‘(2A) In subsection (1), after “at least two undertakings (A and B)”, insert—
“with the intention of substantially reducing competition.”.’.
We have made tremendous progress, Mr Brady, and have come to the last amendment we have tabled to the competition and markets part of the Bill.
I hear expressions of “Shame!” I know we will be sorry to leave this part behind, but I am happy to leave it by looking at the interesting and important issue of antitrust. Antitrust is one of the most difficult and complex parts of the competition regime. The notion of what antitrust is can be difficult to pin down. It includes enforcing legal prohibitions against anticompetitive business agreements, including cartels, and the abuse of dominant market position. When in Government, we put in place a specific criminal cartel offence against individuals who engage in certain forms of price fixing and other types of what can be termed hardcore cartel activity.
Antitrust laws are necessary because history shows that a small minority of companies will always think it easier to make money by fixing the market rather than by winning customers in open competition. As Richard Whish and David Bailey put it in their textbook on competition law:
“The mysteries of some aspects of competition policy should never be allowed to obscure the most simple fact of all: that competitors are meant to compete with one another for the business of their customers, and not to co-operate with one another to distort the process of competition.”
The Labour party believes in a co-operative approach. We were founded on co-operative principles, and many Labour MPs are also Co-operative Members, which I applaud. However, co-operation is a dangerous thing in competition. As Adam Smith stated in “The Wealth of Nations” in 1776:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Cartels were recognised and prohibited in Byzantium, and the constitution of Zeno in 483 BC punished the price fixing of clothes, fishes, sea urchins and other goods, which was punished with perpetual exile, usually to Britain. We have spoken of the importance of competition and choice. At the heart of the cartel offence is the desire to limit the choice of consumers. Clause 39 amends the criminal cartel offence established under section 188 of the Enterprise Act 2002, which was passed by the last Labour Government.
Despite the sedentary comments from the Minister, one legal guide to the 2002 Act, written by Tim Frazer, described the measure as one of the Act’s most radical innovations. It is certainly considered one of the most controversial elements of the legislation. In the White Paper preceding the 2002 Act, the then Labour Government identified two possible approaches to establishing the offence. The first was to make it unlawful for a person to participate in a hardcore cartel that had been found to breach the prohibition of such an agreement in competition law. The disadvantage with that approach was that if there had not been a prior determination of an infringement, a court would first have to find that the agreement breached one of them. That could require a lay jury with no competition expertise to consider potentially complex economic arguments. For that reason, the Government at that time proposed that the offence should be defined as a dishonest participation in an agreement.
Frazer gives some background on the perceived advantages to the dishonesty element of the offence, saying:
“The cartel offence is much broader than the classic price-fixing cartel, incorporating a broad range of anti-competitive arrangements such as limiting supply or production, market-sharing, customer sharing and bid-rigging arrangements. Some of these activities are regarded as hard core or per se anti-competitive in other jurisdictions. For example, horizontal price-fixing and bid-rigging arrangements are universally excoriated as being contrary to the requirements of free and competitive markets.”
Exactly. Frazer continues:
“There are, however, occasions on which customer-sharing and market-sharing arrangements are either not significantly anti-competitive or even may be efficiency enhancing. The requirement on the prosecution to show that the defendant was dishonest means that it is insufficient merely to demonstrate that the defendant agreed to make the arrangements…The breadth of the offence will therefore afford a defence that the parties did not realise what they were doing was dishonest and contrary to the law.”
In the Enterprise Act 2002, the then Government decided to include a dishonesty bar to the offence having taken place on the basis that it was possible for people to meet—contrary to what Adam Smith proposed—to make agreements that were not necessarily part of a hardcore cartel. In the Bill, the Government propose to remove the dishonesty element of the offence, which has proved one of the most contentious elements of the Bill’s competition proposals.
The clause also specifies the circumstances in which an offence would not be committed. It lowers the bar by removing dishonesty, but provides a big get-out clause by saying that if customers are given the relevant information about the arrangements before they make a purchase, an offence is not committed.
The Library briefing paper notes politely:
“The Explanatory Notes to the Bill do not give details as to the Government’s thinking on how exactly these publication requirements should be crafted, though some details were given in the response document”.
Will the Minister give some details of his thinking? The concern is that there has not been much thinking on the issue.
The decision to remove the dishonesty bar has had a mixed reaction. In his evidence to the Committee, Simon Pritchard said:
“My conclusion is that I am in favour of removing dishonesty, because I see the logic, but a lot more work should be done soon to hammer out what you replace it with. Taking the provisions of the Bill and the publication requirements lock, stock and barrel raises a lot of practical issues. I am very sympathetic to the concerns, which are mainstream anti-trust concerns, about how that would work when the rubber hits the road…The reality is a little more complicated when it comes to jury trials, dishonesty and the subjective element of people knowing that what they did was dishonest. On that element, people are very good at rationalising that what they are doing is perhaps not strictly above board or something that they would shout from the rooftops, but nor is it that bad either.”––[Official Report, Enterprise and Regulatory Reform Public Bill Committee, 21 June 2012; c. 93, Q208.]
Mr Pritchard’s point was that the dishonesty offence is subjective and can be difficult to prove, but that something else is needed in its place.
Katja Hall, chief policy officer of the CBI, agreed:
“On this whole issue around the cartel offence and removing dishonesty, I think we understand the intention behind the proposal. We accept that at the moment it is a high hurdle and therefore difficult to prove dishonesty. Our concern is about getting the change, but in a way that is practical for businesses. Our concern is that if you just remove dishonesty and leave it as it is proposed, you will catch a lot of legitimate business activity, such as joint partnerships. Given that the sanctions are so severe”— it is a criminal offence—
“that is a worry for us and for our members. We would be interested in looking for solutions so that you can get a system that works and can deal appropriately with cartel offences”.––[Official Report, Enterprise and Regulatory Reform Public Bill Committee, 19 June 2012; c. 7, Q13.]
She suggests using the phrase “intent to deceive”.
The problem with the Government’s proposals is that although they are lowering the bar to zero so that any group of competitors coming together could be considered cartel activity, their get-out-of-jail-free card—published activities will not be criminalised—is not practical. It simply takes us back to the days of registered cartels as they existed in the 1970s, which was neither successful nor effective.
We agree with the Government that the dishonesty bar is too high. Given the many concerns expressed, it seems that we must replace it with something. Our amendments propose to insert, after “at least two undertakings”, the phrase
“with the intention of substantially reducing competition”.
That would have the effect of retaining a test, but not one requiring a judgment as subjective as dishonesty. It gets to the heart of the offence: although it is the objective of all competitive companies to reduce competition, hopefully by making the best products, reducing competition through agreement with competitors is and should be the target of legislation.
On the registration of cartel activities, as I have said, we appear to be going back to the Restrictive Trade Practices Act 1956, under which agreements had to be registered with the Registrar of Restrictive Trading Agreements. That function was transferred to the Director General of Fair Trading in 1973. We leave it to the Government to come up with proposals that are more practical, but we have sought to help by suggesting that the company website could be a fitting location, in some cases, to publish competitive agreements. The sites are generally easily searchable, and if all such agreements were located under the heading, “Commercial Arrangements”, they would be easy to find for all concerned. That should help ensure that cartel-like activities of undertakings can be easily identified by their customers.
Cartels are like dangerous dogs. They need to be treated with great care and the owners should be held accountable for them. The legislation, however, must not attack the entire dog population. Britain depends on its businesses and their legitimate activities must be supported.
I appreciate the shadow Minister’s offer to be helpful. We have raced through so many clauses and, despite Opposition Members’ protestations, it is clear that they support much of what the Government are doing through the Bill, and I welcome that.
Turning to amendment 89, the shadow Minister referred to the measure’s design back in the 2002 Act being described as a radical innovation. It may have been, but the truth is that it has not worked. It has been difficult to pursue prosecutions and he recognises that point, which again, I welcome.
I appreciate why hon. Members may feel that a new mental element needs to be incorporated in the cartel offence to replace “dishonesty”, which is what the amendment seeks to do, but I do not think that the change is necessary. The introduction of the amendment’s proposed new requirement would make prosecutions more difficult and, in some cases, impossible, even where the individuals concerned should clearly be prosecuted because of the conduct that they have indulged in.
It is worth bearing it in mind that even without dishonesty, there are already clear mental elements to the offence, which the prosecution would have to prove beyond a reasonable doubt. Under the offence, the individual must agree, first of all, with one or more others, that two or more undertakings will engage in one or more of the prohibited cartel activities. Therefore, it is a state of mind that has to be proved, so the prosecution would need to prove to a criminal standard that there was a meeting of minds for a common purpose. Furthermore, for a conviction, it would need to be proved that the individual intended that the arrangements would operate to fix prices; limit or prevent supply or production; divide supply or customers between undertakings; or, be bid-rigging arrangements. A range of different activities fall under the offence, as the shadow Minister mentioned.
It is also worth bearing it in mind that “dishonesty” was not chiefly incorporated in the offence to attach clear moral blame to the conduct, but it was recognised that dishonesty might be a marker to juries of the offence’s serious nature and it might encourage judges to impose deterrent penalties. Reference was instead made to dishonesty not because it was seen to be intimately connected with hardcore cartel conduct, which is inherently damaging in itself, but as a mechanism to ensure certain effects. These were, first, to ensure that benign agreements that would benefit from exemption under the antitrust prohibitions were not criminalised; and secondly, to ensure that the offence could not be classified as “national competition law” for the purposes of EU law. If it were so classified, EU law would most likely operate to prevent individuals engaged in cartels investigated under the civil antitrust prohibition by the European Union from being prosecuted in the UK, which would be wholly counter-productive.
The third reason was to try to make the offence easier to prosecute and reduce the likelihood that juries would have to consider economic evidence. It was felt that dishonesty provided a relatively straightforward test, commonly applied by juries in a host of other offences, for example, under the theft acts.
We believe that those objectives have now been overtaken, or can better be achieved in other ways. Benign agreements can be taken out by the disclosure or publication mechanisms in the Bill. The Court of Appeal decided in the BA case that the cartel offence was not national competition law and their arguments did not depend on dishonesty, so unless the Court of Appeal’s ruling were to be overturned by a higher court, the requirement is no longer needed to support that case. As for putting economic evidence before juries, ironically, the existence of the dishonesty requirement has actually opened the way for such evidence to go before juries. The judge trying the BA case decided such evidence was potentially relevant to the question of whether the behaviour had been dishonest.
I have dwelt on those points because they are relevant to amendment 89. In several ways, the amendment would reintroduce or make worse problems that the drafters of the Enterprise Act sought to avoid, not always successfully, and which we believe clause 39 will overcome.
The amendment would require the prosecution to prove, in addition to other requirements, that the defendant intended that the arrangements would substantially reduce competition—that is what it says. That would introduce a significant impediment to prosecutions. Leaving aside the difficulties in assessing another’s intentions, competition analysis is a complex area over which highly qualified experts can disagree, especially when it comes to such matters as how substantial an effect on competition an arrangement might be expected to have. One could end up with a whole load of expert evidence being given on that particular point. Putting in place a requirement to prove an intention substantially to impair competition would inevitably open the way to the jury being faced with evaluating complex, and no doubt conflicting, expert economic evidence, clearly significantly increasing the cost to both parties—to the prosecution and to the defence—of the whole exercise. Not unnaturally, they would be inclined to give the defendant the benefit of the doubt, and, of course, the case has to be proved beyond reasonable doubt.
Worse, the amendment would substantially increase the chances that the cartel offence would be classified as “national competition law” under EU Regulation 1/2003. An offence that required proof that a substantial effect on competition was intended would look rather like competition law. If it were brought within the scope of EU law, it would have the effect that a prosecution could not be brought. Let me just explain that. As I have explained, the consequences of that would be that the CMA would most likely be unable to prosecute any individuals where the European Commission was dealing with a case against the undertakings under the regulation. Of course, it tends to be the biggest cartel cases that are being investigated at European level.
This is more than a theoretical concern. The only persons to have been successfully prosecuted under the current offence were involved in a cartel involving marine hose. The civil antitrust case against the undertakings concerned was dealt with by the European Commission. Were the cartel offence to be regarded as national competition law, the OFT would most likely have been prevented from bringing those prosecutions. As I said, it is the only successful case brought. This was a case in which the defendants pleaded guilty and received substantial prison sentences. If accepted, the amendment would significantly increase the chances that the CMA would not be allowed to bring such a case. I am sure that the shadow Minister recognises that that would be a perverse consequence of the amendment. In the light of what I have said, I hope that she will withdraw the amendment.
I thank the Minister for his clarifications. We are not saying that our proposed wording is the best possible wording for replacing the dishonesty bar, but we are suggesting that it is necessary to add something to his proposals. How would he answer the concerns of the CBI and of the in-house Competition Law Association that the clause, as it is currently drafted, is too wide?
May I also ask the Minister to address the concerns regarding the practicality of the registration of cartel activities? He did not cover that in his speech, but I think that we are debating amendment 59 together with amendment 89.
In that case, may I therefore ask the Minister to address the concerns of the CBI, British Airways and other bodies? I urge him to consider how the offence might be better worded. It is absolutely right that we wish to ensure that all hard-core cartel activities are caught within the offence, but we do not wish to criminalise legitimate business activities.
I am grateful to the shadow Minister for her comments. I understand that she is trying to be constructive and to get to the right conclusion. We have consulted on such issues, and the Government consider that this option provides the best solution to the difficult questions arising from the operation of the cartel offence. However, we are of course always prepared to consider reasoned arguments for incrementally improving the provisions in the Bill. In this case, although I do not accept her arguments for the specific change, I will reflect on her points before Report, because we want to ensure that we get the provision absolutely right.
‘(2A) All “relevant information” must be made available on the undertakings website under the title “commercial arrangements”.’.
Thank you for your guidance and understanding, Mr Brady. I will not try the patience of the Committee by repeating some of my earlier comments on the practicality of the registration requirements that will be imposed, and which the amendment is designed to address. The arrangements have been called impractical by many of those who have responded. We helpfully suggest making use of commercial activities sections on websites. We recognise that the amendment relates to the previous amendment, in that information about cartel-like activities needs to be published because the bar has been changed on the dishonesty offence.
I thank the shadow Minister for tabling the amendment, but I question whether the additional requirement placed upon undertakings is necessary to achieve the desired publicity for cartel-type arrangements. It would of course be possible for the Secretary of State to specify publication on the undertaking’s website in the manner laid down under subsection (1) of new section 188A. In that case, the additional requirement would be wholly nugatory.
In practice, there may be difficulties in specifying electronic publication, which also apply to the requirement in amendment 59. The smallest companies may not have a website—of course, that is changing, but it will be the case for some businesses, although unusual. Even the smallest companies may agree to fix prices; for example, there have been cases of small shops in a particular locality agreeing to abide by common prices. There is also the question of which website is to make the relevant information available. Far from having no websites, big international businesses may have several. In the case of overseas companies, the main website may not be in the UK or even in English.
I do not suggest that those are major problems or that it would be impossible to overcome them, but we do not need to face such difficulties in the Bill. It already clearly provides for customers—those who would be affected by the arrangements—to be informed of relevant information about the arrangements, or for that information to be published in the prescribed manner, for example, when informing customers would not be reasonably practicable or where the arrangements do not envisage that there will be customers, because they would wholly prevent supply. It is not at all clear what advantage there would be in requiring the information to made available on a website in all cases. I therefore hope that the hon. Lady will withdraw amendment 85.
I thank the Minister for the points he makes. I recognise that publication on a website would not be without challenges, which would need to be overcome. However, given the criticism of the Government’s proposals and their vagueness, a broader solution is required. That said, this amendment relates to amendment 89 in that if the cartel offence was accurately and more narrowly defined, how one published the information about cartel-like activities would not be of such great importance. Having won the agreement of the Minister, for which I am grateful, to take the proposal away for consideration, I beg to ask leave to withdraw the amendment.