The Competition and Markets Authority (CMA) has recently published draft guidance on the role of the Subsidy Advice Unit (SAU) in the UK. The SAU is a new CMA function created by the Subsidy Control Act 2022 (the Act), which received royal assent on 28 April 2022. The Act forms the basis for a new regime for governing the provision of subsidies within the UK post-Brexit, which is expected to come into force this autumn. The draft guidance sets out situations in which a referral of a subsidy or scheme must be made to the CMA and how public authorities can comply with the requirements set out in the Act.
The guidance also explains the SAU’s approach to transparency, consultation, confidentiality, and publication of its reports. It provides further information about its online Public Authority Portal, which public authorities will use to submit referrals to the SAU once the new regime comes into effect. Rachel Merelie, Senior Director of the CMA noted: “we will use our expertise to ensure public authorities have expert and independent advice to help inform their policy decisions.”
Importantly, unlike in the EU, there is no pre-authorisation requirement for subsidy awards; public bodies will be able to self-assess compliance (although in certain ‘mandatory referral’ instances, they must seek the guidance of the SAU). Even where public authorities seek the guidance of the SAU on the lawfulness of any alleged subsidy, that guidance will be non-binding.
These two factors may increase the scope for interested third parties to monitor and challenge subsidy awards on appeal to the Competition Appeal Tribunal (CAT).1 The window for doing so is short: with certain exceptions, one month from the date a reviewable subsidy decision is uploaded to the subsidy database, or from the date an interested party first knew or ought to have known of the decision to give the subsidy or make the scheme, where the subsidy or scheme is not required to be uploaded to the database.
The CAT will hear challenges only on grounds of judicial review: not whether the decision was correct, but whether it was lawful, i.e. was made within the authority’s powers, was fair and reasonable, and consistent with the relevant principles and requirements of the Act. The CAT will not, however, review the merits or effectiveness of a subsidy or subsidy scheme.
THE ROLE OF THE SAU
Subsidies are offered to achieve specific public objectives, for example, car manufacturers may be offered a subsidy to assist in lowering the price of electric vehicles to meet environmental targets. The SAU will have two predominant functions: (i) advising public authorities at all levels on their decisions to provide financial assistance via subsidies to various organisations; and (ii) periodically monitoring and reporting on the effectiveness of the operation of the Act.
The SAU will provide independent, non-binding advice on the assessment of certain high-value subsidies referred to it by public authorities. In a report, it will highlight any effects that granting the subsidy may have on competition or investment in the UK.
However, decisions on whether to offer subsidies are ultimately for public authorities, not the SAU or CMA. The CMA does not have the power to block or clear aid, but the risk of judicial review proceedings by an interested party or the government at a later stage will remain. The UK subsidy regime will be enforced through the CAT who will effectively hear judicial reviews brought by ‘interested parties’ against subsidy decisions of a public authority. The CAT has discretion to decide who is an interested party, e.g., typically, a competitor of the beneficiary of the subsidy; a trade association active in the relevant sector who represents the competitors of the beneficiary; and local administrations where the subsidy has had a material impact on investment in the area in which they exercise their responsibility.
THE SUBSIDY CONTROL REQUIREMENTS
Public authorities must ensure that, when granting a subsidy, the decision making complies with the subsidy control principles (the Principles).2 These include:
- Ensuring a subsidy is given for a ‘common interest’ in order to remedy an identified market failure or address an equity rationale e.g. local or regional disadvantages or social difficulties (Principle A)
- Any subsidy should be proportionate to its policy objective and designed to change the economic behaviour of the beneficiary (Principles B and C)
- Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy and should represent the least distortive means of achieving the policy objective (Principles D and E)
- The beneficial effects of the subsidy should outweigh any negative effects, in particular relating to competition or investment within the UK (Principles F and G)
However, the requirement to apply the Principles does not apply in relation to a category of ‘exempt’ subsidies.3 In particular, it does not apply to subsidies which compensate for damage caused by natural disasters and other exceptional circumstances. There is also limited application of the Principles to temporary subsidies in response to national or global economic emergencies.
Certain categories of subsidies are referenced in the Act which are generally prohibited and so cannot be granted by public authorities.4 The SAU does not have a role in enforcing rules related to prohibited subsidies. Instead, prohibited subsidies may be challenged in the courts by an interested party.
The Principles referred to above in the Act differ from the existing criteria for lawful EU State aid. The TFEU generally prevents EU Member States from granting financial assistance that distorts competition and inter-state trade within the EU. However, there are some exemptions, which allow certain types of aid to be granted without the prior approval of the European Commission. These include:
- The de minimis Regulation exempts aid below €200,000 over a period of three years under certain conditions
- The General Block Exemption Regulation ("GBER"), revised in 2014 and in 2017, exempts from notification to the Commission certain categories of aid. These include regional aid, training, subsidies for small and medium-sized enterprises (SMEs) and research and development (R&D), public infrastructure spending and environmental aid
The compatibility of State aid with the TFEU, if not covered by the above two exemptions, is assessed through a ‘balancing test.’ In situations where a State is investing in an undertaking based on what a market investor would do, the ‘market investor test’ is used. This judges whether a public sector investment equates to the actions of a private investor of a comparable size operating in normal conditions of a market economy and thus does not confer an advantage. Regardless, the State must notify the Commission before granting the aid.
WHEN SHOULD A REFERRAL BE MADE TO THE SAU?
Mandatory referral request
Voluntary referral request
Upon receipt of a mandatory or voluntary referral request, the SAU has five working days to undertake a preliminary assessment and decide if it will issue a report. That report will evaluate the public authority’s compliance, including any effects of the proposed subsidy on competition or investment in the UK. It may also include advice to the authority on how the subsidy may be modified to ensure compliance.
The Secretary of State may refer a subsidy or scheme to the SAU after it has been made. This may occur if the Secretary of State considers that the public authority has or may have failed to comply with the Subsidy Control Principles or that there is a risk of negative effects on competition or investment in the United Kingdom. Additionally, in the context of judicial review, the Secretary of State will always be considered an interested party as a result of their obligations to manage UK subsidy control and the UK’s compliance with related international obligations. The Secretary of State may therefore ask the CAT to review a subsidy if they consider that the subsidy poses a significant threat to competition and investment within the UK, or that it may not be consistent with the UK’s commitments under the World Trade Organization agreements or free trade agreements.
Referral to the SAU is not required in relation to:
- Subsidies given under a subsidy scheme
- Streamlined subsidy schemes
- Minimal financial assistance
- SPEI assistance, as defined in the Act7
- Subsidies and schemes which are made exempt from the subsidy control requirements as set out above
PROVIDING VIEWS ON DRAFT GUIDANCE TO THE CMA
The CMA welcomes views on its draft guidance, alongside a draft Statement of Policy. The Policy considers the enforcement by the SAU of its information-gathering powers for the performance of its monitoring functions. The Act gives the SAU the power to issue a notice requiring a person to provide information or documents and to impose penalties where an information notice is not complied with.8
In particular, the CMA is seeking views on how the SAU will:
- Exercise its functions, including its information gathering powers, and the procedures it will adopt, including the way it will engage with public authorities.
- Evaluate the report on the public authority’s assessment of the subsidy or the scheme’s compliance with the subsidy control requirements.
- Decide which subsidies and schemes to review when it has discretion to do so
The CMA is seeking feedback on its draft guidance until 10 August 2022, with the aim to publish final guidance later this year.
The authors would like to thank Emma Devenish for her assistance with this article.
2. As set out in Schedule 1 of the Act
3. As noted in Part 3 of the Act
4. In Chapter 2 of Part 2 of the Act
5. Public authorities should refer to BEIS Statutory Guidance in determining whether a subsidy is a SSoPI (or an SSoI). Public authorities should also refer to BEIS Statutory Guidance, which explains the circumstances in which a subsidy may be ‘called-in’.
6. As will be defined in regulations from the Secretary of State under section 11 of the Act.
7. As defined under section 38 of the Act, this applies where the total amount or minimal of SPEI financial assistance given to an enterprise within the elapsed part of the current financial year and the two financial years immediately preceding the current financial year, does not exceed £725,000).
8. Under section 41 of the UKIM Act
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.