The UK Competition Regime: Too Slow and Too Expensive?

"Why is there only one Competition Commission?" Although often asked in jest, this question touches on an interesting debate amongst competition professionals who are uncomfortably aware that all is not well with the UK competition regime. The key underlying problem was neatly summarised by FIPRA's Phil Evans who noted that "we don't have a regime; we have a network". The various bodies within the system do not work well with each other, and are in particular distinctly uncomfortable when their decisions are overturned on appeal. This is a serious problem for two reasons. On the one hand, the general public are entitled to be protected by an efficient and effective set of competition watchdogs. On the other hand, however, all competition regimes are by definition very intrusive in the way they interference with property rights and business decisions. This is the main reason why businesses are entitled to very fair, transparent and impartial competition processes, involving judgements by others than officials.

The principal decision makers and routes of appeal are currently as follows:

Phase 1 and Phase 2

Every competition regime has to operate a two stage (or 'two phase') process. Smaller, less troublesome mergers and behaviours have to be sifted out, and the remainder selected for more detailed investigation. The intensity of the first stage process varies from regime to regime, and from one type of investigation to another. In the UK and elsewhere in Europe, for instance, the investigation of cartels and abuse of dominance cases is in effect a three stage process: initial sift, deeper investigation up to the publication of a 'statement of objections', and final review/decision-making.

It is much better if the two phases can be carried out by two different authorities. Resource shortages and other reasons generally mean that this is not possible, but the United States achieves two stages by requiring their two first stage authorities (the Department of Justice and the Federal Trade Commission) to take all their cases through the courts. And the UK achieves it, as summarised above, by requiring the OFT and regulators to refer cases to the CC or allowing appeals to the CAT 'on the merits'.

Phil Evans delivered an excellent speech at the 2010 Vienna Competition Conference in which he summarised the key advantages of the OFT-CC separation, and of having decisions made by the CC's independent 'Members'. He particularly drew attention to effectiveness of this structure in mitigating the evils of single institution confirmation bias, sunk cost bias, momentum bias and group think: "[These behaviours deliver] what I fear is an easily recognisable problem in [single] agency decision making; namely that once an agency has invested time and effort in starting a case it is unlikely to stop that investigation even when its value or importance has proven to be less than immediately thought." Click here to read the whole speech.

The Main Problems

But all is not well within the UK competition regime. Here is what is wrong with the way the regime (or network) currently operates.

  1. The Department for Business Ministers and officials nominally in charge of competition policy have very little influence over the OFT, which had been greatly strengthened by then Chancellor Gordon Brown, and is still funded by the Treasury. And they are also not responsible for the utility regulators. There is therefore no single department in charge of competition policy.
  2. Investigations often take far too long, if you include all the stages from initial review/inquiry, main investigation, reference to the CC and/or appeal to the CAT.
  3. The OFT's new Chief Executive, appointed in 2005, sought to dismantle the previous unwritten understanding under which the OFT actively sought to identify mergers which were worthy of deeper investigation by the CC. Instead, he thought it made much more sense for the OFT to deploy its augmented resources by carrying out much more penetrating Phase 1 investigations and so avoid referring many mergers to the CC, and instead accept companies' undertakings that they would take action to mitigate any anti-competitive effects of proposed mergers. Companies welcomed this relaxation of the regime which saved them both time and money. Critics, however, argued that such OFT decisions still followed less penetrating investigations than would have been carried out by the CC. In particular, customers, competitors and the wider public were given little or no opportunity to comment on the proposed undertakings. There was therefore a danger that mergers were allowed to happen on terms which would not have been allowed had there been a full CC investigation.
  4. Similarly, the OFT almost ceased making market investigation references, preferring to put resource their own newly invented and non-statutory 'Market Studies' or cartel inquiries, and arguing that it is anyway hard to identify markets suitable for CC investigation, other than naturally monopolistic utility markets, for which OFT is not responsible.
  5. The utility regulators - and the companies they regulate - are very reluctant have their disputes referred to the CC. Most companies and most regulators have settled into a wary - or sometimes even friendly - relationship. A CC reference therefore represents a loss of control which might lead to uncertain outcomes, and might even lead to existing regulatory settlements being unpicked by a body unfamiliar with the industry.
  6. Factors 3- 5 above have led to significant under-utilisation of the CC's expert (and expensive) resources.

On the plus side, however:

Proposed merger of the OFT and CC

As well as rewriting the operation of the UK competition regime (see above) - without any consultation - certain senior OFT figures began to criticise the CC itself. They argued that the two bodies should be merged, not least because it was in their view not appropriate for competition decisions to be taken by non-specialists. (The CC's cases are not controlled by, and its decisions are not taken by, staff lawyers and economists. Instead, control and decision-making power is invested in 'Groups' of independent Commission Members whose ranks include lawyers and economists, but also include accountants, and those with business experience.) A few in the OFT even began to criticise individual CC decisions - rather akin to a High Court Judge publicly criticising the Court of Appeal - and even wrote to senior figures in the Department for Business with a critical review of one high profile CC decision.

OFT's objective was of course to subsume the CC's functions, not (or at least not just) so as to expand their empire but also because, like the utility regulators, they thought that the CC added unnecessary delay, expense and uncertainty to what should be a process controlled by competition professionals. Many others, including some in the CC itself, agreed that a merger of the two organisations could indeed offer some benefits, although few shared the view that the CC's Members had become an anachronism. Perhaps one of the most important benefits would be that a merged body would be able to examine sectors such as financial services in the round, rather than in the previous piecemeal fachion. And just about everyone recognised that the OFT/CC separation could only work well if OFT were committed to identifying a reasonable number of worthwhile cases for deep Phase 2 investigation. As this was clearly no longer the case, a merger became inevitable - and was duly announced by the incoming Conservative/LibDem coalition government in 2010.

The sting in the tail for the OFT was that the Government also announced that the OFT would lose its consumer protection functions, so that the merger became one of equals, rather than an OFT takeover of a much smaller CC. The new authority will be called the Competition and Markets Authority (CMA). This left the following key issues to be resolved in a genuinely open consultation which began in March 2011.

  1. How can the new CMA maintain the CC's robust independence? The fact that the CC could not choose its own cases, but had to await references from the OFT and others, meant that it was free of unconscious biases such as confirmation bias, sunk cost bias, momentum bias and group think. Put another way, it could not be accused of being prosecutor, judge, jury and executioner.
  2. Then there is the key point, well made by Professor Stephen Davies:- "We know that many commercial mergers fail because it is impossible to weld two incompatible cultures together. Success ... often depends on either wholesale adoption of the better approach or the careful design, bottom to top, of a rational decision making structure that is seen as such by all parties. The CMA requires the latter."
  3. In particular, should Phase 2 investigations continue to be controlled by independent and mainly part-time 'Members' rather than professional staff? The Members help ensure that investigated companies feel properly challenged by their peers supported by professionals, but their involvement arguably slows down investigations, and costs more money.
  4. If so, how many Members should there be? There are currently around 4 full-timers (or nearly full-timers) in the form of the Commission's Chairman and Deputy Chairmen - who chair the Inquiry Groups - plus around 50 part-timers. There is a case for reducing the number - and so increasing the time-commitment - of the part-time Members who currently and inevitably take some time to get fully familiar with competition law and economics. The aim might be to create an independent College of Commissioners, appointed for their standing as (or ability quickly to become) competition specialists.
  5. Also if so, should Members oversee the later stages of cartel and abuse of dominance cases? Their independent views would be valuable, but it would be unfamiliar and arguably trickier territory. Merger and Market decisions are not accompanied by any suggestion of fault on the part of the companies being investigated. But cartel and dominance investigations imply accusations of bad behaviour on the part of the executives of the companies being investigated, and lead to fines or even imprisonment. They are very hard fought, and require considerable legal input on both sides. It is not entirely clear how part-time Members could add value in such investigations.
  6. The legislation necessary to create the CMA might also be used to introduce pre-notification of larger mergers (thus avoiding the problems which occur when the CC has to unravel completed mergers) and/or abolish the very-hard-to use criminal cartel offence, and/or remove the ability of the utility regulators to investigate cartels and abuse of dominance, leaving this to the experts currently in OFT.

Businesses and business organisations will be faced with a real dilemma when responding to the consultation. On the one hand, businesses generally call for greater speed in competition investigations, and the combined OFT/CC will indeed probably handle cases rather more quickly, especially if there is more rapid transfer of (a minority of) cases from Phase 1 to Phase 2. However, as Laura Carstensen has pointed out, businesses "want everything to be faster. Except when [they] don't [which is] when it is them trying to get their merger through or their market out the other side of a market investigation unscathed." Businesses may also be concerned about the Market Investigatory power of the new organisation, able to instigate and finalise an investigation which can lead to businesses being forced to sell their subsidiaries.

Policy Responsibility for Competition Law

Officials in the Business Department and its predecessors (such as the Department for Trade and Industry) were until 2002 responsible for helping Ministers develop competition policy, and oversee the effectiveness of the competition regime. But Chancellor Gordon Brown was also very interested in competition policy and wanted the UK to have a much more powerful competition regime. He therefore encouraged the passing of the Competition Act 1998 and the Enterprise Act 2002, and allowed consequential and substantial increases in the budgets of both the OFT and the CC. This led senior OFT officials to neglect their relationship with the Business Department and instead focus on keeping in with the Treasury, which in turn led to the competition regime becoming somewhat dysfunctional in the period through to around 2010 - see further above.

Until 2002, Business Department officials also helped Ministers decide whether to allow mergers to take place etc., having received advice from the OFT and/or the Competition Commission (or its pre-1998 predecessor, the Monopolies and Mergers Commission). But it was decided in 2002 that it would be better if Ministers, with their political and other prejudices, were no longer involved in taking decisions on individual cases (other than public interest cases) and most decisions were henceforth taken by OFT and the CC.

The wisdom of this decision was underlined in December 2010 when Business Secretary Vince Cable made it clear to undercover journalists that he had already pre-judged a decision on a proposed public interest merger involving the Murdoch media empire, despite the fact that he had yet to receive advice on the matter from officials or the relevant regulator, Ofcom. It was then clearly impossible for him to remain involved in taking this or similar decisions, so all his media-related competition policy responsibilities were transferred to the Culture Department.

Click here to return to the home page.
Follow this link to browse the separate How to be a Civil Servant website.
And please help me keep this Regulation website up to date. Please send me an email if you have interesting new information, or if any of the links stop working. Thank you.