02 November 2018 by Karen Campbell-White
Breaking competition law can happen in different ways but some of the most serious ones are also the least understood
Fair competition is fundamental for a progressive, innovative economy. Where businesses try to avoid competing with each other, they undermine this principle with harmful consequences. The founder of modern economics, Adam Smith, spoke of collusion as a ‘conspiracy against the public’. To put it in even more frank language, we see it as ripping people off.
Business cartels can include activity such as price fixing, market sharing or bid-rigging but many still don’t recognise how little it takes to end up involved in these practices. What all business cartels have in common is a culture where an opportunistic disregard for fairness in the pursuit of profit prevails. Gordon Gekko famously said ‘Greed is Good’. Ultimately, cartels are fuelled by greed and are a form of cheating by manipulating the odds: they deprive customers of a fair deal, including other honest businesses – stopping them from being able to compete and prosper on a level playing field.
The Competition and Markets Authority (CMA) is determined to root out and stop cartels. Currently we are investigating 15 competition cases across a mix of sectors ranging from construction to estate agents. In the last three years we’ve fined businesses over £150m following investigations into anti-competitive practices. We’re also increasingly flexing our director disqualification powers – with three disqualifications under our belt and more in sight. All the more reason for those at the top to sit up and take notice – if they haven’t already.
Our latest research reveals that many businesses are still unclear about what cartels look like and the risky business behaviours that could put them in danger of breaking the law are as follows:
These misconceptions should ring alarm bells because the consequences of breaking the law are serious and could result in the following:
However, despite the dangers, competition law risk remains low on boardroom agendas. Just 18% of those polled said their business had senior level discussions about it, trailing far behind health & safety and employment law.
We recently launched a ‘Stop Cartels’ campaign to educate businesses and the wider public on what cartels look like and encourage more reporting. This builds on the success of a similar campaign last year that led to a 30% increase in tip offs to our Cartels Hotline. So, what are we doing differently with this latest campaign? After speaking with businesses to understand how best to encourage reporting we have made the process easier with:
Competition law enforcement in the UK is ramping up. The risk of getting caught and punished for being in a cartel has always been high but is even more so today. Our message is that any profits you may seek to gain from being in a cartel aren’t worth the gamble. To ensure your business doesn’t fall foul of the law a culture of compliance with competition law, led from the top down, is essential. This is where company secretaries and those who advise on governance play a key role in challenging and motivating senior teams to take cartel risks seriously.
So how can you convince your board to care about competition law? There are three points to raise. Firstly, your employees may not know where the line is between legal and illegal behaviour and this could come back to bite you. People who are most at risk of breaking competition law include those in roles involving pricing and commercial strategy, such as sales. CMA research conducted amongst frontline sales professionals shows that the majority have a poor understanding of competition law.
What’s even more worrying is that, when quizzed about day-to-day behaviours that would likely break the law, they showed similar levels of ignorance. Directors have a special responsibility to be informed about what is happening in their business – negligence, as well as active involvement, can put them at risk of disqualification. If you’re in charge and a cartel happens on your watch, you could be disqualified.
“All business cartels have a culture where an opportunistic disregard for fairness in the pursuit of profit prevails”
Secondly, competition law applies to all business types. By way of example, let’s consider two very different sectors where businesses broke competition law: the production of galvanised steel tanks (used for water storage in large buildings such as schools or hospitals, and in fire sprinklers) and the online market for posters and frames featuring the likes of Justin Bieber. Would you say, at first glance, that these two sectors had much in common? Both of these sectors harboured cartels. Cartels can occur in any market.
Lastly, informing staff about cartel risks doesn’t have to be onerous. You don’t have to be a competition law expert to understand cartel behaviours and the law. And, while there is certainly a considerable lack of awareness around competition law – within small to medium-sized enterprises in particular – there is guidance available to help businesses stay on the straight and narrow. The CMA has a range of introductory competition law guides – short videos and one-pagers looking at different aspects of competition law in a brief, accessible way.
Now you have everyone’s attention, and bearing in mind the ultimate responsibility of the board for managing cartel risk and internal control, how can you help challenge the business on compliance?
Questions to ask:
The consequences of not getting to grips with cartel risks can be serious and the repercussions for the business can be long lasting – as recent CMA cases prove.
Cartel case study 1: Amazon marketplace seller fined over £160,000 for price-fixing
In 2016 two online sellers of popular posters and frames, featuring the likes of Justin Bieber and One Direction, took part in an illegal price-fixing cartel by agreeing that they would not undercut each other’s prices for products sold on Amazon’s UK website. They used automated re-pricing software to monitor each other’s prices and run the cartel.
The CMA took action and one seller was fined over £160,000 and disqualified from acting as a director for 5 years. Lessons learnt from this case were as follows:
Cartel case study 2: Household fuel suppliers fined over £3.4 million for rigging competitive tenders
In 2018 two of the main suppliers of bagged household fuels to large national supermarkets and petrol stations were fined over £3.4 million for rigging competitive tenders to supply Tesco and Sainsbury’s.
For each of the tenders concerned, they agreed that one of them would deliberately submit a higher bid that was designed to lose, so that the existing supplier could retain its customer. From this case it was clear that:
Cartel case study 3: Water tank suppliers fined over £2.6 million for multiple illegal business cartel activities
Galvanised steel tanks are used for water storage in large buildings, such as schools or supermarkets, and supply the water used in fire sprinkler systems.
In 2016, a number of water tank suppliers were fined over £2.6 million for breaking competition law by agreeing to fix the price of certain tanks, dividing up customers and rigging bids for contracts. In a separate decision one company was fined £130,000 for sharing commercially sensitive information at a single meeting that was secretly recorded by the CMA. Lessons from this case included:
If you are approached to join a cartel or to get involved in anti-competitive arrangements you should: immediately reject the approach, clearly and unequivocally and leave the meeting, making it clear that you refuse to take part in anything illegal.
|If you think you may have been involved in a cartel then it’s better to ‘Be Safe, Not Sorry’ and report it to us first, as you may benefit from immunity from fines and prosecution if you report before others do.If you think you’ve witnessed others breaking the law, do what’s right and report it to usin confidence. You may benefit from a financial reward.For more information on what a cartel is and how to report go to: gov.uk/stopcartels or call the CMA cartels hotline on 020 3738 6888|