Closer ties across the Tasman

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Victoria University, Wellington NZ
27 February 2013

ACCC Chairman Rod Sims discusses cooperation with the New Zealand Commerce Commission and the many mechanisms in place for working together to address consumer detriment, anti-competitive conduct and share ideas in economic regulation.

Transcript: 

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Introduction

It is terrific to be here in New Zealand to address you on the challenges which lie ahead for the Australian Competition and Consumer Commission (the ACCC) and to hear first hand from Mark Berry about the issues facing New Zealand.

Trans-Tasman links run extremely deep, indeed our paths are intertwined in many ways. Australia and New Zealand’s Closer Economic Partnership arrangements— which are studied globally by forums such as the OECD and regionally by bodies such as ASEAN— set a distinctly pragmatic and flexible trans-Tasman model for economic integration.

The ACCC and the New Zealand Commerce Commission (NZCC) have many mechanisms,including staff secondments, for working together to address consumer detriment and anti-competitive conduct and to keep to abreast of new ideas in economic regulation. The NZCC is an active participant in the Utility Regulator Forum along with the ACCC/AER and the Australian State and Territory regulators.

With the latest changes permitting the exchange of compulsorily acquired information, we now have what is probably the most complete set of cooperation arrangements in place globally - outside countries who have established cross border enforcers, such as the EU.

For regulators to work together effectively, it certainly requires the right frameworks, powers and government commitment. But it still won’t happen without the cultural links and the will to do so.

I will today reflect on our recent achievements and our 2013 challenges, with an eye to what is most relevant to you, including:

  • the ACCC's overall approach and our role in a market economy
  • consumer issues and how the remedies available under Australian Consumer Law are making businesses take notice
  • competition issues and deterring cartel conduct
  • the merger review processes, and
  • regulatory issues.

Approach

From the ACCC's perspective, for our competition and consumer law to be effective there are a number of things that are important.

First, strong enforcement by the ACCC is at the top of the list. In many respects this is our core strength. By taking action in areas where we believe there is great detriment we make it clear where the commercial behaviour boundaries are and what the consequences are for crossing the line.

The real power of strong enforcement, however, is that our initial investigation contact with companies can often change behaviour. The more companies see us taking others to court for alleged breaches of the Competition and Consumer Act 2010 (the Act) the more powerful our informal approaches become, and so more matters can be dealt with well away from the courtroom. Overall, we are more effective.

Second, and particularly in enforcement, the ACCC needs to be proactive. It is not sufficient that we simply act on what is presented to us; we must also actively look out for the main problem areas and seek to address them.

Third, we need to seek to get the big and usually very public decisions right. Important authorisation, merger, enforcement and regulatory decisions are important in at least two ways: they are important in themselves, and they illustrate the approach we take, albeit more quickly, to all other matters.

Fourth, we must be practical. This means grounding our decisions in real world understanding, gained in part through detailed discussion with the parties and, importantly, those familiar with the industry and circumstances. While we must operate within clear theories and frameworks, well developed and accepted over time, a rigid application of theory or even ideology will not yield the best real world outcomes.

Fifth, we must recognise that, while effective competition will clearly yield the best outcomes, we will always have monopolies that will need effective regulation. Left to their own incentives, monopolies will pursue action that maximises their own profits and drives inefficient outcomes for society. It defies all the underpinnings of our market economy to assume otherwise.

Finally, and crucially, the ACCC must explain what we are and are not doing, and why. This is fundamental to achieve strong compliance with the law, and so that people can have a better understanding of how and why our market economy works for them.

Indeed, the vast majority of criticisms of ACCC lack of action, and there are a few, involve situations where the complaints concern behaviour that is not a breach of our Act. We need to explain this, which will also see us explaining what our Act is and is not seeking to do. In this sense there is a fine line between being an effective regulator and straying into policy.

There is another element to our approach to communication. We aim to say what we will do, and then do what we say. This way, over time, we hope that companies will take our warnings on problematic behaviour more seriously.

Consumer issues

This leads on to consumer issues and the introduction of the Australian Consumer Law (ACL) and the remedies that came with it.

Historically, in pursuing consumer protection matters through the courts, the ACCC had the choice between:

  • taking civil proceedings for non penalty remedies such as declarations, injunctions and remedial action such as corrective advertisements; or
  • criminal prosecution through the Commonwealth Director of Public Prosecution for remedies including fines.

The former – civil actions – provided the ACCC with the capacity to move quickly, stop poor behaviour, and provide broad remedies with a view to undoing the effects of illegal behaviour.

Civil actions, however, had two main short comings.

Penalty deterrence

Most important, the absence of penalty severely limited the deterrence value of proceedings. While no business likes going to court, we were not able to get what companies most fear – financial penalties. They are vital for two reasons.

First, they affect the bottom line.

French J made the follow observation in a competition case, Trade Practices Commission v CSR Ltd (1991) ATPR 41-076. He said

"The principle, and I think probably the only object of the penalties imposed by s76 (the pecuniary penalties provision of the TPA) is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravener and by others who might be tempted to contravene the act."

Second, the media and the public associate a financial penalty with wrongdoing. Financial penalties greatly increase the reputational damage, so boards and CEO’s now take much more notice of proceedings under our consumer law. This is a profoundly important point.

Compared to the competition provisions in which the ACCC had been able to seek civil pecuniary penalties in the millions for many years, therefore, there was a gap in the law in the consumer protection area.

While criminal proceedings through the CDPP provided deterrence through monetary sanctions and a criminal finding, the higher burden of proof and the extra time required to pursue matters criminally, limited the occasions on which this path was used.

Compensation

The second gap related to limitations, exposed through certain cases, over the capacity of the ACCC to seek compensation for groups of consumers not individually represented in the proceedings. To obtain orders for refunds or payments related to problematic conduct was technically difficult. The ACCC was required to identify and take action separately on behalf of each of those to recover the loss they had suffered.

This was often a barrier to achieving our objective of undoing the effects of illegal conduct. In appropriate cases, we were sometimes forced to deal with such remedies through ancillary undertakings rather than through the proceedings on foot – very often a second best option, and not the best foundation to negotiate outcomes for consumers.

Introduction of the Australian Consumer Law

The ACL was introduced from the start of 2011.

These reforms strengthened our consumer laws. For example, we have new consumer guarantee provisions, and the new direct selling provisions which the ACCC has deployed in the courts to good effect in protecting consumers from what it believes to be poor door to door sales practices in energy retailing.

But it is the new remedies that came with the ACL that I want to emphasise today.

Civil penalties and infringement notices

For the first time, civil pecuniary penalties were made available in civil consumer protection cases. Sanctions of up to $1.1 million per contravention for corporations and $220,000 for individuals became available overnight.

In the last two years, the courts have ordered pecuniary penalties in 33 cases, with penalties totalling almost $22 million.

Penalties in the order of $1 million or more have been obtained in eight matters with larger traders such as Apple, Cotton On, Harvey Norman franchisees and Optus.

At the other end of the spectrum, the ACL has also for the first time allowed the ACCC to issue infringement notices for certain consumer protection matters including false or misleading representations.

They were set at $6,600 for proprietary companies and $66,000 for publicly listed companies, but with changes to Commonwealth penalty units at the end of last year these have now increased to $10,200 and $102,000 respectively. Should a trader choose not to pay the penalty, it is open to the ACCC to take court action over the conduct in question.

The capacity to issue infringement notices as an alternative and efficient means of resolving matters greatly adds to the flexibility and range required by a regulator. Examples of circumstances where the ACCC is more likely to consider the use of an infringement notice include:

  • where it forms the view that the contravening conduct is less serious
  • where there have been isolated or non-systemic instances of non-compliance
  • where there have been lower levels of consumer harm or detriment
  • where the facts are not in dispute, or where the ACCC considers the circumstances giving rise to the allegations are not controversial.

To date, over 100 infringement notices have been issued, some comprising multiple notices to the one company, with over $620,000 in penalties paid.

Disqualification orders

But deterrence for some individuals does not always mean monetary penalty. The threat of losing the ability to continue to be involved in the management of a business or company is often a more powerful incentive. The ACL also brought with it the capacity to seek disqualification orders.

In its first case seeking disqualification under the new ACL provisions, the court banned the individual from managing a corporation for 15 years. By any standards, this was a hefty start to the new regime and will make a number of executives think twice.

Redress for consumers

Closing the gap identified above in relation to obtaining redress for consumers, the ACL also brought with it the capacity to seek redress for third parties without taking action on behalf of individuals. The ACCC has started to use these provisions to good effect and expects to see greater use in appropriate cases as we seek to undo the effects of harmful conduct.

The increased range of tools and remedies afforded by the ACL meant that Australia moved from lagging behind the rest of the world to providing among the strongest protections for consumers and small businesses. They have, quite simply, been transformational, such that the ACCC have never been better placed to do its job.

Proactive approach to fixing consumer problems

Before I move on to competition issues, I will add that the ACCC has taken a proactive approach in partnering enforcement with education to fix consumer problems.

Last year, at the same time door to door investigations and proceedings were being progressed, the ACCC launched its ‘Knock! Knock! Who’s There?’ Consumer awareness campaign.

The focus was to stop unfair door to door sales practices and put the word out to consumers about their rights and ability to refuse door to door sales. We have handed out close to 70,000 ‘Do Not Knock’ stickers, 39,000 door hangers and 16,000 consumer guides.

Late last year, proceedings were instituted against Hewlett-Packard Australia Pty Ltd in relation to a number of alleged misrepresentations about statutory warranties and consumer guarantee rights.

Proceedings soon followed against a number of Harvey Norman franchisees in which we alleged those businesses engaged in misleading or deceptive conduct by making false or misleading representations to consumers about their rights under the consumer guarantee provisions.

At about the same time the ACCC Shopper app was released. It provides information on consumers’ rights and allows users to set reminders for their gift vouchers and lay-bys. The app has been downloaded more than 7000 times since release.

Competition issues

Just last week, we released our latest edition of the Compliance and Enforcement policy.

Our new policy emphasises that some forms of conduct are so detrimental to consumer welfare and the competitive process that the ACCC will always assess them as a priority, irrespective of the sector of the economy in which the activity occurs. These are:

  • cartel conduct
  • anti-competitive agreements, and
  • misuse of market power.

As a specific area of focus, the ACCC has maintained reference to placing priority on competition and consumer issues arising in highly concentrated sectors, and in particular the supermarkets and fuel sectors.

We have also decided to place further emphasis on online competition and consumer issues. This includes conduct which may impede emerging competition between online traders or limit the ability of small businesses to effectively compete online.

Late last year, and flowing from our strategic review process, I made it clear that we expected to increase our rate of intervention in competition matters. Given their resource intensity we have recently reviewed our investigations to focus on the most important or problematic matters, and we currently now have in the order of 30 in depth investigations into anti-competitive conduct.

These matters will mostly face significant hurdles arising from their complexity, the need to obtain evidence, and the need to meet the thresholds set by our legislation. Only a small minority of them will result in court proceedings, and the courts will not always agree with us that a breach of the Act has occurred.

The ACCC's competition focus has already been demonstrated with this month’s announcement of the institution of proceedings against Visa Inc alleging that the operator of the world's largest retail electronic payments processing network misused its market power for the purposes of:

  • preventing the expansion of Dynamic Currency Conversion (DCC) to new merchant outlets in Australia, such as retail stores, and
  • preventing businesses in Australia from supplying DCC services on ATMs in competition with Visa’s own currency conversion service. 

The ACCC is concerned that Visa sought to stop the growth of competing Dynamic Currency Conversion services and, as a result, limit the choices available to consumers.

This was a big investigation and we expect it will be a significant court proceeding, being the first of its kind in the world.

Cartels

The objective of deterring individuals and corporations from being involved in cartel conduct is the reason why we and other regulators (including the Commerce Commission) take proceedings against cartelists each year.

While we continue proceedings against the two remaining airlines (incidentally, one being Air New Zealand) defending proceedings in relation to alleged cartel conduct in the transport of air freight, the penalty figure for the 13 airlines to settle to date crept up to $98.5 million.

By many measures, this has been our biggest cartel investigation ever and sends a clear signal that we will continue investigations over the long haul to deter and punish conduct we believe to be illegal and harmful to competition and consumers.

And it was only late last year that we instituted our latest cartel proceeding in the Federal Court against Yazaki Corporation, a Japanese company, and its Australian subsidiary, Australian Arrow Pty Ltd. 

The ACCC alleges that Yazaki and Australian Arrow engaged in cartel conduct, market sharing and price fixing, in relation to the supply of wire harnesses to Toyota Motor Corporation and its related entities in Australia.

This follows proceedings started earlier in 2012 against Renegade Gas Pty Ltd (trading as Supagas NSW, a privately owned company) and Speed-E-Gas (NSW) Pty Ltd (a wholly owned subsidiary of Origin Energy Limited).

The ACCC alleges that these companies gave effect to an anti-competitive cartel arrangement which included not supplying liquid petroleum gas (LPG) cylinders for forklifts to each others’ customers. These customers were both small and large scale businesses.

Criminalising cartel conduct

After many years of building support, amendments criminalising cartel conduct came into force in July 2009, introducing the possibility of jail sentences up to 10 years per offence.

Whereas pecuniary penalties may be regarded by some as merely a business cost, the risk of imprisonment alters the equation completely.

When combined with the ACCC’s immunity policy for cartel conduct, which offers immunity to the first to disclose and cooperate (not dissimilar the policy employed in New Zealand), there has never been a greater combination of threat and incentive to deter and break open cartels.

While the ACCC has not seen a significant upturn in cartel immunity approaches since criminalisation, it has seen a change in anxiety about the consequences of cartel behaviour amongst those it deals with.

The ACCC has made it clear that it will pursue the more serious matters criminally. To date, the ACCC has not sought criminal sanctions in a cartel matter. In part, this can be explained by the gap between cartel conduct and matters coming to our attention, in that many of our current investigations see the majority of conduct prior to July 2009. In part, it is also about being patient in identifying the right case.

The ACCC is confident that as matters involving conduct beyond July 2009 become more prevalent in the matters reported, we will see an increase in the immunity applications received and the matters that might be pursued criminally.

Since the launch of the cartel immunity policy in 2005, the ACCC has now received over 100 approaches, and this continues to be the lead source of information for cartel investigations and proceedings.

Mergers

The ACCC and the NZCC have a long history of working co-operatively on dealing with potentially anti-competitive mergers even though, as I will discuss briefly, the past ten years has seen an interesting divergence in the process, but not the substance, of merger reviews by the two agencies.

Our liaison on merger reviews became even closer through Commissioner cross-appointments in December 2010. Dr Jill Walker, Commissioner of the ACCC and chair of our Merger Review Committee, is an Associate Commissioner at the Commerce Commission. Dr Mark Berry, Chair of the Commerce Commission, is an Associate Member of the ACCC. Where both agencies are considering the same merger, Jill participates in the NZCC decision and similarly Mark Berry participates in the ACCC’s reviews.

Staff of both agencies regularly exchange information, subject to confidentiality waivers when needed, and analysis on common merger matters. For example, both agencies last year considered Pact Group’s acquisition of Viscount Plastics. The ACCC ultimately cleared this merger, finding that the merged entity was likely to be constrained by other suppliers. In New Zealand, it was found that the likelihood of constraint was not as strong, and the transaction was only cleared after a divestiture undertaking was given.

The fact that the markets differed, leading to the different results, added to, rather than detracted from, the benefits of co-operation between the agencies. It allowed us each to refine our analysis in considering how these different features led to a different conclusion on whether a substantial lessening of competition was likely.

In addition to co-operation on specific matters, the Commissioners and staff of the ACCC routinely discuss issues relating to merger analysis and processes with their NZCC counterparts, often finding that we are facing similar issues. For example, staff of the ACCC and the NZCC recently benefited from discussions regarding proposed revisions to their respective guidelines.

Mergers process

As you will be aware New Zealand has long had a statute based voluntary clearance process for mergers. Australia, by contrast had no formal clearance process for the first 30 years of its competition law arrangements although, as in New Zealand, mergers could be authorised on public benefit grounds.

In both Australia and New Zealand the practice developed of providing parties who considered they may be at risk of contravening the merger provisions an indication of whether any enforcement action was likely to be taken if the merger proceeded. This practice - referred to as a “letter of comfort” in New Zealand and informal review in Australia - developed in both countries due to the understandable desire of potential merger parties to know the likely risk of regulatory action should they continue with their transaction.

As I understand it, the NZCC ceased the practice of offering parties the option of obtaining a “letter of comfort” on an informal basis in addition to the formal clearance process around 10 years ago.

In Australia, by contrast, the informal system has continued. The Dawson inquiry into the competition provisions of the then Trade Practices Act considered the option of introducing a formal merger clearance regime as well as the existing informal processes and concluded that:

“The creation of a voluntary formal process that would operate in parallel with the existing informal system would seem to offer the best of both worlds.”

Since the formal system was introduced in 2007 not a single application has been made thereby resulting in all mergers continuing to be assessed under the informal regime. There are, I suspect, a wide range of reasons for this, some of which may relate to how both our formal and informal processes work. We are currently reviewing our informal merger process guidelines and I would be very interested, while I am here in New Zealand, to understand better your experiences with formal merger review.

Regulatory issues

Part IIIA

Much interest is being generated in regulatory circles this year by the Productivity Commission’s (PC) long-awaited inquiry into the National Access Regime. This was designed to promote competition in markets that need access to infrastructure which has natural monopoly characteristics, such as electricity and communication wires, pipelines, railways and ports.

The genesis of the National Access Regime was an inquiry into National Competition Policy by a committee chaired by Professor Fred Hilmer. The key benefit of having an Australia-wide approach to access issues is that it promotes a consistent approach across the economy.

The ACCC considers that the National Access Regime has been, and continues to be, successful. In our comprehensive submission to the PC’s review we have drawn on our experience of regulation under the National Access Regime to outline what has worked well and what has worked less well.

For example, in recent years the ACCC has witnessed increased competition and efficiency in wheat export trade and coal exports in the Hunter Valley, partly as a result of the effective regulation of relevant port and rail infrastructure.

On the other hand, the ‘declaration process’, by which a service is made subject to the National Access Regime, has been less successful.  It can be a costly, complex and time-consuming path to access. We expect the PC will receive multiple opinions on how best to streamline the declaration process.

Communications 

Turning to the communications sector, the key lesson is how fundamentally beneficial it is to have the economic regulation function and traditional competition function together in agencies such as the NZCC and the ACCC.

There are only a small number of countries that have combined these functions and internationally there is an increasing trend towards ‘togetherness’ or ‘conglomeration’ of regulatory, competition and consumer functions.

The rationale for this combined approach seems clear enough: the need for coordination of approach; the desirability of a broader analytical approach along the supply chain; and the synergies from the sharing of scarce legal, economic and technical skills.

The roles of the ACCC and the NZCC in infrastructure regulation generally are complementary to those in competition and consumer law. The regulatory role means such agencies have continuing contact with a regulated industry. This assists us to understand better the issues that may arise in a competition or consumer matter in that industry.

While there is a dedicated Communications group within the ACCC, all the different parts of the organisation – mergers, authorisations, compliance, and consumer protection – are involved in the developments within these dynamic and complex markets.

Priorities

One of the ACCC’s top priorities in infrastructure regulation is our work in establishing regulation of the national broadband network (NBN).

The Australian government established the National Broadband Company (NBN Co) to build, own and operate a wholesale-only fibre-to-the-premises access network that connects at least 93 percent of Australian premises, with the remaining premises to be served by a combination of next-generation fixed wireless and satellite technologies.

The Australian incumbent – Telstra – is required to progressively migrate its wholesale and retail customers from its copper and HFC networks to the NBN. Furthermore, the second largest HFC network owned by SingTel Optus will also be progressively shutdown as end users are migrated onto the NBN.

As a result, it is crucial for the ACCC to ensure the right access settings are established for NBN Co so that the potential pitfalls of having a monopoly— high prices, inefficient investment and poor service quality — are minimised. They are also vital for facilitating robust competition in the retail telecommunications sector.

Here in New Zealand, the Ultra-fast Broadband Initiative and Rural Broadband Initiative are under way to bring faster broadband to 97.8 per cent of New Zealanders.

While both governments have made decisions to rollout faster broadband using the Fibre-to-the-premises technology, there are different emphases in the policies.

For example, the New Zealand broadband initiatives are based on a public-private funding model, while the Australian NBN is based entirely on public funding.

In contrast to NBN Co’s monopoly provision of wholesale fibre access services in Australia, fibre-to-the-premises providers in New Zealand will be subject to inter-modal competition from the existing copper and HFC access networks, and Chorus will continue to provide wholesale copper-based services.

Given this constraint from competing networks, the New Zealand government has introduced a regulatory regime based on a combination of “regulation by contract”, behavioural undertakings and information disclosure.

Importantly though, the next generation networks in Australia and New Zealand will both be regulated on the premise of wholesale only ‘open access’ principles, including strict non-discriminatory obligations.

Once an effective regulatory regime is established in Australia, issues will undoubtedly arise in the move to next generation networks that will have a direct bearing on broader consumer interest. The ACCC’s remit on consumer protection issues will allow a consideration of all these issues to be more closely coordinated with its decisions on network regulation.

In particular, I could well envisage situations where service providers fall short on consumer expectations for the promise of better network performance as next generation networks are deployed.

Roaming

I cannot leave this topic without commenting on the recent international roaming agreement between our two Governments.

This is an excellent initiative to counter what are, clearly, excessive roaming charges; it is not inappropriate to call the current roaming charge levels price gouging, which is not a term I usually use.

The only solution is the one agreed by our two Governments. Unilateral action cannot solve the problem. While there will be implementation difficulties, in my view the closeness of the ACCC and the NZCC will solve them, so that roaming charges can come down significantly.

On that positive note, thank you for your time today.  

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