In Franz Kafka’s The Trial the chief cashier of a bank, Josef K, is unexpectedly arrested by two unidentified agents from an unspecified agency for an unspecified crime. At one level, The Trial is a satire of bureaucracy. At another, it is uncannily prescient of the oppressive regimes that would emerge in Europe in the first half of the 20^th century.

But The Trial also serves as a caution to those responsible for regulatory agencies in the 21^st century. Modern-day regulators have enormous powers, in some cases even exceeding those of the police. (There is no right to silence when faced with a Commerce Commission investigation).

Yet our politicians give much more thought to how to arm our regulators than how to govern them. This issue is the subject of a research report The New Zealand Initiative will release next week. And it will reveal Kafkaesque shortcomings with many of our regulatory agencies, including the Commerce Commission and the Reserve Bank.

The findings in our report also provide a troubling backdrop for two new bills introduced by the Minister of Commerce and Consumer Affairs, Kris Faafoi. Together, the bills will grant the Commerce Commission’s wishes for two substantial new enforcement powers.

The eponymously named Commerce (Criminalisation of Cartels) Amendment Bill will permit the commission to bring criminal prosecutions, punishable by imprisonment, against alleged participants in a cartel. And the Commerce Amendment Bill, introduced into Parliament last week, will grant the commission the power to initiate “market studies” where the commission – or the minister – think it would be in the “public interest” for the commission to enquire into the state of competition in any market.

Without these powers, the commission would have us believe it will be less effective in achieving its statutory objective of promoting competition.

Troublingly Kafkaesque
Faced with this, it would be hard for any government to resist the commission’s overtures to strengthen its armoury. Everyone wants competitive markets. I know I do. And there have been complaints from all quarters about the commission’s performance.

But there is something troublingly Kafkaesque about the commission’s desire to prosecute alleged cartel participants for criminal offences. The limits of the cartel provisions of the Commerce Act are undeniably blurred. At the same time, the proposed new offence does not require a defendant to have a dishonest state of mind. Consequently, the new bill creates the very risk of unexpected arrests for unknown criminal acts that Kafka warned us about.

And it is not as if the case for cartel criminalisation is strong. Cartel conduct is already subject to a civil penalty regime – with maximum fines of $500,000 for individuals and $10 million for companies. When nothing approaching the maximum fines has ever been imposed by the courts, it hardly seems there is a need to increase the level of deterrent.

Criminalising cartel conduct will also come at a cost – especially for the commission – with investigations having to meet the higher standard of proof required for criminal cases.

In tandem, these factors led the Treasury to conclude in 2011 that it was difficult to see how the likely benefits of cartel criminalisation would exceed the likely costs. It is hard to see what has changed since then.

Kafka would have been even more concerned about the commission’s proposed new market studies powers. It is one thing to subject market participants to the commission’s powers of compulsion when the commission is investigating an alleged breach of the Commerce Act.  Accused wrongdoers should expect to be investigated.

But it is an entirely different matter to compel businesses to hand over their records and to be interrogated under oath just because the commission may have unspecified concerns about the state of competition in their market. An open-ended investigation, initiated with no checks and balances, and with no charges levelled at any of those being investigated, is surely pure Kafka.

Powers of compulsion not needed
Yet if the case for cartel criminalisation is not strong, the argument for markets studies powers is feeble. Competition concerns typically arise when there are too few participants in a market. Whether it is gas stations, airlines, or supermarkets, competition authorities want more of them.

But powers of compulsion are not needed to work out why so many markets are dominated by just a couple of incumbents. Our economy is small and geographically isolated. And our foreign investment and planning regimes are hardly user-friendly.

If the commission had a bit more commercial acumen, it could readily work this out. But changes at the top – not new powers – are needed to bestow the commission with this expertise.

Unfortunately, while the commission’s proposed new powers may strengthen its armoury, their Kafkaesque qualities will only add to the commission’s shortcomings. Parliament should take heed of Kafka’s warning. Granting regulatory agencies open-ended powers that cannot be easily understood, or easily challenged, will help no one.