4

STRONG, PROACTIVE AND INDEPENDENT COMPETITION AUTHORITIES

	The Government wishes to see truly independent competition authorities which work proactively to root out instances of anti-competitive behaviour.
	There will be clear legal duties for the OFT to promote competition.
	Government invites our competition authorities to advise on the impact of laws and regulations on competition. The Government is committed to responding publicly within 90 days.
	Government welcomes the OFT's move to introduce "super-complaints" from consumer groups. This new power will be enshrined in legislation.
	Only those with expertise relevant to competition will be appointed to the Competition Commission. Only those with expertise relevant to competition or consumer affairs will be appointed to the Board of the OFT.
	Both the Competition Commission and the OFT will improve their staffing ­ with recruitment on the basis of expertise relevant to competition becoming the norm for those working in competition.
	The Government, the OFT and the Competition Commission, all share a common understanding of the aims of our competition regime ­ to increase the level of competition in the economy, to improve the UK's productivity performance and to make markets work well for consumers.
	The Government invites Parliament to actively scrutinise our competition regime. The mission statements of the Competition Commission, the OFT and Government will help it to do so.

4.1      While the Government can set a strong framework for competition, it is our competition authorities which carry responsibility for implementing it. For an effective competition regime, UK consumers and businesses rely on the OFT and the Competition Commission to detect instances where markets are not working well, and to take the necessary action to remedy the problems.

THE PRESENT UK INSTITUTIONAL FRAMEWORK

4.2      Our primary UK competition authority is the OFT, which also has responsibility for consumer protection. The OFT is headed up by the Director General of Fair Trading ­ John Vickers. The OFT enforces the Competition Act 1998, and also carries out initial investigations under the Fair Trading Act 1973. Under these Acts, all formal powers are vested in the Director General rather than the OFT. The OFT also has a leading responsibility for enforcing consumer protection laws.

4.3      The Competition Commission is a smaller organisation split into two functions with a Council chaired by Derek Morris. The reporting side of the Competition Commission conducts investigations under the Fair Trading Act. It also has a number of functions under sector-specific legislation. It is led by the Chairman and comprises around 55 members ­ drawn from industry, trade unions, former civil servants, economists, lawyers and consumer activists.

4.4      The Competition Commission Appeal Tribunals operate much like a court. They are headed by Sir Christopher Bellamy ­ who has the status of a High Court judge, and was formerly a judge of the European Court of First Instance.

4.5      In addition, some sector regulators, specifically the Office of Gas and Energy Markets (OFGEM), the Office of Telecommunications (OFTEL), the Office of the Rail Regulator (ORR), Civil Aviation Authority (CAA), the Office for the Regulation of Electricity and Gas (OFREG(NI)) and the Office of Water Services (OFWAT) can apply competition law (other than for mergers) in their sectors, in the same way as the OFT does for the economy as a whole. Utility regulators can also enforce consumer protection legislation.

RECENT DEVELOPMENTS

4.6      Until the Competition Act 1998, our competition regime lagged behind that of other countries. Lacking the necessary legislative tools, it is hardly surprising that neither the OFT nor the Competition Commission were seen as leading world-class competition authorities.

4.7      The last few years have seen significant changes. Decisions under the Competition Act are taken by the OFT. In 1998, the OFT embarked on a significant change management programme to ensure that the organisation was ready to take on its increased responsibilities under the Competition Act. Following a recent review, the OFT is putting in place changes designed to provide a stronger platform for meeting its goals (see Box 4.1).

4.8      The Competition Commission's reporting side has not been directly affected by the Competition Act 1998. However it has increased the transparency of its procedures by conducting more public meetings and making more information publicly available during the course of inquiries. It has also taken steps to increase public awareness of its decisions ­ for example, through press releases and media interviews.

4.9      Both the OFT and the Competition Commission, as well as the Competition Commission Appeal Tribunals, are currently led by renowned competition experts ­ a move which should help the organisations build their profile in coming years.

4.10      These improvements are bringing international recognition. A recent survey² of competition authorities around the world found that both the OFT and the Competition Commission were held in higher regard than in earlier years, and that they ranked above many other competition authorities (equal fourth, with five others, out of twenty five).

4.11      However, the Government believes that there is more to be done if our competition authorities are to stand at the top of the world league. In particular, we wish to see competition authorities which play an active role in increasing the level of competition in the economy ­ helping to boost productivity and enterprise.

Box 4.1: Key changes the OFT has made since 1998
	More recruitment of specialist staff to competition posts.
	Mandatory training for all staff enforcing the Competition Act 1998.
	Open recruitment to fill posts.
	Creation of Markets and Policy Initiatives Division (see paragraph 4.18).
	Enforcement divisions given more focused role.
	Introduction of more flexible pay arrangements to enable the OFT to respond to market pressures and recruit and retain staff with key skills.

CHAMPIONING COMPETITION

4.12      The Government wants to see a step change with the authorities looking beyond enforcement to a role of advocacy and promotion. Historically, our authorities have tended to focus all their energies on implementing the law. They have found it hard to step outside this function ­ for example, by publicly explaining the importance of competition, the significance of decisions, or ways in which competition might be increased.

4.13      In other countries, for example the US and Australia, competition authorities have a clear role as advocates of competition.

4.14      In future, the Government would like our competition authorities to take on a high profile advocacy role, both by advising on the impact of the Government's own laws and regulations on competition; and more widely acting to promote competition in the economy in a variety of ways.

The impact of regulation on competition

4.15      Our laws and regulations are vital in helping to achieve the Government's social, environmental and other objectives. However, they can have unintended consequences. Legislation can affect market structures and dynamics, for example by erecting barriers to entry or to new products.

• In the White Paper, "Opportunity for All in a World of Change"³, the Government announced that it wished the OFT and other competition regulators to advise where laws and regulations create barriers to entry and competition, or channel markets in a particular direction, thereby holding back innovation and progress. This new role applies to assessing the effects of existing and proposed new legislation.
• The competition authorities have on occasion highlighted the impact on competition of existing laws. For example, the Competition Commission in its report on underwriting drew attention to the effect pre-emption rights under company law had on the market for underwriting services. But our authorities need to be confident that issues they identify will actually be addressed. For that to happen, Government must commit itself to respond.
• The Government will therefore consider the advice it receives from the OFT, the Competition Commission or a sector regulator, balancing competition against other public policy considerations. Decisions on how to proceed will be taken by Ministers collectively.
• Government will publish a response within 90 days of receiving a report, setting out where it does or does not propose to make changes in light of the report, or where it proposes to consult on options.
• The Government anticipates that changes to legislation that it decides to make following a report on competition effects could generally be made by the exercise of delegated powers under the Regulatory Reform Act 2001.
• The Government will also legislate to give the OFT the power to publish reports on future developments in markets, including future regulatory impacts. (Reports on the effects of existing regulations can already be published.) This is addressed in more detail in paragraph 4.21.

Promoting competition

4.16      To ensure our competition authorities work actively to promote competition in the economy:

• The OFT should work to communicate the importance of competition to businesses and the public in a modern, dynamic economy.
• Both the OFT and the Competition Commission should ensure that businesses and the public understand their decisions, the reasoning behind them and the likely impact that they will have. This will provide greater transparency and certainty for all.
• The OFT should scrutinise markets to assess whether strong competition pressures are at work. If there are concerns, the OFT should consider whether it should take action under the Competition Act or the Fair Trading Act, or its consumer protection powers. In some cases a quick report, which shines a light into a dark corner, will prove sufficient. In others, it will need to refer the market to the Competition Commission for further investigation.
• The OFT should keep the effectiveness of our competition regime under review. The OFT should publish reports which analyse the effectiveness of previous competition interventions ­ considering, for example, whether the remedies have been successful at promoting competition and bringing consumer benefits. This will be good for business and consumers and increase confidence in the system.
• The OFT should also advise Government on ways in which the competition regime might be improved.

4.17      Both the OFT and the Competition Commission have begun to work towards this goal. For example, the Competition Commission has adopted a more visible media stance ­ which heightens awareness of the importance of competition policy.

4.18      The OFT is to set up a new unit ­ the Markets and Policy Initiatives Division. It will sit alongside the existing competition enforcement and consumer protection divisions and will provide a stronger platform for tackling markets which do not appear to be working well for consumers. The Government warmly welcomes this move, as the new unit will have primary responsibility for promoting competition, and will provide additional funding to ensure that the new unit is successful.

Local markets

4.19      Often, the market for goods and services are very local, and it can prove particularly difficult for the OFT to detect where these markets are not working well. The Government is considering how to improve the detection of competition problems in local markets. Local Authority trading standards officers have a good knowledge of how local markets work in practice, and may be well placed to take on a more active role in detecting local competition breaches, referring cases to the OFT for fuller investigation.

POWERS AND DUTIES

4.20      Government needs to ensure that the OFT has the legal powers and duties necessary to carry out in full its role of championing competition. It will legislate to give it clear duties to promote competition.

4.21      The OFT has long-standing duties to keep markets under review (in the Fair Trading Act) and to publish reports on its findings. However these need to be updated.

4.22      The Government will revise these provisions to give the OFT wide ranging duties to consider and report on matters (including legal restrictions) which they consider are preventing, or could prevent, commercial markets operating effectively, bearing in mind particularly the importance of strong competition in generating benefits to consumers and economic welfare, and on matters aimed at improving the effectiveness of the competition regime. This will give OFT clearer and proactive roles to:

• Scrutinise markets to assess whether strong competitive pressures are at work ­ and if not, find out why not.
• Review and report on possible future developments that may affect markets. The OFT will be able to publish reports that are forward looking, including if necessary on the likely effects of prospective new legislation on competition.
• Publish reports which analyse the effectiveness of previous competition interventions ­ considering, for example, whether they have been successful at promoting competition.
• Advise Government on ways in which the competition regime might be improved.

4.23      The Government will also give the OFT a further duty to explain and promote the importance of competition to consumers and businesses.

4.24      Greater powers and independence require more accountability. The annual reports of the OFT and the Competition Commission will assume greater importance as they report, and are held to account, against new mission statements (see paragraph 4.43). The Government will legislate to require the Competition Commission to produce its own annual report (currently it has to be covered by the OFT's document, though it also produces its own non-statutory report).

CONSUMER GROUPS

4.25      Anti-competitive behaviour in consumer markets can be particularly difficult to detect. Where there are a large number of consumers, and most firms operate in a similar way, consumers will often not know whether they are getting a raw deal. Individual consumers rarely have access to the information necessary to put together a cogent complaint.

4.26      In this situation, consumer groups have a crucial role to play. Through them the interests and power of large numbers of consumers can be articulated.

4.27      The Government wishes to strengthen the voice of the consumer in competition. It therefore proposes to give consumer groups the right to bring super-complaints to the OFT where they suspect there are market structures or practices which are working against the interest of consumers. A draft procedure for this is set out in Box 4.2. The OFT intends to establish arrangements to introduce this new role for consumer groups as soon as possible. Super-complaints will be investigated quickly by the OFT who will issue a clear, public response within 90 days. While the OFT is taking this new procedure forward informally, the Government intends to enshrine this power in legislation.

Box 4.2: How would the new "super-complaint" work?
	A number of organisations will be granted the right to submit super-complaints. These could include the Consumers' Association; National Consumer Council; councils for regulated sectors such as energy and postal services; and the Financial Services Consumer Panel.
	It is envisaged that super-complaints will concern situations where markets fail to work for consumers rather than the activities of particular companies. While the super-complainant may lack a clear understanding of the cause of the market failure, the super-complainant will, however, be expected to provide reasonable supporting evidence.
	The OFT will fast track super-complaints, undertaking preliminary work to establish whether there is sufficient evidence to support the complaint.
	Where sufficient evidence is found for the OFT to proceed directly to the use of competition or consumer powers it will do so. Where further investigation is called for, The OFT will ensure that the super-complainant is regularly up-dated on progress. Eventual outcomes could include a formal reference to the Competition Commission or the publication by the OFT of a report recommending changes to regulation or self-regulation.
	The OFT will within 90 days, announce what action they are taking in response to a super-complaint. Where the OFT does not intend to carry an investigation forward the announcement will explain the reasons for their decision.
	In most cases, super-complaints will be made public and the OFT will announce immediately that it is taking action. In some cases, however, it may be necessary to maintain confidentiality in order to enable the OFT to gather more evidence. In these circumstances, the super-complainant will be expected to respect this confidentiality.

PUBLIC APPOINTMENTS

4.28      Strong competition authorities are generally led by people who are expert in competition issues. In Italy, for example, the Competition Authority is led by a Board ­ and each member is an expert lawyer or economist.

4.29      Government has already announced it intends to legislate to create a Board for the OFT ­ similar to the Italian model. We believe that it is essential that those who are appointed to this Board have expertise relevant to competition or consumer protection ­ and intend to appoint only such individuals to the Board.

4.30      The Government is responsible for appointing members of the Competition Commission. Some members, including the current Chairman, have been recruited for specific expertise relevant to competition ­ accountants, economists, lawyers and consumer activists. Others have been senior persons from various walks of life ­ without specific expertise relevant to competition but with wider strengths.

4.31      We need to reflect the increasing complexity of competition issues in the people appointed to deal with them. So, for the future, the Government intends to appoint as members of the Competition Commission only those with expertise relevant to competition.

HIGH QUALITY AND PROFESSIONAL STAFF

4.32      Historically, our competition authorities have been staffed largely from the pool of generalist civil servants. Staff became increasingly expert in competition over time but it was unusual to recruit people on the basis of specific competition expertise. Such expertise (particularly in staff who are qualified economists, lawyers and financial analysts) is vital in assessing mergers, when investigating whether agreements are anti-competitive and whether a dominant company has abused its position. Competition analysis also underpins the diagnosis of where competitive pressures may be muted. But in many other countries ­ including Italy, the US, Germany and France ­ the norm is for staff enforcing competition law to be recruited on the basis of their expertise in the subject. The UK has to do likewise.

4.33      Some progress has already been made. The OFT recruited an additional 55 staff to implement the Competition Act 1998 ­ most of whom are expert competition lawyers or economists. It has required training for an externally validated diploma for new and existing staff. The Competition Commission has recruited some outside economists and accountants, and the Appeal Tribunals have also recruited two new lawyers. The OFT and Competition Commission are actively recruiting to increase the number of staff they have with such qualifications and they intend that recruitment on the basis of expertise relevant to competition will be the norm in the UK too.

4.34      In the US, there is a true "revolving door". Many of the US' best competition lawyers and economists view a stint at the competition authority as part of a successful career path. They will often take significant pay cuts in the knowledge that it would enhance their long-term income expectations. That reflects the profile and respect the US competition regime enjoys; an ability readily to attract similar people will show how successful the UK authorities are in raising their profile.

4.35      The OFT and Competition Commission are reforming their human resources strategies so that they are fully equipped to deliver the new agenda, and to recruit the very best ­ both competition experts and others with necessary skills, for example investigations or project management experts. They are developing the freedom to set staffing policies which fully underpin their ability to meet their objectives. This involves open competition for new staff (already normal practice) and a move away from the traditional civil service pay and grading arrangements. These moves are welcome improvements.

4.36      Our authorities need to think radically in this area ­ for example, designing strategies to improve their ability to recruit and suitably reward their staff. Government needs to ensure that they have sufficient funds to make this transition, and that they are not constrained unnecessarily by public sector rules.

ADDITIONAL RESOURCES

4.37 The Government recognises that our competition authorities will need additional resources in order to be able to successfully deliver the radical improvements to the competition regime that this White Paper sets out. Ministers will take decisions on the level of increases to the budgets of the OFT and the Competition Commission over the next few weeks. Box 4.3 sets out how this extra funding will be deployed.

Box 4.3: What will the new resources be used for? The new resources for the OFT will enable them to:
	Enhance the skills and expertise within the OFT, including increasing the numbers of their staff who have specific competition expertise so that the OFT meets its goals and is a first class, professional organisation.
	Carry out more proactive and rigorous enforcement work, including undertaking preparatory work on how the new criminal offence for individuals who engage in hard-core cartels will be prosecuted.
	Undertake a new role in assessing when proposed regulations may inhibit competition, including providing guidance to government departments and running a new "help desk" function.
	Further raise the public awareness of the work of the OFT and the benefits arising from increased competition.
	Set up a new Markets and Policy Initiatives Division (MPID) ­ the centre for investigating markets, handling "super-complaints" from consumer organisations and taking forward examinations of government regulations. The new Division will develop a rigorous system for determining priority areas for studies, taking account of the size of consumer detriment involved. It is expected that MPID will: -      Undertake 5 whole market studies in the first full year. -      Ensure that super-complaints will be dealt with on a fast-track process, giving a reasoned response within 90 days whether or not the super-complaint leads to a longer investigation. -      Publicly identify a number of existing government regulations which may have the effect of limiting or distorting competition, including carrying out two studies a year. -      Increase the number of referrals made to the Competition Commission, as part of the new process of identifying markets where competitive pressures are ineffective. The new resources for the Competition will enable it to:
	Enhance the skills and expertise within the Commission, including adopting a "revolving door" staffing policy to bring in professionals and others on short-term contracts.
	Play a full part in the new strengthened competition regime by making rigorous and effective use of its powers, including its new determinative role on competition issues, and increasing the impact of reports.
	Deal effectively with the increased number of market investigation inquiries that may be referred to it by the OFT as a result of the new reference test.
	Devoting more efforts to remedies which address the competition concerns identified, including adopting a new two-stage process for remedy setting.
	Advise where regulations hinder the effective working of markets.

ACCOUNTABILITY

4.38      Consumers and businesses have a right to know what our competition regime aims to achieve, and the responsibilities of the various players (OFT, Competition Commission, sector regulators with competition powers, Government) in doing so.

4.39      The Government, the OFT and the Competition Commission, all share a common understanding of the aims of our competition regime ­ to increase the level of competition in the economy, to improve the UK's productivity performance and to make markets work well for consumers. They are committed to the competition authorities actively using their current and proposed powers to achieve these aims.

4.40      The competition authorities and Government each have separate but complementary roles to play. The Government's mission statement is set out in Box 3.3. The OFT⁴ and the Competition Commission⁵ have also published their own mission statements.

4.41      These three statements together set out what the public and businesses can expect from the Government and our competition authorities. The statements will help to ensure that they are held accountable for their actions ­ both collectively and individually.

4.42      Our competition authorities already produce annual reports ­ in future, these documents will be focused more on the work that they have done to meet their separate mission statements.

4.43      Competition is a matter of crucial importance to the economy. Government wants to see Parliament play a more active role in scrutinising our competition regime ­ probing, in particular, the extent to which the various players are delivering against their promised missions. The Government invites Parliament (the Trade and Industry Select Committee under existing arrangements) to actively scrutinise our competition regime.

OTHER REFORMS

Information exchange

4.44      Urgent action is needed to broaden powers to share confidential information in the fight against international anti-competitive practices. Cartels, in particular, are a worldwide problem ­ which potentially affects us all. There is a growing international consensus on the need for greatly enhanced co-operation on competition issues.

4.45      The Government recently brought forward legislation to allow UK competition authorities to share confidential information with competition authorities pursuing criminal investigations. However, these provisions fell when Parliamentary time was curtailed. The Government will bring forward new legislation to allow UK authorities to share information with foreign authorities to assist them with civil and criminal investigations. In both cases, information gained from firms as part of a merger investigation will be excluded.

4.46      The European Commission is also proposing, as part of its modernisation powers, greater scope for information exchange between Member States. This will make it easier for the OFT to obtain information from other European competition authorities. The Government will work with our European partners and the European Commission to ensure that these powers allow for maximum co-operation between competition authorities, whilst ensuring the necessary procedural protection.

Investigations

4.47      The Government intends to make an amendment to the investigation powers under the Competition Act 1998. At present it is only possible to send 'officers of the Director' on raids to companies. The amendment will allow the OFT ­ and sector regulators with concurrent powers ­ to use the services of expert consultants (eg on extracting information from computer systems) during the course of their investigations, in addition to their own staff.

International aviation cases

4.48      In line with the principle that competition decisions should be taken by independent competition authorities, the government intends to remove Ministers from decisions on international aviation cases. The regime for EU-third country aviation is different from that for most other sectors and is applied by Member States in conjunction with the Commission. Previously, UK Ministers had a role in decision-making, but all decisions will now be taken by the OFT.

²Rating the Regulations 2001, Global Competition Review, June 2001

³A White Paper on enterprise, skills and innovation, "Opportunity for All in a World of Change" published February 2001, is available on the DTI's website: www.dti.gov.uk

⁴ "The OFT: Statement of Purpose" is available on the OFT's website: www.oft.gov.uk

⁵ "The Competition Commission; Statement of Aims and Objectives" is available on the Competition Commission's website: www.competition-commission.gov.uk