Australian competition regulation – What should we expect during 2016?

The chair of the Australian Competition and Consumer Commission (ACCC), Rod Sims, is in the final year of his five-year tenure.  Sims continues to be well respected and highly regarded.  He is eligible for reappointment for a second term of up to 5 years and was reported in the media to be seeking reappointment. One hopes and assumes this will occur. The ACCC itself continues to be consistently recognised as one of the leading competition regulators in the world.

The ACCC remains under budgetary pressure and has reduced its staffing levels in recent years.  Sims assumed the CEO or ‘Agency Head’ role during 2014 as part of these efficiency measures.  While changes in the ACCC’s approach are not necessarily attributable to Sims alone, we have seen the ACCC continue to take a tough and strategic approach to enforcement and to emphasise high quality and principled decision-making.

When undertaking enforcement, the ACCC generally prefers undertakings or administrative resolutions.  Litigation is reserved for the most troubling conduct.  One of Sims’ early comments was that he was prepared to litigate more frequently, even if success was not assured, consistent with the ACCC’s strategic priorities.  In the last financial year, the ACCC was involved in 59 separate proceedings and initiated 21 new proceedings.  We expect the ACCC’s tough yet selective enforcement approach to continue over 2016.

The ACCC’s emphasis on principled decision-making has been reinforced by the appointment in late 2015 of the ACCC’s first chief economist, Dr Graeme Woodbridge.  By doing so, the ACCC has signalled that it intends sound economics will continue to underpin ACCC decisions; promoting greater transparency and predictability.  This will continue to complement the ACCC’s focus in recent years in ensuring its decisions are pragmatic and commercially nuanced.

The government provided the ACCC with additional resources to establish an Agricultural Enforcement and Engagement Unit last year following recommendations in the government's white paper on agricultural competitiveness. In February, Sims identified that agriculture will be given enforcement priority in 2016 starting with a sectoral market study. On 24 February 2016, the ACCC appointed Mick Keogh as a new Commissioner, with a focus on competition and consumer issues in the agriculture sector. This suggests that we can expect to see greater enforcement activity in this sector than has been the case historically.

On 23 February 2016, Rod Sims released the enforcement priorities for the ACCC for the next 12 months. The ACCC prioritises its enforcement activity within its budgetary constraints based on those sectors and behaviours that it considers are most deserving of regulatory attention.

The ACCC considers that some forms of conduct are so detrimental to the competitive process that they should always have priority, irrespective of the sector of the economy in which they occur.  These so-called ‘enduring priorities’ are cartel conduct (i.e., price fixing, market sharing, bid rigging, and agreements on output), anti-competitive agreements and practices, misuse of market power, and product safety issues.  The ACCC has now added consumer issues affecting indigenous consumers to its list of enduring priorities.  

In addition to the ‘enduring priorities’, the ACCC prioritises those industry sectors and areas of market behaviour that it considers are particularly susceptible to conduct that may harm consumers.  Targeted enforcement is intended to occur in these strategic priority areas each year.  The ACCC’s 2016 strategic priorities are oriented more towards consumer protection and cover the following areas:

• Agriculture sector: The ACCC is prioritising competition and consumer issues in this sector in 2016, with an initial focus on the ACCC undertaking an agriculture market study.  The ACCC is likely to focus on competition issues in agricultural supply chains as part of this study.
• Health and medical sector: The ACCC considers that competition and consumer issues in the health and medical sector are particularly deserving of attention.  The ACCC is currently closely reviewing some practices in the health insurance industry following concerns expressed in its Private Health Insurance Report in October 2015.
• Government procurement: The ACCC will focus on anti-competitive behaviour by private entities in government procurement as part of the ACCC’s focus on cartel conduct.
• Small business: A key ACCC priority is conduct that results in substantial small business detriment. The ACCC intends to focus on two priority areas: unfair contract terms and industry codes of conduct (e.g., the Franchising Code) with the ACCC pursuing enforcement against larger companies ahead of smaller businesses.  The new business-to-business unfair contract terms law will be important towards the end of this year; it will apply to all small business contracts entered into or varied after 12 November 2016.
• Consumer products:  The ACCC will focus on representations made by large retailers about express and extended warranties for consumers.   The ACCC will also focus on the effectiveness of action taken by suppliers to recall unsafe consumer products.  The ACCC is likely to have a particular focus on new car retailing, including responses by retailers and manufacturers to consumer guarantee claims.
• Vulnerable consumers: The ACCC continues to focus on vulnerable and disadvantaged consumers, including older consumers and newly arrived migrants.  Over the last 12 months, the ACCC has undertaken a number of prosecutions to protect vulnerable consumers alleging misleading and deceptive conduct and/or unconscionable conduct.  

While not named for 2016, the ACCC has historically given priority to enforcement in concentrated markets, including the grocery sector.  In December 2015, the ACCC commenced action against Woolworths for alleged unconscionable conduct towards supermarket suppliers.  We assume that the ACCC’s attention on the grocery sector will therefore continue during 2016, potentially with a focus on promoting compliance with the Food and Grocery Code of Conduct.

In November 2015, the Commonwealth Government released its response to the Harper Competition Policy Review, the first comprehensive review of Australia’s competition framework in more than 20 years.  Of the list of 56 recommendations, the government supported around 80% in whole or in part.  The 12 most controversial recommendations were referred for further policy analysis and consideration.

The Harper Review was announced as a ‘root and branch’ review of competition policy.  An extensive consultation process occurred during 2014.  A key objective of the review was to identify ways to strengthen Australia’s long-term economic performance by promoting more competitive markets.  The final recommendations of the Harper Review Panel focussed on three key areas, namely competition policy, competition law and competition institutions.

While the precise timing for the implementation of the recommendations is not yet known, we have predicted below the likely timing for implementation.  Many of the recommendations are in areas of state and territory responsibility, requiring a co-ordinated response with the Council of Australian Governments (COAG).  Those recommendations within the domain of the Commonwealth will be affected by the political priorities of the Turnbull Government over the 2016 election year.  We assume that most (if not all) reforms will be deferred until after the 2016 federal election.

The following three tables provide a simplified summary of the Harper Reforms and the likelihood of implementation.  The ‘Likelihood’ column indicates the likelihood of the Turnbull Government implementing the reform within the next term, if it were returned to office later this year.

In the 2014/15 financial year, the ACCC considered 322 potential acquisitions of which 44 proceeded to full review.  Around 80% of these acquisitions were unconditionally cleared while the remainder were either withdrawn or were the subject of undertakings to resolve ACCC concerns. No acquisitions were formally publicly opposed by the ACCC.  We understand that the statistics to date in the current financial year are tracking at similar levels.

These statistics are consistent with previous years and indicate that only a very small proportion of acquisitions reviewed by the ACCC give rise to serious competition concerns.   In previous years, a greater proportion of mergers have been formally publicly opposed.  The decline in this proportion reflects the more effective operation of the clearance process in recent years, including greater transparency, the use of well-established precedents, and greater predictability of decisions.

The ACCC introduced a process for pre-assessment of mergers from 2013 that now results in some 80% of mergers being cleared quickly, without a full review, often in a matter of weeks.   The ACCC follows well defined timelines for those mergers that do proceed to a full review, normally making a clearance decision within 8 to 12 weeks.  If concerns still exist at that stage and a Statement of Issues is issued, a slower process may occur given the need to engage in a greater dialogue with the ACCC, often involving negotiation of remedial undertakings.

While a formal merger review process was introduced into the CCA over 9 years ago, it has never been utilised.  The formal process is also criticised as unwieldy and cumbersome.  One reason for this lack of utilisation is that the ACCC rectified many concerns with the informal merger review process.  In the Harper Competition Review, the review panel considered amendments that could be made to the formal merger review process to make it more user friendly.

Under the Harper Panel’s recommendations, the formal process would be consolidated with the existing merger authorisation process. An application for formal clearance or authorisation would be made directly to the ACCC without prescriptive information requirements under tight timelines.  Any decision of the ACCC could then be appealed to the Australian Competition Tribunal.  The government is currently preparing an exposure draft Bill to implement these recommendations.

Reforms to the formal review process are long overdue.  If implemented, the reforms will provide a more effective process for mergers that raise competition concerns to be authorised on the basis of net public benefits.  We would expect a formal review to become a realistic option for more difficult mergers, potentially creating opportunities in more concentrated sectors of the economy that can demonstrate a high public benefit component.

Cartel conduct is one of the ‘enduring priorities’ of the ACCC and a key enforcement priority. At the end of the last financial year, the ACCC had 20 cartel investigation and a number of proceedings alleging cartel conduct before the courts.

Some 18 months ago, the ACCC published an updated Immunity and Co-operation Policy for Cartel Conduct.  Consistent with overseas approaches, Australia adopts a marker system where the first firm to seek immunity receives a conditional first-in-line ‘marker’ that can be converted into a formal grant of immunity if that firm co-operates fully with the ACCC.  Other firms may seek leniency. Both policies continue to be invoked frequently, including where global cartel participants have simultaneously sought immunity or leniency across a broad range of jurisdictions.

A question frequently asked of the ACCC is when we will see the first criminal prosecution under the cartel provisions. The ACCC has experience prosecuting criminal contraventions in a consumer protection context, compulsory information context and in contempt proceedings. The ACCC has indicated it expects further criminal cartel prosecutions this year. However, the complexity of the cartel provisions causes complications in the context of criminal enforcement where a higher standard of proof applies, as identified by various commentators. The current proposal to simplify the cartel provisions may overcome these reservations and increase the likelihood of criminal prosecutions.

Importantly, the ACCC established a specialised Serious Cartel Group around 12 months ago to investigate criminal cartel matters.  We anticipate that this group will be more likely than previously to utilise the ACCC’s search warrant (or ‘dawn raid’) powers, particularly given the increasing importance of electronic evidence and associated increased risk of evidence destruction in a cartel matter.  The ACCC also works closely with its international counterparts to coordinate the execution of search warrants to ensure that execution in one jurisdiction does not jeopardise enforcement efforts in another.  

Growing budgetary pressures and Commonwealth financial incentives will lead state and territory governments to adopt a renewed focus on infrastructure privatisations over 2016.  The Australian Infrastructure Plan released on 17 February 2016 indicates that this focus will intensify, assisted by continuing investor demand and the high valuations achieved for recent port, airport and electricity leases.  Such privatisations are leading to greater scrutiny of our infrastructure regulation models.

While certain infrastructure is subject to Commonwealth regulation, most infrastructure continues to be regulated at the state or territory level in Australia.  As a consequence, Australia has a patchwork of loosely harmonised regimes for different infrastructure types.  State-ownership of infrastructure has historically provided a further means for state governments to exercise control.  As infrastructure has been privatised, such state control has been replaced by new and increased access and price regulation; most recently for port privatisations in the Northern Territory and soon Western Australia.

While the ACCC is generally supportive of privatisations, the ACCC has been critical of those privatisations involving less competitive market structures.  Rod Sims has also expressed concerns whether certain state regimes are sufficiently robust where they rely on price monitoring alone.  At the same time, the Harper Committee and Infrastructure Australia have both independently recommended in favour of greater national co-ordination.  Momentum is growing for a renewed focus on the harmonisation of the Australia’s various regulatory regimes.  If this occurs, it could well be to a higher common denominator than has historically been the case.

Within this context, the Government has indicated that it is preparing an exposure draft Bill to implement the recommendations of the Productivity Commission (PC) on the National Access Regime.  The PC proposed amendments to four of the five declaration criteria in the National Access Regime to limit the application of the regime to exceptional circumstances.  In doing so, the PC recommended overturning a narrower interpretation of the regime contemplated by the High Court, making declaration slightly easier and hence price and access regulation of nationally significant infrastructure more likely to occur.

As part of the original process in developing the Australian Consumer Law (ACL), COAG agreed there would be an implementation review.  In June 2015, Terms of Reference were agreed.  Consumer Affairs Australia New Zealand (CAANZ) is tasked to conduct the review with a final report expected in March 2017.

CAANZ is expected to consult widely with consumer representatives, businesses and the wider public.  Under the Terms of Reference, CAANZ must focus on assessing the effectiveness of the provisions of the ACL.  CAANZ must also consider the extent to which the national consumer framework has met COAG’s policy objectives.

The ACCC has already publicly indicated that the ACL has taken consumer protection to new levels, promoting awareness and compliance among consumers and businesses.  While we expect that the ACCC and stakeholders will make submissions to improve the operation of the ACL, it seems likely the CAANZ review will view the ACL implementation to date highly favourably.  Ultimately, the CAANZ review may lead to recommendations for further ACL strengthening.

One interesting aspect of the terms of reference is a requirement that CAANZ assess the flexibility of the ACL to respond to new and emerging issues.  It would not surprise us if CAANZ sought to address the continuing issues with consumer protection on the Internet.  The ACCC has taken proceedings in this area, including in relation to misleading online reviews, online group buying offers, and comparator websites.

On 22 February 2016, a new legislative and regulatory framework was established to ban card ‘surcharge payments’ that are ‘excessive’.  The ACCC is the enforcement agency.  This new ban on excessive surcharging will have flow-on effects on merchant behaviour in respect of surcharging on cards in those of card schemes.

Under the new law, excessive surcharging by merchants, which involve an additional cost being passed on to the consumer, where that charge is above the merchant’s cost of acceptance of the payment method – will be banned.  The prohibition will only apply in respect of surcharges that exceed a level for surcharging permitted under either a Reserve Bank standard which covers the kind of payment or else set out in regulations.

The ACCC has been given powers to compel the production of information by issuing a ‘surcharge information notice’, issue infringement notices, seek pecuniary penalties,  and otherwise seek remedial orders from the court (consistent with the existing powers).  We expect the ACCC may seek to test these new powers during 2016.

Please contact Dr Martyn Taylor, Partner, Norton Rose Fulbright if you have any questions arising from this note on martyn.taylor@nortonrosefulbright.com or +61 2 9330 8056.