New legislation in Guernsey is ushering in a pan-Channel Island approach to competition regulation, however there are some key differences. Ogier's Andy Lowe explains how it will affect businesses operating in both islands

The Competition (Guernsey) Ordinance 2012, which came into effect on 1 August, is modelled largely on the Jersey legislation and is designed to facilitate a common approach to implementation. However, Guernsey has taken note of some of the more contentious aspects of the Jersey law – which has been in force since 2005 – and has chosen to adopt a different approach on some issues.

Most notable is the decision to introduce a merger control threshold test that is based on turnover rather than share of supply. It is anticipated that Jersey will introduce the same turnover test later this year or early next year.

Three pillars of competition law

The Ordinance will regulate the three central elements of competition regulation, namely the abuse of a dominant position, anti-competitive arrangements and merger control.

1. Abuse of a dominant position

Conduct that constitutes the abuse of a dominant position within any market in Guernsey for goods and services will be prohibited. Examples of such conduct include unfair purchase or selling prices (eg, price discrimination or excessive prices or predatory pricing); limiting production, markets or technical development to the prejudice of consumers; and applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.

2. Anti-competitive arrangements

Agreements between undertakings that have the object or effect of preventing competition within any market in Guernsey for goods and services are also prohibited. Examples of such arrangements include price fixing, market sharing and in certain circumstances exclusive supply or distribution agreements. 

In limited circumstances, the regulator may grant an exemption for arrangements that improve the production or distribution of goods or services, or promote technical or economic progress in such production or distribution; allow consumers a fair share of any resulting benefit; and do not afford the possibility of eliminating competition in respect of a substantial part of the market in Guernsey for the relevant goods and services. Experience in Jersey suggests that the granting of such exemptions is rare.

There is a six month grace/cure period for existing anti-competitive arrangements in Guernsey (ie, no action will be taken by the regulator in respect of any such arrangements until February 2013 at the earliest).

3. Merger control

The approval of the regulator is required before certain mergers and acquisitions can be implemented. The regulator must not grant approval for a merger or acquisition unless satisfied that it would not substantially lessen competition within any market in Guernsey for goods and services, and that it would not be to the prejudice of consumers, the economic development and well-being of the Bailiwick of Guernsey, and the public interest.

The merger control threshold is based on turnover, and a merger or acquisition will require the prior approval of the regulator if:

• the combined applicable turnover arising in the Channel Islands of the undertakings involved in the transaction exceeds £5m; and
• two or more of the undertakings involved in the transaction each has an applicable turnover arising in Guernsey which exceeds £2m.

Calculation of turnover

The undertakings involved are the target and purchaser (in a typical acquisition situation), the parties to a joint venture including the joint venture vehicle, and the merging parties to a merger. The turnover of an undertaking also includes the turnover of those entities considered by the legislation to be connected with it (for example, subsidiaries of the target or the purchaser), excluding turnover derived from intra-group sales.

Turnover is calculated by reference to an undertaking's preceding business year or, if no figures are available for that year, the one before it. As a general rule, only amounts derived from the sale of products and services in the course of an undertaking's ordinary activities are taken into account, net of directly related taxes.

Generally, for the purposes of the test, the place in which turnover arises is determined by the location of the customer to whom the products are sold or the services provided. In most cases, therefore, it is the turnover derived from sales of products and services to Channel Island customers that is relevant to calculating whether the thresholds are exceeded.

Special rules apply to insurance businesses and to credit and financial institutions. As regards the latter, turnover is calculated by reference to the place where specific income items are received by the institution or a branch or division of it, rather than where the underlying customers are located. While it is envisaged that this may result in many credit and financial institutions exceeding the turnover thresholds noted above, a separate preliminary review process has been implemented for these institutions which is designed to weed out transactions that do not warrant the regulator's further consideration under the normal review process.

Turnover test: the benefits

It is felt that a threshold test based solely on turnover is more appropriate for small island market economies such as Guernsey (and Jersey) than the share of supply test currently in place in Jersey. The perceived benefits include:

• the turnover test is more objective, and is likely to make it easier for companies operating in both islands to know whether they need approval for a merger or acquisition; and
• it is anticipated that the regulator will have more time to focus on local matters because there will be fewer large international mergers requiring approval. This is in contrast to Jersey's experience of the share of supply test which has caught many international deals (such as Kraft's acquisition of Cadbury) that in practice are likely to have very little effect on the Jersey market.

Subject to the approval of the States of Jersey, Jersey intends to replace its share of supply test with the same turnover test later in 2012 or early in 2013.

Status of EU precedent

Jersey

The Channel Islands are not part of the EU. However, the Jersey legislation provides that "so far as possible" the Jersey regulator and the Jersey Court shall attempt to ensure that questions arising in relation to competition "are dealt with in a manner that is consistent with the treatment of corresponding questions arising under Community law in relation to competition within the European Community". Therefore, the status of EU precedent in Jersey is more than merely persuasive.

Guernsey

The Guernsey Ordinance is less deferential and seemingly more restrictive, stating only that the regulator and the Guernsey Court must "take into account [our emphasis] the principles laid down by and any relevant decisions of the Court of Justice or General Court of the European Union in respect of corresponding questions arising under Community law in relation to competition within the internal market of the European Union".

Pan-Channel Island regulation

The competition law is administered and enforced by the Guernsey Competition and Regulatory Authority (GCRA) and the Jersey Competition and Regulatory Authority (JCRA).

Although Jersey and Guernsey remain separate markets for competition law purposes, the GCRA and the JCRA share a common board and co-operate as the Channel Islands Competition and Regulatory Authorities (CICRA) to promote a pan-Channel Island approach to competition regulation.

The key benefit that CICRA seeks to achieve from this arrangement is the delivery of a consistent regulatory framework across the Channel Islands, and CICRA has a common website designed to improve access to information on competition and related regulatory issues in the Channel Islands.

CICRA's role includes the enforcement of the competition laws in the Channel Islands, to publish and provide guidance for the benefit of parties and to conduct market reviews. The Jersey markets identified for scrutiny in 2012 are food, tobacco, gas and electricity. At the time of writing, the Guernsey market reviews had yet to be announced.

Enforcement powers

The regulator's enforcement powers include the power to investigate anti-competitive practices. It would typically become involved after a complaint from a business or individual and, where there is reasonable cause to suspect that an infringement of the law has occurred, an investigation would be conducted and the regulator would then have the power to gather information from all interested parties.

The regulator also has the power to impose fines of up to 10% of the turnover of an undertaking or person who is in breach of the competition law, up to a maximum of three years. 

However, the regulator has emphasised that its aim is to encourage compliance rather than punish non-compliance, certainly in the early period of the new Guernsey competition law. For example, where a cartel exists – namely, a formal agreement among competing firms aimed at increasing members' profits by reducing competition – undertakings that report their activity to the regulator and co-operate with any investigation will be treated leniently. As noted above, there is a six-month grace/cure period for existing anti-competitive arrangements in Guernsey.

Reviewing operations

All Guernsey businesses should review any arrangements they may have with competitors and consider their distribution, supply and other agreements for any provisions that may be anti-competitive. Dominant firms should review their pricing arrangements as a priority. 

The regulator has also recommended that businesses consider whether they are aware of other parties engaging in potentially anti-competitive practices that have an impact on them, and to consider whether to approach the regulator to discuss their concerns. The regulator has made it clear that it is happy to have confidential discussions on a no-names basis or otherwise.

In particular, given the stated aim of a pan-Channel Island approach to implementation, the spotlight is likely to fall on how pan-Channel Island businesses with recognised influence in their spheres operate in the Jersey and Guernsey markets. Those businesses should assess their respective market shares and the actual and potential competitive effects of their contracts, prices, policies and procedures on Channel Island consumers.

Andy Lowe is a managing associate at Ogier.