Commerce (Criminalisation of Cartels) Amendment Bill

I move, That the Commerce (Criminalisation of Cartels) Amendment Bill be now read a second time.

The Government is committed to protecting consumers and honest business from serious cartel conduct, and, while most businesses operate fairly and comply with competition law, there are some in New Zealand who, unfortunately, engage in cartel conduct. This hampers competition in our markets and results in higher costs for New Zealanders, reduced choice, and lower quality goods and services for ordinary New Zealanders. Cartels are the most egregious form of anti-competitive conduct and undermine the efforts of honest business. Criminalising cartel conduct sends a clear message that we as a Government and we as a country will not tolerate unjustified interferences in our markets. Importantly, it will serve as a strong deterrent to deliberately engaging in cartel conduct and will make firms better consider the competitive impacts of their actions and operations.

The Economic Development, Science and Innovation (EDSI) Committee received 20 written submissions and 11 oral submissions from interested stakeholders and parties on the bill. I would like to thank all of those that took time to submit on the bill. I also want to take the opportunity to thank members of the committee for their work on this bill. It is regrettable that the committee was not able to agree on changes to enhance the robustness of this proposed criminalisation regime.

The submissions on the bill mainly focused on the targeting of the new criminal offence, the impact on businesses, and the exceptions and defences available. The voices and perspectives of the business community and experts are important to this Government and help to ensure that New Zealand has an honest business environment which is conducive to encouraging competition and innovation.

Some submitters believe that the offence is not sufficiently targeted to serious cartel conduct. However, the bill distinguishes criminal liability by reference to the actual intention of the defendant so that the person must have intentionally engaged in price fixing, restricting output, or allocating markets and no exemption applies to the conduct. In this way, the bill only criminalises cartel conduct where the person intended to interfere and distort the market. The offence is designed to ensure the necessary level of culpability by the defendant so that merely entering into an arrangement that contains cartel provision is not automatically construed as intention.

There was also some concern over the impacts of criminalisation on pro-competitive business activity. However, as I mentioned previously, honest business should have no concerns in relation to this bill. It will not chill legitimate business conduct, and I will ask the Commerce Commission to assist by preparing good guidance from business as well as supporting collaborations by providing businesses with clearances on arrangements.

The bill provides for a defence to the criminal offence where the defendant believes that their conduct was reasonably necessary for the purposes of collaborative activity. There are also exceptions to the offence for joint-buying agreements, vertical supply contracts, and international vessel-sharing agreements. Between now and the committee of the whole House, I will look at whether the defence should be expanded to other exemptions in the Commerce Act and whether it should be based on reasonable grounds. I also intend to look at the setting up of a specialised panel to prosecute these offences, the categorisation of the offence, and other minor changes to ensure the effectiveness and appropriateness of the proposed criminal regime.

To ensure that businesses have time to become familiar with the proposed changes, the bill provides for a transitional period of two years from enactment until the criminal offence comes into force. This will provide businesses the opportunity to use this time to familiarise themselves with the new offence and ensure that current activities are legally sound. They already should be doing this, and the conduct to be criminalised is already unlawful under the Commerce Act’s civil regime. Businesses are already able to voluntarily apply to the Commerce Commission for clearance of their proposed collaborative activity that, if granted, would provide immunity from the civil and criminal regimes. The two-year lead-in gives them time to do so if they wish.

As the Minister leading off the debate, I don’t have the opportunity to rebut some of the comments that I anticipate from the other side of the House, but I would say that this piece of legislation extends a criminal regime over a civil regime that already exists. The criminal regime that we are implementing through this bill was part of an earlier piece of legislation, which, I believe, passed through on the last day of the previous Government. So what I’m saying is that the previous Government enacted the bill with a criminal regime but saw fit to take that out. And I’m assuming that we will hear about the possible chilling effect of this for business. As I have said, there is nothing to fear for good, honest businesses—the majority of New Zealand businesses. But, in anticipation that there will be speakers following me who will talk about the dread that will fall upon the markets if this piece of legislation is enacted, I just want to remind the other side of the House of some of their own words when criminalisation was part of the earlier legislation.

I’d like to point to the former Minister of Commerce and Consumer Affairs, Jacqui Dean, who said the introduction of criminal sanctions against cartels via this bill “will bring New Zealand into line with many of its trading partners, including the United States, the United Kingdom, Canada, and Australia. This will allow New Zealand to play a more active role in the global fight against hard-core cartels.”

I think it’s the current commerce spokesperson for the Opposition, Brett Hudson, who said, “I am delighted with this bill.”—when it included the criminal regime—“It is clearly taking on the evils, the worries, and the concerns around hard-core cartel behaviour, … it does address the negatives of cartel behaviour, and it is important that it does so, because if it did not, we could end up with that terrible situation where the tiny minority—the nameless and the faceless—are controlling outcomes, delivering things that … many [people] do not want.”

So my question for the anticipated criticism of this piece of legislation from the other side of the House is: what’s changed? What happened from when you first introduced that bill to when you lost your bottle and removed the criminalisation from the piece of legislation? What happened? Because you were talking tough at the first and the second readings, and then something happened. Something happened along the way and they lost their nerve and, oops, the criminal part of the regime disappeared. If it wasn’t for the help of this party on the last day of the previous Parliament, they wouldn’t have even got the civil process through this House, because it was passed on 17 August 2017—the last day that this House sat.

It’s not the committee stage, but my question to the other side of the House is: what happened? Why did you lose your nerve and remove this? As I say, honest business has got nothing to fear here. If you were so committed to making sure that you were going to crack down on hard-core cartel behaviour, and criminalisation was the way to achieve that, why did you stop it? We are committed to making sure, as we said on 17 August 2017, that if there is cartel behaviour, we discourage it, and, if it happens, that we bring it into the criminal regime. I think it would probably be the chair of the EDSI Committee who will go first, so maybe he’s the one that wants to answer for the former commerce Minister as to why the previous Government lost their nerve and decided to take it soft—to go soft on hard-core criminal behaviour. I want to know the answer to that question.

I’m proud to bring this piece of legislation to back up what the previous National Government lost its nerve and couldn’t do, and we’re going to make sure that we support honest business and competition, because, at the end of the day, it means better services and better prices for New Zealanders, and I want to know what the previous Government had a problem with.

Thank you very much, Mr Assistant Speaker. And all of that coming from the party that say too many people are in prison. If I can say, it was good to hear the Minister saying that he’s having a fresh look at elements of this bill prior to it coming before the committee of the whole House.

If I were to respond to some of his questions, I would simply come to some elements of the Economic Development, Science and Innovation Committee report which we placed it in, and that is to say that submitters who opposed the bill stated there is no evidence of a problem with the current regime. The current regime is working very strongly, very well, and has very strong deterrents to the cartel behaviour. I think all of us in this House, this side included, want to see cartel behaviour eradicated from the New Zealand economy and from business. There’s nothing worse than cartel behaviour that undermines good, open, competitive business.

We all understand that competitive business is very important not only for ensuring that prices are well set and products are of high quality, but the intention is that through the process of competition between firms, which drives those firms to lower costs, improve quality, and develop better products in the competitive market, those benefits are passed through to consumers. We want to have an economy where consumers can receive those good prices, good products, new products, and innovation, in a very good and timely way. We do not approve of or support or go soft anywhere, in our view, on cartel behaviour where those rival firms agree not to compete with each other by fixing prices or restricting output or allocating markets between themselves. Cartels, what they basically do allow is firms to raise their prices above the competitive level without fear of losing customers to rivals, and it’s not good.

We also understand that New Zealand is a relatively small economy, and there are appropriate times and places where there is collaboration. I guess this is our point. Our point is that those collaborations—and many of them have clearances from the Commerce Commission—are essential. For example, when it comes to building motorways, there’s probably not one firm that can do it all, and they have to collaborate with one another in order to supply to the Crown or to regional councils or district councils the ability to offer that service and deliver that product. There are those nuances of decision making around what is appropriate and what is not.

Our concern, essentially, is that the criminalisation of cartel behaviour—when many submitters said they cannot identify a problem, and where, in over a decade, in Australia there’s only been one prosecution, in an economy quite significantly larger than New Zealand’s—what it does is it creates a concern and hesitation around whether companies can cooperate together. And, of course, to go to the Commerce Commission for a clearance is not a cheap exercise. So what our concern has been is that directors of those companies would prefer to withdraw, would prefer not to work together, and that would start to stifle economic activity and opportunity in our country. So it’s a matter of, actually, just getting the balance right. It’s a matter of recognising that our current regime has sufficient deterrence, where, if there is the conviction of a cartel activity or behaviour, those fines can run into the tens of millions of dollars for companies, and $500,000 for an individual. We consider those deterrents to be strong enough.

Some submitters raised concerns that the definition of “cartel conduct” amended in August 2017 is untested in its application. They were concerned that this would mean a lack of clarity in the new criminal offence, which parallels the civil defence. So even though this committee looked at this bill and, in good faith, we worked together with our colleagues across the House to improve it, our basic position is that we don’t support it. And, no doubt, when it comes to the committee stage, the Minister will introduce his thoughts and perhaps some amendments to it.

Criminal sanctions have the potential to undermine the economy by having what the Minister identified, from our point of view, as a chilling effect on pro-competitive collaboration. That’s, essentially, the position that we take, and the international evidence that criminalisation reduces the incidence of cartel conduct is actually weak. There is no clear case to support the introduction of criminalisation to cartels. That is our view. Some actions which are not criminal in nature might be caught within the criminal sanctions. Criminal sanctions could result in this ultra-cautious decision-making at the board’s table, as I said before. And so, as I reiterated, we believe the current criminal regime for cartel conduct provides sufficient deterrents and sufficient sanctions to protect businesses and consumers.

The Commerce Commission may also apply for banning orders of individuals from holding management positions for up to five years. That’s one of the sanctions that are currently available. In fact, there was an award of $7.5 million against a body corporate and of $100,000 against an individual for the five-year prohibition against management. So I would argue that the civil sanctions are, in fact, a very strong deterrent.

I have to say that we oppose this bill. We believe that the measures in play and in place are sufficient, and we also believe in the good work of the Commerce Commission to enforce those. Thank you.

Thanks, Mr Assistant Speaker. Thank you for the opportunity to speak to this Commerce (Criminalisation of Cartels) Amendment Bill. Look, it’s an interesting time in the House when the Opposition speaks to legislation they created and, in supposed good conscience, cannot support it now, simply because this side of the House is progressing legislation they wrote.

💬 Hon Paul Goldsmith: I think you got the wrong end of the stick, old boy!

Oh, no, I am not going to apologise. I remember spending months with the members in select committee in the previous term. For months, we were, literally, on the same page in terms of progressing this piece of legislation, because, for such a long period of time, the criminalisation element of this legislation as presented to the House now was in the draft of that bill during that process. And so there was great, and quite unanimous, conversation from both sides of the House, as it were, in the select committee process during that process, and it was constructive.

Mr Young spoke about—what did he say? Something about dampening cooperation between firms. Actually, in this legislation, and I think credit is due to Mr Goldsmith, there is specific reference to enabling and encouraging cooperation where it is for the benefit of the end consumer, because it is collaboration for that benefit rather than the good old-fashioned cartel collusion and coming together, where businesses are seeking to break down market equilibrium, create that dead-weight loss in it, and to undermine the benefit to the consumer. So there is a difference. This legislation recognises that, and so Mr Young is drawing on excerpts that do not apply.

In fact, I’d take the opportunity to quote some of the previous contributions from the National Opposition. I quote Simon O’Connor: “This [criminalisation of cartels] is ultimately a bill at the heart of what the National Party believes is a way forward for our economy.” That is probably true, so I’m not sure why it’s such a problem for the National Party today. Brett Hudson: “I am delighted with this bill. It is clearly taking on the evils, the worries, and the concerns around hard-core cartel behaviour.” And yet the contributions from the other side, dare I say it—I’m not one to use bad language in the House, but “flip-flop” comes to mind.

Actually, there’s no need to go into defining “cartel behaviour” and what this bill achieves, because this House knows full well that those quotes confirm exactly the merit of this legislation. It’s unfortunate to hear the contributions from the members opposite. This is actually logical and needed legislation. It will not dampen cooperation and good behaviour of corporates in New Zealand. We do need that. We have seen evidence of it in the New Zealand market, but we need to make sure that where there is cartel behaviour, we are able to act not only in a civil but in a criminal pathway.

So, Mr Assistant Speaker, this is a short contribution, but it’s pretty important to voice our approval of the legislation. Thank you, sir.

Thank you, Mr Assistant Speaker. Fletcher Tabuteau, the previous speaker from New Zealand First, was a little bit confused about this, saying that we’d introduced this bill. This is a new bill introduced by this Government in order to undo what a previous bill that came through the House did—which was update the competition regime in regard to cartel behaviour and bring in an authorisation programme and a way to better manage and, effectively, deal with cartels—which had not taken the step of criminalising cartels, and this Government is determined to it.

There’s lots of arguments. There’s different countries around the world. Some criminalise cartel behaviour; some don’t. For the history of New Zealand commerce, we haven’t criminalised cartel behaviour, but what we’ve done is treated it as a very serious civil matter. So what we’re talking about here is different companies secretly price-fixing or arranging their affairs so as to collude together in order to rip off consumers. Everybody agrees that it’s a bad thing, but throughout New Zealand history, we’ve regarded it as a matter which should, if caught, be punished severely with fines, and we’ve seen some very large fines, of up to $7.5 million.

Now, what is being proposed by this bill is that those fines are not enough of a deterrent and that we should, potentially, throw the directors of companies and executives into jail as well. There are arguments both ways. My view, as Minister of Commerce when this legislation was coming through the House earlier, was that, on balance, I don’t think it is a useful thing to add yet one more way for public company directors to go to jail if they get their business judgments wrong.

So what you’re balancing here is two competing desires. One is that it’s obviously so important for this country and for consumers in this country to have a robust and effective competition framework so that New Zealand consumers get the best deal that they can and so that companies can’t work together secretively to undermine the benefits of free trade and good commerce. But, on the other hand, what we need to also consider is a basic philosophy around regulatory restraint.

If a Government doesn’t think twice about, as I say, finding a new way to send directors of companies to jail if they get their judgments wrong, then it all adds up over time, because every year, there’s another five or six different ways that you can go to jail if you get things wrong, and, as a result of that, there is a cost. That cost is that directors of public companies move from being very cautious about how they do things to becoming ultra-cautious about how they do things, and they take fewer risks.

In this area, what you’re dealing with is a whole lot of collaborative arrangements that companies can quite legitimately go into, such as the classic example—being international shipping—where it doesn’t necessarily make sense to send five ships from China to New Zealand one-fifth full. It makes more sense for those five competitors to work together and send one full ship. So it is much more efficient for the whole market and for everybody if those different owners collaborate together in order to work out what’s the most efficient way of getting stuff between China and New Zealand.

So there are pro-competitive collaborative arrangements that people go into, but there is a line that can be crossed where they become anti-competitive. That depends on the nature of the market and what’s going on, and arrangements that may have been pro-competitive one year can suddenly become anti-competitive the next year if conditions have changed. So it’s not quite as straightforward and clear-cut as people might seem to think. So it does lead inevitably to the level of risk that company directors are prepared to take and the consequences of being ultra-cautious, as I said, as opposed to being very cautious.

So New Zealand has avoided the criminal regime until now. Some of the much larger economies in the world have criminal regimes, and I do think it is relevant that New Zealand—a place where more than 90 percent of businesses are small businesses and don’t have the ability to avail themselves of the authorisation procedures and so forth that we have established, which are highly expensive. To go along to the Commerce Commission to get an authorisation on a pro-competitive arrangement is a very expensive procedure. It might work quite effectively for a huge economy such as the United States’; not necessarily so practical here in New Zealand.

So, anyway, another element of all this is the way in which this Government operates. Just before giving the speech I thought to myself: well, this is an important bit of legislation which has quite a significant regulatory effect on the way that New Zealanders conduct business in New Zealand, so I wonder what the regulatory impact statement has to say on all this. So I asked for the regulatory impact statement—it’s not on the Table. Lo and behold I find it here. Here it is: regulatory impact statement: “Criminalisation of Cartels”—oh, dated 26 August 2011. So that was some work done by the predecessor to the Ministry of Business, Innovation and Employment (MBIE), whoever it was, back in August 2011—and I’m reading it. It’s—I wouldn’t say—pathetic but it’s a very cursory summary of the details in this regulation.

💬 Dr Duncan Webb: Who was the Minister?

Oh, this was back in the first term of the previous National Government. So this Government, this Government here today in 2018, has introduced this bill, making no effort whatsoever to get their officials to look at what the issues are today. Since this happened, we’ve had seven or eight years of experience of what actually has happened with the criminalisation regime in Australia; you know, not very much. There’s a huge amount of work that’s been done in this area, and this Government hasn’t availed themselves of any of that. They haven’t asked MBIE to update their regulatory impact statement or to seriously consider it. Of course, that should come as no surprise to anyone in this House, because that’s how they operated with the very significant oil and gas decision that we’ve been debating this week—possibly $8 billion. The decision was made before any Cabinet consideration, before any analysis had been done by officials. And that’s the cavalier way in which this Government seems to be operating.

The problem with all that is that collectively this kind of attitude to regulation and business legislation, a cavalier attitude, an ideological attitude—one that announces decisions before the analysis has been done. That kind of decision making all contributes to an undermining of confidence in the way that decisions are made in this Government, contributing to the falling business confidence that we see across this country generally, which, of course, this Government regards as junk. They regard the falling business confidence survey as junk and that is because they don’t have much sympathy or understanding of just how hard it is for New Zealand businesses—competing internationally in a tough old world against all kinds of headwinds—to stay in business. Every day, it’s a highly competitive attitude, and this Government is quite happy each day, each week since they’ve been in Government, to add costs to businesses, such as petrol, such as minimum wages—you name it—assuming that it will make no difference to their international competitiveness.

Secondly, without any thought or full consideration, it’s quite happy to amend competition law to make the consequences of incorrect decisions much worse. Like I say, I’m not saying it’s the end of the world to bring in this legislation, because there are plenty of countries that have criminalised cartels, but the conclusion that we came to as a Government in the last term was that on balance we think the long-established, very substantial civil regime with very significant financial fines for cartel behaviour was just as effective and—

Order! The member’s time has expired.

Thank you, Mr Assistant Speaker. Well, thank you for that penetrating analysis, Mr Goldsmith—the future MP for Epsom. He did use the words “on balance” on several occasions, and I think, actually, that was good, because this is a question of balance, because cartels are something of a conundrum. At one end of the spectrum, we know that if there is a cabal of businessmen in a smoke-filled room doing deals about how to raise prices together, that’s wrong—deeply wrong. At that end of the spectrum, it should clearly be criminal. But at the other end of the spectrum, we may have a group of perfectly decent business people who are putting their heads together as to how they can lower their costs to make a more efficient business. At that end of the spectrum, life gets a lot more difficult.

Here the balance is well struck, because this is not blanket criminalisation. If we do see an agreement between businesses to knowingly move up prices, or to divide up the country so they don’t compete with each other, it’s a serious wrong. It’s not just some cheeky business shenanigans; it’s actually defrauding ordinary folk of their wealth. It may only be a penny at a time, but, actually, millions of dollars are involved, and that’s serious.

Where the collusion—and it is collusion—doesn’t have that same moral taint, then it’s quite right that it shouldn’t be criminal, and that’s what the civil penalties are for. It may well be that the arrangements are seriously wrong—they’ve been put in place; they are cartel arrangements; they are agreements that lessen competition—but they don’t have the underlying intent, that there is a genuine error. In those kinds of cases, those arrangements won’t fall foul. There is a clear recognition in this legislation that collaborative arrangements are permitted. Collaboration that lowers the input costs of a product is permitted. They are, in fact, to be encouraged. So that’s an expressed carve-out. As the future member for Epsom Mr Goldsmith noted, the line between those two is not always clear to see.

One of the other things is there’s been a lot of talk about economics here, and how it will have a chilling effect and so on and so forth, but, at the end of the day, there is a sociological, a criminological, and a moral question to be asked here. That question is: what do we do about serious moral transgressions, the intentional stripping of wealth? We can’t just say, “It’s tricky. The line’s hard to draw, so we won’t draw a line at all.” We’ve got to stand up to that. And when we do have a serious cartel arrangement, it is deeply dishonest. It is moving wealth away from consumers and towards dishonest businesses, and I know the members on the other side of the House don’t want to be seen as supporting dishonest businesses. We all want to be seen to be supporting honest, competitive businesses who do the right thing.

So, in this situation, even if it was not going to change the economics of it, there is a moral reason to step in here and say, “We will not tolerate the wrongful taking of wealth—the wrongful and knowing taking of wealth—from one party to another.” Having said that, we know here that if there is a collaborative arrangement that breaches these rules but the wrongdoer had a reasonable belief that that wasn’t the case, then there is no criminal offence. For that reason, I commend this bill to the House.

Thank you, Mr Assistant Speaker. Thank you for the opportunity to take a very short call, as the bells are about to actually ring, but I shall try and make some headway into my 10 minutes, which will obviously continue in the next sitting period. As a member of the Economic Development, Science and Innovation Committee, which deliberated on this bill, I’d like to acknowledge—

I’m sorry to interrupt the member. This debate is interrupted and is set down for resumption next sitting day. The House stands adjourned until 2 p.m. on Tuesday, 16 October 2018. Tēnā tātou katoa.

The House adjourned at 6 p.m.