RegulationBusiness RegulationBeating the competition law

Beating the competition law

Catriona Munro explains why FDs and other accountants on boards need to be aware of potential anti-competitive practices in their business, and what to do if they are faced with such allegations

AS THE SHUTTERS come down on the public consultation stage of the Office of Fair Trading’s (OFT) guidance to competition law compliance, there is little doubt the obligations of corporates and individual directors have changed forever.

Following in the wake of the OFT’s revised policy on directors’ disqualification orders, when published in its final form later this year, two new guides will set out the specific responsibilities of executive and non-executive directors, as well as addressing some of the issues facing SMEs and their advisers.

Fines of up to 10% of group turnover are just the start if found guilty of infringing competition law. Individuals can also face up to five years’ imprisonment and unlimited fines, not to mention the reputational damage. The business can also be sued for damages for the loss caused by the anti-competitive activity. Recently, former executives of a company have also been pursued (so far without success) through the courts by its new owners, following a fine imposed by the OFT. A combination of sanctions against companies and individuals aims to instil the fear factor.

Getting it wrong is, therefore, not an option, with directors who “ought to have known” about an infringement of competition law now facing the prospect of disqualification. The difficulty, of course, is that anti-competition activity is often difficult, but perhaps not impossible, for directors to spot.

While the OFT does not expect directors to have specific expertise in this area, it does consider it reasonable to expect all directors to have a sufficient understanding of the principles of competition law to be able to recognise risks, and to realise when to make further enquiries or seek legal advice. For instance, non-executive directors are expected to make reasonable enquiries of the executive directors, to ensure they are satisfied the company is complying with competition law. It is undoubtedly a tall order, which is set to create its own challenges.

To assist with core competition compliance, the OFT has identified four specific elements; risk identification, risk assessment, risk mitigation and review. These are areas which will require specific focus of directors and non-executives, as well as a firm commitment from senior management to ensure effective implementation and monitoring.

Those in finance-related roles should be on the lookout for telltale signs of anti-competitive activity. For example, while healthy margins are normally welcomed and may show that the company has great products or services, for which customers are prepared to pay generously, they could equally be an early warning signal of a cartel or an emerging position of dominance. As some directors have found to their cost, the consequences of not asking sufficiently probing questions can be severe.

Most business people know that price fixing and market sharing are illegal but they often do not appreciate that sharing confidential information is viewed in the same light. A senior executive, who recently served jail time for alleged cartel activity, says his error was not probing more deeply as to the source of the competitor data talked about at weekly meetings he chaired.

Competition compliance is an ongoing challenge and requires regular review. As a general principle, all directors are expected to have the standard of skill and knowledge appropriate for their position and the nature of the specific company in question. Directors are also expected to update and refresh their knowledge on an ongoing basis.

So having taken all the prerequisite steps, what are the issues facing directors of organisations alleged to be engaging in anti-competitive activity? There are a multitude of challenges which will face the company’s decision makers when an investigation occurs. However, a key issue for the FD will be to consider how this matter should be addressed in the accounts. Should a provision be made for a potential fine or other costs, or is the position too uncertain? A key consideration in this respect is how a fair appraisal of the potential exposure could be made without prejudicing the position vis-à-vis the authorities.

No compliance procedure can offer a guarantee that a rogue employee determined to breach the law will be stopped, but it can eliminate or reduce the more common risk of infringement occurring through ignorance. The core requirement for achieving competition law compliance within an organisation is a clear and unambiguous commitment from all directors and across all levels of management. What is clear is that ignorance is not bliss.

Catriona Munro is a partner in the EU, Competition and Regulatory practice of Maclay Murray & Spens

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