How to help clients avoid competition law pitfalls

By The CA magazine

4 December 2015

Exploring key elements of competition law and how accountants can help SME clients to avoid a breach.

Competition law could threaten SME owner directors with criminal prosecution, substantial fines and potentially ruinous civil damages.

One of the myths of competition law, at national and European level, is that it is a “big business” issue and something that small to medium-sized businesses do not have to worry about.

To combat this, the Competition and Markets Authority (CMA) has compiled a “60-second guide” aimed at helping accountants to raise awareness among small to medium enterprise (SME) clients of the need to comply.

An issue for SMEs

Michael Dean, head of EU competition law at Maclay Murray & Spens, agrees this is an issue for SMEs. He said: “There are many examples of the CMA and its predecessor, the Office of Fair Trading (OFT), acting to break up cartels that consisted largely or wholly of small businesses and one-man bands. Plumbers and roofing contractors in local areas who have agreed pricing among themselves, have all fallen foul of the legislation."

Firms of estate agents have also found themselves under investigation. Michael said: “We see instance after instance where directors of smaller companies are involved in dialogue with competitors that we regard as putting their organisations at considerable risk."

The CMA guide was developed in co-operation with ICAS and the Association of Chartered Certified Accountants (ACCA). Both bodies have expressed concern that SME owner directors could be breaking the law and risking criminal prosecution. They could face substantial fines and potentially ruinous civil damages claims.

Competition benefits consumers and society at large, in that it ensures that resources are used more efficiently and effectively

Steven Bunch, Scotland Policy Officer at the CMA, pointed out that CAs are ideally placed to spot where a business may be in danger of behaving anti-competitively. He added that there are important ethical and criminal issues involved. “Competition benefits consumers and society at large, in that it ensures that resources are used more efficiently and effectively,” he said. Research by the CMA found that 85 per cent of all businesses regard complying with Competition Law as “the right thing to do ethically”.

Competition law is primarily concerned with practices such as anti-competitive agreements, abusive behaviour by firms in dominant positions and mergers and acquisitions. Awareness of what constitutes anti-competitive behaviour is low; CMA research showed that 77 per cent of businesses do not understand competition law well, while 9 per cent admitted discussing prices with the competition, which puts them on very dangerous ground. Levels of understanding of the consequences of breaching competition law were also poor: only 6 per cent of businesses said that they believed they had a “good” or “very good” understanding of the penalties involved.

Knowing what anti-competitive behaviour looks like can help CAs protect their clients from facing enforcement action by the CMA, the European Commission or regulators such as the Financial Conduct Authority.

Steven said that the current economic climate can lead to enterprises forming overt or tacit agreements not to undercut each other, to protect profits and maintain their presence in the market. If this line is crossed, the businesses involved are effectively operating as a cartel, which is forbidden under competition law. “There does not need to be a formal agreement for the law to apply; a shared understanding or ‘gentleman’s agreement’ not to compete, or seemingly innocent exchanges may be sufficient,” he said.

Contact with competitors carries risks

The more prolonged the contact, the greater the risk. CMA research showed that 83 per cent of businesses have contact with other businesses in their sector, which clearly could present a risk.

Cartels operate in a variety of ways. It can be by coordinating or “fixing” their prices; by colluding and rigging bids to control who wins a tender; or, for example, by sharing markets by allocating customers or territories; or collectively limiting output and supply. The impact of cartel behaviour on customers is generally to inflate prices artificially. Steven pointed out that academic research suggests cartels can inflate prices in a market by as much as 30 per cent or more.

Even without an agreement, businesses can infringe competition law if they engage in “concerted practices”: practical co-operation instead of competition as a result of direct or indirect contact with competitors. “Abuse of a dominant market position” could include offering excessive prices to customers, pricing below cost to drive out a competitor, refusing to supply or limiting production.

Fines could be up to 10 per cent of a company’s global turnover. If a firm is found to have breached the law, customers who feel that they may have suffered from unfair pricing will be in a strong position to claim for damages.

Fines can have a serious impact on smaller businesses. In one case involving a number of local commercial vehicle dealers in Scotland, fines wiped out up to 18 months’ worth of profit for the companies involved

Michael noted that competition law can also work in your favour. He said: “Take a company that has made an acquisition and the acquired company is discovered to have been the victim of a long-running cartel. The acquirer could be sitting on a valuable asset, with substantial damages claims against cartel members that it could bring.”

A new entrant to a local market can face suppliers charging them higher prices than those paid by local operators. “This is a common way of trying to insulate a local market from outside competitors but it is completely illegal and the new company can use competition law to force existing companies in the area to supply it with the goods and services it requires,” said Dean Michael.

He said that, if competition law is not taken into account, contracts could be unenforceable; a deal in a supply chain might be jeopardised. He added that SME directors and their advisors should not conduct their own investigation of a suspected breach of competition law without having taken legal advice as it would risk creating a chain of evidence that could be used against them.

Individual directors and senior officers can face criminal charges for cartel behaviour, with a maximum prison sentence of five years. Directors can be disqualified for up to 15 years. “Fines can have a serious impact on smaller businesses. In one case involving a number of local commercial vehicle dealers in Scotland, fines wiped out up to 18 months’ worth of profit for the companies involved which were fined £2.8m for competition law infringements,”  said Steven.

Companies who find they are infringing laws against cartel behaviour may be dealt with leniently if they come forward quickly enough. Timely advice from a CA might make all the difference.

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