Brexit: Competition and State Aid (EUC Report)

Lord Whitty Excerpts

Thursday 24th May 2018 Lords Chamber

Moved by

[Lord Whitty]

To move that this House takes note of the Report from the European Union Committee Brexit: competition and State aid (12th Report, HL Paper 67).

[Lord Whitty (Lab)]

My Lords, this inquiry was conducted by the EU Internal Market Sub-committee between September 2017 and January this year and was published in February. My thanks as ever go to the members of my committee, several of whom are going to speak today, and particularly to the members of staff and to our specialist adviser, Professor Erika Szyszczak. We were pleased also to receive a response from the Government within the deadline—a decidedly better record than many of our Brexit reports have received. So our thanks go to the BEIS Minister, who has also given us a reply on the CMA’s role as a post-Brexit state aid body. Congratulations to BEIS, and I hope that other departments will follow suit.

The speed of the ministerial response may be due in part to the fact that most of the report is relatively non-contentious in the sense that the Minister, broadly at least, agrees with us. This reflects the fact that the UK’s domestic competition framework has been closely modelled on the EU’s, but it is equally true to say that the EU model itself was based on the earlier precedent of British law and British experience. That does not mean that there is no dissent; witnesses were generally positive about the UK competition regime in its interaction with the EU, but concerns were raised about consumer protection and consumer rights, about tackling market dominance in new-fangled forms of markets such as online platforms, a topic on which the sub-committee had previously reported, and about delays and bureaucracy in the EU state aid approval process.

Repatriation of policy to the UK in these areas poses some complex problems in our relationship with the EU post Brexit and for the UK internally. A deep and comprehensive free trade agreement with the EU would undoubtedly retain some mutual arrangements on fair competition, state aid and public procurement. Indeed, any modern free trade agreement with any major economy would probably have some such provisions—as, to a degree, would trade on WTO terms. As in many areas, “taking back control” is therefore a relative term.

Nevertheless, the prospect of taking back control has raised some old arguments about these policies, especially on state aid, to which I shall return later. First, on the immediate short-term implications of Brexit, the Competition Act, under which UK procedures operate, sets out a consistency principle that obliges UK courts to ensure that there is no inconsistency between the application of domestic anti-trust prohibitions and EU law. That principle will clearly go after Brexit, but the Government apparently agree with the retention of some sort of duty on UK courts to take account of European competition jurisprudence. There is no clear indication what form that would take. I should be grateful if the Minister could give further detail on that: will it be “should have regard to”, “may have regard to”, “should take into account”, or whatever? Any comments would be helpful.

The domestic system of merger control currently operates alongside EU merger regulations. This arrangement is known as the “one-stop shop”. The loss of UK access to the one-stop shop at European level will lead to a need for separate notifications for markets that go beyond the UK to both the CMA and the European authorities. It will therefore mean not only an increased workload for the CMA but some businesses being faced with duplicate inquiries and costs.

The Government’s response says that they intend to limit the impact of the loss of the one-stop shop by increasing the efficiency of the CMA. I am not sure that goes far enough. Should the Government not seek an arrangement that would modify, reduce or, in some cases, abrogate the need for a UK merger review when a transaction has already, or in parallel, been notified to the European authorities?

Contributors to the inquiry set out a number of common transitional issues relating to anti-trust, merger control and state aid. They involve the status of cases still live at the point of exit, future cases that relate to pre-exit behaviour and pre-Brexit cases where remedies and commitments need to continue to be monitored by the authorities. That raises the whole question of the enforcement gap. Given the UK’s red line on the involvement of the European Court of Justice in these matters, has any further progress been made in negotiations on how such things would be dealt with after Brexit?

I will raise one tangential issue. There was discussion in the committee as to whether we should mention this, as it involves the employment of lawyers, and we were not quite sure whether it was relevant to the inquiry—but as we are a sub-committee that deals with non-financial services in the Brexit context, we thought that we should raise it. The UK is effectively the leading jurisdiction for private individuals or businesses seeking damages for breaches of EU anti-trust law. Litigants are attracted to the UK for the skill of its lawyers, the clearness of its procedures, et cetera. Many of those features may well continue. Nevertheless, there was anxiety that that substantial—and, indeed, remunerative—part of EU legal services may cease with Brexit.

The Government say in their response that the UK’s attractiveness as a jurisdiction should not be affected, but they acknowledge that the legal base for pursuing claims based on Commission decisions will be subject to negotiations about future civil justice co-operation. Again, does the Minister have any further detail on those discussions and negotiations so far?

Those are the transitional problems. The key issue is where future UK policy goes. While there was broad consensus from witnesses that there should be general continuity of policy in these areas, there was also recognition that we would have the opportunity and scope to look at policies again. This applies particularly to policy on mergers, for example—on attitudes to the public interest dimension and to overseas takeovers—and even more so to the most difficult area of state aid. Some of these are quite old arguments that are now posed in a new post Brexit context.

I shall take each of the main areas separately. First, on anti-trust, the global nature of competition has resulted in a broadly consistent international approach to competition policy. While it was made clear to us, and we agreed, that the UK should maintain the principles underpinning its competition policy, there will be some opportunities post Brexit to improve the regime, for example in the area I mentioned earlier in relation to the market dominance within digital areas such as online platforms. The Government say that they do not intend to fundamentally change the UK’s competition law and enforcement framework, but they have, for example, said that they are taking steps, independent of Brexit—allegedly—to strengthen this framework, including granting additional resources to the CMA and completing their review of UK competition policy by April next year. I ask the Minister whether there might be commitments in the future UK-EU relationship that could limit or prevent the UK in future from taking a more innovative, independent approach to enforcement.

Secondly, on the merger side, the discussions we have had on mergers policy in this country in the last few years has been overshadowed a bit by the Cadbury takeover by Kraft, which was one of the most controversial foreign acquisitions of a UK firm in recent years, and indeed one where the conditions imposed by the UK authorities were subsequently ignored by the acquiring company. That has rather coloured people’s views on the effectiveness of our merger policy, and some view Brexit as an opportunity to revise and strengthen the public interest criteria in merger control.

We, however, concluded that historically it has not been EU state aid rules that have seriously restricted the UK authorities looking at wider merger control criteria. However, it is the case that it is likely that Brexit will mean increased pressure internally to change current UK legislation and practice. The pressure on overseas takeovers could be in one of two directions—one from a protectionist view to defend UK-owned assets, and the other from the globalists who want to be more welcoming to international investment. Our general view is that we should keep things broadly as they are.

The Government recognise that a reliable merger control regime is important, but of course they themselves have opened the door a little by proposing some new public interest regimes in relation to security issues in the October 2017 National Security and Infrastructure Investment Review. This has amended the threshold tests for the military and dual-use sectors and parts of advanced technology—which could be quite a substantial part of the economy. How will the Government balance future changes in merger control because of these domestic pressures with their stated desire to ensure that we continue to be broadly aligned with European processes? In relation to resources, are the Government convinced that the additional resources provided to the CMA will be sufficient to cover the increased number and complexity of cases?

In terms of negotiations the UK and the EU start from a position of extensive mutual assistance on competition matters through what is known as the European Competition Network of national competition authorities. We would hope, and the Government would hope, that we will maintain that co-operation. What kind of role, if any, would the Government see for the CMA in the European Competition Network, which has provided us with a very substantial degree of benefit over the years?

The last area is state aid, and it is the most complex area that we considered. The EU is, of course, conferred with exclusive competence in this area, and its rulings are applied directly and enforced directly by the Commission. EU state aid rules have clearly been a source of frustration for some and, in some cases, have been painted as the central obstacle to government intervention—a particular example, allegedly, being the recent crisis in the steel sector. However, we concluded that, in general, successive Governments have found EU state aid rules flexible enough to provide support where they have wanted to provide assistance for major projects. Indeed, we found that other EU member states had managed to spend significantly higher sums on state aid, suggesting that it is not really EU rules themselves that are the barrier. To take a topical example, an incoming Chancellor—say, John McDonnell—could quadruple state aid spending in this country without matching the level of other leading economies such as Germany, and in most cases would do so without incurring EU state aid censure. That is not to say that he would not run into trouble with some other bits of EU legislation, but not on state aid provisions.

For post-Brexit state aid policy and institutions, we need a new state aid authority, which will have a dual perspective: first, to ensure that proposed state aid does not contravene our international obligations under our free trade agreement with Europe or, indeed, with anybody else, or indeed under WTO rules. It is likely that any significant free trade agreement will have some such provisions. The EU has been clear that it seeks an agreement that ensures a level playing field between parties on competition matters, and there will need to be co-operation between the CMA and the proposed trade remedies body that is going to be set up under the Trade Bill—if and when it makes progress in another place.

Secondly, as well as those international obligations—and, in a sense, for the first time—the new authority will decide whether state aid, including public procurement aspects, granted by UK bodies, is compatible and does not distort the European or international market or, indeed, the UK internal single market. That is a bit of a novel responsibility, which could cause significant internal political tensions. That is why we emphasised the need for the Government to act in concert particularly with devolved Administrations and local government when they draw up their post-Brexit state aid policy, and the CMA takes on that responsibility.

It is, of course, also true that under EU rules there are substantial block exemptions from state aid limitations, which includes most public services and agriculture, for example. In immediate terms, those will be transposed under the withdrawal Bill, but we would like to hear from the Government whether that is likely to be altered in future or whether we will continue to try to retain the same block exemptions that are in European law. More explicitly, will the £23.6 million additional finance for the CMA be sufficient for it to take on the state aid role, as well as providing resources for the substantial increase in the number of merger and anti-trust cases? Could the Minister report on the views of the devolved Administrations on establishing the UK-wide state aid regulator?

Building a coherent post-Brexit competition and state aid framework will be of vital importance to the UK and, throughout our inquiry, we were told that the UK has a robust and well-respected competition regime and that Brexit does not necessitate a fundamental revision. However, we see some pressures and opportunities for the UK to take a more innovative approach. The repatriation of responsibilities for state aid approval will be the fundamental change, and it is important that government works to involve and secure the support of local government and the devolved Administrations in that.

In determining the UK’s future approach to state aid, the UK will have the opportunity to address criticisms of the complexity and bureaucracy faced under the current EU regime, as well as related issues such as public procurement procedures. The UK will have the opportunity to create a system that is easier for small businesses, in particular, to understand and for consumers to appreciate and benefit from.

In general, this report and our relative consensus with the Government on it should indicate a way forward, but there are some issues that I would like the Government to address, which I hope I have spelled out in the course of my speech. I beg to move.

--- Later in debate ---

[Lord Whitty]

My Lords, I thank the Minister for those remarks. We definitely look forward to the competition review which is promised. I will keep my remarks reasonably short, if only to protect my throat.

I think there has been a reasonable degree of agreement around the Chamber, as there was on the committee, which I shall try to summarise. The principles of the European approach to competition and state aid will continue, with some degree of co-operation and alignment—quite what, we know not yet, but no doubt the negotiations will make that clear. We also have the opportunity to refine that and make it more relevant, and perhaps to look at related issues, such as public procurement, in the new era.

I take the point that the independence of the CMA, particularly given its enhanced role, is very important. Clearly, and particularly in relation to state aid, getting some degree of consensus and structure with the devolved Administrations and local government is vital. I think the issue of how broad the public interest criteria are will not go away, as my noble friend Lady Donaghy said, and there will be arguments from various sides as we go on, but it will be within UK control to decide, politically, how we manage that.

A number of principles were established by the report and have been largely underlined by this debate. I will treasure the new accolade that has been given to me by this House and will point to that accolade in Hansard to my grandchildren, I have no doubt. I repeat my thanks to all members of the committee.

The noble Baroness, Lady Noakes, raised an important point at the beginning, and I imagine the House will have to return to it. My own view is that, at the moment, the structure of the committees is coping with moving from focusing on scrutiny to the outcome on Brexit—keeping an eye on the outcome of those negotiations and holding Ministers to account. It may be that the structure is a bit clunky, but that is an important role. For when we get to the end of those negotiations and we are in the brave new world post Brexit, the House has already set in train a means of looking at the committee structure—which is above my pay grade, let alone the Minister’s—and I hope that the noble Lord, Lord McFall, will present us with some proposals on that front in the coming months.

Meanwhile, in relation to competition, state aid and mergers, we will expect some new kinds of cases and new markets which we will have to address as the UK, but the continuity is as important as the new freedoms. With that, I thank the House.

Motion agreed.