The right mix of sticks and carrots: The OFT's review of its penalties and leniency policies

Transcription

1 The right mix of sticks and carrots: The OFT's review of its penalties and leniency policies Dr. Amelia Fletcher, Chief Economist, OFT King s College London, 1 May

2 Achieving compliance with competition law Adam Smith: People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. 2

3 Ensuring compliance with competition law is important as competition achieves benefits for firms and the economy as a whole Economic growth Level playing field for all businesses Good outcomes for consumers 3

4 Compliance can in some circumstances break down even in well-meaning firms. 1. Ambiguity or lack of management commitment (at any level) 2. Rogue employees (as distinct from scapegoats) 3. Confusion or uncertainty about the law 4. Employee error or naivety 5. Loss of trust in legal advice 6. Box-ticking approach to compliance 7. Competition law compliance having to compete for attention with other compliance activities Source: OFT Drivers of Compliance and Non-compliance with Competition Law, May

5 Getting incentives for compliance right Two linked objectives: Incentivising investment and focus on compliance with competition law, for well-meaning firms and individuals Dis-incentivising the deliberate infringement of competition law Success in achieving both will be influenced by the: - cost of being caught and facing enforcement action and - likelihood of being caught and facing enforcement action (closely related to numbers of cases going through the system successfully) 5

6 A stick and carrot approach Sticks Increase the cost of facing enforcement scrutiny: - Adverse reputational impact company brand and personal - Financial penalties - Criminal sanctions - Director disqualification orders - Private actions - Costs of investigation (time, management resource, uncertainty). 6

7 A stick and carrot approach Carrots Increase the likelihood of enforcement action: - directly through incentivising applications/cooperation, and/or - indirectly by reducing cost/resources involved for authorities in bringing such action and so increasing case throughput These include: - An effective leniency programme (direct/indirect) - Informant rewards (direct/indirect) - Settlement/Early resolution (indirect only) - Commitments (indirect) 7

8 Fines: Only one of many deterrence tools Legal professionals perceptions of the importance of different sanctions and tools in competition deterrence (% of respondents) Financial penalties for the company 74% 26% Criminal prosecution for the individual 67% 22% 11% Leniency policy 52% 26% 11% 7% 4% Reputational damage for the company 44% 48% 4% 4% Director disqualification orders 41% 37% 19% 4% Reputational damage for the individual 30% 22% 37% 11% Internal disciplinary actions for individuals 19% 59% 22% Private damage actions 11% 48% 33% 7% Early resolution 0% 33% 37% 26% 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Very important Fairly important Not very important Not at all important Don't know Source: The impact of competition interventions on compliance and deterrence, London Economics, December 2011 (OFT1391) 8

9 Importance of deterrence instruments: Business versus Legal views Large Business Rank Small Business Rank Company reputational damage 1 =1 4 Legal Advisers Rank Criminal Prosecutions 2 =1 2 Financial Penalties DDOs Internal disciplinary actions Individual reputational damage 6 =5 6 Early resolution 7 =5 9 Leniency and informant rewards Private damage actions Source: The impact of competition interventions on compliance and deterrence, London Economics, December 2011 (OFT1391) 9

10 Overall: Achieving compliance is complex Compliance requires a multi-faceted approach What is OFT doing? - More throughput of civil and criminal cases - Helping business achieve compliance through guidance and education - Ensuring a fit-for-purpose antitrust enforcement toolkit: Financial Penalties Leniency Settlement (review under consideration, see CA98 procedures consultation) Private actions (considering BIS consultation) 10

11 Financial Penalties 11

12 Review of the OFT penalties guidance: Why? Substantial OFT experience in setting penalties for CA98 infringements since current guidance published in December 2004 Opportunity to reflect upon some of the issues raised in the recent Construction and CRF CAT judgments: - Treatment of last business year at Step 1 - Treatment of net versus gross turnover at Step 1 - Treatment of uplifts for deterrence at Step 3 - Proportionality assessment to avoid excessive or disproportionate fines Opportunity to reflect on differences between the OFT s approach to penaltysetting and those of other agencies, including DG Comp Opportunity to reflect on wider economic evidence on the potential gains from anti-competitive behaviour 12

13 Key proposed changes to the current guidance (1) Starting point (Step 1): Increase maximum starting point from 10% to 30% of relevant turnover, with minimum 25% starting point for the most serious infringements of competition law - Increased maximum starting point primarily to give access to penalties that better reflect the gravity of the range of infringements we encounter and to enable deterrent penalties to be set - The increased range will contribute to the deterrence of particular types of practices amongst businesses generally ( general deterrence) - The increased range brings OFT into line with other mature competition authorities (eg DG Comp); CAT suggested the OFT consider a 30% maximum starting point - 25% minimum broadly consistent with OFT practice under current guidance to set starting points for the most serious infringements at the top of the range 13

14 Key proposed changes to the current guidance (2) Adjustments for specific deterrence and proportionality (New Step 4) - Assessment of whether upward adjustments are required to achieve individualised (or 'specific') deterrence Likely to be used in limited circumstances, recognising that with a higher starting point such adjustments are likely to be required less often and are likely to be smaller in size - Assessment of whether downward adjustments are required to ensure that the penalty is not disproportionate/excessive 14

15 How might penalty levels be affected? The increase in maximum starting point may in some cases lead to higher final penalties, but worth noting that: - There have been substantial uplifts for deterrence under the current guidance, some of which may have related to general deterrence [see next slide] 15

16 Effective average deterrence uplifts under the current guidance Effective average Step 3 multipliers in appealed OFT decisions OFT decision Effective multiplier at step 3 (OFT) Effective multiplier at step 3 (CAT) Construction Recruitment Forum (2009) [ ] [ ] Construction (2009) [ ] [ ] Indicative average ranges based on the fines for the parties that appealed the decisions in the CAT 16

17 How might penalty levels be affected? The increase in maximum starting point may in some cases lead to higher final penalties, but worth noting that: - There have been substantial uplifts for deterrence under the current guidance, some of which may have related to general deterrence - Later adjustments for specific deterrence are likely to be made less often and be smaller in size - The new proportionality element of Step 4 should ensure that penalties are not disproportionate or excessive - UK penalties compared to both economic theory and also penalties internationally suggest that an increase in penalty levels would not necessarily lead to excessive fines 17

18 A bit of economics Simple model of deterrence BAD GOOD pf Main implications: - If a firm takes a profit-maximising approach to breaking competition law, and the probability being caught (p) is 1/10, the fine (F) needs to be 10 times the profits that can be made to create compliance - So the fine must be disproportionate to damage alone to create deterrence Wider economic evidence showing cartels raise prices by as much as 20 to 35 per cent or even higher 18

19 UK Fines relative to EU and US US best fit EU best fit UK best fit 19 Source: Analysis of OFT, US Department of Justice and EC data

20 UK Stages relative to EU and US 35.0% Total fines at each stage as a proportion of total relevant turnover 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Step 2 Step 3 Step 4 Step 5 Post UK 6.3% 8.6% 8.2% 8.2% 5.1% US 20.0% 33.0% 27.0% 27.0% 21.5% EU 21.5% 26.5% 31.3% 24.5% 15.8% 20 Source: Analysis of OFT, US Department of Justice and EC data

21 A flavour of respondents views on key changes (1) Increased maximum starting point from 10% to 30% of relevant turnover - Respondents views were mixed. - A number of respondents supported the increase, in particular on the basis that: a greater starting point range allows a better reflection of the relative seriousness of different infringements, and/ or convergence with e.g. the European Commission is desirable - Several respondents opposed the increase, however, in particular on the basis that: a 30% maximum starting point might lead to excessive penalties, and/ or a 30% maximum is not required for deterrence as unlike some authorities such as the European Commission the OFT has individual sanctions available to it (DDOs and the cartel offence) 21

22 A flavour of respondents views on key changes (2) Is a minimum 25% starting point appropriate for hardcore cartel activity and serious abuses of a dominant position? - Majority of respondents opposed this proposal, in particular on basis that: having a minimum starting point for certain infringements reduces the flexibility of the starting point range a minimum at this level is too high treating hardcore cartels and abuses the same may be inappropriate given that there is more disagreement as to the harmful economic effects of abuses 22

23 A flavour of respondents views on key changes (3) Later adjustments for specific deterrence and proportionality - Respondents generally supported the proposed approach to specific deterrence although some considered that such adjustments were unnecessary - Respondents welcomed the proposed proportionality assessment: although some requested more detail on how it would be carried out, for example details on how the principle of equal treatment would form part of the proportionality assessment 23

24 Other significant proposed changes to guidance Apply adjustments for aggravating/mitigating factors before the deterrence/proportionality adjustments (i.e. reverse order of Steps 3 and 4) - Otherwise, applying aggravating or mitigating factors could change the penalty determined to be right for deterrence/proportionality Clarification/addition of certain aggravating and mitigating factors - Further detail on approach to compliance discounts - Further detail on approach to recidivism - Persistent delay to investigation (new illustrative aggravating factor) New Step 6: Leniency/Settlement Discounts - To formalise where in process these discounts will be applied Financial hardship - Not a formal step, but the draft guidance notes that financial hardship discounts may be made in exceptional circumstances 24

25 A flavour of respondents views on these Reversal of Steps 3 and 4: - Little disagreement, although a few respondents considered that reversal might dilute the impact of aggravating/mitigating factors Clarification/addition of certain aggravating and mitigating factors - Recidivism: More detail welcomed, but changes suggested for elements of the approach, in particular that: uplifts should only be made where prior infringement decisions found UK effects and prior infringement decisions should count for less than 15 years - Persistent delay: Broad agreement in principle, but need to ensure that undertakings rights of defence would not be adversely affected - Compliance: Broadly welcomed Step 6: Leniency/Settlement Discounts: Broadly welcomed Financial hardship: Broadly welcomed, although some want more detail 25

26 Changes considered but not proposed Radical new approach to calculating penalties - An in the round approach rather than a step-based approach Other changes to steps of the current guidance: - Entry fee at Step 1 - Affected turnover rather than relevant market turnover at Step 1 - Compensation as an illustrative mitigating factor Respondents generally agreed with the OFT s view that these issues should not be taken forward in the new guidance - other than some debate around compensation as a mitigating factor 26

27 Next Steps OFT to finalise its views on the proposals and submit a final draft of revised guidance to the Secretary of State for approval in due course 27

28 Leniency 28

29 Review of the OFT leniency guidance: Background Consultation draft is the result of a thorough review of the leniency programme and guidance Opportunity to reflect on our experience of operating the leniency programme since last update of guidance As part of the review process, the OFT also spoke with external lawyers with experience of leniency applications 29

30 Consultation guidance - Making the process clear and accessible (1) Guidance has been updated or clarified in a number of respects, to ensure that all prospective applicants benefit from improved knowledge of the OFT s policy on handling leniency applications Introduces a revised procedure from the initial approach to obtain a leniency marker through to the signing of corporate leniency agreements or no-action letters - To note: we state that leniency agreements will be signed in the later stages, not the start of, the investigation The conditions for the grant of leniency for undertakings and for the grant of no-action letters to individuals have been aligned 30

31 Consultation guidance - Making the process clear and accessible (2) Simplified rules for when the different types of leniency are available - To note: we clarify that criminal (individual) and civil (corporate) immunity are assessed separately in Type B cases Includes more detail on what is expected by the OFT in terms of complete and continuous co-operation from leniency applicants - To note: we state that we now expect a senior representative of the applicant to sign a letter, at the marker stage, saying that they understand the co-operation requirements expected 31

32 Consultation guidance - Making the process clear and accessible (3) Presenting the guidance in a more useful way for advisors and applicants: - simplified language (e.g. removing references to the proffer and perfecting the marker ) - diagrams clarifying the process - more visibility given to the list of co-operation requirements (formerly in the pro-forma agreement at the back of the guidance only) - a list of information requirements during the course of a leniency application The admission requirement - The guidance clarifies that an admission of the infringement is an express condition of the leniency agreement - This requirement is not new, it is merely given greater prominence 32

33 Consultation guidance Key issues Pre-application investigations - The draft revised guidance gives indicative examples of the types of investigative steps that might be expected to be carried out by the applicant and/or the OFT Many respondents have queried whether OFT is realistic to expect only limited pre-application investigations, in particular given the admission requirement Waivers of Legal Professional Privilege (LPP) - The OFT states in the draft guidance that it might be necessary for leniency parties to waive legal professional privilege (LPP) over documents, where necessary for a related OFT criminal cartel case This issue has generated very polarised responses 33

34 LPP waivers - What is the issue? Leniency applicants might claim LPP over first account witness material, where the lawyer has interviewed individuals within the business about their role or others roles in an alleged infringement Witness credibility is very often an issue in criminal trials especially where coconspirators to an offence have received immunity in exchange for their testimony Criminal lawyers defending an individual charged with the criminal cartel offence might be keen to see such material in order to see whether the witness story has changed over time, which can go to credibility The duties of the OFT as an investigator and prosecutor in criminal cases include a duty to pursue all reasonable lines of enquiry, and a duty in relation to disclosure to take reasonable steps to obtain materials in the possession of third parties that might undermine the prosecution case or assist a defence case The OFT cannot use its compulsory powers to obtain materials protected by LPP, nor can a court order disclosure of LPP material 34

35 Next steps The consultation responses that we have received on LPP waivers have been polarised We have listened to the responses and have decided to take some extra time to consider the issue and ensure that we strike the right balance... between maintaining the incentives for applicants to come forward and... Safeguarding our ability to prosecute appropriate cases 35

36 A final word on detection Leniency is an important tool but not the only detection tool OFT is aiming to become more intelligence-led - Leniency often catches late-stage cartels : would like to catch more cartels earlier to prevent harm - Increased incentive to apply for leniency if greater likelihood of non-leniency based investigations - Ability to investigate and take action against bi-lateral cartels without having to rely on accomplice witnesses who may benefit from immunity Since October 2009, more than 50% of new OFT cartel cases opened have been intelligence-led 36

37 Overall. OFT has faced some challenges in its enforcement regime but is committed to learning from those and continuing robust enforcement We will continue to work to optimise compliance and deterrence with available resources OFT to submit a final draft of revised penalties guidance to the Secretary of State for approval in due course Leniency and privilege is a complex and difficult issue: have decided to take some extra time to consider Watch this space.. 37

38 The right mix of sticks and carrots: The OFT's review of its penalties and leniency policies Dr. Amelia Fletcher, Chief Economist, OFT King s College London, 1 May