Examination of Witnesses (Questions 20-39)
OFFICE OF
FAIR TRADING
18 JANUARY 2006
Q20 Chairman: It makes our work very
hard. The whole point of these inquiries is they are based on
an accurate inquiry conducted by the National Audit Office. It
makes our work impossible if figures like this are thrown at us
at the last minute. Sir John, would you like to comment on this?
Sir John Bourn: I agree with you
Chairman. It would have been possible and would have been helpful
if OFT, when they developed these figures, had told us about them
so that we could have put in a supplementary note to you on the
basis of discussion with the OFT.
Q21 Mr Curry: Perhaps first of all
I should just refer to the fact that the Register of Members'
Interest shows that I am the chairman of Dairy UK. It is in the
book, but it would just be fair for you to know that. I shall
not refer to anything specific. I think we should also recognise
that you are both new in the job, but if you look at the annual
plan for 2006-07, what I read into that is that you feel your
predecessors' work will bear a great deal of improvement. If that
is your view, then I endorse it whole-heartedly. Third, I am absolutely
astonished by something you said Mr Fingleton. You were judging
the burden on business in relation to the burden on victims. I
think we need to be rather careful about how we use the word "victim",
but if you are going to evaluate the burden on a company which
is doing, let us say, £100,000 or £200,000 turnover
against a collective purchasing power of the British consumer,
it does seem to me that business never stands a chance. Do you
just recognise how big the burden is? If you investigate, first
of all that has to be noted in the business's accounts and it
then sits like a blight across the business for perhaps three
years. Second, the behaviour of the whole of the sector will be
determined to some extent by the anticipation of how you may react
to things, so you are, in many ways, determining business outcomes
passively. Third, it is not just how much time they have to buy
from specialists, it is the amount of management time which goes
into defending their case. I know of cases where companies have
abandoned projects because the cost of defending them to you would
have been greater than the value of the project they were undertaking.
Do you not think it would be reasonable, if they are found not
guilty at the end of the day, that the OFT should meet their costs?
Mr Fingleton: There are standard
rules for cost allocation at the end of cases and the allocation
of costs is a matter for the Competition Appeals Tribunal and
the Court of Appeal. I mentioned earlier that we shall be implementing
all of the recommendations in the NAO Report in full and several
of those, such as shorter investigations, better case prioritisation
and greater transference of communication will help reduce the
burden on business. I cannot promise that there is going to be
zero burden on business from competition investigations. We must
investigate illegal behaviour as required by statute and that
necessarily imposes a cost on business. We are acutely conscious
of that and we work closely with business and with legal practitioners
to try to ensure that that burden is kept to a minimum.
Mr Collins: Having come from the
private sector, I am very conscious of the time and cost involved
in investigations. The last point you referred to in relation
to abandoning projects probably relates specifically to the merger
regime where we are now unfortunately somewhat constrained by
the rulings of the CAT and the Court of Appeal about what the
appropriate test is and that is an issue which needs to be looked
at further at a policy level.
Q22 Mr Curry: I wonder whether I
could put something else to you. Your actions are obviously, and
have to be, based upon a certain view of how a market behaves
and therefore you have a view of how a particular market behaves.
The problem is that the companies in that market often do not
recognise in any shape or form the model of the market which you
appear to be operating to. When you come to a view about the way
a market behaves, what discussions do you have with the industries
in it, the businesses in it, to try to reach a common perception
of the way a market behaves so that when you act, then at least
you are talking within a framework which is common to both of
you and business does not think you are talking about an activity
which belongs on a different galaxy to the one on which we are
engaged?
Mr Fingleton: We put a great deal
of effort into developing sectoral expertise and into close interaction
with industry to understand the details of how that industry works.
I should say that our competition enforcement work is frequently
litigious; there is a litigation mentality at the outset because
of the nature of the legal process. In that context, it does raise
different issues about how much parties may be prepared to share
with us and under what circumstances. In our market study work,
where we look at general issues in the market where there is no
specific suggestion or allegation that the competition laws have
been infringed, we have developed a very high degree of cooperation
with industry. The study we are currently doing on PPRS, the pharmaceutical
pricing system, has involved a very high level of cooperation
with the pharmaceutical industry and its representatives and that
would be common across all of our studies and we should always
try to develop that sectoral expertise.
Mr Collins: Often these cases
have been complaint-led and of course a complainant will always
put a particular spin on how he feels the market should be operating.
One of the things we have to do is to test that. What we are trying
to do as part of our prioritisation of cases now is to be less
reliant on complaints and be more guided by intelligence from
a number of different sources which forms a more informed view
so we can challenge in particular individual complaints at the
outset. I have seen cases in private practice which have been
wholly thrown off the rails by a wholly misconceived view which
has been sold to the regulators by a particular complainant with
a specific interest and that is not the way we should be driving
ourselves.
Q23 Mr Curry: That is very helpful.
I wonder whether I could just illustrate my remark in very general
terms. One is your view as to what extent a market is national
or international and sometimes you take a view that the market
is very hermitically sealed nationally, where the businesses in
it believe that effectively they have to measure themselves against
what is happening overseas and there is clearly a difference in
perception there and if that could be overcome, it would be greatly
helpful. If I may refer to a specific case—somebody is going
to mention Tesco today, so I might as well be the first one to
do so—when you are looking at the retail market, you appear
to have a model which is based upon the segmentation of the market
and the market falls into different segments, which many of the
players in the market, certainly the suppliers, simply do not
believe is the reality of the marketplace. What can one do to
try to overcome those differences which do lead to enormous battles
and resentments? I have to say Mr Fingleton did his little piece
about how hard you work to reduce the burdens on business, but
I have never yet met a company who actually would agree to what
you have said, they would not subscribe to your mission statement;
they certainly do not think that is what happens in practice.
Mr Fingleton: The question of
whether we define a market nationally or internationally in a
particular competition case tends to be the first line of argument
in any case because, if the market is defined very widely internationally,
market shares are lower and the presumption is that behaviour
is not harmful. So perhaps the most litigated element of a case
is often the question of market definition. There will invariably
be cases where, not only will we not agree with the parties on
that, but that would be the central issue which the Competition
Appeals Tribunal may have to rule on. There is an accepted methodology
for doing that, but of course two reasonable people, the OFT and
the parties, may not always agree on how that applies and sometimes
there will be disagreements about it. We do our best to make sure
that we take account of all the market facts because we are subject
to appeal and because we do want to get the right answers in these
cases. With regard to the particular question about supermarkets,
where it is not a national/international issue, but a question
of whether there is a separate market for convenience, as opposed
to supermarket, multiple shopping, I have been very clear when
I spoke to the all-party group on shops in November here and in
an interview in The Grocer magazine, that I have come to
this with a fresh look and without a fixed view one way or the
other on that question. It is something which our preliminary
decision in early March will address.
Q24 Mr Curry: Without pursuing the
supermarket issue, the procurement is a worldwide procurement
of course, so in that sense, it is an international marketplace
and someone might be selling into a national marketplace.
Mr Fingleton: In some cases, part
of the operation of some companies will be international and part
will be national and, for example, if you think about banking
and finance for companies, unsecured finance for small and medium-sized
enterprises tends to be a pretty local market where the bank managers
who know them personally are the only people they can go to and
there is very narrow competition. However, for large companies
looking to finance large projects the world is their oyster and
so the market definition could be truly international.
Q25 Mr Curry: You operate under the
1992 legislation.
Mr Fingleton: The 1998 Act which
came into force in 2000.
Q26 Mr Curry: Do you think the definitions
there are too narrowly defined? The reason I ask the question
is that you keep referring to the consumer and the whole of politics
revolves around the consumer. We are consumers of health, we are
consumers of education, we seem to have become fixated with this
notion of suppliers and consumers right across the whole of the
public sector as well as the private sector and yet there obviously
are people whose livelihoods depend on your decisions, who may,
as well as being consumers, also be suppliers. Do you think the
legislation confines you too narrowly and would you welcome having
a little bit more flexibility in the criteria you bring to bear?
Mr Fingleton: The interpretation
of the Competition Act is heavily influenced by how the European
Court of Justice has interpreted articles 81 and 82 of the European
Treaty on which our chapter one and chapter two are modelled and
the Competition Appeals Tribunal rulings rely heavily on that.
So my first point is that that probably has a very heavy influence
on how we interpret the Competition Act of 1998. In terms of the
question, which is a policy question of whether competition policy
should put this focus on consumers, that is a question obviously
on which Parliament has come to a view. My personal view is, particularly
based on economics, that that is the right answer because when
companies strive to win consumers' business, they strive to become
more efficient, more innovative, to get their costs down and there
is an almost perfect, but not always perfect, correlation between
productivity growth and market serving consumers. There are exceptions
to that and the system is flexible enough to deal with those cases,
so I should be confident that the system we have is good and conforms
to international best practice. If you look internationally at
the way in which competition practice has developed over the last
20 years, look at the US guidelines, the way the European Commission
has reformed its practice over the last 10 years, I should say
that where the Competition Act here comes out is basically anticipating
and being ahead of international best practice.
Q27 Kitty Ussher: Following on the
economic point that you just raised, my understanding of the situation
is that the Treasury believes that to make us all richer with
unemployment low and employment high, we should focus on productivity
and that one of the five drivers is competition. You are obviously
one of the main bodies charged with improving competitive markets
and therefore you have received greater resources and your budget
has gone up as part of the Government's increase in productivity.
What has the Government got for its increased resources?
Mr Fingleton: I did not get a
chance to apologise for introducing figures that I should not
have earlier, but if I give you the particular example that is
mentioned in the NAO Report of football replica kit, where prices
fell from £40 to £25, an almost 40% decrease, and where
the market turnover is £250 million, that comes out as an
annual saving to consumers, simple arithmetic, if you multiply
the two figures in the NAO Report, at about £100 million.
So the numbers, in terms of the savings to consumers when competition
is increased as a result of our intervention, can be extremely
substantial. The serious question for us to address as a result
of the NAO Report is not the question of whether the benefit of
what we do exceeds the cost. I think we give fantastic value for
money. The serious question we have to address is whether the
benefit is as high as it could be and there we accept that no,
it is not and we could do more to prioritise that better and have
an even better impact. I should say in our defence that we have
learned a lot over the last few years, we are a self-critical
organisation, we are going to implement not just all the recommendations
but we shall be acting on all the other suggestions in the Report.
We are third best in the world by peer review as a competition
and consumer agency. I should like us to be best and these recommendations
can help us to deliver on the very high expectations that the
Treasury has asked of us.
Q28 Kitty Ussher: You said that the
potential is far greater. How do you quantify the potential? What
economic effect can you have on this country's economy?
Mr Fingleton: Price reductions
for consumers, enhanced choice are the first line when you look
at that. Second, and this is extremely difficult and the NAO Report
says it is almost impossible to measure, is the wider deterrence
effect that we have. Another thing that is very difficult to measure
is the reduction in uncertainty. Our recent decisions clarified
the law and there is a reduction in uncertainty, for example,
because the European test for mergers is now the same test that
Parliament here adopted with the Competition Act. That was a change
made after we made our change here, so we are leading best practice
and that reduces uncertainty for business. After the savings to
consumers, we also wanted to look at the question of when we intervene
and prices come down, what efforts companies put into getting
their costs down and to what extent more efficient businesses
will grow and develop at the expense of less efficient businesses
and that is driving productivity growth which is an extremely
difficult thing to measure. The OFT and the UK as a whole are
ahead of any other country I know in the world in terms of evaluating
the benefits of what is done in the competition field. Others
are looking at the work we are doing and this NAO Report is already
being studied internationally to see how other competition authorities
can improve as well.
Q29 Kitty Ussher: It is very hard,
but you will appreciate that as elected people we want to be able
to understand how to hold you to account and if you are not able
to describe the measures that we should use, beyond price savings
on football shirts, then our task is made harder. So I want to
push you on this. Your organisation is full of economists and
people who have the expertise to be able to quantify the effect
of your organisation on the economy. The Treasury think you can,
that is why they are resourcing you. How should we hold you to
account? How should the public bodies hold you to account?
Mr Fingleton: We are developing
evaluation measures. The NAO Report itself says some of the benefits
we deliver are impossible to measure. It is not a problem that
nobody has ever thought about before. Other competition authorities
face a similar difficulty; many other agencies that this Committee
reviews will have intangibles that are large but difficult to
put monetary amounts on. We shall do absolutely our best to try
to quantify what we can quantify and to identify those elements
that we cannot quantify and, where we can, to try to illustrate
other ways which can give a sense of the magnitudes involved.
Q30 Kitty Ussher: When will you produce
those?
Mr Collins: May I give you an
example there? One of the measures that the Department of Justice
uses is the volume of dollar commerce effected. That is a very
crude measure; it is a very easy measure for the department to
take, because they require everything to be classified under standard
industrial classification. One of the things we are going to try
to do is to collect more data at the outset of a case; having
prioritised a case to collect more data and then use that to follow
through. So, to take a simple example, if we were going to do
football replica kits, we would try to collect data in parallel
sectors, for instance tracksuits, football shoes, football boots,
all those kinds of things, and then see the impact one case in
one very narrow product area had on prices generally. One of the
things you have noticed, and we claim no benefit for it at the
moment, in the high street in sports shops is much greater competition
and indeed to the point where one company has actually gone out
of business as a result of the competition. We have only measured
the very narrow benefits that we can quantify from these specific
cases. One of the things we are going to try to do in the future
is look more broadly, but obviously we cannot collect the data
over everything.
Mr Fingleton: It is also very
important for public accountability and for the public interest
that our efforts in our enforcement work are not directed excessively
towards things that are quantifiable at the expense of larger
and less easy to quantify benefits. We are all familiar with the
call answering in two minutes which you can measure, but you cannot
measure the quality of the call and we need to be acutely conscious
that devoting all the resources to answering calls but very little
to quality needs to be balanced out.
Q31 Kitty Ussher: We want our country
to be richer because of the work that you do and we want to be
able to hold you to account for that. Could you tell me when you
are going to produce as many measures as you can? You said that
you were doing some evaluation work on that.
Mr Fingleton: By April of next
year we shall publish, for consultation, our proposals on how
we propose to do this evaluation work. We have already started
some international communication with other competition authorities
and other experts on it and that methodology will be put out for
consultation and the results that it brings.
Q32 Kitty Ussher: On a related point,
am I right in my understanding that you currently decide reactively
what to investigate based on complaints that come in? Would it
not be better to develop sufficient expertise within your organisation
to understand sectors well enough to decide where you think you
can have maximum effect on the economy? Will you be doing that?
Mr Fingleton: Yes. That is one
of the recommendations of the NAO and we are in the process of
establishing a preliminary investigation unit which will be the
first stage of doing that; there are many other elements in doing
it as well. In general, the desire to be more proactive in how
we take things forward is a central objective we have and it is
set out in our annual plan which is out for consultation at the
moment.
Q33 Kitty Ussher: What are you doing
to make sure that the skills of your team are sufficiently large
to be able to do this? I do not know whether this is an interest,
but I used to work at the DTI and I know that companies complained
to me often that they felt their teams were dealing with really
quite junior economists in your Department.
Mr Fingleton: We have training
programmes in place. On the competition side we have a post-graduate
certificate on competition law and economics, very much based
around case work. As a result of the NAO Report, we are putting
in place a specific four-part skills training programme which
is around practical case skills, rolled out in modules, again
using case work and that is going to be on everything from project
management to evidence gathering. Separately, and going back to
the Chairman's question about turnover, one of the difficulties
for our organisation is developing what I should call sectoral
expertise. I have just come from an OFT induction meeting where
I met somebody who had just come to us from a retail bank to work
in our banking work, so the flip side of that turnover is that
we are able to bring in people with sectoral expertise and to
try to develop and work that better internally. One of the things
I have asked an internal change management team to look at in
the OFT is how we can better exploit cross-Office expertise. We
do that very well on issues like credit cards where we have people
across all the divisions of the Office working on credit cards
who meet regularly. On our healthcare and construction priorities,
one of the central reasons for prioritising work like this is
to see it as a focal point for encouraging cross-Office working
as well and developing expertise.
Q34 Kitty Ussher: I have always thought,
and this is confusing for members of the public, that it is slightly
not clear where a consumer should go if they have a problem. There
are all sorts of other consumer organisations and in fact, if
you look at your website, you are almost encouraging people to
come to you. What work are you doing with other government departments
and agencies to make it absolutely clear where consumers should
go? I actually personally do not think they should necessarily
be signposted to you. I should prefer that you were starting from
more of a kind of technical grounding.
Mr Fingleton: We are really pleased
to be taking on Consumer Direct from 1 April and that is where
I should ask people to direct their constituents to as the frontline
office for all consumer enquiries. It has just taken its one millionth
call in the last few weeks. It is very successful and it feeds
calls into us, into Trading Standards, into Citizens' Advice Bureaux.
Ten of the 11 regional centres are now live and the eleventh one
comes live next month and we are very happy to be taking that
on.
Mr Collins: An important aspect
of Consumer Direct is that it will assist us and assist Trading
Standards very much in prioritising and focusing on those areas
where there is real consumer concern and detriment.
Q35 Kitty Ussher: So they do not
come to you as the first port of call.
Mr Collins: There is a first tier
which is the phone lines and then referral to other people but
the data is obviously collected. An analysis of that data will
enable us to inform our priorities and also, which is very positive,
engage with business to address with business where there is a
high level of complaints. One or two cases I have seen so far
have been to call centres where the Consumer Direct people have
been able to identify particular problems and address them with
local or regional management of business and that is very positive
for business because often it contributes a new source of information.
Q36 Chairman: Mrs Ussher asked you
about value for money. This is another way of asking that question.
The NAO saves £9 for every pound it spends. How many pounds
do you save for every pound you spend? The National Audit Office
saves £9 for the taxpayer for every pound that it spends.
Your costs have increased by 70% over five years. For every pound
that you spend, how much do you save the taxpayer or the economy?
Mr Fingleton: We would agree with
the NAO figure.
Mr Smith: On the basis of the
preliminary work to which Mr Fingleton referred earlier, we think
that we cannot have saved less than £2 for every pound we
have spent so far, but we aim to get better.
Q37 Sarah McCarthy-Fry: On page 13
in paragraph 2.2, it talks about how you have gone for these five
priority areas and you have selected these five priority areas
largely on the types of complaints that were most regularly received.
Since you have introduced these five priority areas, do you think
that they have been useful in increasing your efficiency?
Mr Fingleton: I should say that
we chose the priority areas, as you said, on the volume of complaints
but also on the impact on consumers and the size of the market.
The priority areas are chosen over a three-year period of which
we are almost completing the first year at the moment. I should
say that in both healthcare and construction, which are the ones
which are most relevant, but not exclusively, to competition enforcement,
cases like Genzyme have occurred. Because of our work on PPRS,
the pharmaceutical pricing, on care homes, our work on a case
called Frederick Muller, dodgy healthcare products, private dentistry
and so on, we are developing quite a lot of expertise and knowledge
about healthcare and these are complex markets where consumers
face new and complex choices. We are hoping to do more proactive
work in that area and on construction obviously, cases like roofing
contractors, our work on estate agents and property searches.
Our work around these priority areas allows us to focus at the
margin, and it is at the margin, because our competition enforcement
work is driven by complaints as well and something we are trying
to do more of is to make sure that our work is prioritised better
around particular areas.
Q38 Sarah McCarthy-Fry: So picking
up the point Mrs Ussher made, do you think that by having these,
by concentrating on these five priority areas, you may be able
to go more into own initiative stuff rather than just responding
to complaints?
Mr Fingleton: Yes and indeed in
my previous position with the Irish Competition Authority we ended
up with about a 50/50 split between very complaint focused investigations
and what we called ex officio or own initiative investigations.
A slightly different legal environment, but that would be something
that we should aspire to and the expression I like to use for
that is complaint-informed investigations rather than complaint
led, so that we can use all of the intelligence from complainants,
from Consumer Direct, from Trading Standards, from our own knowledge
of the economy to determine where we should be prioritising our
investigative resources.
Q39 Sarah McCarthy-Fry: Is there
not a danger though that if you are focusing your resources into
these five priority areas, if you are getting complaints that
do not fit into that criteria, they may not receive the same attention?
Mr Fingleton: At the margin, it
would mean that we focus slightly more on these areas, but we
have six criteria for opening competition investigations so we
look at the strength of evidence, the likely impact on consumers.
These priority areas are not intended to exclude work on other
areas, but more to provide a focus for cross-Office work and a
focus for us to build sectoral expertise within the Office in
these areas.
Mr Collins: And also, to get back
to Mr Curry's point, to make sure that we are well informed about
markets, just by seeing what is happening in markets.
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