UK government consults on proposals for a new pro-competition regime for digital markets

On 20 July 2021 the government published a consultation on its proposals for a new pro-competition regime for digital markets.  The proposals are based on the recommendations set out in the Furman Review, the CMA’s final report of its market study into online platforms and advertising and the Digital Markets Taskforce report to government published in December 2020.  The Furman review concluded that the existing competition tools are not designed to address the unique challenges of fast-moving digital markets issues associated with the strategic market position of a small number of key digital firms.  Instead, the new pro-competition regime will aim to proactively shape the behaviour of digital firms with significant market power by making it clear how they are expected to behave. It should drive competition between digital firms and open up opportunities for innovative start-ups to compete with incumbents.

The key features of the new regime include:

• A new Digital Markets Unit (DMU) within the CMA that will be in charge of  implementing and enforcing the new regime;
• An enforceable code of conduct that governs the behaviour of firms designated with Strategic Market Status (SMS), setting out how they are expected to behave in relation to the digital activity providing them with a strategic position;
• Pro-competitive interventions (PCIs) to address the sources of substantial and entrenched market power in digital markets and create opportunities for greater competition and innovation;
• An SMS-specific merger control regime with a new reporting requirement for SMS firms, a broader and clearer jurisdiction for the CMA to review SMS mergers through the introduction of a transaction value threshold and an accompanying UK nexus test, and a mandatory review for the largest transactions with SMS.

Within this framework the consultation seeks views on a wide range of options and comments are invited by 1 October 2021.

The Digital Markets Unit (DMU)

The DMU was set up in a non-statutory form within the CMA in April 2021 in order to start preparing  for the new pro-competition regime for digital markets, including building teams, preparing draft guidance and supporting and advising government on establishing the new regime.

The statutory DMU will be responsible for designating firms with SMS, overseeing a mandatory code of conduct for SMS firms and implementing pro-competitive interventions. In order to ensure that SMS firms comply with the regime the DMU will be given formal powers of enforcement:

• Financial penalties and other enforcement mechanisms: it is proposed that the DMU will have the power to impose penalties of up to 10% of the relevant undertakings’ worldwide turnover in the previous year, for breaches of the code of conduct and for failure to comply with pro-competitive intervention orders.  It will also be able to apply to the courts for an order requiring SMS firms to comply with a code order or a PCI. The government is considering whether enabling the DMU to hold senior management liable for compliance with the regime would further incentivise compliance.  The legislation will also provide for the DMU to investigate and enforce against conduct that takes place outside the UK but where there is a sufficient connection to the UK.
• Monitoring and information gathering: the government proposes to give the DMU information gathering powers similar to those of the CMA and Ofcom. This will include powers to require the production of information (data, internal documents, written explanations), powers to interview individuals, dawn raid powers and the ability to compel evidence collection (requiring firms to collect, create and store information). The DMU will be able to impose penalties for non-compliance with requests for information, of up to 1% of an undertaking’s worldwide turnover in the preceding financial year and up to 5% of average daily worldwide turnover for continuing failure to comply.

Initial focus will be on public enforcement led by the DMU.  Individuals will have the right to bring private enforcement actions, but at this stage the government does not intend to prioritise private follow-on damages claims under the regime.

The DMU’s decisions should be judicially reviewable on judicial review principles before the Competition Appeal Tribunal.

Strategic Market Status

In order to make sure that the new regime will be proportionate and targeted towards firms and activities where the risk of harm is the greatest, the government proposes that the new regime will focus on firms designated by the DMU with Strategic Market Status (SMS).

To designate a firm with SMS the DMU will be required to test and conclude that a firm has substantial and entrenched market power in at least one activity, providing it with a strategic market position. It will use a range of qualitative and quantitative evidence in its designation process.

The government proposes that the assessment of whether a firm has substantial and entrenched market power should follow the CMA’s approach in its market studies and market investigations regimes.  For the relevant digital activity, the DMU should assess the quality and range of alternatives available to users of the products and services, as well as the possibilities for entry and expansion.

In making its assessment of a firm’s strategic market position, the DMU should consider whether the effects of a firm’s market power in the relevant activity are likely to be particularly widespread and significant taking into account, in the round, evidence in relation to the following criteria: the firm’s size and scale in relation to an activity, whether it is an important access point to consumers, whether the activity is a gateway for a range of other businesses and activities and whether the firm can use the activity to determine the ‘rules of the game’ for those users of the firm’s own ecosystem and also set practice for those businesses in the wider market.

The government recognises the importance for the strategic market position assessment to be sufficiently predictable and proposes to include in the legislation a definition of ‘strategic position’ and the criteria to be taken into account by the DMU.

The SMS designation process will take time and the DMU will need to balance the robustness of the process with its efficiency and speed. The designation process will include a public consultation process, with the opportunity for SMS firms and third parties to provide input before a final decision is made.  SMS status will last for a period of 5 years before being reviewed, but government proposes that an SMS firm will be able to make representations to the DMU if there has been a material change in circumstances relating to its designated activity. The DMU’s decisions on designation should be appealable to a court or tribunal.

An enforceable code of conduct

The code of conduct will manage the effects of market power, by setting out how firms with SMS are expected to behave, in order to influence their behaviour in advance and prevent negative outcomes before they occur.

The government proposes that the code of conduct will consist of high-level objectives and principles that specify the behaviour expected of SMS firms.

• Code objectives: the objectives will set out the overarching aims and scope of the code and outline the types of pro-competitive behaviour it seeks to promote:
  • Fair trading – to ensure that users are treated fairly and are able to trade on reasonable commercial terms with firms with SMS;
  • Open choices – to ensure users face no barriers to choosing freely and easily between services provided by firms with SMS and other firms;
  • Trust and transparency – to ensure users have clear and relevant information to understand what services firms with SMS are providing and to make informed decisions about how they interact with the firm.
• Code principles: legally binding principles will be derived from the objectives and will define the behaviour expected of SMS firms in order to comply with the code.
• Code guidance: the DMU will be able to develop guidance to specific SMS firms, setting out its views on how the code’s legal requirements apply to that firm.  The guidance will assist with compliance but will not be legally binding and cannot require the firm to change its behaviour.
• Code orders: the government proposes to give the DMU the power to issue code orders and interim code orders to address breaches of the code.  Code orders would specify behaviour changes required of SMS firms following an investigation and a finding of a code breach.  Interim code orders would allow the DMU to intervene more quickly, to address potential code breaches that may cause immediate harm, but would be restricted to pausing or reversing behaviour only.

Pro-competitive interventions

PCIs will exist alongside the code of conduct.  Whereas the enforceable code of conduct 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 substantial and entrenched market power. PCIs will have the potential to positively shift the structure of digital markets and drive greater competition.

• Range of PCI remedies: the government proposes that the DMU should have a broad level of discretion in designing and implementing PCIs.  This would ensure that it can implement the most effective remedy to address the harm identified, provided it is proportionate and practicable.  The DMU will have to provide general guidance on the types of PCIs it may consider and the circumstance in which they would be used.  There will need to be a fair and robust process in place to ensure the remedies are evidence-based, targeted, proportionate and subject to appropriate legal safeguards.
• Legal test: the government proposes that the DMU must prove there exists an adverse effect on competition (AEC) in order to implement a PCI.  This is in line with the legal test in the CMA’s market investigation regime.
• Flexibility: the DMU will need to ensure that PCIs remain effective in addressing persistent and evolving competition problems within SMS firms.  PCIs will have to be agile and flexible to keep pace with fast-moving  and dynamic digital markets. The DMU should therefore have the power to: monitor, review and amend PCI remedies, strengthen remedies as well as de-escalate or terminate them, trial remedies before implementing a final PCI order, accept voluntary and enforceable undertakings from SMS firms during an investigation and use powers of direction to enforce PCIs and direct SMS firms to take or refrain from specified actions to ensure compliance with PCIs.
• Prompt intervention: the DMU will need to react promptly to competition concerns in digital markets as market power can quickly become further entrenched.  Detailed CMA market investigations are completed within 18 months.  The DMU will have developed expertise during the SMS designation process and oversight of the code of conduct, and a PCI investigation into a single firm should be achievable in a shorter time frame.  The government is seeking views on the appropriate duration of the investigation period.

SMS merger regime

The government is proposing a bespoke merger control regime for SMS firms, operated by the CMA, in order to provide the CMA with greater scope to review mergers by SMS firms if necessary to protect consumers from potential harm.  The proposed new regime will consist of:

• An ‘advance notice’ reporting requirement on firms with SMS, requiring them to send a report to the CMA before the completion of a transaction, in order to give the CMA a short time to determine whether to investigate the transaction before it completes;
• A broader and clearer jurisdiction for the CMA to review SMS mergers, through the introduction of:
  • A transaction value threshold; and
  • An accompanying UK nexus test
• A mandatory merger review for a subset of the largest transactions by firms with SMS;
• Changing the threshold at which the CMA can intervene in a merger, by amending the probability threshold used in the phase 2 investigation.

The consultation is seeking views on how a transaction value threshold with an accompanying UK nexus test can be designed so that only larger and more competitively significant transactions are subject to review. The government considers that a transaction value threshold in the region of £100 million or £200 million would seem to strike a reasonable balance between capturing important transactions and filtering out those less likely to raise competition concerns.

In respect of the introduction of a mandatory review test for the largest transactions the government recognises the additional burden and resources this may impose on businesses.  As an alternative it is also seeking views on an option under which the SMS merger regime would continue to operate as a voluntary regime, but with a power for the CMA to call in for review any mergers which meet the jurisdictional tests.

Regarding changes to the substantive test, the government is minded to lower the phase 2 threshold for intervention in mergers involving SMS firms, from whether a substantial lessening of competition is ‘more likely than not’ to occur, to whether there is a  ‘realistic prospect’ of a substantial lessening of competition as a result of the merger (similar to the standard of proof required at phase 1 of the existing merger regime).