Examination of Witnesses (Questions 1-19)
OFFICE OF
FAIR TRADING
18 JANUARY 2006
Sir John Bourn KCB, Comptroller
and Auditor General and Mr Edward Humpherson, Director,
Regulation, National Audit Office, were in attendance and gave
oral evidence.
Ms Paula Diggle, Treasury
Officer of Accounts, HM Treasury, was in attendance.
REPORT BY THE COMPTROLLER AND AUDITOR
GENERAL
OFFICE OF FAIR TRADING:
ENFORCING COMPETITION IN MARKETS (HC 593)
Q1 Chairman: Good afternoon, welcome
to the Committee of Public Accounts where today we are looking
at the Comptroller and Auditor General's Report Enforcing competition
in markets. We are joined by Mr Philip Collins, who is Chairman
of the Office of Fair Trading, Mr John Fingleton, who is the Chief
Executive Officer and Mr Vincent Smith, who is Director of Competition
Enforcement Division. Presumably, as you are sitting in the middle
Mr Fingleton, I should address my questions to you but obviously
either of your colleagues can answer questions as they like. Most
of the questions I shall be asking you are conveniently from the
summary at the beginning of the Report which you can find on page
two. Would you like to look at paragraph nine first of all? I
should just like to deal with a couple of questions about your
effectiveness as an organisation. Do you think you can hold your
own against well-resourced companies and law firms, especially
as some of your best people appear to be leaving on a regular
basis to join them?
Mr Fingleton: Yes, I do believe
we can hold our own. Our turnover figures may appear high. The
20% figure has fallen in the most recent year to 16% and the average
figure over four years is about 15%; that figure also includes
transfers to other parts of OFT, so some of that expertise is
not lost to the agency as a whole. I should make the point that
a revolving door is a typical feature of agencies like ours internationally
and it is a desirable feature to have OFT alumni who are experienced
in competition and consumer affairs working in other parts of
government, which many of them are, and in the private sector.
That helps meet our wider objectives of developing knowledge and
expertise in competition generally in the economy. It also allows
us to bring in new talent. I should point out with the average
figures over the last five years that average tenure—
Q2 Chairman: At the end of the day
you had a staff turnover of nearly 20% in 2004-05.
Mr Fingleton: Yes.
Q3 Chairman: We shall not delay on
that then. If you look at the previous paragraph, your approach
to competition enforcement, paragraph eight, you received extra
powers and it took your four or five years to identify obvious
areas such as construction, which everybody knows is rife with
anti-competitive practice. Why was this?
Mr Fingleton: I do not believe
we took four or five years to identify priority areas. We adopted
a new approach to setting priorities in a three-year cycle, starting
in the current year.
Q4 Chairman: It says here, "The
OFT selected five priority sectors in which to channel its efforts
. . . The OFT has not, however, been able to fully reflect these
priorities in its day-to-day competition work".
Mr Fingleton: Yes, and it says
that we have been very responsive to complainants in the past
and in going forward, we shall be implementing all of the recommendations
made by the NAO and many of those are addressed to us being able
to select better the cases we take forward and be more proactive
in how we do that.
Q5 Chairman: I want to ask a couple
of questions on how you manage your cases now. If you look to
paragraph 10 of the summary, which you can find on page three,
you will see "Most full investigations take between one year
and three years . . . six of the 37 ongoing investigations had
exceeded three years", one had been investigated for five
years. Why are you not doing more to reduce the time you take
on cases?
Mr Fingleton: We are doing a lot
to reduce the timetable on cases. Some of our cases have gone
on longer than we should have liked. We are in the learning phase.
I should point out that competition cases take a very long time.
People would point, for example, to our Visa and Mastercard cases,
which have taken, in one case, up to five years. I should point
out that the Department of Justice in the US took seven years
on its Visa case, an agency which is referred to approvingly in
this Report, and the European DG-Comp took 10 years on its Visa
case. So I think that the OFT's timing record on complex investigations
is remarkably good by international comparison, especially for
an agency which has had these competition powers for a mere six
years, compared to those other agencies who have had them, respectively,
for 110 and 50 years.
Q6 Chairman: Why has it taken you
so long to investigate anti-competitive practices in the independent
schools sector? This is a fairly simple issue is it not?
Mr Fingleton: We operate in an
environment where there is a great number of markets and issues
that we could investigate and we have to prioritise them. That
does mean frequently that we are not able to investigate everything
that is raised with us at that time and in fact, one of the—
Q7 Chairman: How long has this particular
investigation been taking place into independent schools?
Mr Fingleton: I might turn to
Vincent Smith on that.
Mr Smith: The investigation took
just under two years to reach a preliminary conclusion and the
schools now—
Q8 Chairman: So they all charge the
same?
Mr Smith: No, they do not all
charge the same. The finding was that they had exchanged information
in a way which infringed the law and we are consulting them, or
seeking their representations, on whether or not they have anything
further to say before we reach a final decision. We are in that
phase at the moment, so our preliminary decision is out with them
for their representations.
Q9 Chairman: I should like to ask
a couple of questions on consumer benefits. Let us just take one
example. Why do you seem to pick on such small targets, for instance
West Midlands Roofing, which is dealt with in appendix three,
page 43? If we look to figure 21 on page 31, apparently you spent
time looking into toys and games including the board game Monopoly.
I should have thought there were more interesting subjects you
could look at like monopoly practices perhaps in the construction
industry.
Mr Fingleton: The most conservative
possible estimate of the benefit of our intervention in the toys
market is £40 million for UK consumers. I should argue that
is a relatively good outcome for consumers from one case. I should
also make the point that the majority of markets in the UK economy
are medium-sized markets; that is just the nature of the bell-shaped
distribution of sizes of markets. It is very important that we
do not ignore the full range of markets that consumers buy products
and services in. Many markets are extremely local, particularly
services markets, services are 70% and more of the economy and
local competition in those markets means that there could be many
local markets that are quite small, but when you add up those
markets across the UK as a whole, it amounts to a very large amount
for consumers. If you take an example like contractors on particular
types of building work, roofing for example, roofing contractors
probably compete locally, but in tackling a cartel in one or more
areas of the economy, we are sending a very clear signal, especially
with the fines which can be imposed in those cases, about that
type of behaviour across the economy as a whole and that is one
of the things where we find it extremely difficult to measure
the full benefit for consumers, but it is substantial.
Q10 Chairman: If you are doing so
well, if you look at the previous page, paragraph 4.5 "Since
the introduction of the Competition Act in 2000, fines imposed
have totalled £60 million". Why so little? We find on
page 44 that even the Netherlands imposed fines of €78 million
in just one year. Why only £60 million over four or five
years?
Mr Fingleton: The fines we have
imposed result from a particular evaluation in each case. They
have been reduced slightly in several instances by the Competition
Appeals Tribunal and we have fining guidelines which we adopt.
The case of the Netherlands stands out internationally as being
an absolutely remarkable performance in terms of fines and I should
say that in my experience of comparative international work I
know of no other case, aside from the Netherlands, where the change
in the level of fines has been so dramatic on the introduction
of a new law.
Q11 Chairman: So you have learned
something from them, have you?
Mr Fingleton: In introducing a
new law like this, it is very important that, and this argument
is often made to us, business has a chance to adjust to the new
law and so on. We have to tailor our fines for each individual
case according to our fining guidelines and according to turnover.
It could be possible, for example, that some of the fines in the
Netherlands are particularly one group of fines in the construction
sector; there was one case involving bicycles which amounted to
£27 million. I am aware of a few small cases in the Netherlands
which amounted to a very large number of fines. Because cases
are also done on worldwide turnover in most countries, if you
end up with a market where the players play internationally, the
fining levels would naturally be much higher.
Mr Collins: May I add a European
perspective? It is also the case in Europe that fines have risen
over time and they have only begun to rise to the kind of levels
that you see quoted here in relation to the Netherlands in perhaps
the last four or five years. So international experience suggests
the best thing to do is to have a high, but not over-high level
of fines to start with and gradually ratchet up the fines.
Q12 Chairman: On the other side of
the coin, let us look at the burden on businesses, which is dealt
with in paragraph 11 of the summary. Some of these inquiries take
a long time and there are obviously costs to business in terms
of legal fees, reputation costs and management opportunity costs.
Do you care about the effect of your timescales on competitiveness?
Mr Fingleton: Absolutely. The
OFT's work as a whole is very positively focused on reducing burden
for business. Burdens on business ultimately are burdens on consumers,
they get passed on to consumers and we care hugely about that.
Many businesses, especially those exporting, benefit when we uncover
cartels in markets where they are buying. For example, in the
roofing case which was mentioned earlier some of the buyers in
that market, in addition to public authorities, were also private
businesses which benefited from lower prices when that cartel
was uncovered. We have produced a great deal of guidance and reasoned
decisions for business. We have worked hard at international level
to ensure consistency of law so that businesses operating in the
UK face the same substantive standard across countries and we
have made particularly important contributions under the guidance
on article 82 and the European merger regulation which has been
very beneficial to UK business. We have surveyed small businesses
and their attitude towards competition. We have set up a small
business forum to work with small businesses to develop the benefits
of competition. In our investigations we have been very attentive
to making sure that our interventions are proportionate. In the
investigations we have done, the burden on business in terms of
the costs of complying with our investigations, the direct legal
costs, which are not the only costs obviously, are small relative
to the burden on the victims from that anti-competitive behaviour.
Q13 Chairman: My last question is
on value for money, which is what this Committee is interested
in. We learn from paragraph 13 that apparently you do not measure
your impact, so it is difficult for us to know whether you provide
value for money. What we do know from paragraph five is that your
costs have increased by over 70% since 2000-01, that is over five
years; 70% over five years. You have been given strengthened powers,
but you do not have a great deal to show for it Mr Fingleton.
Mr Fingleton: We have begun evaluation
work. The preliminary results from that are that across all of
our competition work we have saved UK consumers £750 million
over that period and on the competition enforcement work £110
million.
Q14 Chairman: Where is this in the
Report?
Mr Fingleton: This is work that
we have now been doing as a result—
Q15 Chairman: You have shared this
information already with the NAO, have you?
Mr Fingleton: Actually this is
quite new work that we have been doing.
Q16 Chairman: May I ask the National
Audit Office whether they are aware of all this?
Mr Humpherson: We are aware of
the figure. We have not looked at the methodology or the findings.
Q17 Chairman: There is no point having
an inquiry where figures are thrown at us, especially of this
importance, if they have not been shared properly with the National
Audit Office.
Mr Fingleton: I will say—
Q18 Chairman: Were you aware of these
figures when they were conducting their investigation of you?
Did you share the figures you have just given me, which apparently
provide tremendous value for money to us, with the National Audit
Office?
Mr Fingleton: As I said, I believe
these figures have been developed since the conclusion of this
Report.
Q19 Chairman: Why? Why were they
developed since the Report? You have had these increased powers
all this time, why did you not develop these figures beforehand?
Mr Collins: One of the points
made by the NAO in their Report was that we should do more work
on evaluation and we had already decided to set up an evaluation
unit. The work was ongoing but was not completed until after the
NAO Report.
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