London WC1A 2EB
B e f o r e :
PROFESSOR STEPHEN WILKS
Sitting as a Tribunal in England and Wales
|SOCRATES TRAINING LIMITED||Claimant|
|- v -|
|THE LAW SOCIETY OF ENGLAND AND WALES||Defendant|
Mr Philip Woolfe (instructed by Mr Bernard George) appeared on behalf of the Claimant.
Ms Kassie Smith QC and Ms Imogen Proud (instructed by Norton Rose Fulbright LLP) appeared on behalf of the Defendant.
Heard at the Rolls Building on 8 – 11 November 2016
Crown Copyright ©
"We represent and support our members, promoting the highest professional standards and the rule of law."
(a) Probity. To remove or reduce the risk of fraudulent staff or bogus practices, the initial application for accreditation requires the law firm to supply a range of data to enable identity and status checks to be carried out on the practice, including details of the amount and nature of residential conveyancing work carried out, financial information on the practice, details of PII (professional indemnity insurance) cover and claims history, evidence of risk management procedures, and the names of all relevant members of the firm.
(b) Practice Quality Standards. This is based around two documents: the Conveyancing Protocol, which introduces consistent residential conveyancing processes; and the Core Practice Management Standards, which seek to ensure efficient management, embracing financial management and risk management. This head also embraces the requirement that all relevant staff undertake the prescribed mandatory training within six months of the practice being accredited.
(c) Client Service. The practice must adhere to the Client Service Charter, which is a brief document setting out what clients should receive in terms of service quality, and it must have in place an effective client care and complaints procedure.
(d) Scheme Quality Assurance. The firm must have monitoring and enforcement processes in place. Each firm must appoint a Senior Responsible Officer ("SRO") who is a senior manager in the practice (or the sole practitioner) responsible for ensuring adherence by all conveyancing staff with the various Scheme requirements and is accountable to the Law Society on the firm's behalf. The SRO must inform the Law Society of any changes in staff or practice, or material events affecting the firm such as revocation of PII cover or regulatory investigation.
(a) benefit from the Law Society's marketing activities;
(b) use of related Law Society promotional materials;
(c) a display of the firm's accreditation on the Law Society's Find a Solicitor website; and
(d) the right to use the CQS logo.
It was hoped that the Scheme would also help to keep down premiums for PII cover for accredited firms, but it is unclear to what extent that has yet materialised.
Accreditation and Re-accreditation
THE FACTUAL BACKGROUND
The Money Laundering Regulations
"the following persons acting in the course of business carried on by them in the United Kingdom …—
(a) credit institutions;
(b) financial institutions;
(c) auditors, insolvency practitioners, external accountants and tax advisers;
(d) independent legal professionals;
(e) trust or company service providers;
(f) estate agents;
(g) high value dealers;
"Independent legal professional" means a firm or sole practitioner who by way of business provides legal or notarial services to other persons, when participating in financial or real property transactions concerning—
(a) the buying and selling of real property or business entities;
(b) the managing of client money, securities or other assets;
(c) the opening or management of bank, savings or securities accounts;
(d) the organisation of contributions necessary for the creation, operation or management of companies; or
(e) the creation, operation or management of trusts, companies or similar structures,
and, for this purpose, a person participates in a transaction by assisting in the planning or execution of the transaction or otherwise acting for or on behalf of a client in the transaction."
The Introduction and Evolution of the CQS
The introduction of the CQS
"10. The Membership Scheme Report provides a picture of the current state of the conveyancing market and identifies the challenges that face conveyancing solicitors including:
- the growing role of Licensed Conveyancers
- the likelihood of new entrants using the vehicle of alternative business structures (ABS)
- disquiet amongst lenders and insurers relating to concerns that range from very poor quality of work to dishonesty
- the impact that the minority of poor performers can have on the reputation of the majority and regulatory costs
11. The current proposition is to tackle these challenges through a Membership Scheme which will provide a framework for the conveyancing process. The introduction of this framework will provide a more transparent and structured process that will:
- help members to improve efficiency, and market their services more effectively
- reassure the insurers market and lenders that a process exists which will better demonstrate the differences between worst performing and dishonest firms and the majority of the profession
- enable clients to understand more clearly the conveyancing process and the role of the solicitor and make better informed choices"
"As you are aware, the CML and our members are extremely concerned about the growth of complicit solicitor involvement in mortgage fraud. We have agreed to meet to discuss this unwelcome trend, and invited both the Law Society and Solicitors' Regulatory Authority to speak at our legal issues conference next week, so you can feedback to our members direct the seriousness with which you view the issue, and the actions which you propose to take.
In advance of our planned meeting I am writing to both of you (and copied to the FSA for information) to set out the action we believe is urgently necessary to tackle the problem….
This scale of loss (actual and potential) demonstrates the urgent need for regulatory and supervisory action by your organisations, supported by the CML, to control this unacceptable risk to the lending industry in the short, medium and long term.
The lenders are keen to collaborate with the Law Society and the Solicitors Regulatory Authority to address this business risk. However, they are also subject to pressures from regulators and others, to do more to prevent financial crime and to take timely action to reduce these risks.
Given the scale of exposure which has been identified, and the real regulatory risks to lenders if they do not take firm action, we expect affected lenders to review their future relationship with the profession. Any business model based on an 'open panel' of conveyancing firms will come under pressure, and may become unsustainable as lenders across the industry will continue to seek to reduce the risks they face from solicitor involvement in mortgage fraud. The knock on implications for the structure of the conveyancing profession are clear.
The degree of control that lenders exercise over their panels is, and will be, heavily influenced by the responses of the legal professions' regulators, and the future of arrangements for the provision of professional indemnity insurance coverage. If these instil confidence for the future, it may not be necessary to restructure current operations to the same extent.
We believe the following will be necessary to achieve this outcome:
- Enhanced perimeter controls (specifically around the qualified lawyers' transfer tests).
- Allowing clients to have access to details of the practising history of firms' partners and solicitors.
- Better systems and controls requirements for individual firms.
- A more intrusive supervisory process that is targeted at higher risk firms.
- A disciplinary regime that provides sufficient powers to provide a credible deterrence.
- A regulator that is willing to engage with lenders constructively, deliver measurable change and that is sufficiently resourced and empowered to supervise this market and to maintain progress with initiatives that it commits to.
- A review of the current rules surrounding the lenders' rights to access files.
- An indemnity insurance structure that is 'fit for purpose' and that meets lenders' reasonable needs (see annex d for further detail of members' concerns)."
"The Law Society outlined its work to develop an accreditation scheme that would increase requirements overtime [sic] in the initial period. The Law Society intends to launch the scheme by the end of the year and will consult with the CML on the detail shortly."
"TLS proposes to launch a suite of services designed to enhance the reputation of solicitors in [the conveyancing] market, enable them to maintain their market share, and increase their profitability. Through the provision of services and engagement with members, TLS also seeks to set accepted procedure for how law firms process their work – and create consumer facing standards in an area that has been taken by referral companies, HIP providers, and corporate estate agencies.
A membership/accreditation scheme that established a quality standard for conveyancing practices, for example, could provide a platform for achieving all of the above objectives and be interlinked with the existing Property Section and/or Lexcel."
The report noted that a business case for the project was being prepared, which would include incorporating feedback from lenders and insurers, with a view to delivering the project by October 2010.
"The Conveyancing Quality Scheme was a form of accreditation which aimed to develop ways to design and revise protocols in the conveyancing process, and improve quality in residential conveyancing to the satisfaction of CML. Firms of all sizes would be involved in the scheme but it was primarily a way for small firms to remain in the conveyancing market.
The scheme would launch in October to tie in with the Property Section Conference. A commercial model was being developed to facilitate discounts for members of both the Society and the Property Section…"
"The meetings will be an opportunity for lenders to comment on the Membership Scheme proposals that are relevant to them and to indicate to the Law Society the type of characteristics they would be looking for in a scheme."
"The promotion of due diligence and vigilance against fraud and negligence throughout the profession has also been an important part of this process and Practice Notes on mortgage fraud and anti-money laundering advising members on best practice have been produced."
"Work also continues on the development of a residential conveyancing membership scheme and its soft launch in October 2010. The aim is for the scheme to be implemented in early 2011. The scheme focuses not just on accreditation but on improving standards throughout the conveyancing process and assisting members in tackling fraudulent intervention within their firms. Updated protocols are being developed as part of the scheme."
"The Conveyancing Quality Scheme would provide a recognised quality standard for residential conveyancing practices which would be interlinked with the existing Property Section. It was essential that the Society provided leadership to assist law firms in maintaining a leading role in conveyancing. The Society proposed to launch a suite of services designed to enhance the reputation of solicitors in the market to enable them to maintain their market share and increase [responsibility].
There would be a protocol at the centre of the scheme which would require all members to adhere to. Each firm would have a Senior Responsibility Officer. The integrity of the firm and the individual would be checked. The Officer would monitor and enforce the Society's conveyancing protocol.
There had been a lot of progress over the summer months on the evaluation of information which members had provided. The Society was awaiting the evaluation results. Over the coming months, the governance process and complaints procedure would be looked at. Maureen was hopeful that registration would begin at the end of 2010.
[The President] indicated that the scheme was available to solicitors only and for firms of solicitors regulated by the SRA. A licensed conveyancer or notary in a law firm was also an acceptable member. A pricing structure and entry price to encourage members to join at the inception was being looked at. The design scheme would be developed over the next three years to develop the brand and a logo easily recognisable to the customers.
A paper would be submitted to the November Council meeting in more detail. It was anticipated that total costs of the project would amount to £3m. Payback was based on a [trading] assumption of 31 months. There was significant investment in this but the benefits to the profession were significant. It was not expected that the Society would make a profit on this project.
There would be standard documentation and members of the scheme would be required to use the protocol. It would be a national standard and the Society would need to link the protocol and the suite of documentation together."
"The Conveyancing Quality Scheme will provide a recognised quality standard for residential conveyancing practices. Achievement of membership will establish a level of credibility for member firms with stakeholders (regulators, lenders, insurers and consumers) based upon:
- The Integrity of the Senior Responsible Officer and other key conveyancing staff
- The firm's adherence to good practice management standards
- Adherence to prudent and efficient conveyancing procedures through the scheme protocol
This scheme will create a trusted community which will deter fraud. Year on year we will drive up standards
With the revised Transaction protocol at the heart of the scheme to deliver consistent standards, the CQS is based on four key principles:
1. Probity – application for membership focuses on identity and status checks for individual conveyancers and firms to create a trusted conveyancing community
2. Practice quality standards – consistent processes and standards are central
3. Client/stakeholder service – a new client charter aims to ensure quality of service delivery
4. Quality assurance – monitoring and enforcement will be robust and members may be subject to spot checks and audits
The application and accreditation process will include mandatory training for the Senior Responsible Officer (SRO), who must be nominated by the applicant firm to be responsible for application to the scheme, and post accreditation for ensuring all other key conveyancing staff comply with the scheme requirements. Courses are currently being developed for both the SRO and all key staff.
The benefits of membership
Membership will provide credibility with stakeholders including regulators, lenders, insurers and clients, many of whom have been involved in developing the scheme. It is to be a prerequisite for acceptance onto lender panels.
This unique conveyancing quality kitemark will:
- Increase consumer awareness of the importance of using a qualified conveyancer
- Develop high standards of professionalism and competence
- Help practices to improve marketing and business development opportunities
- Reassure clients, lenders and insurers that your practice is financially sound and well managed
- Reduce your practice's operational risk and improve its quality and efficiency
- Help to reduce negligence claims and minimise PII rates and difficult of obtaining cover"
"TLS proposes to launch a new conveyancing quality scheme designed to enhance the reputation of solicitors in the conveyancing market with an aim to enable them to maintain their market share, and increase their profitability. At the centre of this scheme will be adherence to a new protocol which is currently being developed by TLS in consultation with the industry. Initially concentrating on solicitor to solicitor aspects of the transaction for scheme launch it is proposed that this will be expanded as the scheme progresses.
It is planned that future iterations of the scheme will provide linked resources and services..."
"The property market and solicitors' involvement in the sale and purchase of residential properties is at a critical stage of development. There has been a significant drop in the volume of residential conveyancing transactions which is having an impact on firms of all sizes but particularly small firms. In addition, a number of factors including perceptions of poor service, new entrants into the market and overcapacity threaten the solicitors' share of the conveyancing market.
It is essential that The Law Society provides leadership to assist law firms in maintaining a leading role in conveyancing. TLS proposes to launch a suite of services designed to enhance the reputation of solicitors in this market to enable them to maintain their market share and increase their profitability.
The Law Society are proposing to introduce a membership/quality scheme which provides a recognised quality standard for conveyancing practices. In the longer term this scheme could provide linked resources and services, to include an e-conveyancing portal.
The centre of the scheme will be the protocol to which all members will be required to demonstrate adherence. Reassurance to the extended market will be provided by introducing the requirement for identity checks of firms and individuals to decrease the risk of fraud. Adherence to protocols and financial probity will be regularly monitored and confirmed annually upon re-registration.
TLS aim to offer a training package which will support the adoption of the protocols provided as a mandatory element to the application process in order to ensure consistency in understanding and use of the process and aid restoration of confidence in the wider market.
In brief the objectives of the introduction of this scheme are to:
- Provide assurance as to the financial probity of conveyancing firms and those working in them
- Introduce consistent quality standards throughout the conveyancing process
- Provide assurance to key stakeholders, lenders, insurers and clients that member firms meet the required standards
- Improve standards through annual monitoring and enforcement
- Increase client recognition of quality standards for conveyancing
- Facilitate and support firms in the transition towards e-conveyancing
It is recognised that there is a significant amount of work to be done in order to establish this scheme in the given timeframe. A great deal of work has already been carried out and consultation with the profession and the wider market has taken place.
In the time of increased competition this scheme will offer great benefits to our members but also to lenders and customers of the conveyancing market."
"The Law Society hoped to generate revenue from selling services to scheme members, such as education and training, more than from the cost of membership."
"The focus is not only on the solicitor-to-solicitor contact but also encompasses the relationship with others in the process, such as estate agents, surveyors and mortgage brokers. In particular, the Protocol aims to make the standards expected of solicitors dealing with: lenders, buyers and sellers transparent to all."
The introduction of mortgage fraud training
"The assessment for the role of the SRO and the new conveyancing protocol and the core practice management standards are now currently online and accessible for firms to complete."
"… we were doing this in the dark. Lenders had not been particularly clear about what they would require to endorse the scheme so we had to try and estimate what was going to be necessary. If you had a scheme which after two years they could turn around and say "Well, we do not like it very much" we really would have wasted our time, so we were trying to anticipate what lenders would require and have discussions with them, but no lenders would actually give you certainty in advance. So … this was developing very fast. This meeting took place in February 2012 and we have already got to this point, by late 2011 … but as the Boards do not meet very often we did not have the luxury of waiting all the time for approval which could then take some months in a governance process. But it was certainly considered at Technical Panel level amongst those of us who set up the scheme that this was our best attempt, if you like, to gain the trust of the lenders and the lending community, also insurers, also clients, also complaints bodies, regulators and so on. So it was multi-faceted."
The addition of AML training
"We determined that conveyancing firms would benefit from an AML module that was specifically tailored to conveyancing practices. At this time, the SRA was consistently making statements that firms were failing to do proper AML checks."
In his oral evidence, Mr Smithers added that this was an obvious step to take, based on ongoing discussion in the market as to what the threats were:
"… there was no need to have an enormous debate about it. It was clearly something which needed to be done..."
He further explained that there were a large number of people in firms carrying out conveyancing who were not solicitors but para-legals. It was important for training to reach those individuals who fell outside the requirements of the ML Regulations.
"There are lots of different things that the Law Society could have done, but there was always the consideration about cost and efficiency and wholeness of the scheme to keep the confidence of lenders and insurers and the public and various other stakeholders that I mentioned. We did not know what reaction there would be. The Law Society and its members, particularly solicitors, had been vilified in some parts for poor practice and we were trying to, if I can use this euphemism, climb the hill, to ensure that we got back on an even path and with the outpour from the crash in 2008 which was working its way by this time into some serious claims through the indemnity fund and from lenders – in fact they often arose three or four years later – and then the risk of money laundering claims which had become much more prevalent by then, this was very much a hot topic and seen as a very good way of delivering to scheme members and their employees."
"The CQS had a dual purpose: to ensure the Society's dominant position within the residential conveyancing market and to generate revenue for the Law Society"
In his evidence, Mr Smithers said that this did not reflect discussions at the Law Society at the time. He explained:
"The Law Society remained keen to maximise the number of firms that signed up to the CQS – and as such increase the associated revenue – but this was primarily to increase standards in the residential conveyancing market and to assist conveyancers in obtaining access to lenders' panels rather than to make profit from the scheme."
"Apart from the issue of increasing amounts of work being diverted by estate agents and other national consumer facing brands to conveyancers chosen by them the issue of Lenders and Panels is probably the one that most impacts on solicitor conveyancers."
The restructuring of the CQS
"We are changing our online CQS training so that conveyancers in practices awarded an initial 12 months accreditation and conveyancers who join accredited practices will no longer need to catch up by completing a growing number of existing training courses."
THE CQS TRAINING REQUIREMENTS
(a) at a firm newly becoming accredited under the CQS or at a firm which was already accredited if they had not previously completed the former Years 1-4 training courses, to complete once the two core courses, "Protocol in Practice" and "Financial Crime"; and
(b) to complete each year the two annual update courses.
THE SUCCESS OF THE CQS
|Lender||CQS accreditation required for panel membership|
|Clydesdale Bank||Announced on 27 March 2012|
|Santander||31 March 2013|
|Aldermore Mortgages||August 2014|
|Nationwide Building Society||Announced on 20 April 2015*|
|Yorkshire Building Society||1 October 2015|
|*It appears that Nationwide had previously announced that it would be mandating CQS accreditation for solicitors currently on its panel and then in April announced that it would be accepting new applications for its panel and that any applicant had to be a member of the CQS: Minutes of the Conveyancing and Land Law Committee of 21 April 2015.||*It appears that Nationwide had previously announced that it would be mandating CQS accreditation for solicitors currently on its panel and then in April announced that it would be accepting new applications for its panel and that any applicant had to be a member of the CQS: Minutes of the Conveyancing and Land Law Committee of 21 April 2015.|
|Solicitors firms with CQS accreditation||Solicitors firms with CQS accreditation||Solicitors firms with CQS accreditation|
|Year||Number||Percentage of total*|
|*Based on 4,671 firms estimated active in residential conveyancing in July 2015 and the assumption that this did not vary significantly over the period.||*Based on 4,671 firms estimated active in residential conveyancing in July 2015 and the assumption that this did not vary significantly over the period.||*Based on 4,671 firms estimated active in residential conveyancing in July 2015 and the assumption that this did not vary significantly over the period.|
REVENUE AND PROFITABILITY OF THE CQS
THE STATUTORY PROHIBITIONS
(a) The defendant is an undertaking;
(b) which occupies a dominant position in a market in the United Kingdom, or part of it;
(c) and engages in conduct which amounts to an abuse of that dominant position;
(d) which may affect trade within the United Kingdom;
(e) and which is not objectively justified.
(a) An agreement between undertakings;
(b) which may affect trade within the United Kingdom; and
(c) has as its object or effect the prevention, restriction or distortion of competition within the United Kingdom; and
(d) does not satisfy the four criteria for exemption in sect. 9(1) CA.
(1) from the launch of the CQS in October 2010 to the introduction of the mortgage fraud training course in 2012;
(2) from 2012 to the introduction of the AML training course in June 2013;
(3) from June 2013 to the introduction of the remodelled CQS training: either the end of February 2016 when the mortgage fraud and AML courses were withdrawn or the end of April 2016 when the new Financial Crime course was introduced; and
(4) from end February/end April 2016 to date.
"2…The main purpose of market definition is to identify in a systematic
way the competitive constraints that the undertakings involved face. The objective of defining a market in both its product and geographic dimension is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings' behaviour and of preventing them from behaving independently of effective competitive pressure. It is from this perspective that the market definition makes it possible inter alia to calculate market shares that would convey meaningful information regarding market power for the purposes of assessing dominance or for the purposes of applying Article [101 TFEU].
3. It follows from point 2 that the concept of 'relevant market' is different from other definitions of market often used in other contexts. For instance, companies often use the term 'market' to refer to the area where it sells its products or to refer broadly to the industry or sector where it belongs."
"Basically, the exercise of market definition consists in identifying the effective alternative sources of supply for the customers of the undertakings involved, in terms both of products/services and of geographic location of suppliers."
"… the relevant product market is to be defined by reference to the facts in any given case, taking into account the whole economic context, which may include notably (i) the objective characteristics of the products; (ii) the degree of substitutability or interchangeability between the products, having regard to their relative prices and intended use; (iii) the competitive conditions; (iv) the structure of the supply and demand; and (v) the attitudes of consumers and users."
(a) an upstream market, in which the Law Society supplies the CQS; and
(b) a downstream market, in which Socrates and others supply training courses.
(a) Upstream market
"70. …The essence of a two-sided platform, as its name implies, is that "the platform brings together two types of user. In payment card schemes, these are the consumers who carry the card in their wallet (cardholders), and the retailers and other types of merchant who accept the card for payment (merchants). There are many other examples of two-sided platforms: TV channels, newspapers and websites bringing together viewers/readers and advertisers; PC operating systems bringing together users and developers/programmers; dating agencies bringing together men and women".
71. There is an essential relationship between the two types of user: "the more users there are on one side, the more attractive the platform is to the other side. The more consumers with a MasterCard in their wallet, the more attractive it is for retailers to accept MasterCard, and vice versa". A good example of a two-sided platform is the Metro newspaper, which is free of charge to readers (so as to maximise readership), thus making it attractive to the other group of users – advertisers – who will be prepared to pay more for advertising space the greater the size of the readership. There is a dynamic between the two groups of users (readers and advertisers), which causes one group (the advertisers) to pay more if the other group (the readers) is larger. That dynamic exists, even though there is no formal (legal) relationship between the readers and the advertisers."
(b) Downstream market
"…a position of economic strength enjoyed by an undertaking which enables it to hinder the maintenance of effective competition on the relevant market by allowing it to behave to an appreciable extent independently of its competitors and customers and ultimately of consumers."
And in Case 85/76 Hoffmann-La Roche v Commission EU:C:1979:36, at para 41, the ECJ described dominance in terms of an undertaking being:
"in a position of strength which makes it an unavoidable trading partner and which, already because of this, secures for it, at the very least during relatively long periods, that freedom of action which is the special feature of a dominant position."
"A substantial market share as evidence of the existence of a dominant position is not a constant factor and its importance varies from market to market according to the structure of these markets, especially as far as production, supply and demand are concerned."
(a) when did the CQS become an essential or 'must-have' product for most conveyancing solicitors' firms; and
(b) do mortgage lenders act to apply a competitive constraint so as to counter-act the market power the Law Society otherwise might have?
(a) 'Must-have' product
|Shares "covered by" CQS accreditation||Shares "covered by" CQS accreditation||Shares "covered by" CQS accreditation|
| *share of UK lending assumed to be broadly representative of share of lending in England and Wales. Source: CML.
**see table at para 79 above.
| *share of UK lending assumed to be broadly representative of share of lending in England and Wales. Source: CML.
**see table at para 79 above.
| *share of UK lending assumed to be broadly representative of share of lending in England and Wales. Source: CML.
**see table at para 79 above.
(b) Competitive constraint
CONCLUSION ON DOMINANCE
"A finding that an undertaking has a dominant position is not in itself a recrimination but simply means that, irrespective of the reasons for which it has such a dominant position, the undertaking concerned has a special responsibility not to allow its conduct to impair genuine undistorted completion on the [internal] market."
"The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition."
"A typical example of tying is where the dominant firm is prepared to supply the product in respect of which it holds a dominant position ('the tying product') only if the customer also agrees to buy another product ('the tied product'). The dominant firm may not be dominant in the supply of the tied product, the mischief often being the attempt to extend its market strength into the market for the tied product, to the detriment not only of its customer but also of its competitors in the supply of the tied product."
Two distinct products
(a) The distinctness of products for the purpose of analysis under Art  has to be assessed by reference to customer demand: para 917;
(b) In the absence of separate demand for the allegedly tied product, there can be no question of separate products and no abusive tying: para 918;
(c) But the fact that there was no demand for the tying product without the tied product does not preclude a finding of tying since complementary products are not to be regarded as a single product and it is quite possible that customers would wish to obtain the two products together but from different sources: paras 919-922.
"… the Court finds that a series of factors based on the nature and technical features of the products concerned, the facts observed on the market, the history of the development of the products concerned and also Microsoft's commercial practice demonstrate the existence of separate consumer demand for streaming media players."
In that regard, the CFI noted that the Windows client PC operating system and Windows Media Player were clearly different products in terms of their functionalities; and that there were distributors who developed and supplied streaming media players on an autonomous basis, independently of client PC operating systems: paras 926-927.
"…like other competition rules laid down in the Treaty, art.81 EC aims to protect not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such."
This was reflected in the reasoning of the CFI in Microsoft, at para 1089:
"The Commission therefore had ground to state … that there was a reasonable likelihood that tying Windows and Windows Media Player would lead to a lessening of competition so that the maintenance of an effective competition structure would not be ensured in the foreseeable future. It must be made clear that the Commission did not state that the tying would lead to the elimination of all competition on the market for streaming media players. Microsoft's argument that, several years after the beginning of the abuse at issue, a number of third-party media players are still present on the market therefore does not invalidate the Commission's argument."
"The impugned conduct must be reasonably likely to harm the competitive structure of the market".
In the present case, both sides agreed that this was the applicable test.
"… in order to establish whether such a practice is abusive, that practice must have an anti-competitive effect on the market, but the effect does not necessarily have to be concrete, and it is sufficient to demonstrate that there is an anti-competitive effect which may potentially exclude competitors who are at least as efficient as the dominant undertaking."
Therefore, provided that the conduct is reasonably likely to have an effect, the fact that the effect has not yet been realised is no answer to an allegation of abuse.
(a) Is the obligation to purchase training courses from the Law Society as part of the CQS to be regarded as pro-competitive in the upstream market?
(b) If not, does the holding in Streetmap apply more generally in a 'distinct' or 'related' market case, even where the conduct is not pro-competitive?
Did the tie have an appreciable effect in the downstream market?
"In the light of European Union competition law (in the training market), may a professional association impose the requirement, for the practice of the profession, of particular training provided only by it?"
"Although it is for the referring court to examine whether the contested regulation has had or is likely to have harmful effects on competition in the internal market, it is for the Court to provide it for this purpose with the points of interpretation of European Union law which enable it to reach a decision."
"The division of the market of compulsory training for chartered accountants, as made in the contested regulation, leads, secondly, to the designation of bodies authorised to provide each of those two types of training. In that regard, it is apparent from art.5(2) of that regulation that institutional training can be provided only by the OTOC. Moreover, of the average of 35 credits per year which chartered accountants are required to earn during the previous two years pursuant to art.4(1)(e) of the Quality Control Regulation, 12 credits must compulsorily be obtained from institutional training, as follows from art.15(2) of the contested regulation.
It follows that that regulation reserves for the OTOC a significant part of the market of compulsory training for chartered accountants."
"Such a rule therefore appears likely to distort competition on the market of compulsory training for chartered accountants by affecting the normal play of supply and demand."
(a) The extent of the Law Society's dominance on the upstream market. There were no rival suppliers of such an accreditation scheme and no prospect of any entry into that market with a competing product. Once the scheme became, as we have found, a 'must-have' for a large number of solicitors, there was by definition no choice for them at all.
(b) The large number of conveyancing firms who were members of the CQS by this time and their share of the total. There were some 2750-2800 accredited firms by April 2015, amounting to an estimated 59-60% of the total number of firms active in residential conveyancing, and the number was steadily increasing: see the table at para 79. This sheer volume constituted a segment of demand in the downstream market that was significant, even though it is clear that the total size of that market (as to which we had no evidence) is much larger.
(c) In effect, the obligation for any firm in the CQS to purchase the relevant courses from the Law Society, whilst intermittent, continued without limitation. Although accreditation was on an annual basis and therefore had to be renewed each year, once the Scheme had become well-established it is obvious that a firm which decided it wanted accreditation would wish to continue being a member of the CQS. The Scheme was indeed operated on the basis of annual renewals.
(d) Of the only two conveyancing solicitors from whom we had direct evidence, one (Mr Ian Hamilton) considered that the AML training involved in the courses required under the CQS enabled his firm to comply with the statutory obligation under the ML Regulations and so reduced the need to purchase such training elsewhere. His firm had let its subscription with Socrates lapse in 2012 as it felt it was up-to-date with AML training at the time, and while it became a subscriber again in January 2015, he said the firm would certainly have been much more likely to have renewed earlier if it had not been obliged in the meantime to purchase equivalent training from the Law Society under the CQS rules. Mr Smithers, on the other hand, said that his firm did not consider that the CQS training fulfilled the requirement under the ML Regulations. Neither witness was challenged on this, nor was it suggested that Mr Hamilton's view was erratic. We consider that the evidence demonstrates that different firms would take different views, reflecting perhaps also the profile of the firm generally as the ML Regulations apply more widely than to conveyancing solicitors. But we think it shows that for local firms with a heavy conveyancing practice, there is a potentially significant effect on the demand for AML training from third parties. Although for any firm which has joined the CQS the effect for the future will fluctuate as between years (whether by reason of the difference between the requirements under the ML Regulations and under the CQS, or the degree to which new solicitors join the firm, or otherwise), we do not regard that as sufficient to reduce the potential effect to a level that is insignificant.
(e) Several of its customers had written to Socrates stating that they wished to cancel or were not renewing their subscriptions for training because they had become members of the CQS. Ms Smith sought to dismiss this evidence on the basis the solicitors were just using the CQS as a pretext or a negotiating tactic to get a discounted rate, but we see no reason to belittle the evidence in that way. The evidence was limited, but it provides some support for point (d) above.
(f) The revenue derived by the Law Society from the sale of training courses under the CQS is significant and increased substantially over the period 2013-2015. As corrected on the final day of the hearing (see para 83 above), this showed that training revenue had risen from somewhere between £340,000-£750,000 in the year ended 31 October 2013 to over £1.5 million in the year ended 31 October 2015. Of course, not all of this relates to courses on mortgage fraud and AML, but an appreciable share of it will do. Those are significant sums in the context of competition in the market for training provision. The annual turnover of Socrates is about £750,000 and Mr George's unchallenged evidence was that it has been for some years the leading provider of AML and compliance training to general practice law firms.
(g) AML and mortgage fraud training for conveyancing solicitors is a distinct product, even though it is part of a much wider downstream market. These are on-line courses and there appear to be substantial economies of scale for the supplier of such a course: as one would expect, the figures quoted by Dr Majumdar show that the main cost is the preparation of the materials (both content and programming). The marginal cost of supplying each additional customer is minimal.
"Lenders currently have input into the content of the Law Society's training, which they could not do if the Law Society lost control of the training element of the CQS. Not only would Lenders lose control over content, they could no longer be assured of its quality. Indeed, given that CQS members could be expected to select the cheapest training that allows them to retain CQS membership, there is likely to be pressure on the quality of the training such that the CQS could no longer achieve its aim of providing quality assurance to Lenders.
The Law Society would no longer be able to guarantee that a uniform minimum standard had been reached by all certified firms. Lenders could lose confidence in the scheme, and this could lead to one or more withdrawing the CQS as a gateway to their panel."
"… as regards the conditions for access to the market of compulsory training for chartered accountants, the objective of guaranteeing the quality of the services offered by them could be achieved by putting into place a monitoring system organised on the basis of clearly defined, transparent, non-discriminatory, reviewable criteria likely to ensure training bodies equal access to the market in question."
CONCLUSION ON ABUSE
CHAPTER I PROHIBITION
"Negative effects on competition within the relevant market are likely to occur when the parties individually or jointly have or obtain some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power…."
CONCLUSION ON CHAPTER I
The Hon. Mr Justice Roth
Prof. Stephen Wilks
Charles Dhanowa OBE, QC (Hon)
Date: 26 May 2017
Competition Act 1998
2 Agreements etc. preventing, restricting or distorting competition.
(1) Subject to section 3, agreements between undertakings, decisions by associations of undertakings or concerted practices which—
(a) may affect trade within the United Kingdom, and
(b) have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom,
are prohibited unless they are exempt in accordance with the provisions of this Part.
(2) Subsection (1) applies, in particular, to agreements, decisions or practices which—
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
(3) Subsection (1) applies only if the agreement, decision or practice is, or is intended to be, implemented in the United Kingdom.
(4) Any agreement or decision which is prohibited by subsection (1) is void.
(5) A provision of this Part which is expressed to apply to, or in relation to, an agreement is to be read as applying equally to, or in relation to, a decision by an association of undertakings or a concerted practice (but with any necessary modifications).
(6) Subsection (5) does not apply where the context otherwise requires.
(7) In this section "the United Kingdom" means, in relation to an agreement which operates or is intended to operate only in a part of the United Kingdom, that part.
(8) The prohibition imposed by subsection (1) is referred to in this Act as "the Chapter I prohibition".
9 Exempt Agreements.
(1) An agreement is exempt from the Chapter I prohibition if it –
(a) contributes to—
(i) improving production or distribution, or
(ii) promoting technical or economic progress,
while allowing consumers a fair share of the resulting benefit; and
(b) does not—
(i) impose on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives; or
(ii) afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question.
(2) In any proceedings in which it is alleged that the Chapter I prohibition is being or has been infringed by an agreement, any undertaking or association of undertaking claiming the benefit of subsection (1) shall bear the burden of proving that the conditions of that subsection are satisfied.
18 Abuse of dominant position.
(1) Subject to section 19, any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.
(2) Conduct may, in particular, constitute such an abuse if it consists in—
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts.
(3) In this section—
"dominant position" means a dominant position within the United Kingdom; and
"the United Kingdom" means the United Kingdom or any part of it.
(4) The prohibition imposed by subsection (1) is referred to in this Act as "the Chapter II prohibition".
Note 1 The role of the Membership Board was described as to set and oversee the implementation of policy relating to services for members, such that any major changes relating to products offered by the Law Society required Membership Board approval. [Back] Note 5 In their witness statements, Mr Smithers and Mr Murphy describes them as “modules” but most of the contemporary documents (including the booking forms) refer to them as courses and we will use the latter expression. [Back] Note 7 Mr Murphy in his witness statement said that the price was £60 for staff at CQS accredited firms but the course booking form which he exhibits suggests that is an error and that the prices were as stated above. [Back] Note 9 We understand that between 1 March and 29 April 2016, firms in the CQS at which the relevant individuals had not completed the mandatory training courses were told to delay their orders for training until after 29 April when the new core courses would be released. [Back] Note 10 These were the prices when the update courses were introduced. From a subsequent document it appears that the £40 charge may subsequently have been reduced to £35 but nothing turns on this. [Back] Note 15 Bundling can refer more strictly to the case where products are effectively offered only as a package, whereas for tying the dominant undertaking may supply the tied product (but not the tying product) on its own: see the Commission’s Guidance on its enforcement priorities in applying Art. [102 TFEU] (“CommissionGuidance”), para 48. [Back] Note 16 Although we have some doubts regarding novelty since we note that Socrates introduced its module of “AML for property lawyers” in February 2011, about the same time as this was incorporated in the CQS. We have no evidence regarding Socrates’ competitors. [Back] Note 17 The revenue declined slightly to £1.4 million in 2015-16, and we recognise that as the restructured training requirements take effect it may decline a little further, but that does not affect the point. [Back]
Note 1 The role of the Membership Board was described as to set and oversee the implementation of policy relating to services for members, such that any major changes relating to products offered by the Law Society required Membership Board approval. [Back]
Note 5 In their witness statements, Mr Smithers and Mr Murphy describes them as “modules” but most of the contemporary documents (including the booking forms) refer to them as courses and we will use the latter expression. [Back]
Note 7 Mr Murphy in his witness statement said that the price was £60 for staff at CQS accredited firms but the course booking form which he exhibits suggests that is an error and that the prices were as stated above. [Back]
Note 9 We understand that between 1 March and 29 April 2016, firms in the CQS at which the relevant individuals had not completed the mandatory training courses were told to delay their orders for training until after 29 April when the new core courses would be released. [Back]
Note 10 These were the prices when the update courses were introduced. From a subsequent document it appears that the £40 charge may subsequently have been reduced to £35 but nothing turns on this. [Back]
Note 15 Bundling can refer more strictly to the case where products are effectively offered only as a package, whereas for tying the dominant undertaking may supply the tied product (but not the tying product) on its own: see the Commission’s Guidance on its enforcement priorities in applying Art. [102 TFEU] (“CommissionGuidance”), para 48. [Back]
Note 16 Although we have some doubts regarding novelty since we note that Socrates introduced its module of “AML for property lawyers” in February 2011, about the same time as this was incorporated in the CQS. We have no evidence regarding Socrates’ competitors. [Back]
Note 17 The revenue declined slightly to £1.4 million in 2015-16, and we recognise that as the restructured training requirements take effect it may decline a little further, but that does not affect the point. [Back]