Reforming Competition and Consumer Policy

1. Introduction

This article focuses on the consultation relating to the proposed changes in respect of UK competition policy, consumer rights and consumer law enforcement. The proposals are wide-ranging, extensive, and ambitious. The UK regime is set to get a 21st century shake up to make it ‘best in class’ and fit for purpose in a post-Brexit world. To that end, this article provides a brief description of the key proposed reforms within the Reforming Competition and Consumer Policy Consultation (“Consultation”), comments on their potential impact if adopted, highlights relevant CMA responses to the Consultation (“the Response”) and, in particular, contrasts the proposed changes with the evolving position in the EU in relation to consumer protection laws (most recently through the Omnibus Directive). In keeping with the Consultation, this article first addresses the proposed competition law reforms and then turns to the proposed consumer law reforms.

A. Proposed reforms for “a more active pro-competition strategy to deliver more targeted and effective pro-competition interventions”[1]

2. Market inquiries

Due to the uplift in investigatory work for the CMA since Brexit, simplifying market inquiries and being able to accept binding commitments at any point in an investigation should, in theory, assist in improving the CMA’s speed of response during interventions. Speed and efficiency are positive for businesses and consumers. As such, the Consultation proposes:

i. Consolidating the existing market study and market investigations system into a single-stage market inquiry tool;[2]
ii. Permitting the CMA to impose interim measures at the beginning of a market inquiry;[3]
iii. Greater flexibility for the CMA to define the scope of market inquiries; and
iv. Permitting the CMA to accept binding commitments at any stage of the market inquiry process and have more flexibility in designing and monitoring remedies.[4]

The Response, however, believes the current structure of the market inquiries regime is worth maintaining. While supporting the “government’s aim to increase the pace of markets work” the CMA cautioned against risking the advantages of the current market study flexibility, and the market investigation structure and remedies.[5] Regarding earlier resolutions, the Response was also concerned companies could “adopt a more adversarial approach [in the context of market studies] where they fear remedies may be imposed”.[6] Nonetheless, the CMA did agree to seek market investigation references without having done market studies, where appropriate, and supported imposing interim measures from the beginning of market work.[7]

3. Merger Control

Several proposals in relation to merger control were put forward:

i. Increasing the jurisdictional turnover test from £70million to £100million;[8]
ii. Introducing a new jurisdictional merger threshold for ‘killer acquisitions’, whereby the CMA would have the power to review a merger if one of the parties to the transaction has a UK turnover of more than £100m and a market share of at least 25% of the UK. This is designed to impact those mergers where larger, established market players target and acquire smaller rivals, new start-ups or potential new entrants to remove them from the market;[9] and
iii. Introducing a new safe-harbour for merging parties where each of their respective worldwide turnovers is below £10million.[10]

These proposals are intended to make it easier for small and micro enterprises to grow and merge, whilst making it harder for new entrants to be acquired by larger, established market players without intervention.

The Response is fully supportive of (i) and (ii). The CMA is concerned (iii) would give rise to a material adverse impact on UK consumers,[11] as shown in the example below.

Example of proposed safe harbour Two merging businesses generated just under £10million each year. They are the two main players in the market in which UK consumers are spending close to £40million per year. Where four main suppliers account for the majority of sales in the market, this ‘4-to-3’ transaction would give rise to significant consumer harm, and considerably outweigh the likely costs of a merger control investigation. The proposed safe harbour could, in practice, prevent the CMA from intervening in this scenario.[12]

The Response proposes to set the threshold at a lower level, where the merger parties’ combined UK turnover does not exceed £10million.[13]

4. Reforms to the CMA’s panel

The Consultation proposes reforms to the CMA's Panel (“Panel”) to deliver faster and more consistent decisions in merger and market inquiry cases. The proposals include a smaller, dedicated pool of Panel members whose work on the Panel is their primary employment role. To reflect the smaller number of Panel members, the government is considering revising their role to making decisions on theories of harm and remedies.[14]

The Response agreed, and indeed proposed a “hybrid” Panel model with a core of panellists whose primary employment was at the CMA. However, there was concern that the current model of highly experienced leaders in a broad range of fields with roles outside the CMA, and the associated benefits this brings, could be lost if the Panel was made smaller and exclusively of members whose primary employment was on the Panel. The CMA was also unconvinced an increase in age diversity wouldn’t compromise the calibre of candidates nor that decision making should be limited, and as such was concerned the proposals may not deliver faster decisions due to lack expertise, and an increase in workload for a smaller number of panellists.[15]

5. Tougher enforcement and investigatory regime

Tougher enforcement is key to bringing the CMA’s powers in line with its international partners, whilst greater incentives for whistleblowing should benefit compliant businesses and protect consumers. As such, the Consultation proposes:

i. Chapter I prohibitions should apply to anti-competitive agreements which (i.) are, or are intended to be, implemented in the UK or (ii.) which have, or are likely to have, direct, substantial, and foreseeable effects within the UK;[16] and
ii. Chapter II prohibition should apply to conduct which amounts to the abuse of a dominant position in a market, regardless of the geographical location of that market, where the conduct (i.) takes place in the UK or (ii.) has, or is likely to have, direct, substantial, and foreseeable effects within the UK;[17]
iii. Increasing the whistle-blowing incentives for businesses and individual’s by providing immunity from follow-on damages and offering greater protection during the enforcement process;[18]
iv. Tougher penalties for companies that slow down, obstruct cases or refuse to cooperate through the use of penalties (of up to 1% of a business’ annual turnover and/or daily penalties of up to 5% of daily turnover);[19] In particular, enabling the CMA to extend the prohibition against the provision of false or misleading information to cover responses to voluntary information requests;[20]
v. Providing powers to hold company directors to account for making false declarations;[21]
vi. Changing the standard of review of appeals against interim measures or CMA decisions and asking what the appropriate level of judicial scrutiny should be;[22] and
vii. Stronger powers and tools for more effective international cooperation and collaboration between UK and international competition authorities.[23]

Notably, the Consultation does not expressly clarify whether the new proposed penalties will be based upon UK or worldwide turnover. The Strategic Market Status regime for digital markets, however, proposed identical penalties for failing to comply with CMA information-gathering investigations and specified worldwide turnover.

The Response encourages the government to further consider judicial scrutiny and the standard of review, especially considering the successful transfer to judicial review (from full merits review) Ofcom made in appeals to the CAT in 2017.[24] There was full support for the new investigative and enforcement powers proposed,[25] as well as for full immunity under Competition Act 1998 (“CA98”), with additional immunity from damages claims caused by the cartel on the grounds it would create further incentives for whistle-blowers, so long as immunity agreement terms are abided by. The CMA also supports limiting the proposal to full immunity beneficiaries in order to not undermine private redress against other cartel members.

6. Steering the CMA

Competition law will continue to be enforced by impartial, independent regulators, however BEIS believes that for “strong and effective competition law” the CMA needs to respond to “the strategic needs of the UK’s economy”.[26] As a result, the proposals suggested in the Consultation could see the CMA’s performance being measured against specific metrics, set by the government:

i. The government would provide the CMA with “clearer and more regular steers…to help align the UK’s competition policy with Building Back Better: our plan for growth and wider economic policy”.[27] To do this, the government proposed several example methods:

a. Providing more detailed, and regular updates on relevant issues facing the UK to the CMA (rather than just once a Parliament);
b. Telling the CMA which sectors of the economy should be strategic priorities for investigations and having a more active approach to setting the CMA’s strategic steer; and
c. Setting out specific metrics against which the government will measure the state of competition in the economy and the CMA’s performance based on government’s priorities and expectations.[28]

ii. The government also proposes to consult on the detail of a revised strategic steer for the CMA following responses to the Consultation.

If adopted, businesses may be better placed to lobby government, who in turn can influence the CMA and investigations. Unsurprisingly, the Response, whilst understanding of the governments wish to provide more detailed and regular strategic steers, cautioned against too frequent intervention. The CMA suggested strategic steers should not be given more frequently than “once every two to three years”.[29]

B. Proposed reforms to UK consumer rights

The consumer law reforms proposed in the Consultation could, if implemented, significantly alter the legal landscape. Given this is the first major development in the consumer law space since Brexit, this article draws some high-level comparisons with the EU position in order to shine some light on whether the UK might diverge from EU law.

7. Consumer Law Enforcement

The proposals most likely to seize the attention of consumer-facing businesses are the proposals for the CMA to wield stronger and faster-acting enforcement powers for consumer law infringements. While this may not be welcome news to all, BEIS emphasises that these powers will enhance competition and create a “level playing field” by penalising those who elect not to comply.[30]

a. Current Position

In the UK, consumer law is principally enforced by the CMA.[31] The CMA has various enforcement powers as listed below, which it shares with other regulators including the Trading Standards bodies, the Advertising Standards Authority and other sector regulators.

Current Enforcement Powers in the UK Enterprise Act 2002 o Civil powers to prevent infringements of certain consumer laws through seeking enforcement orders in court o Criminal powers to prosecute traders who participate in unfair commercial practices o If the CMA has secured undertakings from businesses who then breach them - powers to seek enforcement actions in court Consumer Rights Act 2015 o Civil powers to seek a court injunction against businesses who use unfair terms or notices o Powers to investigate breaches of consumer law (where information is requested, but not provided, the CMA may seek court orders)

The CMA’s main enforcement powers, however, rely on the CMA enforcing consumer law through the courts. In addition, it can be challenging, expensive and confusing for individuals to seek redress for consumer law infringements. Thus, whilst consumer law imposes a number of protections aimed at protecting consumers, those protections can be expensive and complex to enforce. This heavily underpins the rationale for the proposed enforcement reforms.

b. Enforcement Proposals – Administrative Model and Fines

The Consultation proposes updating consumer rights by empowering the CMA to enforce consumer law directly through an administrative model and draws comparison with enforcement in the current competition law regime. To facilitate quick and efficient enforcement, the Consultation suggests that the CMA should be able to (importantly, without the need for court intervention):

i. Decide if a business is, has or is likely to commit a consumer law infringement;
ii. If so, decide whether to instruct the infringements to stop, or order compensation/redress for affected consumers; and
iii. If appropriate, issue fines.[32]

BEIS emphasises that any administrative model would require a well-defined framework and suggests a decision-making process similar to the current competition law regime.[33] Moreover, BEIS is considering an appropriate appeals process, so businesses can be confident in their rights to challenge any administrative decisions in the courts.[34]

The Consultation also proposes empowering the CMA to issue financial penalties for:

i. Non-compliance with information gathering powers;
ii. Breach of undertakings; and
iii. Infringing consumer law (as per the proposed administrative model).[35]

Fines under (i.) are proposed to be a maximum of 1% of a business’ annual turnover, with an extra daily fine of up to 5% of daily turnover if non-compliance continues, which would be directly enforceable by the CMA.[36] Such fines would seek to promote investigative cooperation without court intervention. The CMA could also fine businesses up to 10% of global turnover for consumer law infringements under the proposals.[37]

The CMA could also be given powers to seek admissions of liability from businesses through undertakings, similar to the ‘settlements’ process under the CA98.[38] This means the CMA would not need to prove in court that an infringement had occurred, and so the trader could become immediately liable for a financial penalty in court. However, the fine could be reduced to reflect the trader’s cooperation.

The CMA responded to this part of the Consultation with great enthusiasm, welcoming the introduction of an administrative model and turnover-based fines.[39] Regarding admission of liability, the CMA was concerned over any ‘mandatory’ admissions, given the perceived difficulties in negotiating settlements.[40]

c. EU Position

There has been significant activity in the EU’s consumer rights space in recent years, including Directive (EU) 2019/2161 (the “Omnibus Directive”). The Omnibus Directive came into force on 7 January 2020 (post Brexit) and must be implemented into national law and applied by Member States by 28 May 2022.

The Omnibus Directive requires Member States to lay down rules on penalties applicable to infringements of national provisions adopted pursuant to Directives 93/13/EEG (Unfair Terms Directive), 2005/29/EG (Unfair Commercial Practices Directive), and 2011/83/EU (Consumer Rights Directive).

Interestingly, BEIS’ proposed reforms will extend above and beyond the position in the Omnibus Directive, which introduces fines of up to 4% of global turnover (or €2m if a calculation is not possible) for consumer law infringements (like a GDPR fine). Member States can however, introduce larger fines.

8. Proposed reforms to UK consumer rights: Subscription Contracts

The Government has identified two main developments which provide an opportunity for consumer rights to be updated and strengthened: the rise of online shopping, accelerated by the pandemic (such as preventing online exploitation of consumers by preventing the posting of fake reviews and strengthening prepayment protections) and an increase of subscription contracts.[41]

Enforcing consumer protection in subscription contracts has been a top priority for the CMA in recent months, leading to several investigations and undertakings from businesses in the anti-virus software market.[42] It is therefore no surprise that the Consultation aims to address ‘subscription traps’, where consumers enter auto-renewal contracts and have difficulty terminating or forget to terminate. The CMA is supportive of the proposals in the Response, and whilst the CMA acknowledges that such changes may cause business disruption and increase costs, ultimately the CMA places great importance on enhanced consumer protection and transparency.[43] Moreover, in October 2021, the CMA published 9 Compliance Principles that anti-virus software businesses using auto-renewing consumer contracts should adhere to (see our article here).[44]

Subscription Contract Proposals Obligation to display key contractual terms prior to contracting (i.e., on minimum contract terms, price per billing period, position on auto-renewals/extensions and minimum notice periods for cancellation) Consumers are offered the choice at the pre-contractual stage to enter the subscription without an auto-renewal and/or consumers must actively select auto-renewal Reminders of upcoming contract auto-renewals Seeking consumer consent to auto-renew to full price after a free/introductory trial

a. EU Position

The Omnibus Directive does not directly address subscription. These subscription contract proposals could therefore indicate an area where the Government is intending to diverge by strengthening consumer protection in the UK in comparison to that at EU level. However, in some EU Member States, subscription contracts are regulated under national law. This applies, for example, to the Netherlands, where the automatic renewal of subscription contracts is limited under the Dutch Civil Code.

9. Fake Reviews

Fake reviews are a growing problem in the e-commerce industry. In particular, some businesses commission fake positive reviews, whilst others target competitors with fake negative reviews. This undermines fair competition and risks harming consumers who rely on authentic reviews to make informed transactional decisions.

The Consultation therefore proposes that the following practices become automatically unfair in all circumstances (under Schedule 1, The Consumer Protection from Unfair Trading Regulations 2008):

i. Commissioning reviews in all circumstances; or

ii. Commissioning or incentivising a person to write and/or submit a fake consumer reviews of goods/services.[45]

a. EU Position

The Omnibus Directive addresses very similar concerns regarding fake reviews. In fact, the Omnibus Directive expressly adds the following practices to the list of commercial practices which are unfair in all the circumstances:

i. Stating that reviews of a product are submitted by consumers who have actually used or purchased the product without taking reasonable and proportionate steps to check that they originate from such consumers; and

ii. Submitting or commissioning a (legal or natural) person to submit false consumer reviews or endorsements, or misrepresenting consumer reviews or social endorsements, to promote products. This closely aligns with BEIS’ proposals.

In addition, the Omnibus Directive clarifies that information about whether and how the trader ensures that its published reviews originate from consumers who have actually used or purchased their products will qualify as ‘material information.’ This means that the average consumer (i.e., a new purchaser) will need this information in order to make an informed decision about entering into the relevant contract. Omitting such information could constitute an unfair commercial practice under EU law.

It follows from these additions that actual steps and processes will be required to make sure consumer reviews are not misleading. The Omnibus Directive, in effect, introduces an obligation to monitor reviews. Notably, if the UK was to make commissioning reviews in all circumstances an automatically unfair practice, this would go beyond the EU position. Moreover, this position may receive considerable pushback from brands, given that a commissioned review (by BEIS’ own admission) can still be a genuine review.[46] Indeed, the CMA raised this concern in the Response, stating that this could prohibit legitimate practices.[47] For example, beauty product testers who review and keep the products. Overall, however, the CMA was generally supportive of the proposals regarding fake reviews in the Response.

10. Online Exploitation

The Consultation also addresses the negative impact of dark patterns and online choice architectures which ‘nudge’ consumers into making certain purchasing decisions.[48] In particular, BEIS is assessing where paid-for search results should be more clearly marked as advertisements.[49] The concern is that third parties typically pay online platforms to list their products more prominently in search results, but this is not usually obvious to consumers.

11. Strengthening Prepayment Protections for Consumers

BEIS was also concerned by schemes that allow consumers to pay in advance for goods or products where there is no financial protection in place should the scheme provider go insolvent (for example, a Christmas Savings Club).[50] Such saving schemes are not regulated by the Financial Conduct Authority. BEIS is therefore considering whether to amend the Consumer Rights Act 2015, such that consumer saving schemes must safeguard their members’ money by way of insurance or trust accounts. Interestingly, the CMA’s response to the Consultation states that such legal obligations should extend to the ‘buy now pay later’ market. These schemes have been subject to recent scrutiny, given a lack of regulation.[51]

C. Summary

These proposals have been long-awaited. Responses to the Consultation have now been received by BEIS and will be summarised and published. The CMA has largely welcomed the proposals, especially the significant enhancement of its consumer enforcement powers. The CMA has also launched a consultation, calling for views to inform its advice to BEIS on how the competition and consumer regime can support the UK’s Net Zero sustainability goals. Interested parties have until 10 November 2021 to provide their input. The advice is due by early 2022.

Overall, if implemented, these proposals would have significant implications for businesses, not least those which operate in the consumer space. Bird & Bird will be carefully monitoring future developments. Please get in touch with Robert Turner or Dr. Saskia King if you have any questions.

[1] Reforming Competition and Consumer Policy (publishing.service.gov.uk) Page 13, Paragraph 0.15

[2] n1, Page 36, Paragraph 1.63

[3] n1, Page 38, Paragraph 1.70

[4] n1, Page 38, Paragraph 1.73

[5] Reforming Competition and Consumer Policy: Driving growth and delivering competitive markets that work for consumers (publishing.service.gov.uk) Page 8, Paragraph 2.14/2.16

[6] n5, Page 9, Paragraph 2.17

[7] n5, Page 10, Paragraph 2.22

[8] n1, Page 43, Paragraph 1.98

[9] n1, Page 45, Paragraph 1.105

[10] n1, Page 43, Paragraph 1.98

[11] n5, Page 15, Paragraph 2.42

[12] n5, Page 16, Paragraph 2.44

[13] n5, Page 16, Paragraph 2.4

[14] n1, Pages 52-53, Paragraphs 1.131-1.132

[15] n5, Pages 21-22, Paragraphs 2.66-2.70

[16] n1, Page 57, Paragraph 1.149

[17] n1, Page 57, Paragraph 1.149

[18] n1, Page 60, Paragraph 1.161

[19] n1, Page 75, Paragraph 1.220

[20] n1, Page 77, Paragraph 1.230

[21] n1, Page 76, Paragraph 1.225

[22] n1, Page 62/72, Paragraph 1.168/1.207

[23] n1, Pages 78-81, Paragraphs 1.232-1.246

[24] n5, Page 28, Paragraph 2.86

[25] n5, Page 28, Paragraph 2.87

[26] n5, Page 29 Paragraph 1.35

[27] n1, Page 14, Paragraph 0.15

[28] n5, Page 30 Paragraph 1.42

[29] n5, Page 8, Paragraph 2.12

[30] n1, page 100, Paragraph 3.2

Consumer protection: enforcement guidance, Pages 5 – 6, Paragraphs 2.4 - 2.6

[32] n1, page 105, Paragraphs 3.17 – 3.18

[33] n1, Page 106, Paragraph 3.23

[34] n1, Page 107, Paragraph 3.24

[35] n1, Page 110, Paragraphs 3.36 – 3.37

[36] n1, Page 111, Paragraph 3.42

[37] n1, Page 115, Paragraph 3.65

[38] n1, Page 115, Paragraph 3.63

[39] n5, Pages 49 - 50, Paragraphs 2.156 – 2.160

[40] n5, Page 66, Paragraph 2.214

[41] n1, Pages 16-17, Paragraphs 0.24 – 0.26

[42]Anti-virus software (UK Government Homepage)

[43] n5, Page 35, Paragraph 2.111 and page 72, Paragraphs 3.6 – 3.8

[44]Compliance Principles for anti-virus software firms

[45] n1, Page 93, Paragraph 2.43

[46] n1, Page 92, Paragraphs 2.36 – 2.37

[47] n5, Page 40, Paragraphs 2.126

[48] n1, Page 94, Paragraph 2.44

[49] n1, Page 95, Paragraph 2.48

[50] n1, Page 97, Paragraphs 2.54 – 2.56

[51] n5, Page 47, Paragraph 2.147