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UK competition regime set to become stricter and more burdensome for businesses post-Brexit

UK competition regime set to become stricter and more burdensome for businesses post-Brexit

  • United Kingdom
  • Brexit
  • Competition, EU and Trade

13-03-2019

The UK’s departure from the EU is set to lead to a significant change to the UK’s overall approach to competition law. Currently, the UK is required to retain close alignment with EU competition law, which includes respecting the European Commission’s decisions and the judgments of the Court of Justice of the EU (“CJEU”), which is for the benefit of the Single Market. However, unless the UK remains in the European Economic Area (which currently looks unlikely) or a trade deal is signed with the EU requiring complete alignment, the UK will have free rein on its future competition law policy.

With this in mind and the expectation that the workload of the UK Competition and Markets Authority (“CMA”) will increase significantly post-Brexit, the CMA has proposed changes to the UK competition regime including a new mandatory merger control regime, greater penalties on both businesses and individuals for breaching UK competition law, and limitations on parties’ rights of appeal. The CMA intends to consult on its proposals so there is a possibility that they may not come into force. If they are adopted, however, there will be a new landscape for competition law issues in the UK.

Why will Brexit affect the CMA’s workload?

Currently, both the European Commission and the CMA (as well as the concurrent UK competition regulators) are able to apply the EU competition rules. However, if the European Commission initiates formal proceedings to investigate a suspected breach of EU competition law, the UK competition regulators cannot investigate the same conduct. In terms of merger control, the European Commission has exclusive jurisdiction to assess transactions which meet the turnover thresholds set out in the EU Merger Regulation including the aspects of the deal which could affect any UK market.

Under the Competition (Amendment etc.) (EU Exit) Regulations 2019 (“Competition SI”), once the UK leaves the EU, the UK competition regulators will have jurisdiction to investigate all conduct and transactions which may affect UK markets regardless of whether or not the same conduct or transaction is also being considered by the European Commission. Furthermore, section 60 of the Competition Act 1998 (“CA98”) will be repealed meaning that the UK competition regulators and courts will no longer be required to ensure consistency with EU competition law, including EU competition decisions and case law, unless it pre-dates exit date. This means that the UK competition regulators and courts will no longer have to have regard to EU case law and decisions adopted after that date. A new section 60A CA98 will, however, require UK competition regulators and courts to ensure that there is no inconsistency with pre-exit EU competition case law and decisions when interpreting UK competition law, although they can depart from such a requirement in certain specified circumstances. The repeal of section 60 opens the door to divergent outcomes between the European Commission’s and the UK competition regulators’ decisions, as well as between judgments of the CJEU and UK courts.

What will happen to cases which are “live” on exit date?

According to the Competition SI, the European Commission’s “live cases” (being cases where the European Commission has not reached a decision as at 29 March 2019), which may affect UK markets, will be transferred to the CMA (or the relevant concurrent regulator). But is the CMA ready for a no deal Brexit?

The CMA’s Annual Plan 2019/2020 states that the CMA considers that it is “well-placed for any Brexit scenario1, following the Government’s increased allocation of funding to the CMA to prepare for Brexit, including an additional £20 million in the 2019/20 financial year. The CMA recognises that post-Brexit, it will be a “very different body from now, taking on bigger and more complex global cases”. A change in the CMA’s workload is likely, however, to affect its UK casework priorities given that it will have a statutory duty to investigate all relevant mergers as well as State-aid cases. Although the CMA has stated that it aims to increase its workforce by nearly 300 people, only around three quarters of its new staff will be recruited by 29 March 2019.

Proposed changes to the UK Competition Regime

In order for the CMA to be able to handle its increased workload and ensure that UK markets remain competitive, it has proposed a number of significant changes to the UK competition regime. These were set out in a letter from the CMA Chairman, the Rt Hon Lord Tyrie, to the Rt Hon Greg Clark MP, the Secretary of State for Business, Energy and Industrial Strategy dated 21 February 2019 (“CMA Letter”).

New “hybrid” merger control regime

The UK is currently the only EU jurisdiction which has a voluntary merger control regime. This is, however, set to change as a result of Brexit. The CMA estimates that it will review an additional 30 to 50 mergers annually, which currently fall under the European Commission’s jurisdiction. In order to be able to handle this, the CMA proposes to introduce a mandatory merger control regime to catch large international mergers which meet certain thresholds, as well as a standstill obligation to prevent parties from implementing their transaction prior to the CMA’s approval. It is not yet known whether the CMA’s phase I review period will mirror the European Commission’s 25 working days. The CMA is also considering introducing a “short-form notification” process to minimise the impact on businesses relating to non-problematic mergers. The European Commission has a similar process.

Will the UK voluntary merger regime end? No, the CMA intends to maintain this regime to enable parties to notify their transaction to the CMA where they consider that there is a risk to competition in the UK. Furthermore, the CMA will retain its ability to review transactions at its discretion, where separate thresholds are met (e.g. based on the share of supply and/or turnover of the merged entity). There will, therefore, be a “hybrid” merger control system with some transactions falling within the CMA’s proposed mandatory regime and some continuing to fall within its voluntary regime.

The CMA Letter states that “Brexit will increase the absolute cost of the [merger] work considerably”. In light of this, it suggests changing the level and structure of merger fees, namely, to require larger contributions from the largest corporates.

Introduction of an overriding “consumer interest” statutory duty

The CMA’s existing statutory duty is to “promote competition, both within and outside the UK, for the benefit of consumers”. The CMA proposes to change the focus of its (and the UK courts’) primary duty to “ensure that the economic interests of consumers, and their protection from detriment, are paramount”. This would influence how the CMA conducts and priorities its work to ensure that concerns about consumer detriment are at the forefront of the CMA’s mind.

Increased powers to assess markets

The CMA recognises that there are significant defects to the framework for its review of markets including its duration. To remedy these, the CMA proposes to reform the markets regime by:

- more closely aligning the scope of market investigations with that of market studies, so that they both consider adverse effects on consumers (including but not limited to those arising from adverse effects on competition);

- empowering the CMA to impose remedies to address adverse effects on consumers, without having to show that they arise from adverse effects on competition;

- allowing the CMA to impose remedies on firms on an interim basis in order to protect consumers;

- introducing fines for firms that fail to comply with remedies;

- allowing the CMA to accept undertakings from firms at any time (e.g. before or during a market study), and enabling it to impose fines for breaches of such undertakings.

The CMA hopes that these reforms would enable it to engage more with businesses and with the public prior to initiating “formal” markets work. It recognises, however, that legal protections may be required for the CMA informally to communicate with business and with the public in this way.

The CMA Letter suggests other more significant reforms such as have a single regime for examining market-wide competition and consumer concerns, or having a single body with rule-making powers over the regulated sectors.

More severe penalties for individuals

The CMA proposes that it should be empowered to impose civil fines directly on individuals for serious competition law infringements in order to increase the personal responsibility for competition law compliance and enhance the deterrent of enforcement. The CMA, however, considers that “a good deal of further work would be required to assess the merits of such a change”.

Furthermore, the CMA considers that the boards of public companies should be required to comply with certain measures for competition and consumer compliance. These include: requiring companies to appoint a board director with responsibility for assessing and reporting on risks to competition (and consumer) law compliance; requiring auditors to inform the company of any practices which they identify during the course of their usual work may raise competition or consumer law compliance risks and a duty on company directors to attest in annual reports that these risks have been noted and addressed.

Greater protections for whistleblowers and increased regulatory burden for businesses

The CMA considers that the uncertainty surrounding confidentiality protections and limited financial compensation (£100,000 maximum) risk curtailing effective whistleblowing. To address this, the CMA proposes that the cap should be set much higher to “commensurate with the financial impact, the loss of career prospects, and the distress that whistleblowers may encounter”. In relation to confidentiality, the CMA considers that UK courts should decide whether the disclosure of the whistleblower’s identity outweighs the importance of anonymous whistleblowing to competition law enforcement in the public interest.

In addition, the CMA considers that auditors should be required to report suspected breaches of competition law identified during the course of their usual work to the CMA.

Increased investigatory and information gathering powers to enable the CMA to conduct its investigations swiftly

The CMA sends information requests to businesses to obtain information to conduct its enforcement, mergers and markets work. Unlike in other jurisdictions, including the EU, there are no sanctions on businesses that refuse to supply the information, or that provide false or misleading information. The CMA wants this to change so that it can impose turnover-based fines for non-compliance with its information requests, as well as civil fines for the provision of false or misleading information.

The CMA considers that its formal information gathering powers are inadequate and need to be reformed as a result of digitalisation. It proposes that either the CMA should have a general information gathering power, or that its existing powers be reformed to keep up with the way in which information is obtained, used and stored and to ensure effective investigation of firms located outside of the UK.

New statutory requirement for the CMA to act “swiftly”

The CMA suggests that it could be made subject to an explicit statutory requirement to conduct its investigations “swiftly”, like it currently has in respect of mergers. The courts would be obliged to take this into account when parties challenge the CMA’s deadlines for the provision of information, on the grounds that they are unreasonable. In January 2019, Sainsbury’s/Asda successfully challenged the deadlines imposed by the CMA to respond to its working papers before the Competition Appeals Tribunal (“CAT”), as being unfair. The CAT, however, recognises the difficulties when dealing with large and complex mergers for the CMA as well as for the parties, which are created by the statutory deadlines. As a result of Brexit, these types of transactions are more likely to be subject to the CMA’s review and the CAT considers that urgent consideration should be given to a revision of the statutory deadlines, to provide for the greater flexibility that is available under the EU merger regime, and perhaps also expressing the deadline for Phase 2 in terms of working days.

Increased regulatory burdens for businesses

The CMA Letter proposes a number of other tools to enable it to gather information, which would result in increased regulatory burdens for businesses. These include:

- giving the CMA the power to require an independent experts’ view of aspects of a firm’s activities which cause the CMA concern (the Financial Conduct Authority has a similar power); and

- introducing reporting mechanisms requiring certain businesses to inform the CMA of their M&A activities. It is not clear which businesses would be subject to this obligation, but it is likely to be, at the least, the tech giants.

Restricting the CAT’s review of CMA decisions

From the CMA’s Letter, it is clear that the CMA is frustrated with the CAT’s appeal procedure in relation to the CMA’s competition enforcement decisions. The CMA considers the procedure to be too lengthy and that the appellants should be restricted from introducing new evidence during the CAT appeal process, as this complicates and prolongs the process. This is exacerbated as a result of competition enforcement cases being subject to a “full merits” assessment requiring the CAT to review all of the CMA’s findings of fact, its economic assessment and its application of the law in the relevant decision.

The CMA’s view is that the when the CAT was established in 2003, the appeal process was intended to be predominately paper based with oral hearings limited to a couple of days at most compared with heavy cases which currently last for 4 to 6 weeks. According to the National Audit Office’s 2016 Report on the UK competition regime, many lawyers regard the UK as “the best jurisdiction in the world to defend a competition case”.

Furthermore, the CMA is concerned about the effectiveness and efficiency in the current appeal process particular when its workload starts including large, complex cases, which were previously under the European Commission’s jurisdiction.

In relation to fines, the CMA is frustrated with the CAT’s recurring position of lowering the CMA’s fines on appeal and states that: “For those that have broken competition law, appealing against the CMA’s fining decision appears to be a one-way bet.”

In response to these concerns, the CMA proposes the following changes to the CAT’s appeal process:

- moving from the current “full merits” standard, either to a judicial review standard (which is used in appeals of the CMA’s merger decisions and its market investigation remedies), or to a new standard of review, setting out specified grounds of permissible appeals. For example, the EU General Court considers competition appeals on the following grounds: (a) lack of competence, (b) infringement of an essential procedural requirement, (c) infringement of EU Treaties or any rule of law relating to their application and (d) misuse of powers;

- amending the CAT’s rules of procedure to facilitate a faster review process by introducing greater restrictions on the admissibility of new evidence and less reliance on oral evidence, and

- requiring the CAT to set out its reasons for reducing the CMA’s fines with reference to the CMA’s penalties guidance.

Other proposals which the CMA is considering include bringing the CAT within the HM Courts and Tribunals Service, or having competition appeals heard by the High Court.

In a speech given by Peter Freeman, the Chairman of the CAT, on 1 March 2019, he expressed his surprise at the CMA’s criticisms. He considered them to be “greatly overstated” and did not reflect reality. Mr Freeman stated that the CAT “is not able to roam freely over the subject matter of the decision; appeals are often on quite narrow and specific points and even on those specific issues, it is certainly not a re-hearing as there has never been a hearing before an independent judicial body.” Instead, the CAT holds the CMA, the decision-maker, to account. Furthermore, Mr Freeman questioned the correlation between the apparent deficiencies in the appeal procedure and the digital economy.

Comment

One of the key points to grasp is that the CMA’s proposals to revamp its procedures and enhance its powers are to ensure that Brexit does not result in any enforcement gap following the UK’s break from the EU’s jurisdiction. The number of cases currently handled by the CMA are significantly below that handled by the German competition authority, for example. The CMA is, therefore, determined to ensure that it has the resource and capabilities in place to change this and enable it to handle more competition cases successfully post-Brexit.

The CMA is expected to consult extensively on its proposals and we would encourage businesses to engage in this process.

How Eversheds Sutherland can help

Since June 2016, our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues.

We would be happy to discuss how we can help you with your Brexit planning and execution of those plans.


1. Paragraph 4.4 of the CMA’s Annual Plan 2019/20.

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