The era of the mega-penalty is here

Boards, directors and managers should heed Australia's competition watchdog or feel the sting of tougher cartel penalties.

Australian Competition and Consumer Commission (ACCC) chair Rod Sims has a message for businesses currently tolerating practices that might be nudging the law — if you get caught, it’s going to get very expensive. The era of the $100 million penalty is here, he says. The ACCC is pushing harder for fines up to 10 per cent of a company’s turnover for anti-competitive behaviour and false, misleading or deceptive conduct — and companies with a turnover of a billion dollars or more are in the spotlight.

As chair of the ACCC since 2011, Sims has long argued that despite the tough penalties on the books, actual fines handed down to companies by the courts are too low and don’t act as an adequate deterrent to businesses behaving badly.

“I don’t think corporate Australia yet takes seriously enough the breaches of our law,” he says. “With our penalties being as low as they are, corporate Australia probably hasn’t cared enough about complying with the Competition and Consumer Act 2010 (Cth). We think higher penalties will get them to take notice.” That view is backed by a March 2018 OECD report, Pecuniary Penalties for Competition Law Infringements in Australia, which highlights the huge gap between Australia and current practices in other similar jurisdictions.

“The OECD was saying that Australia is an outlier, that most penalties overseas are really using that ‘per cent of turnover’ quite aggressively,” Sims says.

Australia has certainly been slow to catch up. While the average fine in Australia for anti-competitive or cartel behaviour was $25.4m, in comparable OECD economies, it was $320.4m.

Bigger fines and reputational risk

In 2007, the federal government sharply increased Australia’s penalties for anti-competitive behaviour. The previous maximum $10m fine for companies was boosted to a maximum fine of $10m or three times a company’s profit attributable to the offence; or 10 per cent of its annual turnover. Legislation now before parliament proposes increasing penalties for breaches of Australian Consumer Law (currently a maximum $1.1m for companies and $220,000 for individuals) to the same level as for competition law breaches.

But it takes time for the weight of the change to sink in across the legal and business community, argues Sims. Just over a decade on, change has been glacial. This starts with the penalties the ACCC’s legal advisors push for, Sims says. “We’ve got situations where a barrister — our barrister — wouldn’t argue for a higher penalty because they didn’t think it was appropriate. Courts are at the end of the chain. It’s the solicitors, the barristers, the companies themselves, who might want to settle a case, but have completely the wrong sense of what the right penalty is.”

As for recent penalties lacking bite, Sims picks the $10m fine for Coles Supermarkets in 2014 for unconscionable conduct against suppliers, and Reckitt Benckiser’s $6m fine in 2017 for falsely claiming its Nurofen painkillers were targeted at relieving specific types of pain.

It’s time, he says, for both business and the legal community to change mindsets; for Australia to be more in line with penalties in the US and Europe. “The penalties regime change is well on its way, and directors need to be aware of that; the penalties are large, and reputational risk aligns with the penalty. If you get a penalty of $2m... then the reputational harm is only so much. If you get a penalty of $80m, people say, ‘Well, they must have done something dreadful’. The reputational damage is larger. [And] if the share price is affected, it goes up the list of being of priority to the board and senior management. Getting those penalties up will make a big difference in terms of compliance with our law. ”

Harper Review reforms

The ACCC focus on more effective penalties coincides with the most significant changes to competition law in 40 years. Those changes, following recommendations in the 2015 Harper Competition Policy Review and legislated in 2017, strengthen the ACCC’s arm against misuse of market power and anti-competitive concerted practices such as cartels and price signalling.

Last year’s update to Section 46 of the Competition and Consumer Act 2010 (Cth), on the misuse of market power, replaced the “purpose” test with a “purpose or effects” test. That broader test means the ACCC can now pursue corporations whose conduct has either the purpose, effect or likely effect of substantially lessening competition.

The concerted practices law and Section 46 amendment fixed some outstanding issues for the ACCC, says Sims. Once the increased penalties for breaches of consumer law are passed, he believes the organisation will have most of the tools it requires to weed out anti-competitive practices. He, like ASIC, would like more powers for telephone interception. “We can’t do that at the moment — it’s something we should be able to do.”

Setting the boundaries

Although the role of a board is not to manage the day-to-day running of a company, Sims believes directors can’t afford to ignore how an organisation does business. “If you’re a director, they’re, in a sense, doing it in your name. Are you comfortable with this? If your companies are doing things you’re not proud of, don’t be surprised if public opinion turns against you.”

He admits, however, that dubious behaviour is only human. “People will push unclear boundaries, there is no doubt about that. Where the boundaries are clear, there is no doubt that companies will adhere to the law. If the law is not clear — such as, what is misleading conduct, or what amounts to a substantial lessening of competition? — then they tend to push the boundaries.”

He cites recent examples, such as an ACCC case against Heinz for advertising Little Kids Shredz for toddlers as a healthy eating start in life, although the processed fruit and vegetable products could be 68 per cent sugar. “That must be known by the senior management that they’re selling the product with 68 per cent sugar. Yet that was on the market.

“We recently had a case with Ford where they knew there were problems with their power shift transmission. But when people complained, brought the car back and said it wasn’t working properly, they were told it was their driving style.”

In the electricity sector, he targets the “propensity for companies to advertise in ways that confuse customers. To some extent, that’s part of the deliberate strategy. I think if the penalties [for misleading conduct] were larger, they would think twice about that strategy.” Sims says companies should also be keeping a close eye on staff incentive schemes. “If you give incentives, some will do inappropriate things to earn the bonus. You need checks and systems in place. You put the bonuses or incentive schemes in place, you’ve got to put the checks in place. One has to accompany the other. If you’re not doing that, then you don’t care enough about whether your company is breaching at all.”

More rigorous regulation

So what makes an effective regulator? “You’ve got to be taking companies to court where they breach the act. There has to be clear, publicly acknowledged consequences from breaching the act. Secondly, you’ve got to communicate with the public. Communication is the way the public gets to understand that we’re on the job,” says Sims.

“Companies have got to obey not just the black letter of the law, but also the spirit of the law. Even if we haven’t been able to prove you misled consumers or engaged in unconscionable conduct, I think you’ve got to ask yourself, ‘Am I happy that my company is doing this?’

During the banking Royal Commission, we’ve had comments by bankers saying, ‘We know it wasn’t appropriate behaviour, but everybody else was doing it, so we had to do it.’ That’s an appalling situation. If you don’t think it’s the right thing to do, then don’t do it.”

Hit List: ACCC Priorities in 2018

Criminal cartels

More cartel prosecutions, more often, is the message from Rod Sims, chair of the Australian Competition and Consumer Commission (ACCC).

A new prohibition against anti-competitive concerted practices addresses a problem the ACCC had in demonstrating that a “contract, arrangement or understanding” exists. The new law targets businesses that might disclose competitively significant information (either privately or publicly) or take other coordinated action that is intended or likely to substantially lessen competition.

Unfair contract terms

Many complaints by SMEs against big business have to do with unfair contracts. “Some allow companies to unilaterally change the price, to have an automatic renewal of the contract, to contract out of all liability, even if they do something wrong,” says Sims.

The new consumer data right

The ACCC, supported by the Office of the Australian Information Commissioner, will regulate the new consumer data right. Customers can access their transaction, usage and product data from an organisation and share it with a competitor or comparison services to get a better deal. The right will be limited to certain industries.

Digital platforms

The ACCC has begun a world-first, 18-month inquiry into the impact of digital search engines, social media platforms and other digital content aggregation platforms on competition in media and advertising services markets. The final report is due 4 June 2019. “It affects journalism, competition and consumer rights,” says Sims. “The fundamental question of whether consumers are misled about how much data they are giving up, and what that is used for, is a huge issue.”