Regulation

An open letter to John Penrose MP on the Competition and Markets Authority


Dear John,

Competition policy currently has an undue emphasis on private business and impediments to competition arising from the activities of commercial firms. This is despite the fact that the lives of individuals can be shaped to a much greater extent by the quality of the provision of services such as healthcare and education where governments often have protected monopolies. In addition, many impediments to competition arise from actions of government, often as unintended consequences. Whilst the Competition and Markets Authority (CMA) can investigate impediments to competition arising from government, it rarely does so except as an aspect of the technical detail of a broader inquiry.

If this is to be addressed, reforms are urgently needed and, as explained below, these reforms become especially urgent in the wake of Brexit. Two areas of competition policy reform would widen the practice and remit of the CMA and allow it to address a wider range of obstacles to competition. Such reform could include:

A specific statutory duty on the CMA to investigate impediments to competition arising from government regulation. Such investigations would not necessarily have to relate to a specific market complaint. For example, the CMA could examine the effect of planning regulations on competition across a range of markets (education, childcare, retail etc) or the impact of GDPR on the relative cost structure of small and large businesses.

A specific statutory duty to investigate competition in relation to services generally provided by the state and make recommendations not just to the providers but to the government (local or national) the actions of which impede competition.

The need for a statutory duty to investigate government impediments to competition

Government regulation can impede competition for at least three reasons:

  • Well-designed regulation designed to overcome specific problems might impede competition as a side effect whilst being regarded, at least by most informed people, as being beneficial overall.

  • Regulation can be captured by incumbent businesses (or other organisations) that wish to use the regulatory framework to frustrate market entry whilst citing other reasons. Alternatively, they may have genuinely convinced themselves, due to cognitive biases, that the regulation for which they lobby is beneficial.

  • Regulation may be captured by the regulatory body itself which may discharge its functions by trying to reduce the risk of scandal or failure by writing ever-more regulation. An uncosted side effect of this may well be to raise barriers to entry.


Regulation that impedes competition can fall into all three of the above categories. For example, the licensing of medical practitioners might be well-intended and designed to protect the public but become captured by both practitioners and regulators with the former using it to restrict entry and the cognitive biases of the latter over-estimating the importance and efficacy of regulation.

Three examples of this problem are worth citing. Firstly, in the field of financial regulation, the Financial Conduct Authority (FCA) has a statutory duty to promote competition (though, oddly, the Prudential Regulatory Authority does not, and its statutory objectives work directly against effective competition). However, the accountability of the FCA is so weak that it is likely that it will never be held to account for not fulfilling that objective. It is more obvious if the FCA fails in relation to its other objectives. The FCA would rapidly be called to account if, for example, there were a scandal relating to a major financial intermediary. The process of authorisation of a new financial adviser can take six months or more. The FCA regulatory handbook has around 1,000 sections. This kind of regulation creates a significant advantage to incumbents and makes innovation especially difficult. Although the FCA has a statutory duty to promote competition, its other objectives are such that primary responsibility in this area, including primary responsibility for monitoring the fulfilment of the competition objective, should lie with the CMA.

A second example relates to occupational licensing. Currently, occupational licensing and certification covers 40 per cent of all employees. This figure has grown dramatically in recent years and is much higher than equivalent figures in, for example, Sweden and Denmark. There is widespread international evidence that occupational licensing damages consumers, reduces competition and undermines social mobility. However, though the CMA may look at a problem such as this as a minor aspect of a particular inquiry in relation to a specific market, the issue as a whole and its cumulative effects are ignored.

Thirdly, the CMA has recently had its remit expanded in relation to universities. Higher education institutions are almost all independent organisations which may receive funds from the state and are regulated by agencies of government. They are regularly sent highly detailed guidance about their behaviour by the CMA. However, two major impediments to competition are imposed directly by government policy. One is the covert bailing out of failing universities – which encourages both imprudent and anti-competitive behaviour. The second is the differential student loan support for students of those universities deemed as “alternative providers” even when such universities have a royal charter. These problems are entirely ignored by the CMA.

The CMA needs wide-ranging powers to investigate government-imposed impediments to competition. Clearly, it cannot have powers of enforcement as the CMA receives its own authority from government. However, CMA recommendations could be made public and parliamentary Select Committees could conduct inquiries where they affect relevant areas of government policy. There could be a requirement on Ministers to make statements to parliament and explain what action they are taking. There could then be follow-up inquiries by the CMA.

Statutory duty to investigate markets where governments are monopoly providers

Under EU competition law, the provision of many government services come under the same rules as private markets. Although these provisions will be absorbed into UK law post-Brexit, they have rarely been effective and will be less so when the UK government is marking its own homework and the number of parties that can take action diminishes.

The CMA has a statutory duty to “promote competition, both within and outside the UK, for the benefit of consumers”. Its mission is to “make markets work well in the interests of consumers, businesses and the economy”. The CMA’s role and effectiveness in dealing with the impact of monopoly on people’s lives would be much more effective if these statements were expanded to explicitly include government-provided services, including health and education. Much government policy in recent years has involved the promotion of competition in education and families need the protection of competition law here which will be weakened due to Brexit. Where competition policy has been applied to government-funded service providers, such as schools, it has related to minutiae such as school uniform provision and has been directed at the providers themselves (such as academies) and not at government impediments to competition.

There are two areas where the CMA needs to be able to conduct investigations. Parents in the case of schools, or various interested parties in the case of healthcare, should be able to take enforceable action, backed up by competition law where one government body or layer of government is acting in a way which subverts the government’s own policy in relation to promoting competition in public services. For example, parents should be able to take action if local authorities obstruct the development of a free school. Such actions, if successful, could come with penalties imposed on the offending body. The second area would be a general obligation on the CMA to investigate where the government itself is restricting competition in the provision of services (for example by providing its own service free at the point of use). These latter actions could lead to recommendations and the requirement for a response with follow-up inquiries being undertaken by the CMA and by Select Committees. However, the CMA would not be able to demand that the government change the law.

Summary

Current government and CMA policy looks at the splinter in the private sector’s eye whilst ignoring the beam in the government’s eye. Withdrawal from the EU will weaken government competition policy further in relation to government-provided services. This is an area where the government needs to have a more robust policy as well as an enforcement regime. Such a policy will counter-balance the tendency towards monopoly, protectionism and regulation that pervades governments and will ensure that a reforming government can embed its reforms more deeply in the institutional landscape. When it comes to government impediments to competition, too many arms of government are marking their own homework. Current competition law is written in such a way that these questions are pushed to the margins of competition enforcement action.

The objective of promoting competition across a much wider area of economic and social life would be more effectively achieved if the Competition and Markets Authority were given the following explicit duties, which it would be held to account for meeting:

  1. The investigation of government and regulatory impediments to competition in a specific market (examples could include FCA regulation in relation to consumer financial advice or planning constraints and retail competition).

  2. The investigation of specific government and regulatory impediments to competition which affect a range of markets (for example the impact of occupational licensing or planning constraints on markets in general).

  3. The investigation of the lack of competition in public service provision where policy followed by a government entity (for example, local authority or statutory regulator) is undermining the policy of the Westminster government to promote competition. This would come with enforcement powers.

  4. A general duty to investigate competition in government-provided services such as health and education. These measures would transform the competition landscape, benefit consumers and ensure that the government’s own policy objectives were more deeply embedded and not undermined by other branches of government. By treating the private and public sectors the same way, they would reinforce the rule of law. Such a development is especially important in the post-Brexit landscape.


Yours sincerely,

Philip

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.


1 thought on “An open letter to John Penrose MP on the Competition and Markets Authority”

  1. Posted 12/12/2020 at 09:50 | Permalink

    The author of this excellent letter is right to address it to John Penrose MP as he has been appointed by the Chancellor of the Exchequer to lead a review into the UK’s existing competition regime in the expectation that he will recommend how it can be enhanced in the context of Covid-19 and the end of the transition period.

    At the start of 2021, the Business Secretary will inherit repatriated powers on competition policy, the M&A control regime and antitrust enforcement role from the EU which will further widen his remit, to add to powers he already has to direct the Competition and Markets Authority to conduct investigations into the state of private markets.

    Not only should the CMA’s role be expanded to include government-provided services such as health and education, but government procurement should also be brought with its purview – given that central government spends £284bn of taxpayers’ money each year to purchase goods, services and labour (in the form of high-end consultancy) from the private sector, making it quite easily the single largest buyer in the UK.

    Competition is the essence of enterprise and free market capitalism. For an economic model that relies on voluntary exchange between buyers and sellers and seeks to deliver goods and services to everyone at a price they are willing to pay, vigorous competition among vendors on the basis of a level playing field is absolutely essential.

    In Adam Smith’s use, the “free market” is not a market free from government, but one that is free from rents – these rents include distortions borne of market power, privileged access and position. It is therefore heartening to know that senior members of this government, including the Prime Minister, are self-confessed free marketeers and are willing to go out of their way to praise the virtues of the market over the State at every opportunity.

    The central tenet of capitalism is that those participating in it do so in the expectation that they will profit from their own labour and initiative. Yet, the last several years has seen the widespread belief that individuals at the top of big business and corporate houses are benefiting at the expense of their customers, employees, supply chain partners, the local community and the environment.

    To this end, the subsidy-seeking, competition-averse businesses which are permanently on the hunt for taxpayer funds will resort to a whole host of devious means to persuade the governing elite to underwrite the highest category of risks associated with their business activities – by skewing public spending decisions in their favour.

    The post-second world war experience has repeatedly vindicated the view that the single most powerful driver of prosperity is profit-seeking businesses trading within a law-governed and competitive market environment. However, in the new millennium, the recently exposed frailties of capitalism are all too evident in markets in which the government is the main or only customer, which happen to be some the most closed in the world with significant barriers to entry. Indeed, such markets are more often than not, dominated by just a handful of players, the Select Few.

    It is hard not to conclude that this stranglehold by the Select Few has been the cause of poor performance and a lack of competitiveness – characterised by persistent delays, cost overruns and chronically weak export performance.

    The problem with markets in which the government is the main customer is that they are highly susceptible to cronyism – the nexus between the governing elite and the business elite that contrives to put the interests of business first, ahead of the wants, needs and expectations of ordinary citizens. Not least, because the twin evils of lobbying and corruption rear their ugly heads every time taxpayers’ money crosses the boundary between the public sector and the private sector.

    It is, as the economist Randall Holcombe puts in his book “Political Capitalism” a “system in which the economic and political elite cooperate for their mutual benefit.” The political elite tilt the economic playing field in favour of the economic elite, privileging them through subsidies, regulatory protections and targeted tax breaks. In exchange, the economic elite then help to ensure that the political elite remain in power. The rest of us pay the bill for this quid pro quo through higher taxes, higher prices, and a less efficient, less dynamic economy.

    Consider, for a moment, the market in defence equipment.

    When it comes to procuring defence equipment for the Armed Forces, the government has no option but to rely on the private sector, because it no longer has the ability to produce military equipment – as it used to do.

    Unlike the market in consumer goods and services, there is only one customer for defence equipment – the government. Consequently, the purchasing decisions taken by the government has a significant bearing upon the composition and diversity of players in the defence equipment market. And because taxpayers money is used by the government to procure military equipment for the Armed Forces, the condition of the defence equipment market should be of concern to anyone who has an interest in the proper functioning of open and free markets, and securing best value for money, as it relates to the expenditure of public funds.

    What has been clear for many years is that public subsidies handed out to defence equipment manufacturers over several decades is the reason why they have failed so miserably, to deliver equipment to the Armed Forces which is fit for purpose, adequately sustained in-service and constitutes value for money through-life.

    In the UK, as in many western countries, the means of defence production, distribution and exchange is exclusively in the hands of private interests, that is to say, the State is entirely dependent on for-profit organisations for the design, development, manufacture and delivery of new military equipment to the Armed Forces. Consequently, the government has no choice but to rely on the private sector for all its military equipment needs, including its subsequent upkeep, when in-service with the user. The harsh reality is that, no department of state in Whitehall is as dependent on the private sector, as is the Ministry of Defence – putting it at serious risk of capture by private interests (if it hasn’t already been) which allows them to bend policy to their will, as it relates to the expenditure of public funds. Equally, these private interests are entirely hooked on a steady flow of taxpayer funds for their very survival – no least, because they have not bothered to diversify at all.

    It may be that senior executives seconded from the defence industry and embedded within the Ministry of Defence, who remain in the pay of their employers, may have something to do with this skewing of spending decisions, to favour their narrow commercial interests – at the expense of taxpayers and the public interest.

    For those not familiar with this concept of state capture, Transparency International, the anti-corruption non-profit organisation, defines it as:

    “A situation where powerful individuals, institutions, companies or groups within or outside a country use corruption to shape a nation’s policies, legal environment and economy to benefit their own private interests”.

    History has consistently shown that protecting industries from competition sets them up for failure in the long run.
    @JagPatel3

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