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Brexit: competition and State aid Contents

Chapter 2: The current competition landscape

EU competence in competition and State aid

9.The EU’s competence in the area of competition law, including State aid rules, dates back to the 1957 Treaty of Rome, which established the European Economic Community and provided for “a system ensuring that competition in the common market is not distorted”.4

10.Today, the EU’s competition policy is derived from rules set out in the Treaty on the Functioning of the European Union (TFEU), and encompasses three ‘pillars’: antitrust, mergers, and State aid. While the EU retains exclusive competence to establish competition rules necessary for the functioning of the Single Market, the framework is intended to reflect the principle of subsidiarity and focuses on activities under all three pillars which could affect trade or distort competition within the EU.5

Antitrust

11.The EU’s antitrust legislation (relating to and prohibiting anti-competitive behaviour of, or between, undertakings including anti-competitive agreements and abuse of dominance) is contained in Articles 101 and 102 TFEU.6

12.Until 2004, the Commission had the exclusive right to decide on the compatibility with EU law of agreements between undertakings. The entry into force, on 1 May 2004, of Regulation (EC) 1/2003 established a decentralised system of competition enforcement, which made it compulsory for national competition authorities (NCAs)—in the UK, the CMA—to apply EU antitrust rules directly in cases of agreements or practices which might affect trade between Member States.7

13.The Regulation also provided for the establishment of the European Competition Network (ECN), which is a framework for close cooperation between NCAs, ensuring consistency in the application and interpretation of EU law, and facilitating the efficient allocation of cases where several NCAs have an interest (Member States are automatically relieved of their competence where the Commission initiates its own proceedings). Significantly, the Regulation also allows NCAs to exchange, and use in evidence, confidential information for the application of EU antitrust law.8

Merger control

14.Merger control was only introduced at an EU-level in 1989 with the adoption of the EU Merger Regulation, which was revised and replaced by the current Merger Regulation (EUMR) in 2004.9

15.The EUMR prohibits mergers and acquisitions which would significantly reduce competition in the Single Market. The Commission is empowered to examine mergers with an ‘EU dimension’ (based on certain turnover thresholds in more than one Member State). If a merger meets ‘EU dimension’ thresholds, companies must notify it to the Commission prior to its implementation, even if the merger affects competition in the market of only one Member State.10

16.This system provides a ‘one stop shop’ whereby merger reviews are usually dealt with either by the Commission or by a Member State authority. In some cases Member States or the parties involved in the merger may request transactions which would otherwise have been reviewed by the Commission to be considered at the Member State level, and vice versa. For such cases, the EUMR provides for a referral mechanism for Member States and the Commission to transfer cases between them, subject to the Commission’s approval of a reasoned submission from the parties to the merger to justify the transfer.11

17.The Competition Appeal Tribunal (CAT) told us that the EUMR “effectively embraces all the larger, international and cross-country mergers”, such as the recent London Stock Exchange Group and Deutsche Börse merger—which was blocked by the Commission—and the merger of US-based chemical companies Dow and DuPont, which the Commission approved.12

State aid

18.The EU’s State aid rules are contained in Articles 107–109 TFEU, which prohibit all State aid by Member States unless it is deemed ‘compatible’ for reasons of general economic development (including regional aid to disadvantaged areas). Member States are required to notify any planned aid to the Commission, which is then responsible for assessing and issuing a decision on whether the aid meets the compatibility conditions.13

19.The Treaty defines State aid as:

“Any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods.”14

This definition has been broadly interpreted by the Commission and Court of Justice of the European Union (CJEU) to encompass a wide variety of state measures, including subsidies and measures that are economically equivalent—such as access to government assets on favourable terms or favourable tax treatment.15

20.To minimise the burden of State aid notification, a General Block Exemption Regulation (GBER) was adopted in 2008, and revised in 2014, which declares certain categories of aid compatible with EU State rules and exempts Member States from the obligation to notify aid under those categories to the Commission. The GBER applies across a range of sectors and numerous types of aid measures, such as aid to support small and medium-sized enterprises (SMEs).16 The European Commission’s State Aid Scoreboard 2016 shows that more than 96% of new State aid measures in the EU in 2015 were covered by the GBER.17

21.The Commission has also issued guidance and adopted additional Regulations with the aim of further simplifying the process of State aid notification and approval. These include, for example, the 2014–2020 regional aid guidelines and the de minimis Regulation, which established a threshold for small aids which fall outside the scope of EU State aid control.18

Public procurement

22.Public procurement in the EU is subject to the provisions of the EU public procurement Directives, which coordinate national procurement rules.19 Nonetheless, there is a relationship between public procurement and State aid insofar as the awarding of a public contract may confer an economic advantage which an undertaking would not have received under normal market conditions. As a result, there have been instances of uncertainty regarding the application of State aid rules in the case of public procurement.20

23.In 2016, the Commission issued a ‘Notice on the notion of State aid’ to provide clarification on this issue. The Notice confirmed that:

24.As such—while Brexit is likely to have implications for public procurement in the UK—we consider these matters outside the scope of this inquiry and do not discuss them further in this report.

Jurisdiction

25.The CJEU is responsible for interpreting competition law, including State aid rules, as they are set out in the Treaties. The CJEU has the jurisdiction to review, cancel or amend fines and Commission decisions. National courts and tribunals can refer cases to the CJEU for a preliminary ruling on the interpretation or validity of EU competition law. Member States can also challenge Commission State aid decisions and intervene in cases before the CJEU which relate to State aid. The CJEU may then rule on whether or not the Commission, in reaching its decision on the compatibility of the aid, has erred in law.22

The UK’s competition regime

26.The key elements of the UK’s competition legal framework are contained in the Competition Act 1998, which prohibits anti-competitive agreements and abuses of market dominance, and the Enterprise Act 2002, which contains provisions on merger control.23 In relation to State aid, however, as the East of England European Partnership highlighted, “virtually no UK-made rules exist at present”, as EU law is applied directly, with the Commission responsible for approving any aid not covered by established block exemptions.24

27.The CMA is the UK’s lead authority for competition and consumers, with responsibilities including:

28.Under the Competition Act 1998, various UK sector regulators have ‘concurrent’ competition powers and may take action against anti-competitive behaviour and abuses of dominance in their sectors.26

29.The CMA and sector regulators enforce the prohibitions against anti-competitive conduct of, or agreements between, undertakings under EU and national competition law through a civil (administrative) regime. Decisions on whether an infringement has taken place can result in fines of up to 10% of an undertaking’s worldwide turnover and disqualification from directorship of the individuals involved for up for 15 years. Infringement decisions can also be relied upon in support of follow-on private actions and damages claims.

30.Alongside this, the CMA also has a criminal enforcement function, focusing on individuals involved in cartels. Under the Enterprise Act 2002, individuals convicted of a criminal cartel offence can be fined, imprisoned for up to five years, have assets confiscated, and be disqualified from directorship for up to 15 years.27

31.In relation to mergers, under the Enterprise Act 2002, the CMA is tasked with determining whether a relevant merger has or may be expected to result in a substantial ‘lessening of competition’ within any market or markets in the UK for goods or services.28 Although the Act establishes the primacy of this competition-based test, it also permits the Secretary of State to intervene in a merger on the specified public interest grounds of national security, media plurality, or maintaining the stability of the UK financial system. Unlike the EU, the UK operates a voluntary merger notification regime, but the CMA does have powers to review mergers which have not been voluntarily notified to it.29

32.The Competition Appeal Tribunal (CAT) is the UK’s specialist competition tribunal where—by appeal or judicial review—decisions of the CMA and sector regulators relating to mergers and antitrust may be challenged. The CAT also hears private claims for damages or injunctions resulting from infringements of competition law.30

Strengths of the UK regime

33.The Commercial Bar Association (COMBAR) told us that the UK’s competition regime had been modelled on the EU system, and noted that the Competition Act 1998’s antitrust prohibitions closely reflected Articles 101 and 102 TFEU.31 Dr Bruce Wardhaugh, Senior Lecturer in Law at the University of Manchester, suggested that this close relationship, combined with the authoritative status of CJEU judgments on the interpretation of EU competition law, had resulted in “an alignment of the goals of competition policy between the EU and the UK, with consistency being the paramount objective”.32 Indeed, as the CMA explained, section 60 of the Competition Act 1998 requires UK courts and competition authorities to ensure as little divergence as possible from the way corresponding questions are dealt with under EU law.33

34.Witnesses generally agreed that the UK competition regime was well-established and highly regarded internationally. The Law Society, for example, told us that England and Wales was “a leading global centre for competition law”, with an experienced judiciary and numerous specialist competition practitioners.34 Professor Pinar Akman, Professor of Law at the University of Leeds, emphasised that the UK’s influence had been “very positive on the development of EU competition law” and that the CMA was a “very respectable authority among its international peers”.35

35.COMBAR suggested that the strengths of the UK regime were drawn in part from its relationship with the EU system, which had resulted in a “powerful system of deterrence” against anticompetitive conduct, and a “dual system of protection” for UK businesses and consumers. COMBAR warned:

“There is a risk that Brexit (and particularly a ‘hard’ Brexit) could serve to substantially undermine the effectiveness of [the UK’s competition] regime. The object of post-Brexit competition policy should be to preserve its effectiveness to the maximum extent possible”.36

Issues with the current system

36.Although witnesses were generally positive about the UK’s competition regime—and the wider European framework within which it operates—they highlighted some issues with the current system, particularly the EU State aid regime.

State aid

37.The UK State Aid Law Association (UKSALA) highlighted the problem of delay, with even relatively straightforward cases taking six months or more to complete the process of notification and approval by the Commission.37 George Peretz QC, Joint Convenor of UKSALA, explained:

“[Delay] is an even more serious problem once you get outside Whitehall and start talking to local government, where the difficulty is in two stages: if the advice is that they are going to have to notify [the aid], they first have to talk to central government and get them to notify, because that is a matter for central government to do, and then, having overcome that burden, they then have to deal with Brussels, and the time that takes.”38

38.The Local Government Association (LGA) told us: “Councils find the EU State aid regime to be complex”, requiring in-depth knowledge of various pieces of EU legislation, and that the cost of external legal advice could be “disproportional to ensure a small grant is compliant with EU rules”.39 COSLA, the representative body of local government in Scotland, noted that the EU State aid framework and structural and investment funds, while aligned, were “often at odds”, with apparently contradictory guidelines and requirement levels.40 The East of England European Partnership said that the de minimis threshold could “present problems for local authorities procuring public services”, as the volume of paperwork required for contracts exceeding the threshold could “severely complicate the provision of services intended to benefit only the local area”.41

39.Professor Steve Fothergill, Director of the Industrial Communities Alliance, representing local authorities in industrial areas of England, Scotland and Wales, criticised the aid intensity ceilings for regional aid. While noting that allowances were greater in West Wales and the Valleys, and in Cornwall, Prof Fothergill told us: “across the rest of Britain there is a 10% ceiling on support for capital investment”, which was “often not enough to influence [companies’] decision-making”.42

40.Herbert Smith Freehills LLP pointed out the additional restrictions on specific sectors, such as steel, and noted that the issue of EU rules constraining the Government’s ability to act during the 2016 steel crisis had featured in the UK’s EU referendum debate, particularly in affected communities.43

41.EEF, the manufacturers’ organisation, told us:

“Frustrations with the EU State aid framework are often with bureaucracy rather than the regulations/guidelines themselves. The UK Government has actually chosen to take a more stringent approach to awarding compensation than the EU guidelines require, but significant delays and frustrations have been caused by the overly pedantic and legalistic approach Commission officials have taken to considering applications based on a very specific reading of the guidelines rather than any rational concern for negative impacts on competition”.44

42.Whether, and to what extent, the UK Government has actually been significantly restricted by EU State aid rules is discussed in Chapter 6.

Consumer concerns

43.Caroline Normand, Director of Policy at Which? told us that “not all markets [were] working well in the UK by any stretch of the imagination”, highlighting energy prices and home phone and broadband services as significant concerns for consumers. Ms Normand considered that these problems could be solved by improving the operation of the current system without requiring a “fundamental change” in competition rules.45

44.By contrast, think tank Res Publica argued: “Something has gone wrong with our markets and something has gone wrong with our competition law.” In particular, Res Publica suggested that UK and EU merger controls had failed to prevent market dominance by online platforms, which were able to buy up innovative, smaller firms in transactions that fell outside the thresholds for merger review.46

45.The Financial Services Consumer Panel criticised the underlying assumption of current UK and EU competition policy that consumers could drive competition through their choice of goods and services. They suggested most people were not “empowered” to assess markets and make the best decisions for them, thanks to factors such as “the complexity of products, opacity of pricing and information asymmetry between firm and customer”.47

46.The opportunities and challenges associated with the UK using Brexit as a chance to address perceived issues by changing its competition regime are discussed in Chapter 5.

Conclusions

47.EU competition policy is derived from rules set out in the Treaty on the Functioning of the European Union (TFEU), and encompasses three ‘pillars’: antitrust, mergers, and State aid. EU Member States’ courts and competition authorities are required to apply EU antitrust law when considering anti-competitive agreements and conduct which may affect trade between Member States, and to ensure consistency with the principles applied and decisions reached by the Court of Justice of the European Union (CJEU). The European Competition Network (ECN) facilitates cooperation between the national competition authorities of Member States and the European Commission.

48.In relation to merger control, the Commission primarily examines larger, international mergers which have an ‘EU dimension’, based on specified turnover thresholds achieved in more than one Member State. This provides a ‘one stop shop’ whereby merger reviews are usually dealt with either by the Commission or by a Member State authority.

49.The EU has exclusive competence in determining the compatibility of State aid with the internal market, which is prohibited without the approval of the Commission. However, the majority of new State aid measures are now covered by the General Block Exemption Regulation (GBER) and Member States are not required to notify them to the Commission for prior authorisation.

50.The Competition and Markets Authority (CMA) is the UK’s lead competition authority, with responsibility for investigating potential breaches of UK or EU antitrust prohibitions and examining mergers which could restrict competition. Certain sectoral regulators also have concurrent competition powers. The UK’s antitrust and merger control regime is robust and highly regarded, and the CMA is well-respected among its international peers. By contrast, the UK’s domestic State aid framework is very limited, as EU law applies directly and the Commission approves any aid not covered by block exemptions, such as the GBER.

51.While stakeholders are generally positive about the operation of the current UK and EU competition regimes, there are some issues such as consumer concerns regarding pricing and dominance in some markets, and delays and bureaucracy in the EU State aid approval process.


4 Article 3(1)g, Treaty establishing the European Community, OJ C325. In the consolidated version of 24 December 2002, common market is replaced with internal market.

5 HM Government, Review of the Balance of Competences between the United Kingdom and the European Union: Competition and Consumer Policy Report (Summer 2014): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332779/Review_of_the_Balance_of_Competences_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 5 December 2017]

7 European Commission, ‘European Competition Network: Overview’ (6 April 2017): http://ec.europa.eu/competition/ecn/index_en.html [accessed 22 November 2017]

8 Regulation (EC) 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, (OJ L 1, 4 January 2003) and written evidence from the Competition and Markets Authority (CMP0002)

9 Regulation (EC) 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), (OJ L 24, 29 January 2004)

10 European Commission, ‘Merger control procedures’ (13 August 2013): http://ec.europa.eu/competition/mergers/procedures_en.html [accessed 22 November 2017]. The EUMR specifies that there is no ‘EU dimension’ if each of the undertakings concerned achieves more than two-thirds of its EU-wide turnover in one and the same Member State. The Commission can review and block mergers involving the market in only one Member State—see, for example, European Commission, ‘Mergers: Commission prohibits Hutchison’s proposed acquisition of Telefónica UK’ (11 May 2016): http://europa.eu/rapid/press-release_IP-16-1704_en.htm [accessed 19 January 2018]

11 European Commission, ‘Merger control procedures’ (13 August 2013): http://ec.europa.eu/competition/mergers/procedures_en.html [accessed 22 November 2017]

12 Written evidence from the Competition Appeal Tribunal (CMP0042)

See also European Commission, ‘Mergers: Commission blocks proposed merger between Deutsche Börse and London Stock Exchange’ (29 March 2017): http://europa.eu/rapid/press-release_IP-17-789_en.htm and European Commission, ‘Mergers: Commission clears merger between Dow and DuPont, subject to conditions’ (27 March 2017): http://europa.eu/rapid/press-release_IP-17-772_en.htm[accessed 12 January 2018]

13 Articles 107–109, Treaty on the Functioning of the European Union and written evidence from Herbert Smith Freehills LLP (CMP0029)

15 HM Government, Review of the Balance of Competences between the United Kingdom and the European Union: Competition and Consumer Policy Report (Summer 2014): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332779/Review_of_the_Balance_of_Competences_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 5 December 2017]

The Court of Justice of the European Union formally includes both the Court of Justice (formerly the European Court of Justice or ‘ECJ’) and the General Court (formerly the Court of First Instance or ‘CFI’) (Article 19 Treaty on European Union). In the interests of brevity, throughout this report we use the term CJEU.

16 Regulation (EC) 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 or the Treaty, (OJ L 187, 26 June 2014). Other examples of exempted categories include aid to: innovation clusters; make good damage caused by natural disasters; broad band infrastructures; investment for local infrastructure; culture and heritage conservation; transport residents of remote regions.

17 European Commission, State Aid Scoreboard 2016 (16 November 2016): http://ec.europa.eu/competition/state_aid/scoreboard/technical_note_en.pdf [accessed 7 December 2017]

18 Guidelines on regional State aid for 2014–2020: Acceptance of the proposed appropriate measures pursuant to Article 108(1) of the Treaty on the Functioning of the European Union by all Member States, (OJ C 101, 5 April 2014)

Commission Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid, (OJ L 379, 28 December 2006). This was subsequently replaced by Regulation 1407/2013 which maintained the same de minimis threshold—€200,000 per undertaking over a three year period.

19 See European Commission, ‘Pubic Procurement Legal rules and implementation’ (16 January 2018): https://ec.europa.eu/growth/single-market/public-procurement/rules-implementation_en [accessed 23 November 2017]

20 Competition Policy Newsletter, Public procurement and State aid control—the issue of economic advantage, Number 3 (2007): http://ec.europa.eu/competition/publications/cpn/2007_3_15.pdf [accessed 6 December 2017]

21 Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union, (OJ C 262, 19 July 2016)

22 HM Government, Review of the Balance of Competences between the United Kingdom and the European Union: Competition and Consumer Policy Report (Summer 2014): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332779/Review_of_the_Balance_of_Competences_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 5 December 2017]

23 Written evidence from the Competition and Markets Authority (CMP0002)

Other relevant pieces of legislation include the Enterprise and Regulatory Reform Act 2013, the Consumer Rights Act 2015, and various pieces of sector-specific competition legislation. See National Audit Office, The UK competition regime (5 February 2016): https://www.nao.org.uk/wp-content/uploads/2016/02/The-UK-Competition-regime.pdf [accessed 6 December 2017]

24 Written evidence from the East of England European Partnership (CMP0007)

25 Written evidence from the Competition and Markets Authority (CMP0002)

26 UK regulators with concurrent competition powers include the: Civil Aviation Authority, Financial Conduct Authority, Ofgem, Northern Ireland Authority for Utility Regulation, Ofcom, Ofwat, Office of Rail and Road, Payment Systems Regulator. See UK Competition Network: https://www.gov.uk/government/groups/uk-competition-network [accessed 12 January 2018]. See also Q 11 (Dr Steve Unger, Richard Moriarty and Jonathan Spence)

27 Stephen Blake, Senior Director, Cartels and Criminal Group, CMA, Speech on Challenges in the field of economic and financial crime in Europe, 2 December 2014: https://www.gov.uk/government/speeches/stephen-blake-explains-the-benefit-of-specialist-cartel-enforcement-authorities [accessed 30 November 2017]

The criminal cartel offence is contained in the Enterprise Act 2002, section 188.

28 In written evidence to a House of Commons (then) Business, Innovation and Skills Committee inquiry, the CMA explained that this “involves deciding whether a merger may result in worse outcomes for consumers and businesses, such as, higher prices, reduced quality or choice.” (ISG128)

29 Slaughter and May, UK merger control under the Enterprise Act 2002 (June 2016): https://www.slaughterandmay.com/media/2535538/uk-merger-control-under-the-enterprise-act-2002.pdf [accessed 4 December 2017]. The EUMR provides for a broadly similar system where mergers with an ‘EU dimension’ are assessed according to whether they would significantly reduce competition in the Single Market. Member States are permitted to intervene (including prohibiting a transaction) to “protect legitimate interests” provided they are compatible with community law. The Regulation specifies public security, media plurality and prudential rules as legitimate interests. Member States may act to protect other non-specified interests but these must first be notified to and approved by the Commission.

30 Written evidence from the Competition Appeal Tribunal (CMP0042)

31 Written evidence from the Commercial Bar Association (CMP0038)

32 Written evidence from Dr Bruce Wardhaugh (CMP0005)

33 Written evidence from the Competition and Markets Authority (CMP0002)

34 Written evidence from The Law Society (CMP0037). See also written evidence from Hausfeld & Co LLP (CMP0018), Baker McKenzie LLP (CMP0026), and the Commercial Bar Association (CMP0038)

35 Q 20 (Prof Pinar Akman)

36 Written evidence from the Commercial Bar Association (CMP0038)

37 Written evidence from the UK State Aid Law Association (CMP0008)

38 Q 35 (George Peretz)

39 Written evidence from the Local Government Association (CMP0021)

40 Written evidence from COSLA (CMP0033)

41 Written evidence from the East of England European Partnership (CMP0007)

42 Q 40 (Prof Steve Fothergill)

The Commission’s 2014–2020 regional aid guidelines set out the rules under which Member States can grant State aid to companies to support investments in new production facilities in the less advantaged regions of Europe or to extend or modernise existing facilities. The guidelines also contain rules for Member States to draw up regional aid maps of areas where companies can receive regional State aid, and at which intensities. These are known as Assisted Areas maps in the UK. Communication from the Commission amending Annex 1 to the Guidelines on regional aid for 2014–2020, (OJ C 231, 25 June 2016). See also HM Government, State aid: Assisted Areas – introduction (October 2014): https://www.gov.uk/government/publications/state-aid-assisted-areas-introduction [accessed 23 November 2017]

43 Written evidence from Herbert Smith Freehills LLP (CMP0029)

44 Written evidence from EEF, the manufacturers’ organisation (CMP0016)

45 Q 39 (Caroline Normand)

46 Written evidence from Res Publica (CMP0030). Relevant conclusions on this subject in a report from the European Union Committee, Online Platforms and the Digital Single Market (10th Report, Session 2015–16, HL Paper 129), are outlined in Chapter 5.

See also European Union Committee, Brexit: will consumers be protected? (9th Report, Session 2017–19, HL Paper 51)

47 Written evidence from the Financial Services Consumer Panel (CMP0014)




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