• United Kingdom

• Brexit
• Competition, EU and Trade

05-03-2021

On 16 February 2021, John Penrose MP published his anticipated independent report on the effectiveness of the UK’s current competition regime in “promoting a dynamic, innovation-driven economy which delivers for consumers and businesses” (the “Report”). Determining that there is room for significant improvement to the UK rules, Penrose advocates for the adoption of a new modernised Competition Act to respond to the demands of the digital economy, and put forward a number of additional proposals that could be implemented in the meantime to ensure the system better serves consumer needs immediately.

Below we consider Penrose’s suggestions, and analyse these in the context of other regulatory developments in the competition field. For consideration of the consumer protection aspects of the Report, please see our additional briefing below:

The consumer law implications of the Penrose report

Contents

Background

Key findings and proposals

• Strengthening CMA powers
• Streamlining appeals of sector regulator decisions
• Re-designing the end-to-end process
• Removing red tape
• Adapting to digital markets
• Re-distributing work of economic regulators
• Boosting local competition
• Reducing Government intervention

Comment

Background

Over the last few years, the UK Government and competition institutions have shown significant appetite for regulatory change in favour of putting consumer interests first. The Rt Hon Lord Tyrie started the conversation in February 2019, when he set out proposals for reform in a letter to the Secretary of State for Business, Energy & Industrial Strategy (“BEIS”) as then Chairman of the Competition Market’s Authority (“CMA”). Lord Tyrie’s proposals included a new statutory duty for the CMA to treat consumer interests as paramount¹.

Leading into the 2019 election, the Conservative Party also made clear that tackling consumer rip-offs and bad business practices was central to its manifesto. To deliver on this promise, the current Conservative Government asked John Penrose MP in September 2020 to publish an independent report looking at “how the UK’s competition regime can evolve to meet the government’s policy aims of promoting a dynamic, innovation-driven economy which delivers for consumers and businesses across all regions and nations of the UK, within the context of recovery from COVID-19 and the end of the transition period”.

In particular, Penrose was asked to focus on how the UK competition regime could:

• play a role in driving economic recovery following the COVID-19 pandemic;
• contribute to the “levelling-up” of all regions of the UK;
• increase consumer trust and tackle consumer rip offs;
• support UK disruptors taking risks on new ideas and challenging incumbents; and
• use data, technology and digital skills to assist with the CMA’s work.

Key findings and proposals

According to the Report, swift change to the UK regime is necessary. The UK’s regime does not focus on consumer interests; it is ill-equipped to deal with the new challenges presented by digital markets; red tape has increased over recent years as processes have become less efficient and more costly; and therefore the UK’s CMA has ultimately become less effective than its international counterparts.

Such defects, Penrose finds, can only be remedied through creating a new Competition Act sufficiently modernised for the new digital economy. Nevertheless, the Report goes on to outline several proposals for immediate action to improve the system in the interim.

Strengthening CMA powers

The Report recognises that change must begin with the CMA itself. To address the issues identified, the Report suggests the following:

• Tougher penalties for non-compliance with investigations – the CMA only has power to impose penalties for failure to provide evidence/information of up to £30,000 and/or £15,000 per day, which arguably provides an insufficient deterrent. Other competition authorities, such as the European Commission, have the power to impose turnover-based fines (1%-5%), and Penrose considers that the CMA should be able to do the same.
• Earlier settlement – similarly to Lord Tyrie’s suggestion that the CMA should be allowed to accept undertakings at any time during a market study, the Report advises that the CMA should have the power to settle at any stage of any market study, antitrust investigation, Phase 1 or Phase 2 merger review. This would avoid unnecessary duplication of work and expense, and will ultimately allow the CMA to remedy competition issues or consumer detriments faster.
• International cooperation – in the context of increasing globalisation, the growing strength of large international technology firms and Brexit, the Report encourages the Government to continue to pursue cooperation agreements with other countries to ensure an effective UK competition regime.  Since 1 January 2021, the UK no longer benefits from the EU’s cooperation agreements with over forty other competition authorities worldwide. 

Streamlining appeals of sector regulator decisions

Under the current system, there are different appeals processes for different sector regulators’ decisions; while some go to the High Court, others start at the CMA or go directly to the Competition Appeals Tribunal (“CAT”). Such a complex appellate landscape is difficult for non-experts to navigate, disadvantaging smaller firms with limited legal resource, and therefore the Report suggests the regime be simplified so that all appeals are dealt with by the CAT at first instance.

Re-designing the end-to-end process

In addition to the changes already suggested, the Report advocates for the establishment of a taskforce to conduct an in-depth review of the end-to-end process, from CMA investigation to CAT appeal. The purpose is to formulate suggestions for the complete redesign of existing case management procedures to: (1) reduce the length of cases from years to weeks; (2) simplify the system so that it is both reliable and easily understood by non-experts; and (3) fulfil the “fair trial” requirements of Article 6 of the European Convention on Human Rights. To stay relevant and future-proof its work, Penrose recommends the taskforce be reformed every 5 years.

Removing red tape

The Report recognises that the UK’s competition regime has become riddled with red tape, slowing businesses down and increasing transaction costs. Penrose therefore suggests the revival of the “Better Regulation” regime. The focus will be on cutting regulatory burdens and costs by requiring Government Ministers to remove or modernise old rules before introducing new ones, introducing a “one-in-two-out” rule.

As EU rules have previously been exempt from the Government’s prior Better Regulation efforts, the Report notes that Brexit creates ample opportunities to cut the red tape and remove overly-bureaucratic EU rules. In particular, the EU rules for public procurement have been criticised for being slow and time-consuming, and the Report therefore encourages the Government to swiftly implement the broad changes outlined in the procurement Green Paper dated December 2020².

While removing cumbersome EU rules may reduce costs for complying with the UK competition regime itself, it nevertheless carries the risk for yet greater divergence between the UK and EU competition regimes. The result may be an increase - rather than a decrease - of the burden on large international businesses seeking cross-border regulatory approval in the future.

Adapting to digital markets

Broadly, Penrose seems to be in favour of the CMA’s recommendations in its Online Platforms and Digital Advertising study, including the establishment of a dedicated Digital Markets Unit (“DMU”)³.

However, while the CMA recommended that the DMU be given wide-ranging powers to tackle large tech giants, the Report urges caution and warns of the risk of regulatory creep. As a result, Penrose recommends that the DMU’s extra powers be tightly ring-fenced. In particular, its strengthened powers should:

• be supplemental to the CMA’s existing enforcement powers, which should be used in the first instance;
• apply only to those businesses that own and run network data monopolies, rather than whole sectors of operation;
• only be used where the existing CMA enforcement powers are insufficient; and
• be extended only with Parliamentary consent.

To re-enforce the limited scope of its powers, the Report also recommends the unit be renamed the “Network and Data Monopolies Unit” (“NDMU”).

In addition, the Report supports the recommendations put forward by the Furman Review⁴ - and supplemented by the Digital Market Taskforce’s advice - to give the NDMU the power to take pro-competition interventions, such as formulating a Code of Conduct and overseeing data portability schemes to facilitate switching and interoperability. Penrose also suggests the NMDU could support competition by encouraging new technologies, ensuring fair access to monopoly networks, requiring interoperability between networks and making switching cheaper by, for example, supporting initiatives such as Open Banking.

In terms of data privacy, the Report encourages the CMA to continue its work with the Information Commissioners Office, and also recommends it extends the scope of its initial Online Platforms and Digital Advertising study into a full market investigation in order to further improve transparency as to how businesses use consumer data.

Re-distributing work of economic regulators

Interestingly, the Report advocates for the return of responsibility for competition in sectors with network monopolies of regulated assets – such as aviation, financial services, gas and electricity, and communications – from the sector regulators back to the CMA. Penrose argues there is “no inherent reason why […] these sectors shouldn’t become a normally-competitive industry, with the same high standards, strong competition and consumer powers as other parts of our economy”.

Following this transfer of power, sector regulators should only be left with the responsibility for injecting competition into their core network monopolies. The Report proposes that this could be achieved by:

• independently auctioning contracts to build/upgrade network monopoly infrastructure rather than automatically allocating them to incumbent owners; and
• eroding the strength of network monopolies through encouraging data sharing or reducing barriers to entry.

Boosting local competition

The Report finds that there is a need to “level-up” the UK economy outside of the southeast, which could be achieved through nurturing competition beyond the nation’s capital. Suggestions to facilitate this include:

• Creating new County Competition Courts – to extend access to justice beyond London, local and regional competition complaints could be heard at new County Competition Courts, which should be quicker, cheaper and more efficient; and
• Improving Local Authority Trading Standards (“LATS”) teams – LATS have the power to investigate and enforce local scams and consumer problems. However, budgetary issues have resulted in dwindling numbers of employees and insufficient resource to carry out functions. To strengthen LATS teams, Penrose argues there should be increased ring-fenced resources and a new statutory duty for minimum standards in LATS teams, including powers to mount their own antitrust or consumer investigations.

Reducing Government intervention

Following the UK’s exit from the EU, the question of State aid has become a central topic of discussion in Government. In fact, the UK’s Department for Business, Energy & Industrial Strategy has recently announced the commencement of its consultation regarding a new UK subsidy regime⁵.

However, Penrose appears to reject the idea of creating a comprehensive subsidy regime in the UK, maintaining that “to keep our economy competitive and successful, we should choose ‘not’” to subsidise industries. The Report explains that subsidies distort competition, and political intervention could make the UK less attractive for investors. As such, subsidies should be limited to where it is “unavoidable” and intervention should be controlled to minimise damage. For example, like the merger control regime, Minister intervention could be restricted to a limited number of pre-defined legal grounds, such as national security, public health or financial stability.

Nevertheless, the Report also recognises there is a need for some Government input as it encourages Ministers to develop a plan to prevent UK based firms from being poached offshore without jeopardising the UK’s attractiveness for investment.  The Report does not, however, explicitly reference the National Security & Investment Bill which is currently making its way through Parliament⁶.

Comment

It has been two years since Lord Tyrie, then Chairman of the CMA, set out proposals to amend the UK competition law regime in light of the growth of the digital economy and the UK’s exit from the EU.  Although some of those proposals are mirrored in the Report, most of them are not.  In particular, the Report is silent on imposing greater personal liability on individuals for competition law infringements, and on boards of public companies to comply with greater measures to ensure competition compliance.  At the centre of both the Report and of Lord Tyrie’s letter, however, lies the shift in focus of the CMA’s work from promoting competition to prioritising consumers.   

Following the publication of the Report, Lord Tyrie criticised the CMA for not putting the consumer at the heart of its work stating “Direct contact with its final customer – the consumer – needs to enter the CMA’s bloodstream”. 

BEIS is now considering the proposals in the Report.  It will remain to be seen to what extent the UK competition law regime will change in the future.  What is clear, however, is that with Brexit, digitalisation and potentially significant changes to the UK competition (and consumer) regimes, the CMA will certainly have its hands full in the years to come.

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Footnotes

1. For further information on Lord Tyrie’s proposals, see our earlier briefing here.

2. See the Green Paper here.

3. For further detail on the CMA’s findings and recommendations, and the Government’s response, please see our earlier briefings here and here.

4. For further details on the Furman recommendations, please see our earlier briefing here.

5. See the consultation dated 3 February 2021 here.

6. “The UK competition regulator is not fit for purpose”, Financial Times, 24 February 2021.  Available to FT subscribers here.