WITH GREATER POWER OVER COMPETITION COMES GREATER RESPONSIBILITY

Author: Stewart Payne

In future market inquiries the Competition Commission will be able to impose remedies across a whole sector. 

The Competition Commission is soon expected to release a draft report from its public passenger transport inquiry, the last of four separate market inquiries it will have concluded over the past year (into data and the health-care and grocery retail sectors). Once the transport inquiry is finalised, the commission will have cleared its slate of all pending market inquiries initiated under the Competition Act before its amendment past year.

Though the commission has sought to achieve significant and sometimes wide-reaching reform through the recommendations it has made in its recent inquiry reports, a key feature has been that its recommendations are simply that — recommendations. They are non-binding and do not in and of themselves impose any obligations on firms to comply.

The commission could in these market inquiry reports advise firms to alter or cease behaviour under threat of prosecution if they fail to do so. This is a tactic it employed against MTN and Vodacom in the data market inquiry, where it believes it has gathered sufficient evidence to make a case that specific aspects of the firms’ conduct contravene a provision of the act.

However, a full trial before the tribunal would still be required to determine whether this is in fact the case, and only then will the relevant firm be obliged to change its behaviour. The commission could not compel a firm to alter its conduct without such a finding, nor could it implement sector-wide remedies with which all firms must comply.

This is set to change. Future market inquiries will be initiated under the new market inquiry provisions of the Competition Act, which underwent significant revision in the suite of amendments introduced in the past year (effective July 2019). Importantly, the commission now has the power to impose remedies that are binding on all firms across a market or sector, without having to prove that each firm has engaged in specific conduct that contravenes the act.

This represents a more fundamental shift by the competition authorities away from “ex-post” to “ex-ante” regulatory interventions. Traditionally, competition authorities focus on ex-post enforcement — that is, they will intervene to prosecute and punish firms after the fact, where there is evidence that they have engaged in specific anticompetitive conduct that is prohibited (such as exclusionary conduct by a dominant firm that had an anticompetitive effect). This involves the application of competition laws that have clear objective requirements and are sector agnostic.

In many cases, given the ambiguous economic effect of firms’ conduct, there is a high standard of proof on the prosecuting authority to demonstrate that conduct has in fact resulted in effects that are deleterious to competition and ultimately bad for consumers. This rigour is necessary to ensure firms are held liable only for truly anticompetitive conduct. It also provides firms with a level of certainty and comfort in arranging their affairs to comply with the law, while allowing them the necessary freedom to conduct their business as they see fit.

However, ex-post interventions also have their drawbacks. They can be slow to respond to market abuses and, depending on the type of conduct, can have a limited impact on how firms behave in the market generally.

Ex-ante regulation, on the other hand, is directed at imposing broader remedies or requirements on firms operating within a particular market or sector generally, to address features of the market that are considered likely to give rise to anticompetitive outcomes. This necessarily involves looking into the future to anticipate market failures based on current or predicted market characteristics.

Ex-ante interventions therefore proactively anticipate undesirable market outcomes and require that firms behave in accordance with a certain set of rules to avoid or at least mitigate those outcomes. This has traditionally been the realm of sector-specific regulators — such as the Independent Communications Authority of SA (Icasa) in the telecom sector — which look to tools such as licensing regimes and sometimes direct pricing regulation to achieve these outcomes.

In SA, there is a particularly strong desire to proactively alter market structures. The lingering effect of (often state-sanctioned) cartels during the apartheid years calls for interventions that go beyond simply prohibiting and punishing firms for specific instances of abusive conduct. Ex-post interventions are generally not effective in achieving structural market reform.

The commission sees itself not only as a champion of preserving fair competition (which can to some extent assist in maintaining the status quo) but also as having a strong mandate to proactively facilitate inclusive and transformative economic growth in the public interest. This involves promoting the ability of small and medium enterprises and those owned by historically disadvantaged individuals to enter and sustain themselves within markets. This sometimes requires more than simply ensuring that large incumbents do not actively attempt to exclude such parties.

It is against this background that the commission has been granted greater powers to impose sector-wide remedies in the context of market inquiries. Apart from orders to break up firms (which will require confirmation by the tribunal), the commission can now impose wide-ranging requirements on firms within a particular market or sector. Firms will be bound to comply, unless they successfully appeal against these findings.

The indications are that these powers are part of a broader shift in the commission’s approach away from ex-post to ex-ante interventions. The amendments to the act suggest that more resources will be dedicated to market inquiries (there will be one or more deputy commissioners specifically appointed to oversee them). In some industries the commission has also sought to secure compliance with voluntary codes of conduct or guidelines that it has issued, rather than relying on discrete prosecutions.

Even the approach to enforcing specific provisions of the act, which traditionally provided a basis for ex-post interventions, is taking on an increasingly ex-ante flavour. For example, the new buyer power provisions of the act (which are expected to come into force imminently) apply to specific sectors, determined by regulation. The commission’s guidelines on its enforcement approach to these provisions provide a list of specific conduct that it will consider presumptively unfair in each identified sector. It will engage in advocacy efforts to persuade firms to act in accordance with these standards and only seek to prosecute firms that show a pattern of contrary conduct (and not one-off, unintentional instances).

This shift by competition authorities to ex-ante interventions is not a uniquely SA phenomenon. In Europe, for example, there is debate on the need for ex-ante regulation by competition authorities in the context of digital platforms (including requirements of fair treatment, data availability and interoperability). Nevertheless, the SA context presents a particularly compelling case for ex-ante intervention, not only due to our markets’ historical legacy but also given that sector-specific regulators have not been particularly effective in achieving positive structural reforms in the post-democratic era.

However, the commission will need to be vigilant in wielding its newfound power. The potential for unintended consequences arising from ex-ante interventions must not be underestimated. While there is undoubtedly a need for inclusive economic growth, there is also a need for predictability and a business environment that promotes investment. Facilitating new entrants and protecting smaller businesses is not necessarily pro-consumer. Striking an effective balance between these often competing objectives will not be an easy task.

For more information, please contact Stewart Payne or your usual Herbert Smith Freehills contact: