NEWS AND INSIGHTS

Political risk in UK Competition Reforms

August 13, 2021

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Authors

Benedict McAleenan

Benedict founded Helmsley Energy to provide specialist consultancy to support the global energy transition. He is a political consultant with over 15 years' experience in campaigns and advisory services.

Jamie Horton

Jamie is a consultant at Helmsley Energy, supporting political risk analysis, communications strategy and legislative engagement.

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Political risk in UK Competition Reforms

Helmsley Energy is a leading political risk and public affairs consultancy focused on the energy transition and based in London, UK. For questions about these issues or to discuss your wider political risk exposure, please contact us.

SUMMARY

  • The UK Government is consulting on a suite of reforms to competition and consumer policy. While these are not directed at the energy sector, there is an overlap where energy firms are likely to be affected.
  • The Government is also running a second consultation, focusing on competition in digital markets and the reach of powerful tech firms.
  • The Competition and Markets Authority (CMA) is set to be given a range of new powers and responsibilities, including greater enforcement powers.
  • A new Digital Markets Unit has been established within the CMA which will focus on establishing and governing a new code of conduct for companies designated with “strategic market status” – i.e. significant roles in specific digital categories.
  • The new reforms may rein in some regulatory risk by reducing exposure, but increased ministerial interventions, stricter compliance rules, and greater enforcement powers for the CMA all represent potential increased risks for companies seeking to do business in UK markets.

Introduction

Britain’s Department for Business, Energy and Industrial Strategy (BEIS) has launched a consultation on its long-awaited proposals for reforming competition and consumer policy.

The proposed reforms are wide and varied, aiming to improve the efficiency and reach of regulation, as well as adapting to rapidly changing market conditions – particularly those created by the digital economy. However, a parallel consultation has also been published, focused on competition in digital markets and the Government’s new ‘Digital Markets Unit’ (see below).

The competition elements of the reforms cover five areas:

  • Changes to the market inquiries regime run by the Competition & Markets Authority (CMA).
  • Reforms to ‘rebalance’ the merger control regime.
  • Changes to the CMA’s Panel, which reviews the in-depth ‘Phase 2’ stage of inquiries.
  • Changes to enforcement against illegal anticompetitive practices.
  • Measures to strengthen investigative and enforcement powers.

The consumer reforms are also wide-ranging, though noteworthy elements focus on online exploitation of consumer behavioural biases, protection of consumers’ money in certain refund or prepayment situations, and greater CMA enforcement powers.


Political context

The consultation is the latest in a longer programme of competition reforms partly related to Brexit and the UK’s need to forge its own policies independent of the EU. There may also be an element of political pressure relating to a significant uptick in foreign buyers purchasing UK assets at what is perceived to be ‘bargain basement’ prices due to years of Brexit uncertainty and currency devaluation.

In addition, there is a national security element to competition reforms, given the more hostile international environment of the past two years. Earlier this year, Parliament passed the National Security and Investment Act 2021 (NSI Act), which added a new layer of merger control focused on defence and security. Helmsley Partners has published a briefing note on the NSI Act. More detailed consultations will continue for some months.

In Autumn 2020, Conservative Member of Parliament John Penrose was commissioned by government to conduct an independent report into competition and consumer policy. Penrose published in February 2021 and his report presaged a number of the reforms now proposed by BEIS, such as the need to expedite the CMA’s inquiries processes. Other measures have not been adopted, such as Penrose’s suggestion of mandatory reporting of M&A. Ministers have opted to broadly maintain the current system of reporting merger activity, with the exception of sectors relevant to national security, which now face a mandatory reporting regime as set out in the NSI Act.

This reticence by Ministers may be due to a perceived lack of bandwidth at the CMA. The agency is undergoing a major increase in its workload as a result of Brexit, taking on state aid, merger control and competition responsibilities that were previously the remit of the EU. Merger investigations have increased by 40-50%, which may explain proposals for raising the thresholds in the merger control regime and removing sub-£10 million mergers altogether.

Finally, there is a generally acknowledged need to modernise consumer protections in response both to practices seen during the COVID crisis and also in fast-evolving digital markets. Lord Andrew Tyrie, a former Conservative MP who later served as Chairman of the CMA, has said the regulator is ‘not fit for purpose’ and called for greater independence and new powers to make the agency a ‘consumer champion’ (its statutory powers currently mean that it carries more weight in competition law than in consumer law). Tyrie also called for the CMA to be more dynamic and able to protect consumers in rapidly evolving market conditions, especially those presented by the digital economy (N.B. A new ‘Digital Markets Unit’ was created earlier in 2021).

The reforms bear some similarities to the EU’s package of competition law updates, including the Digital Services Act and Digital Markets Act. In general, the UK is expected to maintain a strong degree of continuity with EU competition law. The EU-UK Trade and Cooperation Agreement (TCA – aka the ‘Brexit Deal’) includes a formal commitment by both parties to maintain effective competition laws targeted at anti-competitive agreements and abuses of a dominant position. For now, this essentially maintains the status quo of the existing EU and UK competition law.


Key competition elements of proposed reforms

  • Addressing “killer acquisitions”: Killer acquisitions are those where a large company buys a smaller one to prevent it from being a competitor. This has been especially perceived in the digital economy, where very large firms such as Facebook and Amazon have been accused of buying smaller firms and even shutting down those firms to prevent competition. These companies dispute the accusation, but the proposals certainly raise UK political risk for such strategies.Currently, the CMA can examine a merger when either the UK turnover of the acquired enterprise exceeds £70 million or the two enterprises supply or acquire at least 25% of the same goods or services supplied in the UK and the merger increases that share of supply. Therefore it’s designed for two large companies merging and gaining a dominant position. It doesn’t help with situations involving a leviathan swallowing a minnow.The reforms would allow the CMA to investigate such mergers where either merging party has a) 25% of supply in that market category in the UK and b) £100m UK turnover. So the ‘trigger’ becomes the size of the acquirer alone, while the target is no longer required to be factored in.
  • More Ministerial direction: The CMA currently receives a ‘strategic steer’ from the Secretary of State for BEIS each Parliament, which tends to be very high level. The consultation documents propose a more frequent and specific strategic steer will become the norm. Whereas Lord Tyrie had proposed a more independent CMA, it seems Ministers are moving it in the other direction, creating a more active role for Government. The details of the new strategic steer will be subject to further consultation later this year, but initial wording suggests a rise in UK political risk regarding the CMA's activities.
  • Changes to M&A thresholds: Seemingly to reduce state interventionism (and thereby the CMA’s workload), thresholds for investigations are being raised to £100m UK revenue (up from £70m) and a ‘safe harbour’ de minimis of £10m worldwide turnover, even if other tests are met. I.e. small companies will be permitted to merge even if it leads to control of more than 25% of UK market supply. This improves UK political risk for a number of companies seeking to operate or invest here.
  • Changes to M&A thresholds: Seemingly to reduce state interventionism (and thereby the CMA’s workload), thresholds for investigations are being raised to £100m UK revenue (up from £70m) and a ‘safe harbour’ de minimis of £10m worldwide turnover, even if other tests are met. I.e. small companies will be permitted to merge even if it leads to control of more than 25% of UK market supply. This improves UK political risk for a number of companies seeking to operate or invest here.
  • Streamlining options: The Government is trying to streamline the process for the CMA’s inquiry process. The proposals therefore include options such as creating a single-stage inquiry process (losing the Phase 1/Phase 2 system) or issuing remedies after Phase 2 (currently not allowed). To the same end, the CMA would be able to accept binding settlement terms at any point during the inquiry process. This reflects the Penrose recommendations and would allow companies to engage more proactively with reviews, potentially truncating them and reaching mutually acceptable terms.
  • New penalties and enforcement powers: The proposals would give the CMA extra teeth, including the power to impose remedies earlier in the process rather than completing them in full (which may bring benefits for both the CMA and companies under review). The CMA would also gain the power to impose fixed, out-of-court penalties of up to 5% of a company’s annual turnover for non-compliance and daily penalties of 5% of turnover for every day non-compliance continues.


Key consumer policy reforms

  • Protecting consumers online: A major theme in the reforms is protection of consumers online, particularly relating to exploitation of unconscious biases. The confluence of behavioural psychology and ecommerce is particularly under the microscope: dark patterns, sludge, subscription traps, drip pricing, fake reviews and several other terms crop up in the consultation documents. All refer to practices used to exploit human behavioural biases, not usually to the consumer’s advantage. Government is consulting on options to address all of these.
  • Greater enforcement: At present, the CMA must go via the civil courts to enforce its judgements on consumer law infringements. This can take several years to reach a conclusion. Under the new proposals, the CMA would have its own powers to make and enforce its own decisions, including a penalty of up to 10% of global revenue. This would be a very significant step up for the CMA and may be reflected among other sector regulators.
  • Prepayments and refunds: The government is taking aim at companies that take consumers’ money and fail to deliver. In some cases, this is attempting to redress COVID-related issues in the travel industry, where operators did not refund tickets or holiday bookings despite pressure to do so. In other cases, it is focused on ‘saving clubs’, such as those that allow customers to make contributions over time, such as in the lead-up to Christmas. Such companies will be required to guarantee these contributions.



Process from here

The consultation closes on 1 October 2021. Certain aspects, such as details of the ‘strategic steer’ to the CMA, will be consulted on in more detail later in the year. We expect draft legislation to be published in the 2021-22 parliamentary session, but it should be noted that this is a long-running programme of reforms and the regime will likely take some years to bed-in.

Helmsley Partners’ analysts are available to discuss the process in more detail and work with clients to represent their views within and beyond this consultation.


Headline risks

  • Reduction in exposure: In many ways, the UK Government is seeking to reduce regulatory risk by reining in the CMA’s lengthy inquiries processes and by removing many firms – especially smaller ones – from the regime altogether. This includes shorter processes, as well as the potential to expedite them further by reaching settlements. These wouldn’t quite constitute ‘by mutual agreement’ settlements, since they’d still be legally imposed by the CMA, but there’s far more potential for companies to offer solutions and remedies, rather than find themselves in a purely defensive position. These measures appear to represent a net reduction in political risk.
  • Ministerial intervention: As part of the reforms, Ministers propose to issue more frequent and specific ‘strategic steers’ to the CMA. This might include identifying specific sectors on which Ministers want the CMA to focus. Ministers may come under pressure to use the strategic steers for political ends, including from campaigners and other politicians. The CMA will have authority to resist such instructions, but must explain its reasons for doing so. We believe this raises political risk.
  • Consumer protections: A number of consultation questions suggest a new regime for ecommerce is in development, which raises risks for certain sectors. As part of their UK political risk analysis, ecommerce platforms and vendors should be aware of new legislation and regulation relating to issues such as ‘dark patterns’, ‘drip pricing’, ‘sludge’ and paid-for reviews.
  • Red tape: Despite Ministerial claims of cutting through red tape post-Brexit, the new competition and consumer law regime may result in higher compliance costs. The consultation is detailed and thorough, touching on multiple practices in many different sectors and with stronger enforcement powers within the new jurisdictional limits. This compliance cost is enhanced by the fact that the UK is diverging from EU agencies and regulations, which forces companies to track their exposure to both EU and UK political risk.


Helmsley Energy is a leading political risk, communications and public affairs consultancy for the energy transition, based in London, UK. For questions about these issues or to discuss your wider political risk exposure, please contact us.

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