Why harmed consumers may be more satisfied in the future – the CMA’s new redress scheme

(by Sebastian Peyer) In an earlier blog post I wrote about the new opt-out collective action regime introduced by the Consumer Rights Act 2015. This is not the only measure that is to help consumers and other injured parties to obtain compensation for the violation of EU and UK competition law. The new sections 49C-49E of the Competition Act 1998 provide powers for the Competition and Markets Authority (CMA) to approve voluntary redress schemes. This blog post considers whether these are a welcome innovation.

The redress scheme in brief

Under the redress scheme, ‘a person’, i.e. a company that has infringed competition law, may apply to the CMA for approval of a redress scheme during or after the public investigation has been completed. In both instances the redress scheme will be approved at the same times as the infringement decision or afterwards. In making the decision, the CMA has to evaluate the scheme, taking into account the amount or the value of the compensation offered under the scheme, the setup and the governance (Board) of the scheme. Once the scheme has been approved, individuals can claim compensation against production of adequate proof of, for example, purchase. The details of the application and approval are to be regulated by the CMA’s (Draft) Guidance on which it has recently conducted a consultation.

The idea of the redress scheme is to provide more effective compensation to victims of anticompetitive conduct and, at the same time, avoid the risks and expenses of litigation. Companies that apply for the redress scheme during the investigation process may receive a discount on the fine of up to 10% of that fine. This discount can only be applied by the CMA and cannot be offered to firms that have been fined by the EU Commission. Parties compensated under the scheme will normally lose their right to claim for compensation in the courts. While the exact procedure has not been established yet, there is a risk that the interests of compensated parties are not be adequately protected in the Guidance, or worse, that the scheme may be used strategically to undermine the new opt-out class action regime.

Are the interests of compensated parties adequately protected?

In section 3 the Guidance document sets out how the Board has to be constituted. The Board is the controlling body that decides on compensation claims and the compensating company normally selects the Board’s members. None of the acting parties’ interests (compensating company or the Board) are aligned with the compensated parties’ interests in (full) compensation. Even a careful selection of the Board members may not be able to avoid the problems inherent in the composition of the scheme. The CMA is likely to be interested in closing the matter expediently. Companies will only submit an application for a redress scheme if such an application has some benefits compared to defending compensation claims in the courts. The benefit for companies may stem from either the settlement offer being lower compared to actual damages if the case went to court (this is the nature of settlements) or from the savings in litigation cost and time. Assuming that both considerations induce a company to voluntarily offer redress, it will normally make an offer that is lower than what we might consider to be full compensation. Most settling parties will be likely to accept a lower offer.

While lower compensation is better than no compensation, the current setup could potentially create incentives for compensating companies to set very low offers that are still being accepted. Rational victims may be willing to accept offers equivalent to, say , a fifth or less of the actual harm because they are averse to the risks of bringing a case for the full amount.[1] Low levels of compensation would reduce the deterrence effect of private enforcement. It would also be a far cry from the ‘effective compensation’ the Damages Directive is aiming at. A Board member that presents the interests of consumers may help to limit this problem. The CMA should also make extensive use of its powers to take the amount of the settlement offer into account.

Interaction of redress schemes and the new class action regime

The approval of the redress scheme may undermine the new opt-out group action. The redress scheme encourages individuals to seek potentially lower but hassle-free compensation under the scheme. Those who claim compensation under the redress scheme will not be able to claim compensation in the courts. Consequently, a successful redress scheme will reduce the size of the potential class of claimants, assuming that not all injured parties come forward to claim redress. This poses two problems. It makes it more difficult to estimate the size of the class and it may reduce the critical size of the class but some kind of limited disclosure may help. The second issue is more serious. The redress scheme could be used to reduce the size of a class of potential claimants to the point where it is no longer profitable to bring a collective action on behalf of those who are dissatisfied with the lower settlement offer. There is no easy way to fix this but the CMA should take into account that companies have incentives to make very low offers in order to reduce the size of a putative class.

Make it work

Currently, most victims of anticompetitive conduct do not receive any compensation at all. A scheme that offers redress for injured parties in an inexpensive manner certainly helps to address the issue. It does not mean that the new opt-out damages action is redundant. The threat of opt-out damages claims is probably needed to encourage companies to offer ‘voluntary’ compensation; the discount on the fine may help too. However, much depends on how the CMA interprets its role as the gatekeeper to redress schemes and on the strength of the CMA’s approval and oversight. The Guidance document should make it clearer how the CMA intends to protect the interests of unrepresented customers and consumers. It would be great for injured parties if this scheme worked out.

[1] It is true though that consumers dissatisfied with the offer may refuse it and go to court. Given the low level of consumer participation in private antitrust enforcement in the UK, this is more likely to be a theoretical concern.

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