Stronger competition penalties prompt CMA policy review

The CMA is legally required to publish a statement of policy setting out its approach to imposing administrative penalties for procedural breaches of various UK competition rules. The DMCCA has introduced new and increased cross-cutting competition penalties for administrative infringements, meaning that procedural breaches, such as failing to respond to mandatory document requests, may now lead to substantially higher fines, representing a dramatic change in the potential penalty exposure for businesses and individuals.

To reflect legislative changes arising from the DMCCA, as well as practical developments in the CMA’s investigation and enforcement actions since 2014, the CMA has published for public consultation its draft updated statement of policy on administrative fines. The draft guidance covers administrative and procedural civil penalties that the CMA can impose in competition, market inquiries, merger control, digital markets, and motor fuel monitoring cases. However, it does not cover consumer protection aspects of the DMCCA.

The consultation runs until 23 August 2024 and the finalised version will replace the CMA’s current administrative penalties policy which has been in place since 2014.

Significantly increased administrative penalties

The draft guidance explains the CMA’s new statutory powers to impose administrative penalties on businesses and individuals for a range of procedural infringements. They include:

• failure to comply with mandatory information and document requests;
• failure to comply with mandatory merger reporting requirements – although this applies only to large digital firms designated as having “strategic market status” (SMS);
• breaches of the new duty of evidence preservation under the Competition Act 1998 (CA98);
• concealing, falsifying or destroying evidence;
• providing false or misleading information to the CMA;
• ·obstructing a CMA investigation; and
• breaches of commitments, undertakings, directions, orders, or interim measures.

Businesses

For businesses, the maximum administrative or procedural penalties before the DMCCA were either at a fixed rate of £30,000 or a daily rate of £15,000. They will now increase substantially because under the DMCCA all penalties aimed at businesses are turnover-based - mirroring the longstanding approach under EU competition law.  

As explained in the draft updated CMA policy, most maximum fixed penalties for businesses are capped at either 1% or 5% of their annual worldwide turnover. The 1% cap applies to breaches of “investigatory requirements”, such as mandatory information requests, and dawn raids. The 5% cap applies to breaches of “remedy requirements”, such as commitments, undertakings, enforcement orders, and CMA directions.

However, some large digital “SMS” firms could face a much heftier fine under the DMCCA that is up to 10% of their annual worldwide turnover. These exceptional administrative penalties can be imposed under the new digital markets competition regime if an SMS firm breaches an interim enforcement order (IEO) or a mandatory merger reporting requirement.

In cases of continued non-compliance, the maximum daily penalty that can be imposed on businesses is capped at 5% of daily worldwide turnover for all of the procedural infringements listed above, except for the SMS firm merger reporting requirement, which attracts a fixed penalty. Fixed and daily penalties can be imposed as alternatives, or in combination.

Individuals

One of the main changes the DMCCA brings about is that natural persons may now also face fines for most of the procedural competition law breaches mentioned above.  Although administrative fines cannot be imposed on individuals where an SMS firm breaches a mandatory merger reporting requirement or an IEO, under the digital competition rules; or where new motor fuel monitoring rules introduced by the DMCCA are breached.

DMCCA changes mean that individuals, such as directors, senior managers, or compliance officers, may also be fined for a range of procedural breaches. Individuals may face maximum fines of £30,000 (fixed) or £15,000 (daily), which can be imposed as alternatives or in combination. This penalty level mirrors the maximum administrative penalties that businesses could face before the DMCCA.

Individuals may also face director disqualification orders for breaching certain substantive provisions of the CA98 – as was the case before the DMCCA – or the new digital competition rules in the DMCCA, however such substantive breaches are beyond the scope of the CMA’s draft guidance under consultation.

Important updates on enforcement approach

Apart from changes in the scope and maximum value of procedural competition fines, the draft guidance also explains factors influencing the CMA’s decision to impose an administrative penalty, how the CMA decides whether to impose a fixed, or daily penalty, or both, and how the penalty level is calculated. It also sets out the CMA’s procedural steps for imposing the penalties.  Businesses and their senior managers should be aware of the assessment and balancing of aggravating and mitigating factors and the CMA’s consideration of the need for deterrence when it decides on the penalty level.

The draft guidance also provides more detail about what the CMA considers may constitute a “reasonable excuse” for non-compliance with procedural requirements, including when certain foreign law requirements can amount to a “reasonable excuse”. This is particularly relevant in light of the CMA’s new powers to demand information and documents from foreign-domiciled parties. These extraterritorial investigatory powers were added by the DMCCA amid court proceedings challenging the CMA’s jurisdiction to issue compulsory information requests to foreign-based companies.

Another important update clarifies the interaction between CMA penalty powers and non-penalty enforcement action for rectifying breaches of remedy requirements. The non-penalty enforcement actions fall into two categories: informal measures, such as agreed changes to a party’s conduct; and formal measures, for example, court proceedings and CMA directions under the Enterprise Act 2002.

The draft guidance also provides some useful practical examples of scenarios where the CMA may impose administrative penalties for different types of infringements. One notable example refers to how a business’s document retention policy could breach the new CA98 duty to preserve evidence in certain circumstances.

What is not covered

The CMA’s draft guidance does not cover substantive penalties, criminal offences, or consumer protection.

Substantive penalties

The CMA takes a different approach for calculating and imposing penalties for substantive infringements, and this guidance does not cover those. The CMA uses a more flexible “in the round” approach for administrative penalties, and a more formulaic and predictable “stepped” approach for substantive penalties.

The CMA has separate guidance on substantive penalties. Substantive penalties under the new digital markets competition regime are covered in the CMA’s draft Digital markets competition regime guidance (CMA194), which the CMA has recently finished consulting on.

Criminal offences

Some of the procedural infringements, like concealing, falsifying or destroying evidence, can also be prosecuted as a criminal offence. If a “relevant person”, either an entity or natural person, is found guilty of a criminal offence they cannot also receive an administrative penalty. Similarly, if a relevant person receives an administrative penalty, it does not mean that person has committed a criminal offence. In practice, the CMA has not pursued criminal offences for administrative breaches. For example, in the musical instruments (guitar) case, the CMA chose to impose an administrative penalty on a firm rather than seeking criminal prosecution, after the firm’s employee was found to have deliberately concealed evidence during a CMA dawn raid conducted under the CA98.

Consumer protection

The CMA is expected to separately consult on its new consumer protection direct enforcement guidance, and to also update its other consumer law guidance, to reflect the extensive new consumer law enforcement powers the CMA gains under the DMCCA. This separate new guidance is expected to cover the penalties that the CMA can imposed on businesses and certain individuals for breaches of UK consumer protection law.

Next steps

Over the coming months, the CMA is expected to keep publishing and consulting on various other pieces of draft guidance via its public consultation hub to capture DMCCA related changes. The vast majority of DMCCA provisions are yet to commence, and new regulations are expected in the coming weeks that will specify the commencement date(s) for the DMCCA.

Co-written by Tadeusz Gielas of Pinsent Masons.