Enterprise and Regulatory Reform Bill

Memorandum submitted by The City of London Law Society’s Competition Law Committee (ERR 31)

Summary

1 The City of London Law Society Competition Law Committee broadly supports the proposed legislative reforms in Parts 3 and 4 of the Enterprise and Regulatory Reform Bill, subject a number of reservations (summarised in paragraphs 3 and 4 below).

2 In particular, we are supportive of:

· the new unified competition authority, the CMA, having separate personnel for the different phases of merger and market investigations - clause 18, and Schedule 4 paragraphs 73, 87 and 165

· the decision, following consultation, not to introduce mandatory pre-notification in UK merger control - for which we understand that the tougher interim measures in clause 22 are a reasonable quid pro quo

· the provisions enabling a separation of powers between the investigative and decision-making function of the CMA in "anti-trust" cases (i.e. investigations into alleged anti-competitive agreements or abuses of dominance), in clause 34(4) - which we think will enhance procedural protections, fairness and the perception of fairness

3 We are very concerned that the proposals to amend the cartel offence, taking away the mens rea of "dishonesty", are premature, unfair and potentially chaotic (clause 39).

4 We are also concerned that:

(i) the new powers of the Secretary of State as regards public interest (rather than competition) issues in market investigations risk re-politicising the UK competition regime (clause 27);

(ii) the proposed new time limits in merger control will prolong the competition process in M&A transactions, putting the UK regime on a worse footing than international best practice (clause 24(2) and Schedule 8 paragraph 4).

The City of London Law Society Competition Law Committee

5 The City of London Law Society represents approximately 14,000 City lawyers through individual and corporate membership, including some of the largest international law firms in the world.

6 The Society’s Competition Law Committee is made up of solicitors specialising in UK and EU competition law in a number of law firms based in the City of London, who advise and act for UK and international businesses, financial institutions and regulatory and governmental bodies on competition law matters.

7 The authors of this response are:

Robert Bell, Speechly Bircham LLP (Chairman, Competition Law Committee)

Michael Grenfell, Norton Rose LLP (Chairman, Working Group on the Enterprise and Regulatory Reform Bill)

Becket McGrath, Edwards Wildman Palmer LLP

Samantha Mobley, Baker & McKenzie LLP

Margaret Moore, Travers Smith LLP (Deputy Chairman, Competition Law Committee)

8 The Committee took an active part in the Government’s consultation on the competition law reform proposals that underlie Parts 3 and 4 of the Bill, liaising both formally and informally with the Department of Business, Innovation and Skills and with the competition authorities, including by way of a formal written consultation response that was submitted to the Department on 8 June 2011.

The Competition and Markets Authority

9 We understand the Government’s desire to amalgamate the two UK competition authorities into a single authority, the proposed Competition and Markets Authority (CMA) - with a view to creating a unified body that will be a stronger advocate for competition law and policy, both domestically and on the international stage, and also possibly to eliminate a degree of duplication of costs and administration.

10 While we have had no particularly strong views as to whether there should be two authorities, as at present, or a single unified authority, we have been very strongly of the view that, if there is to be a single CMA, this should not be at the expense of effective "checks and balances" to guarantee procedural fairness in merger investigations and market investigations.

· At present, there is an effective separation of powers in merger and market investigations, with the Office of Fair Trading (OFT) conducting an initial "first-phase" examination and, to the extent that the OFT identifies a concern, a separate body, the Competition Commission, conducting the more detailed "second-phase" inquiry.

· This separation of powers ensures that, if there is to be a second phase, the matter is looked at by a "fresh pair of eyes" before any regulatory intervention, thereby reducing the risk (and the perception) of "confirmation bias".

· We were concerned that the amalgamation of the OFT and Competition Commission into a single body would eliminate these safeguards, and in the consultation last year we pressed the Government to retain the "fresh pair of eyes" principle, with a separate group of people in the CMA handling the second phase.

· We therefore very much welcome the proposals for a separate panel within the CMA to conduct the second phase of merger and market investigations, as provided for in the Bill in clause 18, read with Schedule 4, paragraphs 73, 87 and 165.

11 We hope and expect that the panels will be constituted of senior, experienced people from the worlds of business, law and economics, with most having a good understanding of competition principles - as is at present the case with the Competition Commission members who make the second-phase decisions in merger and market investigations.

Mergers

Stronger interim measures - clause 22

12 We recognise the need for stronger interim measures in merger control investigations - i.e. to prevent the parties integrating their businesses and pre-empting the outcome of a competition investigation into the merger. We acknowledge this to be a quid pro quo for the Government’s abandonment of earlier proposals to introduce compulsory merger notification - proposals which would have imposed an unnecessary bureaucratic burden on businesses and an unnecessary cost on competition authorities.

· A reason for the Government initially contemplating a compulsory merger notification system (whereby M&A transactions could not be completed until the competition authorities have examined and cleared the transaction) had been that, otherwise, there is the danger that parties will complete mergers that do have serious anti-competitive effects, and then integrate the merging businesses, all before the authorities have a chance to investigate - so that, if the authorities eventually decide that the transaction should not be allowed (being seriously anti-competitive), the businesses are by then so fully integrated that it is difficult to "unscramble" the merger.

· Since there will not now be compulsory notification, the quid pro quo is that - to solve this "unscrambling" problem - clause 22 of the Bill proposes tougher "interim measures", allowing the CMA to stop, or if necessary reverse, action (such as business integration) which is "pre-emptive", i.e. which might prejudice the outcome of a CMA investigation into whether or not the transaction is anti-competitive.

13 The proposals in clause 22 are consistent with our recommendation, during the Government’s consultation last year, that the suspension of transactions pending investigation (to avoid "pre-emptive action") should be at the CMA’s discretion, rather than automatic in every case, and we welcome this.

14 We have no objection to the measures in clause 22 to extend the power to suspend to anticipated, as well as completed, merger transactions (clause 22(3)), and to allow measures to undo integration steps (clause 22(5)).

15 We have just two suggestions:

(i) In clause 22(5), the proposed section 72(3B)(b) widens the scope of the measures that the CMA may take to prevent pre-emptive action, including the power to impose "such other obligations, prohibitions or restrictions as it considers appropriate for that purpose". This seems very wide indeed, and we would urge that the word "appropriate" be replaced by "necessary" so that the powers are only to impose obligations etc necessary to undo or mitigate pre-emptive action.

(ii) In line with our submission to the Government, while we accept that the CMA should have discretion, we think it important that there be some guidance to the public on how the discretion is to be exercised. We therefore recommend that a provision be inserted, possibly in clause 22 of the Bill, requiring the CMA to issue guidelines on how it will exercise the powers in section 72(2) and (3B).

Time limits for "first-phase" process - clause 24(2)

16 We note that clause 24(2) of the Bill, read with Schedule 8 paragraphs 4 and 9, has the effect of extending the period for "first-phase" consideration of mergers (i.e. the period before the authority to decide whether to clear the transaction, or launch a full "second-phase" investigation lasting several months):

· Currently, under the UK merger regime, the submission of a prescribed "merger notice" results in a first-phase decision within just 20 working days, extendable to 30 working days. As an alternative to a "merger notice", the parties can choose to notify with a submission in a form of their own choosing, in which case there is a non-binding target for a decision within 40 working days.

· Under the proposal, there would be a period of 40 working days, beginning not on the parties submitting of the merger notice, but on the CMA notifying the parties that it is satisfied that the merger notice contains sufficient information. (Conditional clearance would extends the period to at least 50 working days, by virtue of the proposed section 73A(3) and (4) in Schedule 8 paragraph 7.)

17 As a general point, this is clearly a retrograde step - extending the period in which parties have to wait before they know they have clearance. It also puts the UK out of line with international norms for the period from notification to a "first-phase" decision:

· under the EU Merger Regulation, it is 25 working days (extendable to 35 working days for conditional clearance)

· in Germany, it is one month, i.e. less than half of the proposed UK period

· in France, it is 25 working days (extendable to 40 working days for conditional clearance).

We would propose 30 working days for the UK, moving the UK nearer to international norms.

18 Subject to this overriding point, we have a couple of specific points on the time limit, as follows.

19 First, as the Bill is currently drafted, the time period (40 working days, extendable in the case of conditional clearance) would start to run only from the time when the CMA gave notice the parties that their merger notification was adequate (Schedule 8, paragraph 8(4)). Absurdly, there is no time limit on the CMA for giving such notice to the parties, and it is quite possible that the CMA could take many days (or even longer) from the parties’ original notification to give the parties this notice. The effect of this is, literally, that there is no guaranteed time limit for the parties from their giving a complete notification to the CMA’s first-phase decision; it is indefinite. This urgently needs to be remedied. We would propose a mechanism under which the CMA must respond within a certain number of days to state whether the parties’ merger notification (or amended merger notification) is adequate - i.e. "meets the requirements of subsection (2)" of s96 of the Enterprise Act - and that, if the CMA has not objected within that period, the parties’ merger notice is deemed to be adequate and the 40 working day time period begins from that date.

20 Our second concern is that the CMA should not get into the habit (which, unfortunately, has recently been the European Commission’s practice) of requiring draft merger notifications, which it considers for many weeks, before asking for the merger notification to be formally submitted, the event which triggers the statutory time period. That practice has the effect, in reality, of very considerably prolonging the time to the first-phase decision. To address this, we would suggest a provision empowering the Secretary of State to give directions to the CMA on the procedure for handling merger notices, and the Government should make clear that such a "pre-notification" process, prolonging the first-phase examination, will not be acceptable.

Market investigations

21 Under the Enterprise Act 2002, political considerations were taken out of competition policy, so that the sole criterion for decisions in merger and market investigations became the effect on competition in UK markets. There were, and are, only very limited exceptions to this: certain public interest grounds within the merger regime; and also the ability to intervene on public interest grounds (currently only national security grounds) under the market regime (sections 139 and 153). The latter power has not, however, been used to date.

22 The Bill (clause 27) sets out new procedures for the serving of intervention notices to allow public interest issues to be considered in market investigations. It was envisaged in the Government’s March 2011 consultation paper that potentially greater use would be made of these existing powers. It is also possible that new public interest criteria for intervention under the existing section 153(3) of the Enterprise Act could be added to allow the Secretary of State to ask the CMA to consider and report on a number of public interest issues, as well as competition issues, in the context of a market investigation.

23 We are, however, concerned about the Secretary of State being given the power to issue an intervention notice in market investigations on wider public interests grounds . We take the view that there are substantial risks in mandating the CMA to look at public interest issues even where they are closely allied to a market investigation.

· Issues of public interest in markets are for Ministers and Parliament, not for competition authorities. We think the proposal is a slippery slope which could result in public interest issues dominating future market investigations which should be primarily competition-based.

· The CMA does not have the required expertise or experience to opine on public interest issues. Adding appropriately qualified independent individuals to the market investigation panel would further increase costs and put pressure on scarce financial resources.

· It would compromise the focus of the CMA as a centre of competition excellence.

· It seems to us wrong that within the context of a competition law based system unelected officials will be mandated to opine/report on what is essentially public policy, indeed political, issues. This is so even if the panel members are empowered only to make recommendations with the Minister taking the final decision. Therefore we would suggest that these powers, if they are extended, should be limited to the areas such as media plurality and financial stability in addition to national security which is already been included in section 151 - this is similar to the current merger control regime. Accordingly we would recommend that section 153(3) of the Enterprise Act 2002 should be amended as follows:

"(3) The Secretary of State may by order modify this section for the purpose of specifying media plurality or financial stability to be specified considerations in this section".

24 However, if these new powers for the Secretary of State are to stay in the Bill, we think it is important that the members of the CMA panel considering competition matters should do so independently of those considering the public interest issues. The Bill contemplates in clause 27(7) and (11) that the Secretary of State "may" appoint a public interest expert to opine on full public interest issues. We think that, if the Secretary of State does issue an intervention notice, any public interest issues must be considered by public interest experts alone, and that they should report separately to the Secretary of State on public interest issues. Therefore we would suggest that, in clause 27(8) of the Bill, section 140A(7) should read

"(7) Where the Secretary of State makes a full PI reference under subsection (5) the Secretary of State must appoint a public interest expert under section 141B"

and that, in clause 27(9), section 141B(2) should be amended as follows:

"(2) The Secretary of State shall appoint one or more persons to report to the Secretary of State on the questions mentioned in subsections (4) and (5) of section 141A and those persons so appointed shall report directly to the Secretary of State on public interest issues independently of the CMA panel report on any relevant competition considerations."

Anti-trust (the prohibitions on anti-competitive agreements and abuse of dominance)

25 Clause 34(4) provides that the CMA rules may provide for the exercise of the CMA’s powers under Part 1 of the Competition Act 1998 (i.e. in respect of "anti-trust", being the prohibitions on anti-competitive agreements and abuses of dominance) by different groups within the CMA, including by members of the CMA panel.

26 We read this, consistently with the Government’s March 2012 policy document [1] , as providing for the separation of investigation and decision-making within the CMA, so as to reduce the risk of confirmation bias.

27 The point here is that, currently, the OFT in anti-trust investigations is "prosecutor, investigator, judge and jury", and this has led to concerns about confirmation bias, concerns which have apparently been realised in a number of cases, such as most recently that on tobacco pricing [2] . Because of these concerns, we very strongly advocated such a separation of powers within the CMA for anti-trust matters - with the first phase being undertaken by an investigatory team, and the second phase by a panel of senior decision-makers (not unlike the current panel of Competition Commission members, and the proposed CMA groups under the Bill, which make the second-phase decisions in merger and market investigations).

28 Accordingly, we welcome clause 34(4) of the Bill.

29 However, clause 34(4) is only an enabling power as regards the CMA’s rules. It does not actually prescribe the separation of powers which is needed to reduce the risk of confirmation bias. We therefore urge that this part of the Bill be amended to provide explicitly for a panel within the CMA to make decisions on anti-trust cases, separately from the CMA investigatory team on those cases; the relevant provisions of Schedule 4 as regards CMA panels in market and merger investigations, provide a template for this.

Cartel offence

30 Our greatest concern about the Bill is the proposal, in clause 39, to remove the "dishonesty" criterion in the cartel offence with the effect that individuals can be personally fined and/or imprisoned for involvement in certain anti-competitive agreements, whether or not their involvement was with a dishonest mind (indeed, under the proposal, no mental state, or mens rea, is to be specified for this criminal offence).

31 In our submissions to the Government we opposed this proposal. We pointed out that, in any event, it is premature, since only two prosecutions had been brought since the cartel offence came into force nine years ago, and in neither case is there evidence that the "dishonesty" requirement prevented successful prosecution.

32 We regard it as extraordinary that such serious penalties should attach to business people in the course of doing their jobs, without any requirement of a dishonest (or indeed any other) material intent. In addition the proposals will lead to a substantial increase in red tape and costs for businesses.

33 It is asserted, in defence of this proposal, that prosecutions under the cartel offence have been inhibited by the existence of the "dishonesty" criterion. But the prosecution which failed, of four former British Airways executives accused of illegal price-fixing, collapsed in the course of the trial at Southwark Crown Court because of procedural irregularities by the OFT (which was bringing the prosecution) - namely, its failure to disclose key documents to the defence. If "dishonesty" had been such an impediment to prosecution as is claimed, the case would not have gone so far as getting to court.

34 As it stands, even with the "relevant information" defence, perfectly legitimate activities could incur these severe criminal penalties - for example, common and beneficial risk-sharing arrangements such as syndicated lending, co-insurance and re-insurance and co-underwriting.

35 Moreover, unlike dishonesty, the provision to customers of relevant information is not in the control of the people who would be prosecuted - it is a matter for the companies, not the individuals.

36 We have heard apologists for this proposal arguing that it is unlikely that such innocuous cases would be prosecuted in practice, because prosecutors would be sensible in exercising their discretion. The Bill Committee will appreciate how unsatisfactory it is to expect people to pin their hopes on that, and as legal advisers we would feel obliged to point out to clients the severe personal risks they would be taking in entering perfectly innocuous agreements. Moreover, even if such innocuous cases were not prosecuted, the relevant agreements could be rendered void or unenforceable by the criminalisation (so leading to inability to recover loans, enforce contracts of insurance etc). We cannot believe that this is an outcome that Parliament seeks.

37 We therefore urge the Bill Committee either to restore the "dishonesty" criterion (by excluding clause 39 from the legislation).

38 If, however, the Government is determined to remove the ''dishonesty'' criterion, we urge the Bill Committee to propose an amendment with a suitable alternative mens rea that removes the supposed problems with the "dishonesty" criterion but nonetheless avoids the fresh problems (described above) that flow from the outright abolition of the "dishonesty" criterion. An alternative mens rea which seems to us a sensible compromise would be:

''intention to subvert the competitive process''

It seems to us that this would sufficiently limit the scope of the offence in order to capture individuals who truly deserve criminal punishment, focusing on the mental state of the individual at the time of entering into the agreement that bears a real relation to the mischief that is sought to be avoided.

July 2012