Outcry over competition and insolvency reforms

Business groups condemn the Government's proposals to 'import American regime' in crackdown on cartels

Business leaders yesterday condemned government plans to jail company directors found running cartels and lambasted new official proposals to distinguish between good and bad bankrupts.

The Department of Trade and Industry, run by Patricia Hewitt, was hit by a storm of criticism as it published a White Paper setting out government plans to reform competition policy and insolvency rules.

The move was meant to further prove New Labour's pro-business credentials, but it badly back-fired. There was outrage at plans to imprison directors and managers discovered running "hardcore" cartels ­ described as "serious conspiracies which defraud business customers and consumers and have wide economic impacts".

It would move cartels from a civil matter to criminal status. The Government has yet to decide on the level of sentences to be handed down for this offence. It pointed out that Canada and Japan have penalties of five years for engaging in cartels, while it is three years in the US.

Business organisations said the new measures were too soon after the 1998 Competition Act, which came into force in March last year and was the first strengthening of competition rules for decades.

Nicholas Spearing, a competition partner at the City law firm Freshfields, said: "After 25 years of a toothless regime, it seems odd to be bounding towards imprisonment."

The Competition Act gave the Office of Fair Trading power to levy fines and conduct "dawn raids" on companies suspected of running cartels. Ruth Lea, head of policy at the Institute of Directors, said the announcement was unnecessary. "This is a bit of anti-business politicking.... Where are all these cartels? They have just brought in pretty vicious measures. We don't know that fines are not working," she said.

The Confederation of British Industry warned the changes would move Britain out of line with European law. European businessmen do not face criminal sanctions for forming cartels, it said.

John Cridland, deputy director-general of the CBI, said: "Why are we importing the American regime? How does this stand with the European single market?" He suggested this would place British firms at a competitive disadvantage, as French and German companies would be able to form cartels without fear of jail whereas their British counterparts would be deterred by the harsh penalties.

Mr Spearing said: "Most cartels are formed by salesmen who get together in some pub and hatch a plan so they can all meet their sales targets. They don't gain much financially from it but do it to keep their jobs. In these circumstances, prison seems a bit harsh."

The bankruptcy reforms came under fire too. The Government wants to get away from the "one size fits all" approach and seek to make a distinction between "responsible" bankrupts and those that are "reckless". The good guys, deemed unlucky rather than malicious, could be discharged from debts and released from restrictions within 12 months. However, there would be tougher penalties for the minority "who abuse their creditors and the public", with restrictions lasting between two and 15 years.

Stephen Gale, a partner at the law firm Herbert Smith, said the distinction was unworkable and the new leniency towards the majority of failures would encourage profligate behaviour, so damaging the British economy.

"Where do you become good and cease to be bad?" he said. "This is such a nonsense that it is going to produce huge amounts of litigation. I guess, as a lawyer, I should welcome that."

Melanie Johnson, a minister at the DTI, said the initiatives announced yesterday were part of Labour's broad plan for its second term of office. They aimed to create a "world-class" competition regime for the UK.

"The first term was about stability. The second term is about higher levels of sustainable growth, which requires an increase in productivity and competition in our economy," Miss Johnson said.

The package was clearly driven by Gordon Brown. He needs to keep the economy chugging along at a decent rate to reap the tax revenues necessary to put money into public services. It also smacked of the Chancellor's love affair with the American way of doing business, with most of the measures inspired by US practice.

The IoD's Ms Lea said it was about being seen to be doing something. "They [Labour] do love their initiatives," she said.

Also seen as woolly and impractical were measures to allow consumer bodies to raise complaints with the OFT about markets not working properly, and a move to make it easier for individuals to bring claims for damages from anti-competitive behaviour. It is notoriously difficult to quantify such damages.

The proposals will be put out to consultation and will be incorporated into an Enterprise Bill in this parliament.

The most uncontentious measure announced was the granting of freedom from political interference to the competition regulators, the OFT and the Competition Commission. This move was almost universally welcomed. It means ministers will no longer have a say in decisions to block proposed mergers and acquisitions. The Government will still be allowed to intervene in cases where "public interest" is involved.

The merger policy change mirrors the independence granted to the Bank of England in Labour's first term. The idea is to provide more certainty and impartiality to companies.

Also well-received was a proposed change to insolvency rules taking away the preferential claim of the state to collect taxes ahead of the claims of other creditors. The amount of revenue involved though, about £60m to £90m a year, is pretty insignificant.