The Election Briefing: competition (antitrust) and economic regulation

Following the announcement of a General Election in the UK and subsequent publication of party Manifestos, we provide an outline of what the Labour Party, the Conservative Party and the Liberal Democrats have to say about competition (antitrust) and economic regulation and we describe the implications for business. This is part of The Election Briefing, which covers: climate change and energy; competition and economic regulation; corporate governance, takeovers policy and company law; employment and equality; environment; financial services regulation; Islamic finance; media and electronic communications; pensions; PFI and PPP; planning and local government; rail; and tax.

The years of the Labour Government have seen the most comprehensive and radical transformation of UK competition law for a generation. Having inherited a relatively weak system in 1997, Labour introduced tougher penalties for anti-competitive behaviour, more emphasis on economic effect than legal form in assessing behaviour, and greater (although not complete) consistency with the EU competition regime.

In this General Election, the Conservatives are committed to avoiding any major upheavals in the current legal and institutional arrangements, with no major change of direction. They do, however, propose incremental changes, including exposing the competition authorities to greater accountability, so as to avoid business being burdened with unnecessary competition investigations. The Conservatives also propose to launch major market investigations by the Competition Commission into the energy and banking sectors.

In this Election, Labour is proposing one major change in competition policy, which the Conservatives oppose. In response to concerns raised by the Kraft/Cadbury takeover, Labour is proposing to make certain takeovers harder, and in the field of UK merger control (control by competition authorities of mergers and acquisitions) would allow acquisitions of infrastructure and utility companies to be reviewed, and blocked, on “public interest” grounds as well as just competition grounds. (The Liberal Democrats go even further than Labour, proposing that all acquisitions should be subject to a “public interest” assessment under UK merger control.)

In the field of economic regulation of the utility sectors (electricity, gas, water, rail and telecoms), the Conservatives propose more significant changes, with regular reviews to examine whether the regulators can be stripped of some of their powers to intervene. They express a preference for the regulators’ applying ordinary competition policy rather than direct ex ante regulation in the utility sectors wherever possible¹ - although the Conservative Manifesto envisages stripping the energy regulator Ofgem of its competition law powers. Labour envisages reforms of energy regulation, to improve incentives for private sector investment, and of water regulation, to give consumers a greater say in price control reviews.

This briefing examines the policies of the major parties on competition (antitrust) and economic regulation, and explains the practical implications for business.

After a period of major change, businesses can look forward to stability in the arrangements for UK competition law, with both major Parties committed to retaining the legislation introduced by Labour in 1998 and 2002. The exception to this is in merger control, with Labour’s proposal - opposed by the Conservatives - that it should be possible to intervene in acquisitions of infrastructure utility and utility companies on “public interest”, as well as just competition, grounds; that would represent a significant change in UK competition policy, and might also raise issues about compatibility with EU law and in particular “Single Market” rules prohibiting interference in the free movement of capital between EU  countries.

Since 1997, the Labour Government has introduced far-reaching reforms of the UK  competition law system. It inherited a system that was widely criticised (on all sides) for being ineffective in dealing with serious anti-competitive behaviour, with few penalties and excessive concentration on the legal “form” of an arrangement rather than its actual economic effect. In its place, Labour introduced the Competition Act 1998 and then the Enterprise Act 2002, with the following major changes in competition law:

• new UK prohibitions against anti-competitive practices – the “Chapter I prohibition” on anti-competitive agreements and arrangements, and the “Chapter II prohibition” on single-firm abuse of a dominant market position – modelled on EU competition law
• serious consequences for infringement of the new prohibitions (and their EU equivalents) – including (i) substantial fines imposed by the OFT (the Office of Fair Trading (OFT), Britain’s main competition enforcement authority; and (ii) greater exposure to civil liability in the courts, with parties to anti-competitive practices at risk of being sued by the “victims” (e.g. customers or competitors) for damages or injunctive relief
• powers for the OFT to obtain court orders for disqualification of directors of companies which have infringed the prohibitions from any UK directorship for up to 15 years
• criminal sanctions, including imprisonment and/or fines, for individuals (employees or managers of companies) directly and dishonestly involved in the most serious anti-competitive agreements between businesses
• UK merger control (the competition authorities’ assessment of proposed mergers and acquisitions where they are outside the European Commission’s jurisdiction) was to focus exclusively on the effects on competition in the UK, rather than the wider “public interest”. There were certain specified exceptions to this, covering mergers and acquisitions that affect (i) national security; (ii) media ownership issues; and (iii) following the Lloyds TSB/HBOS banking merger, UK financial stability. As explained below, Labour’s 2010 Manifesto promises to widen the exceptions.
• “market investigations” (previously known as “complex monopoly investigations”) – that is, studies by the competition authorities into particular economic sectors to identify market failure and propose remedies – now concentrated exclusively on effects on competition in the relevant markets, rather than any wider public interest effects.

In relation to merger control, the Labour Manifesto has proposed to extend the “public interest” test so that it would allow acquisitions of infrastructure and utility companies to be reviewed and blocked on wider public interest grounds, not just on competition grounds.

The Conservatives consider the current regime to have been generally effective, and envisage “no major change of direction”. The Conservatives say that business can have an expectation of stability in the current legal arrangements on competition.

The Conservatives, however, oppose the Labour Manifesto proposal for changing merger control to enable acquisitions of infrastructure and utility companies to be reviewed and blocked on “public interest” grounds²

Business implications

After a period of major change, businesses can look forward to stability in the arrangements for UK competition law, with both major Parties committed to retaining the legislation introduced by Labour in 1998 and 2002. The exception to this is in merger control, with Labour’s proposal - opposed by the Conservatives - that it should be possible to intervene in acquisitions of infrastructure utility and utility companies on “public interest”, as well as just competition, grounds; that would represent a significant change in UK competition policy, and might also raise issues about compatibility with EU law and in particular “Single Market” rules prohibiting interference in the free movement of capital between EU countries.

Alongside the Labour Government’s reforms of the UK  competition law system, significant institutional changes were introduced. The most important of these were:

• stronger investigative powers for the OFT to enforce the new UK prohibitions on anti-competitive agreements and on abuse of market dominance (and their EU equivalents), including the power to launch unannounced inspections on business premises where an infringement is suspected – so-called “dawn raids”
• the “depoliticisation” of UK merger control and market investigations: whereas previously Government Ministers took the final decisions, with the UK’s politically independent competition authorities having only an advisory role (the OFT for the initial examination, and the Competition Commission for a full investigation), since 2003 the competition authorities have been given full decision-making powers and Ministers are no longer entitled to intervene (other than in a few exceptional cases)
• a new institution, the Competition Appeal Tribunal, which was established to hear appeals against decisions by the competition authorities (the OFT and the Competition Commission) and by the sector economic regulators, and also to hear claims for damages from “victims” of anti-competitive practices once an infringement of the UK or EU prohibitions has been established (enabling “victims” to obtain damages without having to prove that that the defendant has infringed the prohibition).

The Labour Manifesto proposal that the “public interest” test should be extended to apply to acquisitions of infrastructure and utility companies would reintroduce Ministerial involvement in merger control in those sectors.

Despite widespread speculation that the Conservatives are planning to amalgamate the functions of the OFT and the Competition Commission in a single unified authority, in fact they have no current plans to do so, although they do not rule out the possibility eventually. The current Conservative proposals for reforming the competition institutions are:

• the OFT and the Competition Commission should continue their internal work in assessing how to improve their performance – the Conservatives would prefer to see whether such improvements can be made to work, before attempting any wholesale institutional reorganisation (such as amalgamating the functions of the OFT and Competition Commission)
• the Conservatives regard Labour’s “de-politicisation” of the merger control and market investigation processes as “desirable”, and have no wish to change it
• to avoid unnecessary burdens on business, the OFT will be required, when launching a major investigation, to give clear reasons why the particular market sector has been identified as requiring investigation, and to state what benefits are expected to arise from the investigation – and, once the investigation is completed, to report on how the outcome matched these objectives.

As noted above, the Conservatives oppose the Labour Manifesto proposal on merger control to extend the “public interest” test - and hence reintroduce Ministerial involvement - in acquisitions of infrastructure and utility companies. Kenneth Clarke, Shadow Secretary of State for Business, told the Financial Times on 14 April that the Conservatives are “against moves to allow political interference in the ‘strong competition regime’”³.

Business implications

Again, whatever the outcome of the Election, businesses can expect stability in the institutional apparatus of competition law enforcement. If the Conservatives are elected, attempts will be made to reduce burdens on business by requiring the authorities to justify launching major investigations.

In the UK , certain sectors are subject to special regulation – with separate sector economic regulators for energy (gas and electricity), water, railways and electronic communications (media and telecoms). There is also separate prudential regulation of the financial services sector through the Financial Services Authority.

The Labour Government gave the sector economic regulators powers – in addition to their direct regulatory functions – to apply the competition law prohibitions on anti-competitive agreements and abuse of dominance (see above) in their particular sectors. In exercising these competition law functions, each sector regulator has essentially the same powers as the OFT  to investigate suspected infringements (including by way of “dawn raids”) and to impose sanctions such as fines if infringements are established. The sector regulators exercise these powers “concurrently” with the OFT – that is, the OFT is not itself precluded from applying competition law in the relevant sectors.

Labour’s Manifesto promises that a re-elected Labour Government would:

• ensure greater competition in the banking sector by breaking up the banks in which the Government now has a controlling interest
• “work with” the energy regulator to ensure greater competition in energy supply.

The Conservatives have a range of proposals for applying competition law in these sectors:

• The Conservatives have said that, if elected, a Conservative government would use the residual powers available to Ministers to refer both the energy sector and the banking sector to the Competition Commission for a market investigation. The Conservative Manifesto refers to the need to “increase competition in the banking industry, starting with a study of competition in the sector to inform our strategy for selling the government’s stakes in the banks”; it is not clear whether this is in addition to, or the same as, the Competition commission market investigation which the Conservatives had previously spoken about.
• The Conservatives consider that “concurrency” works well, and have said that have no plans to transfer the sector regulators’ competition law powers to the OFT (i.e., contrary to rumour, the Conservatives do not propose to deprive the sector regulators of their concurrent competition law powers). However, the Conservative Manifesto indicates that the energy regulator Ofgem would have its competition powers transferred to the OFT.

Business implications

Both major Parties are committed to increasing competition in banking and energy, although the Conservatives have the more concrete proposals. If the Conservatives were to launch Competition Commission market investigations into the banking and energy sectors, that would have significant implications for both sectors – for the companies involved in those sectors, and their customers. It would involve an intensive scrutiny of both markets lasting one or two years, and possible radical changes to the structures of those markets, including possible break-ups of companies and banks, price regulation or regulation of terms and conditions.

In 1997, the Labour Government inherited the sector regulators which had been established by the previous Conservative Government in the context of its privatisations in the gas, electricity, water, telecoms and rail sectors. The Labour Government made the following major changes:

• the role of the rail regulator, the Office of Rail Regulation, was expanded to encompass health and safety regulation as well as economic regulation
• the telecoms regulator Oftel was replaced by Ofcom , which took responsibility for the regulation of all electronic communications and media (including spectrum and broadcast content, which had previously been the responsibility of separate regulators).

The Labour Manifesto now promises that:

• the independence of Ofcom will be “safeguarded”
• energy regulation will be reformed “to improve incentives for the private sector to invest”
• the role of the water regulator Ofwat will be reviewed to give consumers a greater say in price control reviews.

The Conservative Party is committed to some significant changes in economic sector regulation.

• The Conservatives propose that all sector regulators (like other quangos) would be subject to a “sunset” clause. This would mean that their functions and powers would be specified and, every seven years or so, there would be a review to see whether they needed to retain those functions and powers, with renewal of those functions and powers subject to parliamentary approval (a process akin to renewal of the BBC Charter).
• Where possible, the Conservatives would wish to make the relevant sectors subject to market competition; where functioning market competition is achieved, a Conservative government would remove the sector regulators’ powers of ex ante direct regulation, through enforcement of licence conditions, and would instead apply ordinary competition law just as in any other sector of the economy. The Conservatives recognise that there is an “irreducible core” of activities which would still require direct regulation – for example, where there are network effects – but would expect to see direct regulation limited to that irreducible core.
• The Conservatives are concerned that the Labour Government has, in some cases, given sector regulators policy-making as well as enforcement functions – and, arguing that this will improve democratic accountability, wish to transfer those policy-making functions from regulators to Ministers and Parliament.
• The Conservatives propose reducing the role of Ofcom, the electronic communications regulator, to technical and enforcement functions, with policy-making powers being returned to Ministers and Parliament (see Media and electronic communications regulation).
• The Conservatives propose expanding the powers of the rail regulator, the Office of Rail Regulation, by transferring franchise enforcement functions from the Department for Transport to the regulator. The Conservative Manifesto says little about this, other than that the Conservatives would “turn the rail regulator into a powerful passenger champion”. (see Rail).
• In relation to supermarkets, the Conservative Manifesto proposes introducing an independent supermarket ombudsman to ensure that the grocery supply code of practice is applied fairly. This is in line with the Competition Commission’s recommendations, and with the Labour Government’s own announced intention.
• In financial services regulation, where the Conservatives believe that flawed regulation was at least in part responsible for the banking crisis, the Conservatives propose abolishing the Financial Services Authority. Its responsibilities for regulating systemic risk in the banking sector would be transferred to the Bank of England. Other functions for financial protection of consumers would, together with the OFT’s financial services functions, be transferred to a new Consumer Protection Agency (see Financial services regulation).

Business implications

It is in sector regulation that the differences between the parties are most marked. If the Conservatives are elected, the role of the sector regulators would change, with less direct regulation through licensing and with policy-making powers transferred to Ministers.

The Liberal Democrats’ Manifesto makes three striking proposals in the field of competition policy:

• Under UK merger control, all acquisitions would be subject to a broad “public interest” assessment, rather than one focusing only on competition. This goes further even than Labour’s proposal to introduce a “public interest” test for takeovers of infrastructure and utility companies (and may raise issues of compatibility with EU law).
• Planning applications for all retail developments would be subject to an assessment of the effects on local competition. This had been a recommendation of the Competition Commission, in 2008 but was overturned when Tesco appealed to the Competition Appeals Tribunal in 2009.
• The OFT would have a separate unit to investigate anti-competitive practices at local and regional level.

1. The Conservative proposals described in this briefing - apart from those attributed to the Conservative Manifesto - were set out in a speech given by John Penrose, Conservative spokesman for business, on “Competition policy and the Conservative Party” at The Law Society Competition Section, 17 March 2010. The speech is the only public statement of Conservative policy on competition.
2. Kenneth Clarke, Shadow Secretary of State for Business, Financial Times, 14 April 2010.
3. Kenneth Clarke, Shadow Secretary of State for Business, Financial Times, 14 April 2010.