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How to size the sanction under the CMA's new guidance

24 August 2017 by Robert Bell

How to size the sanction under the CMA's new guidance - Read more

The UK competition authority’s review of legal penalties will help business limit their liability for breach of competition law.

On 2 August 2017, the Competition and Markets Authority (CMA) opened a consultation on proposed amendments to its penalties guidance, written to reflect experience gained since issuing its former guidance in 2012.

This new guidance sets out how the CMA will calculate the financial penalties it can impose for breaches of EU and British competition law. The proposed amendments are more enhancements of the current system to promote transparency and clarity, rather than a major change in the CMA’s practice.

However, the new guidance is helpful reading for firms on how to limit their liability for competition law breaches, as well as what the CMA expects from an effective competition law compliance programme.

Current guidance

The CMA’s current penalty guidelines explain the steps taken and the factors it will consider when setting a penalty for an infringement of competition law.

The authority has two objectives:

  • To impose a penalty on the infringer that adequately reflects the seriousness of the infringement
  • To ensure penalties imposed have sufficient deterrent effect on future conduct of the infringing party and others

The guidance sets out a six-step calculation procedure for determining the level of any fine.

Step 1

The first step sets a starting point by applying a percentage figure reflecting the seriousness of the infringement. The current ‘tariff’ states this can be up to 30% of the company’s relevant turnover in the last business year.

The more serious and widespread the infringement, the higher the starting point is likely to be. The CMA will consider factors such as the nature of the products or services, the structure of the market, the market shares of those involved in the infringement, the effect on rivals and third parties, and the damage caused to consumers.

Step 2

The second stage allows the CMA to increase or decrease the starting point in Step 1 to take account of an infringement’s duration. Penalties for infringements lasting longer than a year may be multiplied up to the number of years of the infringement.

Step 3

Step 3 permits the CMA to adjust the fine for each infringing party to account for aggravating and mitigating factors. Examples from the guidance of common aggravating factors include situations where the firm is a leader in, or an instigator of, the infringement or whether this is a repeated infringement by the same undertaking.

On the other hand, mitigating factors include where there were adequate compliance measures in place or where the infringer cooperated with the CMA in the investigation.

Step 4

This allows for an increase in the Step 3 figure to ensure the fine sufficiently deters the relevant companies to ensure no repetition of their conduct. Alternatively, Step 4 can be used to decrease the penalty to ensure it is proportionate in the case circumstances, for instance if a company may be in financial difficulties.

Step 5

The fifth stage allows for the penalty calculation to be fine-tuned to ensure the penalty is not above the statutory maximum of 10% of the company’s worldwide turnover. This mechanism also allows credit to be given for any penalty or fine imposed by another regulator or court for the same conduct to avoid ‘double jeopardy’.

Step 6

The final step is where the CMA applies any penalty reductions resulting from its leniency and settlement policies to the final Step 5 figure.

Proposed changes

The CMA is now proposing to make certain limited changes to the guidance. These proposed changes reflect the authority’s recent experience and address the introduction of a new power the CMA and concurrent regulators enjoy under the Consumer Rights Act 2015 to grant a penalty reduction for approved voluntary redress schemes.

The authority is proposing the following changes:

Seriousness of the infringement

Under Step 1, the CMA is proposing further guidance on how it assesses the seriousness of an infringement and in particular how it applies the starting point range. The current guidance provides a starting point of up to 30% of a company’s relevant turnover. Prior to 2012, a starting point of up to 10% had been in place.

The new guidance recognises the starting point for any particular infringement is necessarily dependent on the facts of each case.

Nevertheless, the CMA’s approach will generally be to use a starting point between 21% and 30% for the most serious types of infringement, such as cartel activities or exploitative or exclusionary abuses. Less serious infringements will start between 10% and 20%, with fines of less than 10% only applied in exceptional cases.

Aggravating and mitigating factors

The CMA has fleshed out what amounts to aggravating and mitigating factors under Step 3. This guidance is useful insight into the authority’s thinking as it helps companies understand what compliance steps they need to take to minimise their exposure should they find themselves
under investigation.

The CMA has recently increased its use of warning and advisory letters. The purpose of these letters is to explain that the authority is concerned that certain companies may be breaching competition law, and to encourage them to comply. Where a company fails to act after receiving one of these letters the authority believes the omission should be viewed as an aggravating factor.

The current guidance provides that where the CMA considers that adequate steps have been taken in order to ensure competition law compliance a fine reduction is justified. It will normally consider reducing the penalty by up to 10%.

“Where a company fails to act after receiving a warning or advisory letter, the authority believes the omission should be viewed as an aggravating factor”

The authority is proposing to make further amendments to its policy to explicitly state that to be eligible for such a discount the company concerned must show a clear and unambiguous commitment to compliance.

The CMA considers that this should include a public statement on the company’s website regarding its commitment to comply with competition law, and the firm ensuring that its compliance activities are maintained and monitored.

It will expect companies to review these activities periodically and report back. It is not clear how this is going to work or how practical such a requirement is.

The CMA also sets out further guidance on what constitutes effective cooperation to earn companies a possible fine reduction. In its revised guidance, the authority states that the level of cooperation has to be over and above respecting time limits in an investigation. An example of extra cooperation may be a company’s willingness to offer its staff for voluntary interviews and the providing of witness statements.

Voluntary redress schemes

The new proposals include a new section on voluntary redress schemes which the CMA can approve under the Consumer Rights Act 2015.

These schemes can be put forward by infringing companies to compensate third parties that have suffered loss and damage due to their anti-competitive conduct. Where the CMA approves such a scheme it will consider reducing the penalty, usually by 10%, with the decrease taken into account at Step 6.

Leniency

At Step 6, the CMA will apply any penalty reductions resulting from the operation of its leniency and settlement policies to the figure reached at the end of Step 5. These discounts will be applied first, after which any further discount for a voluntary redress scheme will be applied.

Time to ponder

The CMA’s revised guidance is to be welcomed for the most part in providing additional clarity and transparency to its thinking. However, certain parts do require further consideration as to their practicality or desirability, such as regular reporting of compliance activities to the authority.

A copy of the consultation document can be found on the UK government’s website.

Robert Bell is a partner at Bryan Cave

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