The Competition Act 1998 (which came into force on 1 March, 2000) represented a radical and long-overdue overhaul of UK domestic competition law. It contains a new prohibition on anti-competitive agreements (the Chapter 1 prohibition). Under the act, companies may notify agreements to the Director General of Fair Trading (DGFT) to obtain a decision on negative clearance or exemption.
On 24 January, 2001 the DGFT made his first decision under the new act in response to an application by the General Insurance Standards Council (GISC). The decision states that the GISC rules (which embody a new scheme of self-regulation for general insurance) do not infringe the Chapter 1 prohibition of the act.

What is GISC?
GISC is a company limited by guarantee. It is concerned with the setting of standards for, and the regulation of, those selling, advising on, broking and providing other customer services relating to general insurance. GISC's scope covers intermediaries, such as brokers and agents and insurers (but excludes the prudential regulation of insurers that are subject to authorisation by the Financial Standards Authority (FSA)). General insurance includes motor insurance, home insurance, travel insurance, private medical insurance, marine insurance and insurance of other commercial risks. The regime also governs reinsurance of those insured risks. Firms may fall within GISC regulation either as a member or as an appointed agent of another member (which means that the member takes regulatory responsibility for their conduct).

Why did GISC come into being?
As part of its review of reforms to financial regulation (which eventually led to the creation of the UK FSA under the Financial Services and Markets Act 2000), the Government concluded that the Insurance Brokers (Registration) Act (IBRA) 1977, which provided a system of statutory regulation for those intermediaries using the title 'broker', should be repealed. The Government saw no need for statutory regulation of general insurance business. The best way forward was said to be self-regulation by a body having support across the insurance industry, independent of insurers and intermediaries and taking their interests and those of their customers into account.
There was, therefore, an opportunity for the industry to work together to produce a more coherent and co-ordinated self-regulatory system to replace the existing patchwork of statutory and non-statutory (trade) regulatory bodies. The previous fragmented structure included:
- the Lloyd's Act 1982 and relevant bylaws that governed the right to broker insurance business at Lloyd's;
- the IBRA and the Insurance Brokers Registration Council, which regulates brokers; and
- the ABI General Insurance Business Code of Practice which deals with 'independent intermediaries' and 'company agents'.
To transfer regulation to GISC, Lloyd's has delegated to GISC much of its regulation of brokers. Later this year the IBRA will be repealed pursuant to the Financial Services and Markets Act 2000, and the ABI Code is also expected to be withdrawn.

The GISC rules
Firms that join GISC each sign up to a membership contract in which they agree to adhere to the GISC rules.
The rules contain a general insurance code for private customers and a commercial code. They also contain financial requirements for intermediaries (such as insurance money segregation, professional indemnity insurance and solvency) and provisions on complaints handling, competence and training, and e-commerce. The rules are backed up by an enforcement regime with disciplinary sanctions.
Rule F.42 is designed to facilitate the new scheme. It was suspended pending clearance by the Office of Fair Trading (OFT) and its implementation is the subject of consultation. Rule F.42 requires (in summary) that GISC members do not, during their general insurance activities, deal directly with any intermediary operating outside the GISC regime. Rule F.42 has been described as the glue that bonds the GISC regime, as it effectively makes GISC regulation (as a member or as an appointed agent of a member) a necessity for many intermediaries. Rule F.42 has been opposed by some trade bodies.

Reasons for notifying
the GISC rules under the Competition Act 1998
Notwithstanding the fact that GISC believed strongly that the regime did not in any way infringe the prohibition on anti-competitive agreements under the act, it decided to seek confirmation of this from the OFT by applying for a non-infringement decision.
Otherwise, if the application had not been made, it was possible that participants in the industry might use spurious competition arguments to contest regulatory actions and disciplinary decisions, or as justification for their operation outside GISC regulation. Other regulatory regimes are subject to OFT scrutiny and a clearance decision provides an independent review of the rules.

The decision
The decision is comprehensive in its analysis of the notification and the legal issues. In accordance with the Competition Act principle that the UK prohibition on anti-competitive agreements will be interpreted in accordance with EU law, the decision cites European case law as part of its analysis.
The scope of clearance granted by the DGFT is of practical and legal significance. GISC applied for clearance by reference to regulation of the whole industry. The decision therefore effectively grants GISC the right to regulate the sector as a whole. This, combined with rule F.42, will ensure that the vast majority of firms operating in the sector join the regime.
In his decision that the GISC rules were not anti-competitive, the DGFT found that:
- a self-regulatory regime will have to
control undertakings on the relevant market to ensure competence and consumer protection standards are observed;
- the GISC rules were transparent, non-discriminatory and based on objective standards;
- the rules do not impose significant barriers to operating in the general insurance industry as the requirements and costs of compliance appear to be reasonable and will not result in an appreciable reduction or distortion in the overall level of competition; and
- although the rules impede businesses that lack competence or operate in ways that jeopardise consumers, that is not anti-competitive. Indeed, it may be pro-competitive among the competent businesses that have the proper safeguards in place to protect consumers.

Practical points
The OFT was particularly helpful in commenting on the type and sufficiency of information that should be supplied. A draft notification was submitted in advance for informal comments by the OFT.
Despite a significant fee being charged for processing applications by the OFT to deter frivolous applications, the OFT is keen for applicants to set out the reasons why it should consider their application – in other words, why the agreement might be thought to breach the prohibitions in the Competition Act 1998.
Since it was possible that the OFT might have granted an exemption rather than a non-infringement decision in respect of the GISC rules, a notification was also made to the European Commission (EC).
The OFT policy in such cases of dual-notification is that the OFT will normally wait for the EC to complete its assessment before examining an application.
The DGFT may only act first where the agreement raises particular UK issues or involves important legal, economic or policy developments. It was therefore necessary to satisfy the OFT that the GISC application did involve such considerations and that it ought to proceed with its analysis without waiting for the Commission to complete its assessment.
The OFT publicised the application by a notice in the public register and in the OFT Weekly Gazette and issued adverts in the trade press that invited third-party comments. In GISC's case the fact that an application had been made was
the subject of much comment in the trade press and was therefore well known. The OFT received many comments from third parties. In other applications that are less well publicised, the OFT may advertise more widely in the press.
The OFT has a target for dealing with applications. It aims for a decision being reached within six months on 75% of all completed application forms. The OFT came close to meeting its six-month target in dealing with GISC's application.
After publication of the decision, third parties have one month to appeal to the DGFT to withdraw or vary his decision. A further appeal can be made to the Competition Commission Appeal Tribunal.
As the first decision under the act the decision on the GISC rules is a landmark for those practising competition law. It has also been the testing ground for OFT's internal decision-making mechanism and is of particular interest as it demonstrates the OFT approach to analysing competition issues arising from the rules of self-regulatory organisations.
Nick Paul and Philip Hogg of CMS Cameron McKenna were advisers to GISC in connection with its application under the Competition Act 1998.