Session 2010-11

Competition and Choice in the Banking Sector

Further written evidence submitted by Which?

financial regulation – OFT / Competition commission merger

Following our recent submission to the Committee on financial regulation we set out below our views on the proposed merger of the Office of Fair Trading (OFT) and Competition Commission (CC). Regardless of the institutional framework Which? wants to ensure that individual consumers can access impartial and accurate advice, that systematic and widespread infringements of consumer law are tackled promptly, and that competition enforcement addresses abuses in national and local markets.

At present few of the details of the proposed merger or allocation of the bodies’ relevant powers are known. Which? considers that any changes must:

Preserve the vital consumer protection functions currently undertaken by the OFT. The OFT is able to tackle very large businesses on a nationwide basis and co-ordinate with agencies in the EU or wider to tackle firms based in other jurisdictions. Any successor body must have the capacity and capabilities to offer joined-up enforcement against any firm affecting UK consumers.

Ensure competition issues are addressed comprehensively. Market failures, rooted in weak competition, can only be addressed effectively if remedies are comprehensive, both affecting firms and improving the experience of consumers. A pure competition agency should continue to draw on the lessons learned from consumer enforcement and apply suitable remedies that affect the supply and demand side of markets. In this respect, the market investigation reference (MIR) powers of the CC, which are unique to the UK, give us an effective and dedicated tool to address market failures through a wide-range of remedies. The MIR powers must not be lost or weakened due to the proposed merger.

The OFT’s work in competition enforcement has been scrutinised by the National Audit Office in recent years.

The NAO made a number of recommendations to address its concerns. The competition regime has been subject to a number of criticisms, in particular over the speed of investigations and the length of time it takes for issues to reach the Competition Commission under MIR powers. The proposed merger does not appear to directly reflect the NAO’s concerns or recommendations. Which? notes that the effectiveness of the competition regime more generally would required a wider set of reforms than merely re-structuring two of the UK’s enforcement bodies, for example, by consideration of the role of sectoral regulators and the burden and standard of proof developed through the Competition Appeal Tribunal’s (CAT) judgements.

Preserving the vital consumer protection functions of the OFT

The OFT has a number of duties that are not currently part of the CC’s role:

Consumer credit licensing and enforcement of some rules under money laundering regulations

Enforcement of consumer protection legislation, usually on a national basis in co-operation with Trading Standard Services (TSS)

Reviewing and granting OFT Approved Codes status to trade bodies’ complaint handling schemes

Providing information and advice to business and consumers on consumer protection issues, for example scams

Which? is very concerned that any successor to the OFT has the ability and resources to take national enforcement action and, where necessary, liaise internationally. Which? does not consider that current ‘home region’ basis of the Trading Standard Service is sufficient to tackle national issues. National enforcement actions may arise against very large and well-resourced firms that would be beyond the resources of any single Trading Standards department to deal with.

The clearest example of a national action is that of the bank charges case, where the OFT took a test case under the Unfair Terms of Consumer Contracts Regulations (1999) on the fairness of unauthorised overdraft charges. Ultimately, the OFT lost this case. However, this was a significant action necessary to clarify the law and taken against a very powerful industry at considerable risk to the OFT that. We are concerned that this type of case may not be taken up in the future due to a lack of resources, skills or experience in a ‘local’ trading standards office.

Other functions of the OFT may be transferred or broken up. Which? has previously raised concerns with the split of consumer credit regulation between the OFT and the FSA. We consider that only one regulator should have full oversight of consumer credit, regardless of which types of businesses supply the credit (from banks to car finance to debt collectors). It is clear that to date the OFT has had insufficient resources, with some 100,000 licensees, to properly enforce obligations under the Consumer Credit Act. Whatever body takes over these functions a review of financing for enforcement is necessary and should include a review of the cost of consumer credit licences that are very low compared to equivalent fees levied by the FSA.

The Government should be clear over who will hold responsibility for specific actions. In the meantime, Which? is in discussions with the department for Business, Innovation and Skills (BIS) about how we can increase our role to support all consumers whilst remaining independent of government funding.

Ensuring competition issues are addressed comprehensively

Which? is concerned that competition enforcement remains effective and that it is able to respond to concerns in national and local markets. At present the OFT and CC have different but complementary functions, these are summarised in annex 1 below.

We have outlined specific concerns in our submission of 6 September to the Committee with the role of competition within the current regulatory regime applying to financial services.

These focus on the absence of a clear competition mandate for financial services and the split in responsibilities between the OFT and FSA, which weakens effective enforcement. The merger itself would not appear to address these issues. Which? believes that the most appropriate way to address these issues would be through our proposals to give the Consumer Protection and Markets Authority (CPMA) a primary duty to promote effective competition and for it to have concurrent competition powers.

As noted above there have been a number of criticisms of the competition regime. The proposed merger may help or hinder these outcomes but do not appear directly targeted at resolving these concerns. For example, the speed of investigations or the types of investigations that the merged body undertakes will be determined by its own process to select cases, existing competition law, the standard of proof and way in which the competition appeal tribunal interpret these requirements.

We consider that there are some features of the current regime that should be preserved or strengthened:

The MIR powers are unique to the UK, allowing a comprehensive, time-limited review of an issue with powers to implement significant reform. These powers should remain but to date have been under-used. However, the merged body must be transparent when it considers using market investigation powers and provide clear reasoning for its decision of whether or not to undertake a market investigation. There is a risk that the current visibility of decision making that arises due to two separate bodies is lost.

Some critics of the competition regime have suggested that market studies (undertaken by the OFT) and investigation references (undertaken by the CC) have strayed too far into consumer protection issues, when they should only be focussed on competition issues. Which? considers this a fallacious argument. Market failures may require a wide range of remedies that affect both the supply side (e.g. structural reform of firms) and demand side (e.g. the process by which goods are sold). A merged body should continue to draw on the lessons learned from consumer enforcement where necessary to ensure its remedies are comprehensive.

The CC operates on the basis of advice from a reporting panel of members. These are drawn from a wide variety of backgrounds and offer the CC insights and challenges to improve the quality of its decision making. The benefit of this structure should be preserved for specific market investigations, where the unique circumstances of each case benefit from the experience of panel members.

There remain a number of powers for which clarity is required of how these will be dealt with in the future. At present, the OFT is the primary recipient of super-complaints, Which? expects that the merged body will adopt this responsibility. The Competition Commission acts as an appeal body for sectoral regulators’ decisions on price controls, which the CAT may refer to the CC for final determination in the event of an appeal. The Government should be clear on what will happen to these functions within a merged competition body. Which? notes that certain sectoral regulators, including Ofgem and Ofwat, are under review by their relevant departments. These may consider the pros and cons of similar reform in these sectors.

Annex 1 - Existing competition duties and functions of the OFT and CC

Activity / power

OFT’s role

CC’s role

Competition Act investigations and enforcement, including exercise of European competition rules.

OFT is the only enforcement body for competition law (abuses of dominance and anti-competitive agreements), except where certain sectoral regulators (Ofgem, Ofcom etc) may also investigate.

The OFT is granted powers of investigation, to make visits (dawn raids), require information etc.

It may impose remedies (directions) and financial penalties to end an infringement. It may also pursue criminal cases where a cartel has been uncovered.

Exemptions from competition law may apply, which the OFT can in some cases remove (withdrawing the benefit of a block exemption from a specific agreement)

None.

Appeals are referred to the Competition Appeal Tribunal (not the CC).

Mergers

The OFT is responsible for ‘phase I’ scrutiny, deciding which mergers should be referred for a detailed analysis.

The OFT may accept ‘undertakings in lieu’ of a reference to the CC.

The OFT and CC have recently published joint guidance on assessing mergers.

The CC is the referral body for ‘phase II’ detailed merger analysis.

All mergers operate to a strict timetable that is rigidly adhered to.

Market Investigation References

The OFT is the relevant body (alongside sectoral regulators) to make MIR references to the CC

Certain tests must be met before a reference can be made. However, OFT also emphasises that it has discretion in deciding whether to make a reference.

If referred, the CC has a statutory deadline of 24 months to complete an investigation (imposing remedies may take longer). It also has a wide range of powers to gather information and impose remedies to address the restrictions to competition it identifies.

CC reports tend to be authoritative. They benefit from the use of independent ‘commissioners’, which act as critical friends for the officials undertaking the investigation (a feature missing from normal Competition Act investigations).

Market Studies

No formal power or requirements rest on the OFT to undertake market studies.

Instead, they are conducted under the OFT’s general powers and duties of ‘obtaining, compiling and keeping under review information about matters relating to the carrying out of its functions.’

None.

Super-complaints

The OFT is the relevant body to which super-complaints are made.

It has discretion over what actions (if any) may follow a super-complaint.

None, unless an MIR is made.

Accepting or reviewing ‘undertakings in lieu’ or ‘Orders’ made by the CC

The OFT is tasked with reviewing existing Orders made by the CC, or undertakings in lieu, to ensure they are complied with.

It also advising on whether they should remain, be varied or revoked and may refer the issue back to the Competition Commission for review.

The CC reviews any Order that the OFT refers to it, and decides on any changes.

Note: in a number of cases, powers of the OFT to refer issues also exist for the secretary of state.

The NAO have published two key reports: Review of the UK’s Competition Landscape (

HYPERLINK "http://www.nao.org.uk/publications/0910/competition_landscape.aspx"

http://www.nao.org.uk/publications/0910/competition_landscape.aspx

), and Progress report on maintaining competition in markets (

HYPERLINK "http://www.nao.org.uk/publications/0809/progress_market_competition.aspx"

http://www.nao.org.uk/publications/0809/progress_market_competition.aspx

See paragraphs 84 – 89 of Which?’s submission into Competition and Banking of 6 September 2010, http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/banking/m20.htm

See paragraph 12 of Which?’s submission into Financial Regulation of 13 October 2010, http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/financialreg/m34.htm

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