On 11 May 2011, John Fingleton spoke at the 40th Anniversary of Cleary Gottlieb Steen & Hamilton LLP at its London Office.

You can download a copy of the speech here.

Summary ¹

The Competition Act 1998 represented an enormously radical change to UK competition law. This speech describes, in three broad phases, how the OFT’s approach to competition law enforcement has evolved in the decade since. In its initial phase, the OFT opened a large number of new cases across a range of markets to show it was open for business – quickly developing its capacity, delivering decisions and setting precedent. But subsequent Competition Appeals Tribunal judgments had a profound effect, leading to a higher threshold for opening cases and risk aversion about closing them. Phase two saw a shift to running fewer, high impact cases, often involving multiple parties, supported by the Treasury and National Audit Office. By 2009 this approach was bearing fruit, with decisions flowing again after a lull. A series of substantial fines were issued, and in total the OFT imposed penalties on 204 companies between 2006-10 compared with 55 from 2000-05. The most recent phase, starting in 2010, sees a focus on improvements in speed, delivery and transparency. New research demonstrates the success of a high impact approach rather than case numbers alone, with a doubling in the number of businesses saying they know a lot or fair amount about competition law since 2006. Today, case numbers are rising again, investigations are proceeding more swiftly than ever before, and the number of decisions will increase in turn. Like all new legislative frameworks the 1998 Competition Act took several years to bed down and, despite setbacks, the competition regime is now delivering successfully for the economy. Given the time and costs invested in making it work well, any changes to the UK regime should build on this learning.

Introduction

I was pleased to accept the invitation to speak at today’s event. 40 years is a big milestone for any office and one Cleary should be proud to have accomplished. Representing a 37 year-old organisation with a somewhat uncertain future, I now see 40 as an extremely admirable achievement. ²

I would like today to look back over the past decade of public competition law enforcement in the UK and discuss what has been achieved and what lessons have been learned. My remarks primarily focus on competition law, and largely leave the Mergers and Markets law and the OFT’s responsibilities for consumer protection and credit licensing to one side.

The 1998 Competition Act was an enormously radical change in UK competition law. It still amazes me to think that, until March 2000, the UK had no effective system of prohibition of cartels or abuse of dominance, with no ability to deter companies from engaging in such activities through imposing financial penalties. Prior to 1990, relatively few countries had a competition law, but most EU member states have since introduced a law with prohibitions modelled on articles 81 and 82 of the EC Treaty (now Articles 101 and 102 Treaty on the Functioning of the European Union). ³ At the time the Competition Act was introduced, of course, there was a notification regime for agreements and this too was reflected in the UK system.

I propose to structure my remarks around three broad phases in the development of the OFT’s approach to implementing competition law, which could be loosely characterised as:

• Phase 1: ambitious implementation (2000-2005)
• Phase 2: prioritisation around impact and outcome (2005-2010)
• Phase 3: improving transparency, speed and delivery while taking relevant, targeted and economically beneficial cases (2010-)

The timings and descriptions could be debated and the phases may overlap, but they allow a discussion of activities over periods that are loosely aligned with the impact of learning from competition cases, which invariably (especially if they go on appeal) last several years.

I intend to reflect on how the evolution of the OFT’s approach across these phases has led to its current high impact enforcement strategy and seen the significant development of the transparency, efficiency and effectiveness of OFT procedures. An important result of this approach is that competition law risks are now firmly on the wider business agenda and firms have a much greater awareness of how to comply with competition law.

Phase one: Ambitious implementation (2000-2005)

The Competition Act came into force in March 2000. The OFT had been in existence since 1973 as both a competition and consumer body. But the competition regime in place, which had been designed in 1946, was decidedly old-fashioned. The introduction of an EU-style administrative system required a huge transformation and the rapid building of capability and intellectual leadership. So the OFT hired new staff, and put in place a comprehensive training programme for existing staff, re-skilling a large part of the organisation. And it opened a large number of new cases, over 45 between 2000 and 2002, across a broad range of markets to show that it was open for business. You can see from the slide behind me that OFT opened 23 cases in 2002 alone.

The OFT delivered its first infringement decision in April 2001, just a year into the new Act. ⁴ It found that NAPP Pharmaceuticals had infringed the Chapter II prohibition and abused its dominant position in the market for the supply of sustained release morphine tablets. The decision was notable in several respects: it was delivered quickly, the theory of harm was novel and the findings were largely upheld on appeal to the Competition Appeals Tribunal (CAT). It was followed quickly with a second infringement decision against Aberdeen Journals in 2002, also for abuse of a dominant market position. ⁵ The OFT also innovated during this period with the use of non-infringement decisions, explaining the reasons for case closure.

At the same time that the OFT was building investigative and decision- making capacity, it was producing guidance and speeches and, under the leadership of Sir John Vickers and Margaret Bloom, exercising considerable intellectual leadership on European and international competition policy. Of particular note were the negotiations leading up to the implementation of Regulation 1 of 2003, the revisions to the merger regulation and the promotion of an effects-based approach to rule-of- reason cases. The detailed Competition Act guidance, published over this period, was not only extremely useful for practitioners but strongly influenced the European guidance which followed.

The OFT had to deal with additional challenges. As Sir John Vickers pointed out in a recent talk no sooner had the Competition Act come into force, than the Government was planning a further revision to UK competition law. ⁶ 2001 saw the publication of a White Paper emphasising the link between strong competition and productivity growth. The Enterprise Act that followed was arguably as radical as the Competition Act, introducing a criminal cartel offence and director disqualification, making significant reforms to the markets and mergers regimes, and introduced a new structure for the OFT with a Chairman and Chief Executive. The preparation for this new legislation (and the Modernisation legislation in Europe) and their subsequent implementation inevitably imposed considerable additional pressure on the nascent capacity of the organisation.

In effect, the OFT had to address major legislative changes, at UK and EU level, continually from 1997 to 2004. The EU Modernisation reforms meant that many of the guidelines prepared for the Competition Act had to be revised, and major procedural issues were raised by the 2004 EU reforms.

As investigations continued and decisions emerged, OFT naturally faced procedural and substantive challenges from parties, with numerous appeals to the CAT. Two key features of the CAT’s work had a profound effect on the OFT and its capacity to investigate and make decisions.

First, the OFT discovered just how in-depth the CAT’s level of scrutiny would be when assessing appeals, and the time and resources this would demand from it. Although the fact that it was a full merits-based review was well understood, neither the OFT nor many others had fully appreciated the full implications of this. It had the positive effect of making investigations more thorough, but increased the cost of investigation.

Second, the CAT found that the rejection of a complaint by the OFT could amount to a decision which was appealable to the Tribunal. ⁷ This had an enormous impact, particularly because there were few good quality complaints about anticompetitive behaviour. It was relatively easy to satisfy the threshold to use the investigation powers (for example, reasonable grounds for suspecting an infringement of the Act). But only about one in four of these cases led to an infringement decision (satisfying the requirement for ‘strong and compelling’ evidence). This would not have been a significant problem if case closure were swift and straightforward. But instead, the OFT found itself with a large stock of open cases that it could not now close without considerable additional investment of resource. Its early and hugely admirable ambition now became an additional and unexpected drain on its fledgling capacity.

This was to have a significant effect on the culture of the OFT: it raised the threshold for opening new cases, something that has only recently begun to change, and induced considerable risk aversion about closing open cases without thorough, and hence more costly, investigation. The concurrent regulators also faced the same situation. ⁸

The net effect of this was that the OFT’s ambition and optimism were set back, and a substantial proportion of investigative resource was devoted to dealing with how to close cases at the expense of pursuing infringements. While some might have criticised the OFT for over-hyping what would happen when the Competition Act came into place, it is difficult to criticise its approach to opening many new cases at the outset. Much of the setback could not have been foreseen, given that the CAT might have taken a different approach.

Between 2003 and 2005, at the same time as implementing new merger, market study and criminal cartel policies, and changing some of its own internal structures to deal with the Enterprise Act, the OFT continued to produce a steady number of CA98 decisions. ⁹ A number of these presented novel theories of harm and set important precedents, and were upheld on appeal. Awareness of competition law started to grow. Importantly for a new regime, many cases were in consumer facing markets and contributed to building public support for competition policy and compliance. A good example is the replica football shirts case, which found that sportswear retailers, Manchester United, the Football Association and Umbro were involved in agreements or practices that fixed the prices of top-selling adult and junior replica football shirts. ¹⁰ The toys case, which saw Argos and Littlewoods fined for price fixing of Hasbro toys and games, was another such clearly consumer orientated case. ¹¹

The Office’s experience during this period and its thinking on how to further develop the regime led to a shift in policy towards opening fewer cases prioritised around impact: as the chart shows, the number of new cases opened started to fall steadily from 2003-2007. This shift, and the accompanying focus on evaluation and measurement of impact, brings us to the second phase.

Phase two: Prioritisation around impact and outcome (2005-2010)

In November 2005, the National Audit Office (NAO) published a report on the OFT’s competition act work. ¹² The report identified three key areas for improvement: prioritisation and resourcing, case management and measurement and communication of achievement. It strongly endorsed a move towards prioritisation and evaluation and suggested further measures to strengthen that move, particularly around case management, resourcing and communication of achievement to achieve deterrence.

Further support for the approach of prioritising around impact and outcome was seen in the negotiations with the Treasury in 2006 that set the OFT’s budget (on a minus five per cent each year basis) for 2007 to 2011, and set performance targets based on outcomes in the economy (building on the OFT’s pioneering evaluation work), replacing the measurement of case numbers.

A second, seemingly unrelated, event combined with the NAO report was to have a profound impact on competition case work. In March 2005, the Government proposed to set up a new national consumer organisation. The OFT strongly resisted the separation of consumer and competition functions and, in the December 2005, the government reversed that decision. ¹³

Partly as a result of this, and partly in response to the NAO report, the OFT embarked on ambitious structural change in 2006. The main features of this change were (a) to integrate consumer, markets and competition case-work and in so doing reduce the silos that had built up across these work areas and (b) to extend leadership capacity particularly in order to bring competition cases. The Office also determined that it needed to take a clear stance on its ability to de-prioritise on the basis of administrative priorities. Later in 2006, the Office closed 15 cases in one go. ((This process is referred to in the 2006-2007 Annual Report:
www.oft.gov.uk/shared_oft/annual_report/438243/hc532.pdf)) In contrast to earlier case closure decisions, just one of these was appealed (and separately judicially reviewed). ¹⁴ This decision, and the lack of a wave of appeals, was an important milestone for the office in overcoming the sense of paralysis that had surrounded many of the less strong or less attractive cases, and helped rebuild confidence.

The change programme, with the benefit of hindsight, was ambitious. It was the right thing to do, but it came at a cost. The OFT did not have sufficient experienced leadership capacity both to implement the change and continue case-work. Staff turnover in 2007 reached 35 per cent, and the OFT lost many experienced competition experts. Hiring new staff, especially senior ones, proved time-consuming. ¹⁵ It probably took two to three years to re-build capacity, capability and confidence. The effect of this is shown on the graph with the dramatic fall-off in decisions with none in 2007.

The dip in output appears most profound for CA98 work. Mergers work, if anything, expanded during the period, with the OFT developing its policy and practice. On the markets side, in 2006-2007, the OFT also made three very substantial references – Groceries, Payment Protection Insurance and Airports – to the Competition Commission and produced numerous market studies. Criminal enforcement had begun in 2006 and both the Marine Hose and British Airways investigations were underway in this phase. And the OFT continued actively to enforce consumer and credit law, most notably with the market study and case on bank overdraft charges. The legal case ultimately went to the Supreme Court but OFT action has had a major influence on bank charging practices in any event. A hallmark of all of this work was a focus on issues that had a large impact directly on consumers or indirectly on productivity growth in the economy.

The OFT continued to develop its guidance and evaluation work. There was considerable external demand to understand how the OFT chooses which cases to investigate, and in 2008 it published prioritisation principles, being the first agency so to do. ((Prioritisation Principles can be found at:
www.oft.gov.uk/OFTwork/publications/publication-categories/corporate/general/oft953)) Consistent with the theme of prioritisation around impact, the Principles set out the OFT’s focus on the direct impact of the case in the market, its wider indirect effect on deterrence, its longer-term dynamic impact on productivity and its strategic significance in clarifying case-law etc. Of course, many of these elements were implicit in the OFT’s thinking since the outset of CA98 but the Principles made them explicit. ¹⁶ In November 2007, the OFT published the Deloitte & Touche report on deterrence. ((A copy of the report can be found at:
www.oft.gov.uk/OFTwork/publications/publication-categories/reports/competition- policy/oft962)) This showed strong multipliers from previous cases on business behaviour, and further encouraged the OFT’s work in the direction of compliance.

The number of decisions, although low, does not give an accurate account of case development and activity during this period. The Office made a conscious decision to focus on a smaller number of high impact cases. From 2006 onwards, the OFT had been working on innovative ways to streamline cases, including the development of policy on early resolution, first used in the Schools case decided in 2006. ¹⁷ Some of these matters progressed significantly during 2007, the year that no formal decisions were made. And a huge amount of resource in this period was invested in making progress on long running cases. A considerable amount of office time was expended in addressing threatened procedural actions during (rather than at the end) of the investigations, the scale of which may have been less visible on the outside.

Towards the end of this period, 2009-10, decisions had begun to flow again and, as the graph shows, case openings went up. Substantial fines were also imposed, for example in the Tobacco case, which resulted in £225m fines. ¹⁸ Although OFT fines remain relatively low, they are

intended to have a clear deterrence effect. ¹⁹ Internally, morale had improved, and was helped by the fact that some new cases were delivered more quickly. The cases concluded during this period were significant – the case on construction bid-rigging had 103 parties and a high profile in the industry and more widely. ²⁰ Between 2006–2010 the OFT imposed fines on 204 companies in total, compared to 55 from 2000-2005.

The Gaviscon case, which had a slow start initially due to capacity constraints, took a little under two years from formal launch to agreeing early resolution, following which Reckitt Benckiser agreed to pay a penalty of £10.2m. The final decision was issued last month.

The new confidence and capacity of the office to deliver was reflected in policy development, such as guidance on director disqualification and strong focus on compliance. ^{21  22} The compliance work reflected a desire both to develop a more positive relationship with business and to ensure that the decisions brought had maximum impact. ²³

On the back of this work and getting CA98 case-work back on track, the past year has seen the start of a series of new initiatives that I see as further improvements to its work in this area, leading to Phase Three.

Phase three: Transparency, efficiency and targeted cases (2010 -)

This third phase, which I loosely describe as beginning in 2010, has a number of separate drivers from within the OFT, such as the need to:

• Increase transparency across OFT’s work,
• Further improve the speed and deliver of cases, and
• Take cases that are relevant, targeted and beneficial for consumers and the wider economy.

The drivers for phase three have also been informed by a recruitment ban and the announcement, in October 2010, of a 25 per cent reduction in the OFT’s budget for 2011-15. ²⁴

These changes are not all concurrent, but they are interrelated and have started to change how the OFT does things and will continue to do them in the future.

Transparency

Across Government, transparency standards are being raised, largely by overt policy initiatives reflecting external demand for greater transparency, but backed up by the growing use of Freedom of Information law.

During 2009 the Office consulted on improvements in transparency, which led to the publication of a transparency statement in 2010. ²⁵ A number of commitments were made such as initiating early contact with parties to make them aware of the identities of the key people on the case team from the outset, including the senior responsible officer (SRO) who is accountable for the delivery of a case and is usually the decision maker. The Office also committed to regularly update parties on case status and timescales.

In March 2011, following an extensive public consultation, the Procedural Guidance ²⁶ was published, articulating many of the improvements made to CA98 procedures and setting out clearly for all to see the detail of how the OFT starts cases, deals with cases and closes cases.

Improving speed and delivery

This Guidance also outlines the measures put in place to streamline cases. For some time, the OFT has been sending draft information requests to parties where appropriate, which has helped to narrow the focus of information gathering exercises and enabled parties to be more prompt in providing information.

The Office has also committed to offering parties a ‘state of play’ meeting at least once during the period before a Statement of Objections is issued to ensure they are aware of the stage the investigation has reached. And it has clarified the internal scrutiny process in Competition Act cases including the role of Steering Committees, and made clear in the published Guidance that the decision maker will attend oral representations meetings wherever practical. The OFT recognises – and parties have told us – that access to the decision maker at the oral hearing is of critical importance to provide an opportunity for the party to present its case directly to the person taking the decision on the case.

As another significant step, the trial of a Procedural Adjudicator role was launched in March 201130 to see if this speeds up the resolution of protracted procedural challenges brought by parties to an investigation, which can often slow cases down. So far, one request has been dealt with by the Adjudicator being asked to review a process decision taken by the case team and a decision was taken within six working days. Details of this first decision have now been published on the OFT website. ²⁷

As part of these improvements, the Office also established a new dedicated CA98 team with the specific purpose of piloting some improvements to the OFT’s own processes, seeing, for example, whether some of the disciplines of the merger regime – with its tight deadlines – can be brought to bear on CA98. This team has formed an integral part of the Markets and Projects group, which shares best practice and has opened a number of new cases, including the hotel on-line booking and veterinary diagnostics cases. Another recent case that illustrates the approach of this new team is one in the motor insurance sector, which has involved the proposed use of commitments rather than fines. Scoping it narrowly by limiting the investigation to one market, one data product and only the largest companies has made the investigation more manageable.

In addition, this team has taken forward the new Short-Form Opinion tool, where the OFT gives a rapid view to businesses on novel collaboration agreements that may raise potential competition issues, and where the OFT’s view will provide useful guidance to the market place more generally. The tool was introduced in 2010 and one opinion, on a joint purchasing arrangement, was issued very shortly afterwards. Although there have been some approaches for an opinion since, the team is awaiting a suitable second application.

Relevant, targeted and economically beneficial cases

The Office also had serious concerns about the quality of complaints being brought to the OFT. Feedback from advisors had indicated that parties were reluctant to complain to the OFT because of the difficulty of persuading us to open an investigation or the length of time that it might take. The Office sought to address this in speeches and other fora, pointing out improved timescales and that the OFT is very much open for business, and so communicating the improvements made to delivery. The Procedural Guidance also sets out the availability of informal discussions with potential complainants, and a commitment to reaching a decision on whether to open a case formally within four months of a substantiated complaint.

In identifying new cases, as well as the continuing value of the leniency regime, the OFT is also using all opportunities to identify appropriate own initiative CA98 cases. One important initiative is the development of cases from other markets work, such as the Chapter I investigation that came about as a result of the market study into outdoor advertising. We are working on other such cases, but I’m afraid these cannot yet be made public.

And this year a new Pipeline and Performance group has been set up to enhance our ability to identify, prioritise and resource new areas of work across our all competition and consumer tools. In all of this we remain focussed on taking cases that are relevant, targeted and beneficial for consumers and the wider economy.

Naturally, as well as the various steps forward described above, there are still some setbacks. The collapse of the criminal trial involving British Airways staff dealt a substantial blow to the Office, notwithstanding the important precedents obtained and the known difficulty in bringing criminal cases. Here, as in other areas, the OFT has sought to learn the lessons and move on. More recently, the Office has had judgments from the CAT in construction and CRF, in which the fines were reduced substantially. We are carefully considering the judgments and our next steps.

The OFT’s annual plan for 2011-12 reflects an even stronger emphasis on enforcement, at the expense of market studies and international and other policy work. ²⁸ This reflects a desire to improve deterrence not just through serious sanctions, but also by increasing the probability that infringements get detected.

High impact approach

The focus remains on maintaining a balance between output and outcomes. As a recent paper by Kovacic, Holman and Grant notes, ‘the proper measure of agency performance is the delivery of good economic results, not simply the generation of higher activity levels.’ ²⁹)

The OFT’s high impact enforcement strategy has made a big difference to the way business views competition law and has moved towards achieving optimal deterrence across the economy. Data to be published shortly bears this out. During last year, an independent survey on awareness of competition law, similar to one conducted in 2006, was commissioned. This shows that from 2006-2010, the number of businesses claiming to know ‘a lot’ or ‘a fair amount’ about competition law more than doubled from 12 per cent to 25 per cent. For larger businesses this number is higher at 45 per cent, with only 13 per cent in this category saying they knew nothing. This upward leap in awareness coincides with the period when the business pages have been full of high impact CA98 cases – such as those in the construction, banking, airline, supermarket and tobacco industries – so that 65 per cent of large businesses in the survey said they were aware of OFT enforcement activity in 2010.

Anecdotally, competition law compliance is now far more of a boardroom issue than it was even five years ago. This is borne out by the survey results that show that between 2006 and 2010 there was a near doubling in the number of businesses that claimed they took appropriate action to ensure compliance with competition law, to 77 per cent. This helps to illustrate why it is impact across the economy that counts, rather than case numbers alone, and that this relies both on bringing forward high impact cases and having a balanced portfolio of cases that develop the application of competition law.

Although competition enforcement is key to an effective regime, to optimise benefits to the economy this must be complemented by business education and guidance to encourage companies to comply with the law. The OFT has invested significant resources in providing guidance to educate businesses on the law, set out emerging thinking on certain issues and/or to improve transparency.

For example, the OFT has recently consulted on two pieces of draft guidance aimed at helping businesses and directors comply with competition law, together with an accompanying ‘Quick Guide’ – the final versions of these documents will be published shortly. To the Office’s knowledge, no other competition authority has published guidance specifically targeted at directors to help them ensure that their businesses comply with competition law.

Looking forward

The OFT will continue with its current approach of continual improvement with its strategy of prioritisation around impact, seek to learn from its successes and mistakes, and engage continually and openly with outside parties. While policy work will reduce, the OFT will in the coming year re- examine aspects of its leniency guidance and publish a commentary on experience to date in early resolution of cases. We will also review our penalty policy in light of the recent CAT judgments.

In terms of the portfolio of competition cases, it is important to strike the right balance: between ‘bread and butter’ or routine cases that increase the probability of deterrence and more complex and novel questions, between Chapter I and II cases, and across sectors of the economy, smaller and larger. There remains the challenge of finding good cases to bring, and the OFT will continue to encourage parties to make complaints.

Conclusions

Over 10 years after the introduction of the Competition Act, much has been achieved.

In terms of positive outcomes in the real economy, the available evidence suggests business awareness of and compliance with competition law has taken a giant step forward. Arguably UK business is now more competitive than it was 10 years ago, with huge benefits for business and the economy. The 2010 Annual Report highlighted that estimates of recent OFT work put the direct financial benefits to consumers from the OFT’s work at around £359 million per year – and for various reasons it is likely that this evaluation underestimates significantly the magnitude of this impact.

Case numbers have not been as high as was anticipated at the outset, but initial expectations were perhaps over-optimistic. As the graph shows, the number of investigations is rising, the newer investigations are faster, and I am hopeful that the number of decisions will increase with them. I have said that numbers alone are not the best measure – the crucial point is to take high impact cases that have direct benefits for consumers and/or the economy, as well as maximising the deterrence effect, and to progress these quickly and efficiently.

The OFT has faced a number of significant challenges, threats and setbacks over the past decade. While the Office has not always been as fast as people would have liked, it has sought always to learn and improve and to take the lead in international debate. The OFT’s work is increasingly open and efficient, but there is further to go in achieving a transparent, efficient and faster CA98 regime. One particular reflection is the importance of talent to successful delivery. The OFT has invested hugely in this area in recent years, and managed both to attract superb talent through recruitment and to develop it internally.

All new competition systems take some time to bed down and the CA98, notwithstanding the setbacks and obstacles, has seen a more rapid and successful implementation than many other countries. Both the US and the EU, for example, took several decades for cases to begin to flow. International experience also shows that there are learning effects, most notably when the Courts review the decisions of agencies. And, because cases may take several years to investigate, the learning effects take some time to take effect.

While the OFT has welcomed the proposed changes to the UK competition regime, the hope is that it will not undermine either the development of business compliance with competition law, or the capacity of a strong agency to support this with a balance of effective enforcement, innovation and policy development. The flexibility of the CA98 regime has been crucial in enabling innovation and improvement over time.

After 11 years, UK competition enforcement under the Competition Act 1998 is now working well with a lot of exciting cases in the pipeline. The regime has had significant deterrence, compliance and economic benefits, whilst appearing to have avoided serious chilling effects on the economy.

Many of the lessons learned along the way relate to process, both around investigative approaches within the OFT and the relationship between OFT and the CAT. That learning has taken time, and has not been without cost. Any changes to the UK competition regime need to ensure this learning is not wasted.