Nolan on Penrose
John Penrose’s report on the UK’s competition regime has been published. He was asked by the government to examine how the regime might be improved to foster competition, productivity and growth as well as improving outcomes for UK consumers. His report focuses particularly on consumers with its (unintentionally radical?) title “Power to the People” promising a future where more effective competition benefits all consumers. He also examines the sectoral economic regulators and their attitude towards competition as well as their interaction with the Competition Market Authority (CMA).
This is an extensive brief and the resulting 69 page-report ranges widely across the spectrum of competition and consumer issues. Whilst this breadth is welcome, it does result in a plenitude of recommendations, some of which seem rather unclear and will require much further work before being implemented. But I did find it an enjoyable report to read. The language is less dry than many such reports - readers from law or economic consultancy firms may be surprised to find themselves collectively described as an “expensive priesthood” - and at times verges into rhetorical tropes that are refreshing in their candour. If I have a (rather peevish) complaint, it is that the report does lack a rigorous theoretical foundation. I found some of the conclusions slightly at odds with standard economic analysis. For example, the discussion rather displays a lack of awareness of the economic literature on price discrimination and its effects.
The report as a whole does make an (impressive) attempt to consider these issues “in the round” and to propose a set of changes that he hopes will help “citizen-consumers”. In that sense, it is an honourable attempt to fulfil the brief given to him. But I fear that its ambition to cover so much ground may diminish its actual impact. At times it lacks a clear narrative thread (apart from the laudable admiration for competition), and comes perilously close to being an enthusiastic collection of ideas, which do not cohere together and whose boundless desire to help risks ignoring the quotidian task of prioritising and implementing the main proposals in a timely and efficient manner. Still the report certainly gives the reader - and hopefully the government - much to ruminate on, and hopefully it will lead to some action.
To strike a positive note, the most obvious take-away from reading the report - and particularly its first 10 pages - is how much its author believes in competition. He sees it as necessary for a productive economy but also as a means to give consumers a better deal and ensure they are being treated fairly by the market system. This enthusiasm is palpable and indeed infectious and I found his distillation of the benefits of competition to be convincing and well-written. He also subscribes to the idea of independence - that decisions in this space should be the preserve of independent bodies (though obviously only deriving powers from an elected Parliament) is something he believes in, suggesting that bringing them back into government would lead to incessant lobbying and an increased level of bowing to vested interests, with this rent-seeking proving inimical to driving productivity growth.
Within this vision, he sees the role of the CMA as crucial. Indeed, his first recommendation is that the CMA should occupy a more elevated role within the UK polity seeing it as the “microeconomic sibling” of the Bank of England: a hugely respected organisation that enforces competition law, but also serves as a beacon for the whole concept of efficiency, productivity and well-functioning markets and wielding a similar influence in this sphere as the Bank of England does in the monetary sphere. Whether the CMA can ever be seen as equivalent to the Bank seems rather doubtful (nor indeed is it clear it would want to occupy such a position), but it serves to underscore how important he feels it is. One point about the recommendations he makes: they are compendious, and if all implemented would see the CMA become significantly larger at a time when it is already grappling with an increased workload as a result of Brexit, which might mean it would be almost impossible to deliver such change in an efficient and timely manner.
Give the CMA “teeth”
The most important single recommendation he makes is the one that many predicted he would: that the CMA be given similar powers in consumer law as in competition law. He is very clear on this, does not equivocate, and I very much hope it actually happens. He points out the inconsistency in having fining powers for competition offences but not for consumer ones, and argues that this seems inconsistent with the idea of “citizen-consumers” who are treated well by firms who understand that treating them poorly will be penalised. Some of these concerns have been exhibited during the pandemic - in Spring 2020 the failure of many firms to refund airline tickets promptly (or in some cases at all) led to widespread outrage and a sense that, if the CMA had “real teeth”, it could have done more about it or, perhaps more importantly, deterred the companies involved from behaving like this in the first place.
Most commentators have argued for this change, and it seems unlikely there will be widespread antagonism to the proposal (or at least any that is expressed in public). But it may change the CMA considerably - if given such powers, it will be expected to use them, and it may come to occupy a much greater proportion of resources and senior management time than is anticipated. But this is not to detract from the power of this recommendation, it has been an anomaly for a long time and it needs to be corrected.
CMA versus CAT?
On the issue of the CMA’s competition powers (which was the primary topic of the 2019 letter from its then Chair, Andrew Tyrie) he gets into something of a mess. However, given the complexity of the issues and the fact that there do not seem to be obvious answers, he can perhaps be forgiven for this. He has obviously consulted widely and heard many views, and he seems very clued-in as to the ongoing tension between the CMA and the Competition Appeal Tribunal (CAT), with the former claiming the latter is essentially re-trying and delaying cases and de facto protecting law-breaking firms, with the latter saying this is necessary to ensure proper rights for firms (I wonder if his invocation of the European Convention on Human Rights (ECHR) will irritate those who incorrectly think it is an EU body?) When you examine his language, his sympathies seem to be more with the CMA than the CAT - earlier in the report he talked about the UK competition regime being overtaken by other countries, and the metrics of success he tends to use are number and size of fines, rapidity of cases, etc. But then he can't quite bring himself to recommend major changes that would limit or indeed replace the CAT, so he recommends the formation of a taskforce composed of almost everyone (though not including consumer representatives might be seen as somewhat antithetical to the soi-disant spirit of his report). It is hard to see this as something other than kicking the issue into the long grass, albeit these are difficult issues to weigh-up and give definitive answers to.
I am not sure there are "right" answers on this anyway. My personal view is that the CAT is exceeding its original mandate and that it should be limited in some way, but I completely understand that others may disagree. There is an inherent tension at work in what Penrose wants - he wants faster decisions with no "red tape" or armies of expensive advisers, but the UK legal system generally tends to give significant rights of appeal to companies and it is reasonable that they should use them. His metrics of success for a competition authority seem to embrace the number of successful breaches of competition law, the magnitudes of fines, etc, which are fundamentally outputs rather than outcomes. It could be argued that a well-functioning regime that benefited consumers would not necessarily see numerous breaches/fines, but he appears to view our regime as somewhat “softer” than other regimes, and that it should be more aggressive in enforcing in future. But without throwing away the traditional UK virtues of procedural safeguards. This is not an easy circle to square.
He does make specific recommendations that he feels may speed-up decision-making, including allowing the CMA to accept binding commitments at any stage in a market study, market investigation reference, or merger review, as well as harsher penalties - essentially turnover-based fines - for noncompliance with investigations. Both of these seem reasonably sensible, though whether they will have a major hastening effect remains to be seen. One point that struck me is that discussion of the latter issue - when saying that criminal prosecution for firms supplying misleading information is not effective - is the only time that the CMA’s criminal powers were mentioned in the entire report. It is difficult to avoid inferring that, at some level, the UK’s experiment with criminal enforcement of competition law is not currently seen as a success, nor a major priority for the CMA in the near future.
On regulatory appeals, he “sort-of” goes with the CMA view but leaves it slightly ambiguous. He recommends moving appeals to the CAT but does not specify the legal framework by which such appeals should be governed. The CMA letter by Tyrie explicitly asked for a Judicial Review (JR) standard, and he does not opine on this. I would question whether the CAT could do a full appeal on the merits for some regulatory decisions, though - as has been pointed out to me - it does do merit-based appeals in competition and used to do them in telecommunications. However, even then it remitted any price control appeals to the CMA itself and I think an Ofwat-like appeals process within the CAT involving full technical remodelling of all the issues is simply not feasible.
He does argue that the current system - with different regulators having very different appeal routes - is confusing and ultimately not sustainable (which I agree with) and that there is a need for greater consistency across a diffuse set of regulators. He mentions (approvingly) the change from full merits appeals to the CAT in telcos to an "enhanced judicial review" standard, and it might be that this is a model he would favour for all regulatory appeals. This might still worry investors and be deemed insufficient to calm their fears. How the government will react to this will be interesting to see.
One in, two out?
The report refers repeatedly to red-tape. It asserts the build-up of regulatory burden over the years, and argues for better regulation that seeks to minimise the cost of doing business for regulated firms. This has been a recurrent theme within government for the last 20 years which reached an apotheosis when Sajid Javid was Business Secretary back in 2015-16. The report delicately skirts over the May government's volte face on this and their essential abandonment of the idea, and instead talks about the need to resuscitate some key principles - that for every new rule/regulation imposed an old one (or two) should be removed. Crucially, he proposes these principles should be applied to sectoral regulators as well, which they were not under the Javid regime.
As a former regulator, I do know that regulating first is often a seductive yet questionable choice for any regulatory body, and that it can seem hard to reduce regulations over time. However, I am not sure how the licensed-based framework for regulated companies, that is the mainstay of sectoral regulators' legal powers, could be used in this fashion, particularly as many of the licence requirements come directly from government. Perhaps more bluntly, the “one-in, two-out” strikes me as a foolishly mechanistic idea that may itself generate more red tape than it removes. But the idea of reducing regulatory burdens does seem a reasonable principle that should be explored further with perhaps a more subtle set of tools employed . A more fundamental issue remains, the media and political pressure on regulators to be seen to regulate areas currently not subject to it. The digital space is one example of this, but another is the experience of the FCA and its attempt to delineate a "perimeter" beyond which it would not use its regulatory powers - recent events have suggested that politicians are not sympathetic to this if and when something is perceived to go wrong. We still do not really know what the government actually thinks about more or less intervention in markets. Its reaction to this recommendation may be illustrative in that regard.
All eyes on digital
This tension is borne out by the section dealing with possible regulation of "big tech". The report seeks to strike a balance here, but essentially accepts the findings and theories of harm set out by the Furman Report, the Digital Markets Task Force and various other studies which recommend the setting-up of a unit within the CMA to engage in ex ante regulation of digital companies seen to possess enduring market power. The language used is interesting as it invokes ideas of "network effects" and control of customer data to build a picture remarkably similar to the justification for regulating a classic natural monopoly. The framework envisaged, with its suggestion of regulating only firms with market power in specific markets as well as its recommendation for reassessing market power at regular intervals, seems uncannily similar to the EU telecoms regulatory framework of 2005, which has had some successes but its impact on red tape is questionable.
Penrose is very mindful of these risks, and makes several recommendations to guard against the possibility that this new framework could become an unwieldy and innovation-harming straitjacket for the digital sector. He proposes that the new unit's powers should be ring-fenced from the rest of the CMA, that it should have a legal duty to promote competition and that it should only be allowed to regulate new "monopolies" with Parliamentary consent (via secondary legislation). But some of his suggestions are extremely, and perhaps inevitably, vague: what does "only apply to problems which CMA's existing competition and consumer powers can't solve already" actually mean? How would it be implemented? Would a court decide on it? There is further discussion of reducing switching costs which adduces Open Banking as something to be emulated, plus some recommendations about data privacy but these seem aspirational ideas rather than proposals with specific details.
On reading the report, sectoral regulators may feel they have escaped relatively lightly compared with what might have been. There is no proposal for merging regulators and the much-discussed "unified network regulator" is not even mentioned. Instead there is an interesting discussion of how regulators' functions and duties have multiplied over time, and how nearly all of them now have a number of responsibilities not related to driving competition and ensuring their sectors revert to "normal" competitive conditions. Penrose’s view that regulators should be ceding their consumer-facing powers to the CMA comes in the form of his recommendation that over time regulators should be required to set-out a “multi-year project plan” which would lead to a gradual transfer of many of their responsibilities to the CMA so that regulators are “progressively left with a smaller and smaller piece of less-competitive activity centred on the industry’s core natural monopoly”. This is entirely consistent with the original intent behind the creation of sectoral regulators. Whether it remains this (or any other) government’s intent is more open to question. As mentioned above, the last few years have seen pressure for regulators to intervene more rather than less. Also, the way in which he envisages powers passing would generally involve significant amounts of primary legislation. Nevertheless, it is one of the most interesting and potentially important recommendations of the report. Whether the government chooses to spend time on working out how to implement it (or indeed whether the CMA will itself welcome it) remains to be seen.
Penrose also recommends that statutory duties of all sectoral regulators should be revisited, with the goal being to emphasise the primary role of competition in the regulatory tool-kit. This seems generally sensible but again is contrary to recent experience: the CMA Energy Market Investigation Report made exactly the same recommendation to government about Ofgem’s duties, only for it to be quietly dropped by BEIS.
Finally, Penrose recommends implementation of the National Infrastructure Commission’s view that all future network build and reinforcement in regulated monopolies should be subject to competitive tendering, rather than be the exclusive right of the regulated firm. This is not new in itself, as both Ofgem and Ofwat have been calling for legislation on this for some time, and the government has committed to legislating for it in the Energy White Paper published before Christmas. But the devil will be in the detail. Previous gestations of this proposal referred to large, separable transmission lines of value greater than £100m. A more general injunction that any element of new infrastructure must be tendered out would send shivers down the backs of any current owner.
Levelling-up - characterised here as the South East vs rest of the UK - is a priority for this government, and Penrose clearly shows the productivity gap between different parts of the UK. His recommendations in this area are (i) for small-claims courts and alternative dispute resolution entities (ADR’s) to digitise and become available to consumers 24/7; (ii) for “county competition courts” to be established which would allow appeals of competition and consumer issues at a local level and which would be tightly managed to ensure they had short hearings with low administrative costs; (iii) to give local authority trading standards teams new powers and resources to investigate local competition and consumer cases, with autonomy being given to each authority to allow them to decide how best to use their knowledge of local trading conditions.
These changes are reasonably radical, and represent a clear attempt to move away from the sense of competition and consumer enforcement only being a preserve of the well-financed company with its “expensive priesthood” of advisers. Whether they would actually succeed in “democratising” the competition regime is an open question but they do represent an ambitious attempt to do so. They would obviously involve a significant amount of what might be deemed “red tape” and Penrose acknowledges this tension. It would be an enormous challenge to “skill up” local authorities on competition and consumer law, and it’s not clear if they would wish for what might seem a rather ethereal set of functions, but it will again be interesting to see whether the government chooses to take this forward.
The tone of the report is very much about the consumer interest (as it should be), and in this section he looks at three specific topics related to this.
The first is the much-discussed “loyalty premium” which has occupied considerable public and policy attention, particularly in the insurance and energy markets. His solution is to recommend a general application of the proposal coming from the FCA for home and motor insurance: that all firms are required to offer the same price to new and existing customers. Personally, I fear that this solution, while seemingly reasonable, may be more likely to see average price levels rise rather than fall. The effects of such changes are theoretically ambiguous over a range of different models, but I suspect most academic economists would be more likely to view this measure as decreasing instead of increasing competition and Ofgem’s experience in 2008-2010 - as evaluated by the CMA in great depth where it concluded that prices rose rather than fell - suggested that conditions of this kind are more likely to harm rather than help consumers.
As against that, academic economists and regulatory bodies have been slow to find their own solutions to this issue, with the CMA report published in late 2019 a thoughtful contribution to the debate but one that cautioned against there being easy solutions. Penrose approvingly cites recent research from the University of East Anglia that might provide a framework for “transactional fairness” in the way firms deal with customers, and that might provide a basis for better regulatory principles. Again, there is the tension between what is essentially a new regulation (and therefore should see another two being removed?) and the administrative burden point, but this may be a case where it is simply too easy for a reader such as myself to be critical.
His second area is the issue of overly-complex terms and conditions which consumers do not understand. His main proposals to improve things rest in the incentives that digital comparison tools (DCTs) have to win customers by encouraging them to do the hard work of understanding complex contracts and being trusted enough to reliably inform consumers of what they are signing up to. This seems reasonable to me, though it will require significant further work . To that end, he recommends the CMA revisit their DCT study of 2017 and introduce further measures to improve transparency and consumer choice.
Finally, he looks at “sludge”, the term derived from the behavioural insights literature to refer to firms putting in “nudges” that actually make consumers less well-off by ensuring they pay more or are less likely to move to more efficient competitors. This is a complex, albeit fascinating, area where the CMA and other regulators have attempted to tool-up over the last few years. His main recommendation is a market investigation of the area, which may help but would consume significant amounts of CMA time and resources.
One of the (many) unresolved aspects of the Brexit deal, was the future of the UK’s state aid regime. The final deal agreed between the UK and EU, left a surprising amount of freedom for the UK to opt for a radically different regime than obtains throughout the EU. But the government - while recently issuing a consultation - has given no clear indication of what its plans are in this area. One option, and one that would radically alter the CMA, is to give whatever regime is ultimately chosen to the CMA to administer, as DG Competition does in the EU. Whether the CMA wants this is unclear, though ultimately it is of course a choice for government.
Penrose avoids making formal recommendations in this area. Very much to his credit (in my view). he states that the UK should, when deciding whether to subsidise particular industries or not, clearly say “Not”. But he then frets over the inherent contradictions of having a competition and regulatory regime open to all, and the idea that the UK should be subsidising its companies to enable them to compete more effectively abroad. This contradiction is embodied in the following sentence:
“So Ministers should develop new options on how to prevent fast-growing UK-based firms in fast-growing UK based sectors…..from being poached offshore for non-commercial reasons, without damaging our attractiveness for FDI by creating disproportionate political risks at the same time” (See pg 56)
It is hard to see this as anything other than an example of the kind of Mercantilist thinking that flourished in the early Modern age (and still bedevils discourse today). It illustrates the issues people have with free and open trade: you always want investment from other countries but rarely do you want your firms to invest in theirs.
Despite my occasional outbursts of negativity, I very much welcome this report. It is, after all, far easier to criticise than to try to create, and Penrose sincerely wants to improve the current system to benefit all consumers. But I worry that the sheer profusion of recommendations and the desire to solve so many problems at once will increase the probability that this report will gather dust on a (virtual) shelf. A focus on a smaller number of proposals along with more detail as to how they might be implemented might have been more effective in achieving tangible changes. In particular, I worry that the obvious and necessary change to the CMA’s consumer powers may not happen. But I hope I am wrong. And in finishing, I do want to applaud John Penrose for his enthusiasm and generosity with his time and thinking in this area. Unlike Athena, it may not spring perfectly-formed from its father’s head, but it may have enough of her wisdom as to ensure those who read it benefit from the experience.