House of Commons - Draft Consumer Rights Bill - Business, Innovation and Skills Committee

Draft Consumer Rights Bill - Business, Innovation and Skills Committee Contents

5 Part 3 of the draft Bill

Enforcers' Investigatory Powers

205. Currently the powers of enforcement bodies are set out in around 60 pieces of legislation.[289] The result is confusion for both enforcers and businesses and uncertainty over enforcers' powers.[290] In addition, under current legislation it is not always clear what actions enforcers need to take to be authorised to work across local authority boundaries.[291] At present, responsibilities for enforcement are split between Local Authority Trading Standards Services and the Office of Fair Trading. The Government's impact assessment estimates that local authority funding for Trading Standards will be cut by 20% to 30% in total between 2010 and 2015.[292]

206. In 2011, the Government consulted on proposals to transfer almost all central government funding for consumer information, advice, advocacy and education to Citizens Advice.[293] It further consulted on changes to Trading Standards to "facilitate a more integrated approach to national and cross-boundary threats".[294] The proposals also set out the Government's plan to create the Competition and Markets Authority (CMA), to merge the competition functions of the OFT and the Competition Commission.[295]

207. In March 2012, the Government consulted on further changes to consolidate and modernise consumer law enforcement powers.[296] The first part of the proposals included the creation of a "generic set" of enforcement powers, with the addition of some new "safeguards" in relation to the exercise of investigatory powers of enforcers.[297] As well as consolidation and modernisation of the law, a key objective of the proposed reforms is to reduce regulatory burdens for business.[298] In July 2011, the Government's deregulatory initiative 'Red Tape Challenge' identified the investigatory powers of consumer law enforcers as an area which could be "radically simplified".[299]

208. The generic set of powers in the draft Bill is based on powers currently found in the Consumer Protection from Unfair Trading Regulations 2008, which the Government says are "relatively modern" and "reflect current business practices".[300] Responses to the Government's consultation showed that the majority of consumer representatives who responded supported this approach.[301]

209. The key safeguards that the draft Bill would introduce include the requirement for an enforcer to give written notice to the occupier at least two working days before exercising the power to enter premises without warrant.[302] The Government said that:

Exercising a power of entry can impose significant disruption on businesses; staff need to be available and daily business operations can be disrupted. In order to reduce the burden on businesses, the requirement to give notice will apply where an officer requires access to a back office of business premises, manufacturing or storage facilities which are not open to the public.[303]

210. A majority of businesses and business representatives supported the requirement for notice, on the basis that it was proportionate and would reduce regulatory burdens and costs for business.[304] The evidence was not unanimous however, and several submissions said that the requirement would weaken protection for responsible businesses.[305] In addition, the Alliance for Intellectual Property said that the notice requirement could result in a business removing infringing items from its premises and would significantly reduce protection for consumers from fake goods, which may also have a damaging effect on businesses.[306]

211. Responses to the consultation highlighted that consumer representatives and enforcers were concerned that the requirement to give notice would hamper enforcers' powers to tackle rogue traders and could encourage obstruction of enforcement officers.[307] The Government's impact assessment estimated that the falling budget for Trading Standards would result in Trading Standards "relying more on an intelligence led approach" and "reducing the number of routine inspections".[308] Evidence submitted to our inquiry agreed that the requirement to give notice would lead to fewer routine inspections.[309] The key difference in opinion was whether this was a desirable policy objective.[310] TSI said:

There seems to be an unhealthy suggestion across some commentators that, just because officers have powers, they use them irresponsibly or disproportionately [...] whilst we would be the first to admit that anything that helps officers become more accountable for their actions is a good thing, I would suggest that a Consumer Rights Bill perhaps is not the right place for this to happen: a sledgehammer to crack a nut.[311]

212. The exemptions to the requirement to give reasonable notice before exercising powers of entry are set out in paragraph 20 (5) Schedule 5 of the draft Bill, and include where the occupier has waived the requirement to give notice or where the officer has reasonable cause to believe that there is imminent risk to public health or safety.[312] Submissions to this inquiry focused on the following proposed exemption:

[where] the officer reasonably considers that to give notice in accordance with this paragraph would defeat the purpose of the entry, in particular because the officer has reasonable cause to suspect that evidence may be lost or destroyed if notice is given.[313]

213. TSI said that this exemption in particular gave cause for concern:

The problem with that particular paragraph (c) is that it brings a double test to the scenario. We have to provide two things: first of all, the officer has to make the judgment as to whether this is likely to defeat the purpose of the object; and secondly, he has to make out reasonable cause that evidence may be lost or destroyed.[314]

214. The Minister disagreed and clarified that the exemption was a "single test", with "an example given in terms of whether there is cause for suspicion".[315] TSI provided two examples of recent legislation (the Cosmetic Products Enforcement Regulations 2013 and the Construction Products Regulation 2011) where the corresponding exemption in relation to powers of entry is drafted without the example of cause for suspicion.[316] When asked whether the generic set of powers achieves the right balance, some businesses and business representatives expressed concern that powers were being diluted with the addition of the new safeguards which undermines law-abiding and compliant businesses, giving an advantage to non-compliant businesses.[317]

215. We conclude that the safeguards in relation to powers of entry are more restrictive in the draft Bill than corresponding terms in recent legislation, and in the context of significant cuts to Trading Standards this risks placing an undue burden on enforcers which could decrease protection for consumers and compliant businesses. We believe that providing the example of reasonable suspicion on the face of the Bill qualifies the test for the exemption for notice, which introduces unnecessary and undesirable uncertainty.

216. We recommend that the relevant exemption to the requirement to give written notice before exercising a power of entry without warrant should be amended to "the officer reasonably considers that to give notice in accordance with this paragraph would defeat the purpose of the entry".

Power to require the production of information

217. Many enforcers of consumer law have both criminal and civil enforcement functions. The draft Bill would combine their criminal and civil investigatory powers. The draft Bill retains the existing power of enforcers to require production of information specified in a written notice.[318] A new provision would be included that provides that such a notice "does not require a person to provide any information if to do so might incriminate that person [...] of an offence".[319] The Government's 2012 consultation said that the Consumer Protection from Unfair Practices Regulations included a provision ensuring the privilege against self-incrimination in relation to answering any question or giving any information, "which is found in most consumer legislation".[320] The OFT said:

The privilege against self-incrimination only applies if a person might incriminate themselves in criminal proceedings. We are concerned that the safeguards against self incrimination in the Bill will also extend this privilege to civil remedies. This will limit enforcers' ability to obtain evidence in civil investigations through written requests for information, which will therefore result in more site visits. The outcome will be significantly increased investigation costs for enforcers and increased disruption for businesses, and a possible reduction in the use of civil enforcement powers.[321]

218. Given the difference in views between the OFT and the Government, we look to the Government to clarify the legal position. In particular the Government must demonstrate that the proposed provision against self-incrimination in relation to civil proceedings is lawful. Given the potential burdens on enforcers as described by the OFT, the Government must provide further detail on the provision against self-incrimination in consumer law.

219. The draft Bill would downgrade the offence of obstruction of an enforcement officer from a level 5 (maximum £5,000) to a level 3 (maximum £1,000) offence.[322] The Government said that the intention is to align the maximum penalties for obstruction of other officials, for instance HMRC officers, immigration officers or police officers. The Government further argued that a 2012 survey showed that "less than one" prosecution for obstruction of an officer was brought by Trading Standards each year.[323] However, the TSI asserted that the categorisation of the offence had a deterrent effect which would be lost. It was also concerned that unscrupulous businesses might be more likely to take "a commercial decision" to obstruct rather than cooperate with an investigation.[324]

220. In 2012 the Government consulted on whether the offence should be aligned at a level 3, 4 or 5 offence.[325] Consumer representatives, enforcers and public bodies largely thought that the offence should be a level 5 offence.[326] Business representatives thought it should be level 4 offence.[327]

221. We are not persuaded that the Government has adequate evidence that the downgrading of the offence of obstructing an officer is in the interests of consumers or businesses. The Government has stated that there is approximately one such offence per annum. Therefore, this cannot be said to impose a burden on businesses, while it does offer consumer protection. Downgrading the offence would potentially reduce the deterrent effect that the current maximum fine could reasonably be expected to produce.

222. We therefore recommend the offence of obstruction of an officer in the generic set of powers proposed under the draft Bill is maintained at its current level.

ENABLING TRADING STANDARDS SERVICES TO OPERATE ACROSS LOCAL AUTHORITY BOUNDARIES

223. The second part of the proposals is aimed at removing legislative barriers to allow Trading Standards to operate across local authority boundaries "efficiently and effectively".[328] In June 2011, it was estimated that 70% of consumer detriment was likely to arise out of activities which cross local authority boundaries and that the cost of consumer detriment at regional and national level, where offences occur across local authority boundaries, was in excess of £4.8 billion.[329]

224. The Government's consultation on this issue received widespread support from businesses, business representatives, consumer representatives and local authorities, regulators and representative bodies.[330] The evidence submitted to our inquiry on this issue was in favour of the proposals.[331]

Enhanced consumer measures

225. Currently only limited measures are available to public enforcers to tackle breaches of consumer law.[332] The main formal sanction is criminal prosecution of the trader by the enforcer. That benefits consumers generally, because it prevents the spread of instances of illegal trading. However, it rarely provides a direct remedy to victims of the breach nor secures any guarantee that the trader will not reoffend.[333]

226. For minor or inadvertent consumer law infringements that do not warrant criminal prosecution, enforcers can seek injunctive relief against infringements of consumer law.[334] The enforcer must obtain an enforcement order through which a court can order that the infringer cease engaging in the conduct in question. The court can also order that the infringer publish the enforcement order and a corrective statement with a view to eliminating the continued effect of an infringement. Alternatively, an enforcer may accept an undertaking from the person in question that he will not engage in conduct that involves an infringement. This measure still does not give remedies to individual consumers nor does it consistently secure positive action by businesses.[335]

227. The Government's 2012 consultation set out its policy intention to bridge the gap between limited injunctive relief and full prosecution, and to strengthen the enforcement regime to the benefit of consumers by requiring traders to take positive action.[336] Increased business compliance, improved redress for consumers affected by the breach, and more confident consumers who are empowered to exercise greater consumer choice were identified as the key objectives of the proposed reforms.[337]

228. The draft Bill would amend Part 8 of the Enterprise Act 2002 (EA) to allow the courts to attach a range of enhanced consumer measures to enforcement orders and undertakings.[338] These additional powers would be available only where the enforcer is a public body.[339]

^229.The main aim of proposals is to give the civil courts and public enforcers flexibility when dealing with persons who have given undertakings or who are subject to enforcement orders.[340] The draft Bill provides that only just and reasonable enhanced consumer measures can be attached to enforcements orders and undertakings.[341]The draft Bill also sets out the factors the court or enforcer must take into account when deciding appropriate measures. This includes a specific requirement that the measures must be proportionate, taking into account the costs of the measures (to business and consumers) and the benefit to consumers.[342]

230. The enhanced consumer measures must fall into at least one of three specified categories, referred to as the "redress", "compliance" and "choice" categories.[343] Details of the possible measures are not included in the draft Bill which according to the Government is to avoid "taking away flexibility" from the courts and public enforcers.[344] The Explanatory Notes explain that this flexibility is also to allow the party that is subject to the order or undertakings to put forward measures which could be considered by the court or enforcer.[345]

231. Measures in the redress category may only be imposed by courts or enforcers in cases where there has been a loss by consumers as a result of the breach by the person subject to the enforcement order or undertakings.[346] The draft Bill provides that the court or enforcer must be satisfied that the cost to the person subject to the enforcement order or undertakings of complying with the measures is unlikely to exceed the loss suffered by consumers. However, the administrative costs of setting up and running the scheme are excluded from that calculation.[347]

232. The redress measures will allow businesses that have breached consumer law to offer redress to consumers who have suffered as a result of that breach.[348] The Government Response to consultations said that where individual consumers can be identified, such schemes will aim to offer redress directly to those individuals, for instance by "contacting all affected consumers and paying a sum agreed with the enforcer or one that has been mandated by a court".[349] Where it is impossible or disproportionately costly to identify consumers who have suffered detriment as a result of breach, the draft Bill allows for measures which are in the "collective interests" of consumers,[350] which the Government says could take the form of a charitable donation.[351] Where the infringement which has given rise to an enforcement order or undertakings relates to a contract, the draft Bill provides that offering consumers the right to terminate the contract is classified as a redress measure.[352]

233. The second category of measures is aimed at improving business compliance and reducing the likelihood of future breaches or repetition of the conduct to which the enforcement order or undertakings relate.[353] The Government Response to consultations said that measures in this category could be used where redress was impossible or disproportionate, or where it would be unlikely to change future behaviour.[354] As with the redress category, the draft Bill does not include detail of possible measures, but the Explanatory Notes provide that measures in this category "might include":

· Appointing a compliance officer;

· Introducing a complaints handling process; and

· Improving record keeping.[355]

234. Again, the Government's aim is that the infringing business proposes appropriate measures to be considered and agreed by the enforcer.[356] Failing that, the enforcer would seek a requirement through civil courts "to implement measures that improve business compliance or help improve the way the market works".[357]

235. The third and final category of the proposed enhanced measures is "intended to enable consumers to choose more effectively between persons supplying or seeking to supply goods or services".[358] As with the other categories of measures, the draft Bill contains no detail on possible measures but the Government Response to consultations provides that examples of possible measures might be:

Signing up to an established customer review / feedback site; [and/or]

Providing consumers who have an on-going relationship with the business who breached consumer law with the details of other suppliers' products or services to promote switching.[359]

236. The Government Response to consultations states that the Government intends "that the business would propose a scheme which they would agree with the relevant enforcer".[360] Where a business is unwilling to propose an appropriate scheme, the enforcer could seek a requirement through civil courts that the trader offers redress to consumers.[361] Neither the Government Response to consultations nor the Explanatory Notes address in any details the consequences of non compliance with enhanced consumer measures imposed by a court or public enforcer. The Government's impact assessment identified difficulties with enforcement of enhanced consumer measures as a key risk:

There are concerns over the difficulty in enforcing civil sanctions, and in the Lincoln Law School study, enforcers and regulators indicated that the payment of civil penalties and compliance with civil court judgements is relatively low and that little attention is paid to ensuring that businesses convicted at court and required to provide redress actually do so.[362]

237. Evidence received from Trading Standards Services and consumer groups questioned whether public enforcers would have the requisite resources to agree or draw up appropriate measures with infringing traders.[363] The OFT told us of its concern that the cost benefit analyses that enforcers and courts would be required to undertake would mean that in practice enforcers would be likely to avoid using the enhanced consumer measures.[364] In supplementary evidence to us the Government said that the burden is placed on the enforcer rather than the infringing trader to assess the loss suffered by consumers because it would be disproportionate for small businesses.[365]

238. In the light of these views, we asked the Government whether the powers should be extended to public enforcers.[366] The Minister said that it was:

worth noting that the powers that exist for some organisations have not been particularly used, so it is definitely worth looking at evidence of whether that would be the case in the future. What we have is a good landscape of additional confidence for consumers to be able to resolve disputes.[367]

239. Consumer organisations expressed concern that the draft Bill does not create sufficient incentives to encourage compliance by infringing traders with enhanced consumer measures. Which? said:

We are concerned that the threat of court action is not always sufficient to encourage traders to engage meaningfully in negotiations with enforcers over remedies [...] this risk is likely to be especially acute as enforcement budgets are streamlined.[368]

240. We heard evidence from TSI and the Association of Chief Trading Standards Officers that currently about 90% of enforcement action is through criminal prosecutions.[369] One Trading Standards Officer said that "some departments [of Trading Standards Services] have a general policy of not even bothering to think about doing civil injunctions".[370] DBIS carried out a survey of Local Authority Trading Standards Services in 2011/12 to determine how many criminal cases could have been brought as civil actions if the powers on enhanced consumer measured were available. At the time, the survey found that 476 criminal cases could have been brought as civil actions.[371] The Government's impact assessment said:

We think that this is a high estimate as LATSS were not aware at the time of the survey that the legislation will state that the cost of putting a redress scheme in place, including the redress paid, should not exceed the level of detriment caused. As a result, we do not think that all of these 476 cases would be suitable for the new powers as in some of those instances the cost of putting positive actions in place will cost more than the detriment caused. In addition, not all the companies will be in a financial position to put remedies in place.[372]

241. The revised figure was 275 cases.[373] The Government said this figure also took into account the proposed new civil rights of audience for Trading Standards Officers, which are being taken forward with regulators but do not form part of the draft Bill's proposals.[374] The Government accepted that "many cases involving rogue traders who will never cooperate are [...] more likely to be suitable for criminal prosecution".[375]

242. Some business representatives expressed concerns that the enhanced consumer measures could result in disproportionate costs to businesses. The FSB said that it was "extremely concerned" that the proposals would have an adverse effect on small businesses and argued for them to be removed from the Bill. The FSB argued that the safeguards in respect of the requirement for costs of measures to business to be proportionate did not go far enough.[376] The BRC was more supportive of the proposals but identified the risk that enforcers would be incentivised to prosecute more cases to obtain redress for consumers.[377]

243. The Government's impact assessment estimated the costs to business of these reforms on the basis that "only non-compliant businesses will incur familiarisation costs". This was on the basis of the Government's assumption that businesses that are "confident" that they comply with consumer law "would not need to be concerned" with the proposed measures.[378] We are not persuaded that this is a realistic approach.

244. The Government's argument that the draft Bill is silent on the detail to encourage flexibility in the measures that infringing traders may propose[379] did not convince CBI and the FSB who called for additional guidance.[380] The Government's explanation of how a scheme might be set up did not appear to offer clarity to business or consumer representatives:

The remedies themselves would be based around mechanistic schemes to deliver particular outcomes rather than the outcomes themselves. For example, if the court was required to make judgement on outcomes or effectiveness based on harm suffered, there would potentially be a huge evidence burden. A court could, for example, give a view on the reasonableness of an offer of redress to be made under a scheme but would not mandate a particular redress amount for each individual that had suffered loss. Performance would therefore be based on the technical requirements of the individual schemes.[381]

245. The enhanced consumer measures, which would be available throughout the UK, have been proposed by the Government in response to an identified gap in the remedies available to consumers who have suffered as a result of infringement of consumer law. We heard convincing evidence to suggest that the enhanced consumer measures may not address consumer detriment because in practice they are unlikely to be widely used by public enforcers.

246. We recommend that the enhanced consumer measures are extended to private enforcers, subject to appropriate safeguards, to increase the likelihood of their use, which in turn would benefit consumers and compliant businesses.

Private actions in competition law

247. Research analysing the impact of the EU single market programme has found that increased competition resulted in reduced firm profitability, as prices fell, while increasing levels of innovation. That research found that the higher levels of innovation led, in turn, to increased productivity growth.[382] It is well established that the effects of anti-competitive behaviour are damaging. An OFT report on the effects of cartel behaviour suggested that such behaviour resulted in higher prices of 20-35% for cartels as a whole, and 28-54% for cartels within the EU.[383]

248. In the UK, anti-competitive behaviour is currently addressed largely through the work of the public authorities rather than by private individuals. The OFT's Positive Impact report for the financial year 2011/12 estimated that the benefits of its competition law enforcement work resulted in direct savings for consumers of around £151 million.[384]

249. Competition authorities tend to focus resources on larger, high impact cases which means that small businesses may be less likely to receive redress if they lose out as a result of anti-competitive behaviour.[385] The Government has found that "challenging anti-competitive behaviour is beyond the resources of individual consumers and many businesses, particularly SMEs".[386]

250. The OFT addresses infringement through fines rather than through awarding damages, meaning that even where the anti-competitive behaviour is tackled, the injured party or parties will not be able to gain redress without bringing a private action.[387] In private actions, one or more parties (such as an individual, a business or a charity) take another party to court over an alleged infringement of competition law. The remedies may include damages, an injunction, or making a contract void. Currently the process of bringing a private action is costly and complex. Use of private actions is further restricted in practice since although competition cases may involve very large sums, many businesses and consumers may have suffered loss as a result of the breach and as a result each of those can only claim a small amount.[388]

251. The practical realities of bringing a private action under the current regime mean that most anti-competitive behaviour does not lead to private actions seeking redress. In 2005-08 there were only 27 cases resulting in judgements, and most OFT findings of infringements were not followed by private actions.[389] The Government's 2012 consultation on reforming private actions in competition law indicated that numbers of private actions had increased slightly since 2008, but also found that there continued to be very few cases involving SMEs or consumers.[390] The Government's 2013 impact assessment noted that the competition pro-bono scheme[391] receives about 100 enquiries a year concerning anti-competitive behaviour, which suggests "that there is a broader need for resolution and redress than the cases currently addressed by the OFT".[392]

252. In January 2013 the Government published its response to its 2012 consultation on reform of private actions in competition law. The Government proposed three key measures which are designed "to make it easier for consumers and businesses to gain access to redress where there has been an infringement of competition law",[393] and "to tackle anti-competitive behaviour".[394]

PROPOSAL 1: TO WIDEN THE TYPES OF THE COMPETITION CASES THAT THE COMPETITION APPEAL TRIBUNAL ("CAT") HEARS AND TO STREAMLINE THE PROCEDURE FOR BRINGING A PRIVATE ACTION BEFORE THE CAT

Jurisdiction of the Tribunal and the transfer of claims

253. The CAT is a specialist tribunal which can hear cases involving competition law. Currently the CAT is restricted to hearing follow-on cases, which can only be brought after an infringement has been found by a relevant authority such as the Competition and Markets Authority (CMA), European Commission or certain sectoral regulators with competition powers (such as Ofcom or the Civil Aviation Authority).[395] In such a case, the claimant must show how the claim relates to their own case.[396] A 2009 Court of Appeal decision[397] found that the scope for the CAT to go beyond the findings of the initial infringement decision is extremely limited. The Government said that this is thought to have contributed to the lack of effectiveness of the current regime.[398] The CAT's current role, therefore, is to determine issues of causation and quantum of loss in the context of a follow-on action.[399]

254. The proposals would allow cases to be brought in the CAT directly, rather than having to be transferred from the High Court. This is achieved in the draft Bill by enabling the CAT to hear a stand-alone claim as well as a follow on claim.[400] A stand-alone claim can be brought even where an infringement has not been found by a competition authority. The claimant is therefore required to demonstrate an infringement of competition law, and if this is established, to show how it relates to their case.[401]

255. Currently, businesses or consumers who wish to bring stand-alone cases must bring their case in the High Court of England and Wales (or the Court of Session or the Sheriff Court in Scotland or the High Court of Northern Ireland).[402] The vast majority of responses to the Government's consultation supported this proposal, on the basis that allowing the CAT to hear actions based on alleged and not just established infringements of competition law would help to remove obstacles to obtaining redress and tackle anti-competitive behaviour.[403]

256. The draft Bill would enable the courts to transfer competition law cases to the CAT and vice versa, whether stand-alone or follow-on. Respondents who commented on this proposal were largely in favour.[404]

Fast-track cases (Paragraph 19(3) Schedule 7 of the draft Bill/proposed new section 14(1A) Enterprise Act 2002

257. The draft Bill would also establish a fast-track procedure for some cases in the CAT.[405] The Explanatory Notes state that this reform is aimed at dealing more efficiently with "simpler claims brought by SMEs".[406] In its evidence to us, the CAT said that it "endorses the principle" that SMEs should have swift access to appropriate remedies, and agreed that these proposals would advance that objective. However, the CAT said that it could be difficult to identify "simple" cases since the issues raised by cases involving SMEs were not any more likely to be "simple" than those in cases involving larger parties. It argued for sufficient flexibility to allow application of the fast track procedure in appropriate circumstances only.[407]

258. The draft Bill would provide that for fast track claims, the Tribunal's panel would consist of a chairman only.[408] The CAT said that there was "no reason to believe" that this would be appropriate for all fast track cases and that since such cases would necessitate swift resolution, there was an argument that the expertise of the CAT's cross-disciplinary panel (usually made up of a senior judge or lawyer and two other members who are experts in competition law or related disciplines) would be needed.[409] Herbert Smith Freehills raised the same concern, and said that while the Tribunal should be entitled to proceed with a single member, it should not be obliged to do so.[410]

259. We conclude that while in relation to some fast track cases it may be appropriate for the Competition Appeal Tribunal to consist of a chairman only, that will not be the case for all such proceedings.

260. We recommend that proposed new Section 14(1A) Enterprise Act 2002 (which would be amended by paragraph 19(3) Schedule 7 of the draft Bill) should be amended to provide that in relation to fast track claims "the Tribunal may consist of a chairman only".

Limitation periods

261. The proposals would align the time limit for claims to be brought before the CAT with those of the High Court in England and Wales and the relevant courts in Scotland and Northern Ireland.[411] Currently, the limitation period for claims before the CAT is two years.[412] The draft Bill would apply a six year limitation period to all private action cases in the CAT brought in England and Wales and Northern Ireland, whether stand-alone or follow-on.[413] In Scotland the limitation period will remain as five years, in line with the standard limitation period.[414]

262. Paragraphs 4(2) and 5 (2) Schedule 7 of the draft Bill provide that new Section 47A Competition Act 1998 (allowing stand-alone claims to be brought in the Tribunal) and new Section 47B Competition Act 1998 (allowing collective proceedings to be brought in the Tribunal) apply to claims arising before the commencement of those provisions. That is, the provisions will apply with retrospective effect, allowing stand-alone claims and collective proceedings to be brought in relation to claims that arise before the draft Bill would come into force.

263. However, Paragraph 8(2) Schedule 7 of the draft Bill provides that the new limitation rules in proposed new Section 47E Competition Act 1998 do not apply in relation to claims arising before the commencement of Paragraph 8.

264. We conclude that it is not clear what limitation period would apply to competition law claims arising before the commencement of the relevant provisions in the draft Bill. This risks creating uncertainty for the courts, claimants and defendants, and consequently raises the risk of litigation.

265. We recommend that the Government clarifies the limitation periods that will apply to stand-alone and follow-on claims, as well as in relation to collective proceedings. Furthermore, the Government should explain the rationale for its proposal for new Sections 47A Competition Act 1998 (allowing stand-alone claims to be brought in the Tribunal) and 47B Competition Act 1998 (allowing collective proceedings to be brought in the Tribunal) to have retrospective effect.

Relief

266. Currently the CAT may award damages for follow-on actions, but it does not have the power to grant injunctions to prohibit a party from carrying out certain activities. The draft Bill would give the CAT the power to grant injunctions.[415] Nearly all respondents to the Government's consultation were in favour of this proposal, with some observing that availability of remedies can be "a key factor in choosing jurisdiction, meaning that the CAT would have to have this power if it was to become the venue of choice for competition claims".[416] The CAT supported this proposal as a "crucial form of relief" especially for SMEs involved in abuse of dominance cases.[417]

Competition Appeal Tribunal Rules of Procedure (hereafter, the "Tribunal Rules")

267. Herbert Smith Freehills said that the Tribunal Rules (which had not been published at the time of publication of this Report) would be of "critical importance" to the operation of the proposals and argued that the Tribunal Rules should be published before the Bill was introduced to Parliament.[418] Hausfeld & Co LLP agreed, and argued further that the Rules should be open to public consultation.[419] The CAT said:

Many of the safeguards referred to in the Bill are left to be determined by Tribunal rules, including—for example—the criteria which the Tribunal will apply when certifying (as the Bill provides it must) that claims are suitable to be brought as collective proceedings, and as either opt-in or opt-out.[420]

268. We conclude that the CAT's Tribunal Rules will have a key role in setting out how the intended reforms to the CAT's jurisdiction and power will work in practice, and will be vital to their effectiveness and clarity.

269. We recommend that the CAT should publish draft revised Tribunal Rules before the Bill is introduced to Parliament.

270. The draft Bill would extend the Secretary of State's order making powers in relation to the making of Tribunal Rules. Given the importance of the Tribunal Rules to the operation of the proposed collective redress regime, we recommend that the affirmative rather than the negative resolution procedure should apply, to ensure an appropriate level of scrutiny.

PROPOSAL 2: TO PROVIDE FOR OPT-OUT COLLECTIVE ACTIONS AND OPT-OUT COLLECTIVE SETTLEMENTS

Background

271. Litigation costs act as a barrier to individual claims to redress, particularly where the expected payout from successful claims are significantly smaller than the legal costs involved. Collective actions therefore have a particular role to play in situations where the cost of an action brought on behalf of the entire group of those who have been harmed is likely to be lower than the sum of the costs of individual actions and possibly also of the sum of the cost of individual settlements. Aggregating the claims achieves greater efficiency for injured parties, as well as the courts.[421]

272. Only one collective action in competition law has been taken on behalf of consumers in the UK.[422] Therefore consumers have rarely recovered damages for breach of the competition rules in the UK, even though they have been directly harmed by a number of cartels operating at the retail level.[423]

273. Only opt-in, follow-on consumer representative actions are currently permitted in the UK.[424] Several factors may be contributing to the lack of cases despite detriment suffered by consumers and businesses, including the typical length of proceedings (for example on average, both cartel and abuse of dominance cases took around 50 months to complete by the OFT),[425] and the reliance on initial findings by the Competition Authorities.[426] Which? said that the greatest barrier is reaching consumers who have suffered detriment, due to the current opt-in system, and has stated that it would not bring another action under the current procedure.[427]

274. Currently, while representative follow-on actions can be heard by the CAT on behalf of consumers, they cannot be brought before the CAT on behalf of businesses.[428] The OFT has found that despite the fact that a significant proportion of companies surveyed thought that they had been the victim of anti-competitive behaviour (22 percent or 45/202 companies), just over half of these did not even consider taking the legal challenge route, with only 11 percent (or 5/45) of the harmed firms finally bringing action.[429] The most commonly cited reason for not bringing an action was that the expected costs outweighed the benefits.[430]

Proposed collective proceedings regime (Paragraph 5 Schedule 7 of the draft Bill/ proposed new Section 47B Competition Act 1998)

275. The reforms would introduce a limited opt-out collective actions regime, with safeguards, for competition law.[431] The regime would apply to both follow-on and stand-alone cases, with cases to be heard only in the Competition Appeal Tribunal.[432] The CAT would be required to certify whether a collective action brought under the regime should proceed under an opt-in or an opt-out basis.[433] The Government said that this is because there may be some collective actions which would be more appropriately brought on an opt-in basis, such as a case brought by a small number of businesses, all of whom are clearly identifiable.[434]

276. The draft Bill provides that claims are eligible for inclusion in collective proceedings "only if the Tribunal considers that they raise the same, similar or related issues of fact or law and are suitable to be brought in collective proceedings".[435] Which? provided detailed and persuasive examples of how ambiguous eligibility requirements in relation to certification can give rise to significant differences of interpretation in relation to collective proceedings. An ambiguous eligibility test, Which? argued by reference to case law, was likely to introduce considerable uncertainty and excessive expense to collective proceedings.[436]

277. Which? proposed that the most effective way of removing the uncertainty in the proposed eligibility requirement[437] would be to remove it entirely and leave it to the CAT to determine whether opt-out collective proceedings were suitable on a case by case basis. As an alternative, Which? suggested an additional provision in paragraph 5 of Schedule 7 to clarify that

"all end consumers of a product, where the price of that product has been affected by an infringement of competition law, are affected by the infringement in the same way, such that their claims raise the same, similar or related issues of fact and law".[438]

278. We support the proposals on collective proceedings in the draft Bill. However, we are concerned about the proposed process for certifying collective proceedings. The draft Bill provides that in order to be eligible for inclusion in collective proceedings, claims must raise the same, similar or related issues of fact or law. We have seen evidence to suggest that the uncertainty of this requirement could lead to proceedings in the CAT being tied up in procedural litigation, which would undermine the efficient operation of the proposed collective proceedings regime. We consider that entirely removing this eligibility requirement from the draft Bill would risk compromising the transparency of the certification process. However, we believe that the proposed eligibility requirement should be amended to avoid unintended consequences.

279. We recommend that the Government clarifies the eligibility requirement that cases raise the same, similar or related issues of fact or law. The draft Bill should be amended to clarify that "all end consumers of a product, where the price of that product has been affected by an infringement of competition law, are affected by the infringement in the same way, such that their claims raise the same, similar or related issues of fact and law." We consider acceptance of this recommendation to be crucial to the ensuring the effectiveness of, and preventing abuse of, the new collective actions regime.

Proposed safeguards to the collective proceedings regime

280. The draft Bill would provide that claims should be able to be brought either by claimants or by a person if the Tribunal considers it "just and reasonable"[439] for that person to act as the representative in collective proceedings. The majority of respondents to the Government's consultation considered that the ability to bring claims should be restricted either to the claimants themselves or to bodies that genuinely represented the claimants, such as consumer or trade associations.[440]

281. The Government has said that claims cannot be brought by law firms, third party funders or special purpose vehicles,[441] although there is no express prohibition on this in the draft Bill. Herbert Smith Freehills raised this as a cause for concern, and also argued that class members should not be appointed as representatives unless the Tribunal considers that it is "just and reasonable" for that person to act, to guard against the risk of an unsuitable representative being appointed.[442]

282. The Government has said that collective proceedings should not be brought by law firms, third party funders or special purpose vehicles. Under the draft Bill, any non-class member can be appointed as the representative in the collective proceedings provided that the Tribunal considers it "just and reasonable" for that person to act as a representative. We conclude that this safeguard should be strengthened to reflect the Government's stated intention to restrict representation in collective actions to claimants or to genuinely representative bodies.

283. We recommend that revised Tribunal Rules should clarify that collective proceedings cannot be brought by law firms, third party funders or special purpose vehicles.

284. The draft Bill would allow any class member to be appointed as a representative. We conclude that it is foreseeable that there may be circumstances where a claimant, though a class member, would not be an appropriate representative in collective proceedings.

285. We recommend that the draft Bill should be amended to provide that a class member may be appointed as a representative for the purposes of collective proceedings provided that the Tribunal considers it just and reasonable for that person to act as a representative in those proceedings.

286. The safeguards in relation to collective proceedings include prohibition of treble damages[443] and prohibition of damages-based agreements (also known as contingency fees).[444] Under a damages based agreement, some of the damages are paid to the legal representatives. This was one of the key safeguards highlighted by many respondents to the Government's consultation as necessary to ensure that an opt-out collective actions regime did not lead to a 'litigation culture'.[445]

287. We heard concerns from some stakeholders that opt-out collective actions would risk creation of a US style litigation culture. However, subject to the Government's acceptance of the relevant recommendations of this Report, we consider that the safeguards in the Bill are robust, appropriate and proportionate.

Proposed collective settlements regime (Paragraphs 10 and 11 Schedule 7 of the draft Bill/proposed new Sections 49A and 49B of the Competition Act 1998)

288. The draft Bill would introduce a new opt-out collective settlement regime, "to encourage parties to settle disputes".[446] The Explanatory Notes state:

The function of a collective settlement regime is to introduce a procedure for infringements of competition law, where those who have suffered a loss and the alleged infringer may jointly apply to the CAT to approve the settlement of a dispute on an opt-out basis. The collective settlement regime will operate on the same opt-out principles as the opt-out collective proceedings.[447]

289. The evidence we received broadly welcomed the introduction of a collective settlements regime.[448] The Government Response shows that some respondents said that any settlement concluded on an opt-out basis would need to be judicially approved to ensure fairness for underlying claimants.[449] Concerns were also raised as to whether the underlying claimants would have the opportunity to opt-out from a settlement and whether settlements could lead to a disproportionate sum of money being paid to legal advisers.[450]

290. The draft Bill provides for collective settlements in opt-out proceedings where a collective proceedings order has been made.[451] Provision is also made for collective settlements where a collective proceedings order has not been made.[452] Under the proposals, the representative and defendant must apply for approval of the proposed collective settlement.[453] Under this system the two parties would jointly apply to the CAT to approve on an opt-out basis a mutually agreed settlement agreement. The CAT may only approve the collective settlement if it considers the terms are just and reasonable.[454] The Government Response to its consultation said:

The CAT will then need to approve the settlement itself, to ensure that it is 'fair, just and reasonable'; in other words, does it give satisfactory recompense to those who have suffered loss, taking into account both the degree of loss alleged and the likelihood of a collective actions claim succeeding (were it to be brought in absence of settlement). The CAT will also need to be satisfied that the proposed agreement would be the most satisfactory way of ensuring that as many members of the identifiable class as possible receive redress.

For the purpose of approving the settlement, the CAT will be able to take into account any information it considers relevant, including representations made by the representative and the defendant or by third parties. The CAT will be able to hold a hearing to determine the approval of the settlement agreement and to appoint an expert for the purpose of assisting the CAT to make its decision.[455]

291. Neither the draft Bill nor the Explanatory Notes provide any detail on the factors that the CAT would take into account when approving the settlement. Which? argued that an information asymmetry exists between the claimants and defendant since the former do not have access to the (defendant's) data needed to assess the true loss of end consumers as a result of an infringement.[456] The ESRC Centre for Competition Policy, University of East Anglia thought that this would encourage defendants to offer "a risk-free but low pay-out settlement" to the group.[457] Which? also expressed detailed concerns that the proposed collective settlement process would interact with the practical realities of competition litigation, specifically in relation to cost shifting and costs consequences under the Civil Procedure Rules (or equivalent provisions in the new Tribunal Rules), with unintended consequences:

when a defendant makes a settlement offer, a representative must either accept the offer on behalf of the represented class without knowing whether it is reasonable, or reject the offer and risk paying the defendant's costs if it turns out the offer was in fact reasonable. The structure of the system thus motivates defendants to make unreasonably low offers and motivates representatives to under-deliver for represented victims.[458]

292. On the basis of the evidence we have seen, we conclude that there is a risk that representatives will not be in a position to assess if a settlement offer is reasonable, but in order to avoid risk in relation to costs, may be incentivised to accept an offer that may not give satisfactory recompense to those who have suffered loss.

293. We recommend that proposed new Sections 49A and 49B Competition Act 1998 (inserted by Paragraphs 10(1) and 11(1) Schedule 7 of the draft Bill) should be amended to provide that the party who makes a settlement offer must demonstrate to the CAT that its terms are just and reasonable.

294. We recommend that where the CAT is not satisfied that the terms of the settlement are just and reasonable, the Tribunal Rules should specify that the benefit of costs consequences does not attach to such offers.

PROPOSAL 3:TO PROVIDE FOR VOLUNTARY REDRESS SCHEMES WHICH ARE DESIGNED TO ENCOURAGE CASES TO BE RESOLVED OUTSIDE OF COURT (USING ALTERNATIVE DISPUTE RESOLUTION)

295. The draft Bill would give the Competition and Markets Authority a new discretionary power to certify redress schemes.[459] The aim is to encourage businesses that have infringed competition law to enter into negotiations with consumers and businesses, through a voluntary process of alternative dispute resolution, and to propose redress schemes to the CMA for approval.[460] The draft Bill would enable the CMA to accept binding, voluntary undertakings in respect of a compensation scheme.[461]

296. The certification by the CMA of a scheme would be in respect of whether a reasonable process was followed to establish the scheme, as opposed to whether the amount of compensation is reasonable,[462] to avoid placing burdens on the CMA in respect of analysing cases.[463] The OFT said "the CMA should not be responsible for calculating compensation", to address the risk of resources being diverted from the CMA's public enforcement role.[464] However, the OFT said that when deciding whether to approve a scheme the CMA should be able to have regard to the level of redress offered.[465] The draft Bill provides that the CMA "may not take into account the amount or value of compensation offered"[466] when deciding whether to approve a redress scheme. The draft Bill provides that "compensation" may be monetary or non-monetary.[467]

297. We agree that the CMA should not be responsible for calculating compensation offered under voluntary redress schemes. However, the draft Bill would prohibit the CMA from taking into account the amount or value of compensation offered under a voluntary redress scheme when considering an application for certification. We believe this is unduly restrictive and is likely to prevent the CMA giving genuine consideration to whether the scheme should be approved.

298. We recommend that the proposed new Section 49C(3) Competition Act 1998 (inserted by Paragraph 12 Schedule 7 of the draft Bill) should clarify that in deciding whether to approve a redress scheme, the CMA may not calculate compensation offered under the scheme, but may take into account the amount or value of compensation under the scheme.

299. The Government Response stated its intention that the CMA could consider, on a discretionary basis, whether to offer a reduction of 5-10% in the level of fine where a business has made redress.[468] The effect of certification would be that the scheme would become legally binding, in the sense that the CMA, and a beneficiary who chose to receive compensation under the scheme, would be able to take statutory enforcement action against a business which failed to comply with the terms of the voluntary redress scheme.[469] Possible remedies would include damages or injunctive relief.[470]

300. The vast majority of those who responded to the Government's consultation supported a role for the competition authorities in establishing a redress scheme and agreed that it should be voluntary.[471] The OFT said that the new powers of the CMA to approve voluntary redress schemes proposed by infringing businesses should not divert resources away from the CMA's core public enforcement role.[472]

301. The CMA must monitor the impact on its resources of dealing with applications for approval of voluntary redress schemes. The Government must evaluate this data to establish whether resources are diverted away from the CMA's core public enforcement role.

289 Department for Business, Innovation and Skills, Enhancing consumer confidence through effective enforcement: Supplementary Legislative Document for the consultation on consolidating and modernising consumer law enforcement powers, March 2012, pages 5-12 Back

290 Department for Business, Innovation and Skills, Generic set of consumer law powers: Final Impact Assessment, June 2013, page 6 Back

291 Ibid. Back

292 Department for Business, Innovation and Skills, Generic set of consumer law powers: Final Impact Assessment, June 2013, page 12 Back

293 Department for Business, Innovation and Skills, Consultation on institutional changes for provision of information, advice, education, advocacy and enforcement, 2011 Back

294 Ibid., page 7 Back

295 Ibid., paragraph 5.72-5.86 Back

296 Department for Business, Innovation and Skills, Consultation on consolidating and modernising consumer law enforcement powers, 2012 Back

297 Ibid., paragraphs 2.4--2.9 Back

298 Ibid., paragraphs 1.5-1.9 Back

299 Ibid., paragraph 1.5 Back

300 Explanatory Notes, paragraph 276 Back