Redesigning Regulatory Architecture - the UK Experience
Speech given by CMA Chairman David Currie to the Institute of International and European Affairs, Dublin, on 22 January 2014
Thank you very much for the opportunity to address you this afternoon, and to set out what I hope will be some useful insights from our recent experience. It seems only right that those of us who are part of the UK competition and regulatory regime should be ready and willing to give something back to our Irish counterparts, given that we have done so well out of recruiting our senior staff from the Irish regime.
It is particularly timely to be discussing these issues here in Dublin today, with Ireland in the process of finalising its own reforms to its competition regime. This includes bringing together consumer and competition and consumer expertise in the same organisation, a key feature of the UK regime both before and after our reforms. And there are many other similarities and parallels to be drawn, for example in securing the best use of additional resources, and in working to tackle ‘closed’ sectors and other markets not yet exposed to full, effective competition. Ireland has been reviewing approaches to competition policy in general, alongside economic regulation, as part of the impressive national effort to restore economic vitality and growth, which has deservedly won such plaudits across all of Europe.
So today I want to take you through the changes to the UK competition and consumer protection regime that are shortly to be finalised, with the new Competition and Markets Authority set to take on its full set of responsibilities and powers from 1 April. I will start with a brief look at the rationale for these changes, then discuss key aspects of the process, and then talk about the changes that have been made, and our progress in implementing these changes and establishing the CMA. I will then finish with a look at some of the distinctive features of the new regime, and how we can judge success in 2 or 3 years.
The CMA is in the enviable position of being formed from 2 predecessors that were far from failing. It is not usual for government to invest time and resources in revamping a regime that it believes to be world class, and even more unusual when the motivation for a reorganisation is not to save money. To demonstrate this last point, since the CMA’s budget was first set last year, the government has subsequently allocated substantial extra resources to us for the next 2 years.
So why did government choose to merge the Office of Fair Trading (OFT) and the Competition Commission (CC) into the CMA? Understanding that is key to understanding the decisions as to how the new regime should be structured. The answer is simple; competition is a key driver for delivering greater productivity and growth in the UK economy, particularly in the context of the financial crisis and recession and the challenges that lie ahead in sustaining competitiveness.
Economic benefits of competition
There is abundant and growing evidence of the economic benefits that an effective competition regime can bring, not least in the fact that so many countries have introduced their own regime - more than 120. A recent World Bank Investment Climate compilation of research findings found a swathe of important results:
- price drops of 20-40% after international cartels broken up
- employment rates boosted by 2.5-5% by reforms to state controls and barriers to competition
- GDP gains of 2.5% from competition policy reforms in Australia
- net benefits of €100 million a year from merger control in the Netherlands
- consumer savings from cartel enforcement in the US over 8 years of some US$1.85 billion
Robust competition policy is vital for ensuring economic growth, rewarding businesses that innovate to satisfy consumers, and encouraging new entry and new investment in the market. Research produced for the European Commission found a robust positive effect of competition policy on Total Factor Productivity growth for 22 industries in 12 OECD countries over the period 1995-2005. The London School of Economics’ Growth Commission report last year similarly pointed to increased and more effective competition and a strengthening of competition policy in the UK as a key contributor to economic gains in the period up to the 2007/8 financial crisis.
There are also gains to civil society from having firms confident that they are competing on a level playing field, consumers confident they can exercise meaningful choice, and citizens confident the law is being upheld effectively by impartial public institutions.
Taking this evidence together, it is clear that a powerful competition regime is a major prize. The UK government took the view that there was scope for even better performance from its competition and consumer authorities, and the potential benefits from that increased performance were thus the key driver in the government’s decision to reform the law and institutions in this area. Not for nothing was the government’s consultation document on its proposed reforms entitled ‘A Competition Regime for Growth’.
Approach to Reform
That led to an extensive consultation and deliberation that lasted more than 2 years, as we went from proposals to policy to legislation and finally to the establishment of the Competition and Markets Authority last October. The CMA has continued with this open and consultative approach, and all those who have an interest have had an opportunity to inform everything from the government’s initial proposal to form the CMA, through to its organisational values and its objectives in its first year of operation. Given that our work affects almost everyone in the UK because of our economy-wide remit, this consultation is entirely appropriate. We have an ongoing mission to explain to and inform consumers, businesses and government about our role and our work.
A very wide range of options for change was considered. In the end, the overall approach taken could be characterised as one of ‘evolution, not revolution’; building on the successes of the existing authorities and introducing new elements where there was a strong case for doing so. Hence, the decision to bring in the institutional reform in the merger of the OFT and the CC, but other fundamental changes to the regime were considered and not pursued. For example, a move to a prosecutorial rather than an administrative competition enforcement regime was mooted and had its supporters, but would have meant starting from scratch as opposed to building on the many lessons learned by the existing authorities over the preceding decades.
Fundamentally, the government came out strongly in favour of retaining the link between competition and consumer protection, and opted not to take forward proposals to make the new CMA purely a competition authority. There are vitally important links and synergies between the two areas of work; competitive markets provide choice and value for consumers, while for competition to work properly, consumers have to be able to confidently shop around. Competition problems often manifest as failures of compliance with consumer protection law, preventing consumers from making informed choices and thus from driving competition. And combining the mindsets of competition and consumer specialists in a single organisation means that both perspectives can be applied to the same problems - bringing economic discipline to decisions as to how and whether to intervene to protect consumers, and adding a greater understanding of the real-world experience and concerns of consumers to the analysis of the functioning of markets.
Importantly the CMA also remains an authority for the whole of the UK, focusing on markets across the country whilst taking account of different legal systems and other important context in the devolved nations. We thus retain a strong interest in competition and consumer issues in Northern Ireland, and hence also those markets that cross the Irish border.
Institutional and legal reform
The biggest change to the UK regime that was adopted was the shift to a single competition and consumer authority, bringing together most of the OFT’s consumer role and all of its competition work together with the Competition Commission in the new CMA. There are a number of benefits to this institutional shift:
- firstly, we can be more efficient as a single authority - one of the frequent criticisms of the existing regime is that it is slower than it could be, and in particular that businesses under investigation suffer because of duplication between the OFT and the CC; whilst the CMA will retain the separation between the 2 stages in terms of decision-making, it can reduce duplication in evidence-gathering and other key aspects
- secondly, we can better manage our resources - the Competition Commission’s workload is determined largely by referrals from the OFT, resulting in significant ebbs and flows that are difficult to manage in a small organisation; in a single organisation we can deploy our resources more efficiently across the 2 phases of our work
- and thirdly, we can be a stronger advocate for competition and consumer protection in the UK and abroad by virtue of having a single voice in this area
In designing the CMA, we have looked carefully at the best way to organise the Authority to maximise these benefits, building a new organisation that is more than the sum of its parts. And whilst there are some initial savings to be made from combining back-office and support services, it is worth restating that this is not the objective of the merger: hence the substantial extra resource allocated to us to be invested back into the CMA’s front-line delivery.
That delivery will also be reinforced by a raft of enhancements to competition law and the CMA’s powers. Some of the key changes include:
- an enhanced administrative approach to anti-trust cases, improving the speed of the process and the robustness of decision-making, along with new powers to require individuals to answer questions and to impose civil sanctions for failure to comply with investigations
- a revised criminal cartel offence, removing the requirement to prove dishonesty in order to make the offence easier to prosecute and thus maximising its deterrent effect
- new powers to gather information in market investigations, along with more demanding time limits for all stages of those investigations
- stronger powers to suspend and reverse integration between firms in merger cases and to impose penalties for failure to comply, as well as the introduction of statutory timescales for merger investigations and a time-limited period in which firms can negotiate undertakings in lieu of a referral of their merger for full consideration
These are not wholesale changes but rather tweaks and advances to what has gone before, adding to important improvements that the CMA’s predecessors have already put in place.
Mission and Context
The process of reform has also brought an opportunity to review the mission and objectives of the competition authorities. The government has introduced a new ‘strategic steer’ setting out its expectations for the CMA at a high level, the fact of which led to some raising of eyebrows and questions as to its effect on our independence from ministers. However, the steer is better understood as putting communication between government and the CMA on a more transparent basis, and reflecting the importance of the competition regime as a part of the government’s economic toolkit. It does not bind the CMA, but rather acknowledges the reality that independent regulators have to be sensitive to commercial and political developments, and must maintain dialogue with government.
A key element of the government’s first strategic steer to the CMA is the need for more proactive use of competition law in regulated sectors such as energy and water. The CMA has been given a stronger remit to work with regulators in those sectors, and we have already established a UK Competition Network with the concurrent regulators to help to ensure the consistent and effective use of competition powers across the economy. Those of you who follow British politics will know that there is much political pressure for action to improve competition in banking as well as energy and other similar market sectors at present, and this will be an important area of work for us.
Another change to our mission is our role on the international stage; both the CMA and the UK government attach much significance to this work, and it is no coincidence that the CMA’s new primary duty in legislation is specifically to seek to promote competition both within and outside the UK, for the benefit of consumers.
The CMA leadership is committed to having a real influence on the international stage, and to cooperating with competition and consumer authorities in different countries. The OFT and CC already have ‘pick-up-the-phone’ relationships with overseas regulators, including Isolde Goggin and her colleagues at the TCA here in Dublin. But there is always more that can be done. So while improved international co-operation will help us with our own cases, we will also work with partners overseas to share our experience, to disseminate best practices and to drive the convergence of standards and rules.
The CMA will look to take forward the successful co-operation with international counterparts that the OFT and CC have established in specific cases and projects. The OFT, for example, has recently been co-operating with a range of overseas partners as part of its focus on online sales channels and digital markets. Cases involving ebooks, Amazon and hotels online booking have all involved a significant degree of cross-border co-operation.
In 2013, the OFT began looking at online and app-based games and identified market-wide practices that it considered were non-compliant with the relevant legislation. The OFT produced a set of draft principles to clarify its views and has since promoted those principles with international counterparts through the International Consumer Protection and Enforcement Network (ICPEN). There has been agreement that the principles strike a suitable balance to indicate how businesses in the children’s online games market should treat its consumers, and they are likely to influence other ICPEN member agencies’ input into their own consumer law; this is exactly the kind of success that the CMA will look to replicate and build on.
Of course, the context in which we and other regulators work changes at a furious pace, and we need to remain flexible and adapt to a range of changing circumstances - the CMA will be launching into a continuing stream of regulatory reform. While the CMA is taking on the OFT’s general consumer protection role, that role significantly changed last year as part of government’s drive to reform the UK consumer protection regime, with local authorities taking on more of a national role and the OFT focusing on cases with market-wide implications - those changes and the institutional reforms around them are still bedding in. Other regulators in health and financial services have recently gained or are gaining new competition powers and responsibilities, legislation on consumer rights is going through Parliament, and the government is currently reviewing the balance of competencies between the UK and the EU in competition and consumer policy.
The CMA will also be working closely with sector regulators to ensure the more effective use of competition enforcement in regulated sectors (more than 25% of the economy). Hence the UK Competition Network, deliberately modelled on the European Competition Network. The ECN coordinates competition enforcement across EU Member States, with a view to ensuring that the law is applied in an efficient and coherent manner. It is 10 years old now and is widely regarded in the competition world as a great success. We hope that the same will be said of the UKCN a decade hence.
The Competition and Markets Authority
How, then, will the CMA look to achieve the mission that it has been tasked with at the end of this long process of reform and renewal? Broadly, we have set ourselves an overall ambition to be a world-leading competition and consumer agency, at the forefront of delivering important results and innovation, on a consistent basis and across our portfolio. We have then set ourselves 5 strategic goals to sit below that, which we will need to achieve in order to have the impact that we want as an organisation:
- effective enforcement of the law, protecting consumers and deterring anti-competitive behaviour - this will be the bedrock of our credibility as an organisation and the most obvious measure by which we will be judged; put simply, we cannot be an effective agency if we fail in our core business
- extending the frontiers of competition into new areas, whether that’s new or rapidly changing markets, new ways of looking at consumer behaviour, or areas where competition and markets have not previously been used - including public services
- refocusing consumer protection, following the reforms that I mentioned a moment ago, using our enforcement powers appropriately and leading on policy development in some areas
- achieving professional excellence across all our work, whether in legal and economic analysis, case management or any other area, and ensuring that we do not impose unnecessary burdens on business
- integrating our performance - internally, through combining different professional approaches and backgrounds and through careful selection and combination of our tools for intervening and markets, and externally, by working effectively with the full range of bodies with whom we share powers and interests
As you’d expect, we now have much of the CMA in place. Work is well underway on the infrastructure that we’ll need and key policy and guidance is on track, but by far the most important aspect of the CMA will be its people. I’m delighted to be Chairman of a Board that includes former heads of the EU and US competition agencies as well as members with vast business and academic experience. We also have a very strong leadership team headed up by Alex Chisholm, who many of you will know from his time here in Ireland as Commissioner and Chairperson at ComReg, and made up of both recruits from outside and from the existing authorities. And we will be taking most of the rest of the CMA’s staff from the OFT and the CC, preserving the organisational memory from those bodies and giving a talented and committed body of people the chance to build on their own legacy of important achievements for consumers.
Measuring success
I’d like to close with some thoughts on what success might look like over the course of the next 2 or 3 years; not in terms of the CMA’s performance per se, but in terms of the outcomes of the programme of reform overall. In addition to delivering an Authority that achieves its ambitions and its strategic goals, we will also need to look to some distinctive features of the new regime and how well they have succeeded in order to properly judge the extent to which the reforms have worked.
One of the most valued aspects of the existing regime is the clear separation of 2 phases of decision-making for mergers and market investigations, with the second phase bringing a ‘fresh pair of eyes’. The challenge in building the CMA has been to make that work within one organisation, ensuring that we do not allow the risk of ‘confirmation bias’ whilst still allowing for the new organisation to be more efficient in its handling of cases.
Another key challenge has been to ensure that the decision not to move to a prosecutorial model for antitrust enforcement is not regretted, by building on the current - and already much-improved - administrative approach. This includes enhancements such as case decision groups, which are intended to improve decision-making in antitrust cases, and watching carefully to see what their effects are.
Politicians have set a high bar for the CMA to bring in enhanced competition in regulated market sectors, and the ever-increasing focus on competition in areas like energy and financial services will mean that this is a high-profile area of our work. Through the UK Competition Network and bilateral work with our partners, we will need to deliver a measurable improvement in this area.
In consumer protection, we will have important precedent-setting cases to deliver as well as working with our partners to ensure that the new system adds up to more than the sum of its parts. More broadly, we will also need to make the maximum use of the synergies between competition and consumer work, using both in appropriate measure and in an integrated way.
It’s worth noting that there is what might be termed a ‘lab experiment’ in different approaches to competition and consumer regulation going on across the EU right now. In the UK and France, for example, there will be only 1 competition body where other countries such as Portugal have 2; Ireland will join the UK and others in combining competition and consumer in 1 agency, while others keep competition separate; and in the Netherlands and Spain, competition and sectoral regulation are tackled by unitary bodies, as opposed to having separate bodies with varying degrees of coordination. Time will tell which approaches are the most successful and we hope to learn much from the comparisons and contrasts.
In the end, though, the biggest question for the CMA will be whether the organisation that it becomes and the outputs it produces can justify the efforts of all of those involved in creating a new, more powerful unitary competition authority. This has been no mean feat, and it will be for the CMA to demonstrate that all that work has been worthwhile - helping competition to play its full role in driving economic growth and delivering important individual outcomes for consumers and businesses. It is not a simple task, but we relish the challenge to deliver these benefits to consumers, businesses and the economy. And we look forward to refining and improving our approach through learning and sharing our experience with our fellow members of the European Competition Network and other international colleagues.