Over the course of 2009, global practices in business regulation have toughened up considerably. US regulators have used phone taps to clinch their recent insider trading case against the huge Galleon Group hedge fund, and last week they arrested the fund’s billionaire CEO, Raj Rajaratnam. In April, the Kevin Rudd government in Australia passed laws that place sweeping new powers and penalties at the disposal of the Australian Consumer and Competition Commission, their equivalent of our Commerce Commission.

These powers include the criminalisation of cartel behaviour, Cosy arrangements between firms to use their market power to fix prices and divvy up customers will no longer be punished with the sort of fine that could previously be brushed off as an incidental risk of doing business. The new Oz laws can put executives in jail for up to five years, with erring firms facing fines three times the value of the cartel arrangement. In July, the Rudd government also made phone taps part of the ACCC’s toolkit for the investigation of cartels.

The language is heating up, too. At the time the legislation was passed ACCC chair Graham Samuel was warning corporate representatives in these terms : “You do not fix prices, you do not rig bids, you do not allocate [ie, divvy up ] customers. This is the kind of conduct which could expose your client to jail.” To successfully defend cartel behaviour, the firms involved need to demonstrate to the Aussie authorities that the public benefit from such arrangements outweighs the public detriment from it. That’s far easier said than done.

Much the same attitudes are evident in the United States now, as well. The Obama administration’s assistant Attorney-General Christine Varney ( she heads the anti-trust division at the US Department of Justice ) has explicitly warned that the Bush years of cosy collusion around corporate price fixing are over. In future, she has promised, her division “will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition, and to harm consumers.” In her first major speech on the job, Varney outlined a situation that New Zealanders will readily recognize :

Firms have been given room to run with the idea that markets’ self police’ and that enforcement authorities should wait for the markets to ‘self correct.’ It is clear to anyone who picks up a newspaper or watches the evening news that the country has been waiting for this self correction’ spurred innovation and enhanced consumer welfare. These developments have not occurred.

Instead, we see numerous markets distorted. We are also seeing some firms fail, and take consumers with them. It appears that a combination of factors – including ineffective government regulation, ill considered de-regulatory measures and inadequate anti-trust oversight has contributed to the current conditions…As anti-trust enforcers, we cannot sit on the sidelines any longer. Both in terms of enforcing the anti-trust laws, and contributing to sound competition policy, as part of our nation’s economic strategy.”

In New Zealand, de-regulation was always been more of a religion than an economic strategy. Any paranoia though about the New Regulators is almost certainly misplaced. Here as elsewhere, the targets are not those large companies that owe their market dominance to superior products or performance. The concerns are about those firms that use market dominance to slow the uptake of new technologies, and to strangle and suppress healthy competition, for the sole benefit of their shareholders. Roughly, that’s what Telecom did in the 1990s – at considerable cost to consumers, business, and the entire country.

Any divergence between the regulatory climate overseas and our own corporate mindset is something that Commerce Minister Simon Power will now have to manage. While he and Prime Minister John Key have been talking up the vision of a single Transtasman market, Power is confronted by a local business culture that is prone to viewing de-regulation as the cure for all our ills – past, current and future. Too bad that the rest of the world has moved on. Much of our business lobby remains in a state of arrested development - and it tends to react like a surly teenager whenever the Commerce Commission tells it to clean up its room.

Cannily, Power’s approach to the single Transtasman market has been gradual, and reassuring. Instead of starting with the hard stuff – single currency, common monetary policy, a single tax regime and other touchy issues of sovereignty – he has been sensibly working away at the margins. There is a Memo of Understanding with the Australians on Business Law Co-Ordination. Work is been done on the easier, do-able bits : registration, recognition of credentials, networking on regulatory solutions, cross representation on each other’s regulatory bodies etc etc.

Power’s stated aim is that - one day - any New Zealand firm to conduct its Transtasman business from Auckland or Eketahuna, just as easily as it could in Sydney or Woollongong. “Under this approach,” he maintained in an speech in mid October to the Institute of International Affairs, “ each jurisdiction retains its own regulatory arrangements, but a business can expect to receive similar treatment, and face similar rules and enforcement.”

Well, good luck with that. Still a long way to go to reach that blessed state of harmony. The hardbitten Aussie enforcers do it differently than our Commerce Commission. And keep in mind that the Commerce Commission ( at least under its previous leader Paula Rebstock ) was portrayed in quite apocalyptic terms by Chapman Tripp lawyer Grant David in an article in NBR earlier this year that ended up calling for the complete abolition of the Commission.

In reality, the Commerce Commission is a fairly small tiger. As of August, the Commerce Commission had 16 cartel cases on stream, with some of these being the New Zealand arm of an international cartel investigation with local impact. Exactly half these 16 cases were in the investigation phase, with three of these being purely domestic. The other eight were in the litigation phase and six of these, too, were entirely domestic in nature.

As it carries out this watchdog role, the Commerce Commission hardly places a major drain on the taxpayer. For 2009/10, the operating budget is set at $44.9 million, which includes a litigation budget of just $10.5 million – peanuts at the going rates for higher court action. Just over $14 million goes into market regulation costs – which can be further broken down into $7.7 million for the oversight of telecommunications, $3.167 million for electricity sector regulation, $2.7 million for gas industry issues and $500,000 for airport-related competitive issues. We get what we pay for. And it means that if we are to foot it with the Australians in future, we will probably need to devote more resources to the regulators of our white collar gangs.

On November 3rd, Werewolf editor Gordon Campbell interviewed Commerce Minister Simon Power about the challenges of fostering harmony Transtasman, among business, and among those who watch over it.

Setting the landscape

Campbell : US regulators used phone taps to clinch their recent insider trading case against the Galleon Group hedge fund. Across the Tasman, cartel behaviour has been criminalized under the Trade Practices Act, and phone taps are now among the regulatory options available there, too. Do you think our Commerce Commission need such tools, and the readiness to use them ?

Power : In respect of cartels ?

One of those examples had to do with insider trading as well. I’m talking generally - but of course, cartels are the main area where those powers are being exercised.

I’m persuaded that the current legislative framework of the Commerce Commission operates under is appropriate for our competition settings. There are areas that probably require some more work, and some more discussions. I’ve indicated publicly that I was prepared to look at cartel criminalization, and I expect that the government will be in a position early next year to start that discussion.

In your opinion, do you think cartel behaviour should be criminalized ? What’s the case for it?

Well, I think….the case for it is that …one [is] the strong emphasis on harmonizing the Australian regulatory regime with New Zealand, and their recent moves in this area means it could be timely for a discussion on a similar regime here. But I’m not in a position to say any more than that until early next year.

Do you think the regulation of pricing is a legitimate area of concern for the Commerce Commission ?

When the Commerce Amendment Act was passed last year – with support from both major political parties – pricing mechanisms around monopolies were part of that work. And determining those input methodologies to determine that price-tracking path is work that the Commerce Commission is undertaking now. It is extremely complex and difficult work, and I don’t pretend to be an expert on it, Gordon.

But it sounds like the work of the angels. So investigations into pricing are legitimate for the Commission ?

Yes.

Yet in February, we had Chapman Tripp lawyer Grant David and Todd Energy boss Richard Tweedie calling for the scrapping of the Commerce Commission altogether. Saying it was a constraint on commercial behaviour, and an obstacle to growth, innovation and investment. Did you think those criticisms had any substance?

Well, everybody is entitled to their view. But the government backs the regulator.

And, in your view, this regulator is not doing any of those bad things ?

Well, the government doesn’t have any plans to review the legislative framework for the Commerce Act at this point.

Or to reduce its role?

Or to reduce its role. We don’t have any plans in that area at present. I’ve made it clear as part of my role - which, in effect, is responsibility for the policy settings under the Commerce Act and the appointment of Commerce Commission members - the regulatory settings are appropriate for a new chairman to get his feet under the table, and get on with the job.

Some saw those criticisms by David as being a tactical shot across the bows. Given the subsequent appointment of former Chapman Tripp lawyer Mark Berry to head the Commerce Commission, can you understand why some people had a ‘fox in the henhouse’ perception of the appointment ?

No. I’m delighted with the result of Dr. Berry going in there. Getting highly skilled specialists into those roles is not easy, actually. And Dr Berry is very widely regarded as having considerable expertise in competition law. And its an appointment on which I’ve received positive feedback.

In your opinion, is the corporate landscape in New Zealand over-regulated by international standards ?

That’s a good question. I think its always useful to be reviewing the regulatory framework around business. Having said that, in the commerce and competition area, I think the settings are right presently.

And not unduly burdensome, by international standards ?

Not that I’ve been advised. That’s not my sense of it. A good example though where there is an area for change is in the securities area for instance, where might be outside the scope of where you wanted to head. We are doing quite a lot of work in reviewing those settings. But at the moment, I would say the competition settings are satisfactory, and doing their job.

In the competition area, are we ahead – or behind – Australia - in terms of the nature and extent of regulatory intervention ?

Ahead or behind ? I think we have the capacity to learn from each other in this space. They’ve headed into the cartel criminalization area before we have, and whether we do or not remains to be seen. It sets a post…if you like for us to have a discussion about and issue which broadly speaking in a single economic market context is worth looking at. I can say more about that in the early part of 2010.

Reasons for existence

Taking the criticisms by Grant David seriously for a second..if the Commerce Commission were to be vaporized overnight, how would the public notice the difference ?

That’s a question I haven’t been asked before. The …well, I would think the issue of pricing and monopolies would be a very good example. Fair trading…the Commerce Commission has played a role in those areas, and made itself available for a number of people who have had complaints or concerns about the collapse of finance companies. They play a critical role in getting those regulatory settings firmed.

So the regulator should be seen as a friend of the consumer, and a friend of the market ?

Very much the friend of the consumer, and critical for making sure that consumers are getting value.

And a friend of the market as well ?

Well..I mean, regulators always have a role in making sure that where the market needs an equilibrium set, they are able to do that. I think they do a good job of that. Particularly in the monopolies area. In the Part 4 elements of the Commerce Act that we were talking about earlier, it has an absolutely essential role.

So if the Commerce Commission is clearly on the side of the angels, how come it has so many critics?

Well, everybody who is in a regulatory role has people who think they could be doing it differently. It’s a high profile organization – no different to the Securities Commission, in that the public is always going to have a view as to where the balance sits between regulation and enforcement. That’s a critical delineation which I think Dr Berry has done a good job of getting the line drawn more neatly

So we should read a lot of that criticism [of regulation] as being self interest….as legitimate, or illegitimate, self interest ?

Look, I don’t want to get into it. I just want to say the regulator has a specific role to play – and that means making decisions, and with some decisions, some people are always going to be on the wrong side of them.

Do you see Dr Berry’s role as being a continuation of the work of his predecessor, Paula Rebstock – or is he meant to mark a change in tenor and content, compared to the previous regime ?

Gordon, the regulatory settings haven’t changed. So I would expect the regulatory and legislative requirements to be met.

And the government didn’t come in armed with a perception that there needed to be a change in the way the Commerce Commission operated in the competition area?

No, I think in the end we’ve said Dr Berry needs an opportunity to get his feet under the table in terms of the existing legislative frameworks so in that sense, nothing’s changed. And as I said very early on – and I can’t emphasise this enough – in terms of the impact the Commission may have on the markets, the government will back the regulator.

Yet conversely, though, the public feels that - whether it be the banks, the phone company or the power company – they are often at the mercy of large and unscrupulous corporate forces. Doesn’t the prevalence of that sentiment suggest the Commerce Commission has failed in its watchdog role ?

Yeah, I’m not sure… y’know, how easily quantified that sentiment is. I just know that from where I sit, the Commission has done a good job. In the electricity area for example, they’ve released a report recently that saw Minister Brownlee head into the markets’ review process – and he is to make an announcement in that space shortly. And I’m confident that they’re operating effectively.

The tools of the trade

You’ve indicated your satisfaction with the current set of regulatory tools the Commission has at its disposal to benefit the consumer, and the workings of the market. Is there anything on your mind that you’d like to add to their toolkit ?

As I said earlier, I have been giving some thought to the criminalization of cartel behaviour. I made that statement during the Estimates process before the Commerce select committee. That work was being undertaken for the start of the [Transtasman] discussion and I will be able to say more by early next year.

In April, the Business Council of Australia indicated that phone taps might be acceptable as a trade-off against having explicit provisions in the legislation defining what constitutes cartel behaviour. Do you see a useful role here for phone taps to augment cartel investigations?

That hasn’t been put in front of me. I’m not aware of it. Haven’t turned my mind to it. That hasn’t been an issue that’s crossed my desk since I was Minister of Commerce.

Unlike the US, we don’t have a robust anti-trust tradition. Why do you think regulation is so rarely seen in New Zealand as being the friend of the market and the ally of good management?

I guess, because in the end, regulation is designed to fill gaps or re-balance an equilibrium where it might not exist in the market. And in monopoly markets, that’s the reason you have that regulation sitting there. Its always a fine balance, but I’m persuaded at the moment that those statutory and regulatory settings are about right.

OK then, take a couple of examples. The undue exercise of market dominance. Do you think the test of that in our law is clear enough on what tips the balance – since sometimes, surely such outcomes could have been the result of competitive behaviour anyway, and who’s to tell when market dominance has become intolerable, for consumers or for society ?

I do think the balance is about right overall…apart from the odd article I’ve read from different players. It hasn’t been raised with me in a sense of officials saying, I think we should have a look at this. And as I said earlier, I don’t have any intention at this stage of reviewing the Commerce Act.

Why its cropped up as a problem…. is that what the Commerce Commission has called the undue exercise of market power, the High Court has read as firms being under no obligation to give competitors a helping hand. Is this a grey legal area that needs clarification?

It may be in the fullness of time. But I have not been persuaded it is the case at present. But in the legal system of course, the regulator is a player. Like everybody else is. Or every other party is, I should say. So from that point of view, there is going to be tension from time to time.

Because as you know, the Richard Tweedie critique cited that area as an example of the Commerce Commission going a bridge too far, and as an argument for reining them in.,

He may well have argued that.

Right. And when it comes to cartels, do you think the law should require evidence of an overt agreement to fix prices – or should this be something that regulators can reasonably infer from the circumstantial evidence ?

Its too early for me to get into this conversation.

Because this is what is puzzling me….without such leeway, how do you distinguish price fixing from parallel conduct in which firms merely adjust prices to keep up with their competitors ?

I understand the point. But I’m not going to lead or prejudice a conversation which I think requires quite a broad period of discussion and consultation. At some stage, in the near future.

I know the Australians are trying to work this out themselves. [ACCC chief] Graham Samuel has complained that at present..if you actually say you’re not price fixing, there’s no cartel. This is why the phone tapping powers have edged onto the table -

I see.

- in lieu of creating a legal wording that doesn’t inadvertedly serve as a manual for avoiding prosecution.. In that, if you tell them explicitly what is or isn’t cartel behaviour, you are also telling them what they have to do to drive around it.

Yes, I see. As I said, the government is keen to kick off a discussion of some of these issues in the first quarter of next year. It would be premature to have a further discussion with my Australian counterpart until we’d had a much better signal from the New Zealand public, about some of these issues. But its some way off.

The Big Picture

Looking at it in a more general sense what are you doing with the Australians to synchronise the powers of regulators, so that firms doing business on both sides of the Tasman do not face differing regulatory environments ?

As you will know, the two Prime Ministers have set this single economic market as a very big priority. And my job is to take the timber and the nails and the hammer and try and put it all together – at a regulatory alignment level. Actually, the trick here before you start building the regulatory alignment is to remove some of the impediments, as a first step. Some of those things relate to making sure that…for example, one business number between both countries can be used. Filing information in one country is enough to satisfy the laws of another country. That insolvency proceedings operate seamlessly, as do court and subpoena proceedings between both countries.

I’ve been really encouraged by the signals that we’re having from ASEC and the ACCC about more closely together on some of those issues. Now look, in a different legal system and with a federal system versus one unicameral Parliament, you are going to have different tensions. And Australia will have in mind its own set of priorities, about aligning its own states. But having New Zealand sitting at the table in some of those discussions – and we are part of a number of those ministerial groups and coalition of Australian governments means that we’re a useful point of reference for the Commonwealth when those discussions are going on.

On disclosure, are you satisfied you’ve got it right on the kind of information that is commercially sensitive, and the level of disclosure that could optimize the workings of the market ? There’s always a tension here. If the market knew this, it could make better decisions – but gee, the info has been provided on a confidential basis – almost to the point of entrapment of the Commerce Commission, by dint of the conditions attached.

I understand the notion. Broadly speaking, I think the balance is about right for getting that disclosure/commercial sensitivity issue dealt with in an appropriate way. I think the mechanisms that have been put in place with respect to Part Four discussions, for example – and I was on the Commerce committee when we went through that amendment Bill, an extremely complex piece of work – but I think in the end, the committee and the then government got that balance about right. But it is difficult. And a huge amount of the Commerce Commission’s time and resource is being taken up in this work at the moment. Its running to a pretty tight timeframe.

During 2009, the global culture about regulation has been to advocate more, not less, regulatory oversight. Even the G20 has talked about an enlarged role for the Financial Stability Board. [In future, banks are clearly going to have to hold larger capital reserves – and Kevin Rudd has talked about requiring by law, that executive pay packages must be signed off by shareholders.] In late September in the EU, we also saw the unveiling of plans for new supervisory bodies. When you talk to the Australians, do they show any willingness or interest in delegating regulation to regional or to supra-national bodies ?

No, I’d put it round the other way, and say there’s a willingness to work together more closely on some of these issues. ‘Delegation’ was the phrase you used. That isn’t something I’ve been involved in any lengthy discussion about. New Zealand has responded, in a regulatory sense – particularly as a result of the global financial crisis – quite swiftly.

The former government put in place changes to financial advisers. We’re changing the way that corporate trustees operate. We’re changing the way that moratoria are used. The Securities Act itself is under a big review at the moment. So I think…. Actually, getting regulation right matters just as much when you’re coming back on the up curve, as it does when you’re going down. At the same time, we don’t want to distort the markets to the point where you choke off business opportunities. It’s a fine balance.

From where you’re sitting, is the government likely to make more demands on banks with respect to their capital reserves?

You’d have to talk to Bill English about that.

As Commerce Minister, can you afford to be out of step with the tools and the attitudes of your Australian counterparts?

In the fullness of time, it will benefit both economies if those regulatory regimes are as close as possible.

When push comes to shove though, they’re bigger. Won’t we, inevitably, take on their tools, and their stance towards business?

No, not necessarily. And that’s where I think, the single economic market notion works well. Because issues of sovereignty are not on the table. This is about regulatory alignment, and removing barriers to doing business seamlessly in both countries - whether it is common border initiatives, or being able to have a company on both sides of the Tasman and filing one set of financial accounts, and using one company number…

Sure, you can talk about making the paperwork of business easier and about making compliance easier. But as this conversation would suggest, when it comes to regulatory tools and action over anti-monopoly and price fixing issues, aren’t we currently playing catch-up with the Australians?

Well, a lot of that activity is international in scope. So we have to make sure that we are ..that we are….providing a regulatory regime that makes it clear we understand that some of those activities are international. ENDS

Images by Carolyn Meers.

ENDS

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