Examination of Witnesses

Enterprise and Regulatory Reform Bill – in a Public Bill Committee am 9:31 am ar 21 Mehefin 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Malcolm Nicholson, Robert Bell and Professor Catherine Waddams gave evidence.

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee 10:25, 21 Mehefin 2012

Good morning. Will the witnesses identify themselves for the record and indicate whether there are particular aspects of the Bill that they feel either more qualified or unqualified to comment on?

Malcolm Nicholson: My name is Malcolm Nicholson and I am a solicitor. I have been a lawyer in private practice for more than 30 years, specialising in competition and antitrust law in the UK and European contexts. Since retiring from my day job, I have been a panel member of the Competition Commission, so I have some insight of its internal workings, although I am not appearing here as a representative of the commission.

Professor Waddams: My name is Catherine Waddams and I am an academic economist interested in regulation and in competition issues. I have been a reporting member of the Competition Commission, but am no longer. I work in an Economic and Social Research Council-funded organisation called the Centre for  Competition Policy, which looks more generally at the issues, so I will draw on the wisdom of my colleagues as well as, I hope, my own.

Robert Bell: My name is Robert Bell and I am a partner at a City law firm, Speechly Bircham. I am a competition lawyer with more than 20 years’ experience. I also chair the City of London Law Society competition law committee, on whose behalf I am speaking today. We strongly support the Bill in broad terms on the competition side, although we have serious reservations about the cartel offence and the increased powers of the Secretary of State to intervene in public interest matters and market investigations, and have a number of points to raise in relation to merger investigations.

Q 234

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

Could each of the panel tell us how the proposed merger of the Competition Commission and the Office of Fair Training will help improve the competition regime in this country?

Robert Bell: In terms of the policy objectives that it sets out to achieve, namely the saving of money to the taxpayer, I do not think that that will be the predominant theme. It will help competition policy be more cohesive, and it will help streamline the regulatory process, which, in turn, will provide efficiencies and boost business confidence in the rigour of the competition system in this country.

Malcolm Nicholson: This is not a cost-saving merger—the estimate is that it is 2.2% to 2.5% of the annual cost-savings. These are not two not-fit-for-purpose quangos; they are efficient, effective, well-respected organisations.

Q 235

Malcolm Nicholson: That is quite an interesting question, because what you are producing is a single authority. The way in which the Bill is structured, we have a single unitary authority built on the OFT format with a kind of a goitre on the face, which is the Competition Commission and which will conduct phase 2 enquiries. There may be marginal improvements across the system. You may get slightly greater efficiencies in the system, although I have some concerns about how significant those are. You may get what I call soft merger benefits of an increased pool of talent and possible ability to allocate resources across the system a bit better—that sort of thing.

The risk that you have is taking two systems that have worked quite well, but with a degree of dynamic tension between them, because that is the way that the phase 1 and phase 2 system works, and possibly lose some of the benefits of that by putting them all in one structure, so I am pretty neutral about the benefits of the merger.

Professor Waddams: I would agree on that. It is a vertical merger in the sense that you are taking two organisations at different stages. On the whole, that offers the sorts of benefits that we have heard about, but I do not think that it will save much money. I think that it will be costly to bring them together. They have very different cultures at the moment, partly because they do different things. I think it is going to be quite hard work to bring them together in a single organisation in which you can establish a common culture that is positive and not conflicting.

There are some advantages. There are anomalous situations: only the OFT is the competition representative for the UK and that puts the Competition Commission  in an anomalous situation, so you can see that there are some advantages, but I would be pretty neutral. There are some costs and potential problems in merging them.

Q 236

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

I am very conscious of time, so I will ask three questions that warrant only a yes or no answer. On the basis of those very interesting opening statements, does the panel agree with Sir John Vickers, who said this morning—I think I am right—that this institutional reform might result in weaknesses to the competition regime?

Professor Waddams: Yes.

Malcolm Nicholson: Yes.

Robert Bell: No, I don’t believe so.

Q 237

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

Do you think that the CMA’s ability to consider the public interest is a retrograde step?

Professor Waddams: Yes.

Malcolm Nicholson: No.

Robert Bell: Yes. Does that make things clear?

Q 238

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

That is making it very clear. My final question: should the Bill allow for the deregulation of small mergers?

Professor Waddams: Probably not.

Malcolm Nicholson: The jury is out on that.

Robert Bell: Were we to be introducing a mandatory control regime, I would say yes, but in the event that we are retaining the voluntary system I would say no.

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

Let’s see if we can all follow this.

Q 239

Photo of David Mowat David Mowat Ceidwadwyr, Warrington South

A change is being made to the definition of a cartel. In particular, the dishonesty provision is being amended. Do you agree with that?

Professor Waddams: Are we having yes/no answers again?

Q 240

Professor Waddams: Yes, I agree with it on the grounds that it has been difficult to prove dishonesty. I am worried about the replacement by “it’s okay if you tell people,” because of the practicalities of it. Even if I know that the suppliers in a particular area—whether I am a business or a final consumer—are in a cartel, will I necessarily have much choice about buying elsewhere? I am worried about the right people being notified—all the potential consumers and customers—and whether that is sufficient to enable me to say, “Okay, I’m not going to do this, then.” Perhaps we should think about registering again. I do not know whether that would address some of those issues. There was a sharp intake of breath on my right here.

Malcolm Nicholson: I have an understanding that people view with a degree of concern that having scored a spectacular own goal in the British Airways executives’ case, you are then trying to widen the goalposts at the other end to make it easier to score. I have, however, two points. The first is a practical point, and the second is a policy point.

The practical point is that I have had some quite close involvement with what is known as the “gosh! dishonest” test, because I had a client who was or was not guilty of that offence. If he had been guilty of that offence, I would have had a legal obligation to report him to the Serious Organised Crime Agency, so I was quite focused on it. The “gosh!” test is a very difficult one to meet. It requires something to be dishonest—so, stealing—by the standards of ordinary, reasonable men. If you are in a business where it is understood that you sell in one area, someone else sells in the other area and you tell each other off if you cross-sell, is that dishonest by “gosh!” standards?

The second element is that the individual has to understand that something is dishonest by the standards of ordinary and reasonable people. If you have left school at 16 and you go on to work in a business where that is how business is done, do you really think it is dishonest? It is a difficult test to meet.

If you amend it, it makes it easier to get convictions. You then have to look at the matter in policy terms—what the authority is after, which I hope is the deterrent effect. You want one or two high-profile heads on pikes, so that the lesson is learned and understood across industry as a whole. It may be a price worth paying to get a couple of heads on pikes, but it should not be something that people will be prosecuting on a regular, month-in, month-out basis. That would not be an effective way of doing it.

Robert Bell: I have considerable sympathy with the policy aspect behind this, because of course we all want to detect, root out and punish cartelists. However, I question the route that the Government have taken in this proposal by removing dishonesty and introducing the publication offences. The case for removing dishonesty has not yet been made out, so it is premature to do so. The fact that no contested cases under the cartel offence have actually been put before a jury seems to render rather hollow the argument that we need to change the law. Perhaps what we need to do is to find the right sort of cases to prosecute.

On that issue, you have to bear in mind that the offence probably came into effect in around 2003. We have had too few UK cartel cases. In the European sphere, because of the primacy of EU competition law, there have been cartel cases that have been going through very lengthy appeal procedures, and therefore it has not been within the UK prosecutorial gift to prosecute them.

I say that there have not been the right sort of cases. If you asked me, “What are the right sort of cases?” I would say the sort of cases where you see in the civil arena the fact that companies have consorted together to raise the cost of purchasing for the NHS, thereby ripping off the public purse. Another type would be the cartelists that give themselves the names of vegetables to conceal what they are actually doing. They meet in restaurants for different covert purposes and they give code names in relation to what they are doing. I would have thought that any judge or jury would know that type of dishonesty when they see it, and that the judge would direct the jury appropriately.

I think, therefore, that it is premature to make the change. If you do make the change, you have to realise that it will considerably lower the bar for criminal prosecution and you will catch a wide range of potentially  benign agreements within the scope of the new offence. That would mean that you would have to rely on prosecutorial discretion. Quite frankly, we operate in a system of parliamentary democracy where people have to know with certainty the limits of a criminal offence, so we have to question whether catching all types of agreements and subsequently deciding whom you are going to prosecute is perhaps the right way to go about it.

Q 241

Photo of David Mowat David Mowat Ceidwadwyr, Warrington South

May I ask a follow-up question? My understanding is that toughening the law in this way will make it more like it currently is in the United States, where this is taken incredibly seriously. I do not know if that is correct or not. The impression I have, having worked there quite a lot, is that the business community is immensely aware of not doing anything that could be perceived as acting as a cartel, even to the extent of not having a drink with a fellow supplier, because it could be seen as going down that route. Therefore, the measure would change the business environment, which people may agree or disagree with. Is that the way that you would see it happening as well, if the legislation came in?

Robert Bell: Obviously, there is a slight difference with the US in that we also have quite a powerful tradition of civil enforcement of competition law and civil fines. The cartel offence should be saved for those really serious hard-core cartels, so it is slightly different. I take the point that the US system is based on wide prosecutorial discretion. From my limited knowledge, in the UK system it is not really an English tradition.

Q 242

Photo of David Mowat David Mowat Ceidwadwyr, Warrington South

It could be a good thing for competition, though, couldn’t it?

Robert Bell: The danger is that it will catch far more agreements than just cartelist-type agreements. It will bring in benign agreements. You will subject those people to widespread publication requirements, and there is an issue of whether those agreements might well be exempted under EU and UK law. You would therefore have a system that criminalises something that could otherwise merit an exemption under the civil procedure which would make it lawful, which would be a nonsense.

Professor Waddams: Can I respond to your earlier bit? You talked about the US and a different kind of atmosphere. In the energy sector, which I study a lot, we certainly already have a very strong awareness of what they may and may not discuss, whom they may discuss it with and whether they need other people there. It is coming here even under the present situation.

Q 243

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

I want to get a better idea of what is at risk. It is clear that there are some significant concerns about the merger of the Competition Commission and the OFT, but it is not so clear what the stake is. The OFT and the CC estimate that the benefit to the economy of their competitive regime is about £600 million. Would you say that that is an accurate reflection of the benefits to the economy of a competitive environment? Does the Bill do enough to maximise those benefits? It is particularly important at a time of double-dip recession.

Malcolm Nicholson: I would say that there were considerable benefits to the UK economy of an effective competitive environment. The £600 million a year valuation is, frankly, for the birds. I just do not think that you can quantify it in that sort of way.

Professor Waddams: I have just come from a seminar over in the Department for Business, Innovation and Skills. Nick Crafts was there talking about the real evidence of increased productivity when competition measures are taken from economic history here—I back up what you are saying about measuring it. It is something almost immeasurable, in terms of the whole nature of the productivity of the economy, which, as you say, is very important right now. I think that there is no doubt that the historical evidence shows that vigorous competition policy does have those benefits. Sorry, Malcolm.

Robert Bell: I would agree with the previous two speakers that a vigorous and efficient competition system increases business confidence, saves money for the economy and attracts inward investment.

Q 244

Robert Bell: There are benefits to be gained. On the merger of the CC and the OFT, we do not really have a very strong position, but we are pleased to see in the Bill that the checks and balances between first-stage and second-stage merger investigations and market investigations have been retained. There is potential to streamline the regulatory process and make it faster.

Q 245

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

This is a specific question for Professor Waddams. As is the case now, we have concurrent competition powers between regulators in certain sectors, such as energy and telecoms—I should declare an interest that I worked for Ofcom for six years—but we have seen a reluctance for regulators to use those competition powers, as they tend to rely instead on their sectoral and regulatory powers. We specifically see that in the energy industry. Obviously, that has a cost to the consumer. We have just seen the importance of competition. Does the Bill do enough to ensure that the regulators use their powers, where they have them, in the interests of consumers, or is there more that should be done to ensure that the current regime works better? Have the smaller regulators got the resources to take on competition issues?

Professor Waddams: I think that there might be an issue there. The principle that I am worried about with this Bill is what happens when competition policy conflicts with other objectives. In terms of the overall objective of the Bill, it is further competition and delivering benefits for consumers. But supposing there were more benefits for consumers in another way, how would the Competition and Markets Authority deal with that?

The same thing applies to the regulators. The regulators have additional duties that the CMA will not have, and the Government, or policy makers, have to decide which will dominate. At the moment the problem that can arise is that the regulators try to deliver something as well as competition—they want to deliver competition, too. Where there is a conflict, it is not clear how that will be resolved. I am not sure whether this Bill makes that clear either. The difficulty is that you might have a regulator trying to deliver social and environmental objectives in line with its duties, and a competition authority that is trying to deliver only competition. Actually, competition is a really bad vehicle for delivering social ends. It may bring down general prices but it will not bring down anybody’s price in particular. It is very bad at that sort of targeting. That is just an inherent  problem in this area, and I do not think the Bill resolves it at the moment. That does not quite answer your question directly, but I hope that it gives you a sense of those difficulties.

Q 246

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

It certainly does that, but do you have any suggestions as to how the Bill could help resolve it, especially in your area of expertise, energy, where we see real consumer disbenefits from the lack of effective competition?

Professor Waddams: I am not sure that we know we do, but there are lots of people who would like investigations that have not happened. That is certainly true. If the regulators have these additional obligations, we have to let them use them. It is a bit like the public interest; we have to let them fulfil them. Saying that we must have a competition solution, when that does not deliver their objectives, does not work. If the regulators are going to have those additional objectives, they need to trump competition on occasion. I am not sure whether I would agree with that on any particular case, but either they have those duties or they do not. It is difficult at the moment because they have duties that are not always compatible

Malcolm Nicholson: May I add a couple of points? First, on the whole the regulators are under-resourced and underskilled in dealing with competition issues. That is to say you need a body of experience and breadth of understanding and other people to be bouncing ideas off to be operating competition rules effectively, and I do not think that the regulators necessarily have that. It is also very easy for the regulators to say, “We will use our licence modification powers because it keeps it in-house and we know and understand that and it is just so much easier.” It is infrequent that the problem is the balancing of different public interest concerns.

Robert Bell: There has been a shift over time away from ex ante regulations to the implementation of competition both at an EU and UK level. There is a certain tension where sectoral regulators have their ex ante powers. They probably have an easier jurisdictional ride of things to use those than they do to use the competition powers. As Professor Waddams says, they are trying to do both things and to reconcile them—ex ante powers and competition law. I would welcome—this may well be a solution—the CMA becoming a centre of competition excellence. That is stated in the Government’s response to the consultation. I also welcome the emphasis on the fact that the CMA is going to be a resource and get more involved in concurrent regulation. If the conditions are right and the working relationships are good, it will be a positive benefit.

Q 247

Photo of Anne Marie Morris Anne Marie Morris Ceidwadwyr, Newton Abbot

May I turn to antitrust? The aim of the Bill is certainly to create a stronger regime. It looks at separating investigation from decision making; it looks at absolute privilege from defamation; it looks at lowering the threshold before interim measures can be imposed; and it looks at guidance on penalties. Do you think those are the right things to be doing, and will they have the right effect? Are there other things you would like to see in the Bill that would help?

Robert Bell: First, clause 34(4) provides for the CMA to use its powers to have different groups of individuals investigating the antitrust offences. So you will have a distinct separation between investigators and decision  makers. We greatly support that and we think that it will remove all allegations of confirmation bias and install greater confidence from the business community. But what I would say is that the power in clause 34(4) is an enabling power. We would like to see it enshrined in the Bill that there will be an adequate separation between investigation and decision-making competencies within the CMA.

In terms of interim measures, unfortunately the OFT has not got a very good track record. Since the London Metal Exchange case, there have been no interim measure cases. That has had a knock-on effect, such as in relation to incentivising the Government to bring forward the private actions consultation to mean that small and medium-sized enterprises and others have to take the law into their own hands to enforce their rights. I greatly welcome the changes in relation to interim measures, but they must come with an endorsement that the OFT will use all its powers in its competition toolkit to enforce. That includes interim measures.

Malcolm Nicholson: I think we need to set the antitrust in context. Business hates the antitrust rules because you get a detailed investigation, at the end of which you are told you have committed an offence, you are fined tens of millions of pounds and you are publicly vilified. You open yourself to the prospect of damages actions and to the prospect that senior executives will end up in jail or be disqualified as directors. There is a huge tension in the system initially between regulator and business.

Secondly, there is an inequality of arms and resources between big business, which will throw endless resources at something, and the regulator, which has fewer resources, public sector salaries and what have you. You have a real problem with an administrative process that hitherto has had the same team dealing with investigation, prosecution and decision making. It just does not feel fair. I personally have a visceral objection to it—I have been scarred by it in Brussels over many years—so there is a real problem there.

The Bill is going some considerable way to address that. The OFT consultation paper, in distinguishing between investigation and prosecution and the decision takers—albeit within the same organisation—and having a panel of decision makers, is clearly going in the right direction. I agree that there would be some sense in making that mandatory in the Bill, rather than simply facilitating it. I feel that, in the area of antitrusts, the Government have slightly opted out. Roughly speaking, they have dealt with it by saying, “You can do this. We are not going to impose time limits on investigations yet. We will come back and look at it in five years’ time.” They could be a bit firmer.

In terms of improvements, there are a couple of quite easy additional tricks to play. First, there are probably a dozen people among the Competition Commission panel membership who, as lawyers or economists, have many years’ experience of working the regime, so that is a resource that should sensibly and naturally be tapped. The ability to do so seems sensible. There is another issue as to whether the right cut-off point between investigation and decision taking comes when the whole case has been fully worked up in what is known as a statement of objections. If you look at the other regimes, you will see that the division between phase 1 and phase 2 comes earlier in the process. It seems to me that the  skill set available among the staffers and panel members at the Competition Commission could properly be deployed to deal with some of the antitrust issues.

Professor Waddams: My only concern is about the complete independence of the two phases and the possibility—this is not clear at the moment, although it may become clear as a result of the OFT’s consultation—that somebody who has been involved early on may not come back later as part of the decision-making process. That is the single bit on which we need to be absolutely clear that there is a robust separation so that that cannot happen. That will ensure that we do not have a confirmation bias, which the current structure has avoided so well.

Q 248

Photo of Anne Marie Morris Anne Marie Morris Ceidwadwyr, Newton Abbot

That is very helpful.

Not one of you commented on the guidance on penalties with regard to defamation. Is that because you have no thoughts on it, or because you do not think that it really adds anything?

Robert Bell: I am sorry, but what is that about?

Photo of Anne Marie Morris Anne Marie Morris Ceidwadwyr, Newton Abbot

The absolute privilege for defamation that is being introduced and the guidance on penalties, the idea behind which is to avoid appeals.

Robert Bell: On the guidance on penalties, are you referring to the bit of the Bill where the Competition Appeal Tribunal has to have due regard to the way in which penalties are set? There is obviously a background to that case in the construction cartel appeals, where the CAT decided to go its own way on what it saw as the acceptable assessment of penalties, which did not happen to coincide with the OFT’s guidance. I think this is trying to bring everything back to the centre and say that there has to be a central single policy on the assessment of fines and that everyone has to buy into it. It is a good thing.

Q 249

Photo of Neil Carmichael Neil Carmichael Ceidwadwyr, Stroud

Professor Waddams, why do you say that the extensive possibility for intervening in the public interest raises concerns?

Professor Waddams: Because it is very difficult for people who feel that they have the public interest at heart to avoid using it in a way that is contrary to the benefit of competition policy. I am a bit divided on this. There are legitimate public interests and, where they exist, I really welcome the fact that there is a way for them to be expressed, rather than in any kind of behind-the-scenes, invisible way. I like the visibility very much, but I worry a lot that, for short-term reasons, which might not really be in the long-term interest—again, it is a trade-off thing—there will be an encouragement to interfere “too much”.

Q 250

Photo of Neil Carmichael Neil Carmichael Ceidwadwyr, Stroud

Do you think that that would be an excessive political interference in the new authority?

Professor Waddams: Yes. On cases in which I have been involved with the Competition Commission, I know that there have been letters from local MPs saying, “Please hurry up with this market inquiry, because my constituents are feeling the weight of it and it is depressing their business. Moreover, please find in their favour.” Of course, the Competition Commission knows how to write back a very neutral letter that says, so to speak,  “None of your business.” Sometimes there will be public interest and, as I say, I welcome the fact that that will be publicly known and people will see it, but I think it will encourage too much public interest, if you like.

Q 251

Photo of Neil Carmichael Neil Carmichael Ceidwadwyr, Stroud

What safeguards would you like to see in the Bill to prevent that?

Professor Waddams: Making it extremely difficult so that people are very reluctant to intervene on those grounds, which means that it is very difficult for that to happen.

Q 252

Photo of Neil Carmichael Neil Carmichael Ceidwadwyr, Stroud

Mr Nicholson, you also mentioned this issue in your evidence.

Malcolm Nicholson: I did, and I have a slightly different take on it from Professor Waddams. The key, of course, is the independence of the authority—independence from public influence. I think that for as long as that can be assured, there is a lot of merit in the regulatory authority—the CMA—having the ability to look, if asked, at public interest issues in addition to the competition issues. It is a fallacy to think that competition policy exists in a void without an internal reference to public policy issues. We take markets as we find them. We see that public interest pressures may be present in particular markets, whether they are environmental considerations or security-of-supply considerations—I do not know what they are, but you do take account of them.

Moving on from that, the skill set of an independent regulator of the sort that we have should mean that it is quite well placed to consider public interest issues alongside competition issues. I could certainly conceive of a competition inquiry looking at competition in wholesale and retail energy markets while having regard to security-of-supply considerations. You could look at any number of competition issues in the health service while dealing with the public interest considerations that obviously arise there. I think there is scope here for doing something quite useful.

Robert Bell: We are very much against the introduction of these extra powers. We feel that issues of public interest in markets are for Ministers and Parliament, not for competition authorities. I think you have to remember that back in 2002, when the Enterprise Act was passed, there was a very distinct attempt to separate the assessment of competition grounds in markets and mergers from that of the public interest. It has been retained in relation to mergers, for the simple reason that if you have a structural change in the market, you might well have to take a very quick position on it for national security reasons, so therefore it is appropriate. In market investigations, however, a different set of criteria is at play. We feel that, by injecting these new powers, myriad public interest issues are going to distract competition authorities from looking at the competition grounds that they are meant to be addressing. Parties are going to be exposed to escalating costs due to dealing with public interest issues alongside competition issues. In many cases, there is not the right skill base on the investigating panel to look at public interest issues.

At proposed new sections 140A(7) and 141B of the Enterprise Act, there is a discretionary power, in relation to the CMA, to appoint public interest experts. I think that if you are going to allow this power to go through, there should be a very distinct separation. It should not  just be a question of discretion. If there is a public interest element referred under a market investigation, there should be public interest experts who look at the public interest issues separately from the competition panel.

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

It seems that Members have no further questions for these witnesses. I thank you all very much for your time and very full answers. We are slightly ahead of schedule, so the sitting will be suspended until 11.25 am.

Sitting suspended.