UK Government publishes its proposals for a new pro-competition regime for digital markets

On 6 May 2022 the UK government published its response to the July 2021 consultation on a new pro-competition regime for digital markets (see our blog post here), setting out its proposals for the design of a new regime to proactively shape the behaviour of the most powerful technology firms with strategic market status.

The government's response complements the proposals for reform of the competition and consumer policies (see our blog post here), which include a number of proposals that also aim to improve competition and protect consumers in digital markets more widely.

Key features of the new regime will include:

• A new Digital Markets Unit (DMU), in charge of implementing and enforcing the new regime, with powers of investigation and enforcement powers similar to those of the CMA under its Competition Act 1998 (CA98) powers;
• The regime will apply to firms with strategic market status (SMS), which have a substantial and entrenched market power in a digital activity, providing the firm with a strategic position;
• Firms with SMS will be subject to specific conduct requirements, tailored to the exact circumstances of each firm;
• Pro-competitive interventions (PCIs) will exist alongside conduct requirements and will enable the DMU to implement measures that address the root causes of a firm's entrenched market power;
• On merger control, a mandatory reporting requirement to the CMA will be introduced for the most significant transactions by SMS firms, in order to allow the CMA to carry out an initial assessment to determine whether or not the transaction warrants further investigation prior to completion.

More intrusive measures such as lowering the phase 2 threshold for intervention in mergers involving SMS firms, have been abandoned in light of feedback from stakeholders that these would be disproportionally burdensome and may unintentionally impact UK investment.  A new acquirer-focused jurisdictional threshold will instead be introduced under the general UK merger control regime, in order to capture certain vertical and conglomerate mergers, in particular so-called ‘killer acquisitions’.

Plans to publish draft legislation were announced in the Queen's Speech today and the government intends to introduce legislation as soon as Parliamentary time allows.

We have set out below a summary of the government's response.

The Digital Markets Unit

The Digital Markets Unit (DMU) will be the regulator responsible for implementing and enforcing the new pro-competition regime, established within the CMA in order to allow it to benefit from the CMA's competition expertise.  The government will offer strategic direction to the DMU as part of its wider steer to the CMA, in order to ensure that the DMU is focussed on delivering benefits for consumers and the economy.

The DMU will work closely with other key regulators and will need to consult with the FCA, Ofcom, the Information Commissioner's Office, the Bank of England and the Prudential Regulation Authorithy where proportionate and relevant and notify them when opening a Strategic Market Status (SMS) designation assessment.

The DMU was set up in a non-statutory form within the CMA in April 2021, in order to start preparing for the new regime, including building teams, preparing draft guidance and supporting and advising government on establishing the new regime.  In addition, members of the DMU team have been assisting the CMA with its ongoing investigations in the digital sector under its Competition Act 1998 (CA98) powers.

Strategic Market Status

In order to ensure that the new regime will be proportionate and targeted towards firms and activities where the harm is the greatest, the new regime will focus on firms designated with strategic market status (SMS).

SMS will be applied only to a small number of firms which meet certain criteria. These will include having substantial and entrenched market power in at least one 'activity', providing the firm with a strategic market position.  The legislation will contain a definition of the activities in scope, in a way that is clear and easy to apply.

The criteria to be used in order to assess whether a firm has a strategic position will be set out clearly in the legislation and the DMU will also be required to publish guidance on these concepts and how they will be applied in practice.

A UK nexus requirement will ensure the DMU focuses on the impact on competition in the UK.  The government will also introduce a minimum revenue threshold to make it clear that smaller firms will not be caught under the regime.

The DMU will have discretion to decide how it prioritises the cases it takes forward, in line with its statutory objectives and duties, but it will be required to publish guidance on the way it will prioritise its assessments, in order to provide clarity to stakeholders.

The DMU will be subject to a statutory deadline of 9 months to complete SMS designation assessments, extendable by a further 3 months in exceptional circumstances.

Conduct requirements

Once a firm is designated with SMS the DMU will set out how it is expected to behave in respect of the activities for which it is designated, through conduct requirements.  The conduct requirements will be subject to the overarching objectives of fair trading, open choices and trust and transparency, to be defined in the legislation.

The categories of conduct requirements will be set out in the legislation and the DMU will have the power to develop specific conduct requirements corresponding to the exact circumstances for each firm.  Examples of categories of potential conduct requirements include:

• Requiring firms with SMS not to apply discriminatory terms, conditions or policies to certain users, compared to equivalent transactions;
• Preventing bundling or tying the provision of its products or services by making access conditional on the use of the relevant designated activity;
• Providing clear, relevant, accurate and accessible information to users;
• A wider, cross-cutting category of conduct that prevents a firm with SMS from leveraging other parts of the business to further strengthen its power in a designated activity.

There will be an exemption for conduct that results in net consumer benefits but would otherwise result in a breach of conduct requirements.  Firms with SMS will need to put forward the necessary evidence and the DMU will need to be satisfied that the conduct is indispensable in order to achieve the benefits and that the benefits outweigh the potential harm.

The DMU will be required to publish guidance setting out how the conduct requirements will operate in practice for each SMS firm.  There is no statutory deadline for the development of the conduct requirements, but the DMU will normally issue the conduct requirements with its final SMS designation decision.

The CMA and Ofcom have now also published joint advice, first provided to the government in November last year, on how a code of conduct would apply to platforms and content providers, requiring digital platforms with 'significant bargaining power' to agree fair and reasonable terms for the content they use on their platforms.  It would include a requirement for platforms to be more transparent about how their algorithms work, giving publishers appropriate control over presentation and branding of their content and driving improved practices in the sharing of user data between publishers and platforms hosting content.

Pro-competitive interventions

Pro-competitive interventions (PCIs) will exist alongside conduct requirements.  Whereas the conduct requirements will aim to prevent harm that may result from the strategic market position of SMS firms by setting out the rules of the game in advance, PCIs will enable the DMU to implement measures that address the root causes of a firm's entrenched market power.  The legal threshold for imposing PCIs will be whether there exists an adverse effect on competition (AEC), in line with the legal test under the CMA's market investigation regime.

PCIs will not be limited to a specific list of remedies set out in the legislation, but will allow the DMU a broad level of discretion in order to ensure that it can implement the most effective remedy to address the harm identified.

The DMU's powers will include ownership separation remedies where other remedies are insufficient.  The DMU will also be able to implement a PCI anywhere across the SMS firm's ecosystem, as long as it relates directly to a competition concern in a designated activity.

PCI investigations will be subject to a statutory deadline of 9 months, with a possible 3 month extension in exceptional circumstances.

Regulatory framework

The DMU's information gathering powers will reflect the fact that large amounts of information can be expected to be stored online and will not be held at the firm's premises.  Subject to appropriate safeguards, the DMU will be able to interrogate the impact of algorithms on competition and require firms to carry out field trials in order to evaluate the impact of new innovations or processes.  It will also be able to request compliance reports from SMS firms to monitor compliance with the regime.

The legislation will provide for the DMU to have access to information that is stored outside the UK, and the new regime will apply to conduct that takes place outside the UK provided there is a sufficient UK nexus.

In line with the CMA's powers under the CA98 regime, the DMU will be able to impose fines of up to 10% of a firm's global turnover for the most serious offences, with a further 5% of daily worldwide turnover for continued breaches.  In addition, fines of up to 1% of global turnover can be imposed for information offences (failure to comply with information requests or providing misleading information).

Directors of firms in breach of the new regime may face director disqualification and the DMU will also have the power to impose penalties on named senior managers who fail to ensure that their company complies with requests for information.

Decisions of the DMU will be subject to review on judicial review principles.

SMS merger reform

Original proposals for a bespoke merger control regime for SMS firms have been considerably watered down.  Proposals for a new transaction value threshold, a mandatory review for a subset of the largest transactions and changes to the intervention threshold for phase 2 investigations have been abandoned.

Instead, the government is proposing to introduce a new acquirer-focused jurisdictional threshold under the general UK merger control regime, in order to capture certain vertical and conglomerate mergers, in particular so-called ‘killer acquisitions’ that risk the development of new products or services.  Under the new threshold the CMA will have jurisdiction where the acquirer has both an existing share of supply of goods or services of 33% in the UK or a substantial part of it, and a UK turnover of £350 million. Greater clarity will also be achieved through the addition of a UK nexus criterion to ensure that only mergers with an appropriate link to the UK will be captured.

A mandatory reporting requirement to the CMA prior to completion will be introduced for the most significant transactions by SMS firms, as follows:

• The SMS firm acquires more than 15% equity or voting share after the transaction;
• The value of the SMS firm's holding is over £25 million; and
• The transaction meets a UK nexus test.

The CMA will then undertake an initial assessment of the merger in order to determine whether or not the transaction warrants further investigation before it can be completed.

At this stage the proposals remain relatively high level and much of the detail is still to be worked out in the draft legislation and in guidance to be published by the DMU in due course.