Good government for free markets
Remarks
to the Competition Policy conference of the Regulatory Policy
Institute, Oxford
By John Vickers
Chairman, Office of Fair Trading
15 September 2004
Beyond competition law
The
point discussed in these remarks is that good competition policy
extends well beyond competition law − i.e. beyond the law
dealing with anti-competitive agreements, abuse of dominance,
and mergers.
It is well known that competition law in the UK has changed
fundamentally in the past few years thanks to the Competition
Act 1998 and the Enterprise Act 2002. The law is now clearly
focused on competition. It has teeth where it should, for
example against cartels. And it is applied transparently by
independent bodies − principally the OFT, the Competition
Commission, and the Competition Appeal Tribunal − with Ministers
out of the process.
That
is all well and good. But there is much more to good competition
policy than good competition law, well applied. So what are the
key elements of competition Office of Fair Trading policy beyond
competition law? Who is responsible for them? How is UK policy
in this area developing? And what are the challenges ahead?
Regulatory
reform
and competition
Perhaps
the most important element of competition policy beyond
competition law is competition scrutiny of regulation.
Competition policy is a potentially important ally for all those
who think that there is too much regulation. Sometimes it points
simply to deregulation the removal of restrictions so that
existing and would-be market participants have more freedom to
compete for the business of customers. Sometimes it points to
smarter regulation so that the aims of policy are achieved
more effectively, and at lower cost, when there is more freedom
to compete.
Regulatory
reform is the responsibility of Government and Parliament − and
the European Commission and Council − not the competition
authorities. It has not traditionally been a role of the
competition authorities even to carry out competition scrutiny
of regulation. But this is changing.
A
striking example is the Fiammiferi case. The Italian competition
authority challenged a national regulatory framework governing
the production, distribution and sales of matches, which
included an anti-competitive quota system. The matter was
referred by the Italian court to the European Court of Justice,
which ruled a year ago that national legislation must be
disapplied if it requires or facilitates conduct contrary to EC
law against anti-competitive agreements, legitimising or
reinforcing the effects of the conduct, specifically with regard
to price-fixing or market-sharing.2 While legal proceedings by
competition authorities against anti-competitive laws might be
rare, this case is an interesting one to take note of. Office of
Fair Trading 2 (2 Judgment of 9 September 2003, Consorzio
Industrie Fiammiferi (CIF) v. Autorita Garante della Concuurenza
e del Mercato, case C-198/01).
More
commonly, competition scrutiny by competition authorities of
laws and regulations results in advice to Government. This
advice, and the analysis on which it is based, are carried out
with the same independence as the authorities' competition law
enforcement work, though whether or not to accept the advice is
of course for others to decide.
Deregulatory initiatives
There
are two main kinds of competition scrutiny of regulation − that
of existing regulation and that of proposals for new or
different regulation. Here are some examples of both.
Professions:
The OFT's 2001 report Competition in professions4 challenged a
number of anti-competitive restrictions in the regulation −
including self-regulation − of professional services including
law. Some deregulatory steps have since been taken and more are
in prospect. Following the report, the exclusion of professional
rules from the scope of competition law was removed. The
OFT's 2003 market study of the private dentistry, as well as
addressing lack of market transparency, recommended removal of
certain regulatory restrictions on how dentistry services can
be supplied.
Pharmacies:
Since 1987 regulatory restrictions on entry have impeded the
development of new pharmacy businesses in the UK. On the basis
of a detailed Though not primarily competition scrutiny, the
CC's role in relation to the regulated industries (e.g. energy
and water) should also be noted here. 4 The report, and updates,
on competition in professional services is at
www.oft.gov.uk/News/Publications (in 'Reports/Professional
bodies'). Office of Fair Trading (The report on private
dentistry is at
www.oft.gov.uk/Business/Market+studies/dentistry.htm). The
Government's response of June 2004 is at
www.dti.gov.uk/ccp/topics2/dentists.htm.study, (the OFT
recommended liberalisation to enhance competition and consumer
choice, and to open new ways of getting medicines to the
public). The Government has however decided, for the time being,
only to relax the rules for new pharmacies open more than 100
hours a week, located in large out-of-town shopping centres, or
based on the internet or mail order. Taxis: The OFT's 2003
report on taxi services found that restrictions on taxi numbers,
which apply across about half the UK, block competition and mean
fewer taxis on the roads, longer waiting times, less choice for
the public, and risks to public safety. The OFT recommended that
the legislation allowing local authorities to limit taxi numbers
should be repealed. Rather than securing de-restriction for all,
the Government is encouraging it locally.
Financial
services: The OFT advised in 1999 (and again in 2002)9 that the
'polarisation' regulation on those who advise on and sell
packaged investment products was restrictive of competition and
not beneficial for consumers. Supported further by its own
extensive analysis the FSA is proceeding with
de-polarisation.10Betting: The OFT advised Government on the
transfer of the Tote to the private sector. The Tote has an
exclusive licence to supply pool betting. The OFT advised
against maintaining this exclusive right in order to allow
business freedom and promote
competition to the benefit of consumers. The Government decided
to lift the exclusive right after seven years.
(The
report on pharmacy entry controls is at
www.oft.gov.uk/Business/Market+studies/pharmacies.htm. The
Government's response of August 2004 is at
www.dti.gov.uk/ccp/topics2/pharmacy.htm Further, the
system for approving new pharmacies will be modernised so that
NHS Primary Care Trusts can take account of the benefits of
competition and choice in its assessments of applications for
new pharmacies. The OFT's 2003 report on taxi services
is at www.oft.gov.uk/Business/Market+studies/taxis.htm.
The OFT's 1999 report on polarisation and its 2002 paper are
at www.oft.gov.uk/News/Publications (in 'Reports/Financial
products and services'). Office of Fair Trading See, for
example, the FSA's 2004 consultation document at
www.fsa.gov.uk/pubs/cp/04_03/)
In
all these cases, the OFT recommendation was to remove regulatory
restrictions on business freedom to serve customers. This
brought vocal protests from vested interests for the retention
of restrictions on the freedom of other, potentially competing
businesses. That is natural. Perhaps the best restrictions on
competition from the point of view of incumbent businesses are
those imposed by public regulation. Which underlines the
importance of independent competition scrutiny on behalf of the
wider public.
The
removal of restrictions on business freedom to serve customers
has also been a feature of steps taken by the OFT, under
competition law, against privately-imposed restrictions on
competition. Examples include the ending of resale price
maintenance − and hence the creation of retailer pricing freedom
− on books and over-the-counter medicines; and the greater
freedom and choice being established in horse-racing. Similarly,
some privately-imposed restrictions on the supply of
professional services have been eased − e.g. the scope for
direct access to barristers has been widened −
and after the Clementi review further liberalisation of legal
services might well be on the cards.
Competition and the public
interest
Defenders
of anti-competitive restrictions often say that liberalisation
of regulation, though it would lead to more competition, would
be detrimental to the 'wider public interest'. Since competition
is but a means to ends, defences on these lines cannot and
should not be dismissed out of hand. But they should not hold
sway unless certain conditions are shown to hold. (Office
of Fair Trading 5 11 The OFT's response in June 2004 to the
consultation of the Clementi review is at
www.oft.gov.uk/news/press+releases/2004/91-04.htm)
An
important point to keep in mind is that competition − through
its incentive properties and otherwise − is a valuable means
towards a great range of ends, public as well as private. It
simply isn't a question of competition on the one hand, and the
public interest on the other. Competition and the public
interest generally go hand in hand.
That
is not to say that 'more competition' is always for the good.
How, then, to distinguish justified regulatory restrictions on
competition from the rest? A natural test is suggested by the
competition law treatment of anti-competitive agreements. For an
agreement − or part of an agreement − that appreciably prevents,
restricts or distorts competition, the questions are:
does it bring benefits
of which consumers get a fair share
and for which the anti-competitive agreement is indispensable
and without eliminating competition?
Likewise,
a good test for a regulation shown to be anti-competitive is
whether it achieves, and is indispensable to the achievement of,
identified public interest benefits that outweigh the detriment
from restricted competition.
Embedding competition scrutiny
Important
steps have recently been taken to make competition scrutiny of
regulation in the UK more systematic.
First,
the Enterprise Act has strengthened the powers of the OFT and
the CC to examine and make recommendations to Government on
regulatory restrictions and Office of Fair Trading Article 81 of the EC Treaty, which
is mirrored by Chapter I of the UK Competition Act 1998.
distortions of competition.13 The OFT proposes to amend its
guidance on market investigation references in order to
enhance further the potential role of the CC in this
regard.14
Second, since 2002
competition scrutiny has been built into the regulatory impact
assessment of legislative proposals. The assessment is primarily
done by Government departments. The OFT provided guidance15 to
Government departments on when and how to carry out competition
assessment, and assists on cases as necessary.
Third,
this summer the Competition Forum was established. This is a
cross-government forum for discussion of relationships between
market competition and government bodies. The work of the Forum
will include helping to identify markets where competition
appears not to be working well.
Conclusion
The
comments above have mainly concerned pro-competitive regulatory
reform. Of course Government interacts with markets not only as
regulator but also as producer, subsidiser and purchaser.
Publicly-owned producers engaged in economic activity are
subject to competition law just as private firms. Section
7 of the Act gives the OFT a function of making proposals to
Ministers or public authorities, such as the recommendations
we make following a market study. Section 131 enables the OFT
to refer markets to the Competition Commission for
investigation when it has reasonable grounds to suspect that a
feature of a market − which can include regulation − prevents,
restricts or distorts competition. If the CC finds an adverse
effect on competition, it has a range of remedial powers, as
well as the power to recommend changes to regulations. The OFT
proposes to amend paragraph 2.31 of the Market Investigation
Reference Guidance to remove the statement that 'where the OFT
is satisfied that adverse effects on competition arise
primarily from laws, regulations, or government policies it
will not normally make a reference when it considers that the
CC will not be able directly to remedy such adverse effects.'
Available at www.oft.gov.uk/Business/regulations. Office of
Fair Trading 7 Publicly-owned producers that have been
subject to inquiry under the Competition Act 1998 include the
North & West Belfast Health & Social Services Trust
and Companies House.
Office of Fair Trading 8 Government
subsidies and procurement are currently the subjects of
preliminary OFT studies that will be published in the autumn.
In
all these respects Government activities can help or hinder
competition, and markets can work more or less well − not only
for consumers but also for Government policy objectives. Good
competition policy therefore extends well beyond competition
law. Where regulation or other state intervention unduly
restricts competition, good government frees markets.
See
www.oft.gov.uk/Business/Market+studies/subsidies.htm and
www.oft.gov.uk/Business/Market+studies/procurement.htm. Some
subsidies fall for competition scrutiny under the EC Treaty
rules on state aids.
With
our compliments.
Nationwide
Poles & Jim Foot
next
|