Having fined Compare The Market (‘CTM’) £17.9 million for imposing wide ‘most favoured nation’ (‘MFN’) clauses in its agreements with home insurance companies, on 9 February 2021 the Competition and Markets Authority (‘CMA’) released the non-confidential version of its infringement decision. The decision is welcome guidance for businesses and legal practitioners on how to assess these elusive restrictions and to navigate the complex legal landscape which has developed around them. It is also an example of the CMA seeking to carve out its role as a leading competition authority on the international stage post Brexit.
This article provides a brief description of wide MFN clauses, summarises the CMA’s decision and comments on the potential impact of this decision for these types of clauses.
What are MFN clauses?
MFN clauses (also known as ‘retail parity provisions’ or ‘price parity provisions’) can take many forms. They all have in common a supplier agreeing to offer a customer (in this case CTM) terms as favourable as, or no less favourable than, those offered to other customers. MFNs are one of the most common competition law pressure points in the context of marketplaces (i.e. an online platform or price comparison website/ digital comparison tool).
MFNs relating to price have been the main focus of investigations by competition authorities as, on balance, they are more likely to restrict competition than those relating to other conditions of business. An important distinction in the competition law assessment is made between ‘wide’ and ‘narrow’ MFNs:
- Wide MFNs are agreements between a marketplace and a retailer, typically requiring retailers to publish on a marketplace the same or better price and conditions as those published on any other sales channel, i.e. the marketplace prevents the retailer from offering a better deal to another marketplace.
- Narrow MFNs typically require a retailer to publish on a marketplace the same or better price and conditions as those published on its own (direct) website, i.e. the retailer is prevented from offering a better deal on its own direct to consumer website.
CTM is a Price Comparison Website (‘PCW’), which allows consumers to view and compare offers on retail prices (premiums) from different home insurance providers. CTM had agreements with many insurers, 32 of which contained wide MFN clauses. The offending clauses were materially the same across all 32 providers, obliging the insurance providers to ensure that the prices they quoted on CTM were no higher than those they quoted for the same product, on either their own website, or that of a competitor. The initial investigation was opened by the CMA in September 2017, with the final infringement decision issued nearly three years later in November 2020.
The CMA found that CTM’s network of wide MFN clauses had the effect of restricting competition in breach of the Chapter I prohibition of the Competition Act 1998 and Article 101 of the TFEU. You can find a link to the case page which includes the full decision here.
CMA’s Investigation and Findings
On the back of the CMA’s market study into digital comparison tools, the CMA opened its investigation into CTM in September 2017. The CMA found that CTM’s network of wide MFNs had the appreciable effect of preventing, restricting or distorting competition between PCWs and between home insurers competing on PCWs, in breach of competition law, by:
- Reducing price competition between PCWs;
- Restricting the ability of CTM’s rival PCWs to expand, enabling CTM to maintain or strengthen its market power; and
- Reducing price competition between home insurers competing on PCWs.
The effect of the network of MFNs meant that CTM was protected in contract from being undercut by the prices quoted by the relevant insurers on rival PCWs. The level of fine imposed by the CMA underlines how serious it believed CTM’s restrictions to be.
Market definition and nature of competition
The CMA considered that the relevant market was the provision of PCW services for home insurance products (‘PCW Services for Home Insurance’) in the UK. The CMA found that the market for PCW Services for Home Insurance was a two-sided market comprising the supply by PCWs of:
- customer introduction services to home insurance providers; and
- price comparison services to consumers.
The CMA found that CTM had a strong position in the market and in particular, throughout the Relevant Period, it had a market share of more than 50%, almost double that of the next biggest competitor.
PCWs compete on marketing and advertising, the usefulness of their comparison services and the retail prices quoted by insurers on their platforms. These were found to be the primary dimensions of competition. The retail prices were particularly important, demonstrated by the behaviour of the ‘Big Four’ (four biggest PCWs) through their differential pricing strategies and close monitoring of their competitors. The CMA noted that the Big Four PCWs viewed securing competitive retail prices as critical to their competitive strategies.
CTM’s wide MFNs were integral to its competitive strategy and were effective in achieving its objectives. CTM used wide MFNs to strengthen its competitive position by securing the lowest prices, whilst also maintaining growth in the commission fees that it received from insurers. The CMA found internal documents showing CTM believed that, without wide MFNs, there would have been greater competition between PCWs, putting greater pressure on commission fees and reducing its profits. Alternatively, other PCWs used promotional deals as a key strategy to incentivise providers to offer lower of different prices. The CMA noted this approach was better at increasing competition. In line with the general trend, the internal documents were a significant factor in the CMA’s analysis, reinforcing the message that what businesses say internally matters and will impact on any assessment.
CTM closely monitored and enforced the compliance with the MFNs. The CMA found that on four of the five occasions on which relevant insurers agreed promotional deals with CTM’s rivals (whereby they temporarily offered lower prices on another PCW), CTM enforced its wide MFNs. CTM also refused to remove its wide MFNs from its contracts despite numerous requests from insurers.
The effects of the MFNs
The CMA found the effects of CTM’s MFNs on the market were:
- CTM was protected from being undercut by its MFNs;
- CTM’s rivals were unable to secure a price advantage over CTM, unless an insurer was willing to breach its agreement with CTM;
- CTM relied on this and the MFNs to ensure it had the lowest price, as opposed to competing on the merits;
- CTM’s network of wide MFNs entrenched its position of market power; and
- Because CTM’s rivals struggled to compete, overall competition was reduced between PCWs, leading to a general decline in competition on retail prices, to the detriment of consumers.
The CMA also assessed the use of the MFNs against the effect on trade on the UK and the EU and the relevant potential exemptions (e.g. the Vertical Block Exemption Regulation (‘VBER’), which was found not to apply).
CMA Action and appeal
As a result of CTM stating in November 2017 that it would no longer enforce wide MFNs with insurers, there were no ongoing infringements and the CMA did not issue any directions to this effect. Given the serious nature of the infringements, however, the fine issued was intended to be both punitive and a deterrent.
On 3 February 2021, CTM (the group) filed an appeal in the Competition Appeal Tribunal (‘CAT’) against the CMA’s findings in the infringement decision and the penalty imposed. The CMA has announced that it will defend the appeal.
MFNs have posed a conundrum for businesses and competition agencies alike across Europe for some time and their impact on competition has been the source of spirited debate. The VBER and accompanying guidelines do not provide adequate guidance on how MFNs should be assessed and there has been a lack of infringement decisions by the European Commission with investigations typically ending in commitments. Despite the European Commission’s misgivings that MFNs: (i) may reduce competition between digital comparison tools and retailers, and (ii) can reduce the ability of rivals to compete on prices, it has also acknowledged that such online platforms should be able to recoup their investments and avoid free-riding. As such, the European Commission advocated that MFNs should be analysed and assessed on a case by case basis, which has resulted in a web of diverging approaches across the EU.
The CMA has previous form in the wide MFN space: in 2015, as part of its private motor insurance market investigation, it issued an Order banning wide MFNs between online platforms and insurers. This was because it found that by restricting an insurer’s ability to set different prices on different sales channels, wide MFNs limited price competition and innovation and could restrict entry into the market. This thinking was then confirmed in its market study on digital comparison tools, where it found that wide MFNs were likely to restrict competition and lead to higher prices for consumers.
By issuing an infringement decision, the CMA has cemented its approach to wide MFNs and provides, (at least for businesses operating in the UK), a certainty of approach and a detailed explanation of why the MFNs in contention restricted competition by effect and the key aspects that were taken into account in making this finding. Notably, the CMA did not consider the wide MFNs to be a restriction of competition by object. This is explained by the perceived economic benefits they may bring. Nevertheless, this development in the decisional practice of the CMA will likely feature in its upcoming review of the retained Vertical Block Exemption Regulation, which it announced on 10 February 2021. You can follow the CMA’s consultation process on the retained VBER here. Likewise, the European Commission is also conducting its reform of the VBER, given it is due to expire in May 2022. The European Commission has noted that its guidance on the compatibility of MFN clauses with the prohibition on restrictive agreements under Article 101 of the TFEU is insufficient.
A key question will be whether the EU diverges from the UK in respect of its treatment of wide MFN clauses. There is generally a consensus across Europe that wide MFN clauses are problematic for the reasons set out above. However, some national competition authorities’, (notably Germany’s Bundeskartellamt) acted against narrow MFNs. It remains to be seen how the European Commission will address this divergence. In its Evaluation document published in September 2020 which reflected on the shortcomings of the current VBER, the Commission strongly hinted that the next instalment of the VBER will provide more guidance on MFNs.
In the meantime, the CMA will be defending its position in the CAT, which means that until the appeal process has been exhausted, the MFN question has not quite gone away. Given the CMA’s continued pronouncements about the importance of the consumer voice and the power of digital markets, the CMA will be keen to drive home the point that digital markets should work well for consumers, that they should yield great benefits for competition and therefore consumers, as opposed to being used as a conduit to deprive consumers of competitive and lower prices. The appeal therefore gives the CMA a platform to test its thesis and determine once and for all whether wide MFN clauses restrict competition.