Effective competition is an economic asset that should be protected
Over the past two years – if you are to believe our newspapers – Britain has acquired a new reputation in Europe. It is not for the size of our economy, or our low rate of inflation / unemployment, nor for that matter, any other economic success. No, we are best known for customer rip-offs: for what countries might call profiteering / over-pricing. Hitting the consumer with the highest prices, charging till it hurts.
You may have read allegations in newspapers that British consumers pay some of the highest prices in the world for new cars, petrol, supermarket groceries, mobile phones, subscription television, branded medicines, and a seemingly endless list of other goods and services. It isn’t wise to believe everything we read in the newspapers, but if some of this is true, how can it happen? How can everything here be so expensive if competition is working properly? Competition lies at the heart of any successful market economy and is crucial to the protection of consumer interests and the efficient allocation of resources.
Competition has several dimensions of which price is only one, albeit in many markets the most important. It fuels innovation, shocks the complacent and shakes out businesses that are too arrogant or too inefficient to provide acceptable goods and services. Most businessmen strive to maximise their market power and where they see an opportunity to control a market, they will take it. Taking proper advantage of a market position has never been outside the law, but time has run out for businesses which have become used to getting together to fix prices, rig markets or take unfair advantage of a dominant market position.
Before the Competition Act 1998, competition law in the United Kingdom (UK) had to be searched for in the complex web of case law and individual statutes enacted to deal with particular situations. The old legislation had little effect on businesses as it was unduly technical, did not contain sufficient sanctions against genuinely harmful anti-competitive conduct, and unnecessarily exposed many innocuous agreements. It did not prohibit any particular kinds of conduct, had become a burden for businesses, and cumbersome for the authorities to operate.
The Conservative Government reiterated this point in the original 1988 Green Paper: “Our present system is inflexible and slow, too often concerned with cases which are obviously harmless and not directed sufficiently at anti-competitive agreements….. ” The Act. The new Act, came into force on 1st March 2000, making radical changes to the existing competition law and effectively incorporating Articles 81 & 82 (formerly Articles 85 & 86) of the Treaty of Rome into the UK regulatory framework.
This wide ranging statutory code deals with most aspects of competition law and thus the various statutes making up the Restrictive Trade Practices Act 1976; the Resale Prices Act 1976, and the provisions of the Competition Act 1980 were repealed. However, the monopoly provisions of the Fair Trading Act 1973 will remain in place, allowing for the investigation and remedying of ‘monopolistic’ practices. The new Act outlaws any agreements, practices or conduct that have a detrimental effect on competition in the UK.
It prohibits: * Agreements (verbal, written, formal and informal) between businesses, decisions by associations of businesses (such as trade associations), or concerted practices which prevent, restrict or distort competition, or are intended to do so, and which may affect trade within the UK (known as the Chapter I prohibition); and * Conduct by one or more businesses amounting to the abuse of a dominant position in a market which may affect trade within the UK (the Chapter II prohibition).
The main powers of investigation, decision-making and enforcement will rest with the OFT and its Director General, although in the case of gas and electricity, water, telecommunications and the railways, s/he will operate in tandem with the existing regulators for those industries. It will be possible to appeal against a decision made by OFT to a new body, the Competition Commission. The Director General will have far greater powers of investigation and enforcement than existed under the RTPA (1976).
This has a substantial affect on businesses, as when the Director General has ‘reasonable’ grounds for suspecting an infringement of the Chapter I & Chapter II Prohibitions, he or an authorised officer from OFT can either: * Modify / terminate offending agreements. * Search for & seize documents. * Carry out a dawn raid, with or without a warrant. * More importantly, impose penalties of up to 10% of UK turnover. To reiterate this point, on October 13th 2000, newspaper reports indicated that the OFT had carried out dawn raids at bus groups, Arriva plc and FirstGroup plc.
The Evening Standard reported that OFT investigators raided the headquarters and West Yorkshire offices of Arriva and FirstGroup, searching electronic and paper records on suspicion that they have been carving up bus services in the Leeds area between them. Chapter I Prohibition. So what provisions in an agreement would constitute an infringement of the Chapter I Prohibition and thus be deemed void and unenforceable? * Directly or indirectly fixing purchase or selling prices or any other trading conditions. * Limiting or controlling production, markets, technical development or investment. Sharing markets or sources of supply. * Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage. * Making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations, which, by their nature, or according to commercial usage, have no connection with the subject of such contracts.
For the Chapter I Prohibition to be breached, an agreement will need to have an appreciable effect on competition, rather than ‘de minimis. The OFT has stated that this will eventuate, where the parties combined market share exceeds 25%. However, this does not apply to certain categories of agreement such as price fixing, resale price maintenance and market sharing, thus the common feeling particularly among smaller businesses that the Act somehow doesn’t affect them is erroneous. Small companies that collectively fix prices are susceptible to the same investigations as an entire industry, regardless of their market share. There are two reasons why all businesses should be aware of the legislation.
The more obvious reason, perhaps, is that businesses that understand the Act are in a much better position to avoid infringing its prohibitions in the course of their commercial activities. In turn, they will avoid the potentially very serious consequences of committing an infringement. In addition, there will inevitably be adverse publicity, which would be likely to dent the confidence of investors, lenders, customers and suppliers. The Office of Fair Trading has itself published guidance emphasising the importance of businesses to set up a compliance programme to make employees and directors aware of the new law and its consequences.
The guidance stresses that a compliance programme will constitute a mitigating factor when the Director General comes to judge what penalties to levy for infringement. The guidance also encourages ‘whistleblowers’ to come forward in cartel cases by indicating that they will have total or partial immunity from financial penalties. It is important for businesses to be proactive. If either of the parties is unsure of whether there has been an infringement, they should notify OFT of the agreement, in order to obtain a declaration of non-infringement, known as ‘negative clearance. Notification will again secure immunity from fines, from the date of notification until at least the date on which the application is determined. On 20 July 2000, The General Insurance Standards Council (GISC) notified its Rules (as amended on 15 June 2000) to the OFT for a decision under the Act. The GISC’s objective is to establish a single, independent, self-regulatory regime to set, monitor and enforce harmonised service standards across all areas of general insurance business.
GISC will regulate the activities of insurers and intermediaries who engage in general insurance activities from a principal place of business in the UK as well as qualifying non-UK applicants. Applicants are being admitted to GISC on the basis of a membership contract under which they agree to be bound by the GISC Rules. The Rules contain a General Insurance Code for Private Customers and a Commercial Code. In addition, the Rules contain provisions regarding e-commerce, membership, financial requirements, complaints handling, competence and training, monitoring and investigation, enforcement, and intervention.
GISC intends, in the future, to bring into force a rule, which prohibits members from dealing with intermediaries who are not operating within the GISC regime. The GISC has requested a decision from the OFT that the Rules do not infringe the Chapter I prohibition. In accordance with Section 3, it is possible for certain types of agreement and arrangement to be excluded from the Chapter I Prohibition altogether. To name but a few, mergers and concentrations are outside the scope of the prohibition and agreements, which have previously received clearance under the old RTPA 1976.
The prohibition will also, it seems, be disapplied from vertical agreements – that is agreements between those operating upstream and downstream in a particular market. This was confirmed on April 10th 2000, when the OFT confirmed that the vertical agreements between Dixons, Packard Bell and Compaq did not appear to infringe the Competition Act 1998. Vertical agreements between manufacturers and retailers are excluded from the prohibition. However it is possible for the Director General to claw back this exclusion should s/he consider the agreements to be anti-competitive.