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UK Government consults on pro-competition regime for digital markets

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United Kingdom

The UK Government has published a consultation setting out its proposals for the new pro-competition statutory regime to be overseen by the Digital Markets Unit (DMU). The new regime will target  harms associated with the substantial and entrenched market power alleged to be held by a small number of large digital businesses. The Government does not believe that these issues can be addressed adequately by the existing competition rules.
 
The DMU was launched earlier this year and has been operating in "shadow form" within the Competition and Markets Authority (CMA), awaiting statutory powers and objectives. See our previous blog post from when the DMU was launched.
 
This consultation follows and builds on recommendations by the Digital Competition Expert Panel, and advice from the Digital Markets Taskforce.
 
We discuss below the key aspects of the Government's proposals.
 
Purpose and powers of the DMU
 
The core purpose of the DMU will be 'to promote competition by addressing both the sources of market power and the economic harms that result from the exercise of market power'. The Government is seeking views on a possible supplementary duty to support innovation and on giving the DMU powers to engage with wider policy issues that interact with competition in digital markets.
 
The  proposals include introducing informal non-statutory arrangements to encourage the DMU to work closely with other regulators including, for example, Ofcom, the Information Commissioner's Office, and the Financial Conduct Authority. The consultation seeks views on whether a formal duty to consult or cooperate with other regulators would be more effective.
 
The Government's proposals also refer to the possibility of a wider monitoring role for the DMU, which could involve the power to gather information outside of a formal investigation.

Strategic Market Status
 
The DMU will be responsible for determining which firms have Strategic Market Status (SMS), and will consequently be subject to the new regime.  SMS would be determined by way of an evidence-based assessment to identify firms with:

  • substantial and entrenched market power;

  • in respect of at least one digital activity;

  • providing them with a strategic position.

There are some key differences between the proposed criteria for SMS, and the definition of "gatekeeper" status under the EU's proposed Digital Markets Act – not least because the Government's consultation suggests that the DMU will place more weight on qualitative, rather than quantitative criteria in its assessment of SMS. The Government has indicated that it may not publish an exhaustive list of activities that are potentially within the scope of the regime (unlike the list of "core platform services" under the Digital Markets Act).
 
Both regimes are designed to serve similar functions in targeting, and placing obligations, on the very largest tech firms, and it is likely that there will be significant overlap between the firms caught by both regimes.
 
It is proposed that the DMU will prioritise its work where there is the highest risk of competition concerns and the strongest case for intervention. The DMU will make this assessment on the basis of a firm's revenue; the characteristics of the activity; and whether an existing regulator is better placed to address the harms identified.
Code of Conduct
 
Firms with SMS will be subject to a new, enforceable code of conduct that will set out how they are expected to behave. The code will only apply to activities where a particular firm has SMS, and not to other activities carried out by the firm and  will have the following three objectives:

  • Fair trading – users are treated fairly and are able to trade on reasonable commercial terms with firms with SMS;

  • Open choices – users face no barriers to choosing freely and easily between services provided by firms with SMS and other firms; and

  • Trust and transparency – users have clear and relevant information to understand and make informed decisions about what services firms with SMS are providing, and to make informed decisions about how they interact with those firms.

These objectives will be supported by legally binding principles and the Government is consulting on whether these should be firm-specific or applicable to all SMS firms.
 
The Government proposes to give the DMU the power to issue "code orders" to address breaches of the code, requiring behavioural changes such as the suspension, cessation or reversing of harmful conduct.
 
Pro-competitive Interventions
 
The DMU will have powers to implement pro-competitive interventions (PCIs) such as data-related remedies or measures to enhance consumer choice. It is intended that the DMU will have broad discretion to design effective remedies to address harms identified, subject to providing general guidance on the types of PCIs it may consider and the circumstances in which they would be used, and complying with obligations of procedural fairness.
 
The DMU will only be able to implement PCIs where it can prove there exists an adverse effect on competition. This is in line with the legal test in the existing market investigation scheme.
 
Enforcement
 
It is proposed that the DMU will have the power to impose financial penalties for a breach of the new regime up to a maximum of 10% of an undertaking’s worldwide turnover. The DMU will be required to publish guidance on its proposed approach to  penalties.
 
The Government is also considering giving the DMU power to apply to the courts for an order requiring SMS firms to comply with a PCI; and the power to hold senior managers liable for compliance with the regime. This is similar to the approach that allows the CMA currently to apply to the court to disqualify a person from holding directorships.
 
Merger Rules
 
The  proposals include new merger rules that would provide the CMA with greater scope to scrutinise mergers by firms with SMS, and to intervene if necessary to protect consumers from potential harm.
 
The Government considers that the CMA's current merger control powers are not sufficient to capture, for example:

  • acquisitions of firms that have strategic value in the market before they develop and reach scale, or that are expanding and yet to monetise. These types of mergers may not meet either the turnover or share of supply test;

  • mergers where the relationship between the target and acquirer is purely vertical, or purely in related markets, which may not be captured by the share of supply test.

The proposed measures are:

  • a new reporting requirement on firms designated with SMS, to inform the CMA of all mergers;

  • a broader and clearer jurisdiction for the CMA to review SMS mergers, through the introduction of (i) a transaction value threshold (for example in the region of £100m-£200m); and (ii) an accompanying UK nexus test;

  • a subset of the largest transactions by firms with SMS to potentially undergo a mandatory merger review prior to completion; and

  • changing the threshold at which the CMA can intervene in a merger, by amending the probability threshold used in a Phase 2 investigation to consider whether there is a "realistic prospect" of a substantial lessening of competition as a result of the merger.

Funding
 
There are two options for the funding of the DMU.
 
The DMU could be funded directly through the CMA’s departmental budget. The "shadow form" DMU is currently funded this way, though costs will likely increase once the statutory regime is introduced.
 
Alternatively, the DMU could be funded by way of a full or partial levy, likely from entities that it regulates (further work would be undertaken to determine who should pay the levy). Many other regulators including the new Online Safety function in Ofcom are funded in this way.
 
Consultation
 
The Government is seeking views on the draft proposals by 1 October 2021. The Government intends to publish a response to the consultation before introducing legislation to put the regime on a statutory footing.
 
If you would like to discuss whether and how these proposals might affect you, please get in touch.



Co-authored by Liah Roberts (trainee solicitor)
 

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