Penrose report – proposals for a stronger UK competition and consumer protection regime

On 16 February the UK government published a Report by John Penrose MP, commissioned earlier this year to lead a review on how the UK’s competition regime will need to evolve to meet its policy aims of promoting a dynamic, innovation-driven economy which delivers for consumers and businesses across all regions and nations of the UK, within the context of recovery from COVID-19 and the opportunities created by Brexit.

Penrose describes his Report, entitled ‘Power to the People’, as “a recipe book of changes to make post-Brexit, post-pandemic Britain into a free-trading global powerhouse so our businesses, exporters and investors can become more competitive, creative, successful, digital and agile”.

It will now be up to government to consider these recommendations and to respond in due course. Many of the proposals will not come as a surprise as they are based on previous reports and recommendations, including some put forward by the CMA itself.

We have set out below a summary of the key proposals and the full Report is available here.

Making markets work for people, not the other way around

The Report highlights the importance of a world-class competition and consumer regime as a key driver for economic growth. In order to achieve such a world-class regime consumers need to be placed at its centre: “if competition works in favour of consumers rather than companies, the economy will grow faster and society will be happier and fairer”.

The review finds that competition and consumer choice has weakened over the last two decades and that the UK’s competition and consumer regulators are lagging behind in the international rankings.  The CMA opens fewer enforcement cases, issues lower fines and its investigations take too long to complete.  The UK has also stopped making progress on cutting the costs of red tape and sector regulators intervene heavily, thereby making large parts of the economy less focussed on consumers.

The system needs to be “updated, improved and refreshed”, with greater powers and choice for consumers so more businesses become world leading competitors and exporters.  A new Competition Act is required in order to update and modernise the regime for the digital economy.  Many other recommendations set out in the Report do not require legislation and should be able to be achieved more quickly by changes to internal processes and governance.

Faster, more predictable competition decisions

The report concludes that the  CMA should become a “micro-economic sibling” for the Bank of England’s public macro-economic role, responsible for tracking progress of UK competition, consumer rights, supply-side reforms and productivity improvements.  The CMA should publish an annual State of Competition and Consumer Detriment report which measures progress across all sectors of the economy.  The CMA should also hold monthly intelligence-gathering meetings with consumer complaints bodies such the Citizens Advice, Trading Standards and Ombudsmen and publish findings of these meetings.  Taken together the findings of both publications should explain and frame the CMA’s strategic choices as to which sectors it will focus on which businesses it will investigate.

Other proposals aimed at faster and better decisions include:

• The CMA’s consumer enforcement powers should be updated and brought in line with its competition enforcement powers
• Penalties for non-compliance with investigations should be strengthened and instead of the current ceiling of £30,000 for failure to supply information for example, these penalties should become turnover based as is the case in other major jurisdictions
• The CMA should be able to accept legally-binding undertakings at any stage in a market study, market investigation or phase 1 or phase 2 merger review in order to speed up investigations
• The system for appeals of decisions by the sector regulators should be simplified with all appeals dealt with by the CAT

The government should establish a taskforce with representatives from the CMA, CAT, sector regulators, senior competition lawyers, business leaders, investors and entrepreneurs to complete an end-to-end review and redesign of procedures and case management processes in the CMA and the CAT. The aim should be to:

• Resolve all (except for a small number of the most complicated cases) within weeks or months rather than years
• Be as predictably simple and certain as possible so businesses can take decisions with minimum legal risk
• Fulfil the fair trial requirements of Article 6 of the European Convention on Human Rights

More competition in industries burdened by red tape

The Report sees Brexit as a huge opportunity for cutting red tape and replacing bureaucratic EU rules with modern, digital equivalents.  The government should make cutting red tape costs into an automatic burden-reduction process, with a revived and stronger ‘Better Regulation’ regime:

• Reinstating the gateway condition, so ministers and regulators must first remove or modernise old rules before they can introduce new ones
• Increasing the ambition of the regime’s current one-in-one-out target to one-in-two-out
• Including all forms of government and regulator rule-making in the new process, with no exceptions

Public contracting and procurement is seen as one of the most economically valuable areas that is currently being held back by red tape and the Report recommends implementing the changes outlined in the Procurement Green Paper as quickly as possible.  The Green Paper shows how post-Brexit Britain could achieve better value for taxpayers by reforming, updating and improving the EU procurement rules with a new, more digital, faster, automatically-transparent process (see here for our briefing on the Procurement Green Paper).

More competition in digital industries

The Digital Markets Taskforce (DMT) has recently put its proposals to government on the design and implementation of a new pro-competition regime for digital markets, which include the creation of a new pro-competition ex ante framework for the most powerful digital firms with Strategic Market Status (SMS), overseen by a new Digital Markets Unit (DMU).

The Report endorses these proposals but also expresses concern over the risk of ‘regulatory creep’, with the new powers over time spreading to every digital sector thereby adding unnecessary red tape costs. The Report therefore suggests that the new ex ante powers should:

• Be a ring-fenced addition to the CMA’s existing competition and consumer powers
• Only apply to individual firms that own and run networks and data monopolies
• Only apply to problems which cannot be solved under the CMA’s existing competition and consumer powers

In order to reinforce these points the Report proposes for the DMU to be renamed as the Network and Data Monopolies Unit (NDMU).  The NDMU should have a legal duty to extend and promote competition by making pro-competition interventions to reinstate normal competitive conditions where possible and proportionate.  Such interventions could include data portability measures, fair and equal access to a monopoly network, interoperability requirements and making switching cheaper and easier.

More competition in sectors with economic regulators

At the heart of each economically regulated sector is a network monopoly with a Regulated Asset Base (RAB) and sector regulators have the same type of ex ante regulation powers here as the new proposed NDMU in the digital sector.

The Report considers that outside these network monopolies however there is no reason why each of these sectors should not become a normally competitive industry with the same high standards, strong competition and consumer powers as other parts of the economy.

In the longer term the Report envisages that the sector regulators should formally hand over responsibility for more of their sector to the CMA, so the sector regulators will end up focussing solely on their industry’s core network monopoly.

Within the remaining core network monopolies there will still be scope to inject more competition and the Report proposes that sector regulators should have powers, similar to those of the  proposed NDMU, to make pro-competitive interventions such as data sharing or reducing barriers to new entrants where it is possible and proportionate to do so.

Levelling up: more competition outside the South-East

The Consumer Rights Act introduced a new fast track procedure in the CAT which allows for a  faster resolution of competition law claims and greater cost control for cases suitable for this procedure (taking into account issues such as whether the claimant is an SME, complexity of the issues, time estimate for the hearing and scale of witness and documentary evidence). The Report welcomes this regime but concludes that for many small or local businesses the procedure will still seem too slow and expensive and argues that improvements need to go further.  In order to extend justice for smaller firms based outside London the Report recommends:

• The creation of new, cheap, efficient, fast track regional County Competition Courts for local and regional cases, with very tight case management, a low cost cap for losing firms and shorter hearings of a maximum length of 1 to 2 days
• Local authority trading standards teams should be better resourced with greater skills and powers to carry out both antitrust and consumer investigations

Sticking up for consumers

The Report concludes that most of the existing consumer protection laws are adequate and do not require changing, but it highlights three areas where there are gaps in the legislation and where consumers continue to be ripped off.  These relate to:

• Loyalty penalties and price discrimination, where consumers are charged different prices for the same things
• Rip-offs hidden in the small print of lengthy and complex contracts
• ‘Nudging’ consumers the wrong way (so-called ‘sludging’), where the consumer behaviour insights of ‘nudge theory’ are used to rip off consumers

In order to address the issue of price discrimination the Report recommends a solution currently being consulted on by the FCA, which requires businesses to offer the same prices to new and existing customers, so that loyal customers benefit from the more advantageous prices offered to consumers who switch.  This requirement should become a consumer protection rule across the entire economy.

The CMA should also update its guidelines on what treating consumers fairly means in  practice and include the concept of ‘transactional fairness’ in its work.  On the issue of ‘sludging’ the CMA should carry out a market investigation in order to identify what consumer protection rules and analytical techniques may be necessary to protect consumers.

State aid, subsidies and political intervention

Reducing regulatory and political risks is seen as an essential part of creating a stronger competition regime and the same applies to state aid and subsidies. Subsidies distort competition as they result in investment being directed towards less-productive parts of the economy and should therefore as much as possible be avoided.

The Report recognises the value of foreign direct investment (FDI) to the UK economy, with only a minority of cases resulting in offshoring know-how, jobs and supply chains with a negative impact on our economy. It recognises that it can be difficult to find the right balance between ensuring such transactions are prevented without frightening off legitimate investment that results in jobs and growth, but government should aim to prevent successful businesses in industries of the future being poached offshore without damaging the UK’s attractiveness for FDI.

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