Posted on September 9, 2016 by Charles Nancarrow
“Twenty years ago when accountability of public institutions was discussed, the NAO’s name was not mentioned; it is now.” So said a leading expert in competition law, speaking at an NAO Competition Seminar in June to discuss where the competition regime needs to be by 2020. With competition central to the government’s ambitions to improve growth and productivity, and consumers harmed by anti-competitive practices, this seminar was an excellent example of how the NAO’s cross-government role and its influence can truly help to drive public service improvement.
Effective competition between businesses can lower prices and improve consumer choice, product quality and innovation. Moreover, as the Organisation for Economic Cooperation and Development (OECD) has found, competition also drives productivity growth – and productivity is a key determinant of living standards (see Figure 2 of our Feb. 2016 report, details below). Such benefits are, however, dependent on the competition being effective, and not, for example, leading to perverse market outcomes such as a race to the bottom in terms of quality that harms consumers.
To achieve these benefits, there needs to be public understanding of the role of market regulators; clarity about competition law; bold and resolute enforcement; and effective punishments that encourage business compliance and deter anti-competitive behaviour by firms.
The benefits and approach are well known; the challenge is in its implementation. In 2010 the NAO reported on significant failings in the UK’s competition regime. Following our report the government decided to merge the Office of Fair Trading and the Competition Commission to create the Competition and Markets Authority (CMA), which began operating in April 2014. Although it’s still relatively early days in the CMA’s operations, we reported in February this year on their progress in improving the operation and oversight of The UK competition regime.
Our February report found a number of improvements in the oversight of competition, such as strengthened processes that have increased the robustness of the CMA’s legal challenges, an innovative approach to merger control, and greater coordination across the eight regulators through the new UK Competition Network. The CMA did, however, inherit significant challenges in competition enforcement, including a difficult legal environment, low business awareness of competition law and a reputation affected by some high-profile lost cases.
We made a number of recommendations to help embed the improvements underway and tackle some of the remaining issues. These were accepted by the CMA. Moreover, the CMA and wider UK Competition Network welcomed the NAO’s proposal to get together to discuss the way forward on two of the key issues in our report.
The result was a seminar on 30 June, hosted by law firm Linklaters. This event is an excellent example of the NAO’s ability, as a neutral organisation working across government, to convene debates on significant areas of public policy and taxpayer interest, bringing together functional experts and practitioners to share experiences and discuss solutions. Other such NAO-facilitated seminars this year have focused on issues ranging from best practice in cost forecasting, achieving value for money from public service markets, to improving the capability of the government’s commercial profession; in each case the participants have been enthusiastic to engage in the discussion and share their perspectives.
The June seminar followed up two particular aspects highlighted in our report: firstly, the need for the CMA to improve its competition enforcement including what success would look like by 2020, and, secondly, the implications of the CMA’s ability to investigate an entire regulated market, focusing on the energy sector. A full summary of the seminar is available alongside our The UK competition regime report. Some of the key points made at the seminar were:
An expectation that by 2020 the UK competition regime will produce a greater number of competition enforcement decisions, and that this should include more enforcement in the regulated sectors (where regulators such as Ofcom, the Financial Conduct Authority, and Ofgem have concurrent powers to enforce competition law).
The Competition Appeal Tribunal’s new power to hear stand-alone cases, and the new collective redress route, offer potentially valuable alternative routes to the use of competition law by private parties. The extent to which this is the case should become clearer over the next few years.
There has been a notable change since our 2010 report found strong disincentives to regulators referring their own markets to the CMA for a full market investigation reference (MIR). The seminar discussed the implications for institutional relationships, and highlighted the CMA’s support for the regulator (Ofgem), handing it a significant role in implementing remedies and making recommendations to improve Ofgem’s independence from the department (now the new Department for Business, Energy and Industrial Strategy – BEIS).
The CMA also took the opportunity to highlight its wish to make significant progress on another of the NAO’s key recommendations: the need to raise awareness of competition law among SMEs. As detailed in our report, business awareness of competition law is important in encouraging compliance, but it is currently low – as seen in the results of the CMA’s own 2014 survey of UK industry, showing only 23% of businesses felt they knew competition law well. A 2014 survey of public attitudes also found a relatively low awareness among UK respondents that price-fixing is illegal.
One way the CMA aims to raise business and public awareness of competition requirements is to publish materials targeted at smaller businesses, including highlighting the results of successful cases to firms in the relevant sector, such as in the estate agent case study (below).
Case study: Three Counties Estate Agents
In March 2015, the CMA issued a decision which found that a trade association, three estate agents and a newspaper publisher had breached competition law by agreeing to prevent estate and letting agents from advertising fees or discounts in the local newspaper. During the investigation, they admitted breaching competition law and agreed to pay penalties totalling over £775,000.
The CMA followed up the case by working with the key trade association and other relevant bodies to distribute compliance material. It published open letters on the illegality of such practices and sent warning letters to a significant number of other estate and lettings agents, which it suspected had been involved in similar practices. The CMA estimates that its materials were distributed to 95% of UK estate agents and 75% of lettings agents. The CMA has subsequently received complaints and intelligence about similar practices elsewhere, resulting in it opening a further enforcement case.
We are delighted that the seminar generated such useful discussion and sharing – and, of course, that the speakers welcomed the NAO’s role in holding the CMA and wider competition regime to account for its performance. This event was an excellent example of how the NAO seeks to drive public service improvement and illustrates why we are organised internally around the key issues facing government today, including through our specialist Regulation, Consumers and Competition team.
We will continue to discuss and report on the competition regime’s success in realising its ambitions and creating the right conditions to transform the UK economy. Meanwhile, we would be delighted to hear your comments and invite you to contact us if you would like to discuss any issues raised by this blog, or more broadly regarding regulation, consumers or competition.
About the authors:
Charles Nancarrow leads the NAO’s work on consumers and competition, and is strategic lead for the NAO’s markets work on consumer protection in public and private markets, and on the UK competition regime. He is a regular speaker at conferences and seminars.
Peter Langham is a senior member of the NAO’s regulation, consumer and competition team and leads the Office’s work on public service markets: developing best practice approaches, and coordinating a cross-government public service markets group. Peter also has extensive experience of assessing the effectiveness of the UK competition regime.
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