Why 2018 will be a great year for Australian competition
In a recent speech to RBB Economics, Australian Competition and Consumer Commission Chairman Rod Sims explained how recent changes to the Competition and Consumer Act (CCA) will boost competition in Australia this year.
After noting several landmark cases pursued by the ACCC recently, he underlined the broader principle that fairness is not, and never will be, a theory of harm under Australian competition law. Vigorous competition is a public good, although it will inevitably see many firms fail, and the CAA is designed to foster the competition required to produce economic efficiency and fairness for all.
Competition is a public good
Giving hope to Australia’s mid-sized firms in the face of corporate competition, he argued that firms that offer consumers a better deal should be rewarded irrespective of their size. While some large firms may feel they are unfairly targeted by the ACCC’s enforcement investigations, it is usually large firms with significant market power who have the ability and incentive to interfere with the competitive process.
In competitive markets, there will be winners and losers but protecting the competitive process is all about ensuring winners and losers are determined by the quality of the offers firms make to consumers.
The harsh reality is that competitive markets will see some firms prosper while others go out of business. While some see this as unfair, it is this process that drives innovation, better business practices and lower prices for all Australians.
He expressed fascination that some of the loudest opponents of the changes under Harper Section 46 believe the arrival of Amazon to the Australian market could be anti-competitive and believed this shows how much of the debate about Section 46 was misplaced.
He noted that, in terms of misuse of market power, if a company opens a store in a new town and sets a common price point, it will initially lose money if it doesn’t have scale. Eventually, if it gets its business plan right, it will start to make money at that price point and even if it damages incumbent firms and puts some out of business this is in no way illegal.
He argued that Amazon’s entry into Australia will be good for consumers, whatever damage it does to incumbent retailers, and rejected the call which incumbents have made for the ACCC to act against Amazon’s business model.
Against the Cartel
He discussed the rise of economic ‘populism’ and the appeals made to the ‘public in the street’ that they are being unfairly exploited by a wealthy and powerful elite. Populism often opposes market economy as a result but the CCA exists to ensure that Australia’s market economy does, and is seen to, work to benefit the population as a whole.
The section 45 case the ACCC brought against Informed Sources and the major petrol retailers, for example, aimed to address public concern about petrol price rises and put the pricing information they use into the public domain.
Petrol pricing is a major source of ongoing community discontent, with a large percentage of the population convinced they are being fleeced by a rapacious ‘oil cartel’. The public see petrol prices increased by 25 cents per litre overnight, with no relation to the actual wholesale cost of fuel, while others see the price they pay in their town significantly higher than another down the road.
The ACCC’s action now empowers consumers to avoid price gouging garages and to time their petrol purchases in cities to minimise expense. Many regional towns also have retailers which maintain reasonable prices which would welcome more customers.
Cartels are clearly against the public interest as they cost ordinary consumers so much. While many have been successfully dealt with or are being tried before the courts, they are persistent and must remain a core investigative priority for the ACCC and every competition agency.
The ACCC has taken action against cartels in shipping, polycarbonate roofing, electrical cable, air freight, electrical components in cars, foreign exchange in the banking sector, airline tickets, and laundry detergent and others will doubtless follow in 2018.
Reforms made in the wake of the Harper report have created a workable Section 46 to deal with misuse of market power.
Protecting the Consumer
The essence of consumer law is “do not mislead consumers” and yet major Australian firms continue to try to hoodwink the public. Telstra customers have paid for broadband speeds they could not receive, entertainment seekers bought tickets on Viagogo thinking they were from an official source and at the advertised price, Ford drivers had issues with their PowerShift transmissions and various health funds have changed important entitlements mid-stream without notice; to name just a few.
Consumer law has other ‘safety valve’ provisions that touch on the issue of fairness, unconscionable conduct being a classic example. There was a public outcry against Coles when it pressured smaller suppliers to hand over large sums of money or risk being blackballed. Justice Gordon noted in her judgement that ‘Coles’ misconduct was serious, deliberate and repeated.
Coles misused its bargaining power. Its conduct was ‘not done in good conscience’. It was contrary to conscience. Coles treated its suppliers in a manner not consistent with acceptable business and social standards which apply to commercial dealings. Coles demanded payments from suppliers to which it was not entitled by threatening harm to the suppliers that did not comply with the demand.’
The ACCC is also taking action against Murray Goulburn for making misleading representations regarding the farm gate milk price, in contravention of the Australian Consumer Law. Many farmers are in a relatively vulnerable trading position, and rely on transparent pricing information in order to budget effectively and make informed business decisions, yet Murray Goulburn failed to provide it.
Unfair Contract Provisions
Unfair contact term laws have applied to standard form contracts between larger and smaller business since 12 November 2016. Terms may be unfair where they cause a significant imbalance in rights and obligations, where they aren’t required to protect the legitimate interest of the parties and where they cause detriment to the smaller business. These provisions go some way towards addressing issues of competition, inefficient allocation of risk and creating certainty for investment, although more could still be done.
The ACCC’s case against JJ Richards, a large waste management company, was the first to be litigated under the new legislation and the Court declared by consent that eight terms in JJ Richards’ standard form contracts with small businesses were unfair and consequently void.
These terms bound customers to subsequent contracts unless they cancelled the existing contract not less than 30 days before the end of the term, allowed JJ Richards to unilaterally increase its prices and allowed JJ Richards to suspend its service but continue to charge the customer if payment was not made after seven days.
They also created created an unlimited indemnity in favour of JJ Richards, granted JJ Richards exclusive rights to remove waste from a customer’s premises, prevented customers from terminating their contracts if they have payments outstanding and allowed JJ Richards to continue charging customers equipment rental after the termination of the contract.
In the ACCC’s view, these terms were as damaging to competition and efficient allocation of risk as much as they were an affront to fairness. The combination of roll-over clauses, limitations on termination and exclusivity limited the ability of customers to choose competing services. Broad indemnity or limited liability clauses and unilateral variation clauses go to allocation of risk, and often work against the party least able to mitigate that risk, hampering effective decision making by small businesses.
The ACCC’s action against Servcorp Ltd, a supplier of serviced office space and virtual office services, alleges that its terms are unfair in that they also automatically renew a customer’s contract and allow Servcorp to unilaterally increase the contract price after the renewal and without prior notice to the customer.
Furthermore, they not only permit Servcorp to unilaterally terminate the contract and to impose penalty-type consequences on the customer but allow Servcorp to unilaterally acquire the customer’s property without any notice.
While some commentators initially queried whether the provisions went too far in seeking to determine fairness, experience shows their ability to improve competition and efficiency as well as safeguarding customer rights.
The new UCT provisions can be made more effective in a range of areas. While there is logic in the UCT provisions attracting penalties; the definition of a standard form contract could be improved. The ACCC should also have the ability to use its information-gathering powers to enforce these laws and the small business thresholds may need review.
Small firms often complain about their treatment at the hands of larger corporates and the ACCC’s experience with the UCT laws shows that such concerns are often well-founded.
While competition drives firms to succeed by lowering prices and innovating in their products and services, the accumulation of market power inevitably pulls them in the opposite direction. However markets can only function effectively if consumers are not misled and the CCA can often deal with situations that consumers simply see as unfair, whether such a sentiment is in the law or not.
The accumulation of bad behaviour by some companies that the ‘common person’ sees as unfair drives populist sentiment against the market, but economic efficiency and fairness can be harnessed to work together, rather than in opposition, given enlightened oversight.
2018 will see positive steps for competition
2017 will be remembered as the ‘Year of Harper’, although the Harper amendments were actually the culmination of many years of effort to recalibrate and update Australian competition law.
The reforms saw three main changes. They changed the misuse of market power provision to reduce the competition test, prohibited concerted practices that substantially lessen competition and amended the merger authorisation test and made the ACCC the initial decision maker on merger applications.
In response to these new powers, the ACCC has formed an SLC Unit with 10 staff to investigate anti-competitive claims, reinvigorate its competition investigations and improve its enforcement work to speed decision making.
The changes to Section 46 and the introduction of a concerted practices provision were both sorely required. The old Section 46 left the commission powerless to deal with a range of behaviour by powerful firms in many parts of the value chain which prevented competitors competing on their merits. The failed case against the egg cartel offers a clear example of why change was required. The reforms mean more SLC cases will be taken and the Australian economy will function better as a result.
Mergers
The Harper amendments simplified the options available to merger parties to get their deal assessed. Parties now have the choice of informal clearance, as they did before, or merger authorisation either on competition or net public benefit grounds.
The restoration of the ACCC’s role as first instance decision maker, which was moved to the Tribunal in 2007 after the Dawson review, will stop parties ‘forum shopping’ for the result they desire, or changing horses midstream, as Tabcorp did, by seeking a decision based on a different test from the Tribunal rather than waiting for the ACCC decision.
This reform should facilitate a more efficient regulatory process, the streamlined merger authorisation test will provide greater flexibility to merger parties, and the outcomes will be better for Australia.
Penalties should fit the crime
The ACCC currently has five referrals with the CDPP alleging criminal cartel conduct. While it is up to the CDPP to assess whether these matters meet the criminal standard, the ACCC is convinced they meet the civil standard of harm.
Whatever their outcome, more cases will be brought and the ACCC will also push for significantly higher competition law penalties, as large firms have long paid derisory fines for anti-competitive activity which offered no deterrent to malicious action.
The OECD will release a report on sanctions for competition law breaches in Australia at a workshop in Sydney in late March 2018 and, if a significant gap between Australian and international penalties is identified, greater penalties may well be recommended.
This should not require a change in the broad legal framework for determining penalties, as it already allows substantial fines to be imposed which take account of the firm’s turnover when punishing breaches of competition law. The legislation was changed in 2007 to allow penalties up to 10 per cent of Australian turnover in some circumstances, however such fines are seldom imposed.
The ACCC in 2018
The ACCC has worked on issues ranging from milk prices and vehicle servicing to internet and mobile communications. Its electricity and gas inquiries are looking into a lack of competition and undue market power in the energy sector which drive up prices for customers.
The ACCC’s residential mortgage products price inquiry has forced the major banks to provide extensive pricing information they previously withheld from customers, but further action to drive competition in the banking sector is required.
The large banks have considerable market power which, in tandem with government regulation and policies and barriers to customer switching, has impeded the challenges by new entrants and smaller rivals that might otherwise be expected. The ACCC’s inquiry, beginning in July 2018, will build on the work of the Productivity Commission to examine and recommend options to bring about more competitive retail banking.
Nick Xenophon called for the ACCC to conduct an inquiry into platform services and the impact of their growth on competition in media and advertising markets last year and the ACCC agrees this would be timely. Australia’s media is undergoing a transformation which some people fear gives too much influence to large digital platforms like Google and Facebook in terms of digital advertising.
While the eclipse of traditional advertising, and therefore the media platforms such as newspapers and TV which they supported, is not necessarily a problem, an inquiry can examine the interrelationships between players in the industry to assess the state of competition in media and advertising markets and the impact on consumers in terms of choice and journalistic quality.
Access to data
The Productivity Commission has recommended the introduction of a new Comprehensive Right for consumers and small and medium-sized businesses in relation to their user data. In November 2017 the Government announced that it will legislate for such a right and the ACCC believes this will be a game changer for competition and consumers, although its significance is still not fully understood.
The way data is used within society is changing rapidly, and the ways in which businesses are collecting and using data derived from consumers are radically different to the practices of even ten years ago. A right to data will enable consumers to request, access and use consumer data, including to direct that data be provided to a third party, and allow consumers to benefit from their data in ways that businesses already do.
The ACCC strongly welcomes efforts to redress the balance, give more to consumers and spur competition by allowing consumers to contrast and compare market offers. Consumers should be able to determine what is best for them given their usage history and take their data with them to a new provider.
The Productivity Commission was ahead of the game by calling for consumer empowerment in the use of data and has urged Australia to move from a system based on risk aversion and avoidance, to one based on transparency and confidence in data processes. Data should be recognised as a valuable asset rather than something personal that must be protected.
The Productivity Commission has described this as a new competition policy, driven by consumers’ rights to use their data. It is therefore essential that access to data, while underpinned by confidence in privacy, is considered through a competition and consumer lens.
The right should be inalienable; not able to be contracted out or sold. Importantly, the Productivity Commission review sees consumer data operating as a joint asset between the consumer and the entity holding the data.
Both parties would have the opportunity to harness the dataset for their own purposes, and consumers would be allowed to share their consumer data with third parties, empowering both the individual and new competitors.
