The major crisis in the financial markets which led to the credit crunch and a global recession has raised questions about our reliance on markets and competition to provide optimum outcomes. Firms struggling to cope with financial restrictions and reduced demand for their products are calling on governments to prop them up, and even for a temporary or permanent relaxation of the competition rules. Competition authorities such as the Office of Fair Trading (OFT) and the European Commission have provided assurances that they intend to remain robust in their application of the rules, while recognising that the current economic climate will pose new challenges.

This article provides an overview of some of these issues, how the authorities have responded and the implications of these responses for the application of competition policy going forward.

The need for competition

The competition authorities are clearly committed to the view that competition policy has a strong role to play in the recovery of the economy. Competition encourages firms to allocate resources efficiently and to innovate. Competing firms are forced to develop new products, services and technologies at the lowest possible cost, providing customers with greater choice and better products at lower prices.

Relying on past experience, the authorities maintain that while restricting competition can look attractive to policymakers faced with distressed businesses in a recession, it may not be the best solution. Policymakers should heed the experiences of the United States in the 1930s and Japan in the 1990s, where state intervention to relax the competition rules is generally thought to have prolonged the crisis.

However, changing economic circumstances are providing the competition authorities with new challenges in their application of the rules. In the arena of mergers and acquisitions, the current economic climate is likely to increase the number of failing firms and lead to consolidation in some sectors. While mergers involving genuinely failing firms may well be competitively benign where the exit of a competitor is inevitable and there is no prospect of another firm taking over its assets, there is a higher chance that companies may use this argument more freely than in the past.

In response, the OFT in particular has assured businesses that it will take a practical and flexible approach in addressing each case, and will ensure that the economic context is taken into account along with other considerations. It is confident that its rules pertaining to the assessment of a failing firm are adequate to deal with the current situation and should provide certainty for companies contemplating such issues.

The commission has also demonstrated its willingness to assist businesses while maintaining its application of the competition rules. In the purchase of the UK government's stake in Bradford & Bingley by Santander, the commission allowed the companies to derogate from the usual strict filing requirements and cleared the transaction after it had already been implemented, dropping its standstill requirement. The commission also showed its flexibility in the speed of its assessment of BNP Paribas' acquisition of Fortis group assets, arriving at its clearance decision 10 working days before the decision deadline.

In its assessment of applications for the approval of state aid measures, the commission has been willing to act both swiftly and effectively. This is most apparent in the commission's assessment of aid provided to banking institutions by various national governments over the past months. As early as October 2008 - shortly after the bankruptcy of Lehman Brothers - the commission published guidance to assist member states in their approach to measures for banks in crisis, setting out clear conditions for aid and aiming to speed up the decision-making process. One of the commission's most recent decisions in this area - concerning the Belgian government's assistance to the KBC Group - was cleared (subject to conditions) by the commission within two weeks of notification. Outside the financial sector, the commission has also demonstrated the efficiency with which it can take such decisions: its clearance decision of the proposed aid of €50 million by the German government to retailer Quelle was taken on 30 June 2009 after receiving the notification only on 25 June. While ensuring that these cases are dealt with efficiently and effectively, the commission points out that these provisions operate within the existing state aid rules and that its decisions will always aim to minimise potential distortions of competition.

The authorities are also preparing themselves for an increase in so-called 'crisis cartels' (where competitors within a particular industry work together to ensure that all survive). These cartels operate to fix prices and limit output, and members may assist one another in market sharing, reducing competitive pressures on those signed up to the arrangements. Again, the OFT has stated that it will continue to take breaches of competition rules very seriously, and has warned that these cartels will prove detrimental to the recovery of the economy in the long term while ensuring that prices stay at artificial levels harming consumers in the short term.

Possible exceptions

In the field of merger control, the acquisition by Lloyds TSB of HBOS was only made possible only by the intervention of the UK government. Following a decision of the OFT to refer the merger to the Competition Commission on the grounds that it gave rise to competition concerns, the government - under new legislation passed for this purpose - overruled the OFT under its remit to "maintain the stability of the UK financial system". However, many commentators have criticised this measure and it is debatable whether, had this assessment been undertaken by the commission, it would have been cleared, given that no similar public interest argument is available at commission level.

In the area of state aid, the commission has made use of the exemption provisions within the EC Treaty to approve certain aid measures. Article 87(3)(c) provides an exemption for rescuing and restructuring aid, allowing it to facilitate the development of certain economic activities provided that it does not adversely affect trading conditions contrary to the common interest. This exemption was applied, for example, in the cases of aid to Northern Rock and Bradford & Bingley by the UK government. In addition, Article 87(3)(b) provides an exemption for aid to remedy a serious disturbance in the economy of a member state. This provision has been utilised, for example, by the commission in its exemption of the emergency recapitalisation of ING by the Dutch government. The use of the exemption for "serious disturbance", however, has been and continues to be rare. The commission has preferred to make greater use of the exemption for rescue and restructuring, in allowing for increased flexibility in its assessment of current aid measures.

Conclusion

It follows that competition policy has played an important role in the financial crisis. However, the competition authorities clearly recognise that others are better placed to address the financial issues that companies face. For example, the banks themselves need to assist in addressing access to credit for smaller firms, with governments supporting the measures. In addition, government intervention in, and regulation of, the banking system will play an important role in stabilising the banking system. The role of the competition authorities is clear: they must ensure the continued application of the competition rules in order to guarantee that in the long term, companies will come out of the recession stronger.

Elizabeth M Turner is an associate in the competition department at Orrick, Herrington & Sutcliffe LLP.