Overdue streamlining or pointless fiddling with a well-regarded regime? Helen Mooney finds that competition specialists remain divided over moves to reform the UK's antitrust agencies

It looks like it's almost a done deal. Among antitrust advisers, the expectation is that it is only a matter of time before the Government makes good on its proposal to merge the Office of Fair Trading (OFT) with the Competition Commission (CC).

Announcing the move last October among the much-touted (and sometimes mocked) 'bonfire of the quangos' – a self-conscious effort by the new coalition administration to be seen as cutting red tape – the Government claimed the merger would "increase the clarity" of competition law enforcement.

Perhaps. But it is fair to say that views on the policy are mixed among competition specialists, with antitrust veteran Alec Burnside dryly noting last year that these pillars of the UK's well-established competition regime had been singled out for Business Secretary Vince Cable's assault on quangos alongside the Advisory Committee on Historic Wreck Sites, the Pesticides Residues Committee and the Zoos Forum.

The Government's consultation on the proposals – 'A Competition Regime for Growth' – closed in June, and officially we will need to wait until the autumn or New Year to know for sure the outcome that many lawyers see as a foregone conclusion.

The proposed merger would dismantle not just arrangements entrenched by Labour in the 2002 Enterprise Act, but also the two-tier competition regime that has been refined since the creation of the OFT in 1973 under the Heath Government.

In essence, the case for reform remains finely balanced, with supporters citing speed, cost-savings and greater certainty for businesses, while opponents fear new arrangements will lack the rigour of the status quo. At stake is the UK's reputation for effective antitrust policy during a period in which many countries are pushing quickly towards far more robust and active competition regimes.

The status quo

The current regime sees the OFT and the CC operate independently. The OFT is responsible for antitrust investigations under the Competition Act and for conducting initial merger and market study inquiries. It passes the most serious cases on to the CC – which replaced the Monopolies and Mergers Commission in 1999 – for further investigation and for consideration of the remedies required to eliminate perceived risk of substantial harm to competition.

The larger OFT has jurisdiction over cases that are brought under the UK Competition Act 1998 and Articles 101 and 102 of the European Treaty (Chapter 2 in the UK) such as anti-competition agreements and abuse of dominance for mergers. It is the 'phase 1' competition authority in the legal argot and refers cases to the CC for in-depth investigation if it has concerns that cannot easily be remedied.

For market inquiries, the OFT carries out an initial study and then decides whether to refer the market to the CC or to adopt one of a number of alternative outcomes, for example, closing the inquiry or agreeing to set up remedies with the parties concerned. Businesses can appeal the decision of the OFT and the CC to the Competition Appeal Tribunal, the specialist appeal body set up in 2003 to review the work of the competition bodies and a number of other industry regulators.

If the OFT/CC union does go ahead, what will it mean for the future of the competition regime in the UK, and what will the body, provisionally dubbed the Competition and Markets Authority (CMA), look like?

The Department for Business, Innovation and Skills consultation paper on the move suggests a range of options for how the merged entity might operate, including extending the use of the CC's approach, whereby decisions are taken by a panel of members, or even moving to a prosecutorial system in which the CMA would present cases before a court rather than being the decision-maker.

The merged competition authority would also take over the OFT's and CC's duties in assessing whether or not companies are breaking competition law when they merge or when one company buys another, as well as when they collude in their general behaviour. The Government is also proposing that consumer enforcement related to competition law and consumer protection will be moved so that it falls under the control of local trading standards offices.

Cable has said that the Government's aim is to create "a simpler structure with a single competition authority and a stronger role for frontline consumer services". The point of the merger would be to eliminate duplication between the two organisations and streamline the two-stage process of determining the competitive impact of proposed takeovers, market structures or assorted business practices.

In theory, at a time when all public sector bodies are under pressure to make substantial savings, crunching together the OFT and CC to make them more efficient carries some weight (the bodies have a combined budget of nearly £100m).

However, there remains some scepticism regarding the scope for cost savings, and critics understandably stress that, whatever its faults, the UK has a thorough and effective competition regime. Supporters counter that there is simply too much duplication, particularly in a jurisdiction in which competition agencies are frequently crossing over a range of industry watchdogs.

Chris Bright, an antitrust consultant at Shearman & Sterling, believes that the merger is inevitable because the CC is "unsustainable in its current form" owing to the limited number of cases it receives for investigation from the OFT. "The organisation is elaborate in the way it is designed and resource intensive. Do you really need a sledgehammer to crack a nut?" he asks.

He says that on the market investigation side, the CC has tried to increase case flow with "very limited success". He comments: "It's hard to find candidates and, even where candidates are mooted, a lot of them are in the hands of sectoral regulators; for example, Ofgem wants to keep the domestic energy market and it does not serve it to send cases to the CC, because it wants to keep control of those itself."

Another criticism is the time it takes the current system to investigate. As Simon Pritchard (pictured), an antitrust partner at Allen & Overy, says: "If your company has a merger case that goes to the CC, you will have gone through one of the most detailed and long phase 1 investigatory processes anywhere in the world – eight weeks versus often four weeks elsewhere."

He argues that the UK phase 1 merger control is "more like phase 1.5 or 1.8".  "As for phase 2, people like this because it is transparent and there is no rush to judgment, but no rush means it can take 24 to 32 weeks at the CC, which is a very large chunk of a year." He questions whether it is proportionate when some cases are very small.

As he sees it: "The system is optimally designed for big, complex cases but there are very few of them because a lot of them go to Brussels, so there is a Rolls-Royce system set up which ultimately processes very few cases: if you only drive to the convenience store and back, for what it costs for the insurance and the parking, is it really worth it?"

'It ain't broke'

Supporters of the current regime point out that the basic model has existed for nearly 40 years, during which time the UK has built a reputation as one of the best competition regimes in the world. For example, the UK is regularly a top scorer alongside the US and EU regimes in the Global Competition Review's annual surveys.

While the OFT has long been criticised by consumer advocates for not bringing the level of vigour of US antitrust watchdogs, overall the UK regime is seen as delivering a very rigorous process with effective checks and balances.

One of the most attractive features of the current two-agency system is that prior beliefs about competitive effects are not carried forward through the process, so decisions do not have a tendency towards "confirmation bias".

Cadwalader Wickersham & Taft's Alec Burnside thinks this is something that needs to be preserved and is not convinced of the need to merge the two organisations. "There is going to be a lot of disruption in doing it, and I am not clear that the savings will justify it. The old cliche 'if it ain't broke, don't fix it' applies here – the system we have works well. There are many refinements that are being considered in the consultation, but they can be made without the need for merger."

Burnside also argues that the two-tier system provides a rigour that more than compensates for extra time, arguing a single agency acting as judge, jury and prosecutor must lead to confirmation bias. "It is an everyday reality when you are dealing with a unitary institution that you don't get fresh eyes on the merits of the case," he observes. "Independent minds need to be brought to bear before any decision, and once you accept the need to ensure that, what is the basis for putting the two institutions together?"

Phil Evans, a consultant on consumer, competition and trade matters at public affairs adviser Finsbury International Policy & Regulatory Advisors, agrees that there is a heightened risk that the initial stance of a single body handling competition issues will build a momentum to its investigations that will be very hard to counter, a criticism often made of the European Commission's (EC's) competition division.

He also believes that the current design of the CC where a panel of independent people are appointed to direct and decide upon cases delivers a strong check to the system. He comments: "These people tend to come from a variety of backgrounds but are rarely over-encumbered with 'group think' biases. This in-built panel of independence firmly undermines the tendency of agencies to follow the momentum bias and use group think to ensure sunk costs are not wasted."

Evans says that the problem of momentum is addressed by a clear break between phase 1 and phase 2 investigations by transferring a case from the OFT to the CC. "Its solutions to the problem of 'judge-jury-executioner' in one body stops the problem of momentum in its tracks… such a break severs the link between initial decision and final finding; there is no carry over from one body to the next and simply because the phase 1 body has found a problem does not mean that the phase 2 body will do likewise."

Cynics might also question the wisdom of cost-cutting in competition enforcement, given that market inquiries often involve watchdogs challenging industries like supermarkets and banks with huge financial resources, risking a huge inequality of arms.

However others, arguably representing the majority view of competition practitioners, remain unconvinced of the need to keep the two bodies separate in order to ensure independence. Shearman's Bright maintains that it is often the refrain of lawyers who had practised in Brussels before the EC competition directorate reformed its procedures and introduced better checks and balances.

"Before that it was truly atrocious, but my belief is that you can build checks and balances into an organisation, so I think it's an overblown argument."
Bright is also critical of the CC's current panel system, which he says still has members who know nothing about competition. "It harks back to a Royal Commission – most panel members only deal with an average of one-and-a-half cases a year, which bears no comparison to the training for competition lawyers or economists."

Slaughter and May competition partner Philippe Chappatte also believes that a merged organisation would disperse the inefficiencies in having different teams for phase 1 and phase 2 investigations. "There will be some benefit in having some commonality between the phase 1 and phase 2 teams," he says. However, unlike

Bright he believes that the best way to ensure a fresh pair of eyes is to retain the CC's panel system, but within the single agency – perhaps suggesting a meaningful compromise between the camps largely split on the fundamental issue of the vice and virtue of a two-tier model.

He comments: "Decision-makers who were not involved in the OFT phase 1 look at the evidence and look at the probable outcome. This is a very good system – it is robust and independent. The panel members meet frequently, meet the relevant players involved and review the evidence. The independent panel wards against institutional bias."

Chappatte believes that the merger will be able to retain the benefits of a two-phase system while at the same time extracting greater efficiencies. "There will be cost savings when the merger is done and you have a single management team running both so you won't have people twiddling their thumbs in one institution and overstretched in the other." He also says that having one body will avoid the inter-institutional wrangling and turf wars that can plague such models.

As it is, the type of institutional split that currently exists between the two organisations is unusual. In the US there are two federal agencies that regulate mergers, the Federal Trade Commission and the Department of Justice, but each examines both phases of a merger, with mergers allocated between institutions on fairly arbitrary but roughly industrial lines. In Brussels, the Director General for

Competition regulates mergers with a European dimension in a single institution.
Those in favour of an integrated system argue that it avoids duplication in understanding competition issues, may benefit from economies of scale and can be simpler for firms to comprehend.

Introducing the proposals for the merger, Business Secretary Cable said that he believes that: "One powerful Competition and Markets Authority would ensure a more dynamic and flexible use of competition tools and resource, would create a single advocate for competition in the UK and internationally,  would reduce delay and would end duplication for business."

Bright says that the problem with the current system is that the "really easy cases, which get pushed out quickly, and the really difficult cases go to the second phase, and then you have the cases in the middle which need tinkering with and our system is not good at dealing with them; the OFT doesn't have enough time and the CC is too big. One organisation will make this more efficient and these will make up the bulk of the cases it deals with".

Ultimately, if the merger goes ahead new legislation will be required and, given that the board of the new CMA will be accountable to Parliament for its overall performance, there is the danger of an in-built tension between the independence of the new organisation's panel and the accountability of the CMA board.

Ironically, there appears to be little confidence among competition specialists that a merger will deliver on one major ground: saving money. That leaves a somewhat technical debate among advisers about which model will deliver better competition policy. Though there has been considerable business support for an end to the two-tier system, there may be some reservations when the business community has to start dealing with yet another regulatory shake-up.

Quality, speed, rigour, reliability and cost – reform can likely deliver on some of these fronts but, since some of them are in conflict, probably not all. While there are considerable grounds in favour of reform, arguably there has been a lack of clarity about the trade-off that will be involved.

As Norton Rose antitrust, competition and regulatory head Martin Coleman (pictured) puts it: "If there won't really be any cost saving, it does beg the question of why incur the disruption? If the independence of the two organisations will be replicated in the new system for mergers and market investigations, what is the point of making the change?"

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A watchdog bites off more than it can chew – the 'British Airways four' versus the office of fair trading

In 2007, British Airways (BA) admitted collusion over the price of long-haul passenger fuel surcharges after an Office of Fair Trading (OFT) investigation and was fined £121.5m by the OFT. At the time, the fine was the highest ever imposed by the OFT for infringements of competition law. BA admitted that between August2004 and January 2006 it colluded with Virgin Atlantic over the surcharges which were added to ticket prices in response to rising oil prices. Over that period, the surcharges rose from £5 to £60 per ticket for a typical BA or Virgin Atlantic long-haul return flight.

Virgin escaped having to pay a penalty because it blew the whistle and qualified for full immunity under the OFT's leniency policy. Under this policy, a company which has been involved in cartel conduct and which is the first to give full details about it to the OFT will qualify for immunity from penalties in relation to that conduct. But the case didn't end there. In 2008, four BA executives were charged with price-fixing in a landmark criminal prosecution brought by the OFT, with the threat that senior figures from one of Britain's biggest corporate names could get up to five years in jail. The watchdog decided to charge the four men with "dishonest" price-fixing.

This was the first time a prosecution of the criminal cartel offence under the Enterprise Act 2002 had gone to a full trial, with the defendants pleading not guilty. Those charged were Andrew Crawley, BA's head of sales; Martin George, former commercial director and board member; Iain Burns, former head of communications; and Alan Burnett, former head of UK and Ireland sales. However, in 2010 the case against the four men spectacularly collapsed in what was seen as a significant setback for the OFT.

Although BA admitted to the OFT that it colluded with Virgin Atlantic, the criminal trial against the executives disintegrated after the prosecution decided to offer no evidence. Emails had emerged indicating that during a period crucial to the allegations, Virgin had decided to raise its fuel surcharge without having spoken to BA. The relevant executives from Virgin were to play a key role as prosecution witnesses, but Virgin's apparently last-minute identification of some 70,000 previously undisclosed emails, including emails to or from one of Virgin's former employees who was to be a prosecution witness, which neither the OFT nor the defendants' lawyers had previously been able to review, caused the trial to collapse.

The case attracted a range of advisers, with Peters & Peters head of fraud Michael O'Kane advising Burns and Burnett with Matrix Chambers' Ben Emmerson QC and Queen Elizabeth Building's William Boyce QC instructing as counsel respectively.
Kingsley Napley criminal partner Stephen Pollard advised George with Matrix Chambers' Clare Montgomery QC as counsel, and Irwin Mitchell advised Crawley with 2 Hare Court's Andrew Radcliffe as counsel. Richard Latham QC of 7 Bedford Row advised the OFT while Slaughter and May advised BA. The OFT concluded that continuing the trial would be potentially unfair to the defendants, who were thus acquitted. The OFT has acknowledged responsibility for its part in what it describes as the "oversight" regarding the disclosure of the emails.

It is fair to say the case was viewed by advisers as a blow to the OFT's standing. One competition partner comments: "It is all very well introducing more criminal cases but they are tricky things to do – there are some exceptional circumstances where people have rigged markets where they should be prosecuted but these are very few and far between. Trying to prosecute the BA guys when they had made a couple of phone calls to each other when oil prices went through the roof was really trying to look for scalps: they are trying to criminalise people who might be incompetent but they are not doing things to increase their personal wealth… taking policeman off the streets to pursue these cases, which cost millions – is that really the best use of resources?"

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Competition – major recent developments

2011

• Sky's control over pay-TV movie rights in the UK is restricting competition, leading to higher prices and reduced choice, the Competition Commission (CC) provisionally ruled in August 2011. The CC said it is now considering whether to restrict the number of Hollywood studios from which Sky currently has the exclusive rights to be the first to air their new releases. Sky currently has twice as many pay-TV subscribers in the UK as all its rivals combined. At present it has agreements with all six of the major Hollywood studios to be the first UK broadcaster to be able to air their new releases on pay-TV. Under recommendations put forward by the CC, BT and Virgin Media would be able to rival Sky Movies by offering their own selection of new releases.
• In March 2009, the CC told BAA to sell Gatwick and Stansted airports, and either Edinburgh or Glasgow. Spanish-owned BAA operated Heathrow, Southampton and Aberdeen, as well as Stansted, Glasgow and Edinburgh. It has sold Gatwick, but challenged the decision to sell the other airports. However, following the appeal the CC said earlier this year that the sales process for Stansted would start in September 2011 and would be followed by the sale of one of the Scottish airports. 
• The OFT has referred the market for statutory audit services to large companies in the UK to the CC for a market investigation. The OFT said it had been concerned for some time that the market is "highly concentrated" with "substantial barriers to entry and switching".

2010

• The OFT in 2010 fined Royal Bank of Scotland (RBS) £28.6m for breaching competition law. The RBS decision marked the first major case the OFT had brought against a financial services company. The case began in 2008 and involved the illegal sharing of pricing information on commercial loans to solicitors and accountants between two individuals at Barclays and RBS. The OFT used its leniency policy to extend immunity to Barclays Bank in return for providing the initial tip-off.

2009

• In September 2009, after a five-and-a-half-year investigation, the OFT fined 103 construction companies £129.5m over allegations of collusion on contract bidding between 2000 and 2006 that pushed up the price of building contracts. However, in a ruling in July 2011, the Competition Appeal Tribunal (CAT) said the fines for bid-fixing were "excessive given the nature of the infringement" and cut them from £41.8m for six companies to just £4.4m. The majority of the allegations against the six companies were of "simple" cover pricing, which they accepted took place. This involved bidding for contracts they did not want to win in order to avoid showing the client there was a lack of interest. By talking with other bidders, the companies established what prices they could bid without winning the contract. The CAT concluded that the OFT did not recognise that this practice was "longstanding in the industry and widely regarded as legitimate".
• Following a two-year investigation, the CC banned the sale of payment protection insurance (PPI) alongside credit cards and personal loans in 2009. The CC concluded that lenders had an unfair advantage selling PPI with credit products, resulting in an uncompetitive market where consumers are overcharged. The CC ordered that, from 2010, banks and retailers making a loan or credit offer must wait a week before they can sell PPI to the borrower. Single-premium PPI – when the cost of the insurance is added to the debt so that borrows repay interest on both – was also prohibited. 
• Supermarket chains including Sainsbury's, Asda and Tesco were found to be part of price-fixing group that earned about £270m extra from shoppers during 2002 and 2003. Tesco, Morrisons and dairy firm Lactalis McLelland challenged the OFT findings and, in August 2011, Tesco threatened legal action after being hit with a £10m fine from the OFT. Tesco has denied collusion and said it would defend its position vigorously, "through the courts if necessary". "We surely have now reached the stage where the absurdity of the OFT operating as investigator, prosecutor and judge cannot be allowed to continue," said Lucy Neville-Rolfe, Tesco's director of corporate and legal affairs.

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