Cracking down on businesses that don’t play fair:
UK Government unveils radical competition and consumer protection reforms
These long-awaited proposals aim to strengthen and streamline the powers of the Competition and Markets Authority (“CMA”) to drive innovation and growth in UK markets. They follow various calls to reform the UK competition regime, in particular to deal with the challenges of the digital age and to improve public confidence in UK markets. They also come in the wake of the criticisms of consumer exploitation during the pandemic.
Setting out the broad ambition underlying the reforms, Business Secretary Kwasi Kwarteng stated that: “By delivering on our commitment to bolster our competition regime, we’re giving businesses confidence that they’re competing on fair terms, and the public confidence they’re getting a good deal.”
Meanwhile, the CMA has welcomed the proposals, with Chief Executive Andrea Coscelli saying that they take forward many of the CMA’s own recommendations for a more flexible regime, and confirming that the CMA plans to respond to the consultation in due course.
The proposed reforms build upon a number of previous recommendations over the last few years, including most recently the Penrose Report issued in February, which included a host of recommendations spanning consumer law reforms, court reform, red tape / better regulation reforms and fitness for purpose challenges to sectoral regulators.
That report followed the February 2019 reform proposals by the then CMA Chairman, Andrew Tyrie, as well as the Treasury and BEIS commissioned CMA report into the state of the UK economy in November 2020.
Whilst its status as a Government priority was previously unclear, the launch of this consultation indicates serious commitment to fundamental reform.
A more active role for Government on competition policy
In recent decades competition policy has been driven by a move away from political interventions towards decisions by impartial, independent regulators. Whilst reaffirming that independent, evidence-based decision-making remains crucial to effective competition policy, the Government is consulting on whether it should adopt a more active role in shaping and setting competition policy.
In particular, it is seeking views on how it should set its “strategic steer” to the CMA. This may include providing the CMA with greater clarity about:
- which sectors of the economy should be strategic priorities for the CMA’s investigations; and
- the Government’s priorities and expectations - which may include setting out specific metrics against which the Government will measure the state of competition in the economy and the CMA’s performance.
In addition, the CMA will be required to produce regular “State of Competition” reports, assessing the strength of competition in the UK economy.
Achieving a “best in class” competition regime
In order to bolster effective enforcement of the new rules and create a “best in class” competition regime which ensures that the UK makes the most of the opportunities presented by leaving the EU, the Government plans to give the CMA enhanced powers to intervene more quickly and impose tougher penalties across all of the CMA’s competition tools.
(i) Tougher penalties for competition non-compliance and non-cooperation
The proposals seek to ensure that the CMA’s powers remain in line with international best practice and envisage an arsenal of robust penalties to ensure that companies cooperate fully and in a timely and honest way with the CMA’s investigative work:
- Fixed penalties for companies that slow down or obstruct CMA cases of up to 1% of annual turnover, and additional daily penalties of up to 5% of daily turnover as long as non-compliance continues.
- Financial penalties on companies that fail to comply with the CMA’s direction, orders or undertakings – or commitments that the company has previously given the CMA. These would be capped at 5% of annual turnover, with additional daily penalties of up to 5% of daily turnover whilst non-compliance continues.
- Extending the personal accountability of directors for the provision of evidence to the CMA by imposing on them the same penalties as are being proposed for companies, and making flagrant breaches of this obligation grounds for director disqualification.
- Extending the current prohibition against the provision of false or misleading information to information which is provided to the CMA voluntarily, outside of the CMA’s formal investigatory function.
(ii) Speedier processes to drive competition, innovation and growth
The Government wants to ensure a competition regime which is efficient and predictable, where harms are remedied quickly and costs and uncertainty for businesses are reduced – all the more important given indications that competition in UK markets may be decreasing, and the recent evidence of a significant lack of awareness among businesses of the UK’s competition rules.
Under the proposals, the CMA would:
- be able to resolve cases by accepting voluntary, binding undertakings at any stage of an investigation, rather than having to wait until the end, with the aim of achieving lower costs and faster results for both parties; and
- enjoy expanded and more effective powers to impose interim measures in investigations and market inquiries, to prevent significant damage to a person / category of person, or to protect the public interest.
(iii) Bolstered merger control enforcement
Merger control is an area which has seen the CMA’s workload nearly double since the UK left the EU, with the regulator taking on a much higher number of complex mergers that were previously dealt with by the European Commission under the EU’s One Stop Shop principle. Over the past few years, the CMA has also taken a significantly more interventionist approach to cases, and a more extensive view of its jurisdiction: on average, the CMA currently refers 23% of cases for an in-depth Phase 2 review, which in turn results in prohibition, unwind or abandonment 67% of the time (see our Insights here).
Revamped jurisdictional thresholds
The Government’s view is that the current voluntary and non-suspensory regime strikes the right balance between consumer protection and regulatory burden and so it does not intend to change this.
However, the proposals do seek to improve the voluntary regime to adjust for inflation and reduce the pressure on the CMA, including by raising the current turnover-based threshold for the target of a merger from £70m to £100m and exempting smaller mergers where each party’s worldwide turnover is less than £10m from review – even where the share of supply test is met. This safe harbour is designed to promote innovation and growth by making it easier for small and micro enterprises to grow and expand.
If a change to the UK’s jurisdictional thresholds is required, the proposals envisage a possible third limb to determine jurisdiction, including if any merging party (most likely the acquirer but not necessarily so) has a share of supply of at least 25% of a particular category of goods or services supplied or acquired in the UK or a substantial part of it, plus a UK turnover of more than £100 million.
This new threshold is designed to allow the CMA to more easily investigate vertical mergers involving larger market players, or mergers that might increase market concentration. It would also enable the CMA to more easily review so-called “killer acquisitions” – where larger players acquire smaller innovators before they have the chance to become effective competitive rivals. The CMA has already expressed its intention aggressively to enforce against killer acquisitions, in the tech sector in particular, using existing merger powers.
Streamlined merger processes
The proposals also set out a number of ways to make CMA merger processes more efficient and effective including:
- Allowing the CMA to agree binding commitments earlier in Phase 2 which address its competition concerns, particularly if the parties were simply timed out on agreeing commitments at the end of Phase 1 – possibly coupled with a new power to pause the Phase 2 investigation while commitments are being considered.
- Restricting the CMA to refer only the issues that are identified at Phase 1 to streamline and speed up the Phase 2 process.
- Allowing parties to request an automatic “fast track” reference to Phase 2 via a short form submission before the start of Phase 1, without having to accept that the merger could result in a substantial lessening of competition. This could entail a three-week extension to the Phase 2 timetable to allow the CMA to undertake the necessary evidence gathering.
- Using the CMA’s power to extend the timetable more efficiently, including by potentially making it subject to additional conditions and giving the CMA greater flexibility to extend the statutory timetable unilaterally or with the agreement of the merging parties.
- Replacing the existing obligation to publish the Merger Notice in the gazette with the requirement for the CMA to simply publish it on the CMA’s website.
(iv) Stronger and faster enforcement against anticompetitive conduct
Whilst the UK’s competition enforcement regime is well-regarded internationally and its outputs in terms of caseload and timescales are improving, the Government sees room for improvement. Timeframes remain long, with one third of the investigations taking over three years - and the CMA will increasingly find itself faced with more challenging investigations, following the UK’s exit from the EU. Moreover, long investigations mean that potentially harmful conduct can continue unchallenged, sometimes leading to irreparable harm to competition and consumers.
The consultation document therefore proposes a number of possible reforms, including changes to (i) the scope of the UK’s prohibitions on anticompetitive conduct; (ii) the CMA’s tools for identifying potential infringements and gathering information; and (iii) the CMA’s settlement procedures and how the agency reaches decisions on cases.
(v) An updated markets regime
The Government is concerned that the market inquiry process - and market investigations in particular - are overly cumbersome and significantly underused.
To address these issues, it proposes to reform the CMA’s market inquiry tools to deliver a more efficient, flexible, and proportionate market inquiry process, which would allow the CMA to tackle harms sooner. It is therefore consulting on whether to
- retain market studies and market investigations, but enabling the CMA to impose certain remedies at the end of a market study; or
- replace the existing market study and market investigation system with a new single stage market inquiry tool.
Other areas being consulted on include (i) enabling the CMA to accept binding commitments from businesses at any stage in the market inquiry process; (ii) consideration of how to update the CMA’s toolbox and remedy design process to make them more versatile and effective - including in particular by giving the CMA the power to require businesses to participate in implementation trials, to allow the CMA to test and trial how best to implement its remedies.
(vi) Greater international cooperation
In line with its ambition for the UK to take a leading role in global competition enforcement and competition policy, the Government is working with the CMA to negotiate cooperation agreements with a number of the CMA’s international counterparts. Although the CMA has signed cooperation frameworks with a number of authorities, including the US, Australia, Canada and New Zealand, it has not yet entered into a similar agreement with its largest neighbour. However, the EU is understood to be eyeing an unprecedented cooperation deal with the UK to bridge post-Brexit gaps.
In this context, the Government is now specifically consulting on legislation to provide for:
- Clearer and more flexible rules for information-sharing with overseas competition authorities, in line with international best practice; and
- New investigative assistance powers in civil competition and consumer investigations, which would allow the UK’s competition authorities to use compulsory information-gathering powers to obtain information on behalf of overseas authorities.
Bolstering consumer laws to protect consumers and their cash
The Government has identified two key developments which require updates to existing UK consumer laws: (1) the rise of online shopping, accelerated by the pandemic, and the resulting unfair use of data to exploit consumer behavioural biases; and (2) the increase in subscription contracts across a range of sectors, which bring benefits to companies and consumers but can also be difficult to cancel.
To tackle these potential issues – to which vulnerable consumers are especially sensitive – the proposals set out a suite of potential specific reforms to boost competition, protect consumers from exploitation, and safeguard their spending, including:
(i) Tackling subscription traps
- Businesses will need to make it clear exactly what consumers are signing up for, giving specific contract information on the minimum contract terms and price per billing period, whether the contract will auto-renew or auto-extend, and any minimum notice period for cancellation.
- Traders must remind or “nudge” consumers when the contract will auto-renew unless cancelled, or when a free trial or low-cost introductory offer is coming to an end. Under existing consumer laws, traders must already tell consumers the conditions, time limit and procedures for exercising their right to cancel before entering into a contract. But the proposals seek to go further, requiring traders to provide consumers with a mechanism to cancel a subscription contract that is automated, simple, timely and easy to find.
- The reforms would not apply to contracts for goods, services, and digital content where an interruption in supply could result in serious harm to consumer welfare in principle, such as contracts for the supply of medicines or contracts for certain financial services such as insurance.
(ii) Tackling fake reviews
- The Government is considering whether to explicitly prohibit the commercial practice of commissioning consumer reviews in all circumstances, or having a narrower prohibition which relates only to fake ones.
- New rules could also target other tactics used to dupe online shoppers such as “dark patterns” designed to manipulate consumers into spending more and negative nudges by businesses who pay to have their product feature highly on a trader’s website without making the payment known.
(iii) Strengthening pre-payment protections
- Pre-payment schemes which are promoted as methods of saving will have to safeguard customers’ money to avoid situations where they lose their savings should a company go bust.
Levelling up CMA powers for swift and robust public enforcement of consumer laws
While the Government believes that the CMA is well placed to tackle consumer harms where a number of consumers are affected, it is hampered by two important realities: (1) the necessity for often lengthy court processes, and (2) the inability to apply robust sanctions, especially civil penalties.
In line with the Tyrie and Penrose recommendations, the proposals would enable the CMA to enforce consumer law directly rather than via a court process which can often take at best many months, and to wrap up investigations faster – meaning swifter redress for consumers suffering harm.
And, broadly in line with its current competition powers, the CMA would also be empowered to fine companies for:
- non-compliance with information gathering powers (up to 1% of annual turnover plus 5% of daily turnover for each day of continued non-compliance);
- breaches of undertakings (at a level that acts to dissuade traders from exploiting undertakings at the expense of consumers and competitors, which may or may not relate to turnover); and
- breaches of consumer protection law (up to 10% of global turnover – the same as competition law breaches).
The hope is that the threat of significant fines would act as a sufficient deterrent for businesses to play fairly, such that fines would be issued sparingly in practice. The CMA should also engage with businesses at an early, informal stage to secure compliance before resorting to formal, punitive action.
Supporting better private enforcement of consumer laws by consumers themselves
Most consumer protection complaints are individual in nature. Where consumers cannot agree directly with the trader, the Government acknowledges that they need support to enforce their rights independently and knowledge of their redress options such as Alternative Dispute Resolution (ADR) – an independent dispute resolution mechanism outside of the court system.
The Penrose Report highlighted the importance of consumers having access to easier, cheaper, and more digital ways to enforce their rights, whether through ADR or the courts. In response, the Government believes a well-functioning ADR system can make markets work more effectively and drive economic growth by increasing consumer confidence in spending and generating higher trader compliance with the law.
However, improvements are deemed necessary and the Government is seeking views on three specific areas:
- improving consumer awareness and signposting to make the process less confusing and more predictable, with Citizens Advice and Advice Direct Scotland already considering how they can further support consumers to access and navigate the routes to redress, including the use of ADR;
- increasing the quality of and access to ADR services and the oversight of ADR bodies across both regulated and non-regulated markets by amending the ADR regulations to require that all providers of consumer ADR are assessed and approved and strengthening their minimum service expectations; and
- improving the take-up of ADR by businesses in non-regulated markets, including by mandating business participation in ADR in certain sectors – namely the motor vehicles sector (to include the supply of new and used vehicles and servicing and repair) and in the home improvements market (such as roofing, glazing, plumbing work, or the fitting of flooring, kitchens, or bathrooms) – and a possible default position of requiring businesses in these sectors to pay for ADR on a pay per use basis.
Addressing the digital question: Parallel consultation on the Digital Markets Unit
The Government has simultaneously launched a consultation seeking views on the objectives and powers of the Digital Markets Unit. The proposals are designed to help British start-ups and scale-ups compete more fairly against big tech firms with market power. They include a mandatory code of conduct on tech giants and new powers to issue fines of up to 10% of turnover for serious breaches. For more information read our latest Tech Insights post here.
Going for zero: Exploring the role of competition policy in the UK’s green transition
The Government believes that competition policy can do more to support the Ten Point Plan for a Green Industrial Revolution. So alongside the consultations it has asked the CMA to prepare advice on how competition law can better support the UK’s transition to a net zero economy and wider sustainability goals. The Government set out three specific questions for the CMA to consider:
- If, and how, do current competition and consumer legal frameworks constrain or frustrate initiatives that might support the UK’s Net Zero and sustainability goals?
- Are there changes to the UK’s competition and consumer law that would help to achieve the UK’s Net Zero and sustainability goals?
- Are there other opportunities within the UK’s competition and consumer policy toolbox that would support the UK’s Net Zero and sustainability goals, which the Government should be considering?
The advice is due by early 2022 and may yet open the door for more guidance and a framework for analysis for sustainability issues. For more information read our latest Sustainable Futures post here.
Next steps and implications for business
The reforms outlined in the Government’s consultation document, if implemented, would amount to the most significant changes to the UK competition regime since the creation of the CMA almost a decade ago. Their impact would be felt across all of the CMA’s areas of activity, and they would have profound implications, in particular, for consumer law and policy.
Linklaters will be preparing a response to this consultation ahead of the 1 October deadline. Please do get in touch if you would like to discuss any of the areas covered by the proposed reforms.