Competition | Regulatory Outlook September 2022
Published on 28th Sep 2022
Digital Regulation Cooperation Forum publishes its terms of reference | Compare the Market's appeal against £17.9 million fine upheld | Horizontal agreements
Digital Regulation Cooperation Forum publishes its terms of reference
On 5 September 2022, the Digital Regulation Cooperation Forum (DRCF) published its terms of reference. The DRCF launched in July 2020 and is made up of the Competition and Markets Authority (CMA), the Information Commissioner's Office, Ofcom and the Financial Conduct Authority (which joined the DRCF in July 2020). The DRCF is a voluntary cooperation forum which aims to facilitate engagement between its member regulators on digital policy areas of mutual interest.
The terms of reference set out that the DRCF's goals are threefold:
- promote greater coherence, particularly in resolving any tensions that might exist between its members where regulatory regimes intersect;
- work collaboratively on areas of common interest and jointly address complex problems; and
- work together to build the necessary capabilities.
In addition to these overarching goals, the terms of reference sets out a number of specific objectives. These include using the member regulators' collective expertise to respond to policy challenges in the digital space, anticipating future developments by developing a shared understanding of digital trends and strengthening international engagement with regulatory bodies to exchange information and best practice regarding approaches to the regulation of digital markets. This will, in turn, facilitate a UK digital economy that will serve its citizens and consumers better, reduce regulatory burdens for industry (where appropriate) and enhance the UK's global impact and position.
For more on the DRCF's work, see our previous Insights on the launching of a UK hub for digital expertise and an invitation for views on its algorithmic processing papers.
Compare the Market's appeal against £17.9 million fine upheld
The Competition Appeal Tribunal (CAT) has upheld Compare the Market's appeal against the CMA's finding that Compare the Market's use of wide price parity (aka most favoured nation) clauses (wMFNs) between 1 December 2015 and 1 December 2017 was anti-competitive. As well as criticising the CMA's analysis, the CAT quashed the CMA's £17.9 million fine imposed on Compare the Market.
In its infringement decision, the CMA had concluded that Compare the Market's use of wMFNs, which aimed to prevent certain home insurance providers from undercutting the prices quoted on Compare the Market both through their own websites and other price comparison websites, had anti-competitive effects.
In overturning the CMA's decision, the CAT held that the CMA had erred in its definition of the market. Specifically, the CMA had wrongly considered that the two products of Compare the Market - the home insurance intermediation services offered to consumers and customer introduction services offered to home insurance providers - were part of one market. Furthermore, the CMA should have considered other channels of purchasing home insurance products, such as direct home insurance channels, as part of the same market as price comparison websites.
The CAT held that the use of wMFNs by Compare the Market was not anti-competitive by object. That meant that, for an infringement to have arisen, the CMA would need to have shown that the wMFNs had an appreciable effect of preventing, restricting or distorting competition. However, the CMA had failed to adduce sufficient evidence to show that the wMFNs had any such anti-competitive effect. The CMA's evidence was described as "anecdotal", "lacking depth" and "untestable" by both Compare the Market and the CAT. On this basis, the CMA's decision was set aside.
While bringing the UK position into line with the European Commission (which, in its updated vertical agreements block exemption, treats wMFNs as excluded restrictions that need to be individually assessed), the CAT's judgment directly conflicts with the recently published vertical agreements block exemption order (VABEO) and accompanying guidelines. Under VABEO, wMFNs are considered to be "hard-core" restrictions of competition law which have as their object the restriction of competition and therefore cannot benefit from the block exemption. While businesses can take comfort from the CAT's decision that wMFNs may be pro-competitive, they will not benefit from automatic exemption and will need to be individually assessed for their effect on competition.
Moreover, the CAT made clear in its decision that even narrow MFNs may have anticompetitive effects. While narrow MFNs benefit from automatic exemption under VABEO, they will be vulnerable to challenge if included in agreements that fall outside the VABEO safe harbour (that is, where one party has more than 30% market share).
The Department for Business, Energy and Industrial Strategy is consulting on the draft text of the two horizontal block exemptions, relating to specialisation and research and development agreements. Comments are invited by 7 October 2022.
These two block exemptions set out how competitors can enter into agreements with each other without breaching competition law. New legislation is needed to replace current EU legislation, currently retained in UK statute, which is due to expire on 31 December 2022.
Although the new regulations are broadly in line with existing EU regulations, the draft text of the horizontal block exemptions does propose some notable changes to both the specialisation and research & development exemption regimes.
The draft Specialisation Agreements Block Exemption Order expands the scope of the block exemption to include unilateral specialisation agreements between more than two parties. Previous EU legislation only covered unilateral specialisation agreements between two parties. Unilateral specialisation agreements are those entered into between parties active on the same product market where one party agrees to stop production of certain products and instead purchase them from another party.
The change should allow more agreements to benefit from the exemption and these agreements may result in products being produced more efficiently and cheaply.
Research and development
The draft Research and Development Block Exemption Order (R&D BEO) alters the test for whether undertakings "competing in innovation" can benefit from the R&D BEO.
Under the previous EU regulations R&D agreements between undertakings developing new technologies were not subject to a market share threshold, that is, the parties to an agreement did not have to demonstrate they had a market share under 25% in order to benefit from the block exemption. Instead the new UK regime requires undertakings "competing in innovation" to identify three or more competing R&D efforts that are comparable with those carried out by the parties to the agreement.
This change is aimed at promoting dynamic competition – the possibility of firms being able to enter or expand in a market, principally as a result of R&D.
Updated EU rules on horizontal agreements
The EU is also proposing to introduce new horizontal agreement block exemptions, which the UK proposals largely reflect. A notable difference is the inclusion of a chapter within the Horizontal Guidelines on how horizontal sustainability agreements can be assessed.
Although the CMA has also provided guidance relating to horizontal agreements and sustainability, the EU's guidance goes into significantly more depth. Please see our previous Insight for more detail on the Commission's and CMA's view on competition law and sustainability.