§ 9.15 p.m.
§ Lord Sainsbury of Turville
rose to move, That the draft orders laid before the House on 19th January be approved [7th Report from the Joint Committee].
The noble Lord said: We are here to debate two orders which will complete the overhaul of our competition regime that we promised in our manifesto. We said that we would adopt a tough "prohibitive" 758 approach to deter anti-competitive practices and abuses of market power. The Competition Act, when it comes into force on 1st March 2000, will deliver that.
The two orders before us are concerned with helping to build an efficient, focused and effective regulatory system to enforce the prohibition. One obstacle to that is the risk that the competition authorities, the Director-General of Fair Trading and the utility regulators with concurrent powers under the Act, will be faced with the notification of a large number of benign agreements and will inevitably spend their time processing those rather than, as we would wish them to do, tracking down cartels. It is, of course, in the nature of cartels that they themselves will not be notified!
There is practical evidence of the existence of such a risk of excessive precautionary notifications. When what are now Articles 81 and 82 of the treaty came into force, the European Commission received thousands of notifications. And when the Irish Government introduced a domestic prohibition modelled on Article 81, their Competition Authority was inundated with notifications of leases for shops.
I know that your Lordships recognised that risk during the passage of the Bill, and Section 50 was incorporated to give express power to define and exclude land and vertical agreements from the Chapter I prohibitions.
The Land and Vertical Agreements Exclusion Order does that. Its purpose is to remove any need to notify such agreements to the OFT or regulators on a precautionary basis, while putting in place mechanisms to deal with any agreements within the categories that do raise competition concerns. The regulatory system will be more efficient if the competition authorities are able to focus on and deal with those agreements that do affect competition significantly and adversely.
So far as land agreements are concerned, the order will disapply the prohibition in respect of agreements which create, alter, transfer or terminate an interest in land for—example, a lease—together with certain obligations or restrictions which are part o f the agreement and which are accepted in the party's capacity as holder of an interest in land, or benefit him in that capacity. Examples of these are the usual covenants in commercial property agreements relating to the payment of rent, service charges, obligations to insure the property and clauses on the use to which the property is to be put. Our purpose is to exclude the normal restrictions and obligations to be found, for example, in shopping centre leases which we do not think are likely to affect competition appreciably but which may well be notified to the OFT on a precautionary basis.
There is, similarly, a good case to exclude vertical agreements. Broadly, these are agreements between a supplier and business customer or dealer concerning the use or marketing of the goods or services supplied. They are less likely to raise competition concerns than horizontal agreements between businesses at the same level of trade, for example, two manufacturers of a 759 product. The prevailing view among economists is that vertical agreements will have only beneficial effects, such as stimulating inter-brand competition, except in some cases where one or more of the parties has market power or, sometimes, there is a network of similar agreements. Even in such cases careful examination of the market and the other circumstances is needed to establish whether the vertical agreement has a harmful effect. We need to exclude the mass of vertical agreements from scrutiny while providing powers to investigate and deal with those which may cause competition concern.
The text of our definition of vertical agreements is closely modelled on the new Commission block exemption for vertical agreements which will apply from 1st June. In particular, I draw your Lordships' attention to the definition of price-fixing, which we have largely drawn from the Commission, in Article 4 of the order. It is the possibility that vertical agreements may facilitate price-fixing, such as resale price maintenance, which has led some to look at them suspiciously. We and the Commission have adopted wide definitions to ensure that not only the most overt forms of price-fixing but also the more subtle forms of pressure or incentives cause an agreement to fall outside the exclusion and hence within the prohibition.
We have, however, thought it right to go wider than the Commission in excluding vertical agreements. We have not adopted all of the qualifications that the Commission has in its block exemption, such as market share tests, and that approach was supported when we consulted on a draft order. We can be more relaxed than the Commission because its concern that vertical agreements do not divide the single market on national grounds is not relevant to the Chapter I prohibition. In almost every case in which the Commission has taken action against vertical agreements single market considerations have been the predominant or only concern.
We also believe that we have more effective safeguards than those available to the Commission to deal with any vertical agreements that cause competition concerns domestically. In particular, we have provided a more effective withdrawal power in Article 7 which will enable the director-general to "clawback" from the exclusion and deal with individual agreements that raise competition concerns. We also have the complex monopoly power in the Fair Trading Act, to which there is no real equivalent at Community level, which will enable networks of vertical agreements, which may in combination have an effect on a market, to be investigated and remedies imposed.
With these powerful safeguards in place, we conclude that to exclude land and vertical agreements will enable the new competition regime to be more effective and efficient in dealing with matters of real competition concern, including any vertical and land agreements which fall into this category, than it would be if the OFT and the regulators became bogged down in the detailed scrutiny of what will usually prove to be benign agreements.
760 I turn now to the turnover for penalties order. Section 36 of the Act enables the director-general to require an undertaking to pay him a penalty in respect of an infringement of either of the Act's prohibitions. Subsection (8) provides that no penalty fixed by him may exceed 10 per cent of the turnover of the undertaking as determined in accordance with such provisions as may be specified by the Secretary of State. This order specifies how the turnover is to be determined.
I should emphasise that the actual penalty in any particular case will be determined by the circumstances and in the light of the DGFT's guidance on the appropriate amount of any penalty. This sets out the steps which the director will follow when calculating the amount of penalty in any case. The steps encompass, among other factors, consideration of such matters as the undertaking's turnover in the relevant product and geographic market, the nature and duration of the infringement, and the size of any gain made. One step involves adjustment for any aggravating factors such as the involvement of directors and senior managers and repeated infringement, and any mitigating factors such as acting under duress, genuine uncertainty as to whether an agreement constituted an infringement, and negligent, as opposed to intentional, infringement. Any penalty may then need to be adjusted to take into account the ceiling of 10 per cent. The order is concerned with determining that ceiling.
Under the corresponding EC regime, the maximum fine is 10 per cent of the undertaking's world-wide turnover in the preceding business year. We have departed from that approach in two significant respects, just as elsewhere in the Act we made changes where we thought the EC regime could be improved.
First, we have decided that, since this is a piece of domestic legislation concerning trade within the UK, the turnover should be confined to turnover arising in the UK. Secondly, subject to a minimum of one year's and a maximum of three years' turnover, turnover is to be that arising for the entire period of the infringement.
We know from the cartels that the OFT has uncovered under its existing powers that they can be long lived, often enduring for years. We believe that the punishment should fit the crime. Those who have engaged in a long-running cartel should face a higher potential penalty than a business which commits a one-off infringement.
I said at the start that these orders were about creating an efficient, focused and effective regulatory system. The provisions in the Act and this order will provide a regulatory system with real teeth. Taken with the other order and the Act, we shall have established a modern competition system, one which is efficient and effective in dealing with matters of significant competition concern and one which is able to punish those who transgress and to deter those minded to follow in their path. I commend the orders to the House.
761 Moved, That the draft orders laid before the House on 19th January be approved [7th Report from the Joint Committee].—(Lord Sainsbury of Turville.)
§ The Earl of Courtown
My Lords, I thank the Minister for his description of the orders. Usually when I debate such orders I am in full agreement with the Government. On this occasion, I am not.
The Minister must be aware that there is concern in the industry about the effect of the orders on the part of no less a body than the CBI. As noble Lords are aware, these orders originated from the Competition Act 1998, which states that the penalty for contravention of Chapter I, which covers cartels and price fixing, and Chapter II—abusing a dominant position—will result in fines of 10 per cent of the UK turnover for up to a maximum of three years. Perhaps the Minister will confirm that. That will no doubt force industry to think very carefully about how its actions will affect its competitors. It will be able, of course, to apply to the Director-General of Fair Trading for guidance on its actions. That could result in any number of applications. Can the Minister tell the House whether it is planned for a fee to be paid on such applications? If so, how much will that be?
As regards any fine, will the Minister confirm that the figure is 10 per cent of UK turnover over the maximum period of three years; or is it 10 per cent per year? I do not argue that there should not be a penalty. However, do the Government realise the knock-on effect of imposing such onerous burdens on industry?
I understand that part of the reason for the orders is to bring us into line with the European Union. However, its imposition of fines is limited to one year and, if imposed, is subject to extensive consultation throughout the Commission, and final approval by the entire Commission. Has there been any indication from the Commission that the one-year period is not enough? Even though the fines imposed by the Commission will be worldwide, UK companies with a large turnover could be disproportionately affected. A fine of 10 per cent of turnover could easily turn a profit into a loss and could even force substantial companies into liquidation.
As regards the Competition Act 1988 (Land and Vertical Agreements Exclusion) Order 2000, that is once again a very significant measure. It would emasculate the Competition Act in relation to distribution agreements and agreements relating to land, including tenancies of tied outlets such as pubs and petrol stations. That could be contrary to the public interest.
The proposed order would exclude exclusive and other restrictive agreements between suppliers and retailers from the Act's prohibition on anti-competitive agreements. It would thus permit a wide range of anti-competitive agreements restricting competition between both distributors and suppliers, 762 to the detriment of consumers and the economy. I have made a number of points and I look forward to hearing the Minister's response.
§ Lord Avebury
My Lords, perhaps I may ask one question before the Minister replies. As I understand it the figure of 10 per cent is the maximum and that it is not an automatic fine. The Minister said that the punishment would be made to fit the crime. Presumably, therefore, where it is imposed, if the fine was of such a nature that it put a company into a serious financial position then presumably there would be some leeway and mitigation of the 10 per cent maximum.
I am ashamed to have to ask the next question because I was not here when we dealt with the Bill itself. Can the Minister say whether there is an appeal against the fine? If a company believes that the amount imposed is unreasonable, can it go anywhere else to get a judicial or any other kind of review?
§ Lord Sainsbury of Turville
My Lords, if the infringement has continued for three years the 10 per cent maximum level of fine applies to that period. As has been pointed out, the fine is placed only on UK trade as opposed to the situation in the EC, where it is placed on worldwide turnover. We have made adjustments both ways. Our view is that in these circumstances, if there is a long period of infringement, that should be taken into account when deciding the penalty. That suggests that the punishment should be proportionate to the crime. The point must also he made that there is a 10 per cent maximum fine. Whether it reaches that maximum depends on the nature of the infringement. I gave some of the reasons why it may vary.
The fees are £5,000 for guidance or £13,000 for a decision. Clearly, where companies believe that they may be trespassing, they will take very careful account of the matter. There is also a right of appeal to the Commission.
The final point that I should make is that as regards EC law, and in America also, very substantial fines are being imposed by the Justice Department and the Commission in order to make it very clear that infringements will be taken very seriously. I believe that everyone agrees that American law has probably been the most effective. In the case of the company Hoffman La-Roche, there was a fine of 500 million dollars.
We believe that firms as well as consumers will benefit from a strong Competition Act. Competition is the life-blood of a competitive economy. We cannot afford weak, uncompetitive domestic markets. We allow cartels, abuses of dominance and other anti-competitive behaviour to hold back business at our peril.
That is why the Government embarked on a radical strengthening of our competition laws. A key part of that strengthening is provision for penalties. Under the competition regime we inherited, when a cartel is uncovered, all that happens is that the businesses concerned are asked to stop.
763 By contrast, our proposals, of which the Determination of Turnover for Penalties Order provides an important part, will give the new regime real teeth. As I have said, the penalties in any case will depend on the particular circumstances, but they are intended to act as a deterrent. They should encourage firms to think twice before entering into anti-competitive agreements or abusing a dominant market position. By taking into account the period of the infringement, the Determination of Turnover for Penalties Order will discourage a cynical cost-benefit analysis that the potential profits might outweigh the penalties provided that the anti-competitive behaviour can remain secret long enough.
I do not accept the proposition that such an approach will be bad for business. On the contrary, strong competition in our domestic markets makes for strong businesses. It provides a spur for firms to innovate, increase productivity, and provide real choice for consumers. It equips them to compete in the global market place. Conversely, anti-competitive behaviour is a burden on the economy and on businesses which want to grow by offering better 764 value. It is certainly a burden on new small businesses and on ordinary consumers who have to pay more for less.
The US economy shows that strong competition laws vigorously enforced can contribute to growth, innovation and investment. Is it suggested that American businesses have been made less competitive by their authorities' long-standing, tough approach to anti-trust enforcement? I believe that we all know the answer. It is the rigour of the competition authorities in pursuing anti-competitive practices which has contributed to the success of US businesses. Furthermore, fines there are seen as an essential component of anti-trust enforcement. Certainly, that is the lesson drawn by the US Department of Justice, which has been increasing the level of the fines it imposes.
I hope that the House will support these important proposals. They will help to make the new competition regime efficient and effective; and that regime is a key part of our strategy for modernising the British economy and helping it to become more competitive. I commend the orders to the House.
§ On Question, Motion agreed to.
§ House adjourned at twenty-two minutes before ten o'clock.