UK competition reforms: new CMA powers confirmed

Background & planned reforms

On 20 April 2022, the UK Government announced reforms it will seek to make to the UK competition and consumer law regimes.  These measures will be part of a “draft” Digital Markets, Competition and Consumer Bill that was referred to in the recent Queen’s Speech – though as confirmed in a subsequent Competition and Markets Authority (CMA) blog post, this Bill (combining separate digital market proposals) will not be introduced in the current parliamentary session (2022 to 2023).

In terms of the competition regime, the Government has taken on board input received during last year’s consultation process and is now proceeding with important changes to how the CMA enforces the rules. These reforms are set out below.

Merger control

The Government decided to maintain a voluntary/non-suspensory regime despite the urging of some stakeholders to adopt a mandatory (suspensory) notification system.  

The Government is keen that merger control should not place a disproportionate burden on benign or low risk mergers while nevertheless ensuring robust scrutiny of mergers that might raise concerns. On this basis, it remains the Government’s view (as supported by feedback it received during consultation) that the voluntary/non-suspensory nature of the UK’s merger control regime remains appropriate and strikes the right balance.  

However, the Government opted to make a number of notable changes to the UK’s merger control regime, including:

• Raising the existing turnover-based threshold for targets from £70m to £100m primarily to account for inflation, except for  ‘media mergers’ (intervention on public interest grounds).
• Creating a ‘safe harbour’ for mergers between small business where the UK turnover (rather than worldwide turnover as originally proposed) of each merging party is less than £10m.  This would exclude transactions that meet the ‘share of supply’ test but not ‘media mergers’. 

The value of a ‘small merger’ exemption based on global thresholds was questionable – it is hard to see how any deals of relevance would likely have escaped the CMA’s jurisdiction on this basis. The move to a UK turnover-based threshold might result in more transactions benefiting from this exemption (in particular, foreign-to-foreign deals generating a UK share of supply of 25% or more but where both merging parties have individual UK turnover below £10m) but even here the impact of this reform might not be particularly significant.

• Introducing a new (acquirer) jurisdictional threshold to enable scrutiny of a wider range of transactions – in particular, ‘killer acquisitions’ (where there is fear that nascent (potential/future) competition is snuffed out by the alleged acquisition strategies of larger rivals) but also purely vertical or conglomerate mergers involving no horizontal overlap.  This means that, in principle, transactions pursued by certain companies will often meet this new jurisdictional test.  Under this reform, the CMA would have jurisdiction to review where the acquirer has:
  • a share of supply of at least 33% of particular category of goods or services supplied or acquired in the UK or substantial part of the UK (up from the 25% originally proposed); and
  • UK turnover of more than £350m (up from the £100m originally proposed).

The Government indicated that there will be a UK nexus requirement ensuring caught deals have an appropriate connection with the UK.  However, no details are provided as to what form such a test might take. In the absence of an appropriate nexus caveat, this new threshold risks being inappropriately expansive, particularly in terms of its extraterritorial implications (ie catching foreign-to-foreign deals with little if any impact on UK markets).  Therefore it will be interesting to see what the Government ultimately proposes. 

It is also unclear how this new jurisdictional threshold will interact with the proposed merger powers for the Digital Markets Unit (DMU) confirmed by the Government on 6 May in its published responses to the consultation initiated last summer (see ‘Sending out an SMS’ – UK proposes powers for regulating digital markets). Such powers, which will be included in the draft Digital Markets, Competition and Consumer Bill referred to above, focus primarily on ensuring that acquisitions of promising start ups by large tech companies’ (firms designated as having ‘Strategic Market Status’) cannot fly under the CMA’s jurisdictional radar on account of low target turnover. Until the DMU (which is housed within the CMA) receives statutory underpinning, it will remain in shadow (non-statutory) form. 

• A commitment to keep the ‘share of supply’ test under review.

In recent years the highly flexible 'share of supply' test has come under significant scrutiny.  This is based on the expansive way in which the CMA has exerted jurisdiction over deals which appeared vertical in nature or did not otherwise appear to involve a horizontal increment. 

However, this flexibility is valued and the Government believes that a lack of clarity and consensus (following consultation) as to how it might be reformed means that it would be “premature to set out proposals for reforming the share of supply test at this time.”  At the same time, the Government acknowledged the importance of certainty for merging parties and is concerned that the CMA therefore applies “its existing thresholds more predictably”.  Reconciling the valued flexibility with such desired predictability could remain a challenge in the absence of further guidance as to how the CMA plans to apply this test going forward.

• Improving the efficiency of merger control reviews by:
  • allowing the CMA to accept binding commitments earlier during a Phase 2 review (except in public interest reviews);
  • allowing parties to request the ‘fast tracking’ of mergers to a Phase 2 review without having to accept that there is a realistic prospect the deal could substantially lessen competition (except in public interest reviews); and
  • retaining the CMA Panel as an independent “fresh pair of eyes” but working with the CMA to consider non-legislative changes as to how the Panel operates and its staffing.

Market review powers

The Government declined to replace the existing market study and market investigation system with a new single stage market inquiry tool (as proposed last year).  Nor will it make changes allowing the CMA to impose (non-structural) remedies at the end of a market study or impose interim measures to prevent potential harm while market inquiries are ongoing (as proposed last year).

The CMA will, instead, be encouraged to take advantage of the flexibility provided under the current tools and rules (which might include consulting on a market investigation reference directly without first carrying out a market study).  To this end, the main focus of the reforms is on procedures that might increase the flexibility, efficiency and effectiveness of remedial action – including: 

• permitting the CMA to accept binding undertakings at any stage of a market study and market investigation;
• providing the CMA with greater flexibility to define the scope of market investigations;
• removing the requirement to consult on a market investigation reference within the first six months of a market study;
• enabling the CMA to require businesses to conduct trials to determine the final format of certain remedies; and
• enhancing the CMA’s ability to amend remedies in a ten year period following its finding of an adverse effect on competition in a market investigation (subject to a mandatory two year “cooling-off” period from the end of a remedy review).  

Stronger, speedier and extraterritorial enforcement against anticompetitive conduct

The Government has expanded the territorial scope of the Competition Act 1998 Chapter I prohibition to include conduct which is likely to have direct, substantial or foreseeable effects within the UK – meaning the UK can pursue international cartels implemented outside the UK that may have had detrimental effects in UK markets.

However, the territorial scope of the Chapter II prohibition will not be amended (conceivably as it would be impractical for the CMA to investigate unilateral behaviour occurring off-shore even if it indirectly had implications for UK commerce).  It is also worth noting that the recently published draft guidance on the UK’s Vertical Agreements Block Exemption Order (VABEO) confirms that the VABEO’s safe harbour is only available to vertical agreements implemented in the UK. 

The Government also seeks to improve the conduct of competition infringement cases by:

• enhancing the CMA’s information and evidence gathering powers, including by:
  • broadening the power to interview individuals (including any relevant person regardless of connection to the company under investigation);
  • extending the duty to preserve evidence (analogous to that which exists in the context of the cartel offence);
  • extending powers to ‘seize and-sift’ evidence (including during inspections of domestic premises under a warrant); and
  • strengthening powers to obtain information stored remotely when executing a warrant.
• reducing the turnover threshold for immunity from financial penalties for Chapter II infringements from £50m to £20m (note the proposed reduction from £20m to £10m for ‘small agreements’ has not been taken forward);
• providing that appeals against interim measures decisions in investigations are determined by reference to the principles of judicial review, rather than on the merits of the CMA’s decision (which were believed to be acting as deterrent even when interim measures were warranted); and
• amending rules governing how the CMA provides access to its case file when taking interim measures decisions.

The Government declined to introduce further incentives for cooperation through enhanced leniency arrangements (including full immunity from follow-on damages claims) and will not implement any measures that might offer additional protection to individual whistleblowers during the administrative process.  It has also not pursued the proposal to streamline the ‘settlement process’, including through introducing an ‘Early Resolution Agreement’ tool in Chapter II cases.

Stronger investigative and enforcement powers

To help the CMA address a broader range of concerns (and more rapidly), the Government is moving forward with a range of additional enforcement reforms applying across the CMA’s competition tools – including:

• significant fines for non-compliance/cooperation with the ability to levy fixed penalties of up to 1% of annual turnover in relation to investigations (5% for orders/remedies) as well as additional daily penalties up to 5% of daily turnover where non-compliance continues;
• fixed penalties of up to £30,000 for individuals who conceal, falsify or destroy evidence, or who provide false or misleading information (as well as an additional daily penalty of up to £15,000 where non-compliance continues);
• penalties for non-compliance with CMA orders, or undertakings and commitments accepted by the CMA (capped at 5% of annual turnover as well as additional daily penalties of up to 5% of daily turnover of the company’s corporate group where non-compliance continues);
• enhancing international cooperation to facilitate the timely review of global cases and to ensure safe and appropriate information exchanges amongst authorities;
• using compulsory information gathering powers to obtain information on behalf of overseas authorities, subject to reciprocity, ministerial consent and other public interest safeguards; and
• powers to disqualify company directors who make false declarations to the CMA.

It is notable (and a reflection of stakeholder pushback) that the Government declined to:

• introduce personal accountability in relation to the provision of evidence; or
• widen the prohibition against the provision of false or misleading information to the CMA to include information provided voluntarily.

Encouraging a more active pro-competition strategy

The Government will provide the CMA more “regular steers” (albeit non-binding) on which sectors of the economy the Government believes the CMA should focus its investigation efforts.  It will be interesting to see whether such increased political oversight makes for a less independent, possibly more cautious CMA less willing to exercise initiative or one that feels emboldened to take on strong players proactively where concerns arise.

The Government has also proceeded with other ideas designed to ensure the CMA better monitors the state of competition in key UK markets, including:

• requiring the CMA to produce regular ‘State of Competition’ reports assessing and documenting the vibrancy of competition in UK markets (albeit without additional information gathering powers for preparing such reports); and
• introducing a statutory duty of expedition for the CMA in relation to both its competition and consumer law functions, including the new digital competition regime.

Other reforms

Finally, the Government also intends to:

• introduce a new statutory framework for confidentiality rings, including civil penalties to ensure the protection of  confidential information disclosed into a confidentiality ring;
• expand the Competition Appeal Tribunal (CAT)’s jurisdiction to grant declaratory relief;
• with the exception of collective proceedings, return to the courts and the CAT the discretion to award exemplary damages for competition law breaches (which is only expected in a limited set of cases); and 
• amend the Serious Organised Crime and Police Act 2005 (SOCPA) so that the CMA is a ‘specified prosecutor’ and can use the SOCPA ‘assisting offender’ process to enhance its criminal cartel enforcement.

Looking forward 

These reforms to the competition regime will have a significant impact on businesses and consumers. Businesses, whether directly consumer-facing or otherwise, should expect greater levels of scrutiny from the CMA and swifter and more direct intervention where the CMA decides to investigate.

These reforms will invariably result in a more powerful CMA but will also see it receive more regular steers from the Government – helping the Government to align competition strategy with wider government policy and objectives. As a result, while the CMA will have enhanced powers, it may also find that, in practical terms, it has less discretion on how it wields those powers.

Authored by Christopher Hutton, Matt Giles, and Joe Beautridge.