SHEPHERD+ WEDDERBURN
How level is your playing field?
In this article, Liz McRobb, Partner at law firm Shepherd and Wedderburn discusses how market participants might respond to the competition law conundrums coming their way. The water industry in England is undergoing changes of a scale unseen since privatisation. Incumbents in the market will very much be aware of the looming presence of non-household retail competition going live, an event less than a year away. With shadow operation literally around the corner, minds are focussed on delivery for day one, but how much time is being given to the longer term and strategies for competing in the new market?
in the past, are now more determined to flex their regulatory muscles where they find misbehaviour.
The concepts in competition law may be familiar to some, but understandably will be unfamiliar and remote to others in this industry.
Are you confident?
To those unfamiliar, these concepts may not have meant much in the past – but they represent real and material risks in the future for any wholesaler or retailer operating in the competitive market. The consequences of breaching competition law obligations are significant. No one wants to be accused of running an anticompetitive cartel, or to have a multi-million pound fine levied on their business. Whilst of significance, these consequences can at least be quantified and have limits. The reputational damage to a business in the eyes of customers, regulators and investors can be even more severe. Plus, there is the potential for follow-on damage claims by parties affected by anti-competitive behaviour, which could be even more painful for the business. Cases brought by the Competition and Markets Authority (CMA) in liquid storage tanks and concrete drainage products are recent, real world examples of anti-competitive behaviour affecting the water industry. The UK competition authorities, having suffered some embarrassment
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Those looking for comfort and a regulatory ‘stamp of approval’ from Ofwat will not be rewarded. Ofwat have set out expectations on market participants, but these are not prescriptive beyond arms-length trading requirements and general reminders on competition law compliance.
Over the coming months, market participants will need to provide assurances to the market operator through interim and final assurance letters. The language used in these requirements sets a high standard – wording that was no doubt deliberate. Company boards must have fully considered the risks of their approach to business separation and competition law risk. They must establish policies that reflect these risks and be confident that these policies will secure a level playing field, with control processes in place to ensure compliance with these policies. Ultimately, coming up with an effective and proportionate response to competition law risk is very much in the hands of individual companies. Companies will have to consider exactly how they will demonstrate this compliance and consider what it might take to seriously embed compliance in the long run.
So where to start? A great place is to look at the existing guidance from the CMA and adopt a risk based approach to competition compliance under their four step
process. A risk based approach can help identify those more likely to engage in competition breaches and allow the most appropriate mitigations to be put in place. This helps avoid implementing an unnecessary and overly complex training programme. In essence, the most significant challenge will come from people and culture, particularly when interacting with wholesalers. Embedding the necessary behaviours will take time. This will be helped with clear policies and processes – particularly on getting employees to recognise when something is ‘not quite right’ and asking practical questions where they find themselves in ‘red flag’ situations: Would I do what I’m about to do for all retailers equally? Should we really be talking about this topic with my competitors at this trade conference? Does the wholesale tariff scheme I’m about to draft comply with the Competition Act? Follow up and refresh is important. Many major utilities operate ongoing competition compliance programmes involving training, policy review and audit. An appropriately specified programme could make all the difference in the years after market opening, when the risk of complacency can set in. Fundamentally, a successful compliance culture is instilled through leading by example. Senior management should take competition compliance seriously and be seen to do so very visibly within and outside the business. Establishing a culture of compliance from the top down is critical.