Competition law compliance: role for profession
A study suggests that there is an important, but often untapped, role for legal advisers to make directors aware of important law such as the Competition Act
COMPETITION law, its implications for the economy and consequences for industry are particularly topical and controversial. Recently, for instance, Microsoft has been ordered to divest and split its component parts due to the perceived detriments arising from its monopoly power, and in Europe there has been the proposed collaboration/union between British Airways and KLM which is certain to excite the interest of the European Commission. There are also numerous examples of price-fixing cartels being uncovered by the competition authorities both internationally and domestically. The implications for industry of competition law and policy can be fairly dramatic. The author recently undertook research with a view to ascertaining the extent to which industry in the UK complies with the requirements of both EC and UK competition law. The research sought to examine the extent to which industry sought to be compliant with the new Competition Act 1998 and also levels of awareness of the Office of Fair Trading education programme and various initiatives introduced to enhance industry awareness of the implications of the 1998 Act. Finally, the empirical project also sought to illicit industry attitudes regarding compliance, the impact of competition law on industry and industry views on differing bases for the exercise of competition law controls. An important feature in the research was the role of external legal counsel in the formation and implementation of competition compliance programmes.
The Competition Act 1998
The Competition Act 1998 has introduced a remarkable shift in the UK competition law framework.1 The Act has introduced two prohibitions, the Chapter I and Chapter II prohibition, modelled on Articles 81 and 82, and furthermore, the authorities are required to interpret the legislation, as far as is possible, consistently with Community interpretation of similar provisions. Perhaps more important than these substantive changes in line with Community law are the inclusion of powers to investigate and fine which are modelled closely on the powers afforded to the European Commission under Articles 81 and 82. The threat of ‘dawn raids’ and substantial fines is likely to make UK competition law a more pressing concern for industry. Three specific reasons exist for the role of compliance in UK industry to be enhanced following the Competition Act 1998. First, the new investigatory and fining powers, second the possible deterrent effect of private enforcement under the legislation, and thirdly, the specific reference in the Office of Fair Trading’s guidance on its fining policy under the Act to potentially lenient action based on the existence of a company compliance programme.
OFT role in urging compliance-education programme
The questionnaire sought to assess awareness of the OFT initiatives to encourage industry compliance with the 1998 Act. The Director General of Fair Trading has outlined the two-prong strategy of enforcement under the Act, the carrot and stick approach. On the one hand, the Director General accepted that ‘a large number of infringements are committed through ignorance’ and therefore a central plank of policy would lie in ‘encouraging firms to comply with the law through education.’2 The motivation to take compliance seriously, lay, he stressed in the potentially very serious nature of the consequences of breach of the Act, involving resort to the Director General’s investigatory and fining powers. More directly, the OFT has been running a campaign to increase awareness and compliance among business since 1998 through the auspices of its Education and Compliance section. This education programme was launched in recognition that the OFT should be pro-active in helping small and medium-sized businesses to prepare for implementation of the Act.
In order to provide a measure against which to evaluate the success of the education programme in increasing awareness of the Act, the OFT conducted a survey on Competition Act awareness in March 1999.3 The research methodology was different from the present study and therefore one must be wary when comparing results and drawing conclusions from any ‘changes’ in awareness during the interim period. Nonetheless, the findings in this early survey do allow for some tentative comparisons to be made. In the March 1999 survey, 2% of respondents were spontaneously aware of the Act. This increased to 6% after some nominal prompting, but rose to 23% after a fuller description of the Act. The vast majority of those aware of the Act said that they did not know very much about it. (92%)
The Questionnaire and Results
Questionnaires were mailed to all companies in the UK with a turnover of over £10 million.4 The sample upon which we based the research covers 96% of the FTSE Allshare Index and extends to more than half of the FTSE Fledgling Index,5 capturing slightly less than 96% of the Listed Market Capitalisation of UK companies.6
The questionnaire was sent to all sample companies on 17th March 2000 together with an accompanying letter and a follow-up mailing was forwarded to all companies on the 26th April The overall response rate for returned and completed questionnaires7 of 141 questionnaires, or 9.5%, was disappointing. This factor obviously limits the value of the findings, both in terms of quantity of returns and the quality of information obtained, although the results are interesting and provide some useful insights for policy-makers, companies and the legal profession. Limitations of space preclude a full analysis of the results and only selected issues will be detailed here.8
Awareness of EC rules
84.4% of respondents claimed to be aware of EC Competition rules, and, despite the high profile of EC competition law, the response to this question is fairly dramatic. A lower figure of 61% of respondents considered their companies to be affected by EC rules. This is perhaps explicable by the limitations on the application of Community law by the affect on inter-state trade criterion.
Awareness of 98 Act implications
A particularly positive response was received in respect of whether respondents were aware of the implications of the Competition Act 1998. 56% claimed to be fully aware, the figure for partially and fully aware combined was 82.3%, and this figure increased to 93.6% including those simply aware of the Act. This is a remarkable increase from the 1999 OFT study where 77% claimed they were not aware of the Act and 21% did not know very much about it, although one must bear in mind the different format of that study.
Respondents were also asked how they found out about the Act. The greatest individual response was in respect of external legal advice at 23.4%, followed by legal periodicals/journals at 19.9%. This differs from the 1999 OFT study where ‘legal adviser’ received a 5% response rate and 55% had received information via newspaper/magazine/article. As mentioned, external legal counsel was the most frequent response, emphasising the important role of external legal advice in competition law compliance.
OFT Education Initiatives
A central plank of the OFT’s enforcement strategy under the Act involved a range of educative initiatives and measures to increase awareness and levels of compliance in industry. Respondents were asked to advise regarding awareness and usefulness of a range of these OFT initiatives and there was a marked variation in the responses received, demonstrating the success of some and failure of others. The most positive response was in relation to the OFT Guidelines of which only 36.2% of respondents were unaware and 53.2% found them to be useful/very useful, and similarly successful was the OFT website, with figures of 37.6% and 53.2% respectively.
The highest response rate was for ‘Yes- part of a wider regulatory compliance programme’ at 37.6%. This overall figure for yes, including those who responded that they had a specific competition compliance programme, was very positive at 77.3%.
Compliance and the 1998 Act
59.6% responded that they had changed or planned to change their compliance programme to take account of the 1998 Act. This compares favourably with the OFT study of 1999 in which 52% had stated that they had neither taken nor intended to take any compliant action in relation to the Act. The improvement suggests a degree of success in the OFT’s strategy of both enhancing awareness of the Act and its implications and of their policy of encouraging firms to take appropriate compliant action, given the sanctions available under the Act for breach.
This question sought to ascertain a little more detail about the measures which undertakings utilise as part of their compliance strategy, given that a purely ‘formal’ compliance programme would have very little merit. A range of potential measures which may be considered as key components of a successful compliance programme were selected and respondents asked to what extent these were adopted by them. The most positive response was in respect of external advice at 61%.
Training and Evaluation
51.8% responded that all relevant staff received training on competition issues and while there is room for improvement, this figure is encouraging. It has been suggested that evaluation of compliance programmes is the most fundamental issue for organisations to take on board, given both continual developments, changes and reforms in the law and the policies and practices of the organisation. Disappointingly, given the importance attached to this element, only 41.1% of respondents undertook evaluation as part of their programme.
Merger Control Basis
This is a particularly sensitive issue currently given the 1999 DTI consultation document9 which makes radical proposals to transform the basis of UK merger control, which remains unaffected by the Competition Act 1998. The key proposals are to change the basis of the merger control system from a public interest test to a competition based model and to reduce the impact of political decision-making by the Secretary of State on the merger control process.10 One of the criticisms of the public interest test model is its uncertainty and unpredictability11 although it has been argued that it is important to consider a range of issues under the ambit of merger control.12 Accordingly, during this consultation period it was considered that industry views on this issue were an important and valid aspect of this research, particularly given the significant impact which merger controls can have on any company’s plans for expansion or self-protection. The responses produced a very close result with 41.8% favouring the public interest and 41.1% stating a preference for a move to a competition-based test for merger control.
The research project produced considerable and interesting feedback, both quantitatively and qualitatively. The results suggested an enhanced degree of awareness of competition law and the requirements for effective compliance programmes, particularly following the internal OFT study into awareness of the Competition Act 1998 was carried out in 1999. The evidence of enhanced awareness and compliance by industry may reflect industry’s recognition of the greater deterrent of a competition law system involving stringent fining powers. Although limited, the data also suggests that the OFT’s education strategy has been reasonably successful, given the popularity of the OFT Guidelines and the increase in compliance programmes. The feedback was also interesting on a limited number of wider issues relative to competition law, and it was interesting, for instance, to elicit industry attitudes on the preferred basis for merger control in the UK.
However, one must also be aware of the limitations of the current study. Perhaps most important is the low response rate. This affected the quantity and quality of results per se but one must also accept the likelihood of a significant response bias, given that companies which are more compliance-oriented were more likely to respond in the first place. This research, and the emphasis placed on compliance by the OFT, particularly noting its policy of leniency in fining where a compliance programme exists, stresses the role which the legal profession has to play in ensuring industry complies with both Community competition law and the new UK regime. Given the high profile now afforded competition law generally, and the eagerly awaited jurisprudence under the 1998 Act, the legal profession will require to follow developments closely in order to best advise clients on developing and maintaining effective competition law compliance programmes.
Barry J Rodger, Senior Lecturer, The Law School, University of Strathclyde, Glasgow. For a more detailed discussion of this issue, see Rodger, ‘Compliance with Competition Law: A View from Industry’ Commercial Liability Law Review, forthcoming.