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The Minister of State, Department of Trade and Industry (Lord Clinton-Davis): My Lords, I am grateful to the noble and learned Lord for allowing me to intervene. Of course, he is entitled to express whatever criticisms he wishes about the Bill. I shall do my best tonight and in the course of subsequent
argument, together with my noble friends Lord Simon and Lord Haskel, to deal with those points. As my noble friend said, we shall be listening to criticism with great care because we see this as a continuing process of consultation. However, perhaps after all those strictures the noble and learned Lord would care to explain to the House why his government took no action to deal with the matters which were of great concern to British industry and business.
Lord Fraser of Carmyllie: My Lords, if we had secured a response from the CBI and others that this change would bring about a chilling effect on innovation in industry and commerce we would have thought long and hard about it. I believe that the noble Lord's intervention was unworthy. Rather than trying to make a cheap point he should be concerned about exactly what prompted those anxieties in the business community. If he does not yet know that they are keenly felt he will discover very soon how deep they are.
I hope that we can eliminate those matters, but the issues of duplication and overlap are a problem. There appears to be an underlying feeling that somehow to be big or dominant is to be bad. It is not a fault to be big or dominant, but a problem arises when one abuses that position. We need to scrutinise the Bill in order to establish a restricted test that there will be no risk of business believing that it cannot innovate or take things forward because it might subsequently be penalised for such activity.
I was pointing to an extraordinary omission from the Bill. I derived some comfort from what was said by the noble Lord, Lord Simon, in opening this Second Reading debate. The Secretary of State in her consultation paper in August stated:
- "I see a good case for excluding most vertical agreements from the scope of the prohibition--something that I know business will welcome".
Related concerns are those of community pharmacies. We have real sympathy with them and will certainly return to the issue of such pharmacies in Committee. In the meantime--I wrote my speech before Question Time today--I hope that the Government will recognise that it will not be acceptable to destroy the smaller chemist shops, not least because that would undermine their own public health strategy. However, in answer to a question from my noble friend Lady Miller, I heard the noble Baroness, Lady Jay, say today that the Department of Health is neutral on the destruction or closure of community pharmacies. I hope that at least the DTI understands the desirability of having a public health strategy based on the inclusion of community pharmacies rather better than it appears does the Department of Health.
More generally, we are concerned that the Bill does not appear to recognise the effect of the proposals on smaller businesses. Only limited protection is afforded to them. They remain open to third-party action and even the immunity from fines is effectively only provisional because it can be ended by the Director General of Fair Trading without return to Parliament. Again, we should wish to review that matter in Committee. I give the noble Lord some indication, that in our view, it would be right to exclude them entirely, not least to reduce the burden of compliance that would be imposed upon them.
What troubles us is that the cost of compliance is one the DTI now seems to be revising upwards massively, and it is far from clear to us at present what is the current estimate. While I ask that only one question of mine should be answered in winding up, it would be helpful to us if, in so doing, the noble Lord, Lord Clinton-Davis, could give the latest estimate on an annualised basis of what would be the cost of compliance.
I turn to the issue of enforcement and sanctions. I say immediately that we agree entirely with the Government that a necessary part of any change in regime is effective enforcement and sanctions. But we shall have to consider very carefully whether fines of up to 10 per cent. of turnover--typically, for an efficient company, a whole year's profits--are not grossly excessive. We must consider also whether the powers of investigation included in the Bill are not similarly grossly excessive. We want to ensure that that is properly analysed. As I understand it, a power is to be given to use force to enter premises, including vacant premises and private homes, to interrogate former employees and to allow also for certain confiscatory powers.
It is extremely important that we analyse those proposals carefully. After all, we are not dealing with a set of criminal complaints or activities. We looking at a set of administrative actions. If we are to allow the introduction of powers, which some have described as draconian, we must be satisfied, when the Bill leaves this House, that those powers are not unnecessary or inappropriate.
We are concerned about a wide range of points. We want to analyse them carefully. We shall listen to what the Government say. I say immediately to the noble Lord, Lord Simon, that it is with gratitude that we accept his invitation to discuss matters not only with us, as I understand it, but with interested parties. It would be helpful for us to know in advance what amendments the Government intend to propose. I have complained about duplication in the Bill but it would certainly be desirable to avoid duplication of effort in trying to determine what changes should be made. I shall listen carefully to what is said about Clause 58 and consider whether we regard it as being quite so satisfactory as the noble Lord seems to believe it is.
As I said, we are concerned also about steep compliance costs. But we want to be constructive in a number of other areas. There is one matter on which I do not expect an answer from the noble Lord, Lord Clinton-Davis, but it may be helpful if I signal it now. We understand that an amendment is likely to be tabled which seeks to use the Bill as a vehicle for tackling the problem of inadequate protection against what are described as look-alike products. I understand that an amendment may be introduced to include limited unfair competition provisions along the lines of the World Intellectual Property Organisation's model law, Articles 2 and 3. I mention that because I hope that the noble Lord's department officials may begin to look at that issue and not try to dismiss our submission at a later stage by saying that they have had inadequate time to consider whether or not that provision might be introduced.
We shall participate as vigorously and scrutinise as effectively as we can, but before we do so I hope that the noble Lord's department and the noble Lord will indicate to those concerned about the Bill's provisions as soon as possible where they propose to make changes. Otherwise, I fear that we are at a real risk of drowning in a sea of representation. If some of that concern is unnecessary, it would be helpful to put it aside before we reach the Committee stage of this most important Bill.
4.55 p.m.
Lord Ezra: My Lords, I do not share the wide-ranging criticism which the noble and learned Lord, Lord Fraser, has just expressed. The noble Lord, Lord Simon, said that the Government would welcome close scrutiny of the provisions of the Bill. It is one thing to have close scrutiny but another to condemn the Bill in total, as I believe the noble and learned Lord, Lord Fraser, was doing.
I believe that the noble Lords, Lord Simon and Lord Clinton-Davis, were right to draw attention to the long delay that there was under the previous government in introducing legislation which most people concerned considered to be long overdue. As we all recall, there were Green Papers and a White Paper. There had been a commitment in the Conservative election manifesto as far back at 1987 that legislation would be introduced, but in fact there was none. The present Government
deserve credit for so quickly getting to grips with the problem, having introduced a consultative document in August and a Bill, which we are now considering, in October.There are three overriding reasons for changing existing competition policy--the long overdue reforms that we are looking for: first, there is a need to simplify and strengthen measures on anti-competitive behaviour; secondly, to make rulings more transparent; and thirdly, to bring the UK more into line with EU law.
I believe that the Bill achieves those three objectives in general terms. As we know, the main change proposed is a prohibition approach to anti-competitive agreements and abuse of dominant power based on Articles 85 and 86 of the EC treaty. The current regime is based on warnings and protracted negotiations, some of them lasting for years. The new Bill introduces swifter investigations and heavy fines for abuse. It also introduces a formal appeals procedure through the new competition commission.
But if the main thrust of the Bill is acceptable, we must also be sure that it will be right in its application, and here I join in some of the points raised by the noble and learned Lord, Lord Fraser of Carmyllie. I propose to examine this aspect from the point of view of business interests on the one hand and consumer interests on the other. As the noble Lord, Lord Simon, said, there should be a proper balance of impact on those two interests. In an ideal world, that balance would be achieved automatically in fair, open and widespread competition from which both enterprises and consumers would gain in equal measure. But we do not live in an ideal world, as Adam Smith pointed out two centuries ago. There are grey areas and even some black ones. Therefore, there must be clear and effective competition legislation.
From the point of view of enterprises, the rules of competition must not only be fair, but their application must be clear and speedy. In that respect, we shall need to face up to a number of issues as we reach subsequent stages of the Bill. First, there is the problem of jurisdictional overlap. Although the declared purpose of the legislation is to bring British law into line with EU law, the problem of possible overlap between EU jurisdiction and UK jurisdiction is left in large measure unresolved. Indeed, Clause 8 allows the UK authorities to impose stricter requirements than those in EU exemptions. In my experience, there seems to be an in-built tendency for UK authorities to go for a stricter application of EU law than is the case elsewhere. For example, there are some who feel--and the noble and learned Lord, Lord Fraser, referred to this--that the investigatory powers granted to the authorities under the Bill exceed those available under EC law. I believe that this situation should be avoided, if indeed that assumption is proved to be correct. Moreover, there should as far as possible be a distinction drawn between the jurisdiction of the EU and the UK in competitive cases, and the two jurisdictions should be run on a compatible basis.
Another jurisdictional problem is created by the intention to give the utility regulators what are described as "concurrent powers" in their particular sectors;
indeed, the noble Lord, Lord Simon, referred to that fact. It is one thing to have the provisions of the new legislation applied and enforced by one authority--namely, the Director General of Fair Trading--but it is quite another to have this function exercised by him concurrently with no fewer than seven regulators in the privatised utility sector. That must surely inevitably result in lack of consistency. While it is desirable that the experience of the regulators in their particular sectors should be brought to bear on particular cases of possible infringement of the prohibitions, surely this could be made available to the DGFT which could then reach a decision based on experience in cases in other sectors. We could thereby achieve greater consistency. I therefore suggest that the DGFT should be responsible for reaching decisions in all cases, including the privatised utilities.There is a further problem relating to the utilities. They are subject to their own particular Acts of Parliament; they will also be subject to the new and more stringent competition law. It will be essential to ensure that the two legal regimes do not overlap and that the jurisdictional impact is clear. I have received representations from a number of these privatised utilities which fear that such confusion may arise from the issue.
In adopting the framework of EU competition law, which is certainly desirable, we should nevertheless avoid the pitfalls which the EU has run into. One of these appears to be that the block exemptions under Article 85 have not been drawn effectively enough. The result has been a flood of notifications with which the Commission has been unable to deal. As I understand it, only a handful of those cases can be investigated and decided within the course of a year. The rest are left pending, creating much uncertainty for the enterprises.
Within the UK it will therefore be necessary for the exemptions to be drawn in such a way as to avoid unnecessary notifications. Further, it will be necessary to work out in detail the procedures to be applied. After having put in place the necessary exemptions and procedures, in my opinion an adequate transitional period of at least a year should be allowed for the new system to apply. The important first step is for the legislation to be put forward. The Government have now done this. The second essential step to make is to make sure that it will be applied effectively. If more time is required for this than originally anticipated it should, I believe, be readily granted.
I turn next to consumer interests. These are that anti-competitive agreements and abuses of dominant positions should be quickly identified and dealt with. The Bill goes a long way in that direction. Indeed, it might be argued that the whole purpose of the legislation is to protect consumers' interests. However, there are a number of ways in which these can be more specifically safeguarded. One of them would be to provide for consumer representation within the Office of Fair Trading, as has been proposed by the National Consumer Council. That would mean that any issues of specific consumer interest could be highlighted during the course of inquiries conducted by the DGFT and by the competition commission. This is linked to the
question of consumer representation in the privatised utilities. Generally speaking, this is inadequate, with the possible exception of the Gas Consumers' Council. I believe that the Competition Bill provides an opportunity for getting this right and establishing effective consumer representation within the regulatory framework.The Bill represents an important step in clarifying and improving competition law in Britain and in bringing it closely into line with EU law. It deals with many of the weaknesses of the present system and establishes a well-defined framework. The challenge is to make it work satisfactorily. That is why it is necessary to clarify the various jurisdictional responsibilities, to set in place the detailed regulation and to establish the exemptions. What must be avoided is a flood of unnecessary notifications and uncertainty in the minds of enterprises about which jurisdiction they should turn to. An adequate transitional period is required to ensure that all these operational matters are clearly sorted out. It is my opinion that, if this procedure is adopted, the new legislation could be of considerable benefit both to enterprises and to consumers.
5.5 p.m.
Lord St. John of Bletso: My Lords, competition law is a technical subject which many noble Lords speaking today know a lot more about than I do, principally the noble Lord, Lord Borrie, with his distinguished career as past Director General of Fair Trading. Like others, I welcome the move towards a workable--a word used by the noble Lord, Lord Ezra--a practical and an effective system of protecting competition in our economy. It is the practical effects of competition law, and the need for a simple and workable regime, which I wish to comment upon. I propose to address three key areas. First, what is competition? Secondly, why does it matter? And thirdly, by introducing this Bill, how will competition be controlled?
From my own experience as a stockbroker in the City, I know that competition is the best way to create innovation, improve quality and choice and drive up efficiency. The competitive spur is the best way to drive down prices for consumers and create the innovations that will change the way we live. The information technology revolution is a classic example. Competition is of key importance in improving the economy generally. When I say "improving the economy" I should point out that I believe the competitive process applies to both national and international trade.
Competition law holds the ring between competing businesses and the various interested parties concerned. Here, of course, the parties include, first, the shareholders who invest their money and who stand to lose if companies go out of business as a result of anti-competitive behaviour; secondly, the employees whose jobs depend on the success of their employers; and, thirdly, the customers for the products and services of the competing companies.
Competition law provides the framework for competitive activity. It protects the process of competition. As such, it is of vital importance. But it
must be predictable and workable. Abuses need to be clearly defined. As we all know, the competitive process means that some succeed and that, obviously, some do not. Those who succeed should not do so by preventing others competing. However, a healthy competitor should not be disabled by practices which are unacceptable. How, therefore, can we determine what is fair and unfair in competition? In considering what is fair and unfair, the interests of consumers, those of shareholders and, indeed, those of the general public ought to be weighed up.In essence, as I see the difference between the old competition regime and the new proposals for trying to control competition in this Bill, it appears that in the old law competitive activities were allowed unless prohibited whereas now those activities will be prohibited unless allowed. This begs the natural question: who is responsible for deciding what is allowed? As several noble Lords have said, the Bill seeks to align the United Kingdom's competition law with that of the European Union, in particular Articles 85 and 86 of the EU Treaty. As the Minister, the noble Lord, Lord Simon, outlined, the Bill introduces two main prohibitions: first, those that prohibit agreements that restrict, prevent or distort competition; and, secondly, those that prohibit conduct which amounts to an abuse of dominance.
Clauses 2 and 18 set out the prohibitions in broad terms. The prohibitions are essentially open-textured and include wide discretions. It can often be difficult to recognise a "distortion" of competition or an "abuse" of dominance. I feel that there needs to be more definition of abuse other than may be derived from case law.
The result of any wide discretion is that there may be uncertainty. Uncertainty is not in the interests of this Bill. As several noble Lords have mentioned, uncertainty is undesirable--a point made by the noble and learned Lord, Lord Fraser. Uncertainty in laws such as these where the competitive process is at stake and where heavy fines can be imposed is most undesirable. Uncertainty should therefore be minimised. I believe that previous proposals for reform of competition law did not include the second prohibition because of the concerns about uncertainty. The current proposal seeks to reduce uncertainty through a general principles clause in Clause 58.
It appears that notwithstanding Clause 58, the prohibitions still give rise to uncertainty about their scope and application. I have sympathy with the concern of the noble and learned Lord, Lord Fraser, that the Bill is thin on detail. To address that, Clause 50 provides for guidelines to be issued by the Director General of Fair Trading about the way he would expect the prohibitions to be applied. Guidelines, by their nature, are not binding. I believe that it is essential for these matters to be incorporated into the Bill to provide clarity of definition.
The prohibitions are likely in practice to have significant effects on the behaviour of companies. The Bill is intended to create strong deterrent effects. I agree that deterrence of behaviour which is clearly anti-competitive is necessary. Prevention is certainly
better than cure. But if it is unclear whether or not the behaviour is anti-competitive, then deterrence may be a bad thing.Several noble Lords have spoken about innovation. It is an important benefit of the competitive process. Competition law should not act as a brake on, or undermine, the incentive to innovate. Fear of infringement should not deter legitimate innovation. Competitors may allege infringements where none in fact exists.
Whether or not a company decides to take the risk of investment in some innovative venture may depend on whether or not it would expect the venture to be regarded as infringing the prohibitions. The right signals are therefore critical to investment. Who applies those laws is of great importance. The Bill provides for a number of different routes to obtain redress. The right of action in the courts is an alternative to making a case before the Director General of Fair Trading or one or more of a number of sectoral regulators.
My concern is that this series of parallel procedures has the weakness that all the different bodies could potentially reach different conclusions. There appears to be no mechanism for achieving consistency among those applying the law. When applying the prohibitions, the courts will be concerned only with the legal issues before them and will apply legal process. The Director General of Fair Trading will also adjudicate on the prohibitions. It is essential that he should approach that matter in the same way the courts do while applying competition policy objectives.
However, the Bill also proposes that some, but not all, sectoral regulators, should have the same powers as the Director General of Fair Trading to investigate and adjudicate on the application of the prohibitions within certain fields. I feel that special arrangements for those sectoral regulators should be introduced only where they are justified as an exception. The discretionary nature of the prohibitions means that uncertainty and inconsistency are bound to be increased if there are multiple enforcers. I am not convinced that more "policemen" will mean better enforcement.
In essence I am concerned that the regulators and the Director General of Fair Trading could potentially trip over each other. Unlike the courts and the Director General of Fair Trading, sectoral regulators have a separate statutory remit which could make the application of the prohibitions more complex or could cloud the purpose of their application. The statutory remits of the sectoral regulators are broad. Their objectives may not readily be reconciled with the objectives of the prohibitions. The prohibitions should not therefore be applied to achieve regulatory purposes.
If the sectoral regulators were to deal with competition matters under the Bill in very wide parts of the economy--I note, for example, that the Director General of Telecommunications would have jurisdiction in relation to,
- "commercial activities connected with telecommunications",
I note that the joint working group of the Law Society and Bar Council concluded that the sectoral regulators should not have adjudicatory powers in applying the prohibitions. Any sectoral expertise possessed by sectoral regulators which might be relevant to the application of the prohibitions could be made available to the Director General of Fair Trading. The sectoral regulators could assist the Director General of Fair Trading, or the courts, by providing advice or perhaps by carrying out investigations and reporting to the Director General of Fair Trading. They could provide competition analysis and a recommendation, as they do currently in the case of mergers. But the decision should be for the Director General of Fair Trading.
Despite the Minister's assurance that the tribunal would preserve a consistent approach, I am not convinced that the need for systematic recourse to appeals to the tribunal within the competition commission would be in the interests of efficient administration.
I welcome the findings of the DTI's current review of utility regulation before deciding conclusively on the extent of the powers of the various regulators.
In conclusion, I hope that the arrangements will be as simple and as certain as possible to ensure that they are workable and effective. A nightmare of uncertainty, duplication and inconsistency would discredit the administration of competition law, would be damaging to business and innovation, and must be avoided. While I warmly welcome the Bill, I hope that these concerns will be given further consideration and that the Government will show flexibility in the amendments brought forward at Committee stage.
5.20 p.m.
Baroness Nicol: My Lords, I must first declare an interest as chairman of the All Party Retail Group. That explains why I am taking part in discussion on this very important Bill. The issue of competition and a free and competitive market is of fundamental importance if we are to continue to have a thriving retail industry.
Retailers have for some time acknowledged, as my noble friend said in opening and the noble Lord, Lord Ezra, reiterated, that competition law in the UK needs reform. They welcome the introduction of the Bill as a vehicle to implement more effective enforcement, to prevent the use of anti-competitive agreements and the abuse of dominant market position.
The British Retail Consortium--which represents some 90 per cent. of retailers in this country--has indicated that it considers the Bill an important measure both for retailers and their customers. There are, however, some points that I should like to raise and some clarification that I wish to seek. It is obvious from my noble friend's introduction that he intends to be helpful during the Bill's passage and that he is open to suggestions. Nevertheless, it might be helpful if I put these concerns on the record now.
First, the British Retail Consortium recognises that there is a strong case for strengthening the powers of the Director General of Fair Trading. It is, however,
concerned that the powers proposed under the Bill are excessive. It would like to see the inclusion of a system of checks and balances, and in particular clear legal justification for unannounced entry to premises supported by a warrant. Some concern has been expressed that application for entry warrants during investigations should be made to the High Court rather than a magistrates' court. As a magistrate for many years, I am inclined to support that view. The issuing of a warrant and the interruption of a business is a very serious matter. It is not to be entered into lightly. I hope that the Government will give sympathetic consideration to that point.In addition, in the interest of fairness, companies under investigation should have reasonable access to their documentation and computer systems during the investigation and without incurring excessive costs to the business. I understand the need to seize documents and to seize the computer system; but businesses must be allowed reasonable access to them.
Secondly, retailers, and indeed all businesses, will need to be clear about their responsibilities, and will need to check that agreements already established will be acceptable under the Bill. It will therefore be imperative that the director's rules and guidance are in the public domain. My noble friend indicated that the guidance will be open to discussion and that it will be in the public domain, but he has not said anything about the rules. I wonder whether that point could be cleared up.
As the noble and learned Lord, Lord Fraser, indicated, it is important that businesses should have an appropriate transition period to renegotiate agreements where necessary before the commencement date of the Act. As the noble and learned Lord said, compliance costs are likely to be high. Therefore it would be appropriate to allow for an extended transition period if businesses are adequately to meet the terms of the Act.
It would also be helpful to be given some indication as to when the rules and guidance are likely to be published. Furthermore, following investigations I would seek clarification about the criteria that the director or the Secretary of State will use in deciding what information should be disclosed in the public interest. That is particularly important for third parties, who can be obliged to provide information that is commercially sensitive. Anti-competitive behaviour should be exposed, but sometimes innocent parties caught in the middle can suffer. It is right that we should seek to safeguard their interests.
Finally, while I understand that this is an enabling Bill, I should like clarification as to what exemptions and categories will be allowed. We had some discussion, for example, on vertical agreements. Both the British Retail Consortium and the CBI have suggested that vertical agreements, including distribution, are generally benign, and, it is to be hoped, beneficial to the consumer. It would be helpful if the Minister could offer a definition as to which vertical agreements would be exempt under the terms of the Bill as it stands. The Minister indicated that
this aspect is open to discussion. I hope that we can reach agreement on all these points before Committee stage.5.25 p.m.
Lord Lucas: My Lords, I, too, welcome the Bill. I particularly welcome the attitude that the noble Lord, Lord Simon, proposes to take towards it. I believe that, between us, we have the opportunity to do a great deal of good to the Bill in the course of the Committee and later stages. Many businessmen fancy "a bit of corporate nookie"--cuddling up to a competitor or abuse of a dominant position. After all, that is only human nature. It is reasonable for the Government to want to control those urges in the interests of us all and in the end the health of the business community.
The Bill clearly needs improvement. The noble Lord, Lord Simon, admitted as much. It certainly needs elucidation, as my noble and learned friend Lord Fraser said. There is a great deal that we do not know about the Government's proposals which ought to be made clear in the course of our considerations. I hope that we shall also be able to spend some time making certain that the powers that the Government have kept for themselves or their regulators are sufficient to adapt the Bill over the course of the next 10 or 15 years, so that we do not have to return to the subject in further primary legislation.
I wish to cover fairly briefly some particular issues that concern me in relation to the Bill, and give notice to the Government that I propose to raise them in Committee. Perhaps it may be possible to receive some sort of reaction by way of letter before we arrive at that point.
As the Bill stands, it risks an enormous volume of applications and clearances. We need a far better understanding of what exemptions are proposed by the Government. The question of vertical agreements was raised on all sides--"in out, shake it all about". We just do not know where we are. That is not satisfactory. The point has to be cleared up before Committee stage.
The position of small firms is such that this legislation could impose enormous burdens upon them. Long-term vertical relationships can be very important to small firms; they can be the anchors of the business, the way in which they climb the ladder to success. It is inappropriate that they should be challenged under this sort of heavyweight legislation. The launch by a small company of a new product, if that product is sufficiently innovative, can immediately place it in a dominant position in the market. It is inappropriate that such firms should be subject to the full rigours of this law--and especially inappropriate given the powers that the Bill provides to third parties to challenge companies which may infringe it. If a large competitor has this power in relation to a small, innovative company, under the Bill as it now stands it is possible for that large company to abuse it in a way that makes innovation extremely difficult.
Under Clause 38, or whatever version of the clause may emerge in the future, I should like to see a good turnover limit, to make sure that when we talk about
companies that come within the scope of the Bill, we are talking about the sort of company that will have the administrative resources to deal with the burdens that the Bill imposes.We also have to deal clearly with the matter of uncertainty. That point was raised by the noble Lord, Lord Ezra, and others. Guidance must be swift, and it must be clear. In all matters we need speed. I can see that we shall not get any provision onto the face of the Bill. However, I should like to see the Government committed to setting targets by which the Director General of Fair Trading should produce his guidance, and to make sure that, if he is unreasonable in delaying, there are swift remedies for companies to have their agreements passed.
The Bill gives rise to particular problems for agricultural co-operatives and possibly for enterprises involved in horizontal agreements rather than vertical ones. One thinks of Spar, Toymaster and others in the retail sphere, where retailers or others--essentially small businesses--band together to give themselves the market power to deal with competition from much larger enterprises, whether they be vertically or horizontally opposed to them. It would be a great pity if the Bill were to disturb some of those relationships. I believe that they operate very much in the public interest. Certainly, agricultural co-operatives require them in order to have access to some very substantial EC funds. I should be fascinated to know whether the noble Lord thinks that the general attack on horizontal agreements would apply to agreements between political parties, which also serve to reduce competition!
Those who are out and about on the high streets at the moment will see that there is an arrangement between Disney and McDonalds whereby, if you go into McDonalds and buy a particular meal, you are given some Disney memorabilia to do with its latest film. Those are two firms in a dominant position. How is that sort of agreement affected by the Bill? Will Disney have to offer the same terms to Burger King? Will McDonalds have to go to Warner Bros. and offer it the same? The relationship which Disney and McDonalds have seems to me perfectly reasonable. It is not clear to me how the Bill will affect it.
As the noble Lord, Lord Simon, said, planning will be a big issue. There will be all sorts of restrictions: "We have too many supermarkets in this town; no, you cannot have another one". I am sure that my noble friend Lord MacLaurin will have something to say about that. We shall be fascinated to see what comes by way of government proposals.
One of the great principles of running large businesses these days seems to be partnership sourcing. That is something which has given a great deal of strength to our car component companies, for example, which they never had before. The idea is that they can work with the car manufacturers, to mutual benefit. Obviously such relationships become very strong and long term and difficult for competitors to break into, but clearly they are in the interests of this country as a whole and of its overall competitiveness. I hope that such
agreements will be safe and free from challenge under the Government's proposals, but that is not clear at the moment.Another form of agreement which I think is generally to be welcomed is that which involves facilities management by utilities companies. For example, an electricity company will agree to supply and maintain a heating plant and at the same time supply the electricity to run it. I appreciate that that kind of agreement can have anti-competitive aspects to it. I hope that the Government will confirm that they intend to follow the European practice of having standard black, grey and white clauses so that a company making such an agreement can know whether it is likely to be clean or to come under question under the provisions of the Bill. My noble and learned friend Lord Fraser went in some depth into the question of the interplay between the Bill and regulators. I very much share his concerns.
With regard to Clause 18 and the related clauses, there is a question as to whether the DGFT has power to give guidance on whether a particular company is in a dominant position. It is not clear to me that he has. I think it would be helpful if that were the case.
Clause 18(2)(d) talks of "no connection". Looking at what the European Commission has decided in practice, one could effectively insert the word "necessary" between "no" and "connection". It seems to me that on a strict interpretation of "no connection" one could get away with almost anything. I hope the Government will confirm that they intend the clause to have a wider effect than that. This is where the Bill gives us the opportunity to strike at the practice of "bundling", which it seems has evolved from a quaint 17th century Puritan practice--a bit eyebrow-raising for those who know about it--to one of the most irritating and inconvenient uses of competition regulations from the consumer's point of view that we have in this country today.
What is the position of the Bill with regard to companies with a dominant position in a market which begin to integrate vertically? Is there anything in the Bill which is intended to strike at that or to have an effect on it?
What about suppliers of a service who restrict the choice of their customers with regard to other services? One thinks of building societies which say that a borrower may use only one insurer, or McDonalds, which sells only Coca Cola? Are such practices held to be reasonable under the Bill or do they come under attack by it?
I strongly agree with the noble Baroness, Lady Nicol, that it should be a High Court judge who issues a warrant for entry of premises. The powers proposed by the Bill are enormous and it would be entirely unsuitable for a magistrate to issue a warrant. Given the effect on the companies that could be subject to them, it must surely be a High Court judge.
Finally, will the competition commission have sufficient powers to prevent a retrial? If someone complains to the competition commission that an investigation has been inappropriate or that the verdict reached was inappropriate, can the commission give a
summary judgment on that, or does it have to go into the whole matter again, with all the costs that that would involve?That is a brief list of the matters that I intend to raise at Committee stage. I hope that the Government find it helpful.
5.35 p.m.
Baroness Turner of Camden: My Lords, I should like, first, to welcome the Bill and to thank my noble friend the Minister for his very comprehensive introduction of it. As he said, the Bill fulfils a manifesto commitment. I understand that the Government are intent upon the protection of the consumer. With that aim in view, the use of monopoly power to dominate the market and to impose higher prices than might otherwise be the case will be curbed. The Bill is against the abuse of monopoly power. I am sure that most of us would agree with that; I certainly do.
There are, however, some issues that arise from a perusal of the Bill, and the extremely helpful guide issued by the DTI, to which I should like to refer. I note that the intention is to align UK domestic prohibition with the EC regime so as to avoid inconsistency and potential conflict. I hope that in doing so the Government will move more closely to the philosophy that has informed much of EU practice. That philosophy has always acknowledged employees' rights and the rights of their organisations. In EU terminology, unions are social partners. That has always seemed to me an appropriate way in which to regard employees. It is an indication that workforce and employees are not simply disposable items whose welfare is entirely dependent upon the untrammelled rigours of the market.
I note that the Bill dissolves the Monopolies and Mergers Commission, the MMC. Its existing functions are to be transferred to a new body, the competition commission. There will be changes to the Fair Trading Act 1973 in order to strengthen the investigative powers of the Director General of Fair Trading in respect of monopoly. However, it seems that the law in relation to mergers will remain unchanged; the administrative structures will simply be altered.
I well remember that very shortly after I became a Member of your Lordships' House I attempted in 1987 to introduce a Private Member's Bill. I was concerned about what in the 1980s had begun to be called "merger mania". The year 1986 had been a record one for mergers, mainly in the industrial sector. There were 695 recorded acquisitions that year, 50 per cent. more than in the preceding year. The livelihoods of about 500,000 employees had been bound up in those deals. I complained at the time that this merger activity had not produced new jobs, nor had it stimulated our manufacturing base. Quite the contrary.
The intention of my Bill, which of course made no progress, was to try to provide some protection for people caught up in this merger activity. I drew attention to the merger code existing, for example, in the Netherlands, which provides for employees' organisations to be informed, first, of merger talks at an early stage; secondly, of the reasons for the merger;
thirdly, of the likely social, economic and legal consequences; and, fourthly, of measures designed to alleviate their effects. Even though it attracted the support of the noble and learned Lord, Lord Denning, and of my noble friends Lord Wedderburn and Lord Monkswell, the Bill, as I said, made no progress.For a while, in the succeeding years, merger mania appeared to abate. But more recently there has been a spate of mergers, many of them in the financial services industry. Again, there has been the complaint that employees do not hear of these moves until they are all but completed and then, as in one notable case, they hear an announcement at breakfast time on the morning radio along with a statement that there will be 5,000 redundancies.
The companies in question claim that the takeover code operated by companies listed on the Stock Exchange makes any advance consultation or even notification impossible. Therefore mergers and takeovers are planned in secret and invariably announced without any consultation with staff or their representatives. Any form of meaningful consultation about the social consequences, and particularly about the impact on employment, is prohibited. This renders completely ineffective the 22 year-old protection intended to be afforded by the EU's collective redundancies directive requiring prior and meaningful consultation designed to reach agreement on proposals to declare mass redundancies, including consultations on the numbers to be affected. The voluntary takeover code operating in the United Kingdom excludes any possibility of discussions between the social partners. It therefore appears to be quite contrary to the spirit of EU legislation in general.
In only a few cases where public interest is manifestly at risk are references made to the MMC, and presumably the same will apply in relation to the new competition commission. It would appear that the major concern in regard to such references is a somewhat narrow definition of "competition". That was the standpoint of the previous government. Once a reference has been made, it is open to the MMC to take other factors into account and presumably the same will apply to the new competition commission. But, of course, only a minority are referred anyway.
I appreciate that the Bill before your Lordships this evening does not include any reference to the concerns that I have raised. It would appear that the intention is that the legislation in relation to mergers and takeovers will remain as it is now, presumably with the present "voluntary" takeover panel still operating within the framework of current Stock Exchange regulations. The only change is that the legislation will be administered by a different body, the competition commission.
I think that is a pity. This is an opportunity, in an otherwise excellent Bill, at least to make provision for regulations which could, at some future time and after adequate consultation, replace the present arrangements with a code more in line with best EU practice. There is an important social element here. Mergers and takeovers do not always help with the problems of unemployment; quite the contrary. They can often
import an element of general insecurity into workplaces which itself has a negative social effect. Nor are they always to the advantage of the consumer. They may in fact limit consumer choice or perhaps result in branch closures, causing problems for local people, particularly the elderly, who no longer have a local branch to visit.I urge my noble friend to look at this issue within the context of the debate on this Bill. There is an opportunity to do something about the problems to which I have given voice this evening. So, although I welcome this excellent Bill, for all the reasons that were stated when my noble friend introduced it, I believe that there are issues which could also be addressed.
5.42 p.m.
Baroness O'Cathain: My Lords, I must admit that I have had certain difficulties with this Bill. I suspect that the fault is mine, not having a lawyer's training. I found it exceptionally difficult to read through the 98 pages of close type legal presentation, and comprehension was an added problem. However, I was encouraged when I heard the Minister describe the Bill as "very complex" and a "technical" Bill. I shall have to listen very carefully to all the arguments during Committee, Report and Third Reading stages.
I find it difficult to determine whether it is a good, bad or indifferent Bill. But, in essence, I support anything which encourages greater competition. My level of support and enthusiasm for greater competition is exactly the same, whether I examine the issue from a consumer standpoint or from the standpoint of someone who works in and with business and commerce.
I am sure that throughout the passage of the Bill I shall find issues on which I have concerns. But today I wish to register one concern and give my support to a series of clauses on which I seem to take a different line from business and some of the legal profession.
Let me deal first with my concern. I worry that hidden within those 98 pages (that total includes the 14 schedules) there could be hidden costs which business will have to bear. It will come as no surprise to your Lordships that I smell hidden costs; neither will it surprise noble Lords that I warn, yet again, against any additional costs that are not accompanied by additional efficiency, thereby affecting our overall international--and national--competitiveness. It would be ironic if a Bill, which was supposed to increase competition, turned out to have a negative effect on competition by virtue of the burden of costs imposed on business in following through the Bill. From a business point of view, I urge caution on imposing more costs as a result of compliance with the measures contained in the Bill. I hope that the noble Lord, Lord Clinton-Davis, will be able to give strong assurance on that point.
An extension of that concern relates to the possibility that the Bill will undo some of the work done by the previous government in the area of deregulation. It is not so long ago that measures introduced to reduce the burden of regulation received support from all sides of this House, particularly on the need to reduce bureaucracy. Again, I hope that the noble Lord will give us the assurance that that is still official policy.
Before I come to the area in which I should like to give support to the Bill, I want to make an observation about the widely held perception that there is little competition in our economy. I frequently hear policy-makers and journalists stating that there is little competition and that manufacturers, retailers and suppliers of goods and services have the market all sewn up. In my experience, the reality is quite different. I have been operating at different levels in the business and service sectors for over 30 years and can avow that competition is fierce and cut-throat. It has become even more fiercely competitive over the past 20 years or so and some areas are almost gruesomely competitive--food retailing, for example.
Yet the perception remains that cartels exist in this area. "Why is it," I am asked, "that baked beans are exactly the same price in supermarkets A, B and C?" The baked beans are the same price in supermarkets A, B and C, because as soon as supermarket A, say, reduces the price of baked beans, the shopping sleuths in supermarkets B and C will have those prices reduced within minutes. The bush telegraph in the food retail and distribution sector is very effective. Then, if supermarket C, for example, decides to increase the price of baked beans, does that sequence happen too? No it does not. The supermarket might have a very short-term advantage by getting an additional margin on those baked beans but the other two supermarket chains will not follow. And, of course, the canny customer, who, we must not forget, is the most important person in this situation, will march to those supermarkets supplying the cheaper baked beans. I have to tell noble Lords that competition certainly exists in that sector.
But I am not naive, and irrefutable evidence exists that cartels have been operating until very recently. Those are the ones that have been found out. What about the ones that are still hidden? Cartels are the enemy of the customer and competition; cartels are also the enemy of overall UK competitiveness. They have existed and still exist and must be resisted and stamped out. It is to assist that stamping out that I support Clauses 25 to 30.
Briefings that I have received have commented unfavourably on the investigatory powers contained in the Bill. Comments include the statement that "no case has been made" and that the investigatory powers are "not necessary".
However, one has only to read the press notices from the Office of Fair Trading to realise that it has been a tortuous task to uncover the workings of cartels. The paint makers' price fixing cartel, which was ended by an undertaking to the Restrictive Practices Court in early June this year, had been going on for years. It was quite obvious that the companies involved knew exactly what they were doing and knew that it was illegal. Why else would they have used assumed names to book hotel conference facilities? Some companies blamed employees for price collusion without authorisation by the companies. But this House ruled in 1994 that such an argument is not acceptable.
Just eight days ago, five suppliers of protective polyester film used for glazing as part of bomb-proofing gave undertakings to the Restrictive Practices Court that they would no longer collude on tenders nor share information about prices to be charged or quoted.
Last month, it was revealed that sales managers of two high technology firms involved in the manufacture of filters used for removing impurities from liquids swapped information on product prices charged to customers and put a limit on the extent to which they undercut each other. The Director General of Fair Trading said that it was difficult to put a figure on the cost of the cartel but costs will:
- "in the end have been paid by taxpayers and consumers".
Both as a deterrent to those who may be tempted to become involved in cartels and as an expedient to bring such cartels to an end as quickly as possible, the investigatory powers contained in Clauses 25 to 30 are needed and I support them, but with one caveat. There are concerns about invasion of privacy. An amendment to the Bill requiring warrants to be issued by a High Court judge rather than by magistrates would offer greater safeguards against such concerns. The noble Baroness, Lady Nicol, raised this matter. I support her. My noble friend Lord Lucas also made the point. At Committee stage I shall support any amendments which cover that matter.
Other than that point, I cannot see at this stage why there is opposition to Clauses 25 to 30. It has been stated that other member states of the European Union do not have such powers. That is not strictly true. Germany has criminal investigatory powers and only the UK does not currently have the power to make on-site investigations. The anxiety has been expressed that with the powers contained in this Bill the UK would be leading the way. The noble Lord, Lord Ezra, referred to that. I do not know whether that is true; but if it is, does it matter? I guess it would be quite nice to be in the lead on some issues in Europe for a change. It would be particularly good if it was a genuine effort to stamp out uncompetitive practices. I look forward to following this Bill on its passage through this House.
5.51 p.m.
Lord Borrie: My Lords, I regard this Bill as providing the radical reform of competition law that has been overdue for a long time. I congratulate the Minister on bringing it forward to this House so soon after the general election and after the reasonable consultation period from August.
The Bill emerges after years of what I can only call procrastination on the part of the previous government. From the forthright and imaginative White Paper of 1989, we were time and again promised legislation by that government, but they delivered nothing. From my experience as Director General of Fair Trading, during the whole of the 1980s I repeatedly said to successive Secretaries of State that the weaknesses and inadequacies of the existing law must be dealt with. I was therefore delighted by the 1989 White Paper. However, lack of political will meant that repeatedly the government excused themselves and pleaded lack of
parliamentary time--an excuse which the all-party trade and industry committee in another place said in 1995 had worn a bit thin.We have had some sort of legislation dealing with monopolies and competition matters in this country since 1948 to combat monopoly abuse and cartels. We had an anti-cartel law in 1956--the Restrictive Trade Practices Act--which was intended to bring to an end all price fixing and other anti-competitive agreements and informal arrangements between firms unless they could be proved to be exceptionally in the public interest. It was a useful piece of legislation. It resulted in a significant number of price fixing and other major cartels in manufacturing industry either biting the dust following court proceedings or, alternatively, being abandoned by the manufacturers as they knew that to fight the case would be a hopeless task.
But by the 1980s it was apparent that secret cartels could operate for years to the detriment of business, private customers and the economy as a whole because the law was slow to operate, the investigative powers in the Office of Fair Trading were extremely limited and the sanctions were so mild as to constitute nil deterrent. Even the failure to register a cartel with the Office of Fair Trading, which was a requirement of the law, attracted no penalty under the law. If a cartel agreement was discovered, usually as the result of a tip-off from an employee or from one of the participants in the cartel who had fallen out with his colleagues, the restrictive practices court would prohibit the agreement. But again there was no penalty; only a slap on the wrist--that is, an order was made to say, "If you do it again, you will be in contempt of court and will be penalised". The most blatant contempt of court by 17 ready-mixed concrete companies resulted, in 1995, in fines totalling £8 million. But I had first brought legal proceedings against those companies in the late 1970s, so it had taken 17 or 18 years before they were finally brought to book.
The present Director General of Fair Trading, Mr. John Bridgeman, recently gave another example. It was mentioned briefly along with a number of other examples by the noble Baroness, Lady O'Cathain, but I want to refer to it also. During 1995 and 1996 two hi-tech companies making filters for removing impurities from liquids entered into an unlawful price fixing agreement. They swapped information on the prices that they charged and limited the extent to which they might undercut one another. Obviously that caused financial loss to their customers. Who were those customers? They were hospitals, water companies, chemical companies and food and drink companies. As Mr. Bridgeman put it in a speech he made on the whole subject of competition law last month,
- "We need to be able to act quickly and forcefully against firms which collude to deny customers the benefits of fair competition".
The noble and learned Lord, Lord Fraser of Carmyllie, refers to those matters as not being criminal but only administrative. I suggest that that conduct is
conspiracy; it is as near criminal behaviour as one can get. It deserves proper investigative powers in the Office of Fair Trading and adequate sanctions as a deterrent to ensure that it does not happen again.The CBI, as we heard, raised objections to the investigative powers contained in the Bill and the possibility of imposing fines up to 10 per cent. of turnover. But that example of a price-fixing agreement as recently as 1995 and 1996 is one of many where over the years the sheer lack of adequate power of investigation has meant that the OFT has had to rely on the chance occurrence of information being forthcoming from disgruntled employees or disgruntled participants in the cartel. I welcome the support of the noble Baroness, Lady O'Cathain, for strong investigative powers within the OFT.
With all that history it seems to be remarkably late for the CBI and the Opposition Front Bench to be raising objections. Up to now the law has been that the Office of Fair Trading can only demand and require the production of documents from suspected companies if it has "reasonable cause to believe" that there is a cartel. But that has been interpreted by the courts in such a way that it creates a Catch-22 situation. To my mind there is an almost Gilbertian absurdity about a requirement for the Office of Fair Trading to have to have firm evidence of the existence of a cartel before it can issue a notice in order to find out whether the cartel exists.
Any business that is anxious, as it is perfectly entitled to be anxious, especially if businesses are encouraged by the Opposition Front Bench, about Office of Fair Trading powers should be somewhat comforted by the requirement in the Bill that the power to force entry into someone's premises is permissible only on a magistrates' warrant. I know that several participants in this debate referred to the need for a High Court judge to give that warrant. But that no doubt is a Committee matter and will be discussed at the next stage.
As to the maximum fine that can be imposed, major UK firms engaging in trade with other EU countries will have been well aware for many years now that precisely the same maximum applies to breaches of Articles 85 and 86 of the Treaty of Rome, on which the prohibitions of the Bill are modelled. The fine is no surprise and should cause no amazement to the leading members of the CBI, who are perfectly familiar with that law to which they have been subject when trading with other countries in Europe for a very long time. After all, we are not talking about penalties actually being imposed. We are talking about deterrence. That is the whole point. Adequate deterrence is what the United Kingdom competition policy up to now has so patently lacked.
It is clear from the Bill that the Office of Fair Trading is to have the key role of front line enforcement of the new law and of giving guidance. I hope the noble Lord, Lord St. John of Bletso, notices that the Bill provides that the director general should give general advice. Before the Bill becomes law he will no doubt give general advice to help to create certainty on what is lawful and what is not. But in addition to that there are clear provisions in Clauses 13 and 21--I looked them up while the noble Lord was speaking--to deal with the
ability of individual businesses to ask for guidance from the director general as to whether their agreements or conduct could possibly be regarded as illegal, and when they get the guidance--assuming the guidance is that it is okay--that it is binding and that it provides a certainty of being able to continue with that conduct without fear of contradiction later.Noble Lords might expect me to make my next point because of my previous contact with the Office of Fair Trading, but I make it to the Minister with some deliberation. It is vital that the Government should make available adequate resources to the Office of Fair Trading and to the competition commission, with its important appeal function to which the Minister referred. We want speedy but also effective and fair decision-making. We do not want those who have to make the decisions to be lacking in resources. Unless I have missed something in the Bill, it seems to need a provision to give the Director General of Fair Trading power to require persons to attend and give evidence. If he does not have that power, it seems to me that something is missing.
When the Bill becomes law, both business and the public will expect the director general to maintain a fair and consistent approach. I rather agree with the noble Lord, Lord Ezra, who was doubtful about the desirability of the provisions in Clause 52 for the sharing of powers with the seven different specific industry regulators in such utilities as telecommunications, energy and water. Those regulators have considerable experience in their respective industries but not--I mean no insult to them--in UK or EU competition law. Might it not be better if their expertise were fed into the Office of Fair Trading, as indeed it is now, and will continue to be, in that important field of competition law concerning mergers and takeovers? There is not concurrent jurisdiction but they feed their expertise and understanding of the industry into the director general before he proceeds.
It is proper, given the enlarged powers to be vested in the OFT, that there should be adequate safeguards and rights of appeal. Hence the importance of the competition commission, and its tribunal function, hearing appeals both on the decisions and on the amount of penalty. I mention that because, in addition to that appeal, there is a further appeal on a point of law to the Court of Appeal. That seems appropriate. I just wonder whether one needs a further appeal on the matter of penalty. Surely an appeal from the DGFT to the Competition Commission should be sufficient.
Those are detailed queries which I ask the Minister to consider. As to the Bill as a whole, I commend it strongly, including the provisions to retain the possibilities of making references to the competition commission on so-called scale or complex monopoly inquiries. As the Minister said, structural or divestment requirements may sometimes, albeit unusually, be needed. I welcome too the possibility of court action for compensation at the instance of those businesses and individuals that have suffered loss from cartel activity or from predatory pricing or other anti-competitive activities by dominant companies. The Director General of Fair Trading should not be the only gate-keeper to
open up an inquiry into business misconduct and abuse. I am not sure precisely where the Bill deals with private actions. I thought I heard the Minister say in his introduction that there would be further provisions on that matter.6.6 p.m.
Lord Chapple: My Lords, I wish to make two brief points on this important Bill. I declare an interest. I am President of the British Radio and Electronic Equipment Manufacturers Association. Our members are deeply interested in the Bill.
Having got the details of the Bill out of the way, my first point concerns the people who are to operate the structure. If they are not sensitive to the problems of the industry and they make a mistake, that mistake may be costly in jobs and investment.
In the Bill the Government say that the removal of the four items from the statute book will bring us more into line with Europe. I cannot see any mention of loss leaders or predatory pricing. I ask the Minister to deal with those points in his reply.
6.7 p.m.
Lord Berkeley: My Lords, I welcome the Bill. It is a major step forward in competition legislation. I warmly congratulate the Minister on the way he introduced it. Even I understood it.
As in so many things, the devil is in the detail. I wish to explore the exemptions and exclusions. I am pleased that the net for the Chapter II exclusions appears to be very much less wide than that for Chapter I. However, as we have heard already, there will be pressure for those involved who have an interest to declare to widen the exclusions and exemptions still further. The noble and learned Lord, Lord Fraser, said that every representation he had received was against vertical restraint. I received representations from the Independent and from the National Consumer Council saying exactly the opposite. Perhaps I have it wrong. Certainly, from the consumer's point of view, there is an opposite view.
I believe that competition is good for business. Monopolies, or near monopolies, are less good for the consumer. They stop innovative ideas and cost-effective performance happening. Monopolies argue that there are economies of scale. We are told that all the time. We are told that economies of scale outweigh the lack of consumer choice. We heard that from British Telecom five or six years ago. Professor Carsberg knocked that one on the head, and I think that things are much better in telecoms now.
I strongly believe that we must resist any pressure to extend the exclusions and exemptions included in the Bill. I would like to illustrate that by giving a few examples on transport. I hope that they will illustrate some of the problems, and also that I shall receive assurances from the Minister either tonight or at a later stage confirming my concerns are groundless.
Perhaps I may now declare an interest. I am an adviser to Adtrans and chairman of the Railfreight Group. Having said that, I wish to start with buses. They
are not regulated at all except in London. Sometimes one has an operator who buys up all the competition in an area or town. He may produce a wonderful service or a terrible service. I went to a lecture last night by Brian Souter, who is the chairman of Stagecoach. He has had one or two run-ins with the Office of Fair Trading. Surprise, surprise: he was very much against this Bill. He said that it would stop him buying buses. He would say that, would not he? I am sure that other people will buy buses. It is back to the same old question; namely, "We shall not invest unless we remain a monopoly". Of course, he is not a monopoly, but he may be in some areas. There is no strong case for exemptions or exclusions here, but there may be a strong case--and that may be something to discuss in the transport forum--for looking into bus routes being franchised in the future rather as they are in London. As regards competition, we must be wary of exclusions.I turn now to trains. As several noble Lords have said, relationships with the regulators are of concern. The noble Baroness, Lady O'Cathain, spoke in favour of deregulation, and quite so. But I believe that if there is a monopoly involved it needs strong regulation. I shall seek to demonstrate a few examples where it has gone wrong. As regards the railways, we start with a very inconsistent policy which has been inherited from the previous government. We have spoken about it many times in your Lordships' House, and the matter needs clearing up.
Perhaps I may give one or two examples. The first is the Channel Tunnel rail link. It is a vertically integrated railway; in other words, the operator and the infrastructure provider are the same company. They are trying to build some Chinese walls and they may be successful. But they are not regulated by the rail regulator who regulates the competing parallel railway. Is not that a bit odd? Why should they not be regulated? For that matter, why should they not come within the scope of this Bill? I hope that they do. I do not know the answer. My solution would be that the scope of the rail regulator should be extended to include the Channel Tunnel rail link and that both should come within the terms of this Bill.
I now move to the Channel Tunnel. Half of it is in the United Kingdom so I suppose that that means it comes within the limits of this Bill. I have been fighting for quite a few months now as regards the concern that the price that Railfreight is charged to use the tunnel is about three times the price that Roadfreight is charged. The reason is quite simple. Roadfreight through the Channel Tunnel is in competition with the ferries but Railfreight is not in competition with anyone. I suspect that the same problem applies to passenger trains. We have seen high prices, with no new competition or services being brought in.
Eurotunnel in this context is an infrastructure provider of railway services which is the only unregulated monopoly of rail services infrastructure in this country. There is an historical reason for that. But why should it be excluded? I do not know whether it is included under Article 85 or 86 of the Treaty of Rome. Perhaps the Minister will be able to tell me or write to me later about
that. There is a contract between the railways, which was British Rail, SNCF and Eurotunnel, behind which everyone hides, saying that they cannot drop their prices. But if lorry prices can come down as a result of competition, why should not Railfreight prices come down, too?To me that is an abuse of a dominant position. I am no lawyer or competition expert. Rail is a monopoly in its own services. Therefore, I very much hope that the Minister will be able to assure me that in future consideration will be given to bringing certainly the United Kingdom half of Eurotunnel within the rail regulator's responsibility, as well as within the limits of this Bill.
I do not know whether the matter will come up under freight freeways or anything else, but it is extremely serious. The consequences are that the Channel Tunnel is taking only 3 per cent. of the unitised traffic between Britain and the Continent. That compares with 30 per cent. of freight going to Southampton by rail. There is a long way to go to catch up in price. It is price that is the problem.
The last example I wish to give concerns the rolling stock leasing companies (called ROSCOS for short). They were set up under the Railways Act 1993. They were to take over all British Rail's passenger rolling stock and lease it to the train operating companies. There were three of them and they got about one-third each. We have heard stories in the past year that two of the companies have been sold off by their original owners. Some of the directors involved have apparently grossed tens of millions of pounds for themselves. There is nothing illegal about that. They have sold the companies.
The latest prospectus that I have seen for the third and last one, Angel Trains, which is being sold off by Morgan Stanley, states that in 1996 the turnover of the company was £291 million, out of which it made an operating profit of £134 million. That is 46 per cent. of the turnover as operating profit. The company has done nothing illegal. It is perfectly legal to do that. But even more worrying for me is that the 20-year forecast shows the trend continuing.
Of course, some profit is necessary, but it should be related to risk. The risk to these companies is virtually zero. If the train operating companies cease to pay the rentals, I believe that the Government will pick up the problem. So it is almost a licence to print money because there is no regulation. That is the key to the matter.
When the Government set up the privatisation of the railways they regulated Railtrack and the passenger train operating companies, but the people in between, the rolling stock companies, were not regulated. So if one grosses up that sum to the three companies, it is equivalent to about £300 million which is taken out of the industry every year. What can one do with that sum of money each year in a railway company? I could go on for years, could I not? It would certainly pay for my favourite project, which is a piggy-back route from London to Glasgow, and that could be done in one year. It would probably be possible to drop rail fares by 20 per cent. for ever. It is big money.
I do not know whether it is a cartel, three monopolies or a combination of both. I do not know whether the existing contracts with the railways mean that this must be one of the exclusions or exemptions. However, I believe that it is against the public interest and that something needs to be done about it. I would like to see that done in this Bill rather than waiting for the possible legislation on transport which might come in a few years' time.
Lastly, as we have been discussing who complains about some of these issues, it is not clear to me in this Bill whether a third party can make a complaint about these matters. I suggest that none of these ROSCOS customers would be likely to complain, because if they then took the trains back into their ownership, the train operating companies could not perform the contracts that they have with the franchising director. These trains are not tradable. They are not fixed to one line, but they cannot be traded around the country between different people. There is a great shortage of them because it takes three to four years to build them. There is a serious problem here. It may be just an example, but I very much hope that the Minister will be able to give me some comfort that the issue can be addressed. I have given your Lordships three examples.
In conclusion, I welcome this Bill. I hope that the Government will resist the temptation to water it down or delay its implementation too much. I shall obviously wish to explore some of the matters I have mentioned, and a few more, during the next stages of the Bill.
6.18 p.m.
Viscount Trenchard: My Lords, I am grateful to the noble Lord, Lord Simon of Highbury, for introducing this debate on the Bill today. I am aware of the wealth of experience and knowledge on competition issues which exists on all sides of your Lordships' House and so it is with some trepidation that I address your Lordships this afternoon.
As an investment banker, these measures are of great concern to me and my City colleagues. Nowadays an increasing proportion of the mergers and acquisitions in which City firms are interested involve more than one jurisdiction. By far the largest proportion of such transactions involve other European Union countries, and I would therefore broadly welcome steps which bring about greater alignment between regulations applied across the European Community and British regulations, where such greater alignment serves to improve further the system of regulation which currently protects the public interest against abuse of a dominant market position in this country. Whatever its imperfections, our system is well regarded by our trading partners around the world. Unfortunately, however, I do not believe that the Government's proposed Bill will have the effect of improving the protection of the public interest against anti-competitive behaviour.
Under our present system of competition regulation, it is impossible for a merger or acquisition to be blocked unless both the President of the Board of Trade, having received advice from the Director General of Fair
Trading, and the Monopolies and Mergers Commission, after an independent investigation, consider the proposed transaction to be contrary to the public interest. The important point is that the MMC is independent and must publish its report. If the MMC considers that the transaction is not against the public interest, the President of the Board of Trade has no powers to block it.However, if the Bill should be enacted, the effect will be a significant transfer of control away from the MMC to the President of the Board of Trade. The current investigative approach will be replaced by one based on prohibitions, and particularly on Articles 85 and 86 of the EC Treaty. Under the proposed system, the primary responsibility for enforcement will be vested in the Director General of Fair Trading, whose decisions will be binding unless overruled as a result of an appeal to the competition commission, which is to be created as the successor body to the MMC. However, the DTI's guide to the Competition Bill describes the competition commission as a "specially created appeals body". I believe it may lack the teeth that the MMC has and the centre of the review process will move away from an independent commission towards the Office of Fair Trading and the President of the Board of Trade. The effect of this move will be to diminish the importance of the public interest and to increase the effect of political influence on merger decisions.
Under the present arrangements, it is possible to obtain confidential guidance from the Office of Fair Trading as to the likelihood of a referral in any particular case. The Bill is not clear as to whether the provisions for guidance as to possible infringement of either prohibition continue to offer guidance on a confidential basis.
Indeed, this is only one area in which this Bill is less than clear. As my noble and learned friend Lord Fraser said, there are several areas where the way in which competition law will actually be applied remains uncertain. Among others, the CBI is rightly concerned that the Bill grants excessive powers to officials of the Office of Fair Trading. The Bill bases prohibition of abuse of a dominant position directly on the vague and general wording of Article 86. Indeed, neither the Bill nor the commentary on it give any real detail about exactly what kind of behaviour the Government intend to prohibit. It is still unclear whether vertical agreements, such as those involving tied public houses, will receive exemptions or not. The Bill does not resolve conflicts resulting from overlap between EU and UK jurisdictions. The treatment of vertical agreements under Article 85 is in any case under review in Europe.
I would also bring to your Lordships' attention the powers available to the Director General of Fair Trading for imposing penalties. Penalties may not exceed 10 per cent. of turnover. This provision discriminates against low margin, high turnover companies as compared with high margin, low turnover companies. It would surely be fairer to devise a maximum penalty which would have an equal effect in its application to all companies.
I do not wish to claim that everything about competition law is perfect at present, but I am surprised that the Government should seek to make such fundamental changes to such an important area of the law in such a hasty manner and before sufficient consultation has taken place. Confidence in the City and in the legal framework that governs it must be maintained, not just in Brussels, but all over the world. The Minister, with his extensive business experience, knows this as well as anyone. This is an area where it may well be that the British flexible approach works better than the European model, which is based on prohibitions, and rather than throw away our own tried and tested methods, perhaps we should try to persuade the European Commission to develop its own system of regulation to be more like our own.
I was heartened to hear the Minister say that the Government continue to discuss the Bill with interested parties. I sincerely hope that on this occasion the Government will listen to the opinions that have been expressed by many noble Lords on all sides of the House and that they will take the necessary steps to amend their proposed legislation. I thank your Lordships for your attention.
6.25 p.m.
Lord Desai: My Lords, I rise to speak more as an academic economist than as a practitioner. The only other economist to have spoken so far has been the noble Baroness, Lady O'Cathain, but she has much practical experience and I have none.
I rise to express certain doubts and general views because I do not understand some of the Bill's provisions. Everybody thinks that competition is marvellous, as if it were an unambiguous notion, but it is not. Some of our difficulties about defining "competition", especially in economic terms, go back a long way and have not yet been resolved. Most economists think of competition as something perfectly static. Perhaps I may give an example. It could relate to baked beans. A commodity could have one price either because it has a monopoly supplier or because of competition.
Perhaps I may give another example of the problems of defining "competition" which we may want to distinguish from economic efficiency, which delivers low cost. One may want to encourage those firms which deliver low-cost products as against those with high margins. It is possible for a company to deliver lower prices despite higher margins if its costs are low enough. I do not know which way people would choose to look at this, but the position may vary considerably if we consider only the margins and a high cost/low margin firm would be encouraged compared to a low cost/high margin firm.
Dynamic competition is different from static competition. Having said that, I do not have any operational tricks up my sleeve, but I should like to turn to a specific case in which some of these issues arise. No doubt my noble friends Lord Simon and Lord Clinton-Davis know that there has been much new
research recently into what is called "industrial organisation". There has been a flurry of work on that subject in the past 15 years, but despite the best efforts of some very brilliant people, we have not advanced very far in terms of establishing operational rules which may be consistently applied with regard to framing the law.When it comes to putting such a law onto the statute book, we must ask about, for example, the criteria and rules that will be used to define the "dominant position". As far as I can see, "dominant position" is here defined in relation to the UK market. Unlike my noble friend Lord Borrie, I am neither a lawyer nor a regulator and I do not know how that phrase will relate to a company which is in global competition. We all like global competition, but very large local firms may be only small minnows in global terms. Their ability to survive global competition may depend very much on their ability to be large in the UK domestic market while remaining small in relation to the global market. In today's world, where there is much innovation and where R&D expenditure is necessary for a firm to survive, even dominant firms have to work hard to survive global competition. That is why I am not sure whether some of the rules, which are based on the static notion, may not do more harm than good. I hasten to add that I do not know how they will be applied.
I give the example of the proposed merger between Nestle and Perrier in the mineral water market. Last week a paper appeared which was written by some French economists, one of whom was in charge of French competition policy. In this industry there were three very large companies which between them had 76 per cent. of the market. If Nestle and Perrier had merged they would have controlled more than half the market, leaving the third company, BSN, with one-third. The Commission insisted that if Nestle and Perrier were to merge they would have to divest themselves of part of their businesses and sell it to BSN so that in the result both parts would be of equal size.
This looks very nice, but those economists have shown that it is the wrong way to encourage competition. Although the paper is a preliminary, theoretical work, I am convinced by it. The authors tried to show that in such a case two approximately equal duopoly firms had more reason to collude and stop competition than if one were larger than the other. By creating one big firm with a half-market share and another with one-quarter of the market one does more for competition than if one has two firms of equal size. That goes against so much of our traditional thinking; namely, that a monopoly is bad, two firms are less bad but still bad but 100 firms are very good. It does not work like that.
I have vague and metaphysical doubts about what this Bill will achieve, in particular because my noble friend Lord Simon said that one of its purposes was to make UK firms more globally competitive than they are. If the Commission in deciding on monopolies and mergers uses criteria that can be shown not to be encouraging competition and we adopt that kind of case law, we must be careful and think more about dynamic competition than static competition.
I have one small practical point to make. Perhaps my point is not very practical but it is slightly less academic than what I have already said. Some noble Lords have said that the OFT must co-ordinate with the utility regulators and that somehow there must be a greater ability to feed in information from public utility regulators to the OFT. This point may be completely irrelevant. However, in the financial services industry, having set up a number of matters, later on we have had to create an overarching body within which particular SROs are nested. We are still going through the process.
Perhaps my noble friend, maybe not now but later on, will give some thought to this matter. He does not necessarily have to give me an answer. But are there any advantages in thinking about setting up an overarching structure now so that two years later we do not discover, having set up this framework, that further primary legislation is required to put the public utility regulators within the OFT framework, requiring another building, another name and another director general for this great body? If this Bill is as large and as technical as it is and it is to be thought through and amended, some of these issues should be looked at now rather than later.
6.34 p.m.
Lord MacLaurin of Knebworth: My Lords, as a past chairman of Tesco with some 38 years' experience of the retail industry, I wish to make some brief observations about competition policy drawing upon my knowledge of that industry. I am also chairman of the England and Wales Cricket Board, where competition policy has another but equally important meaning. In many ways, however, it is more controversial. I am also conscious that I am speaking in the same debate as the noble Lord, Lord Borrie, who has such an outstanding record of representing the public interest in all these issues.
To many people outside this House the subject of the Competition Bill will be dry, and they must feel that it is irrelevant to them. That view could not be more mistaken. Competition policy has an exceptionally important impact on the atmosphere in which industry conducts itself. It sets out the parameters for the practical, day-to-day behaviour of thousands of individuals and companies. Competition policy also determines the mechanics of any government policy for competitiveness, enterprise and even wealth creation. You cannot encourage companies to seize commercial opportunities if the competition policy is not right. You cannot reduce the cost of living for the man or woman in the street if you do not have strong competition policy. You cannot foster innovation or greater choice if these actions are not encouraged by the right legal framework.
The President of the Board of Trade, in her speech to her own party conference, spoke of the importance of using competition policy to ease the pressures on family budgets. This is a matter with which all parts of your Lordships' House will, I hope, agree. Much of the thrust of the legislation from my own Benches has always had this in mind. Allowing access by businesses to new markets and encouraging the discounting of goods plays a role in creating a popular faith in our whole economic
system. It underpins wider consent for the market economy as a whole. This is very important in a democracy. Price cutting by its very nature also helps to build an inclusive society. Lower prices allow more people to benefit from the goods and services we all desire.Your Lordships only have to think of the recent liberalisation of the air markets within Europe to see how falling prices allow more people to extend their horizons and expectations. A competition policy that promotes lower prices will also help more people to share in some of the popular cultural symbols of our day. Those of your Lordships who have grandchildren or young children will know at first hand of their obsession--I do not believe that that is too strong a word--with the latest designer fashions and the "right" logo. Not all of society is able to enjoy those goods. I have no doubt that that can exclude people, particularly children from disadvantaged backgrounds whose parents simply cannot afford to pay these high prices. Designing a policy which helps people to have wider access to the nicer things in life can, however, be complex.
In the field of sport, it is essential to have the ability to secure a fair price for our broadcasting arrangements. It is also right that there should be a balance between satellite and terrestrial television in sports coverage. In cricket some change is needed in the Government's listed events to allow us to strike the right balance between the needs of the sport, viewers and broadcasters.
Strong competition and innovation will help to bring about the goal shared by all governments of rising living standards. The use of competition to deliver these objectives means that government does not always have to use our very limited tax resources.
With the right competition policy, the private sector can help to ensure that the state is not burdened with the task of trying to make society more equal. Competition between companies can do part of that for the state. There is an important point here. The more goods you allow to be sold by a diverse and large number of retailers the more you will improve the quality and standard of living of the population as a whole. You will also bear down on inflation--a goal shared by every government that I can recall.
I hope that the Minister, the noble Lord, Lord Simon, will take the opportunity offered by the Second Reading of this Bill to expand on the Government's attitude to selective distribution agreements. There is a failing in competition here. I am specifically referring to those arrangements which discriminate against certain retailers and their outlets. Those restrictions result in higher prices in the UK than in, say, North America. The result is that supermarkets and others cannot obtain adequate supplies of cultural symbols such as trainers, designer T-shirts, fine fragrances, and fashionable jeans. Poorer families, like everyone else, aspire to those products but cannot afford them.
The current competition regime tolerates the existence of selective distribution agreements by some manufacturers which mean that retailers--large or
small--are not always allowed to sell or even discount categories of products. Selective distribution artificially restricts the number of retailers in any one market, and previous experience might suggest to your Lordships that that is not always in the public interest. I am not an expert on competition policy, but I look forward to taking a constructive part in the detailed scrutiny of this important Bill and helping your Lordships to ensure that the Bill serves the public interest.I must apologise for being unable to stay until the conclusion of the debate as I have another speaking engagement.
6.42 p.m.
Lord Cocks of Hartcliffe: My Lords, first, I must declare an interest, registered in your Lordship's Register, in British Telecom and say that I am particularly pleased to be associated with BT because it is one of the flagship industries on which the future of this country depends.
This is a landmark Bill in a difficult area, and all those with an interest in this important matter are grateful to the Government for providing time in the first Session of Parliament to consider the Bill. I am grateful to my noble friend Lord Simon for his introduction to the debate.
All sides of the House will agree that telecommunications in the UK has been a success story. The UK telecommunications markets are widely recognised as the most open and competitive in the world. Note, I refer to "markets"--not "market". This is part of the issue which I wish to consider.
The recent press coverage of global alliances has demonstrated the scale and international importance of telecommunications. Telecommunications is a key part of the information technology revolution which the Government are already using for education, training and job creation, bringing fresh hope to a new generation. The UK has a lead in this field and innovation is the key to keeping it. New products are in the shops every day, computers are able to send and receive fax and e-mail, and portable telephones and computers are integrated. Many noble Lords will share my experience of being led by the hand through these mysteries by young children, some of them not even 10 years old yet.
Financial trading and the strength of our City financial institutions are underpinned by the revolution that has taken place. The use of technology and the application of information are huge growth industries in the UK and in the world. Why is that relevant to the Competition Bill? A topical example is the current inquiry by the United States competition authorities into the practices of Microsoft packaging Internet software with its other computer software.
Is that unlawful abuse of a dominant position or is that new product innovation? Whatever the answer, if it is the wrong one it could devastate the industrial landscape for years to come; and whatever the answer
it will impact on the industrial picture. We need a structure for competition which optimises the prospect of delivering the right answers.We need the right structures to deliver the right answers. One of the major problems in devising the right structures for telecommunications is that it is no longer clear what the industry is. The traditional markets of broadcasting, telecomunications, computing and media are converging. I have here a quotation from a recent statement by Oftel. I am sorry to weary the House, but it is important.
- "Thirteen years is a long time in the telecommunications and information technology industries of which telecoms is an important part. Telecoms no longer remains a discrete industry sector nor the relevant market for a number of competition issues. Developments in digital technology mean that traditional market distinctions between telecoms, IT and broadcasting are fast breaking down.
- "Telecommunications is now but part of the new digital communications market which encompasses content production, storage, processing, packaging, distribution and the delivery over networks of electronic information or entertainment to customers. Telecoms has changed from a domestic monopolistic utility to an international competitive industry".
A further major change is the emergence of effective competition. There are now over 200 telecoms licences issued and cable TV franchises cover 75 per cent. of the country. Those cable companies have over 2.5 million telephone customers.
No sector of the market is closed to competition. Many large international players are investing in the UK. Investment is currently running at about £5 billion a year. Competition is crossing national boundaries. It is increasingly a global business. There will be a single European market in telecoms in the EU from January 1998.
These high-tech markets are very different from traditional commodity utilities such as gas, water and electricity. Digital information can be processed, packaged and stored and applied as new products which appear in "cyberspace". The processing power of personal computers can be provided in central computer systems sitting within communications networks. The power on the desktop can be replaced by the power within the system. That is not so true of water, gas and electricity, essential commodities which can be ring-fenced and separately regulated.
I therefore note with concern that under the Bill the Director General of Telecommunications would have concurrent jurisdiction with the Director General of Fair Trading in relation to,
- "commercial activities connected with telecommunications".
The communications and information technology revolution has limitless boundaries and we should not create a recipe for rivalry between different authorities. The OFT should be a one-stop for the application of competition policy in telecommunications. That is the best way to ensure that we have the best structure to deliver the right answers on those questions which are so vital to our industrial future. I hope that the Government will give full consideration to that matter.
6.48 p.m.
Lord McNally: My Lords, this has been, in the usual jargon of the House, a wide-ranging and informed debate. I was especially interested in the contribution of the noble Lord, Lord Lucas. I suspect that, like me, he has a young family, and that that was the reason for his many references to McDonalds. Like me, he knows that Big Macs on a Saturday morning are not price-sensitive. We also had the pleasure of attending, yet again, one of the seminars of the noble Lord, Lord Desai, and we are all the better for that.
In introducing the Bill the Minister said that it was complex and technical. That made us all a little bit more comfortable. We could hide behind that assurance. We also welcome the Minister's generous approach and that the Government are open to consultations as the Bill progresses.
My starting point for the Bill is not the noble Lord, Lord Desai, but another academic economist, Adam Smith. I did not believe that we would get this far in the debate without him being quoted. He said that people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in conspiracy against the public or in some contrivance to raise prices.
The experience of the intervening century and the examples given by the noble Baroness, Lady O'Cathain, show that the old boy's assessment was not too far off. These days, we have the added fig leaf of maximising shareholder value to justify all manner of corporate greed. However, as the debate has made clear, the need to control corporate greed and outlaw competitive practices is only one side of the coin. I must admit that, like the noble Lord, Lord Desai, I have probably mellowed over the years. In looking at market position we must look at national, European and global points of view in terms of operation. In the presence of the noble Lord, Lord Borrie, I say with deference that I do not always see the watchdogs and regulators as the good guys. In the American deep south there is a saying that when you are up to your armpits in alligators it is sometimes difficult to remember that the plan was to drain the swamp. By the same token, in business it is sometimes difficult to remember that the name of the game is producing the right products of the right quality at the right price at the right time when you are up to your armpits in regulators.
Tonight there has been a general consensus that a new Competition Bill is timely. As my noble friend Lord Ezra made clear, the Government can expect overall support for the measures from Members on these Benches. However, as has also been made clear tonight,
the Committee stage will require us to examine in detail the three tests which my noble friend set for the measure; namely, that it should operate simply and transparently and bring us into line with EU law.We will want to examine in detail the powers and effectiveness of the Director General of Fair Trading and the new competition commission. My experience of the MMC investigations is that they have sometimes been over-academic and over-leisurely. Only certain people in a company--even a very large company--have the experience and knowledge to respond to an OFT or MMC investigation and they are often the same people at the sharp end of making a particular business a success. A long drawn out and other-worldly investigation may seem par for the course for the investigatory body, but it may be a daunting diversion of scarce management time for the company concerned.
In another context of law reform, the analogy has been made of replacing the blunderbuss with an armalite. Whether in this context that analogy is completely fair I am not sure, but I am sure that industry will want Government and Parliament to make every effort to deliver a Competition Act which is understandable and clear about what is expected of companies and which produces efficient and focused investigations. At the same time, Parliament will want a full debate of the scrutiny and powers of search and entry requested in the Bill, which seem very far reaching.
My noble friend Lord Ezra dealt with the problems of concurrent and overlapping powers and I noted that he was supported by the noble Lord, Lord Borrie. Again, I put my swamp analogy to Ministers and say that it is bad enough that you have to deal with the alligators, but it becomes double jeopardy if you have to deal with snakes too. I hope that Ministers can give the House a reassurance on that matter, which is concerning a large number of companies. In so doing, Ministers should beware of turf wars and empire building by regulators. It is totally unfair to companies trying to run a business if they end up being tugged this way and that by regulators anxious to establish jurisdiction over them.
As was indicated by the noble and learned Lord, Lord Fraser, another area where the impact of the Bill will be scrutinised is that relating to small businesses. The Government have recently committed themselves to a vigorous and positive policy towards small businesses, yet the Federation of Small Businesses has sent us a powerfully argued brief setting out the various competitive difficulties it faces in this important sector. Indeed, in its brief the federation called for an end to the continuation of a situation in which small businesses are penalised for conforming to Government rules and regulations when those with real market power operate with unfair commercial advantage. Both tonight and in Committee we will want Government assurances about the needs and concerns of small and medium-sized enterprises.
As my noble friend Lord Ezra indicated, the other interested party in competition law is the consumer. We believe that it would be an opportunity missed if the Government did not build effective consumer representation into the regulatory framework.
Tonight we have heard about a number of anxieties; namely, the impact on pubs, pharmacies, retailers, transport operators, the City of London and sports rights on TV. Perhaps I may add two other dogs which have not barked in the night. First, we received representations from the Food and Drink Federation and the British Brand Group, among others, about the fact that lookalikes and loss leaders are not dealt with in the Bill. That was dealt with briefly by the noble and learned Lord, Lord Fraser. Surely, this is a missed opportunity which Ministers should rectify in Committee.
Finally, the noble Lord, Lord Cocks, spoke of the media. During the discussions which the Minister offered I should like to examine whether we have an opportunity to deal with predatory pricing, loss leading and abuse of power in the newspaper industry. As the noble Lord, Lord Cocks, emphasised, we are told that we are on the dawn of the information age; a post-industrial society of great power and influence. It seems to me that in terms of guaranteeing freedom, independence and access, the rules governing the big players are little better than those controlling 19th century mill owners before the Factory Acts. We need to be very sure that the powers to control abuse of power--power which is often global as it affects the control, access and independence of our media--are effective.
We are told that it was fear of the Sun which caused the Government to take their cautious approach to EMU. Perhaps a media obsessed government are too scared to address the issues of abuse of power, predatory pricing, dominant position, cross-media ownership and so forth. But how we regulate and control the concentration of power in the information age is as big a challenge to Parliament and our democratic process in the 21st century as was bringing order and responsibility to unfettered capitalism in the 19th.
From the size and complexity of the Bill, from the wide range of submissions made tonight and sent to us and the Government from consumer groups and industries of all sizes, it is clear that we are heading for a very interesting Committee stage. Perhaps I may finish, therefore, by explaining a question posed by the noble Lord, Lord Lucas. He asked how vertical arrangements between political parties worked. Perhaps I may explain that in respect of this Bill, Ministers can look forward to constructive support from candid friends.
6.59 p.m.
Lord Kingsland: My Lords, having heard the noble Lord, Lord McNally, wind up for his party, I hesitate to say that this has been a constructive and wide-ranging debate. However, I certainly believe that it has. Indeed, I find myself in agreement with almost everything that almost everyone said tonight. If the debate had been twice as long, I am sure I would have agreed with almost everything that everyone would have said had they had the opportunity to say it.
If one speech remains etched particularly sharply on my memory it is that by the noble Viscount, Lord Trenchard, who said, in the course of a spirited
intervention, that he thought the right approach was to persuade the European Community to adopt our principles of competition law. I think that that reflects his distinguished service antecedents by following the great dictum that when everything about you seems to be collapsing, you go on the attack.We have had a good debate on the general principles. It is now time to look ahead to the work of the Committee sessions. In a few moments, I wish to pick up a few points that have been made and try to show the direction in which Her Majesty's loyal Opposition would wish them to be taken.
First, I deal with the question of the conflict between various regulation regimes. That is a serious point. The existing proposals invite order, counter-order, disorder. I suggest that the way ahead is to create a hierarchy between the OFT and the five regulators. I believe that the Government must grasp the nettle firmly and put the OFT at the top of the hierarchy because there must be a common competition jurisprudence which infects the work of all the regulators. Otherwise, there will be discrimination between the work of many important, what I would call, public utility operators.
However, there is another confusion which has not yet been mentioned in the debate. Although the OFT will be responsible for the Part II prohibition on monopolistic practices--the abuse of a dominant position--it appears that what will become the competition commission, but what was the MMC, will retain responsibility for dealing with complex monopolies. There is surely a serious danger that the decisions made by the MMC and the decisions made by the OFT in a particular sector which exhibits monopolistic tendencies will conflict.
We support the retention of the complex monopoly provisions but believe that it is a recipe for disaster if they are handled by a different organisation. Therefore, our firm recommendation is that the former MMC responsibilities which, under the current draft, will become competition commission responsibilities, should be given to the OFT. The MMC has done sterling work for the nation over many decades but it has not exhibited consistency in its decisions. Therefore, it is perfectly reasonable for the OFT to take over that work and carry it on in conjunction with its work on the Part II prohibition.
There is another reason that I say that. I do not think it right that the competition commission should have, on the one hand, an investigatory role and, on the other hand, a judicial role. I know that the Government intend to compartmentalise them but justice must be seen to be done as well as done. It would be much cleaner if the Competition Commission concentrated uniquely on its judicial role and the whole investigatory procedure were left to the OFT. Those are my reflections on potential confusion in the regime.
I turn now to the matter of procedure. There is a great bugbear in passing modern legislation--and I readily admit that in the course of 18 years' very distinguished service to the nation, Her Majesty's Opposition, when in government, were sometimes guilty of this too--containing general enabling clauses when the real bite
turned out to be in the statutory guidance which frequently did not appear for several months or even years.The real bite in this legislation will be contained in the procedural safeguards for the companies to be subject to the investigation by the OFT. It must be laid down absolutely clearly in the guidance what rights the companies or individuals will have if they are subject to investigation.
It must be made absolutely clear what offence they are said to have committed in a reasoned statement; and they must have plenty of time to respond to that reasoned statement. It must be clear also, since the OFT will conduct the investigations, that there will be an opportunity not just for written submissions but also for oral submissions and that the OFT official who adjudicates at those oral hearings has nothing whatever to do with the investigation. I say this because there is a clear danger that the OFT, which is investigator, prosecutor, judge and jury, will confuse those responsibilities.
It must be made clear also that, except in cases of established confidentiality, there is full discovery of documents on both sides; that is to say, including the OFT. And, of course, the basis upon which penalties are made must be set out very clearly.
I hope that all those matters will appear in a form at which this House can look in Committee. I do not ask for final statutory guidance but we must have an idea of how the government thinking is developing in that area.
As the Government well know, there has been a considerable amount of jurisprudence in relation to the rights of individuals in the European Court of Justice and more recently in the European Court of first instance. It is fairly clear from the decisions of the courts that they have not always followed the standards that we would expect as a free and democratic society when individuals are accused of offences. And we are talking about criminal offences because there are fines at the end of them.
In that respect, the European Community has not fully incorporated the principles laid down in the European Convention on Human Rights. I understand that it is the Government's intention in due course to introduce a Bill which will have the object of incorporating the provisions of the European Convention on Human Rights. I trust that in formulating procedures for investigations by the OFT, the principles which lie behind that convention will be fully incorporated; because it is not clear from Clause 58 of the draft Bill that they will. It is clear that the general rules of Community law will be incorporated but it is not clear that that goes to procedure.
If we just have the jurisprudence of the European Court of Justice on procedure incorporated, that will not meet our existing and, perhaps, future incorporated obligations under the European Convention on Human Rights. I suggest that that area will need some thought by the Government.
I make one final point on the question of jurisprudence. I said earlier that we are talking about potentially criminal offences because a fine lies at the end of them. Are we right in making the court, which is the competition commission, just a commission? Should it not be a full branch of the High Court in the same way as the restrictive
practices court is a full branch of the High Court? There are suggestions in the jurisprudence of the European Court of Human Rights that where criminal offences are concerned, that is the only way in which a state can meet its obligations to the accused.I turn now to what is a very difficult area. I was very struck by the remarks of my noble friend Lord MacLaurin on vertical agreements. I do not know what the answer to that is. It is a pity. I wish I did. But I can speak even less confidently about that than I can about what I just said. It is clear that in some circumstances there can be what I would call Article 85 transgressions and so an absolute prohibition would be at least premature.
How does one handle the situation? There are two ways in which to handle it in principle. One is to exclude all vertical agreements, subject to a discretion by the OFT to include those it finds offensive. The other is to take the opposite approach and say that basically all vertical agreements are in there subject to very generous block exemptions and to wait to see what the European Commission will decide about that--as I understand the general idea of the legislation, which I fully endorse, it is to approximate with what has been done at European Community level. Therefore, this is one of the areas where we need to make haste slowly. If we rush ahead too much, we may find that we have to change everything that we have done in the light of what the European Commission has done. I hope that we shall make progress in this area in Committee. However, in principle, the debate today has not taken the Government very far, hard though we have all tried to do so.
There is a point on exemptions that I should like to make. It is one that I believe the Government ought to find easy to deal with--namely, whether or not an exemption granted by the OFT should be backdated to the date of the agreement. It is pretty clear to me that it should be. I believe that there is somewhere in the Bill, although I cannot recall where, a clause which suggests that there will be no penalty for the period between the moment that the agreement was made and the notification. If that is so, logically it seems to me that the exemption should be backdated unless there was some good reason for not doing so, in which case the OFT would have to give clear reasons for not giving the general exemption.
I believe that I have said enough for Her Majesty's Government to be going on with. In conclusion, I should like to say how much we appreciated the way in which the noble Lord, Lord Simon, presented the Bill. We have great respect for his industrial record. We are particularly lucky that he is taking the Bill through the House. We very much look forward to working closely with him on it.
7.11 p.m.
Lord Clinton-Davis: My Lords, I should like to begin by welcoming my noble friend Lord Kingsland--if I may call him thus; indeed, he has been a friend for a very long time--to the Opposition Front Bench. I hope
that he enjoys a long tenure in that position. If I may say so, his approach was a very reflective one and one which I and my noble friend Lord Simon much appreciated. I shall, with my noble friend Lord Simon, ponder on the points that the noble Lord made about jurisprudence, about the rights that companies will have, about exemptions and, indeed, about the backdating of exemptions. I say that without making a clear commitment. However, I believe that they are interesting points and ones which will be appropriately dealt with in Committee and during the other stages of the Bill.I also very much appreciate the points that the noble Lord made about my noble friend which were in stark contrast to the remarks made by his right honourable friend in another place. I believe that such personal comments would not have been introduced in this place by any Member of the Opposition Front Bench of whom I can think. I have been in this House long enough to know them; indeed I knew many of them in another place and also from my many visits to the European Parliament when I first saw the noble Lord, Lord Kingsland.
The noble Lord's approach was in marked contrast to that of his right honourable friend who leads on such matters in another place. He appeared to reject the whole purpose of the Bill, the way in which it has been drafted and the consultation process, with his usual ability to disgorge any sort of reflective approach to the sort of matters with which he is dealing. Indeed, one could hardly say that his approach was constructive.
I thought that the noble and learned Lord, Lord Fraser, with whom I have jousted over some period of time in a number of respects and in interesting debates--and this will certainly be one of them--seemed to be walking a tightrope between the instructions he received from his right honourable friend the shadow Secretary of State and his more usual, characteristically reflective way of approaching such matters. The fact that the noble and learned Lord did not wholly succeed is not entirely his fault; indeed, he faced an impossible task.
One thing seems overwhelmingly clear from today's debate; namely, that this Bill is overdue and that the reform of competition laws has, as the Economist put it,
- "languished on the Whitehall agenda for over a decade".
The other introductory point that I should like to make is to repeat what I said in my intervention during the speech of the noble and learned Lord, Lord Fraser, which was reiterated by my noble friend Lord Simon. We have engaged in what I believe to be an appropriate consultation process. We have tried to address the
concerns and indeed have met many of the concerns of those who have made submissions to us. However, the process of consultation continues. The voice of Parliament has only now been heard for the first time. This is not a party politically contentious Bill. It follows, therefore, that when my noble friend and I see the word "Resist" on briefs which will accompany the Committee stage, we shall view that word with a degree of reserve. That is not to say that it is, "Open Sesame", and that we will accept everything that noble Lords put forward.However, many constructive points have been made in today's debate. It is appropriate, therefore, that the Government should reflect very carefully on the matter. When the Bill is ultimately enacted it will have a great effect on business and enterprise in this country. No speaker in the debate spoke to the detriment of those objectives. There was of course a philosophical intervention from my noble friend Lord Desai upon which I shall certainly muse; indeed, I also listen very seriously to him. I believe that all of us are determined to produce legislation in this area. We may not ultimately agree in the final analysis, but we shall do our best to produce an Act which is effective and in the interests of our business community and consumers. That is what the legislation is about, as a number of noble Lords said.
Today has been a very important part of the process that we have sought to conduct to ensure that the Bill will work effectively. It is important that practitioners, as well as business and consumers, should also receive an Act which they are capable of understanding, thus enabling them to pass on the best advice about it to those whom they are serving.
I am most grateful for all the interventions made during the debate. I should now like to turn to the impossible task of replying to at least some of the points raised. I cannot possibly deal with all of them, nor shall I promise to write to noble Lords individually on certain points. Indeed, we shall tackle them at the appropriate time--that is, during the subsequent stages of the Bill. However, if any noble Lords who participated in the debate wish to pursue a matter by way of correspondence or discussion with my noble friend and/or myself before Committee stage, we shall be happy to meet them, as my noble friend said earlier.
I start with specific references to the speech of the noble and learned Lord, Lord Fraser. He said that the Bill was half-baked and short on detail. That is all Redwood stuff, of course. But he suggested that we had honed inertia to a fine art. I do not think that he is entitled to talk in those terms. While those were not his exact words, it was the effect of what he said. I should not have to remind the noble and learned Lord of the detailed consultation--I do not simply refer to the 150 letters, and so on--that we have had. I was disappointed--I say this in the friendliest possible way--that he had little, if anything, to say about the shortcomings of the present law: about the massive delays in dealing with abusive practices; and the inadequate powers of the investigating authorities. He
did not deal with the point that I think he should have considered in advance--it was made by my noble friend Lord Borrie--about the effective absence of deterrence. But perhaps we shall get together further. Perhaps he will think about the matter, and I hope come more into line.The noble and learned Lord raised points about the chilling effect, as he called it. It is part of the submission made by the CBI. I believe that it coined the phrase the "chilling effect". I have seen no evidence in support of that proposition. It is incumbent upon those who put forward arguments to address further and better particulars when an allegation or assertion is made. But I have no doubt that we shall come back to that matter. Perhaps the CBI will be able to elucidate what it says to rather more effect. The CBI is not against the Bill. It has some reservations about it. I hope that we shall be able to deal with them in the course of amendments put before us. The CBI welcomed the Bill initially. Curiously, too, some might have thought, the Institute of Directors has given general support to the Bill. Therefore, with respect, I believe that the noble Lord was not right to assert that somehow or other many people are opposed fundamentally to what we are doing.
If I may, I shall deal with questions on the pharmaceutical sector and the detailed matters to which the noble and learned Lord alluded at Committee stage. I am sure that he will come back to them. They are concerns which have been notified to us.
I do not accept the point the noble and learned Lord made that SMEs should be completely excluded from competition law. Consumers suffer frequently from the activities of small firms, as they do from large ones. One has only to think of the cartels that have been found among the small cement makers to which reference was made. I do not believe that it would be right to exclude SMEs from the powers altogether. But we have said that we are considering the way in which SMEs will be brought into the whole process. We shall do so with sympathy as regards the SMEs, and when considering the detailed points later.
The noble and learned Lord also referred to compliance costs. We have stated clearly the position on compliance costs. I have now found the note. I loved the way in which my noble friend Lady Farrington referred recently to the fact that she was in considerable difficulty in answering a question because she was short of her glasses. I wish to be accurate on this issue because the noble and learned Lord is entitled to a reply. My noble friend Lord Haskel intervenes effectively by turning on the light. I shall be able now to cast some light on the subject. I believe that in general terms the benefits of the regime that we propose to introduce will outweigh the costs substantially. It is not our wish to put any unnecessary burden on business beyond that which is necessary for the working of the regime.
We provided the House with an estimate of the compliance costs to business as well as the potential benefits to the economy from the legislation proposed. That has been put to business and we have taken account of what business said to us. However, one of the aspects of compliance costs is to gain some coherence between
our own rules and those of the EU. I refer to Articles 85 and 86 of the treaty. Consistency in complying with those domestic and European levels, I believe, will save costs rather than cause companies to incur them. Our estimate is that the on-going cost of the regime to business will be minimal, ranging between a reduction of £2.2 million and an increase of £4 million per annum. One-off costs linked to the introduction of the regime are estimated at between £6.4 million and £14.3 million, a significant proportion of which is attributable to the cost to business of reviewing agreements previously considered under the RTPA. We are looking closely to ensure that the exercise will be cost effective. Perhaps the noble and learned Lord, Lord Fraser, will welcome this point. We shall consider whether there is a need to bring forward a government amendment to alleviate any burden on business which might arise in that connection.I should deal with one other matter in relation to the utility sector regulation. It is a point which the noble and learned Lord and others raised. The prohibitions will apply to the regulated utility sectors--telecoms, water, electricity, rail and gas. We have kept in close touch with sector regulators as the Bill developed. They will be able to exercise concurrently most of the powers of the Director General of Fair Trading in relation to prohibitions in their sectors. The sector regulators already have concurrent powers under the Fair Trading Act 1973 and the Competition Act 1980. They will be able to issue advice and information about the application of prohibitions in their sectors. They will do that in consultation with the Director General of Fair Trading. It is not our intention to make changes to the nature of sector regulation via this Bill. The matter is being considered in a different context; namely, the review that we are making of the powers of the regulators.
I shall not deal with the pharmaceutical sector. I turn immediately to a matter raised by the noble and learned Lord, Lord Fraser, and many others about the powers of investigation. I very much agree with my noble friend Lord Borrie. The noble Baroness, Lady O'Cathain, referred dramatically in many ways to this issue. Those powers have to be adequate. They have to be effective; and they must provide an immediacy about the way they will be applied. Clearly, the powers available at present lack effectiveness. Of course the House is right; and if I were on the other side I should raise a number of issues. The House should not believe that Ministers are unconcerned about civil liberty rights in this respect. We want to get the balance right. We do not in any way dismiss the fact that the powers that we seek to invoke are very tough.
The question therefore is: how do we achieve the right balance? We have had a good "first go" at that, but I do not deny that it may be right, for example--a point raised by the noble Lord and by a number of my noble friends, Lady Nicol among them--to consider whether the authority, the warrant to enter premises, should be sought from a High Court judge rather than from a magistrate. The noble Baroness, Lady O'Cathain, also referred to that matter. We will examine the issue further. We have been examining it. The House will be entitled to share in our deliberations.
The noble Lords, Lord Ezra and Lord St. John of Bletso, raised some important points in relation to the guidelines. Both noble Lords wanted them incorporated into the Bill. Our immediate reaction is that they should not be. But there is a need for the House to be consulted about the guidelines. I do not know whether I can comply with demand in regard to the time limit prescribed by the noble Lord, Lord Kingsland. Perhaps I might attract the noble Lord's attention--I have been rebuked for a similar offence. I rather doubt that I can. The guidelines are a matter of concern for the House. However, we have quite a long time in which to deliberate on these matters. The courts will apply the prohibitions. That is the backcloth and the protection that is available.
The noble Lord, Lord Ezra, liked the idea of regulators doing the investigation, and of adjudication falling to the OFT. What is intended is that regulators should have the full powers of the director general to apply the prohibitions. We are not satisfied that it would be right to create separate stages of investigation and adjudication for cases in the regulated sectors. The decisions of the Director General of Fair Trading and the regulators are subject to appeal to a tribunal.
The courts will apply the prohibitions consistently with the Director General of Fair Trading and the regulators. The application of the prohibitions is clearly a matter of law, and the courts, the regulators and the director are all subject to the governing principles clause.
I turn to the points made by my noble friend Lady Nicol. I have already dealt with her point about safeguards before entry. We have dealt with the matter of the transition, and are prepared to look carefully at whether we have made any errors in our calculations in that regard. I am sure that we shall return to the matter as a result of my noble friend's intervention at a later stage.
As to SMEs, the noble Lord, Lord Lucas, in a characteristically helpful and thoughtful speech, raised a number of important points. I am glad that the noble Lord said that they are essentially matters for Committee stage. I thank him for giving notice of those points. However, time marches on, and it would be appropriate for me to take advantage of his invitation not to deal with them on the Floor of the House tonight.
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