When WA first wrote about these changes last month, the government’s proposals for competition regulation were flying under the radar. Thanks to a devastating report by John Fingleton, former Chief Executive of the Office of Fair Trading, they are now starting to get the attention they deserve. More wide ranging than the reforms introduced in June 2018, which allowed the government to intervene more easily in mergers affecting three specific sectors, these reforms represent a significant change to the way all investment will be conducted in the UK.
Under the new proposals, the Competition and Markets Authority (CMA) will be entirely removed from the process of investigating deals related to national security. Instead, an entirely new unit will be set up to deal with these cases, with the government estimating that over 200 cases will be reviewed on national security grounds every year. This would be a significant increase when compared to the current system, which has opened eight informal investigations on national security grounds since 2003.
The huge expected increase in caseload is driven by the changing scope of the government’s powers. Although the consultation specifies sectors where intervention is most likely (civil nuclear, communications, defence, energy and transport) any Secretary of State would have would have the power to call in any deal regardless of sector. In many cases this would be the Secretary of State for Business, Energy and Industrial Strategy, although the consultation also specifies that “government proposes using “the Senior Minister” in any legislation, which would be defined as covering Secretaries of State, the Chancellor and the Prime Minister”, meaning that any Senior Minister would be able to trigger a review, regardless of the sector it affected. Additionally, the changes would not only affect mergers and acquisitions, but would also give the government powers to intervene in investments, loans, and acquisitions of intellectual property rights, including copyright and patent rights, and physical property.
This amounts to a fundamental change in the way that UK approaches mergers and competition law, particularly foreign investment. While the changes will also affect UK based firms, by citing ‘national security’ as the reason for the changes, it is clear the government has foreign firms in mind when making the reforms. This could result in a reduction of foreign investment in the UK, as firms become deterred by the increased bureaucracy which acquisitions would have to negotiate, and the uncertainty generated by new rules and a new regulator. As Fingleton sets out, if this does deter foreign investment, then the general value of UK assets is likely to decline, meaning bad news for the wider industry too, particularly as Brexit continues to be at the forefront of some investors’ minds.
The proposals won’t just affect foreign investors, as the effect of the changes will be felt across the whole sector. Investors, faced with a new system and a new regulatory body, will have to navigate additional bureaucracy and new uncertainties regardless of where they are based and what sectors they are investing in. There is no word from government yet on when the results of the consultation will be announced, but investors should use the proposals as a signal of government intention and start to prepare. Increased awareness of the political mood across parliament, and among ‘Senior Ministers’ will become increasingly necessary as investors enter this new regulatory world.