The new Competition and Markets Authority: how will it promote competition?
Speech given by CMA chairman David Currie to the Beesley Lectures on 7 November 2013
It is a great pleasure to give this lecture in honour of Michael Beesley. I had the very good fortune to have been a colleague of Michael’s at London Business School in the later part of his life. Michael had moved from the LSE in 1965 to become one of the founding professors of London Business School. I moved there in 1988 and when in the mid-1990s I moved from being a macroeconomist and forecaster into regulation and microeconomics, Michael was hugely supportive as we established the regulation programme at the School. He, of course, established this lecture series with Colin Robinson under the auspices of the Institute of Economic Affairs, and it proved a launch pad for the programme of privatisation and regulation of which Michael can rightly be acclaimed the grandfather. That programme continues to this day with the recent partial privatisation of Royal Mail. On his death in 1999, I took over the running of the series, and we naturally named the series after Michael. The continued vibrancy of the lecture series, as evident in this year’s programme, is a fitting tribute to Michael’s memory. At his memorial ceremony, I said that Michael through his work touched for the good the lives of millions of people without their knowing. That remains as true today as it was then.
Michael, of course, served as a member of the Monopolies and Mergers Commission (MMC) from 1988 to 1994, and our London Business School colleague, Paul Geroski, was first Deputy Chairman of the Competition Commission (CC) and then Chairman, though only briefly before his tragically premature death. I think they would both be as surprised as I am to find me as the Chairman of the successor body to both the MMC and CC, namely the Competition and Markets Authority (CMA), which came into legal existence at the beginning of October and assumes its powers, replacing both the Office of Fair Trading (OFT) and the CC, at the beginning of April 2014. Having had a good run as the founding Chairman of the Office of Communications (Ofcom), heading the bringing together of 5 communication regulators into 1, I thought my career as a UK regulator had come to an end. I little thought that I would be asked to head the merger of the UK’s 2 competition authorities, though it is a huge honour to have that responsibility. It is also humbling to follow the illustrious roll call of distinguished competition experts who have headed the UK competition authorities: Gordon Borrie, Bryan Carsberg, Philip Collins, John Fingleton, Peter Freeman, Sydney Lipworth, Derek Morris, John Vickers and Roger Witcomb.
The announcement of my appointment came in July last year, 10 years almost to the day of the Ofcom one in July 2002. The contrasting media coverage of those 2 announcements is quite telling. Within minutes of the Ofcom announcement, the media pack was onto me: my mobile phone never stopped ringing, the Department for Culture, Media and Sport press office that was to have handled enquiries had abandoned me because the media questioned how a government department could manage the media relationships of a (yet to be created) independent regulator, and I had to do dozens of interviews. To this day, I never answer my mobile phone unless I know who is calling. The CMA announcement received no mainstream media interest, only competition specialists, and many usually well-informed friends and former colleagues remained ignorant of my appointment for weeks, even months.
That contrast in part reflects the self-referential nature of our media: nothing interests the media more than themselves, as we have seen from the coverage of the Leveson Inquiry. But it also reflects a key difference between a sector regulator and a competition and consumer authority. A sector regulator, such as Ofcom, the Office of Gas and Electricity Markets (Ofgem), Monitor etc, have a very clear and identifiable constituency of business and other stakeholders that has a keen interest in what the regulator may do. This has both advantages and disadvantages. The downside is that the regulator is subject to intense lobbying by industry interests. The upside is that it knows its interest groups and stakeholders, both industry and consumer, and can forge the appropriate relationship and, if it is smart, its independence and authority. Economy-wide competition and consumer bodies are rather different. Since all are potential stakeholders, none are until they come under scrutiny. It is much harder for the competition authority to forge a close relationship with its stakeholders. The consequence is that the main source of lobbying comes from the competition specialists, the lawyers, economists and consultants who make their living in the competition world.
It is hard to overstate the importance of the task ahead of creating the new unified competition and consumer authority. The functioning of markets is questioned much more since the financial crisis of the past few years. But history tells us that there is no viable alternative to the market system. The challenge is to make markets work better for consumers, business and the wider economy. The key responsibility for that will now rest with the CMA. Open, transparent and dynamic markets serve consumers and business best. They also foster growth and innovation, facilitating the creative re-combinations that Brian Arthur so cogently argues lie at the heart of the innovation process (note 1). That is why the creation of a highly effective new authority is so important.
What I would like to do in this lecture is first say a little about the creation of the CMA – a progress report on where we are and where we are going. Second, I will talk about our ambition and aspirations. Third, I will focus on 2 particular areas where the reforms make an appreciable change: the concurrency regime with sector regulators; and the changed consumer landscape. Fourth I will address a few other important issues. And finally I argue that this reform – the new legislation and the creation of the CMA– represents a significant enhancement of the competition regime. I want to touch on a number of things that we need to get right to make this enhancement as major as possible, and to outline what success will look like. That is quite a lot of ground to cover, especially since I will dwell significantly on the concurrency regime, since its focus on competition and regulation is so central to this Beesley lecture series.
1. The Creation of the CMA
The creation of the new CMA has not been without controversy. Many took heart from the high regard in which the UK competition regime is held internationally, reflected in the GCR rankings, and argued that the replacement of the OFT and CC by the CMA was a mistake that ran the risk of weakening a strong regime. A more specific and widely held concern, probably continuing, is the risk of weakening the independence of Phase 2 by putting the current CC inquiries under the same roof as the rest of competition policy: confirmation bias.
On the other side, the critics of the old regime first noted the large swings in workload for Phase 2 CC cases, going from famine to feast. One could debate long and hard the reasons for these swings, but whatever the cause the indisputable fact was that such swings were hard to manage for a relatively small organisation. An integrated body may result in a more even flow of work, and even if swings are justified (for example resulting from a boom in mergers) efficient resource management is more easily achieved in an integrated organisation where resource can move from Phase 1 to Phase 2 and back (subject to the important qualification that Phase 2 is independent). Secondly, they also noted the slowness of many competition processes, a major drawback particularly when markets are subject to rapid change, and argued that an integrated body could conclude matters in a more timely way, and in particular avoid the sense on the part of the businesses involved of a complete restart as cases moved from Phase 1 to Phase 2. Thirdly they also argued that the OFT enforcement record was patchy, with some high profile OFT cases overturned on appeal, fines reduced and criminal cartel prosecutions (notably the BA/Virgin case) collapsing in the courts. And fourthly they noted the failure to prosecute successfully UK criminal cartel cases, the only successful prosecution (Marine Hose) being off the back of a prior successful prosecution in the US.
It is arguable that these last 2 points were somewhat overstated – thus the BA/Virgin civil cartel case was won, even though the criminal one failed, and the OFT played an important role in preparing the US Marine Hose case. And insofar as they had substance, they could be, and were being, addressed within the old bi-headed structure without the creation of a single authority. Thus since its setbacks, the OFT has made huge strides to put in place more robust decision-making and to adopt a more forensic approach to cartel prosecution, and the CMA will have the considerable advantage of building on these advances. But to address the first 2 points does require an integrated organisation. And there are 2 additional benefits of a single authority. First it should provide better career development prospects for its professional staff with a wider and deeper range of work. Second in terms of competition and consumer advocacy at home and internationally, there is considerable advantage in having a single voice.
Those arguments are behind us now. As we know, after consultation, the Government decided to create a single competition authority by bringing together the OFT and CC. Given the preceding debate, this proposal proved remarkably uncontroversial in Parliament. As I recall, only 1 lone voice in the Lords, a former Deputy Chairman of the MMC in the 1980s, argued against the merger, bizarrely suggesting that instead all the possible benefits could be derived by appointing me chairman simultaneously of both the OFT and CC – bringing to mind the dangers of riding 2 horses at once. But an important reason for this virtual consensus was that the draft statute hard-wired the CC panel system for Phase 2 decision-making into the CMA, creating a complex, but workable, governance structure for the new body.
Alongside this organisational reform went a number of adjustments to the powers and duties of the new body. These included:
- Tighter timetables for different parts of the competition process (for example an 18, rather than 24, month time limit on Phase 2 market inquiries, a 40 working day time limit on Phase 1 merger decisions)
- Stronger powers of investigation and information gathering in competition cases
- A power to focus a Phase 2 market investigation on a particular feature spanning several markets
- Stronger powers to impose interim measures in mergers and markets, including for mergers greater “hold separate” powers and powers to undo previous integration if appropriate
- Removal of the dishonesty requirement in the criminal cartel offence, but with new defences allowed
As I will argue later, these reforms represent a significant enhancement of the UK competition regime, which will enable more effective competition enforcement for the benefit of consumers, businesses and the economy. For that, we need the new CMA to be a high performance organisation. It is to the creation of that new organisation that I now turn.
At this point in time we are right in the middle of the process of creating the new organisation. I took up post in September last year, Alex Chisholm was appointed Chief Executive Designate from March of this year, the non-executive members of the Board were appointed in July, and the 3 other executive directors together with the General Counsel and Chief Economic Adviser were appointed last month, and yesterday we announced a further group of senior executive appointments following open competition.
I think the membership of the Board provides a very strong signal concerning our ambition. Among the non-executives, Bill Kovacic is a former chairman of the US FTC and the leading authority on competition regimes around the world. Philip Lowe ran DG Comp for a decade. Annetje Ottow is a professor of competition law at the University of Utrecht, and was heavily engaged with the merger of the Dutch competition and telecoms authorities. Roger Witcomb, the Chairman of the CC, and Alan Giles, a Board member of the OFT, provide continuity and institutional memory from the current regime, as well important business experience, which is also provided by Carolyn Fairbairn and Jill May. Alex Chisholm, with private sector experience as well as a considerable track record in regulation and competition, provides very clear and effective leadership as Chief Executive. Sonya Branch, Andrea Coscelli and Erik Wilson make up the very strong executive representation on the Board, which will be well advised by Sarah Cardell as General Counsel and Mike Walker as Chief Economic Adviser. The Board has met 3 times so far: twice informally in August and September, with the first formal Board meeting 2 weeks ago. Later this month we have a joint meeting of the OFT and CMA Boards to review the caseload, including possible new cases, to ensure that the portfolio is optimised ahead of transfer to the CMA next April.
The remaining senior executive appointments open to competition will be announced very soon. The rest of the positions in the organisation will be filled from the staff of the OFT and CC through a complex job-matching process which is currently underway and will be completed by the end of the year when virtually everyone will know their future role in the new organisation. There will be efficiencies from the new single organisation, and a selected voluntary redundancy programme has been put in place, especially for back office functions. It is hoped that this will deliver the required efficiencies without any compulsory redundancies, but at this point in time these cannot be ruled out. But before Christmas the shape of the new authority will be known, with a total staff complement of around 510.
This represents a very major, complicated HR process: I remember in the midst of the same process for Ofcom, one of the senior executives described it as climbing Everest by the North Face. And since we are dealing with people’s careers, it has been a paramount consideration to ensure that people are treated throughout with care and respect. It is a tribute to the calibre and professionalism of the staff in the OFT and CC that they have remained absolutely committed to delivering their on-going case load. Since the vast proportion of staff in the new organisation will come from the existing organisations, it will be a great relief when this process is over. But we will have achieved 2 important outcomes through it. First, the CMA will come into existence restructured ready for the exercise of its new powers and with a fully integrated management structure. Too many public sector mergers in the UK have simply bolted 2 organisations together with a view to doing the restructuring later: that restructuring, if it happens, is usually limited and the result is that the merger is a failure. Second, we will have taken the best genes from the OFT and CC, while mingling in some new ones through outside appointments. That will provide the new organisation with the best chance of a robust and powerful constitution.
Other important processes for the creation of the CMA are refitting our offices which will be in Victoria House, the current home of the CC and Competition Appeal Tribunal; providing for the IT support that is so essential for the casework of both the CC and OFT; and the other operational requirements for the CMA to open for business in April. Inevitably with a complex merger process of this kind, not everything will be perfect on day one, and they will need working on, and there will be non-critical things that will fall into place after April. And indeed the work of refining processes and enhancing ways of working will be an on-going priority for the CMA – continual improvement to make the competition and consumer regime work better.
A major work programme has been to update the substantial number of guidance documents that the OFT and CC has put into the public domain: much of this carries over unchanged except for rebadging; but some important revisions have been needed in the light of the legislative changes. The consultation has been in 2 tranches: the first issued for consultation before the summer, and the CMA Board will consider the results of this consultation at its next meeting; the second tranche issued shortly before the CMA launch at the beginning of October, with the consultation closing next week. The Government has published its Strategic Steer, which I will discuss, and this will be followed by a performance framework against which we will be judged.
2. Ambition and Aspirations
So far I have focused on the practical issues concerning the creation of the CMA. Now let me turn to the ambition and aspirations that we have for the new organisation. We set this out in our Vision, Values and Strategy for the CMA consultation document published on 1 October when we came into legal existence. My narrative that follows is subject to that consultation.
First and foremost, our overall mission is to make markets work well in the interests of consumers, businesses and the economy. This echoes the OFT’s mission, but expands on that. It mentions the interests of business not to set those interests against those of consumers, the focus of our primary statutory duty. Rather it is because open, well-functioning markets are very much in the interests of efficient, innovative and fair-dealing businesses as well as consumers. And it mentions the economy because of the centrality of effective competition to the longer term growth and innovation performance of the economy.
Our ambition is to be consistently among the leading competition and consumer authorities in the world. What does that mean? It is that other authorities around the world look to the UK and the CMA as an exemplar of best practice, as a thought leader and as a key player in international competition networks – the European Competition Network (ECN), the International Competition Network (ICN) and Organisation for Economic Co-operation and Development (OECD). In this we will be building on the high international standing of the OFT and CC. But the single integrated UK authority will give additional advantage in achieving this goal
To deliver on this mission, we have set ourselves (subject to consultation) 5 key goals: deliver effective enforcement; extend competition frontiers; refocus consumer protection; achieve professional excellence; and develop integrated performance. Let me briefly touch on each of these.
Deliver effective enforcement: The first proposed goal is to deliver effective enforcement. That requires a number of things. We need to be successful in our enforcement cases, both competition and consumer, and these cases need to be both of sufficient number and covering the full range of our tools. A credible enforcement record is essential to establishing the authority of the CMA. And the portfolio of cases needs to be balanced: high profile cases to be sure, but also more bread-and-butter cases, and ones affecting not just big businesses but also smaller, and UK-wide including the devolved nations. The significance of competition enforcement needs to be something very much in the minds of the boards of companies: that is the way to deter malpractice. It also establishes a better basis for settlements in those cases where that is appropriate, speeding up the competition process.
Given the increasingly litigious nature of the competition area, earning this record and reputation will require careful legal and economic groundwork preparing the cases. We will not win every case: if we did, then that would be clear evidence that we were being too cautious. But if we do lose, we want it to be not because of inadequate preparation and process, but because we are legitimately seeking to clarify the law and extend case law to cover new market developments.
Extend competition frontiers: The second goal is to extend competition frontiers. An important part of this is to apply competition law more effectively in the regulated sectors, which account for some 25% of the economy: I will leave that to discuss at some length later on. But there are other dimensions. One is what we could refer to as public markets: sectors such as health and education where government actions to decentralise and liberalise have created new markets. A very good example is higher education, regarding which the OFT has very sensibly made a Call for Information. All too often with newly developing markets of this kind, consumer detriment can arise and we need to be alert to this.
Another critical area is the rapidly expanding online market or markets, which increasingly touch all aspects of business. Making sure competition works effectively in these markets will be a major priority. It is one that the OFT has already picked up by investigating Amazon’s policy of requiring its suppliers in the UK to undertake not to sell online elsewhere at a price lower than that charged on Amazon Marketplace, a potential distortion of the market that can keep prices to consumers high. The OFT has announced that it is minded to close its investigation following Amazon’s decision to end its policy in the EU. Interestingly it seems that Amazon continues with this policy elsewhere in the world. The OFT is also tackling in-game payments in children’s apps where the OFT has identified possible consumer law breaches, not least in the use of what may amount to the use of emotional blackmail of young children; and is leading discussion internationally and driving for a common approach to raising industry standards across the world. It has also effectively clamped down on airline payment card surcharges, which has relevance across much of the online business space. An important development that we will wish to monitor is the growing collection, processing and use of consumer transaction data for commercial ends. This is proving an increasingly important source of competitive advantage; we need to be alert to the possibility that it will be an increasing source of consumer detriment.
Refocus consumer protection: Our third goal is to make the newly redrawn consumer landscape work effectively in the interests of consumers. Since this deserves substantive discussion, I return to this later.
Achieve professional excellence: One of the very valuable aspects of the OFT and CC that we will take in to the CMA is the sheer professionalism and dedication of their people. We will build on that legacy. We need to take full advantage of the greater range of work in the CMA and ensure that people are able to develop their careers to the fullest. The launch of the CMA Academy, building on the success of the OFT Enforcement Academy, will be an important step towards this. To ensure that our cases stand up in the face of intense legal challenge, we need to ensure that we deliver joined-up legal, economic and business analysis of the highest quality. And to ensure that we deliver with speed, efficiency and transparency, we will need the highest standards for project management delivery and stakeholder engagement.
Develop integrated performance: Our final goal is to have genuinely integrated ways of working. This has a number of dimensions. We need to ensure that the new organisation is truly integrated with a way of working and culture that is truly the CMA’s. That does not mean throwing out the OFT and CC ways, but rather drawing on the best of both, looking forward and not back. We already have more joint working between the 2 organisations as part of the transition process, and we will do more to aid the process of building a new culture. We also need to ensure the effective integration of different professional expertise: successful competition and consumer enforcement requires legal, economic and business expertise working in tandem.
We also need to work effectively with other regulatory bodies, notably the sector regulators in the concurrency regime and other consumer protection agencies in the redrawn consumer landscape – I discuss both of these in more detail in a moment.
And we need to work with our partners internationally, in Europe through the ECN, more broadly internationally through the ICN and OECD and on a bilateral or multilateral basis where appropriate, for example in international criminal cartel cases. The OFT and CC have played important leadership and advocacy roles in these networks, and the CMA will continue to do so, in pursuit of our overall ambition.
And finally but as importantly we need to work effectively within Government as an advocate of competition, and I will return to this.
3. The Concurrency Regime and UKCN
Let me now turn to the regulated sectors and the competition concurrency regime. One concern about the UK competition regime has been the relative paucity of competition cases in the regulated sectors. These sectors account in total for some 25% of the economy. They are also typically characterised by monopolistic or oligopolistic market structures. This might suggest the need for more, rather than less, competition enforcement than in other parts of the economy – hence the concern.
Several factors have contributed to this dearth of competition cases in the regulated sectors. The sector regulators may have found that the use of sector-specific regulatory powers has a more predictable and timely result than the use of more general competition powers which typically entails a more drawn-out process. Market references have meant handing over to another body, the CC, consideration of the issues, which can entail a prolonged period of uncertainty and can be interpreted as an admission of failure by the regulator. Both the sector regulator and the regulated businesses may well prefer to avoid this through undertakings-in-lieu or other regulatory tools such as a licence modification, which may of course deliver faster benefits for consumers. Even though Ofcom has been quite active in the use of competition powers, I saw both these factors in my time as founding Chairman of Ofcom. Thus the Office of Telecommunications (Oftel) passed a margin squeeze case (Freeserve) to Ofcom, and this case was finally closed after I had stepped down as Chairman after 7 years. And it was the prospect of a market reference by Ofcom that led British Telecommunications (BT) to offer up the undertakings which led to the creation of Openreach, functional separation and the blossoming of competition in the UK broadband market.
But it is also clear that, despite having concurrent powers, the OFT was reluctant to get drawn into consideration of the regulated sectors. In part, this was a matter of resource. Sectoral regulation in total costs some £850mn a year, whereas the combined budget of the OFT and CC was less than £60mn and the CMA budget in 2014/15 will be £52mn, some 6% of the regulatory budget, and although our budget will rise to £68mn in 2915/16 the difference remains huge. It is hard to rationalise this disparity, though it reflects in part the fact that sector regulators are typically funded from their industry whereas the competition authorities are of necessity funded from central government. It is an understandable, though not necessarily correct, response to this disparity to husband the competition budget by focusing it on the non-regulated parts of the economy, relying on the better funded sector regulators to look after their sectors. But many of the sector regulators have lacked in-depth competition expertise (Ofcom being the exception), and have therefore also held back on the use of competition powers.
The consequence has been that sector regulation looks like a permanency, against the hopes of many of us - I well remember early speeches in which I envisaged that Ofcom would ultimately work itself out of a job, but sadly though it has shrunk it is still very much around. That is not how the architects of the British model of sector regulation envisaged it. Stephen Littlechild, that most distinguished student of Michael Beesley, in his path-breaking report (‘Regulation of British Telecommunications’s Profitability’, para 4.11) wrote:
Competition is indisputably the most effective – perhaps the only effective means – of protecting consumers against monopoly power. Regulation is essentially the means of preventing the worst excesses of monopoly; it is not a substitute for competition. It is a means of ‘holding the fort’ until competition comes.
That perspective suggests the need to give competition and competition promotion and enforcement the priority that it has not sufficiently had. And that is the rationale for the changes in the concurrency regime introduced by the Enterprise and Regulatory Reform Act 2013.
The changes introduced by this Act are fivefold. First it places on the sector regulators (with the exception of Monitor) a strengthened obligation to give primacy to the use of their competition enforcement powers ahead of their regulatory enforcement powers; that is, to fall back on their sector regulatory powers when it is more appropriate to prefer them over general competition powers. Second, the CMA is given a lead role to coordinate competition policy between itself and the sector regulators. Third, the CMA is required to publish an annual report on the effectiveness of the concurrency regime and the application of competition powers in the regulated sectors. Fourth, in certain circumstances the CMA has the power to take from a sector regulator a competition case and advance it itself. Finally, the Secretary of State can remove competition powers (either or both Competition Act 1998 and Enterprise Act 2002) from the sector regulators (again with the exception of Monitor).
This represents a fairly major revamp and strengthening of the concurrency regime. Building on these legislative changes, we have moved quickly to put in place mechanisms to deliver enhanced coordination of competition policy in the regulated sectors. I had early discussions with the chairs of the sector regulators, who committed enthusiastically to this objective. On appointment, Alex Chisholm had early engagement with his chief executive counterparts. A statement of intent committing to the new UK Competition Network (UKCN) as agreed with the chief executives on 18 September of this year, and will be published in the next month or so when approved by the boards of the regulators. Alongside this statement of intent, there is agreement at CEO level to an associated work programme for the coming year, including detailed MOUs with each of the sector regulators, establishing an information-sharing platform, and the publication of a baseline Annual Concurrency Report in April 2014.
All of this is being done in a spirit of cooperation. Stephen Littlechild’s allusion to “holding the fort” in the above quote might be interpreted by some as putting the CMA in the role of the US cavalry coming to the rescue with the weaponry of competition. That would be a misinterpretation: the CMA is part of the rescue mission but in collaboration with the regulators. It is true that the fourth and fifth legislative elements listed above appear something of a threat hanging over the regulators, but we would be disappointed if they ever needed to be deployed. Cooperation between the competition authority and the regulator is, we believe, the best way forward. In collaboration, the regulators bring their deep knowledge of the sector; while the CMA brings the competition expertise that the regulators, particularly the smaller ones, may lack, as well the consistency of approach across sectors, both regulated and unregulated. And given the resourcing disparity noted above, collaboration is the only realistic way forward if we are to have good portfolio of competition cases in the regulated sectors.
The UKCN will not be without its challenges.
Many of the regulated sectors are very much in the political spotlight – one thinks of energy, financial services, health. There is the risk, especially if political horizons shorten ahead of the looming election, that there is a call for immediate action, not on the timescale of (even-speeded up) competition processes. That could be a missed opportunity. John Fingleton, the former CEO of the OFT has said of the energy sector that what is needed is a thorough-going market inquiry of the kind that the CC, and from April the CMA, can undertake. I do not know whether that judgement is right, but what is important is that the option of a market inquiry resulting from the current review is not ruled out. A key challenge for the CMA is rapidly to command respect and authority, so that if a market inquiry is needed in any sector the CMA is given the time to undertake the in-depth analysis how best to embed effective competition in a lasting way.
Further down in the weeds, it will be necessary for the CMA and the regulators to manage the complexity of the regulatory regimes that have grown from the initial seed planted by Stephen Littlechild and Michael Beesley. Each regulator has been given somewhat different marching orders from Parliament in the form of their statutory duties. The contrasting ways in which competition as an objective is embedded in statute varies considerably between the Financial Conduct Authority (FCA), Ofcom, Ofgem, and The Water Services Regulation Authority (Ofwat) (without mentioning Monitor), and provides the material for many learned theses. Reformers naturally want to rationalise all of this, but I am sufficiently long in the tooth to remember the fate of the Utility Act 2000, the 1997 Labour Government’s failed attempt to address this issue. I would prefer a pragmatic approach to manage these complexities, and I am confident that the UKCN will succeed in that.
The UKCN will also have to evolve a pragmatic approach of working effectively both with regulators that have considerable resource to deploy in competition matters (Ofcom, but also quite soon the FCA as it builds up its competition team) and those whose competition capacity will inevitably remain limited. And the UKCN will need to operate with sensitivity to the fact that, whereas in most parts of the economy the case for effective competition is well accepted, there are parts, notably emerging public markets such as in health, where this acceptance is much less. This highlights the importance of the advocacy role that the CMA will play, and of working closely and sensitively with the sector regulator.
I am confident that the UKCN will navigate its way through these issues and challenges. And there are many opportunities. In telecoms, despite the undoubted successes of Ofcom, there remain important segments of the market (for example, leased lines for smaller businesses) which are effectively a BT monopoly, and as a consequence there is a good deal of detailed regulation; the European communications internal market remains work in progress, despite Commissioner Kroes’s strenuous efforts; and in the bidding for the state-funded roll-out of fast broadband to rural areas the former state monopolist, BT, has been the exclusive winner. In water, the Water Bill envisages the creation of a new market for retail and sewerage services for non-domestic customers, with greater upstream competition, following more ambitious market developments in Scotland. Martin Cave’s Beesley lecture earlier in this series asks why not a greater ambition for competition. In energy, Ofgem has been making significant efforts to promote competition at the wholesale and retail ends of the market, though they have received little credit for that. But clearly there is much more that could be done, as there is in other regulated sectors.
Bill Kovacic, who has a uniquely authoritative academic and practitioner perspective on global developments in the competition sphere, describes the UKCN as an international first: no other competition regime has sought to coordinate sector regulation and competition enforcement across regulators in such a comprehensive way. In that, we hold fast to the course that Michael Beesley set us, to be the path-breaker for institutional innovation and advancement. I look forward to the critical assessment of what the UKCN has achieved in future Beesley lectures.
4. The Reconfigured Consumer Landscape
Let me now turn to another key aspect of the work of the new CMA.
Consumer work will continue to be a central element for the CMA and we intend to maintain a focus on the synergy between consumer and competition issues. Experience strongly suggests that competition and consumer policy are linked. Good consumer outcomes rely on competitive markets to provide choice and value, while vibrant competition relies on consumers confidently shopping around. Competition problems can often manifest themselves in businesses failing properly to comply with consumer protection laws, which in turn can prevent consumers driving effective competition and lowers prices through the exercise of informed choice.
There are also some less obvious synergies. 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. And what may first appear as a consumer problem may end up being resolved through a competition tool, and vice versa.
While the CMA will inherit the range of consumer enforcement powers from the OFT as part of its toolkit, the CMA will play a somewhat different role in the consumer protection regime. This is because the competition regime is not the only one undergoing change.
The Government has also undertaken a major reform of the consumer protection regime. This was in response in particular to concerns from stakeholders that the consumer landscape, comprising an array of public, private and voluntary bodies with overlapping responsibilities, was too complex and caused considerable confusion for consumers and also faced funding challenges, leading to risk of an enforcement gap opening up. The reform was also informed by the National Audit Office’s 2011 report ‘Protecting Consumers – the System for Enforcing Consumer law’.
Although the steps being taken to reconfigure the consumer landscape are themselves, somewhat complex (note 2), these reforms aim to increase consumer empowerment by streamlining the public bodies that exist to help consumers, strengthening the effectiveness of enforcement of consumer rights and ensuring that activities that help consumers to be empowered are delivered more cost effectively and in a way that links national and local intelligence to the problems that consumers face.
Some of the changes have begun in advance of the formation of the CMA and the remainder will happen in April 2014 when various functions and powers of the OFT are transferred to the CMA and others move to the local authority Trading Standards Services (TSS).(note 3) There is already a new institutional split in the way consumer enforcement is delivered, with TSS taking a greater proportion of the larger cases regardless of the size or location of the firms involved – particularly the single firm investigations.
The CMA will take on the OFT’s focus on using consumer law to address market-wide problems and will retain the OFT’s leadership role for the Unfair Terms in Consumer Contracts Regulations 1999. In general, it is envisaged that the CMA will seek to target consumer enforcement action where it can secure wide ranging changes across a whole market and tackle significant consumer detriment, particularly with regard to emerging threats. Thus the general issues tackled by the OFT such as misleading statements, hidden fees, drip pricing and hidden surcharges are likely to continue to fall to the CMA. TSS will have responsibility for tackling the vast majority of cases against individual firms.
In the short term, as Alex has already said, we will still have a job to do in setting appropriate expectations for the CMA’s consumer enforcement work – it will take time for people outside of the consumer and competition regimes to recognise that Trading Standards have taken on more responsibility for big national enforcement cases – but the best way for us to do this will be for all of the bodies with consumer powers to deliver effective results under the new regime.
Arguably the most important aspect of the CMA’s work in this area will be to play our part in ensuring that the system works as a whole. In the reconfigured consumer landscape we will need to adopt a more strategic stance, working across the 4 nations constructively with our partners in Trading Standards, the sector regulators, Consumer Futures and the Citizens Advice Services, and ensuring between us that the new regime is as effective as possible. This includes participating fully in the new co-ordinating groups such as the Consumer Protection Partnership (CPP).(note 4) This brings together the key partners within the new consumer landscape to identify priorities for enforcement and for the provision of consumer information, advice and education and business guidance, ensuring effective joint working and that important issues do not fall between partners in the consumer landscape due to differing accountabilities. Since April 2012, the CPP has worked to identify priority areas of detriment (and recently published its first assessment), and its individual partners have also worked together to implement action plans, for example, tackling mass marketing scams and raising awareness of potential and emerging detriment if rogues try to exploit the Green Deal.
As part of the CPP we will agree with our partners how to best target our resources, and that will apply to issues arising in all parts of the UK, even though there are different arrangements for our partners in Trading Standards in the different nations.
As well as the consumer enforcement powers shared with TSS, the CMA will share most of its consumer powers with a number of other agencies, many of which have enforcement responsibilities for particular economic sectors. Through the Consumer Concurrency Group (CCG), the CMA and the other agencies will aim to improve clarity and share best practice on overlapping areas of responsibility especially in relation to enforcement.(note 5) And crucially, the CMA will be able to act as a conduit between the sector regulators, which sit on the CCG and the CPP to ensure issues from the regulated sectors are reflected in discussions regarding threats (and appropriate responses) to UK consumers. While these arrangements are more informal than the UKCN, they are just as important.
On the international front, the CMA will retain the OFT’s role as the Single Liaison Office, ensuring compliance under the EU Consumer Protection Co-operation Regulation and coordinating the UK’s interaction with EU and international enforcers. In carrying out this role, the CMA will work with enforcement partners in the UK and internationally, to deliver on its objectives and to promote a joined-up approach to consumer protection.
Our consumer enforcement role will therefore be somewhat different to the one taken by the OFT over recent years, but no less important. I am confident that the CMA’s consumer role will complement and reinforce the effect of competition action taken to improve markets and to support economic growth through addressing problems where competition enforcement alone does not, or cannot, make a market work well for consumers.
5. Other Issues
I have dwelt at length with the UKCN and the new consumer landscape. Let me now quickly turn to a number of related issues that have concerned commentators. The first concerns the independence of the CMA and the question of the strategic steer.
In a paper last year on regulatory capture (note 6), I wrote:
But a crucially important cluster of issues concerned establishing our independence from industry and government; that is, avoiding the risk of regulatory capture whether by industry or politicians. At the heart of the issue is the conundrum of independent regulation. Effective regulation requires a thorough understanding of the regulated industry, and sensitivity to political currents, but at the same time it needs to be independent of both the industry and Government. But how then does it achieve its legitimacy? The answer in practice is that complete independence of both industry and Government is not possible, because complete independence risks degenerating into a self-perpetuating and illegitimate oligarchy. One option is that the regulator derives its legitimacy from the industry in a form of self-regulation. The other is that the regulator gets its authority from some form of statutory underpinning. Or, most interestingly, it may be possible to construct a hybrid of the 2.
This issue is, of course, at the heart of the challenge of press regulation, with which I was grappling at the time as an assessor on the Leveson Inquiry. In that context, it is a very difficult issue, because of the tensions between the fundamental rights to freedom of speech and privacy. In the context of competition policy it is fortunately rather easier. The competition authorities have long been respected for their independence and impartiality, notwithstanding the fact that those leading these bodies have been appointed by Government ministers. That will be as true for the CMA as for the predecessor bodies. If ministers wanted to make the CMA compliant, then they would not have appointed me as Chairman, for my record at Ofcom speaks for itself. Nor would they have appointed such a strong, experienced and independent-minded board. There is a clear appreciation in Government of the advantages of having an independent competition authority to grapple with the difficult issues of competition and commercial interest.
Some have pointed to the strategic steer that Government has given us as a weakening of that independence. I could not disagree more strongly. As I indicated in the quote above, it is important that any regulator, including the competition authority, is sensitive to both political currents and commercial realities. And it is important that there is a continued dialogue between the regulator and Government (as well as other stakeholders) on a “no surprises, no veto” basis. The strategic steer makes that high-level communication, which might otherwise be covert, open and transparent. The CMA must have regard to the steer, but is not bound by it. And were we to be steered to an issue which we judged to be without substance, then the CMA Board would be obliged to explain in public why we reached that view – that is the transparent way that independence would be asserted. But given the high-level and well-positioned nature of the current steer, I would be very surprised if that were necessary. But if in the future this happens, be assured that we will safeguard our independence in that way.
Concern about the creation of the CMA has also focused on the possibility of confirmation bias. Putting the separate Phase 1 and Phase 2 processes for merger control and market investigations under 1 roof makes people worry that the 2 separate decision-making stages would be collapsed into 1.
I understand that concern but I believe that it has been more than fully addressed. The Enterprise and Regulatory Reform Act 2013 hardwires the CC system of decision-making by independent panels into the governance and decision-making structure of the CMA. Thus the CMA Board has direct responsibility for Phase 1 market references, but not at all for decision-making at Phase 2. Of course, the Board does have responsibility for oversight of the panel system and for its good-running, including the allocation of resources to Phase 2. Those of a suspicious mind could think this latter responsibility could be used to influence Phase 2 decisions, compromising the independence of Phase 2. But there are at least 3 defences against that.
First, just as the strength of the CMA Board is a key to its independence, so the quality and standing of the panel members (recently replenished as a number came to the end of their 8-year term) provides a similar robust defence. I have spoken to all of them, and they are clear about, and proud of, their independent role. Parliament has endorsed that role, and they are rightly clear about their responsibility to deliver independent, dispassionate and evidence-based decisions. Of course, they will be sensitive to arguments about consistency in decision-making at Phase 2. But they will not brook interference.
Second, we have been clear that we value this system and want to sustain it. That is reflected in the appointment of 2 panel members, including the current chairman of the CC, Roger Witcomb, to the CMA Board, to play a full role as non-executive board members but also to have particular responsibility for the panel system, representing it to the Board and the Board to panel members. The legislation required only 1; we went for 2. And we have given Roger the particular responsibility of appointing members to particular panels. The legislation would have allowed me to reserve that responsibility to me. But we felt that it could potentially be seen to weaken independence if, having chaired a referral at Phase 1, I then chose the panel that would decide the issue at Phase 2.
The third, and perhaps most important point, is that neither I, nor Alex, nor the CMA Board has any interest whatever in undermining the independence of Phase 2 decision-making. In the area of mergers and markets only Phase 2 can make enforcement decisions. Successful challenges to those decisions in the courts on the grounds of lack of independence would seriously compromise the effectiveness of the CMA.
However, in thinking about the relationship between Phase 1 and Phase 2, the risk of confirmation bias, crucial though it is, is not the only consideration that we need to consider. Another is the need, written in legislation, to speed up processes. A third is to address the complaint from business that all too often the transition from Phase 1 to Phase 2 feels like a complete restart.
With both Phase 1 and 2 under the same roof, there is the opportunity to ensure a faster and smoother transition between the 2 phases. With common systems, information transfer can be made much more automatic. It is also possible to have some continuity in the case team, so that the expertise acquired in Phase 1 carries over to Phase 2. With the independence of the panel providing robust assurance against confirmation bias, this will enable the CMA to avoid the sense with business that Phase 2 is a restart.
We also need to manage projects in a much tighter, more timely way. That is why a new feature of the CMA will be a project management office to oversee the progress of cases and report both to the 2 executive directors for enforcement and markets, as well as to Alex. We need to manage cases as rigorously as the best, building on the substantial improvements in case handling at both the OFT and CC in recent years. This will contribute both to greater efficiency and a better relationship with business.
There is 1 other complaint that Alex and I, in our extensive consultations with stakeholders since being in post, hear very regularly. This is that all too often business find themselves having to interact with quite junior staff on the side of the competition authorities, and do not have access to the senior people who actually make the decision. This saps confidence in the perceived authority of the competition process because inevitably junior staff often lack the appreciation and understanding of the issues that loom large for business.
This is an issue that besets regulatory relationships more generally. In a lecture I gave to the Middle Temple on the occasion of its 500th anniversary celebration, I said:
A regulated company would come to the regulator with an issue that was of real importance to their business. Their first interaction with the regulator was typically at a junior level with someone who had not a clue about the business imperatives facing the company. Eventually if the matter was deemed sufficiently important it would rise up the agenda of the regulator and, with luck, would be dealt with someone with the right level of understanding. But in the meantime a good deal of friction has been generated that is corrosive of the regulatory relationship – the regulatee comes away thinking poorly of the regulator even if in the end they get the right outcome. Contrast that with a consultancy firm. The first interaction with the client is at a senior level, and a senior person owns the relationship throughout the engagement even if the work is done by juniors.
I went on to say that “naturally this requires more capacity at a senior level: the typical consultancy firm has a higher ratio of senior to junior than other organisations, particularly public sector ones”. I know that the senior team that we have appointed are committed to building and maintaining good high level relationships with business as appropriate. But I believe that we will need a greater weight of senior staff than the current OFT and CC enjoy. We have made a modest step in that direction by not reducing the number of senior positions, in contrast to most mergers, but we wish to go further. It will be a challenge for Alex, me and the Board to see whether we can achieve this over time, given our position as a non-ministerial Government Department and the remuneration structures that are allowed given this status. I hold out no promises, except that we will do all we can to achieve a better balance.
Let me conclude this set of issues with one other important one. Many competition issues arise from decisions made within Government, by departments addressing key policy issues and inadvertently in the process doing things that impede competition. This has happened with privatisation and with the opening by Government of new markets. There is an important role for the CMA to act as an advocate for competition within Government, and working with other Government departments to design policies before implementation that are as friendly as possible to competition, rather than having to sweep up the problem afterwards. Here our status as a non-ministerial Government Department is helpful. Some of that work will be in public, and there is now an important obligation on Government Departments to respond in public to CMA recommendations. But some will be behind the scene, so you may not hear a lot about it. But it may well prove to be as important part of the CMA’s work as those much more in the public eye.
6. What Will Success Look Like
Let me finally now turn to consider how we will know whether we have made a success of this reorganisation. Helpfully others have given thought to this. Thus Peter Freeman, the former Chairman of the CC and a veteran of the competition world, has written a paper (note 7) where he sets out 9 criteria for judging success, namely:
Use of competition powers and processes in the most flexible and dynamic way
More efficient and effective use of scarce public resources
A single, powerful advocate for competition in the UK, in Europe and internationally
Enhancing predictability and consistency
Eliminating overlaps between current processes
A strong focus for competition expertise and capability
A more streamlined approach in decision-making through stronger case management
Faster, less burdensome processes for business
The CMA to provide leadership in competition for sector regulators
This checklist focuses on the competition part of the CMA’s work, though many of the criteria apply equally to our important consumer work. As a checklist, it works pretty well and certainly captures many, though not all, of the things that Alex Chisholm, I and the Board are determined to get right. I would add the second goal of the CMA, namely extending competition frontiers. I would also add the CMA’s role in acting as a competition advocate and expert within Government, which I have just touched on.
In reaching these judgements, it will be important to recognise the evolutionary, rather than revolutionary, nature of the reforms: the results will not come all at once but will develop over time, sometimes a long time. Take, for example, the reform of the criminal cartel offence. The new formulation of the offence will apply only to cartel activity after April 2014: evidence that emerges over the next few years of cartel activity before that date will be prosecuted under the old regime. Since evidence takes time to accrue, it is likely that the first prosecution under the new regime will be some years away. That will not stop the CMA prosecuting under the old regime, building on the very considerable effort that the OFT has devoted to this area. In other areas the time that competition processes, including appeals, take, even with the required extra pace, means that it will be in 2 to 3 years’ time that we will see the benefit.
But I think we will know earlier whether this major reform is delivering. We will know whether the CMA is respected in competition and consumer circles for its professionalism and the rigour of its processes, its analysis and its evidence. We will know whether the CMA is highly regarded internationally from the interest and attention paid to its work around the world. And we will know whether the staff of the CMA, the keenest observers of what is happening, despite all the uncertainty and work that the reform necessarily entails, judge it to have been worthwhile, and that the CMA is a worthy successor to the OFT and CC.
Our ambition is that we pass this triple test with flying colours. That is what all our efforts are designed to achieve. If, as we are confident, we succeed in this, then I believe that this will be seen as a major enhancement of the UK competition and consumer regime. And alongside the Fair Trading Act 1973 which created the OFT, the Competition Act 1998 which aligned UK and EU competition law, and the Enterprise Act 2002 which created the uniquely powerful and effective UK markets regime, will sit the Enterprise and Regulatory Reform Act 2013 as a significant evolution and strengthening of the UK competition regime. The benefits will be felt by consumers and business, and will flow through better prospects for long term growth and innovation. That is the prize. I look forward to the scrutiny that future Beesley lectures will give us to hold us to account for delivering this.
- Brian Arthur - ‘The Nature of Technology’.
- The changes to the consumer landscape have been summarised in the CMA’s recent consultation on its draft guidance on the CMA’s approach to the use of its consumer powers.
- For example as at 1 April 2013, the OFT’s responsibility for the provision of consumer education, advice and guidance has transferred to the Citizens Advice Service and as of 1 April 2013, enforcement of consumer law at a national level largely became the responsibility of TSS.
- Formerly known as the Strategic Intelligence, Prevention and Enforcement Partnership. As at the date of writing, the CCP includes the National Trading Standards Board, Trading Standards Scotland, the Department for Enterprise, Trade and Investment Northern Ireland, the OFT (and subsequently the CMA), Consumer Futures, the FCA, the Trading Standards Institute, Consumer Council for Northern Ireland and the Citizens Advice Service.
- As at the date of writing, the membership of the CCG is the OFT, Civil Aviation Authority, Ofcom, TSS, Ofgem, FCA, Office of Rail Regulation, Ofwat, Which? and the Advertising Standards Authority
- “Regulatory Capture: A Perspective from a Communications Regulator”; in Stefano Pagliari (ed.) ‘The Making of Good Financial Regulation: Regulators, Financial Industry and the Problem of Regulatory Capture’, ICFR 2012.
- Peter Freeman: “The Competition and Markets Authority: Can the Whole be Greater than the Sum of its Parts?”; The Antitrust Enforcement Symposium, Pembroke College Oxford, September 2012.