Concerns are being raised that European regulation is becoming too stifling and could echo the stringent US model. Liz Booth investigates.

Dawn raids and lengthy, costly investigations are becoming a hallmark of doing business in Europe, it seems, as the European Commission, Union and competition directorate stamp their authority on industry.

It has not just been the financial services that have been targeted. The dairy industry as well as the airlines, to name but two, failed to escape the wrath of the European authorities and faced massive fines as well as orders to change the way in which they conduct their business. The continuing row over the EU’s Ship Source Pollution Directive and, most recently, the dawn raids on various ship classification societies have brought the problem closer to home while the business insurance inquiry of the past couple of years has brought the issues right into reinsurers’ offices.

It seems that this is a trend that is set to continue. The more kindly approach is to consider that such developments are a sign of a maturing organisation that has moved beyond initial regulation to the point of seeing how that regulation can be improved. Others would argue that, in fact, the regulations work perfectly well and such investigations are costly for industry and not necessarily productive. Some go even further and argue that they are the product of an organisation that is in danger of interfering to a point that business can not function properly.

As one insider says, “The regulators introduce the legislation and then the competition authorities realise it is not doing exactly what they had hoped so they set about changing things. It is like having two cooks in the kitchen, trying to achieve the same thing but using different tools.”

Turning American
Ian Giles, a senior associate in the competition team at Norton Rose, fears that “reality for business in Europe is that competition enforcement could be heading closer to the US model which is quite a frightening thing for European businesses to grapple with because the US model is so much more intrusive and damaging than the system that is currently in place.

“In the US, in addition to investigation by authorities, the class action damages system means ‘victims’ of anti-competitive behaviour can take you to court and you may have a whole court process to go through on the back of the costly regulatory investigation. It is a difficult process and one that can be quite counter-productive,” he adds. Worse still, for business, in the US there are treble damages, which provide a “massive” incentive for lawyers to chase after any company that is being investigated.

Giles explains that the US system allows lawyers to file lawsuits before any decisions are made regarding the investigation. Claimants will post quite vague suits waiting for the outcome. In the meantime, the business can spend several years and millions of dollars in dealing with both the investigation and the subsequent claims. Since normally each side will bear their own costs, firms often choose to settle quickly to avoid the costs – something that simply incentivises the claimant bar still further. While Giles is quick to point out that the European Commission has publicly stated it does not want to go as far as the US – and certainly not in terms of treble damages – it does seem that Europe is slowing moving towards that US model.

Another issue for industry, Giles says, is the growing link between regulators. Already there is the European Competition Network that links the Commission’s competition body with all the individual national competition authorities in the EU. Information on investigations is shared and used between the bodies and there are also bilateral arrangements between the US, Europe and Asia, which means investigations are becoming global in nature. Combined with the size of fines being applied in some cases, business faces a challenging time. And the penalties are getting worse too, as Giles points out - the Commission imposed a €992m fine on a lifts cartel and a €497m for Microsoft this year, and the UK’s Office of Fair Trading (OFT) imposed a £121m fine for British Airways among others.

“The reality for business in Europe is that competition enforcement could be heading closer to the US model which is quite a frightening thing for European businesses to grapple with

“The authorities’ view was that penalties were not biting so therefore we needed bigger punishments until the message gets through. And these fines are being imposed for behaviour that is sometimes not as dark and menacing as the authorities would like to portray. The case against dairies and supermarkets in the UK is for price fixing but there is clear evidence that supermarkets at the time faced governmental and farmer pressure to improve dairy prices to give farmers a better deal.

“Likewise the BA investigation related to a discussion on fuel surcharges - one element of the overall price - in what is a highly competitive market and the fact some executives are facing a criminal investigation in the US now seems something of an over-reaction.”

Guy Soussan, a partner at Steptoe & Johnson in Brussels, believes the European authorities behaviour was somewhat inevitable. “Whenever an issue has a Community dimension, it is today the subject of EU legislation by application of Treaty principles and regulations and directives. This had to be the first step and it would be incomplete without the possibility of enforcement,” he says. “A mature legal system needs appropriate enforcement mechanisms. It includes competition rules, a Court of Justice and importantly a willingness on the part of the executive to use these mechanisms against both defaulting entities and member states.”

He adds: “In the area of financial services, we have moved from a lightly regulated Common Market to a more mature ‘single market’ where legislation must both facilitate the activities of market participants and protect the consumers. Until recently, focus has been on wholesale markets, now it is focusing on retail market but overall the focus is to make the single market work. Therefore, the Commission has its ‘better regulation’ agenda and its enforcement capabilities.”

And the authorities can also rely on recent research for justifying their position. Last year the OFT published some figures that showed that after the investigation of one cartel, a further 16 would be disbanded or fail to form. Talking about the research, a spokesman for the OFT says, “This is a detailed, independent analysis. The survey carried out interviews with 234 senior competition lawyers based in the UK and Brussels, 202 UK companies and 30 interviews with lawyers and economists. This marked the first time we have commissioned research into the wider benefits of competition enforcement. It confirms that the OFT’s merger control and competition law enforcement work plays an important role in preventing other anti-competitive behaviour from taking place. Indeed, as a result of our cartels work the report estimates that some 290 further cartels may have been avoided.

He adds that as a result of the report the OFT has agreed further monitoring of the markets. And interestingly, at the end of the legal and company surveys, respondents were asked if they had any suggestions for what could be done to improve deterrence of competition law infringements in the UK. The report finds “the most frequently made suggestions were: increased publicity and education, encouraging private damages actions, faster decision taking, more criminal prosecutions for cartels and more decisions/greater enforcement activity.”

Here to stay
Norton Rose’s Giles believes that sector investigations are very much here to stay even though it makes life difficult for businesses. “The challenge for the regulators is not to be obstructive.”

Using the business insurance sectoral inquiry, which involves reinsurance, as an example, Soussan says, “The business insurance inquiry was launched by the Commission with the view to accelerating the removal of barriers in the wholesale insurance market. The Commission did not see fundamental competition law problems in the market but has highlighted areas of concerns in relation to practices in the London subscription market. At stake are 300 years of practice which the Commission has said it is not afraid to upset.”

“One problem is these organisations send out blanket questionnaires which are very intrusive and require a lot of time and effort for businesses to respond to

He warns: “We can disagree with elements of the Commission’s findings but it cannot be denied that the Commission is taking a more robust approach to its enforcement obligations. This is evident not only in insurance but also in banking and payments and in other sectors.”

Looking at the retail insurance market, Soussan says “The initial focus of the EU was to create an environment for cross-border sales in the EU. The focus was on the provider. Now the focus is moving toward the consumer and hence the Commission’s work on retail financial services and the issues relating to it such as mediation, the affect of general good and consumer protection issues such as consumer education and class actions.”

But Giles worries that sometimes the authorities can use too blunt an instrument. “One problem is these organisations send out blanket questionnaires which are very intrusive and require a lot of time and effort for businesses to respond to. They send out so many because they have limited resources and cannot necessarily target firms specifically enough. And because of the limited resources, it also takes a long time for the information to be assimilated and the results to be announced. So companies under investigation have long periods of time of not knowing what is happening – and that is a difficult environment for business.”

Nick Lowe, director of government affairs at the London-based International Underwriting Association, says “The European Commission has decided they have now created enough legislation for a single market. They have stopped producing so much legislation and focus more on improving the quality of the existing legislation. They have a whole campaign for better regulation rather than more regulation.

“I think it is important to understand there is one than one part of the Commission. Apart from the Council and Parliament, there is a competition authority, which has a policing function to ensure there is a free market. You will find such authorities elsewhere in the world and they have a job to do.”

“I suppose the perspective is that some changes needed to be made and the challenge for business is to work with the regulators,” Giles concludes.

Liz Booth is a freelance journalist.

The European Commission investigation into business insurance

In September 2007 European Commissioner for Competition Neelie Kroes announced the findings from the largest-ever investigation into business insurance in Europe. The inquiry, which polled various players in the European insurance industry in 2005-2006, concluded that European businesses could be paying too much for insurance due to anti-competitive practices. Among its other findings, which include questions surrounding lack of competition in the subscription market, the sector inquiry reopened the debate surrounding broker transparency and disclosure.