Following hot(ish) on the heels of the EU’s Digital Markets Act, the UK’s Digital Markets, Competition and Consumers Bill (“the Bill”) was published on 25 April 2023. It seeks to do three things: (1) to establish a new ex-ante regulatory regime for digital markets, conferring powers on the CMA, via its Digital Markets Unit, to impose conduct requirements and make “pro-competitive interventions” (“PCIs”) in relation to designated firms, and to impose hefty penalties for failure to comply; (2) to reform the existing competition law system, notably relating to merger controls, market inquiries and enforcement; and (3) to enhance consumer rights and enforcement. This post focusses on the first of these.
Certain characteristics of digital markets – including network effects, unequal access to data and the importance of ecosystems – can lead to the dominance of a small number of firms. Existing regulatory tools, the Government says, are inadequate to redress this. The proposed regime thus takes a dual approach. First, it targets the effects of market power, seeking to remedy harms in the short term. Second, and more innovatively, it targets the sources of market power, by pre-emptively identifying problems and shaping market behaviour, the idea being that in the longer term market power will be rebalanced. So how will this work in practice?
The initial stage is SMS designation. Subject to a turnover threshold (global turnover above £25bn, or UK turnover above £1bn) and following an investigation, the CMA may designate an undertaking as having SMS in respect of a “digital activity” (broadly defined as the provision of a free or paid for service by means of the internet, the provision of free or paid for digital content, or any other activity carried out for these purposes). The digital activity must be “linked to” the UK” – i.e. where it has a significant number of UK users, the undertaking carries on business in the UK in relation to the digital activity, or the digital activity is likely to have an immediate, substantial and foreseeable effect on trade in the UK. The “SMS conditions” must also be met, namely that the undertaking has (a) substantial and entrenched market power and (b) a position of strategic significance. The CMA will then have two tools in respect of SMS firms.
First, in respect of the effects of market power, the CMA will be able to impose conduct requirements on a firm for the purposes of one or more of three objectives: fair dealing (with users or potential users); open choices (that users or potential users are able to choose freely and easily between services or content provided by the firm and others) or trust and transparency (that users or potential users have information to understand the services or content provided and to make properly informed decisions).
While these requirements will – in contrast to the approach taken by the EU’s Digital Markets Act – be tailored to the firm in question, they must be of a permitted type, which the Bill lists. These include positive obligations, such as having effective complaints handling processes, and negative obligations preventing a firm from, for example, restricting interoperability between its own service and others’ products.
Where the CMA finds, following an investigation, that a firm has breached a conduct requirement, it may make an enforcement order. It must close a conduct investigation, without making a finding, where a “countervailing benefits exemption” applies and it may also do so where it accepts a commitment as to the firm’s behaviour.
Second, in respect of the sources of SMS firms’ market power, the CMA will be able to make a PCI where it considers that factors relating to a relevant digital activity are having an adverse effect on competition, and that the PCI would be likely to contribute to, or otherwise be of use for the purpose of, remedying, mitigating or preventing the adverse effect. A PCI can take two forms: a “pro-competition order” imposing conduct requirements (which can also be made on a trial basis), or recommendations by the CMA about steps to be taken. An example of a PCI provided in the Bill’s supporting documentation is requiring firms to allow greater interoperability or data access. In considering whether to make a PCI, the CMA may have regard to any countervailing benefits to UK users or customers. Where the CMA accepts a commitment as to a firm’s conduct, it may end or change the scope of a PCI investigation.
SMS firms will also have to report certain mergers to the CMA in advance, where prescribed ownership or voting thresholds are met and where the value of the transaction is at least £25 million. The CMA will have powers to require information and may require a firm to name a senior manager who will face consequences as a result of any failure to comply. The majority of the CMA’s decisions will be reviewable by the CAT on judicial review grounds.
The Government envisages that the new regime will force the most powerful tech firms to treat businesses in the UK fairly, open up opportunities for innovative start-ups in the UK, and lower the prices of online goods and services. It will be interesting to follow the debate surrounding these issues as the Bill passes through Parliament and – in the longer term – to assess the success of the regime in meeting these objectives, particularly in areas in which it differs from the approach taken by the EU.