Address by Micheal Martin Minister for Enterprise, Trade and Employment, on Private Members Motion re. Competition

Tuesday 15 November 2005 Check Against Delivery

This government believes that open and fair competition is one of the central keys to both a successful economy and a good deal for consumers. Our decision of last week to repeal the Groceries Order because it is both anti-competitive and anti-consumer is another demonstration of this. The path of least resistance would have involved trying to fudge the issue, but we felt that the evidence was overwhelming and that action was required.

There is a dramatic contrast between this clear stance and incredible contortions which the self-described ‘consumer champions’ in Fine Gael put themselves through. Having spent a large amount of time and money telling everyone how they were willing to take tough decisions in favour of the consumer, Fine Gael’s behaviour on the Groceries Order showed that the last thing they are willing to do is to take a tough decision.

This year alone they have managed the incredible feat of having three entirely different position on the future of the Groceries Order.

The promotion of competition in the economy requires an effective legal framework. Strong competition legislation contributes to our competitiveness by penalising anti-competitive and anti-consumer behaviour, and by protecting the competitive process in all sectors of the economy.

The positive effect that competition has on consumers takes two forms. The most visible one is that companies that compete to win our business will reduce prices, provide enhanced service and variety, and generally become more responsive to our needs. The other benefit, and the one that is less visible, is the fact that competition drives companies to cut their costs and find more efficient and productive ways of doing business.

If competition were just about cutting prices, it would bring important benefits. But when we take account of the effect of competition on cutting costs, the effects are much more substantial. Lower costs and greater efficiency bring further price cuts for consumers, but more importantly mean higher productivity growth for the economy as a whole. And when those companies trade their goods and services internationally, the higher productivity they enjoy from competition at home makes them more competitive abroad.

The 2002 Competition Act consolidated, reformed and modernised previous legislation relating to competition policy and merger control. In essence the 2002 Act

• increased the penalties for serious cartel activities, such as price fixing,
• enhanced the independence of the Competition Authority, and
• transferred responsibility for controlling mergers and acquisitions from the Minister to the Competition Authority,

But the 2002 Act did much more than that.

The Act was the culmination of a root and branch review of all aspects of competition law in the State which was undertaken by the Competition and Mergers Review Group. The Review Group comprised eminent lawyers, economists and representatives from right across the economic spectrum, including the Social Partners. It reported in 2000.

The 2002 Act implemented the recommendations of the Review Group and it also anticipated developments at EU level. In particular it provided a framework for the application of Regulation 1 of 2003 in the State whereby the Authority was enabled to fully apply European Community competition rules.

The 2002 Act became fully operational on 1 January 2003. Therefore, it is a recent statute and its provisions have not yet impacted fully across the economy. Nonetheless, it forms the basis for one of the most modern competition regimes in the world.

Section 4(1) of the Act sets out the general prohibitions on anti-competitive agreements, decisions and concerted practices and reflects Article 81 of the EU Treaty.

Section 5 prohibits the abuse of a dominant position and reflects Article 82 of the EU Treaty.

In this respect, I wish to say something about predatory pricing which is an abusive and anti-competitive practice that acts against the interests of consumers.

It is a tactic employed by a firm that is dominant in its market and involves the sale of product below cost for a prolonged period of time in order to damage or eliminate a competitor.

It is an expensive practice and the predator must be confident that he will be in a position to raise prices after the event in order to recoup any losses incurred. A predator could find, for example, that after one competitor has gone out of business, another even bigger competitor enters the market making it impossible to raise prices.

Because it is expensive and because it is not guaranteed to succeed, predatory pricing is quite rare. This is the experience internationally.

Predatory pricing must not be confused with other forms of low cost selling, such as for promotional reasons, to dispose of old stock, or to match a competitors prices,

The Groceries Order was not a suitable vehicle to prevent predatory pricing because it was unable to make the distinction between legitimate low prices and genuine acts of predation.

On the other hand, predatory pricing is prohibited by Section 5 of the Competition Act which outlaws abuse of a dominant position in a market.

Dominance does not have to be measured on a national scale and the Act allows for dominance to be measured “in any part of the State”. The Act is, therefore, sufficiently flexible to allow the Authority to tackle predatory pricing in all circumstances.

If dominance were to be more tightly defined, it would make the prohibition of predatory pricing more difficult and not less so as some have claimed.

The provisions of the Competition Act which outlaw predatory pricing are based on the provisions of EU Treaty law. There is case law in Europe to support the use of these provisions to prohibit predatory pricing. It is important to bear in mind such case law when interpreting the provisions of the Competition Act.

If any individual business or group of businesses believe that they are being harmed by predatory pricing, they may -

• Make a complaint to the Competition Authority, which has the powers to investigate and take legal action including by means of bringing an injunction;
• Seek a private injunction in the High Court to stop the illegal activity, and,
• Seek compensation in the courts for any damage done, either following a successful Authority court case or as a private right of action.

The Competition Authority has extensive powers and a dedicated Division of expert staff which investigates allegations of companies abusing a dominant position. The circumstances of each allegation are unique and each complaint is assessed on a case by case basis.

Furthermore, under the 2002 Act, the Authority can block anti-competitive mergers and acquisitions. This means that large retailers cannot build a dominate position by buying their competitors where this significantly lessens competition.

The penalties for any undertaking found to have engaged in predatory pricing are up to €4m or 10% of the company’s turnover – very substantial penalties indeed. It must be borne in mind that such penalties are much greater than those which applied under the Groceries Order and are likely to act as a real deterrent to any business contemplating predatory action.

The previous Competition Act of 1996, which created criminal offences for breaches of competition law, provided for an “ignorance defence”. In other words, a defendant could escape punishment if he could claim that he did not know, nor could be reasonably expected to have known, that the activity engaged in was likely to be regarded as anti-competitive.

Under the 2002 Act, this ignorance defence was abolished making for much more effective enforcement of the law.

The 2002 Act also created new offences for breaches of the provisions of EU competition law. This greatly facilitates the enforcement of EU competition law in Ireland in line with recommendations of the Competition and Mergers Review Group.

An important provision in the Competition Act is that a distinction exists between lesser and more serious offences.

The most serious offences - often referred to as “hard-core” offences - are defined as agreements, decisions or concerted practices involving competing undertakings, the purpose of which is to:

• directly or indirectly fix prices
• limit output or sales; or
• share markets or customers.

This reflects a more economic approach to competition law enforcement whereby certain offences are regarded as being unequivocally harmful to consumers and to the economy as a whole.

Certain other offences, particularly those relating to vertical agreements, are less seriously restrictive of competition.

Section 6(2) introduced a presumption which applies in the prosecution of the more serious offences. This obliges the court to presume, unless the defendant can prove otherwise, that the object of the agreement is to prevent, restrict or distort competition.

The Act also provides greater penalties for the hard-core offences. Agreements, decisions and concerted practices between competing undertakings attract a penalty, on summary conviction, of a fine of up to €3,000 for an undertaking. An individual will be liable to a fine of up to €3,000 or six months’ imprisonment, or both.

However, on conviction on indictment, the penalty for these offences is a fine of up to €4M; the penalty for an individual is a similar fine, or five years’ imprisonment, or both. This five-year penalty of imprisonment also makes this offence “arrestable” under Criminal Law.

The Authority’s power to investigate breaches of the law can be delegated to any Member of the Authority or member of staff of the Authority. The search powers of the Authority were also strengthened, with powers to enter premises “if necessary by force”, and to search private dwellings. The Authority can take away original documents, rather than copies.

Search warrants obtained under the 2002 Act, unless they state otherwise, operate to authorise members of the Garda Síochána to accompany and assist authorised officers. Further, "whistle blowers" are given statutory protection under the 2002 Act and any statements they provide may be admitted into evidence.

The Irish Competition Authority is, therefore, one of the most empowered, pro-active and successful enforcement agencies of competition law in Europe. It was also the first enforcement agency in Europe to secure a criminal conviction for a competition offence and, to date, it has obtained 5 such convictions. These facts, combined with the Authority’s cartel immunity programme and the recruitment of Gardaí to the ranks of the Authority, with powers of arrest and detention for competition offences, should send shivers down the spine of anyone considering cartel membership or participation in the most serious anti-competitive practices.

Section 34 of the Act facilitates co-operation agreements between the Authority and other regulatory bodies. The Authority has concluded such agreements with the Office of the Director of Consumer Affairs, the Health Insurance Authority, the Broadcasting Commission of Ireland and the Energy, Aviation and Communications Regulators.

These agreements enable the Authority to exchange confidential information with those regulators as well as to consult with them and, where appropriate, to act instead of them in a competition matter in which they are both engaged.

In addition to the formal cooperation agreements, the Financial Regulator has a statutory mandate to monitor competition in the financial sector and to pass on to the Competition Authority any information it has in relation to possible breaches of the Competition Act; and the Consumer Strategy Group has recommended that the new National Consumer Agency should be able to liaise formally with the Competition Authority. Very likely, a cooperation agreement will be the most appropriate basis for such liaison.

In relation to the question of whether to statutorily provide that the Authority advise the Director of Corporate Enforcement of the conviction for competition offences of company directors, any finding by a court that a company director has infringed competition law will be a matter of public record and the Authority is entitled, without the need for amending legislation, to bring this to the attention of the Director of Corporate Enforcement.

I would like to comment briefly on the nature of investigations by the Competition Authority. The Authority’s experience of investigating hard-core cartel activity, such as price-fixing, bid rigging and market sharing is that it is a difficult and painstaking process. Cartels are by their nature conspiratorial. Participants are secretive and hard-core cartels are difficult to detect and prosecute successfully.

The evidential standard for indictable offences is high with a “beyond reasonable doubt” burden of proof on the prosecutor. Following investigation, the Authority is then required to prepare a file for the DPP after which a book of evidence must be prepared. Following a decision by the DPP to proceed with a prosecution, the Authority assists and works with the DPP, the Chief Prosecution Solicitor, Legal Counsel and An Garda Siochana in getting a case ready for trial.

Yesterday, Ireland was expected to be the first country in Europe to hold a criminal trial in front of a jury for a breach of competition law involving an alleged cartel of oil retailers in the West of Ireland. Even though the trial has had to be deferred until next year because of a lack of court time, one of the defendants has pleaded guilty and he will be sentenced next March.

This case has been complex and has taken some time to bring to Court. The Authority has informed me that it does not view the number of defendants in this case, or the length of time that it has taken to get this case to Court, as unusual or atypical of cartel investigations.

Another Competition Authority investigation of which I am aware relates to alleged business cartels covering a span of ten years. The estimated financial damage caused by activities in question is is between €75m and €105m. The investigations are extensive and has involved the Authority in 35 searches and 46 cautioned interviews. Files have been referred to the DPP.

International experience of cartel investigations is no different to our own. Cartels, wherever in the world they operate, are secretive and their detection and successful prosecution is slow. Even jurisdictions with a much longer history of competition law enforcement, such as the US, recognise that cartel detection, like most other white-collar crime, is very time-consuming to prosecute successfully.

At this point I would also like to stress the importance of complaints in the Competition Authority’s campaign to stamp out anti-competitive behaviour in Ireland. The Authority has substantial powers to investigate complaints if it has reasonable grounds for suspecting that a breach of competition law has taken place. When the information provided through complaints is sufficient to give the Authority reasonable grounds for suspicion, a formal investigation may be launched. Where information does not point towards a breach of the law, it may inform other aspects of the Authority’s work, for example in identifying unintended anti-competitive effects of business practices and structures.

Any individual or organisation or group, if they suspect anti-competitive behaviour in any aspect of business or the economy, is entitled to make a complaint to the Authority. All complaints are vigorously pursued.

To be effective the Competition Authority needs evidence rather than mere suspicion of wrongdoing. So it is important that complainants to the Authority provide as much information as possible. The Authority has published on its website - and in its annual report - information about how to make a complaint and what type of information it requires to progress a report. It acknowledges that complaints are vitally important to its campaign to stamp out anti-competitive behaviour in Ireland.

Complaints made to the Authority are subject to a screening system, details of which it published in its 2003 Annual Report. Essentially it involves three stages. All complaints received are examined within one week of receipt to determine the validity or otherwise of the complaint, disposing directly of those that do not involve a competition issue or offence.

Those that require further scrutiny are referred for evaluation. This involves additional work to decide whether or not to progress to an investigation. It may involve background research, taking formal statements from complainants or third parties and examining the legal parameters of a case. The object of this part of the exercise is to identify cases suitable for investigation. At all stages of the process complainants are advised as to the status of their complaint.

Any objective analysis of the Competition Authority’s record in dealing with such complaints must take into account the fact that that competition cases are inherently complex.

The Authority does not investigate matters by relying solely on information already in its possession. It must engage in an evidence gathering process that involves relying on other parties to provide information and, perhaps, the exercise by the Authority of its considerable powers to search for and confiscate relevant documentation.

Imposing a statutory deadline for completion of investigations would inevitably compromise this process. Furthermore, within the context of an investigation, parties retain a right of reply. Imposing deadlines that do not provide an adequate period for parties to consider and respond on the position taken by the Authority would compromise that right of reply.

The setting of a statutory deadline for completing a competition law investigation would also set such investigations apart from all other agencies in the State with a responsibility for investigating breaches of the law, whether criminal or civil. Therefore, I would ask this question: why should the investigation of an alleged competition law offence be treated differently to an allegation of fraud, assault, theft, murder, smuggling or tax evasion?

Furthermore, voluntary compliance with competition law is an important and frequently overlooked part of the Authority’s work. The essence of civil enforcement is to ensure compliance with the law in the speediest, most efficient way possible. In the civil area, court proceedings are, and always should be, measures of last resort.

Compliance, on the other hand, means the parties in breach commit to changing their behaviour rather than forcing the Authority to the expense of challenging them in lengthy court proceedings. Examples of compliance of this nature include Statoil, Independent Newspapers, Irish Times and Irish Actors Equity. In all of these cases, the Authority subsequently published Enforcement Decisions to provide transparency and predictability in the enforcement of the Act, thus resulting in greater legal certainty and in the reduction of compliance costs to undertakings.

I am aware that the Competition Authority has recently been considering the idea of an "Annual Review of Competition" in the light of its broader statutory functions in area of competition advocacy as set out in Section 30 of the Competition Act. The purpose of such a review would be provide “an annual status update on developments affecting competition in liberalising and restricted markets.” and thus "provide a single forum where the full impact of State restrictions on competition could be synthesised regularly"

The Authority is considering how this might be done in an effective way from a resource perspective. For example, I understand that the Authority is currently considering whether it could achieve this objective by enhancing its Annual Report, or by an annual standalone publication, or perhaps by producing a more in-depth and more widely scoped bi-annual report.

In any event the Authority’s Advocacy Division plays an important role in areas where the State, either through direct involvement in the economy or through regulatory systems, may restrict competition.

The Authority is also made aware of some public restrictions on competition through its own study and observation of individual markets; others are specifically drawn to the Authority’s attention by complaints from businesses and the general public. The Authority comments on these restrictions, and advocates for their removal or reform as appropriate, by responding to public invitations to comment on particular sectors or issues, and through media appearances, both written and broadcast.

While the Authority continues to deal with its caseload of competition issues arising from the existing stock of regulation, there is also a regular flow of proposals for new legislation. The importance of the Authority’s expertise was recognised by the Oireachtas in 2002, when, in the Competition Act, it gave the Authority the specific function of advising the Government, Ministers and Ministers of State about the implications for competition of proposed legislation. Thus, the Authority regularly advises Government Departments and Agencies on the likely effect on competition of new policy proposals under consideration. In doing so, the Authority seeks to highlight competition concerns and pre-empt any negative consequences for consumers that newly framed policies might bring – whether inadvertently or otherwise.

In its annual report for 2004 the Authority stated that it responded to over 30 such requests for advice from Government Departments and other public sector bodies, in the form of meetings, written comments or a combination of both. Many different economic sectors were involved, for example:

• The Authority advised the Department of Health and Children on the appropriate regulatory structure and level of transparency to be applied to the regulation of certain health and social care professions.
• The Authority met with the Department of the Environment and Local Government to advise on its study of the waste sector in light of complaints received by the Authority related to the waste sector.
• The Authority advised the Enterprise Strategy Group on the role of competition in the development of Ireland’s enterprise sector and competitiveness.

The question of whether a category of “Super Complaints” should be created has been raised on occasions in the past and would involve bodies such as the Director of Consumer Affairs, the Consumers Association of Ireland or the Financial Regulator making a complaint to the Authority in relation to, for example, a particular sector of the economy on behalf of consumers generally.

There is nothing to stop prevent such bodies from making complaints at present, and as I have already explained the Authority works closely with other statutory regulators by means of formal cooperation agreements.

As I have already stated, I do not favour the imposition of statutory deadlines by which the Authority would be required to complete investigations of such complaints.

I should point out that over the last few years the Authority has embarked on three major sectoral studies, two of which it completed this year and the third, and largest, is nearing completion.

In these studies, the Authority examines regulations and practices that potentially restrict competition, and seeks to have anti-competitive restrictions abolished or replaced. It also seeks to study how competition works in the sector concerned, and to identify behaviour which, although not necessarily breaching competition law, nevertheless inhibits competition.

In its final report on “Competition Issues in the non-life Insurance Market” the Authority reported on its examination of competition in the motor, employers’ liability and public liability insurance markets. It made 47 recommendations designed to make the insurance market in Ireland more open, transparent and competitive. It found that specific categories of motorists, businesses and voluntary groups were “locked in” to their current insurance supplier and that there was an absence of information available to them to allow them to search for better insurance quotes. In addition it found that new and existing insurance companies were “locked out” of many important and profitable segments of the insurance market.

The focus of the Authority’s recommendations is to provide the necessary information to open up the Irish insurance market so as to enable new and existing insurance companies to get into or expand in the profitable Irish insurance market and to empower motorists, businesses and voluntary groups to shop around for a better insurance deal.

The Authority’s recommendations have informed the Financial Regulator in its work, the effects of which will be seen in the Regulator’s forthcoming codes for regulating the industry. Indeed the Regulator has already begun implementing Authority recommendations by bringing forward the date of publication of the “blue book” of insurance statistics.

In the Authority’s report on competition in the non-investment banking sector in Ireland, published in September last, it identified anti-competitive problems in the three sectors examined, those being personal current accounts, lending to small businesses and the crucial role of the payments clearing system. The Authority made 25 recommendations intended to mitigate these problems and make the banking industry more competitive.

The Authority’s recommendations are intended to:-

• make it easier for personal customers and businesses to move their bank accounts,
• make it cheaper for small business to access working capital, and
• make it easier for new banks to offer services to Irish customers.

We have already seen significant progress on implementation of the Authority’s recommendations. The personal current account switching code set up in response to the Authority’s recommendation is having significant success and has led to the phenomenon of “free banking” for many customers. A business current account switching code is being devised and the payments industry has revised its rules of entry.

The professions study is analysing competition in the market for professional services, focussing on engineers, architects, solicitors, barristers, veterinarians, dentists, optometrists and doctors. In respect of each of these professions, the Authority’s strategy is to release a preliminary report containing initial proposals for improving competition. This allows for a period of consultation with interested parties before the publication of a final report.

By the end of 2005 the Authority will have completed final reports in 2 of the 8 professions being examined (engineers and architects) and published preliminary reports in respect of 4 others (solicitors, barristers, dentists and optometrists).

This Government continues to see competition as the life-blood of a vibrant economy and we are committed to removing unwarranted constraints on competition in all sectors of the economy and placing the consumer at the top of the policy agenda.

Increased competition in the economy has a critical role to play in helping to keep prices under control. An example of this is the aviation industry where competition from low cost airlines has substantially reduced the cost of air travel. While much needs to be done to encourage competition in some sectors of the economy, the Government is working hard to bring about these changes.

The Competition Authority has proven itself to be a powerful advocate for such change as well as being a fearless, independent and effective enforcement agency. Since the enactment of the most recent Competition Act, the resources of the Authority have virtually doubled. Today it employs 52 people across a broad range of skills and disciplines necessary for the performance of its functions.

There is every reason to have the utmost confidence in the performance by the Authority of its advocacy and enforcement functions. The Authority enjoys a unique reputation internationally as evidenced by the quality and experience of those who have been attracted to come and work at enforcing Irish competition law from other parts of the world.

The Government keeps the resources available to the Authority under close review. For example, further funding for the Authority has been sought in the context of the estimates process and I am hopeful that the Authority’s enforcement resources will be expanded in 2006.

The Government also recognises that restrictions on competition arising from regulations can impose substantial costs on the economy and have adverse effects on the international competitiveness of Irish business. In this regard the Government is committed to addressing sectors where barriers to entry or restrictive practices exist. Our commitment to better regulation stems from the recognition that if State regulation is excessive in quantity, or is of poor quality, then it will be an unnecessary burden on economic and social activity. By minimizing regulatory barriers, we can make it easier for entrepreneurs to avail of business opportunities and to enter markets, and we can achieve greater efficiency and choice for consumers.

ENDS

ETE 1457