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THE UK AND EUROPEAN FRAMEWORK

	The UK's competition regime is built on the Competition Act 1998 which prohibits anti-competitive agreements and abuses of dominant market position.
	EC law has direct effect in the UK ­ prohibiting the same kinds of behaviour where they have an effect on inter-state trade.
	The European Commission proposes far-reaching reforms to strengthen the effectiveness of the EU regime ­ the Government broadly welcomes these proposals.
	The Fair Trading Act 1973 contains important provisions which address mergers and allow for market-wide investigations. Currently, final decisions on cases are made by Ministers acting on the advice of competition authorities.

THE DOMESTIC REGIME

2.1      Four years ago, the UK's competition regime was widely accepted as being much weaker than those of our industrial competitors. In particular, it was ineffective at dealing with cartels. The penalties for engaging in anti-competitive behaviour were also weak ­ the competition authorities could not fine firms, nor could third parties take action for the harm they suffered.

2.2      Following the 1997 general election, the Government introduced legislation to adopt a prohibition against anti-competitive agreements and abuses of dominant market position ­ along the same lines as the European regime.

Competition Act 1998

2.3      This legislation ­ now the Competition Act 1998 ­ prohibits cartels and other anti-competitive agreements. It also prohibits abuses of dominant market position. The new regime ensures businesses do not face the burdens of two divergent sets of competition law addressing similar practices.

2.4      Firms which breach the prohibitions in the Competition Act break the law. Their actions can be subject to penalties ­ of up to 10% of UK turnover in the relevant market, for up to three years of an infringement. They also face the prospect of actions for damages against them by third parties that have been harmed by their illegal acts.

2.5      Under the Competition Act, it is the Office of Fair Trading (OFT)¹, rather than Ministers, which is responsible for taking decisions on day-to-day competition cases. Appeals against decisions are made to a new tribunal ­ the Competition Commission Appeal Tribunals.

Mergers

2.6      The Fair Trading Act 1973 also provides an important limb of domestic competition law.

2.7      Most merger cases are considered under this legislation. Initial investigations are normally carried out by the OFT, who advise Ministers on whether to make references to the reporting side of the Competition Commission² (although Ministers can also independently make references). The Competition Commission then conducts a formal investigation and sends its report to the Secretary of State for Trade and Industry ­ in particular considering whether the merger operates, or may be suspected to operate against the public interest. The Government cannot take action unless the Commission advises that the merger contravenes the public interest ­ in such cases, it has discretion on what, if any, remedies to adopt.

2.8      The Government announced in 1999 that it intended to modernise the merger regime ­ leaving decisions on cases to the competition authorities, making judgements against a competition-based test. Following consultation, the Government has decided how best to put these proposals into practice ­ more detail on the changes is set out in Chapter 5.

Complex monopolies

2.9      The Fair Trading Act also contains provisions to address "complex monopolies" ­ ie where a group of firms in a market adopt similar behaviours which have anti-competitive effects. Recent cases have included New Cars and Supermarkets. These provisions are the primary basis in UK law for looking at how markets work. They are particularly valuable because they allow action to be taken against non-collusive parallel behaviour ­ for example where a particular practice is prevalent in a market, and its effects mean consumers do not get a fair deal.

2.10      The procedures are similar to the merger procedures. Initial investigations are carried out by the OFT. Rather than advising Ministers on whether to make a reference, the OFT makes references direct (Ministers also have the ability to refer markets). The Competition Commission conducts an inquiry ­ determining whether the market operates in a manner which is against the public interest and normally recommending remedies to address the situation. The Secretary of State for Trade and Industry considers the report, and determines what remedies to impose.

2.11      The Government announced in June 2001 that it saw a strong case for reforming the complex monopoly regime along the same lines as the planned merger reforms. Chapter 6 sets out in some detail how the Government intends to proceed.

Scale monopolies

2.12      The Fair Trading Act also contains provisions on scale monopolies ­ ie where a single firm has a share of supply exceeding 25%.

2.13      The Competition Act overtakes these provisions. In the majority of monopoly cases, the OFT will wish to take action under the prohibition of abuse of a dominant market position, which carries the possibility of fines. However, there was some doubt about the extent to which these powers could be used to require firms to sell some of their business. Therefore, the Government decided in 1997 that it would be premature to repeal the scale monopoly provisions. Instead, it would be better to curtail their use ­ so that they would only be used in the utility sectors, or if firms engaged in repeated abuses of their dominant market position.

THE EU COMPETITION REGIME

2.14      Articles 81 and 82 of the EC Treaty outlaw anti-competitive agreements and abuses of dominant market position when they may affect trade between Member States. They are enforced by the European Commission, which has powers to investigate infringements, and can impose fines of up to 10% of worldwide turnover on firms that break the law. Firms can appeal against Commission decisions in the European Courts. The Competition Act regime is modelled very closely on Articles 81 and 82.

2.15      The European Commission also considers large merger cases. Under the European Community Merger Regulation, the Commission assesses whether mergers between companies with turnovers above certain defined thresholds would create or strengthen a dominant position which would significantly impede effective competition. Member States have a formal role in the process, but the final decision is for the Commission alone. As with cases under Articles 81 and 82, the Commission's decisions may be appealed to the European Courts.

EU Modernisation

2.16      The Commission has, however, embarked on a programme of reform of Community competition rules. It is considering a possible reform of the European merger control regulation but has already brought forward proposals for a significant modernisation of the rest of the Community framework.

2.17      Most notably these proposals seek a much greater role for national authorities in enforcing Community competition law. Furthermore their emphasis on strengthening the effectiveness of the regime in combating serious infringements and on achieving greater consistency and co-operation in the application of competition rules in the Single Market demonstrates that the Commission shares the Government's approach set out in its principles for competition policy in Chapter 3 of this White Paper.

2.18      Under these modernisation proposals, the Commission plans:

• To decentralise much of the enforcement to courts and competition authorities in the Member States. Currently, the European Commission has a monopoly on the right to approve agreements, which although restrictive of competition, have certain beneficial effects which merit an exemption.
• To end the burdensome procedures whereby companies have to notify agreements to the Commission in order to be sure they are compatible with EU competition law. In the future, companies will be responsible themselves for assessing whether their agreements comply with the law.
• To improve the legal certainty for businesses operating in the Single Market, by obliging Member States to apply Community law ­ to the exclusion of national law ­ for all cases which affect inter-state trade. Such harmonisation would only extend to substantive issues of law: national rules for investigations and penalties would remain.

2.19      Overall, the Government welcomes the Commission's proposals:

• Decentralisation will allow the OFT to handle more cases which affect inter-state trade and impact on the UK. Cases with truly pan-European implications will continue to be handled by the European Commission.
• The end of the notification system should reduce the bureaucracy of (largely unnecessary) notification and in so doing free resources for the Commission to investigate the more serious European-wide cartels and other serious breaches of competition law.
• Greater consistency for businesses operating in the Single Market has long been a UK policy goal. Reducing the costs of operating in multiple jurisdictions should benefit them by increasing investment opportunities, allowing businessess to concentrate on their business strategies, rather than worrying about legal uncertainties.

2.20      The Commission's proposals remain at a relatively early stage of consideration. Nevertheless, it is likely that the Commission will amend the proposals over the coming months in order to win the support of Member States. The Government will work closely with the Commission to ensure they meet the best interests of the UK.

Future developments

2.21      We will need to reflect the outcome of negotiations on the modernisation proposals (once they have been completed) in our domestic laws ­ for example, giving the OFT the power to apply Articles 81 and 82 directly.

2.22      The Government does not believe it would be right to hold up desirable reform to our competition regime until the modernisation proposals are finalised. However, it is clear that both to implement the modernisation reforms and to maintain the consistency of our domestic regime with developments in the EU, some changes will be needed to the domestic regime, including significant modification of primary legislation. We currently anticipate that the changes required could be made by the exercise of delegated powers under the European Communities Act 1972 and the Regulatory Reform Act 2001. However, the modernisation proposals are not settled and are likely to require substantial changes to domestic legislation. Therefore, the Government will keep under review whether these existing powers are likely to be sufficient and appropriate to deal with inconsistencies or difficulties of interaction between the EU and domestic competition regimes. If it concludes that they are not, it will come forward with proposals for further powers to ensure modernisation can be implemented by secondary legislation.

¹ Even though formal powers are vested in the Director General of Fair Trading, in reality it is the OFT led by the Director General which enforces the law. Therefore, this document refers to the OFT rather than the Director General.

² Throughout this document, the reporting side of the Competition Commission is referred to simply as the "Competition Commission". Similarly, "competition authorities" includes only the reporting side of the Commission.