On 21 February, the chair of the UK’s Competition and Markets Authority (CMA), Lord Tyrie, published his advice to the UK Government on the legislative and institutional reforms needed to the UK’s competition and consumer protection regimes to safeguard the interests of consumers and to maintain and improve public confidence in markets.
The need for a bigger hammer?
Underpinning Lord Tyrie’s proposals is a concern that, as he puts it, “the CMA is currently constrained from acting to protect consumers’ interests unless doing so through purely competition-based remedies”.
This ‘constraint’ is particularly important, according to Lord Tyrie, in the context of digitalisation.
This, he says, “has dramatically improved consumer welfare, and has given small firms access to vastly larger markets. But it has also created new forms of consumer detriment (for instance, through harvesting of personal data, or from personalised pricing that takes advantage of vulnerabilities). And it has created new forms of vulnerability, among those without internet access, or without the skills, confidence or time to trade effectively online”.
In order to remove this ‘constraint’, Lord Tyrie proposes to re-purpose the market investigation regime established under the Enterprise Act 2002.
This currently allows the CMA to investigate whether there may be features of a market which restrict or distort competition and, if it finds such adverse effects on competition, to impose remedies on businesses designed to prevent or mitigate them and the resulting consumer detriment.
The remedies which may be imposed by the CMA on businesses are extensive and include orders to divest or restructure, to prohibit types of conduct, to require the provision of goods or services and to regulate prices.
The proposal is to allow the CMA to impose remedies on businesses in future where it identifies consumer detriment in relation to the supply of goods or services without having to establish that such detriment is attributable to any market malfunction.
As Abraham Maslow famously said, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” In proposing to use the ‘hammer’ of business remedies to tackle consumer detriment irrespective of the cause, the CMA risks mistaking consumer detriment for a ‘nail’ when in fact it is not. In doing so, the CMA not only risks raising artificial expectations about its capacity to address consumer detriment through business remedies, it also risks undermining business confidence in the market investigation regime.
More than a nail? The complexity of consumer detriment
Consumer detriment, the conscious or unconscious harm we experience when we are disappointed or exploited as purchasers of goods or services, is a complex issue with many complex causes.
Whilst consumer detriment may result from business misconduct or market failure, it may equally result from regulatory failures and behavioural biases, or from a combination of all of these causes.
Even where market failure is a cause of consumer detriment, it may not be the case that this involves firms exercising (or misusing) market power.
It may in fact be the case that ‘public goods’ (surely an expanding category in the digitalisation context) cannot be provided by the market at all or without public subsidy.
It follows that, given the complex causes of consumer detriment, the steps which may be needed in order to remedy consumer detriment may be similarly complex.
Where consumer detriment clearly flows from business misconduct or from the use or abuse of market power, then remedies may reasonably be addressed to businesses.
Otherwise, such remedies are unlikely to prove effective and may indeed create consumer detriment by introducing fresh distortions to competition.
Bigger hammer, higher expectations
As well as proposing to re-purpose the market investigation regime to target consumer detriment, the CMA also proposes substantially to strengthen the regime in a number of respects.
First, it proposes the introduction of interim measures, allowing the CMA to impose binding remedies pending the conclusion of the market investigation.
Second, it proposes to introduce financial penalties for firms which fail to comply with any remedies which are imposed on (or undertakings given by) them.
What is missing, however, in Lord Tyrie’s discussion of the re-purposed and enhanced market investigation regime is an acknowledgment of the complexity of consumer detriment (whether in terms of causes or remedies) and, consequently, of the practical limitations of the market investigation regime as a means of dealing with consumer detriment.
There will be many examples of consumer detriment (digital exclusion, for instance) which - even if attributable to market failure - cannot practically or efficiently be remedied by businesses (whether individually or collectively) and which call for other forms of remedy or intervention.
Importantly, these may include action by government, for instance, to remove barriers to competition or to ensure the provision of ‘public goods’ in the absence of competition (taking into account a wide range of cost / benefit considerations).
Unless this complexity is properly acknowledged by the CMA as its proposals are developed, there is a risk that it is raising artificially the expectations of consumers (and of politicians) as to its ability to use a re-purposed market investigation regime to solve important and emerging areas of consumer detriment.
Nailing business confidence?
By proposing to re-purpose the market investigation regime, not only does the CMA risk raising artificially high expectations around its ability to tackle consumer detriment, but it also risks undermining business confidence in the regime itself.
There are two examples worth picking up here.
First, by removing the requirement for CMA intervention to depend upon an underlying market malfunction, the re-purposing proposals beg an important question as to how to test the proportionality of business remedies imposed under the re-purposed regime. If, unlike now, remedies no longer need to be designed to ‘hold the ring’ until a market is functioning properly again, what standard(s) will be applied by the CMA in framing and reviewing its remedies?
Second, there is a strong suggestion given by Lord Tyrie that, faced with the threat of CMA intervention via the re-purposed and strengthened market investigation regime, firms will wish to engage informally with the CMA to change their behaviours.
As he puts it:
“The reformed regime could also enable the CMA more effectively to influence the conduct of those businesses whose practices raise concerns, without the need for formal work in the form of market studies or market investigations. This is because the power to order legally-binding requirements to remedy consumer detriment, and the power to do so by way of interim measures pending full investigation – at both a firm and a market-wide level – would provide a stronger incentive for these firms to listen, engage and take steps to address the CMA’s concerns in advance of formal work, than currently. Weighing on the minds of management in deciding whether to co-operate with the CMA would be the alternative: direct intervention, in the form of legally-binding requirements”.
Lord Tyrie clearly sees this approach - and the opportunity to avoid the time and cost of a formal investigation - as preferable from the consumer standpoint.
However, pressure to enter into informal settlements of this sort may also pose a serious threat to business, and wider public, confidence in the regime.
The market investigation regime is not designed to establish wrong-doing on the part of individual firms, but rather as a means of conducting a thorough public inquiry into (often complex) facts and circumstances, with wide stakeholder participation, in order to arrive at robust set of policy conclusions. Informal settlement - encouraged by the threat of interim remedies - risks producing lower quality, less robust outcomes.
For bespoke advice from our expert team on any of the topics discussed in this article, speak to Gordon Downie, Partner in our regulation and markets team, or your usual Shepherd and Wedderburn contact.