Out-Law Analysis | 17 Feb 2021 | 1:11 pm | 6 min. read
The independent report, by John Penrose MP, examines in a holistic way how improvements could be made to place consumers at the heart of competition and regulation without a complete overhaul of the existing regulatory structures; putting the UK economy in a strong position to meet the challenges of competing in increasingly global, digitised markets.
In his report, Penrose reinforces the long-held view that stronger competition and consumer choices will drive a more efficient and competitive economy leading to more jobs, greater success for exporting firms and winning contracts, and a wider range of high quality goods and services at more competitive prices.
The proposed reforms are wide-ranging. They seek to refocus the duty of regulators on achieving better outcomes for consumers, while speeding up competition and consumer law enforcement and appeals. While the report recommends a new Competition Act to update and modernise the UK's institutions responsible for competition and consumer law enforcement, it also notes that many of the proposals do not require legislation and can therefore be achieved more quickly.
Businesses are likely to welcome Penrose's recommendations to rein in regulatory and political intervention in a range of areas, and changes enabling firms to resolve often protracted and burdensome merger control and market intervention procedures more quickly via legally binding undertakings.
The report proposes reducing the regulatory burden on businesses through a revised and strengthened version of the 'Better Regulation' regime operated by the coalition government between 2010 and 2015. Specifically, this would mean reintroducing the 'gateway condition' requiring ministers and regulators to remove or modernise old rules before they can introduce new ones.
Partner, Head of Competition, EU & Trade
While the report recommends a new Competition Act, it also notes that many of the proposals do not require legislation and can therefore be achieved more quickly.
The new regime should operate on the basis of 'one in, two out', and apply to all forms of government and regulatory rule-making. Penrose notes that the previous regime excluded all EU rules and rules set by sector regulators from its scope.
The report strongly endorses the need for independent regulators that are free of political interference and focuses on the empowerment of consumers, especially in relation to digital markets. It recommends strengthening and defining the over-arching role of the Competition and Markets Authority (CMA) as a "micro-economic sibling for the Bank of England's well-established public macro-economic role, responsible for tracking progress of UK competition, consumer rights, supply-side reforms and productivity improvements".
Sector regulators' primary legal duty should be to achieve "competition for the benefit of consumers first, regulation as a last resort". They should develop multi-year plans for turning their sector into a 'normal' pro-consumer, high standards competitive market, progressively handing over more responsibility for the sector to the CMA as the plan progresses.
Sector regulators would be expected to abide by the 'Better Regulation' regime and to focus their regulatory powers only on the core network monopolies. Other proposals include the independent auctioning of contracts to build and upgrade the network monopoly infrastructure in regulated sectors, and having all appeals of sector regulators' decisions dealt with by the Competition Appeal Tribunal (CAT).
The CMA's civil consumer enforcement powers should be updated to bring them into line with, and have the same importance, as, competition law. This is significant as it will enable the CMA itself to investigate and make decisions itself relating to consumer law infringements, and impose penalties directly for breach of the rules; rather than, as currently, having to go to court to force companies to make the necessary changes.
Currently, many consumer protection cases are settled by way of voluntary undertakings given by companies to make the changes requested by the CMA. It is possible that if the CMA is given more powers to take infringement decisions and impose fines, companies will be more inclined to defend themselves more robustly.
Notably, Penrose recommends that restrictions on price discrimination and 'loyalty penalties' should be extended beyond the financial services sector to be a general consumer protection regulation across the entire economy. Similarly, the CMA should update its guidelines on what treating customers fairly means in practice, including 'transactional fairness'.
Consumers should also have enhanced information and transparency in relation to pricing, terms and conditions, and a CMA market investigation should be carried out to assess how consumers can be protected from the negative aspects of 'nudging' techniques in digital markets. The CMA should also re-open its 2017 market study into digital comparison tools.
Penrose did not consider that it was necessary for the competition enforcement regime to move to a prosecutorial system. However, the report recognises that there are conflicting interests and legal requirements that must be addressed in order to speed up CMA competition enforcement decisions and appeals while respecting parties' rights of defence. It is also Penrose's view that all but a small number of the most complicated competition, consumer and merger cases should be resolved within weeks or months rather than years.
Penrose does not make a specific recommendation on whether appeals of CMA decisions should remain 'on the merits' or be enhanced to a 'judicial review' standard. Instead, he recommends that the government should establish a task force to complete an end-to-end review and redesign of procedures and case management in the CMA and CAT. The task force should consider changes to internal governance and statutory process requirements, including appeal standards, from investigation and case launch to appeal, in its review.
A review of this nature would involve consulting a broad range of stakeholders including businesses, sector regulators and senior legal practitioners, and is likely to generate some divergent views on appropriate reform. The report also recommends a further task force review five years later, that could lead to yet further reforms.
Penalties for non-compliance with investigations – such as failing to respond to information requests - should be strengthened. The CMA should also be able to agree legally binding changes with firms part-way through a merger case or a market study; and co-operation arrangements for sharing information between the CMA and other international competition regulators in global cases should be enhanced.
It is possible that if the CMA is given more powers to take infringement decisions and impose fines in consumer protection cases, companies will be more inclined to defend themselves more robustly.
New fast-track County Competition Courts should be established for speedy, low cost resolution of local and regional competition and consumer claims at the tier below the existing CAT fast track. Small claims courts and alternative dispute resolution (ADR) services should be made available on a fully 24/7 basis, to match the needs of the modern digital economy.
The UK government has announced its intention to create a new digital markets unit, within the CMA, with additional powers to tackle the competition law challenges created by digitisation. In Penrose's view, this new unit must be tightly ring-fenced to avoid regulatory 'creep'. The CMA should use its normal competition and consumer powers wherever possible in preference to the additional digital regulation powers, and only apply them to individual firms that own and run new network and data monopolies.
The new unit should be named the Network and Data Monopolies Unit (NDMU), to reinforce the ring-fenced nature of its role.
Further CMA intervention in the digital sector could also be on the cards. The report suggests that the CMA could extend its online advertising market study from 2019 to a full-scale market investigation. Penrose also recommends that the CMA carry out a market investigation to "assess how we should recognise and measure sludge in future, and identify what consumer protection rules and analytical techniques will be needed to protect consumers from it as digital technologies evolve and develop over time" - with 'sludge' referring to techniques used online to influence consumer behaviour and entice them into poor value transactions.
The government should implement the changes outlined in its recent procurement green paper as quickly as possible by reforming, updating and improving the previous EU regime. The new regime should be a faster, more digital, automatically transparent process that is easier for entrepreneurial firms to compete through, while more resilient against corruption and fraud.
Following the departure of the UK from the EU, EU state aid rules no longer apply.
The report recommends that the UK's approach to state aid and subsidies control should follow similar principles, keeping state subsidies to a minimum in order to keep the UK economy competitive and successful.
The report recommends that political intervention in proposed foreign investment should be as limited as possible. The government should, however, develop new options on how to prevent fast-growing UK-based firms in fast-growing sectors from being poached offshore for non-commercial reasons.
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