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UK consults on new competition regime for digital markets

UK consults on new competition regime for digital markets

Overview

Alongside a raft of other recent proposals, the UK Government is consulting on plans to introduce tougher competition oversight over major players in the digital technology sector. 

These are intended to promote a more coordinated and interventionist approach by regulators, notably the new Digital Markets Unit within the Competition and Markets Authority – but also other regulators whose remit covers this area, such as the Information Commissioner.

How did we get here?

A thriving digital economy is at the heart of the UK Government's vision for long-term economic growth, and there is broad consensus that digital technologies are positively transforming the way in which we work, access information and keep in touch. On the Government's calculations, the digital sector contributed £151bn in output and accounted for 1.6 million jobs in 2019, and over 34,000 new tech businesses were created in 2018 alone. The importance of effective and well-functioning digital markets has become even more acute since the Covid-19 pandemic.

Digital markets have been a key focus for governments and antitrust authorities across the globe in recent years. Here in the UK, the Competition & Markets Authority (CMA) has a busy portfolio of enforcement cases in the digital sphere, including (i) abuse of dominance investigations into Apple's T&Cs governing app developers' access to its App Store, and into Google’s "Privacy Sandbox" proposals to remove third party cookies and other functionalities from its Chrome browser (view our briefing here), and (ii) consumer law enforcement regarding fake and misleading online reviews.

The Furman Report and its aftermath

The CMA launched, on the recommendation of the Furman Report,  a market study into online platforms and digital advertising in the UK back in 2019. The study concluded that competition is not working well, leading to substantial harm for consumers and society as a whole.

The CMA and UK Government are concerned that the alleged market dominance of a few key tech companies is leading to fewer opportunities for challenger firms, lower innovation, higher prices and less choice and control for consumers.

With that in mind the UK Government has (on 20th July 2021) launched a consultation in the latest step towards the establishment of a competition regime for digital markets in the UK. The consultation sets out reforms aimed at driving greater dynamism in the UK's tech sector, empowering consumers and driving growth across the economy. 

The key proposals include:

Digital Markets Unit

The UK Digital Markets Unit (DMU), already set up in shadow form within the CMA, will be responsible for designating firms with 'strategic market status' (SMS), overseeing a mandatory code of conduct for those firms and implementing pro-competitive interventions. In the Government's view the statutory duty of the DMU should be as lean as possible - to promote competition (including promoting competitive outcomes) in digital markets for the benefit of consumers. The DMU should also support innovation when promoting competition, but the Government does not consider it necessary to include innovation in the DMU's core duties. Likewise, Government does not propose to include specific reference to citizens, given this could reduce clarity around its core duty to promote competition.

What are the key issues?

Views are sought on the appropriate arrangements for ensuring regulatory co-ordination and information-sharing in digital markets, including through:

  • New information-sharing gateways between regulators;

  • The possibility of a duty for the DMU to consult or cooperate with other regulators (e.g. Ofcom, the ICO and the FCA), similar to those already in place between regulators in financial services; and

  • The establishment of a limited set of joint powers between the DMU, as lead regulator, and other regulators with particular sectoral expertise.

Cooperation between competition authorities and other regulators has already been seen this year - for example, the CMA and the ICO have co-operated, both in relation to Google's proposals for its new Privacy Sandbox, and also with the publication by the CMA and the ICO of a collaborative statement setting out how the two regulators will work together on those tech issues which result in both potential distortions to the market, and potential infringement of data protection laws and privacy rights.

The Government is also seeking views on the appropriate scope of broad market monitoring powers for the DMU, for example to identify competition concerns in digital markets outside of the scope of the SMS regime.

"Strategic Market Status" (SMS)

The Government proposes to focus the new regime on firms that the DMU designates as having '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, and that this power provides it with a 'strategic position'. This will be based on a market power assessment, taking account of a range of quantitative and qualitative factors. The DMU should focus its assessment on whether a firm has SMS in respect of particular activities, rather than all of its activities – although this will not require a formal market definition analysis.

What activities are in scope?

The Government's preferred approach is to limit the scope of the regime to activities where digital technologies are a 'core component' of the products and services provided. This should bring activities which have a digital component but are essentially non-digital out of the scope of the regime, whilst also preserving the DMU's ability to respond to new digital business models where firms with SMS could emerge.

The DMU's decisions on SMS designation should be appealable to a court or tribunal.

Code of Conduct and Competitive Interventions

Enforceable Code of Conduct

The establishment of a new mandatory Code of Conduct will govern companies designated as having SMS. The Code will set out three overarching objectives, namely (i) fair trading (ii) open choices and (iii) trust and transparency vis-à-vis customers and competitors. The Code should, in the view of UK Government, help to change behaviour by anticipating and preventing practices that exploit consumers and business or exclude innovative competitors, examples of which are given in the textbox below.

Examples of practices the Code is designed to prevent

  • Entrenching and protecting market power – where a firm uses contractual terms or its wider ecosystem of products to unreasonably restrict the ability of others to compete.

  • Extending market power – where a firm uses its position in its designated activity to unfairly extend its market power into related activities.

  • Exploitative conduct – for example, where a firm uses unfair or unreasonable contract terms.

  • Unreasonably restricting customer choice – for example, where a firm uses default settings unreasonably or provides insufficient information to enable informed and open decision making by users.

Enforcement Powers

Robust investigation and enforcement powers will underpin the Code, including powers to (i) impose fines of up to 10% of global turnover for the most serious breaches and (ii) suspend, prohibit and ultimately unwind code-breaching behaviour by SMS firms (e.g. requiring changes to algorithms, T&Cs, and ordering SMS firms to take specific actions to comply with the code).

Pro-Competitive Interventions

Pro-competitive interventions (PCIs) will be required alongside the Code. Whilst the Code will seek to prevent harms from SMS by setting out the rules and principles to be adhered to in advance, PCIs will be aimed at enabling the DMU to tackle the root cause of a company's SMS (for example by facilitating compatibility between digital platforms, customer switching and ensuring consumers are given choice and control over the collection and use of their data). The CMA will also continue to use its existing investigatory powers to investigate potential harm to competition in digital markets.

Merger Control for SMS Transactions

The Government is considering whether the CMA should have specific powers to scrutinise and intervene in certain mergers involving SMS designated companies (and what substantive standard should be applied where a review takes place). Issues under consideration include:

  • Jurisdiction: Proposals for (i) mandatory merger review for the largest SMS transactions (with a possible fast-track review of deals that clearly do not raise concerns) (ii) an obligation for SMS parties to report all proposed acquisitions regardless of the market in which the target is active and (iii) amending the voluntary notification thresholds for SMS firms to capture low turnover mergers through a transaction value test and an accompanying UK nexus test.

  • Substantive assessment: Proposals to keep the current SLC ('substantial lessening of competition') test but changing the threshold at which the CMA can intervene in SMS mergers from the current Phase 2 threshold ('more likely than not') to the lower Phase 1 threshold of 'realistic prospect'. The Government considers that it is difficult for the CMA to prove the current 'more likely than not' threshold but has emphasised the importance of stakeholder input on this proposal.

Bigger picture and next steps

The Government has said that enforcement by the DMU of the proposed Code should, as well as protecting against abuses of market power, also result in greater choice for consumers and control over their data, and protection from unfair practices. This is just one example of a number of measures which the Government is taking to seek to protect consumers, businesses and the wider economy, against a perceived imbalance of power concentrated in the hands of a small number of tech giants. Other measures include the proposed Online Safety Bill, which is designed to ensure that social media, other user generated content platforms, and search engines, take greater responsibility for moderating and dealing with illegal and harmful content that their users post on their sites. Neither is the UK alone in closing in on big tech companies: the EU has launched a number of anti-trust investigations into the likes of Facebook, Google and Amazon, and its proposed Digital Services Act package is aimed at overhauling the digital market and the way in which big tech businesses operate in the EU.

Next steps

The consultation is open until 1 October 2021. New powers for the DMU and the new regulatory regime will require legislation, and the Government has committed to putting it on a statutory footing as soon as parliamentary time allows. In the meantime the DMU has been established within the CMA (in a shadow, non-statutory form) to focus on operationalising and preparing for the new regime. The Government recently published Terms of Reference setting out the role of the non-statutory DMU. The CMA will also continue to use its existing powers, in the interim, to investigate suspected harm to competition in digital markets.

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