HL Deb 04 August 1980 vol 412 cc1305-16

5.14 p.m.

Lord LYELL rose to move, That the order laid before the House on 21st July be approved.

The noble Lord said: My Lords, I beg to move that this order be approved. Most of the provisions of the order will, I believe, be generally welcome to your Lordships. Many of them are indeed a direct result of assurances given by the Government during the passage of the Competition Bill through your Lordships' House. A number of your Lordships will be able to see that their own representations have indeed borne fruit. But I hope that they and the rest of the House will bear with me while I explain some of what we see as the salient points in the order.

The order excludes certain courses of conduct from being considered anticompetitive practices under the provisions of the Competition Act. The Competition Act provides wide-ranging powers for the investigation and control of restrictions of competition. It imposes no general prohibition on any action and need cause no general concern to any particular section of industry. The desirability of any investigation can be considered on a case-by-case basis, both by the Director General of Fair Trading, who has the power of investigation, and if necessary by the Secretary of State, who has a power of veto. The question therefore arises of whether there is any real need to exclude in advance the possibility of action in any particular area. Certainly such exclusions should not be made without good reason.

Nevertheless, it is the view of the Government that there is a small number of areas where, on balance, it would be desirable to indicate clearly in advance that matters will not be subject to the procedures in the Act. This will serve the dual purpose of removing uncertainty and anxiety among the firms concerned themselves, and of enabling the Office of Fair Trading to concentrate their efforts where they are most likely to be rewarding.

Undoubtedly the most important of the exclusions is the provision to exclude the conduct of small firms. The rationale behind this provision is two-fold: first, it is likely that an investigation by the Director General, and especially a fuller investigation by the Monopolies and Mergers Commission, would impose a serious strain on the management resources of a small firm. Second, there must be a presumption that a relatively small firm would be unlikely to enjoy a sufficient degree of dominance in any particular market to be able effectively to restrict competition. As to the precise level of the exemption threshold, my right honourable friend the Secretary of State indicated during the passage of the Bill in another place that he had it in mind to base the exemption on an annual turnover of less than £5 million. This figure is adopted in the order.

Any such threshold is of course to some extent arbitrary, and we shall keep the particular figure of £5 million under review in case it proves either too high or too low. However, it is important to note that the threshold is not an absolute barrier. As my right honourable friend also indicated, the exemption based on turnover will not apply if it can be demonstrated that the firm concerned enjoys a quarter or more of a relevant market in the United Kingdom or part of the United Kingdom—in other words, a monopoly situation as defined in the Fair Trading Act. We think that it will be exceptional for a small firm to be responsible for a serious restriction of competition, but, if in such an exceptional case the market share condition is met, the conduct of the firm will be open to investigation.

The House will be pleased to hear that I do not intend to go in detail through all the provisions for the definition of turn- over, but there are two points however worthy of mention. First, where a company is a member of a group, the turnover and market share of the group as a whole will count towards the relevant turnover and market share of the group thresholds. We recognise that a firm within a group may sometimes enjoy a substantial degree of independence, but as a practical step we are bound to regard a group as a single economic entity. Secondly, in formulating the definition of turnover we have tried to ensure as far as possible that the position of a firm under the order can be established from its published accounts and reports, without any further inquiry. In general, the basis for the assessment of turnover will be the amount charged for the supply of goods and services in the United Kingdom during the most recent completed accounting period. This is what the noble Lord, Lord Bruce, and I used to call a financial year, but it has been changed recently as a result of companies legislation in the past three or four years.

There could however be firms, such as property companies, which derive a substantial income from rents or other sources distinct from turnover under this general definition. Such companies could nevertheless be engaged in anticompetitive practices within the meaning of the Act, and it would be wrong to exclude them from investigation on a mere technicality. In these cases, income from activites other than the supply of goods and services will be included in turnover for the purposes of the order.

The position of local authorities should be mentioned. The Act makes special provision for the investigation of anticompetitive practices in local authority procurement. It would clearly be inappropriate for the possibility of investigation to be affected by the quite extraneous consideration of the authority's turnover from commercial activities, which in general will be very limited. Local authorities will therefore not be eligible for the turnover exemption. However, we have made a special provision to exclude investigation of the smallest local authorities, the parish and community councils.

In mentioning local authority procurement, I take the opportunity to give further guidance on the scope for investiga- tion in this field. The order is designed to allow the investigation of local authority procurement practices, other than those of community and parish councils, if it appears that these may have the effect of restricting competition. We have however made it clear that we have no intention of undermining the widely recognised practice of selective competitive tendering which offers very real benefits both to local authorities and to their contractors. Where procedures are operated competitively within a framework accepted by the Government, an investigation would not be appropriate and the Government would expect the Office of Fair Trading to take this into account when considering any possible investigations.

The fullest statement of relevant principles for tendering procedures is set out in Chapter 8 of the Department of the Environment's Code of Procedures for Local Authority Housebuilding. This applies to the particular field of house-building in England and Wales, but its main principles are relevant to local authority procurement in general. Many relevant principles are also contained in the Code of Procedure for Single Stage Selective Tendering of the National Joint Consultative Committee for Building, which applies throughout the United Kingdom. Procedures applicable to contracts for supplies as well as works are contained in the Model Standing Orders—Contracts issued by the Ministry of Housing and Local Government for the assistance of local authorities in England and Wales. Procedures offering scope for competition within the guidelines set out in these documents so that all suitable and eligible firms have equal tendering opportunities, would not be suitable for investigation under the Act and it would be open to the Government to use their powers of veto if such an investigation were proposed.

I come to the exclusions listed in Schedule 1 of the order. Unlike the general exemption for small firms, the exclusions in Schedule I relate to specific activities or categories of persons. I have mentioned the special provision for parish and community councils, and I will briefly take the House through other provisions of the schedule, but first I will make a general remark. Those of your Lordships who are familiar with existing competition legislation will see that the exclusions in the schedule bear some relation to the matters excluded from the legislation on restrictive trade practices. The exclusions in the present order are more limited, and there is a reason for this.

The restrictive trade practices legislation imposes automatic requirements to register restrictive agreements and applies a strong presumption that such agreements are against the public interest. Where any particular category of agreements seems in general likely to be beneficial, there is therefore a good case for excluding them in advance from the rigours of the system. The approach of the Competition Act is quite different. It provides only for selective investigation at the discretion of the director general. The case for block exemptions in advance is, in general, weaker, and there are therefore a number of areas where exemptions under restrictive trade practices legislation have not been repeated in the present order. This does not mean that such areas are a prime target for investigation under the Act; only that investigation is not ruled out. There are indeed areas where we believe investigation would not in general be desirable, but where occasional abuses may arise, and these can be examined individually.

Schedule 1 provides for block exemptions only in a small number of cases where the absence of an exemption, and the consequent theoretical possibility of an investigation, could in itself cause damaging uncertainty or misunderstanding and misrepresentation of Government policy. In proceedings on the Competition Bill in the House earlier this year we mentioned in particular the possibility of complications with international questions of jurisdiction. It will be seen that the Schedule includes exemptions for matters concerning international shipping and civil aviation services. It was also represented to us—in particular by my noble friend Lord Mottistone—that conditions on the supply of goods in the United Kingdom which relate solely to their subsequent supply outside the United Kingdom would not be a suitable subject for investigation. On reflection, we accept that, and to avoid uncertainty on this point and the possible distraction of the Office of Fair Trading by comp-plaints on such matters, we have provided an explicit exemption.

We were also asked by my noble friend Lord Teviot for assurances that agreements entered into by bus operators in pursuance of provisions of the Transport Acts would not be undermined by action under the Competition Act. Paragraph 2 of the schedule ensures this. We were also asked to confirm that the internal affairs of agricultural co-operatives should not he investigated, even though technically they may involve a restriction of competition. Paragraph 7 of the schedule provides for this, but I would emphasise that it does not exclude investigation of anticompetitive behaviour of an agricultural co-operative as a whole vis-à-vis other suppliers in the market. Paragraphs 5 and 6 provide for the exemption of certain agreements between the Government and financial institutions which are necessary for the operation of the Government's monetary and financial policies. Perhaps there would be no serious doubt on that point, but on such an important matter we thought an explicit provision was desirable.

In conclusion, I emphasise again that the exclusions provided for in the order are limited. They are not immutable and if it should emerge that significant anti-competitive practices are being excluded from consideration as a result of the order, we shall review the need for the exclusion in question. In general, the aim of the exclusions is not to prevent investigation in areas which would otherwise be major targets for action, but on the contrary, to make explicit some limits to the scope of investigation as envisaged from the outset. I would therefore not wish to overstate the practical significance of the order, hut I believe it will provide greater assurance and remove misunderstandings about the legislation in the areas to which it applies. I beg to move.

Moved, That the order laid before the House on 21st July be approved.—(Lord Lyell.)

5.29 p.m.


My Lords, I thank the noble Lord, Lord Lyell, for explaining the order and for going through it in considerable detail. I am sorry that the noble Baroness, Lady Hornsby-Smith, is not in her place because I know she would have been pleased to learn that the order has taken the form of excluding small businesses from the effects of the Competition Act. In explaining the order the noble Lord said that the figure of a £5 million turnover was purely arbitrary. That would certainly seem to be the case, and indeed one wonders why a figure so large as £5 million is set as the limit at which the exclusion applies. Elsewhere, a small firm or a small business has been defined as a firm with, say, 200 employees, and one would envisage that a firm of that nature would probably have a turnover of £2 million; that is to say, considerably less than is proposed in the order.

The order also refers to one-quarter of the market domination, and this, too, is arbitrary. Why should one-quarter be taken, instead of one-fifth or one-sixth? The Government should try to justify these figures and proportions beyond saying that they are purely arbitrary, and they should say why they have come down at these two particular levels. In moving the order the noble Lord said that if the Government find that the levels are too high or too low, they will adjust them, but certainly at first sight it would appear to me that the purpose of the Act was that firms or businesses of a size smaller than is now proposed should be brought within its ambit. I should be pleased to have any comments which the noble Lord may care to make in justification of those two very important aspects of the order.


My Lords, since during the passage of the Act I requested that the Government look at certain matters regarding agricultural co-operatives, I should like to say a few words about Schedule 1, paragraph 7 of the order. As I understand it, this paragraph excludes those organisations, such as agricultural co-operatives, that were previously excluded by Section 33 of the Restrictive Trade Practices Act 1976 from being examined by the Director General of Fair Trading. Again as I understand it, this paragraph excludes the Director General from looking at the internal affairs of agricultural co-operatives and not, as my noble friend Lord Lyell said, the external affairs and practices of a co-operative as a whole with outside traders. Believe it or not, that is exactly what I asked for during the passage of the Bill, though I believe that my noble friend Lord Mottistone thought that I was asking also for the external affairs not to be subject to examination by the Director General of Fair Trading. Of course had I been offered that, I might in my weakness have been prepared to accept it, but I did not actually ask for it. I also wish to welcome the £5 million limit, or top limit —call it what you will—because this will exclude the majority of farmers from being investigated by the Director General.

Finally, I believe that the wording of the paragraph is correct, but if it is not, my noble friend Lord Lyell need not worry too much because I promise him that I shall be hot-foot to the relevant authorities to complain. I wish to thank the Government for understanding my point and to assure them that I continually pray that they will go on so doing, in particular on this Wednesday.

5.34 p.m.

Baroness SEEAR

My Lords, I take it that the £5 million limitation has been chosen because the Government assume that at that figure it would be very unlikely that an organisation can dominate the market, and that therefore ordinary competitive processes will work. While I imagine that in most cases that would be true, there is the question—which think arose when the Bill was going through the House—of what is virtually a monopoly, or indeed completely a monopoly, in a local area, although the actual turnover may be very low and indeed would be much lower than the £5 million which appears in the order. The Minister said something about this when he was going through the order just now, but it would be helpful, if only for the record, if he would tell us a little more about the situation where there is a monopoly in a local area, albeit involving a small turnover, yet none the less a monopoly. Such would be quite possible, for example, with the provision of a service. If it seemed to some people that that monopoly was being exploited, how could action be taken with the present provisions to have that checked?


My Lords, with your Lordships' permission I wish to ask one question, which is perhaps technical. I observe that through- out the order the term "person" has been used, but this term does not appear among the definitions given. Sometimes misunderstandings arise regarding this. I need remind the noble Lord opposite only of the instances in which the word "person" appears in the income tax Acts and in the Finance Acts, with a variety of definitions given at various places, and this has been known to give some cause for confusion. I do not know whether the noble Lord would care to comment on this; as I say, it is a purely technical question. There may he a reason why the term was used but thereafter not incorporated in the definitions, and perhaps the noble Lord will be kind enough to explain.

Another point occurred to me while reading through the exclusion provisions. Paragraph 5(1) of Schedule 1 refers to: Any course of conduct required or envisaged by any agreement entered into between the Treasury (or the Treasury and the Secretary of State) and building societies which relates solely to the raising of funds or the making of loans". I am a little at a loss to see why that should have been included among the exclusions. The noble Lord may recall that the Wilson Committee, which recently reported, made recommendations to the effect that building societies ought to be subject to the normal laws of competition, and I understand that as a matter of principle competition is a belief to which noble Lords opposite are supremely addicted. Bearing in mind the very weighty conclusions reached by the Wilson Committee, I wonder why the Government should have decided to exclude building societies.


My Lords, I should like to thank all noble Lords who have given the order what I believe was in general a very charming welcome. Perhaps I may attempt to answer some of the questions—I was going to say Peer by Peer, but perhaps it would be more suitable if I dealt with the points in the order in which noble Lords spoke. The noble Lord, Lord Ponsonby of Shulbrede, asked me first about the £5 million turnover. The noble Baroness also mentioned this point, and I think that it was also raised in passing by my noble friend Lord Stanley of Alderley. The Government believe that the £5 million turnover threshold figure will exclude the small, and even what we would call the small to medium size, businesses. I take on board the point that the noble Lord, Lord Ponsonby, made, and no doubt other Members of your Lordships' House could instance relevant companies whose turnover figures might differ even where there are the same number of employees in each case. Some such firms might be more capital intensive, while others might be more labour intensive.

We believe that this is a significant first attempt to find a threshold level below which there will not he any automatic investigations by the director general. If it is found that a firm which has a turnover below this level is restricting competition in any specialised or local market, it will still be possible to investigate the activities of this firm, but the burden of proof in this particular case will be on the director general to establish that the firm has a relevant and substantial market share. We think, though, that this last provision, in conjunction with the £5 million threshold, strikes a reasonable balance between the need to protect smaller firms from unnecessary and tedious intervention and, indeed, the need to control genuine restrictions of competition. The actual level will of course be amended if it is seen to be too high or too low. The noble Lord, Lord Ponsonby, may recall—he will certainly find it in Hansard tomorrow, and I hope he heard me as I went through this order earlier—that I said that this threshold was not an absolute barrier one way or the other: it may be raised, it may be lowered, as the Government see the need to deal with competitive legislation.

I should like to thank my noble friend Lord Stanley for his words of comfort. I hope I got the point right about relations outwith the agricultural co-operatives. I was pleased he welcomed the limit of £5 million, and I was interested that he thought this was a relevant level for agricultural co-operatives. Certainly from my own knowledge of farming on a much smaller scale I am fascinated, for it will be a number of years yet before anything we do in my part of the world will be on this level.


My Lords, may I interrupt my noble friend to explain something? I welcomed it on behalf of farmers, and I welcomed it also on behalf of agricultural co-operatives, not with the £5 million limit but on its special basis, because a lot of agricultural co-operatives, as he will appreciate, are well over £5 million. My own is.


I take the point, my Lords. Lastly, so far as my noble friend Lord Stanley is concerned, I hope we have the wording correct. There is always a point with the noble Lord and with others of your Lordships who take particular care over the drafting. The noble Baroness, Lady Seear, made the point about the £5 million threshold for me because she thought it was relevant. She had one other query so far as I recall, and that was to do with local monopolies and the level of what might or might not be described as a local monopoly.

Baroness SEEAR

My Lords, it was not the level so much as the difficulty of getting at it. I can envisage a situation in which a local monopoly is going on, and in practice it might be very difficult to bring it to book. That is what I am after.


My Lords, the answer, which I hope might satisfy the noble Baroness, is that where we find that there is what is termed a monopoly in a local area—and this is over 25 per cent.; I shall come to this later—the anticompetitive behaviour of the firm, which the noble Baroness finds might be blatant, even, can be and indeed will be investigated even if the firm is below the £5 million limit. But we believe that there are adequate powers in the Act for such anti-competitive behaviour to be investigated. We believe that the director general already has powers to investigate. Of course, such behaviour has to be brought to his notice, but we do not think that there is any special problem as far as local monopoly is concerned.

I do not think I answered the noble Lord, Lord Ponsonby, on his figure of 25 per cent., and why we had taken this particular figure. We understand that the figure of 25 per cent. for a market share is not purely arbitrary. It is the figure which has been adopted all the way through in legislation on monopolies and on restrictive practices. This is the initial benchmark for a significant market dominance in that legislation, and we regard that as a sufficient starting point for the Competition Act. That is the reason why 25 per cent. has been taken as the level in the order that I am putting before your Lordships today.

The noble Lord, Lord Bruce, tempts me, as indeed he always does when he wishes to look into drafting and accountancy points. He tempts me with the word "persons". I am fascinated to know that we are all of us persons so far as the income tax Acts are concerned; but I understand that the term "person" is defined in the Interpretation Act 1978 as including an individual or, indeed, a body corporate or unincorporate. We understand that there is no need to repeat this particular definition in the order, or that if we did it would be otiose.

The noble Lord also asked me about building societies, prefacing what he said with the comment that the Wilson Committee had had various views on building societies and their activities. I think that even the noble Lord would not expect us to legislate immediately on the report of the Wilson Committee, even on this particular point. It might be thought that this order, or indeed the Competition Act, would he a suitable vehicle, but this Government believe in thinking before they legislate, especially in relation to building societies and the comments that the committee of Sir Harold Wilson has made upon them. But as a general rule the behaviour of building societies will be open to investigation, just as any other firm will be open to investigation. It is only matters which are agreed between the building societies and the Government which are excluded.

My Lords, I hope that answers the points which have been raised by noble Lords and, indeed, by the noble Baroness. Apart from that, I think that the order adds significantly to the Competition Act and is a useful adjunct to it. For that reason, I trust your Lordships will now agree to it.

On Question, Motion agreed to.

5.47 p.m.