Major UK competition law reforms proposed

The UK government has published a consultation proposing a series of refinements to key aspects of UK competition law, aimed at improving the speed, predictability and proportionality of Competition Markets Authority (CMA) processes while looking to preserve its operational independence. There are also proposals to enable increased scrutiny of online retailers’ algorithms.

The consultation paper signals a firm intention to better align the regulatory regime with the UK’s broader economic priorities. Much of this follows from the government’s focus on driving economic growth and attracting investment, which has been reflected in the authority’s recent focus on enhancing pace, consistency and engagement in its work.

Consultation on the competition reforms is open until 31 March and, subject to the consultation outcome, the government intends to bring forward legislation as soon as parliamentary time allows.

CMA decision making

A significant part of the proposals involves revising the decision‑making structure for CMA’s merger control work, as well as its work under the “markets regime” involving statutory market studies and market investigations under the Enterprise Act 2002.

The UK government proposes removing the independent ‘panel’ making final decisions in inquiries, and instead giving the CMA Board a more prominent and accountable role, while still seeking to preserve the CMA’s substantive independence by retaining the involvement of non-CMA staff in decision-making processes. It hopes the changes will add transparency to internal CMA governance and produce more consistent decision making, particularly in large or more complex cases.

These proposals would be a significant change to the CMA’s processes. They may raise concerns over the possible impact on CMA’s decision-making independence in Phase 2 mergers, and lead to increased political pressure on the CMA.

At the same time, the reforms are aimed at reducing situations where the CMA may be criticised for Phase 2 decisions made by an independent panel, as in the Microsoft/Activision-Blizzard merger.

The consultation also raises the possibility of a more formalised role for the Secretary of State in relation to certain areas, although this is framed as being about transparency and policy alignment rather than intervention. The consultation reiterates that the CMA’s independence would remain protected.

Merger control reforms

Greater certainty about when the CMA will open merger investigations would also be provided under the reforms, seeking to address industry concerns that UK merger control jurisdictional boundaries have become too elastic and that transaction parties do not always have a clear sense of risk at the outset.

The consultation proposes narrowing how the CMA applies the “share of supply” and “material influence” legal tests that give the authority jurisdiction to review M&A deals under merger control rules, by prescribing an exhaustive list of factors the CMA can consider when applying each test. There would be a longer timeframe for negotiating remedies at Phase 1 of a merger review, doubling the timeframe to 20 working days for the authority to undertake initial consideration of remedies.

At the CMA’s discretion, an additional five working days to propose remedies in a Phase 1 procedure could also be allowed. This has been a potentially challenging area for businesses as the current timetable can be too compressed to develop remedies to prevent Phase 2 procedure. The amendments, if adopted, should make it easier to engage constructively with the CMA at an earlier stage of the process.

The proposals to limit the scope of the CMA’s jurisdiction to review mergers, through the changes to the share of supply and material influence tests, are likely to have limited impact, but are welcome nonetheless. They do not involve a radical overhaul of the UK merger regime, and the CMA will still retain significant flexibility to review a broad range of transactions.

The proposals to allow more time for remedies discussions at Phase 1 are important, despite their procedural nature. These should be considered alongside the CMA’s recent update of its merger remedies guidance, which demonstrates potentially greater flexibility in respect of Phase 1 remedies.

This combination of a potentially more flexible substantive approach, and a more favourable timeline, in respect of merger remedies may allow for more deals to be cleared at Phase 1, and will be welcomed by businesses considering merger activity. Due to the cost and intensity of Phase 2 reviews in the past, many businesses continue to see the risks of a Phase 2 investigation as a disincentive to merger activity in certain cases.

Streamlined market reviews

The proposals also look to shorten review periods relating to the CMA’s market review function; to tighten its approach to ensuring that remedies imposed in the context of market reviews remain both necessary and proportionate over time; and to create a more flexible model for working with sector regulators that have concurrent competition law powers alongside the CMA.

Under the proposed reforms, the markets regime would see the currently two-phase market studies and investigations regime being replaced with a single-phased process. This could last up to 24 months, with a streamlining of simpler cases to a shorter timetable, but also a potential six-month extension for more complex cases.

The CMA is currently required to conduct a market investigation when a sectoral regulator refers a market to it. The new proposals would give it discretion as to whether or not to take referred markets forward for review.

Sector-specific regulators would have responsibility for monitoring and enforcing market remedies imposed or accepted by the CMA in their areas, to reduce the amount of regulatory touch points companies may face.  In addition, there would be regular reviews of market remedies to make sure they are working and not placing unnecessary burdens on business.

Ultimately, firms operating in regulated sectors could face faster markets work and deeper cooperation between the CMA and regulators, meaning that competition and regulatory teams will need to stay closely aligned in these types of review.

There are certain market sectors involved in the markets regime where the issues under investigation and the range of potential remedies, such as those where transparency remedies are impossible, could be in contemplation at the outset, and where a more streamlined single phase process would be more efficient.

The government also has proposed replacing the legal test currently used for market investigations – ‘adverse effect on competition’ - with an ‘adverse effect on consumers’ test, in effect replacing a somewhat technical test with a more flexible test. The intention is that this will introduce greater flexibility into the markets regime and the remedies which the CMA may impose.

It remains to be seen whether this also means that the markets regime will focus on consumer-facing markets to an even greater extent than currently, and whether some of the cases seen in the past involving markets where any impacts on consumers are indirect will become rarer. 

New powers over algorithms

Under the proposals the CMA would also gain new powers to investigate algorithms across both its competition law and consumer protection law functions, reflecting increasing concern that pricing tools, ranking systems and automated optimisation technologies can affect market dynamics or consumer behaviour in ways that may warrant closer scrutiny.

If the proposals are implemented, businesses using sophisticated algorithmic systems will need to be prepared for more detailed questioning around governance, testing and monitoring, and the CMA is likely to expect evidence of robust controls and documentation.

Collective proceedings

The government had previously announced plans for a separate consultation on legislative changes concerning the UK collective proceedings competition regime. Those proposals will be subject to separate consultation that will commence in the coming weeks.

Co-written by Tadeusz Gielas of Pinsent Masons.