Brexit: competition and State aid Contents

Summary of conclusions and recommendations

The current competition landscape

1.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. (Paragraph 47)

2.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. (Paragraph 48)

3.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. (Paragraph 49)

4.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. (Paragraph 50)

5.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. (Paragraph 51)

Short-term implications of Brexit

6.Although Brexit does not necessitate a fundamental revision of the UK’s well-established domestic competition framework, the ‘consistency principle’ under section 60 of the Competition Act 1998 will no longer be appropriate in its current form after the UK leaves the EU and EU law no longer has primacy. It would be desirable to replace section 60 with a softer duty, whereby UK authorities might ‘have regard to’ EU law and precedent, although such an approach may not be appropriate in the longer-term. We call on the Government to clarify this during negotiations on the UK’s future relationship with the EU. (Paragraph 82)

7.The current EU block exemptions are valued by UK businesses in helping them to ensure that certain types of agreements do not fall foul of either EU or UK antitrust prohibitions. Similar arrangements should continue to apply under UK law after Brexit. To provide certainty and minimise disruption for businesses, the Government should clarify whether the EU (Withdrawal) Bill is intended to facilitate the ongoing application of current exemptions, and for how long. The Government will also need to decide the extent to which the UK will continue to take account of future EU block exemptions. (Paragraph 83)

8.The loss of the ‘one stop shop’ arrangement whereby larger mergers fall under the exclusive jurisdiction of the Commission is likely to increase the number of mergers subject to review by the CMA and the number of appeals heard before the Competition Appeal Tribunal (CAT). We welcome the CMA’s commitment to continue to work on procedural efficiencies to minimise the burden of dual notifications to businesses, and we support measures to reduce the impact of differences between the statutory timelines for CMA and Commission reviews. (Paragraph 84)

9.A further issue is the effect of Brexit on specialist legal services. A number of factors have enabled the UK, and London in particular, to develop into Europe’s foremost jurisdiction for private damages actions resulting from breaches of competition law. Many of these features are likely to endure beyond Brexit, but uncertainty surrounding the future status of EU antitrust prohibitions and Commission decisions could put this leading status at risk. The Government should take this into account when it decides whether to repeal or amend the legislative basis for ‘follow on’ claims in the Competition Act 1998, and whether to allow UK bodies to continue to accept final Commission decisions. (Paragraph 85)

Transitional arrangements

10.Negotiations on any transition (or implementation) period for the UK’s withdrawal from the EU need to be resolved to gain clarity on exactly when the UK will completely withdraw from the EU’s competition regime. Nonetheless, whether in March 2019 or at the end of a two-year period where EU rules and regulations remain largely in force, arrangements will be necessary to manage EU court cases and administrative procedures which are ‘live’ at the point of this transition, including competition cases. We welcome the Government’s recognition of the necessity of such arrangements, and expect the Article 50 withdrawal agreement to include provisions to ensure continuity in the handling of such cases. (Paragraph 117)

11.We note the differing positions outlined in the EU and UK position papers on ongoing Union judicial and administrative proceedings, particularly with regard to the jurisdiction of the CJEU post-Brexit, which may complicate the process of reaching a transitional agreement on competition matters. (Paragraph 118)

12.We recognise the Government’s ambition to provide clarity for businesses on these issues, but note that businesses are likely to already be planning future merger transactions and investment projects that will span, or occur after, the point of Brexit. We urge the Government to come to an early agreement with the EU on jurisdiction over competition cases during any transition period, to provide certainty for businesses and to ensure that no cases ‘fall through the cracks’ during this time, to the cost of UK consumers. (Paragraph 119)

13.We support the Government’s ambition to reach at least an outline agreement with the EU on a transition (or implementation) period, including competition matters, in the first quarter of 2018. Any transitional agreement on competition issues should ensure continuity with current arrangements, so that businesses are not faced with the additional complexity and cost of having to adapt to the implications of Brexit twice. (Paragraph 120)

Future UK policy: antitrust and merger control

14.The UK has played a significant role in recent decades in pushing forward the broad alignment of global competition policy, based on improved economic efficiency that delivers economic growth and development, and long-term consumer welfare. We note that ongoing consistency with the EU’s approach to competition policy—at least in the short-term—could help to provide stability and predictability for UK businesses in the face of the significant changes Brexit will bring. (Paragraph 164)

15.Nonetheless, Brexit does provide an opportunity for the UK to develop a more effective competition enforcement regime. With the repatriation of responsibility for enforcement decisions previously taken by the European Commission, the UK will have the freedom to take a more innovative and responsive approach to antitrust enforcement and merger control, including in relation to fast-moving digital markets and dominant online platforms. (Paragraph 165)

16.In terms of the potential for the UK to review public interest criteria in merger control, the UK is already able to intervene on larger mergers within the jurisdiction of the EU Merger Regulation (EUMR) on public interest grounds that closely match those specified under UK law. Member States are also able to make interventions based on other “legitimate interests”, subject to approval by the Commission. We conclude that EU rules have not materially prevented the UK from amending its approach to merger control. Indeed, the current competition-based approach was pioneered by the UK. (Paragraph 166)

17.We recognise that, post-Brexit, there may be pressure for wider public interest criteria to be considered—particularly in relation to foreign takeovers—as well as opposing pressures, for example to dilute merger controls to encourage more inward investment. On balance, we do not consider that Brexit should be seen as an opportunity to make significant changes to existing public interest criteria. (Paragraph 167)

18.The extent of trade between the UK and the EU 27 makes it likely that future substantial antitrust and merger cases will have effects in both markets. It will therefore be in the mutual interests of the EU and the UK to continue to cooperate on competition matters post-Brexit. The best way to facilitate this cooperation would be for the UK and EU to negotiate a formal cooperation agreement, covering both antitrust and merger case investigations and enforcement actions. Any such agreement should enable reciprocal evidence-sharing (including of confidential information) which would not be possible under informal cooperation arrangements without express consent from the undertakings involved. We note that parties to mergers would be more likely to provide this consent to ensure that merger transactions can go ahead as quickly as possible. (Paragraph 168)

19.The UK and the EU start from a position of extensive mutual assistance within the ECN. Nevertheless, we note that, if it is to achieve the CMA’s desire for the same, or equivalent, levels of current cooperation, the Government will need to negotiate the most comprehensive competition cooperation arrangement the EU has ever agreed with a third country. The UK will also need to re-establish competition cooperation arrangements with countries currently covered by existing EU bilateral agreements. (Paragraph 169)

Future UK policy: State aid

20.While it is clear that the EU’s State aid rules have been the source of some frustration in the UK, successive Governments have found them flexible enough to provide support for major projects. Moreover, other EU Member States spend significantly higher sums on State aid. This indicates that the EU rules have not been the decisive factor in limiting State aid in the UK, during the time it has been an EU Member State. (Paragraph 214)

21.The EU has, in almost every case, insisted that trade agreements with third countries include some form of controls on State aid, and it is highly likely that any deep and comprehensive UK-EU Free Trade Agreement (FTA) will include State aid provisions. There is also likely to be a link between the level of access to the Single Market the UK hopes to secure and the degree of coherence with the EU State aid regime the UK is required to maintain. (Paragraph 215)

22.If no agreement is reached with the EU—or in the unlikely event that the agreement does not contain State aid provisions—the UK will still be bound by its obligations under the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (ASCM). This would be a less intrusive system of subsidy control than the EU regime, but the extent to which it would change levels of state support in the UK is questionable. (Paragraph 216)

23.We recognise that after the UK leaves the EU there may be domestic pressures for a more interventionist industrial strategy with greater use of State aid measures at national, devolved, and local levels. On the other hand, should the Government significantly increase State aid to UK businesses, this could undermine the UK’s ambition to become an open, global trading nation after Brexit. We therefore welcome the Prime Minister’s assurance that the Government will not attempt to “beat” other countries’ industries by unfairly subsidising our own. (Paragraph 217)

24.The ASCM has no domestic application and therefore would not regulate State aid within the UK. Outside the EU, a UK-wide State aid framework will be necessary to avoid the risk of domestic subsidy races and distortions of competition between various parts of the UK. A UK State aid authority may also be required in some form, whether by extending the remit of an existing authority or creating an entirely new entity. We note the possibility that the CMA could take on this role but also that it has no experience in this activity. It would also be important to ensure that such an extension of the CMA’s remit did not detract from its existing responsibilities.
(Paragraph 218)

25.In developing this framework, the Government should take into account calls from local authorities for a less complex and burdensome approval process than under the current EU regime. The Government should also involve and secure the support of the devolved administrations in this process, including in agreeing the terms of reference, remit and priorities of any new UK State aid authority. It was made clear to us that any approach where the UK Government was perceived to be both ‘rule maker’ and ‘rule taker’ would probably be unacceptable to local and devolved governments. (Paragraph 219)

26.The EU (Withdrawal) Bill, as introduced, seeks to preserve the general prohibition on unapproved State aid, but does not specify what approval mechanism State aid would be subject to after Brexit. We urge the Government to clarify this omission, and its position on the shape of the future UK State aid regime, as soon as possible, to provide certainty to local authorities and businesses. (Paragraph 220)

Determining the UK’s future institutional framework

27.As a direct consequence of Brexit, the CMA will assume responsibility for a greater number of large and complex cases, and is likely to require more funding and more staff to meet this additional demand. It will be imperative to ensure that the CMA is appropriately resourced—and has staff with the right skills and experience in place—in good time to prepare to take on its post-Brexit caseload. We welcome the Government’s current high levels of engagement with the CMA on this issue, and call on the Government to confirm its resourcing plans for the CMA and other affected institutions, like the CAT, as soon as possible. (Paragraph 249)

28.As well as existing bodies, the UK’s future institutional framework for competition matters will involve a number of other organisations, including the proposed Trade Remedies Authority (TRA), and possibly a new State aid authority. It will be important to ensure that all these organisations are sufficiently resourced, have clearly defined remits, and that they work together to deliver a cohesive and effective competition regime. The Government should also bear in mind the need to avoid duplication and ensure that public resources are used cost-effectively. (Paragraph 250)

29.In developing this regime, the UK will have the opportunity to design a system that more closely reflects domestic needs and priorities, and is more inclusive of the devolved administrations and local authorities, as well as other stakeholders such as businesses and consumer groups. We urge the Government to make full use of this opportunity and launch a consultative process, involving all relevant stakeholders, to inform its decisions and any related legislation. We hope this report will be a useful contribution to that endeavour. (Paragraph 251)

30.Finally, we were encouraged by witnesses’ confidence that Brexit should not affect the UK’s influence in international networks such as the International Competition Network (ICN), OECD, and United Nations Conference on Trade and Development (UNCTAD). We urge the CMA to maintain, and increase, its engagement in these fora to help enhance its influence in the global competition community post-Brexit. It will also be important for the TRA, once established, to build relationships with international networks and other trade authorities. (Paragraph 252)

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