The Bill establishes the UK's answer to the EU's Digital Markets Act, placing "pro-competitive" obligations on the largest tech firms to be overseen and enforced by the new Digital Markets Unit (DMU) within the CMA. However, it's not just Big Tech that will feel the effects – changes to the CMA's general competition law framework, including updated merger thresholds and a redefinition of the Chapter I prohibition, will have an impact across all sectors.
We have discussed in a previous blog post the consumer protection and enforcement aspects of the Bill. In this article, we cover the regulation of digital markets and general changes to the competition law regime. We will focus in future posts on changes to the competition litigation landscape.
1. Regulation of competition in digital markets
The Government is concerned that the unprecedented market power of a small number of businesses, in relation to certain digital activities, is holding back innovation and growth. The Bill is therefore intended to allow the CMA to address proactively the root causes of competition issues in digital markets.
The Bill empowers the CMA (through the DMU) to designate undertakings which are very powerful in particular digital activities, as having strategic market status (SMS). An undertaking will have SMS where:
- the CMA considers that the digital activity is linked to the UK and the undertaking meets the SMS conditions in respect of the digital activity, namely:
- substantial and entrenched market power; and
- a position of strategic significance in respect of the digital activity;
- the turnover condition is satisfied – i.e. in a defined 12-month period, the undertaking's UK turnover exceeds £1bn, or global turnover exceeds £25bn; and
- the CMA has carried out an investigation into whether to designate the undertaking as having SMS.
- Bespoke conduct requirements. The CMA may impose one or more conduct requirements on a designated undertaking for the purpose of meeting one or more objectives of ensuring "fair dealing", "open choices" or "trust and transparency". The Bill prescribes permitted types of conduct requirements, including requiring an undertaking with SMS to trade on fair and reasonable terms, not to self-preference their own products and services, use data unfairly or restrict interoperability.
- Compliance with pro-competition interventions (PCIs). The CMA can also make PCIs to remedy adverse effects on competition as a result of the undertaking's activities, which may take the form of behavioural orders and/or non-binding recommendations.
- Mandatory reporting of certain mergers. The Bill requires the mandatory reporting by undertakings with SMS in relation to two possible merger situations. A report will be necessary where:
- the SMS undertaking (i) crosses the 15%, 25% or 50% thresholds with regard to the percentage of shares in another UK corporate body; and (ii) provides consideration of £25 million or above; or
- the SMS undertaking forms a UK joint venture where (i) the SMS undertaking holds at least 15% of the shares in this venture; and (ii) the value of contributions and/or consideration from the SMS undertaking to the joint venture amounts to at least £25 million.
- Responding to investigations and requests for documents / information. For the purposes of exercising, or deciding whether to exercise, any of its digital markets functions, the CMA will have the power to require information, to access premises, services, information, equipment or persons, and to interview persons.
- Significant financial penalties for breach. SMS businesses that breach a regulatory requirement (a PCI order or conduct requirement) can face penalties of up to 10% of worldwide turnover, and in the case of breaches of orders or commitments up to 5% of daily worldwide turnover for each day a breach continues.
In practice, only the very largest digital firms are likely to have SMS status, and therefore the direct impact on businesses more widely will be fairly limited. However, businesses should be aware of (i) the rights they will have against SMS firms under the Bill, and (ii) the potential that those firms attempt to seek contributions from third parties (whether directly or indirectly, such as through increased fees for services) to cover the additional costs of compliance.
2. Changes to the general competition law framework
The Government's view is that UK competition law – which was last overhauled significantly in 1998 – is failing to keep pace with market developments (and not just in the digital sector). The Bill therefore seeks to introduce a rebalanced merger control system, stronger enforcement against anti-competitive conduct and a series of enhancements to the CMA’s investigative and enforcement powers.
The key changes to the general competition law framework are as follows.
Amendments to the jurisdictional thresholds for merger control
Changes under the Bill will:
- increase the level of the existing target turnover test from £70 million UK turnover to £100 million UK turnover (adjusting the existing thresholds to account for inflation);
- introduce a safe harbour by adding a condition into the existing share of supply test that requires at least one of the merging enterprises to have UK turnover of more than £10 million (this will likely assist with alleviating the regulatory burden on smaller businesses that merge); and
- introduce a new threshold which will grant the CMA jurisdiction to review transactions where one party has a UK share supply of at least 33% and UK turnover exceeding £350 million (this enables the merger control regime to capture so-called "killer acquisitions", where large firms acquire small start-ups that would not otherwise engage the jurisdictional thresholds).
Amendments to the Chapter I prohibition
The Chapter I prohibition under the Competition Act 1998 will be amended to state as follows:
'agreements between undertakings, decisions by associations of undertakings or concerted practices which have as their object or effect the prevention, restriction or distortion of competition within the UK and which:
(a) in the case of agreements, decisions or practices implemented, or intended to be implemented in the United Kingdom, may affect trade in the UK, or
(b) in any other case, are likely to have an immediate, substantial and foreseeable effect on trade within the UK;
are prohibited unless they are exempt.'
The new wording is intended to ensure that UK trade and businesses and consumers based in the UK are protected from the detrimental effects of anti-competitive conduct, regardless of where that conduct takes place, even when an agreement is implemented in another jurisdiction.
Expanding the CMA's investigation powers
Greater investigative flexibility for the CMA in the age of remote working is another theme in the Bill. Central to reform is a proposal to extend the powers currently granted to the CMA to "seize-and-sift" documents when inspecting under a warrant on business premises, to inspections carried out on domestic premises. Another element of the Bill seeks to strengthen the CMA's powers to obtain electronic information stored remotely (e.g. in the cloud), to safeguard the CMA's ability to conduct its investigations effectively, given the increasing trend for businesses of all sizes to store documents and other information remotely.
The CMA will be empowered to seek information and documents from companies and people outside the UK in the course of UK competition law investigations. This means effectively that BMW and Volkswagen's victories against the CMA in the Competition Appeal Tribunal, overturning statutory information notices issued to non-UK group companies, are likely to prove short-lived, as the CMA's powers are extended extra-territorially.
There are also amendments to the scope and procedure for market investigations. For instance, the CMA will no longer be required to consult on a market investigation reference within the first six months of a market study. This will likely help the CMA to avoid the issues that plagued its mobile browsers and cloud gaming market investigation, in which Apple successfully challenged as ultra vires the CMA's decision to make a market investigation reference, on the basis that it was outside of the prescribed time limits for doing so.
Finally, the CMA will be able to require businesses to trial proposed remedies before setting a final remedy package. Whilst providing flexibility to the CMA, this approach means that firms may have to invest time and resources in a proposed remedy, before potentially having to backtrack and adhere to an alternative finalised remedy package.
The Bill completed its Committee stage in the House of Commons in July 2023 and is expected to come into force some time in 2024.
Co-authored by trainee solicitor, Ben Groden.
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