploitation, it is most welcome to see the OFT actively using market studies to get to grips with potentially troublesome consumer-supplier interactions, in market sectors such as payday lending and quick house sales, and also to see both the OFT and the CC exploring new territory in public markets such as education and health, where competition has the potential to deliver enhanced value to taxpayers, as well as improved choices for users.
So I very much welcome that the Authority will have this ability to use the dual instrument of market studies and market investigations.
Clearly we will need to use our market powers wisely. The legislation makes a market investigation reference a decision for the CMA Board. I take this as indicative of the especially high significance attached to opening what is typically a wide-ranging enquiry, involving significant time and resources for all concerned, and with the possibility of weighty remedies, including divestment, as a consequence of the review – even where no unlawful behaviour has been proved. This should not deter us from making references when we see the market circumstances deserve it. But equally it should caution us not to assume that every market study ought to end in a market reference. Indeed experience shows that:
Some studies do not reveal substantial problems at all;
Others do highlight problems but problems that can better be addressed by negotiating changes in behaviour by firms, taking formal enforcement action, or advocating changes in public policy; and
Only a minority justify a market reference to bring into play the deeper scrutiny of the Panel-based system, and the powerful remedies available in that Phase 2 process.
With the creation of the unitary Authority, bringing under one roof the Phase 1 and Phase 2 work, we have the opportunity to refine further our approaches to market studies and market references, to help us choose the right markets for this attention, and where necessary to fine-tune the most appropriate remedies. We must fully respect the needs: to keep a clear distinction between the 2 phases; to preserve the objectivity of the Panel system of independent Members; and to safeguard from confirmation bias. But we can do all of this, and still bring more efficiency and timeliness to the process, as is envisaged by the Government review and the new legislation. This will require tighter management of the investigation – now subject to shorter statutory timetables; also smoother interchange between the two Phases; and to a certain extent, use of some of the same personnel across both phases.
I would like to add at this point some further remarks on the CMA’s consumer responsibilities, and how these sit together with our competition regime.
I am a strong believer in the power inherent in the combination of competition and consumer responsibilities. Theory and practice show that consumers are best served by a choice of alternative products from competing suppliers. Competition is also the most reliable spur to the innovation which creates the next generations of products and services to delight consumers. And we recognise the need of well informed and empowered consumers for competition to be truly effective.
But there are also some less obvious ways in which the combination works. Within an organisation like the OFT today, and the CMA tomorrow, policy can be optimised by the interactions between competition and consumer specialists. The former group will typically apply a measured scepticism to consumer protection interventions, helping us to make sure they are properly justified in a cost-benefit analysis, and that the market distortion resulting from any intervention is not worse than the status quo ante. Equally the more consumer-minded professionals, often more exposed to the day-to-day concerns and complaints of consumers, and thereby better attuned to the messy frustrations of the marketplace, can help bring both a sense of urgency and of reality to competition work. More technically, typical competition remedies such as switching mechanisms can be enhanced by the application of the afore-mentioned behavioural insights; and typical consumer remedies such as codes of practice can be enhanced by designing them so as to avoid anti-competitive capabilities.
The combination of competition and consumer work keeps us focused on the core task of helping competition and markets work well for consumers. And by working hard and well in this task, we can continue to demonstrate the relevance and importance of our work, and thereby continue to generate support from our many stakeholders. We must make sure that the CMA, even without the consumer information responsibilities recently transferred to the Citizens Advice services, and even with its new, reshaped position in the wider consumer landscape, continues to deliver for consumers.
Efficient merger control
The final area of the work of the CMA that I wanted to raise with you this evening is mergers. It is easier to say what we want from a good merger control regime than it is to achieve one.
Clearly we want to minimise both the Type 1 error of blocking or modifying the harmless merger, and the Type 2 error of passing unmodified the harmful one.
But in practice the challenges tend to take one of two other forms.
First, the debate that will often arise as to whether a potentially anti-competitive merger merits the deeper scrutiny of the Phase 2 process. The authorities have tended to refer the marginal case, and given the policy framework, the lower legal threshold for concerns to arise at the Phase 1 screening stage, and the express ‘duty to refer’ in UK legislation, it is hard to disagree with this general stance. But inevitably there can be lively debates in an individual case.
Secondly – and this is where the hardest analysis and most intense disputes with parties tend to arise – one has to determine the appropriate level of modification to a merger proposal to address identified competition issues. Commercial interests of those promoting the merger will obviously tend to want to minimise the modification, and will frequently argue the price of passage with the authorities at both Phases in merger control. It is not always easy for the non-involved observer to judge whether the right balance has been struck, and ex-post evaluation is necessarily imprecise when a modification has been made, as we cannot measure accurately the counter-factual.
The best that can be done is to seek to apply a rigorous and consistent competition analysis blending legal, economic and business expertise to merger control; to apply this within reasonable time-frames and without excessive information or research requirements; and to be as clear as possible in one’s reasoning, as set out in published general guidance, in the specific case publications of Phase 1 clearance reference decisions, in Phase 2 provisional findings, and in the final reports.
Two further points I would like to emphasise in relation to merger control.
The first – and again one that has been informed by my personal business experience, and regulatory involvement with the communications sector – is the extent to which competition can bring about rapid changes in markets experiencing a lot of innovation or changes in the terms of trade. Contrast, for example, the change in relative fortunes of Nokia and Apple in the global mobile handset market over the last five years or so, or the shifts in market power between fixed and mobile operators. So when assessing mergers we must be alive not only to historic market data but also to the potential for the relevant market to evolve so as to alleviate or resolve the competition issues identified. And indeed there have been recent cases where the Competition Commission has observed such changes even while their Phase 2 assessment has been in train, such as in the Movies on Pay TV enquiry, or the Kerry/Headland merger.
The second point is the growing challenge presented by complex international transactions, requiring difficult, time-consuming and sometimes contentious interactions with multiple national competition regimes and national laws, such as in relation to bankruptcy and intellectual property. The ICN and OECD, with the help and support of the UK competition authorities, have made a useful start in helping to bring about some convergence in merger procedures and substantive assessment, but there remains much to be done within the competition domain, and these bodies cannot help us much if the boundary issues occur outside the competition sphere. I have no particular solution to offer, though obviously it is intended that the CMA should continue the work of its predecessors in seeking to understand and resolve problems within the ICN and OECD groupings. Even with continued mitigation efforts, jurisdictional issues will tend to add to the complexity of the task of merger control, and very probably to the duration of cases, and the incidence of legal challenges.
High performance organisation
So we face some great challenges as well as some real opportunities as we plan out how best to optimise the CMA’s enforcement approach, and our market investigations, consumer work and merger control.
What of the organisation itself?
We want to see an organisation that is even more effective, efficient, transparent and accountable. Who would not? Changes in our legislative responsibilities and powers can help with this step-up. So too can the application of fresh thinking from new people becoming involved in the management of the regime - some of which I hope you have seen evidence of this evening.
But in truth the legal reforms are evolutionary rather than revolutionary; and the CMA, though a new institution, will have at its core the merged and integrated legacy bodies of the OFT and the Competition Commission. So it is excellent that the body of inherited law, practice and know-how is as good as it is. And that the two legacy bodies are so richly endowed with highly talented and committed professionals, and have been able to attract outstanding individuals as both staff and Panel members. We want to build on this, at such an exciting time when we are creating a new, high performance organisation, and implementing the new legal frameworks, to help motivate and retain existing staff, and to attract new people to join us in this fascinating and worthwhile work.
To sum up. We want:
A vigorous and successful enforcement regime that promotes a high level of compliance;
A proactive markets programme that uses a well-judged combination of market studies and investigations to bring worthwhile and timely reforms to troublesome, under-performing markets – be they mixed, private or public;
An effective and productive coordination with other regulatory bodies, especially in the areas of sectoral regulation and within the new consumer landscape;
An efficient merger control that focuses remedies as precisely as possible on the competition issues identified;
A step-up overall in the pace and efficiency of our investigations; and
A new organisation that that makes the most of its rich inheritance from the OFT and the CC, while developing new procedures, practices, talents and values, so as to deliver even better outcomes for UK consumers and the UK economy.
It really matters that we get this right. A world-class competition and consumer regime can help stimulate economic recovery through enhanced innovation and performance, and greater business and consumer confidence. It is vital that our markets work as well as they can for consumers and firms, powering the return to growth.
And you can help with this! The counsel you give to your clients plays a key role in the evolution of business practices. You can help promote a high standard of compliance, and I urge you to do so.
And you can help by sharing your insights and experience, as we work up our plans for implementing the new competition and consumer framework in the UK. Be generous with your advice to us.
Thank you very much for your attention, and I look forward to hearing your reactions and suggestions, both tonight and following up after this event.