1. The regime only applies to firms having “strategic market status”

• The Competition and Markets Authority (CMA), through its Digital Markets Unit, will designate firms as having “strategic market status” (SMS) in relation to a digital activity. Five conditions must be met:

1. The firm carries out one or more digital activity, e.g., providing a service via the internet or providing digital content.
2. The digital activity is linked to the U.K., e.g., it has a significant number of U.K. users, or the firm carries on business in the U.K. in relation to the digital activity.
3. The firm has “substantial and entrenched market power” (based on a forward-looking assessment).
4. The firm has “a position of strategic significance” in respect of the digital activity. This could be where it has achieved significant size or scale in relation to the activity, a significant number of other firms use the activity, or its position in relation to the activity would allow it to extend market power to other activities or substantially influence how other firms conduct themselves.
5. The CMA estimates that the firm (or its group) has global turnover > GBP25 billion or U.K. turnover > GBP1bn.

• The CMA must complete an SMS designation investigation within nine months (extendable by three months). Designations will last for five years.
• We expect only a small number of the largest digital firms will be designated. The CMA has indicated three to four designation investigations in the first year. Some firms will likely be designated in relation to a number of different digital activities.
• In preparation, the CMA is consulting on draft guidance.

2. SMS firms will be subject to binding but tailored conduct requirements

• These will be tailored to each SMS firm. This is unlike the EU Digital Markets Act, where a blanket set of obligations apply to all “gatekeepers”. Conduct requirements will be kept under review and may be amended.
• Conduct requirements can only be imposed for the purpose of certain objectives: treating users fairly, enabling user-choice, or providing information to enable users to make informed decisions. They must be proportionate.
• They must fall within permitted categories. These can take the form of obligations (such as trading on fair and reasonable terms or providing information) or restrictions (including requirements that prohibit self-preferencing, discriminatory terms or restrictions on interoperability). Their scope is potentially very broad.
• If under investigation by the CMA for suspected breach of a conduct requirement (see point 5 below), SMS firms can argue their conduct is exempt due to resulting benefits for users, such as lower prices or higher quality. Firms will likely face a high burden to show that the conditions for exemption are met.

3. CMA can make “pro-competition interventions” including structural separation

• “Pro-competition interventions” (PCIs) go beyond the conduct requirements and will enable the CMA to tackle the root causes of barriers to competition in digital markets. They are modelled on the existing U.K. market inquiry regime.
• PCIs are wide-reaching and can force an SMS firm to behave in a certain way, restrict its conduct or even require divestment of parts of its business. They can also take the form of recommendations to government or other regulators.
• SMS firms can offer legally binding commitments to address any potential concerns.
• The CMA has already indicated where its new powers could be used, based on experiences in recent CMA investigations and market studies, calling out platforms funded by digital advertising and mobile ecosystems.

4. SMS firms must report all M&A above certain thresholds to the CMA

• This applies where an SMS firm (or member of its group):

1. acquires 15% or more of shares/voting rights in a company carrying on activities in the U.K. or supplying goods or services in the U.K. (or increases its shares/voting rights to more than 25% or more than 50%), and
2. the value of the consideration is at least GBP25 million (for this acquisition and other acquisitions of shares/voting rights in the company).

• There is a similar threshold for joint ventures.
• SMS firms cannot complete these deals until expiry of a waiting period, which will run for five to ten working days after the report is submitted.
• The rules give the CMA greater visibility over deals in the digital sector. If a reported deal raises concerns, the CMA can take forward an investigation through the standard merger control process and may impose a “hold separate” order.

5. SMS firms can be fined 10% of global turnover for breach

• This includes non-compliance with conduct requirements, PCI orders and the merger reporting obligation. Daily penalties are possible in some circumstances.
• The CMA has robust powers to investigate possible breaches, including via information requests, interviews, dawn raids, expert reports and even requiring SMS firms to demonstrate or test systems/processes.
• Failure to comply with an investigation (e.g., not responding to an information request) or giving false or misleading information will attract fines of up to 1% of global turnover, plus daily penalties.
• Individuals face fines of up to GBP30,000 and director disqualification for up to 15 years. Certain conduct may also amount to a criminal offense.

6. Appeals against CMA decisions will be (mostly) on judicial review grounds

• CMA decisions under the new regime can be challenged in the U.K. courts.
• Although digital firms lobbied heavily for such appeals to be on a “merits” basis rather than on more narrow judicial review grounds (which only allow appeals on the basis of errors of law or procedural fairness), the government has ultimately settled on a hybrid approach—judicial review for all appeals under the digital regime except for challenges to the level of a fine, which will be on a merits basis.
• This goes some way to addressing concerns of digital firms that it would be difficult to successfully challenge CMA decisions, but means that key decisions (such as designation as SMS or imposing conduct requirements) can only be appealed on limited grounds.