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Lord Brittan of Spennithorne: My Lords, I did not say that.

Lord Sainsbury of Turville: My Lords, I take the point that the noble Lord did not say that the UK one was selected for that reason.

Lord Brittan of Spennithorne: My Lords, I said that the loudest voices arguing for it were the Americans', not that that was why it was introduced by the present Government or why the committee came down in its favour.

Lord Sainsbury of Turville: My Lords, I accept the noble Lord's point. I want to make it clear that there are substantial arguments, from an economist's point of view, in selecting these tests, and that they are independent from the arguments of others who may want to support that view.

We believe that the test is fundamentally better adapted to merger control than is "dominance". Its advantages lie primarily in the fact that it is more directly grounded in economic principles, thus

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providing the UK competition authorities with greater flexibility to deal with all forms of anti-competitive mergers. I agree with the noble Lord, Lord Hannay, that the introduction of SLC at European level would therefore be an important strengthening of the European competition regime.

The most important benefit, as the noble Baroness, Lady Sharp, said, would be to plug potential gaps in the dominance test in a straightforward way. That would minimise the risk of any anti-competitive mergers slipping through the Commission's net. I agree with the noble Lords, Lord Brittan and Lord Hannay, that it would not be less restrictive. It would also bring the ECMR into line with other key international merger regimes, including that of the United States, which can only be of benefit as the importance of international co-operation in competition enforcement increases. We agree with the noble Lord, Lord St John of Bletso, that that would not lead to substantial disruption.

Such a change would not amount to a radical overhaul of the ECMR system. The current system is basically a sound one, and a move to SLC would in all probability not alter the way in which the Commission goes about its job in the great majority of cases. However, adopting SLC could bring real benefits in analysing certain types of merger. We will therefore continue to argue the case for the introduction of SLC in a revised merger regulation.

The coming months will be important in shaping the new regulation. We will be consulting stakeholders closely on the Commission's latest publications and will continue press for changes to the regulation to address UK priorities during the ongoing negotiations.

The noble Lord, Lord Grenfell, raised the question of member state jurisdiction. The Commission originally proposed in its Green Paper a system whereby mergers subject to three or more national filings would fall to the ECMR regime. The noble Baroness, Lady Miller, is incorrect to refer to the three-plus test, as the Commission has moved away from it in its revised proposals. It has made a new set of proposals, which it believes will simplify the way in which cases can be allocated to a competition authority and then, if necessary, transferred between member states and the Commission, based on amendments to articles 9 and 22 of the ECMR, including their use at a pre-notification stage. We want to consider the proposals carefully to ensure that they achieve the desired results.

Under the new proposals, the parties would approach the Commission during pre-notification discussions and request that the matter be dealt with either by them or the member states. The Commission would then work with the concerned member states before considering whether to apply a new pre-notification referral mechanism to the case. That mechanism mirrors the one in place in articles 9 and 22 but sets strict time limits in which decisions must be taken on where the case should be handled. We look forward to working with other member states during

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the negotiating phase to ensure that the mechanism leads to cases being dealt with by the best placed authorities.

The noble Lords, Lord Grenfell and Lord Brittan, raised the question whether the European merger process should include an efficiency defence. The Commission's recently published proposals make clear its view that the current regulations provide a sufficient legal basis for efficiencies to be taken into consideration. We welcome the recent publication of draft guidance on how efficiencies would be considered by the Commission.

Efficiency considerations can have a part to play in merger analysis. In a minority of cases, efficiencies may flow from a merger that actually reduces competition. A restrictive approach needs to be taken in consideration of such efficiencies, and we need to take a tough line on the issue. To be relevant to merger analysis, efficiencies must be likely to be passed on to consumers, be expected to be delivered in a reasonable time frame, and be unlikely to be achieved in the absence of a merger.

The noble Lords, Lord Brittan and Lord Hannay, raised the question of accountability. We have already made clear that we see merit in the introduction of a second pair of eyes in the ECMR system, and are pleased that the Commission has announced that it will establish review panels to consider individual cases as part of the process. However, we agree with the noble Baroness, Lady Sharp, that second case teams considering individual mergers would be even better. The ECMR system of administrative authorisation rather than judicial authorisation is appropriate and proportionate for mergers, but again there is room for improvement.

The noble Lord, Lord Grenfell, expressed concern at the Commission's resource constraints. The Government made clear in their response to the Select Committee's report that it is essential that the necessary resources are provided to maintain the effective equitable and transparent implementation of the ECMR. The Government agree that the Commission should therefore give careful consideration to the question of whether procedural improvements following the ECMR review will require the provision of additional resources to the Competition Directorate-General.

In closing, I say again that we believe that the EC merger regime has functioned very well in the vast majority of cases. Its one-stop shop approach has been a key strength and a benefit to business. In 2001 the European Commission received notification of 335 mergers, 299 of which were cleared speedily without any competition concerns needing to be addressed. Indeed, since the regime's inception in 1990 only 18 notified mergers have been prohibited.

The three recent decisions by the Court of First Instance overturning aspects of the European Commission's decisions on certain mergers are unfortunate but I do not think they mean that the whole system is inherently flawed. The review provides

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an opportunity to take stock and to improve some of the areas which it has been argued constitute weaknesses in the current system. The Government will continue to press the Commission on those areas which we have identified as important for the review: better checks and balances; improvements to the process of determining jurisdiction; and the introduction of a test based on the concept of substantial lessening of competition.

The coming months will be important in shaping the changes to the EC merger regulation and we shall be working closely with the European Commission and other member states to ensure that our priorities are reflected. We believe that the introduction of an SLC test would be an important strengthening of the European competition regime. We want a merger regime that is transparent and based on sound economic principles so that businesses can conduct their activities within a clear framework.

The Select Committee's report is a very useful contribution to the ongoing debate and our response to it illustrates how much agreement there is between the Government and the committee. The Government are grateful to all those who took part in the preparation of the report and to all those who have taken part in the debate.

5.12 p.m.

Lord Grenfell: My Lords, I thank all those who took part in the debate from both the Front and the Back Benches for their excellent contributions to what was a most interesting and well informed discussion on this important issue. I particularly appreciate the Minister's thoughtful and encouraging reply.

I wish to take up briefly two points. The noble Lord, Lord Hannay, is surely right to say that the argument over the substantive test is by no means over. It will certainly come back. My own view on that—if I may reinforce it—is that as the Commission reinforces its economic capability to look at mergers, it is likely that the dominance test will move towards the SLC in everything but name, and that it is only a question of time before this change takes place and we shall eventually move, as I hope, to the SLC.

I was interested in the point raised by the noble Lord, Lord Brittan, on the loss of jurisprudence. We recognised in our discussions that there certainly would be a short-term loss of certainty. But we also feel strongly that that can be compensated for if the Commission issues clear guidelines on how it intends to interpret an SLC test, if there is one. We believe that that would remove much of the uncertainty and compensate for a loss of jurisprudence.

The noble Baroness, Lady Miller of Hendon, suggested that it was too late for us to take Airtours into account. However, Airtours had given evidence to us so we were able to incorporate that into our conclusions. But it is a matter of record that Commissioner Monti came into his job just five days before the Airtours decision was given in court. He got rather a "bum rap", as the Americans would say, when he was hit over the head by the media for that result. I

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have known him a long time. Frankly, I consider him one of the least arrogant international civil servants that I have ever come across. I refer to subsequent cases which he lost in the courts. However, everything that we had heard from him prior to that indicated that he was fully aware of the relevant problems and had a great determination to set things straight.

I end simply by commending the report to your Lordships' House and also to the Government as they enter the negotiations in which we wish them well. It looks as though they have some good material and the right attitude as they go into the negotiations in the Council.

On Question, Motion agreed to.

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