fresh fields store by abe24

VIEWS: 23 PAGES: 4

									           MEMORANDUM BY FRESHFIELDS BRUCKHAUS DERINGER



1.        INTRODUCTION

1.1     Freshfields Bruckhaus Deringer1 welcomes the opportunity to respond to the
Call for Evidence on the UK Economic Regulators (Call for Evidence) published by the
House of Lords Select Committee on Regulators (Committee) in December 20062. We
have confined our remarks to those areas in which we are best placed to comment –
namely the working methods of regulators, the relationship between regulators and the
public interest and the interests of consumers.

1.2     Our detailed remarks should be read in the context of our general observation
that the UK enjoys a high quality system of regulation which is fundamentally sound.

2.        REGULATORS’ WORKING METHODS

Selection of Competition Act 1998 Cases

2.1    We wish to draw to your attention the publication by the Office of Fair Trading
(OFT) in October 2006 of a “Competition prioritisation framework” designed to set out
the considerations it will take into account in determining whether to launch or pursue
an investigation under the Competition Act 1998 (CA 98). We view this framework as
an example of best-practice in this area, allowing the OFT to prioritise cases of genuine
merit above the investigation of complaints that are, in reality, commercial disputes
between competing firms.

2.2     Under the CA 98, the ability to enforce the major prohibitions on anti-
competitive behaviour is shared by the OFT with the sectoral regulators that enjoy
concurrent powers3. We therefore agree with the OFT’s recent recommendation that –
to the extent they have not already done so – the sectoral regulators should follow the
OFT’s practice and adopt up-to-date, transparent guidelines on how they determine
which cases will be pursued4.




1
     Freshfields Bruckhaus Deringer is an international law firm providing business law advice to national and multinational
     corporations, financial institutions and governments throughout Europe, the Middle East, Asia and the US. Our comments are
     based on our substantial experience of advising parties in the UK in their interaction (both in merger control and in connection
     with behavioural issues) with the UK competition authorities and sector regulators. The comments contained in this paper are
     those of Freshfields Bruckhaus Deringer. They do not necessarily represent the views of any of our clients.
2
     We confirm that none of the information contained in this response is confidential, and that it may be published in full on the
     House of Lords’ website.
3
     The Office of Communications (Ofcom), the Office of Gas and Electricity Markets (Ofgem), the Northern Irish Office for the
     Regulation of Electricity and Gas (Ofreg NI), the economic regulator for the water and sewerage industry in England and
     Wales (Ofwat), the Office of Rail Regulation (ORR) and the Civil Aviation Authority (CAA).
4
     “OFT response to the report by DTI and HMT on concurrency competition powers in sectoral regulation” (31 January 2007),
     paragraph 13.



                                                                                                                          Page 1
Timely Investigations under the Competition Act 1998

2.3      The time taken to conduct an investigation by the OFT under the CA 98 has
been reviewed and commented on by the National Audit Office in its November 2005
report5.
          “Most full investigations take between one year and three years for the OFT to reach a decision.
          As at April 2005, six of the 37 on-going investigations had exceeded three years, including one
          very complex case which had been investigated for five years. Although other competition
          authorities also face difficulties with the timescales of cases, we believe there is a need for the
          OFT to strengthen its case management and set deadlines for resolving cases by helping staff to
          develop project management skills. The OFT has recognised these weaknesses and begun to
          address them.”6

2.4     We are concerned that the efforts being made by the OFT to address the length
of its CA 98 investigations should be matched by a similar commitment on the part of
the other sectoral regulators7.

2.5     The OFT has a team dedicated to investigating alleged infringements, which
benefits from a significant number of employees and enjoys extensive experience of
conducting antitrust investigations. Investigating factually complicated cases under the
CA 98 often demands detailed economic analysis which in turn necessitates significant
expert resources. In this context, it seems to us pertinent to ask whether the devolution
of the CA 98 enforcement powers amongst the sectoral regulators has proved effective
or whether this has led to enforcement resources and expertise being spread too thinly
across numerous bodies?

2.6      From the perspective of our clients, we see that there are very real costs to
business activity in the UK from lengthy and inconclusive investigations under the CA
98. Such investigations hinder effective management of the business, may serve to
dampen innovation and progress, and can have a significant bearing on the share price
of a listed company.

3.        RELATIONSHIP BETWEEN THE REGULATORS

Concurrency between Regulators

3.1     The concurrent application of the CA 98 by the OFT and the sectoral regulators
requires the relevant bodies to co-ordinate between themselves as to which regulator is
better placed to act in a particular case. We welcome the work of the Concurrency
Working Party (CWP) in this area. We would further suggest that the CWP aims to
make its thinking in this area, and the principles it develops, as transparent as possible
to third parties, and that the CWP’s work should extend beyond CA 98 investigations
into the selection and conduct of market studies under the Enterprise Act 2002 (the EA
02).


5
     National Audit Office: “The Office of Fair Trading – Enforcing competition in markets” November 2005, HC 593 Session
     2005-2006, available at: http://www.nao.org.uk/publications/nao_reports/05-06/0506593.pdf.
6
     Ibid, paragraph 10.
7
     For example, we note that the ORR’s decision in its investigation of conduct by English Welsh and Scottish Railway Limited
     in the carriage of coal by rail in Great Britain was made on 17 November, 2006, over five and a half years after the initial
     complaint was made on 1 February 2001. Available at: http://www.rail-reg.gov.uk/upload/pdf/ca98_decision_ews-
     dec06.pdf?bcsi_scan_4768CB94A8A496D0=7cniWTi73xfREjrtF3GhhhgAAABzVg8P&bcsi_scan_filename=ca98_decision_
     ews-dec06.pdf.



                                                                                                                       Page 2
Merger References under the Enterprise Act 2002

3.2     The interpretation of the “duty to refer” test in merger control cases placed on
the OFT by the EA 028 has been the subject of review by the Court of Appeal in Office
of Fair Trading v IBA Health9 and, subsequently, the Competition Appeal Tribunal in
Celesio v Office of Fair Trading10. However, the upshot of those interpretations of the
test appears to be that:

(a)        the OFT is obliged to expend significant resources investigating whether it has
           jurisdiction in cases which may be of dubious substantive merit: since the EA 02
           came into force, the OFT has investigated 596 cases of which 173 (29%) were
           found not to qualify for investigation (i.e. were outside the OFT’s jurisdiction)11;
           and

(b)        the OFT is sending a significant proportion of cases for further investigation by
           the Competition Commission (CC): since the EA 02 came into force, the OFT
           has referred 13% of qualifying merger cases it investigated and, of those cases in
           which the CC issued a final report, 59% were cleared unconditionally12.

3.3     Given that the OFT considers that the proportion of cases it refers to the CC is a
function of the “duty to refer”, it is perhaps worth considering whether the statutory
provisions should be amended. Allowing the OFT a discretion (rather than a duty) to
refer a merger which has resulted, or may be expected to result, in a substantial
lessening of competition would be likely to have two consequences:

(a)        first, it would be expected to lead to fewer cases being referred to the CC for a
           detailed investigation (lasting 24 or 32 weeks) only ultimately to be cleared
           unconditionally; and

(b)        second, it would relieve the OFT of its statutory obligation to investigate cases
           to determine whether it had jurisdiction. This would enable the OFT to
           concentrate its resources on cases of substantive interest.

Market Investigation References under the Enterprise Act 2002

3.4    Since the EA 02 came into force, there have been seven market investigation
references by the OFT13, which have generally lasted for a full two years. Although
market investigation references can be an important tool to address structural issues in a
market, there are two aspects of the OFT’s practice in this area which we consider
would merit further consideration:

(a)        first: the decision to refer a merger even when other regulators, or government
           bodies, are examining issues which will be central to the inquiry. Paradigm
           examples of this are the Store Cards and Home Credit references, when the

8
      Sections 22 and 33 of the Enterprise Act 2002.
9
      [2004] EWCA Civ 142.
10
      [2006] CAT 9.
11
      This also raises a question as to whether excessive resources are being spent determining which cases fall within the
      authorities’ statutory remit.
12
      Figures are all Enterprise Act 2002 merger cases up to 6 February 2007.
13
      Store Cards, Domestic Liquid Petroleum Gas, Home Credit, Classified Directory Advertising Services, Northern Irish Personal
      Banking, Groceries and Payment Protection Insurance.



                                                                                                                       Page 3
           Financial Services Authority already had regulatory oversight in these
           industries, and the Groceries reference, which was focusing on planning at same
           time as Professor Barker was already examining planning issues for the
           Treasury. There appears to us to be a real issue of “regulatory fragmentation”
           arising in this context; and

(b)        second, we suggest that greater weight be given by the OFT to the “downside”
           of making a reference, namely the “chilling effect” on business of facing
           detailed regulatory scrutiny for a two year period14. This problem is exacerbated
           by the issue discussed above, namely that companies can face concurrent and
           successive investigations by multiple regulators.

4.         PUBLIC INTEREST AND INTEREST OF CONSUMERS

Market Investigation References under the Enterprise Act 2002

4.1     In UK merger control proceedings, the EA 02 removed political involvement in
decision-making, allowing the Secretary of State only to intervene on exceptional
“public interest” grounds. A similar regime operates with respect to market
investigation references. While this structure has led to UK regulators having
significant strength in analysis of competition concerns, they are understandably less
well versed in assessing wider public interest considerations. Indeed, the result of the
regime introduced by the EA 02 is that the “adverse effect on competition” (AEC) test
applied by the CC15 does not allow for the consideration of countervailing public policy
issues and does not allow the CC to balance competing interests in its assessment.
Allowing for such a balancing of policy considerations might be expected to involve
greater involvement in the market investigation process for the Secretary of State than is
current permitted.16

4.2    This narrow focus on an AEC test can lead (and has done, most obviously in the
case of the Groceries reference) to consumers and consumer bodies considering that
their wider interests have been left unheard; despite the significant scale of the CC’s
inquiry, there is perceived to be a democratic deficit. Although we recognise the benefit
of a regime focusing purely on competition considerations in terms of clarity of
analysis, we would question whether the current position is satisfactory either to
businesses under investigation or to third parties anxious to voice their concerns.

5.         CONCLUSION

5.1     We would be happy to provide any further explanation of the points raised in
this response, either in a meeting or otherwise.

                                                                                       Freshfields Bruckhaus Deringer
                                                                                                      9 February 2007



14
      A recent example of the commercial impact of a market investigation reference can be seen in Angel Trains’ unwillingness to
      supply rolling stock to Virgin Trains because of the anticipated reference of passenger rolling stock leasing companies to the
      CC: http://news.independent.co.uk/business/news/article2237735.ece and http://www.rail-reg.gov.uk/server/show/nav.1363.
15
      Section 134 EA 02.
16
      Section 139 EA 02 allows the Secretary of State to issue a public interest intervention notice, but public interest considerations
      are very narrowly defined under section 153 EA 02.



                                                                                                                             Page 4

								
To top