The UK Government announced wide-ranging reforms to its competition and consumer protection regimes on 20 April 2022.
This announcement follows the UK Government’s proposal (discussed in our July 2021 post) and several months of public consultation. Linklaters submitted a detailed response to each of the individual proposals in October (see here) as part of that consultation. We also published extensive analyses of the proposed reforms to the mergers regime here (and on the mergers aspects of the digital consultation – see here and here).
Many of the reforms require legislation to implement, and we anticipate some further discussion and debate as these reforms move through the parliamentary process. The changes aim to boost competition, drive innovation and growth in UK markets, as well as shielding consumers from “rogue traders”. The package follows calls to make the UK competition regime better reflect the challenges of the digital era, and to improve public confidence in UK markets.
In this post, we take a look at some of the key changes to UK competition and consumer protection – and consider where some pitfalls may remain.
Strengthened merger and antitrust enforcement
The reforms see some significant changes with respect to the CMA’s overarching competition strategy, merger control, cartels and market inquiries. These are summarised below.
Merger control: ‘rebalanced’ thresholds, ‘killer’ acquisitions, and safe harbours
The CMA began taking a more expansionist role in merger control, notably in smaller-target foreign-to-foreign deals well before the end of the Brexit transition, aided by its highly powerful and elastic ‘share of supply’ test, especially in innovation-heavy markets in tech and life sciences. From 2021 onwards, since the end of the Brexit transition, the CMA has added EU-sized cases to its docket, and while it has formally reviewed fewer EU/UK parallel cases than originally predicted, there have been some divergent outcomes that no sensible adviser would have been brave enough to predict in advance: notably, the CMA in March 2022 blocking Cargotec/Konecranes after the EC approved it with a Phase 1 divestiture remedy and in September 2021 clearing Facebook/Kustomer at Phase 1 before the EC went onto impose 10-year access remedies at the end of Phase 2.
All that said, despite the jurisdictional breadth, the share of supply test does not capture every last transaction of interest to the CMA and the EC’s revised application of Article 22 (no EU Member State needs to have national jurisdiction for a referral to the EC) is even more expansive than the UK: consider for example there is no open CMA inquiry into Illumina/Grail, a contested Article 22 case, despite the CMA’s earlier provisional prohibition of Illumina/PacBio. Consequently, the reforms aim at expanding CMA jurisdiction in potential competition and non-horizontal cases, although they are marketed as part of a ‘rebalancing’ package that ostensibly gives and takes away from regulatory burdens. Specifically:
- A new ‘no-increment’ share of supply jurisdiction for any global deal where only one party has significant UK presence. An additional basis for establishing jurisdiction has also been created to capture “so-called ‘killer acquisition’ and other mergers which do not involve direct competitors”. Jurisdiction would be established where at least one merging business has: (i) an existing share of supply of 33% in the UK; and (ii) a UK turnover of at least £350m (up from the consultation proposals of 25% and £100m). In response to feedback, the government has said that it intends to also introduce a UK nexus criterion on top of these thresholds, although no details on the proposal are included. It therefore remains to be seen how the supplement of the existing share of supply test (and its requirement for a UK increment) will apply in practice and how the UK nexus will be interpreted (by reference for instance to existing activities) for the “killer acquisitions” targeted by these reforms.
- A small impact change in turnover thresholds. These will be raised in line with inflation from £70m to £100m. However, given that the share of supply test is the workhorse of CMA merger control, would catch every horizontal deal caught by the turnover test, and will be even more powerful to catch non-horizontal or no-overlap deals, this change makes no meaningful difference for almost all global M&A.
- A small new safe harbour. Mergers will be exempt from review where each party’s UK turnover is less than £10 million. The original proposal had been based on worldwide turnover, and we had concluded it was likely that one case in the CMA era (2014-2022) – Crowdcube/Seedrs – sent to Phase 2 would have benefitted from this safe harbour. Now that the safe harbour is based on UK turnover, it is slightly larger, but while there are numerous cases subject to CMA intervention where the target’s UK turnover was less than £10 million, in the vast majority of cases, the acquirer has had material UK turnover meaning that the safe harbour remains very narrow.
Many aspects of the regime remain unchanged. On this note, the regime will remain voluntary and non-suspensory. Despite calls for greater limitations to the scope of its application, no immediate changes will be made to the share of supply test, but the government will continue to monitor its operation and consider further proposals on reform.
Finally, and less controversially, there are also useful changes aimed at making merger control more efficient by: (i) enabling binding undertakings earlier in Phase 2; (ii) enhancing and streamlining the merger ‘fast track’ procedure; and (iii) updating how the CMA is required to publish its merger notice.
Antitrust: stronger enforcement – but no increased judicial scrutiny
While the UK’s antitrust enforcement is well-regarded internationally, and its outputs in terms of caseload and timescales have been improving, the government has proposed a number of changes aimed at making enforcement more efficient and tougher. Some of the key changes include:
- Extraterritoriality. The Chapter I prohibition will be amended to apply to agreements, concerted practices and decisions implemented outside of the UK, depending on the effect of that conduct within the UK.
- Strengthening evidence-gathering powers. The CMA will be given new evidence-gathering powers in Competition Act investigations, including the power to: (i) interview any relevant person, regardless of connection to a business; (ii) ‘seize and sift’ evidence when it inspects domestic premises under a warrant (to reflect the increase in working-from-home); and (iii) obtain information stored remotely when executing a warrant.
- Strengthening interim measures powers. Appeals against interim measures decisions will be determined by reference to the much lighter-touch principles of UK judicial review, rather than full review on the merits. The rules governing how the CMA provides access to its file when taking interim measures decisions will also be amended.
- Additional powers. There are a range of other powers and changes aimed at giving the CMA more heft and discretion. For example, the CMA will be able to: (i) impose penalties to protect information disclosed in confidentiality rings; (ii) determine its own internal decision-making processes for findings of infringement; and (iii) act as a ‘specified prosecutor’ and use the ‘assisting offender’ process to enhance criminal cartel enforcement.
- Reduced turnover threshold for applying dominance fines. The turnover threshold for immunity from financial penalties for breaches of the Chapter II prohibition (abuse of dominance) has been reduced from £50m to £20m. This will mean that smaller players can’t escape the rules, and will put deterrence in front of mind for all businesses.
In principle, there are sound arguments behind reforms to jurisdictional requirements and immunity thresholds. However, the increase in CMA power does not come with a corresponding increase in judicial scrutiny. Rather, in some instances, scrutiny is reduced – as is the case with respect to interim measures, where the scope of appeals has been narrowed. Given how light-touch and generous UK judicial review is towards the CMA (the principles were developed more for political decisions by ministers, not evidence-led agency decisions) those with CMA experience may fear that the well-intentioned exercise of great powers, including punitive penalty powers, without sufficient checks and balances, will compromise fairness and robustness of decision-making. While merits standard of appeal on non-interim decisions is retained, exercise of those rights comes at great litigation expense.
Market inquiries: more efficient, flexible and proportionate
The government proposes reforms to address concerns that the market investigation process is overly cumbersome and significantly underused. Most of these changes are aimed at creating more flexibility in the market inquiry and market investigation process, and also improving procedures (for example, allowing more opportunity for the CMA to accept legally binding commitments during market studies and market investigations).
The changes ultimately retain the two-stage market study and market investigation system, while streamlining that system, which should help make the system less slow, burdensome and inflexible.
The government had also considered introducing interim measures from the beginning of a market inquiry. We raised concerns about this, as interim measures in a market inquiry would be targeting presumptively legal and permissible ordinary course of conduct by business, and would therefore be a particularly severe intrusion on the legal rights of businesses. Following consultation, the government has decided not to introduce interim measures from the beginning of a market inquiry. This is a welcome result.
Pro-competition strategy: expect greater CMA interaction with government
Finally, proposed policies would increase interactions between the CMA and government with the aim of creating a commercial and regulatory environment that supports innovation. This involves:
- enhancing the CMA’s role as an economic adviser to the government via regular ‘State of Competition’ reports (though with no new information gathering powers);
- the government providing non-binding strategic steers to the CMA; and
- introducing a statutory duty of expedition for the CMA.
While having an overarching pro-competition strategy is laudable, the breadth of these powers and obligations gives rise to a number of questions and concerns. Namely:
- The scope of the State of Competition reports appears to be quite wide-ranging, with the CMA reporting on the health of competition across the economy. Given the market-specific nature of competition, it is unclear how useful broad economy-wide health reports will be.
- Strategic steers from the government could limit the independence of the CMA to be free from political intervention. While their non-binding nature certainly reduces this risk, it is also crucial that government guidance is based on well-founded evidence rather than sectors potentially being targeted for purely political reasons. It is currently unclear what metrics the government plans to use, or how and when those will be communicated.
- A statutory duty of expedition was not one of the changes proposed in the government’s initial proposal, which means it did not benefit from public consultation like most of the other reforms. Rather, this was included because feedback received during the consultation process “emphasised the need for swift decision making and certainty for business”. However, expediency must not be at the expense of market participants’ legal rights and the due process. Similar sentiments previously led to more statutory deadlines. However, our experience is that in the abstract, firms may want CMA process to be fast, and when they actually experience them, they want a powerful authority to take the time to listen, engage and act with utmost fairness. Because these goals are in tension in the CMA system in practice, we remain unsure whether to welcome this development.
Enhancements to the UK’s consumer protection powers, in contrast, are long overdue and less controversial. It should aid the goal of increasing public trust in the market economy and brings the UK more in line with the powers of peer agencies in other advanced consumer protection regimes.
The government identified two key developments which required updates to the existing UK consumer laws: (i) a rise in online shopping, and the resulting unfair use of data to exploit consumer behavioural biases; and (ii) an increase in subscription contracts across a range of sectors, which can be difficult to cancel.
To tackle these potential issues and protect vulnerable consumers, the government has proposed a number of far-reaching reforms with respect to consumer rights and consumer law enforcement.
Subscription traps: more information for consumers
It is estimated that consumers spend as much as £1.8 billion per year on subscriptions that they regard as poor value for money. Government plans to take steps to tackle subscription traps at three stages:
- Before subscribing. Businesses will need to provide clear information to consumers before they subscribe.
- During subscription. Traders will need to send clear reminders before a contract auto-renews, or before a free-trial or low-cost introductory offer ends.
- Cancelling subscriptions. Traders will have to give customers a straightforward, cost-effective and timely mechanism to exit a subscription contract.
Protecting online shoppers: expect stronger (and targeted) rules on unfair practices
Many customers use online reviews to help them weigh up whether to make a purchase. Commissioned or incentivised reviews can mislead consumers. To address this, government plans to:
- strengthen the law relating to unfair practices;
- consult on updating consumer law to deal with commissioned or incentivised reviews; and
- continue building evidence on the impact of undisclosed paid-for advertising and strengthening the law so that it is easier for the CMA to take action.
Additional protective measures
The government also plans to: (i) make reforms to strengthen protections for prepaying customers (for example, those using Christmas Savings Clubs and similar schemes not covered by financial protections); and (ii) make regulatory updates to protect customers of package travel (for example, to provide better flexibility for insolvency protection).
Stronger enforcement powers
The government raised concerns that the CMA (while well-placed to tackle consumer harms where a number of consumers are affected) is hampered by lengthy court processes and the inability to apply robust sanctions, especially civil penalties.
In response to these concerns, the government is progressing policies to: (i) give the CMA power to decide itself whether consumer law has been broken; and (ii) impose directions and monetary penalties on businesses without having to go through the courts. Specifically, the CMA will be able to:
- Impose fines for non-compliance with an information request (up to 1% of a business’ annual turnover plus 5% of daily turnover for each day of continued non-compliance with an information request during non-compliance. For failure to comply, penalties of up to £30,000 with an additional daily penalty of £15,000).
- Impose fines for failure to comply with a direction (up to 5% of a business’s annual global turnover, with an additional daily penalty of 5% of daily turnover during non-compliance. For failure to comply, penalties up to £150,000 with additional daily penalty of up to £15,000).
- Determine whether an infringement has occurred, make directions including to bring infringement to an end, and award redress to consumers.
A suite of civil financial penalties will also be introduced, enabling civil courts to impose penalties when public consumer enforcers apply. This will include penalties for non-compliance with statutory information notices, and non-compliance with an undertaking given to the court.
Supporting better private enforcement of consumer laws by consumers themselves
Most consumer protection complaints are individual in nature. The government believes a well-functioning Alternative Dispute Resolution (ADR) system will support consumers by facilitating quicker and cheaper redress, without the need to go to court. To this end, government is examining radical new ways to mainstream ADR for all types of disputes, and BEIS will continue to work towards providing support to consumers in individual disputes with businesses and improve the quality of ADR services.
For further information, please contact:
Nicole Kar, Partner, Linklaters