For a number of years the UK Competition and Markets Authority (CMA) has called for tougher powers to tackle large digital firms and ensure digital markets are competitive, dynamic and innovative. But despite being one of the first jurisdictions to table the idea of a new digital regime, UK government progress on the plans has lagged behind that of the EU, whose Digital Markets Act (DMA) will apply from 2 May 2023 (see our alert).
The unveiling of the new measures is therefore a pivotal step. Once enacted, it will mean that the Digital Markets Unit (DMU) – established within the Competition and Markets Authority (CMA) in 2021 but to date without any formal powers – can fully get to work.
As yet we don’t know when that will be. The government says the Bill will take effect as soon as possible following parliamentary approval. This could take a number of months, meaning it is unlikely we will see the rules make their way onto the statute book much before the end of 2023.
Whilst having a clear focus on the digital sector, the Bill goes much further. Digital and non-digital firms alike will be impacted by changes to the competition framework, including revised merger control thresholds. The Bill also gives the UK’s consumer regime more bite, enabling the CMA to decide itself when the rules have been breached, and to impose heavy fines. You can read more about these reforms in our related alert.
In this article, we give you the six things you need to know about the new digital markets regime.
1. Only firms designated as having “strategic market status” (SMS) in respect of a digital activity are in scope
The government points out that only a small number of large tech companies with very high UK or global revenues will be caught by the new regime. Five conditions must be met for the DMU to designate a firm as having SMS:
Condition 1 - Firm carries out one or more digital activity
- Covers:
the provision of a service by means of the internet (paid or free)
the provision of one or more pieces of digital content (paid or free)
any other activity carried out for these purposes
Condition 2 - Digital activity is linked to the UK
- The digital activity has a significant number of UK users, or
- The firm carries on business in the UK in relation to the digital activity, or
- The digital activity (or the way the firm carries on the activity) is likely to have an effect on trade in the UK
Condition 3 - The firm has “substantial and entrenched market power” (SMS condition 1)
- On the basis of a forward-looking assessment over at least five years, taking into account developments expected/foreseeable if the firm was not designated as having SMS or, eg, changes to the wider regulatory landscape
Condition 4 - The firm has a position of “strategic significance” in respect of the digital activity (SMS condition 2)
- The firm has achieved a position of significant size or scale in respect of the digital activity, or
- A significant number of other firms use the digital activity, or
- The firm’s position in respect of the digital activity would allow it to extend its market power to a range of other activities, or
- The firm’s position in respect of the digital activity allows it to determine or substantially influence the ways other firms conduct themselves
Condition 5 - Turnover condition is met
- The DMU must estimate that:
the global turnover of the firm or its group > GBP25 billion, or
- the UK turnover of the firm or its group > GBP1bn
Firms that meet these conditions are not automatically designated as having SMS and (unlike the EU DMA regime) do not have to notify the DMU that they meet these conditions. The DMU has to initiate an “SMS investigation” before it designates them. The DMU has a deadline of nine months to complete an SMS investigation once initiated (extendable by three months). Designations will last for five years. It is likely that some firms will be designated in relation to a number of different digital activities.
2. SMS firms will be subject to binding conduct requirements
The DMU can require SMS firms to behave in a certain way in relation to the digital activity/ies for which they are designated.
These conduct requirements will be tailored to the individual SMS firm. This is different to the EU DMA, which imposes a blanket set of obligations on all “gatekeepers” in scope. The UK government hails the UK regime as more flexible, targeted and pro-innovation, with decisions informed by engagement with the firms themselves.
Conduct requirements can only be imposed on an SMS firm for the purposes of one or more of the following objectives:
- fair dealing: treating users fairly and allowing them to interact with the SMS firm on reasonable terms
- open choices: enabling users to choose freely and easily between the services/digital content provided by the SMS firm and those of rivals
- trust and transparency: providing users with the information needed to make informed decisions about whether/how they interact with the SMS firm
Conduct requirements must also fall within a permitted category. The Bill contains an exhaustive list, including:
- obligations on the SMS firm, eg to trade on fair and reasonable terms, provide information about the digital activity to users, give explanations to users before making changes to the digital activity, or present to users any options or default settings in relation to the digital activity
- restrictions on the SMS firm, eg from applying discriminatory terms, self-preferencing, restricting interoperability, restricting access to/use of the digital activity, or using data unfairly
The conduct requirements of each SMS firm must be kept under review by the DMU and can be amended or removed over time.
The DMU can investigate SMS firms where it suspects they have breached a conduct requirement. It can impose interim enforcement orders to prevent further damage in the meantime, can accept commitments from the firm to end the breach, and can ultimately issue enforcement orders requiring the firm to comply and impose heavy fines (see point 5 below). As a backstop measure, to resolve breaches of conduct requirements relating to payment terms, the DMU will be able to use a specific mechanism to choose between final offers made by the parties.
Importantly, SMS firms suspected of a breach will be able to argue that their conduct is exempt due to the resulting benefits for users.
The exemption will apply where, overall, the conduct results in benefits for users (eg lower prices, higher quality or greater innovation) that outweigh the negative consequences for competition. It must not be possible to realise the benefits without the conduct, and the conduct must be proportionate to the benefits and must not eliminate or prevent effective competition.
This may sound familiar – it is very similar to the exemption from the prohibition on anti-competitive agreements under the UK competition regime. Notoriously, however, businesses face a high burden in demonstrating that the various limbs of the competition exemption are met. SMS firms may well have the same difficulties.
3. DMU can make pro-competition interventions including structural separation
The CMA already has a general markets inquiries regime that allows it to study or investigate markets in the UK and intervene in markets that are not working well for consumers (a regime which is not without controversy). The new digital markets rules will give the DMU additional powers to design targeted pro-competition interventions (PCIs) in relation to designated SMS firms to tackle the root causes of barriers to competition in digital markets. This goes further than the EU DMA.
The government has mirrored many aspects of the CMA’s existing market investigations regime when crafting the DMU’s PCI powers:
- The DMU can make a PCI to remedy an adverse effect on competition – this adverse effect may or may not be related to an SMS firm’s conduct.
- PCIs can order an SMS firm to behave in a certain way (eg to ensure interoperability with a rival), restrict its conduct (eg prohibiting the combination of user data collected from different activities) or even require it to divest parts of its business.
- PCIs can also take the form of recommendations to another party, eg government, or another regulator.
- The DMU can trial and tweak PCIs to ensure they are effective.
- It can accept legally binding commitments from an SMS firm to address a potential concern.
Final decisions on PCI investigations must be made within nine months, with any orders or recommendations being finalised no later than four months after the decision.
It remains to be seen how the DMU will decide which interventions to pursue and implement. The government notes that recent CMA investigations and market studies have made suggestions for where the DMU’s new tools could be used. These indicators – including on data openness, consumer control over data use (such as personalised advertising), choice screens and interoperability – could well serve as a starting point.
4. SMS firms must report all M&A above certain thresholds
The Bill imposes mandatory reporting obligations on SMS firms that go beyond the general (voluntary) UK merger control regime. SMS firms must report to the DMU all transactions that meet one of two thresholds:
Threshold 1: acquisition
- SMS firm (or a member of its group) acquires ≥ 15% shares or voting rights* in a company carrying on activities in the UK or supplying goods or services in the UK; and
- The value of the consideration (for this acquisition plus other acquisitions by the SMS firm of shares/voting rights in the company) ≥ GBP25 million
* Also satisfied where % of shares/voting rights increases to > 25% or > 50%
Threshold 2: joint ventures with third parties
- Joint venture will carry on activities in the UK or supply goods or services in the UK; and
- SMS firm (or a member of its group) holds ≥ 15% of the shares/voting rights in the joint venture; and
- Total value of capital and assets contributed by the SMS firm (or a member of its group) to the joint venture on formation and all other consideration provided by it in relation to formation ≥ GBP25m
Once submitted, the DMU has five working days to confirm whether it accepts the report. Crucially, completion of the transaction cannot take place until a five working day waiting period has expired. This period starts on the day after the DMU gives notice that it accepts the report.
If a reported deal meets the thresholds for review under the existing merger control regime, the CMA can take forward an investigation under the merger control regime and may impose a “hold separate” order. The government estimates that the obligation could result in 35 reports a year, and lead to up to eight additional phase 1 investigations a year.
5. DMU will have robust powers to investigate and impose fines for non-compliance
The government notes that the DMU will first seek to resolve any concerns through “informal and cooperative engagement with firms”. However, the DMU also has a full suite of powers to enable it to enforce the regime.
It can request information, including information located outside the UK. It can also interview individuals, carry out dawn raids (at business and domestic premises), require expert reports and in some cases require SMS firms to demonstrate or test a system or process.
The DMU can impose fines on SMS firms of up to 10% of global turnover for breaching conduct requirements, enforcement orders, PCI orders or the merger reporting obligation. This mirrors the CMA’s fining powers under the competition and (reformed) consumer protection regimes. Daily penalties may also be imposed in some circumstances.
Failing to comply with DMU investigations, eg not responding to information requests, or providing false or misleading information, attracts fines of 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 offence.
6. Appeals against DMU decisions will be on judicial review grounds
Tech companies lobbied the government extensively during the consultation stages for appeals against DMU decisions to be on a “merits” basis rather than on judicial review grounds (which only allow appeals on the basis of errors of law or procedural fairness). However, the government has remained resolute on this point, and the Bill provides that appeals should be on judicial review grounds only.
This is a blow for prospective SMS firms, who may find it difficult to successfully challenge designation decisions, decisions related to conduct requirements/PCI orders and non-compliance findings on this narrow basis.
What next?
The Bill will now make its way through the parliamentary approvals process.
In the meantime, the DMU will continue to gear up for its new powers. The CMA will also carry on using its powers under the competition and mergers regimes to keep a check on conduct and transactions in the digital sector.
Players in UK digital markets – particularly those most likely to be designated as having SMS – will consider the Bill’s provisions carefully. They will not only need to compare their potential obligations with those they may face under the EU DMA, but must also keep a close watch on other emerging digital regimes across the globe.
We will keep you updated as matters develop. Please be in touch if you would like to discuss these any of these issues.
