The Digital Markets, Competition and Consumers Bill – Part One – Changes to regulation of digital markets

On 25 April the UK Government published its long-awaited Digital Markets, Competition and Consumers Bill, which introduces significant changes to the regulation of digital markets as well as to competition and consumer protection law. In this, our first of four blog posts on the Bill, we look at the new regulatory regime for digital markets.

What is 'Strategic Market Status' and who will have it?

The Bill empowers the CMA to designate a business as having 'Strategic Market Status' ("SMS"). The conditions for being designated as having SMS can be summarised as follows:

1. the business must carry on digital activity – i.e. it must provide a service over the internet, provide "digital content" (data produced and supplied in digital form), or must carry on any other activity for the purpose of providing one of those services;
2. that digital activity must be linked to the UK – i.e. the business must either carry on business in the UK or have a significant number of users in the UK, or the activity must be likely to have an immediate, substantial and foreseeable effect on trade in the UK;
3. the business must have "substantial and entrenched market power" – the Bill does not define this requiring the CMA to take into account how the business is likely to evolve in the five years following the assessment, but the CMA has issued guidance on how it will assess market power;
4. the business must have a position of strategic significance – either it has achieved a position of significant size or scale in respect of a digital activity, or a significant number of other undertakings use its services, or its digital activity would allow it to extend its market power to other activities, or it has the ability to influence how other businesses conduct themselves; and
5. the business must have a total global group turnover of more than £25 billion or a total UK group turnover of more than £1 billion.

The Bill sets out detailed procedures the CMA must follow before making an SMS designation. Cumulatively, the conditions set out above will mean the status is targeted at the so-called "tech giants", of the sort that have recently attracted a lot of CMA attention (e.g. see our blog on the recent Microsoft / Activision merger ruling). The CMA has indicated that it will prioritise using these powers in areas in which market studies have identified issues, such as data openness and personalised advertising.

What will businesses with strategic market status have to do?

The CMA's powers under the Bill will be exercised by its recently-established Digital Markets Unit ("DMU"). The CMA will be able to impose conduct requirements on SMS-designated businesses to increase fairness, choice, trust, and transparency within the relevant digital markets. These conduct requirements may include specific obligations to:

• trade on fair and reasonable terms;
• put in place complaints handling processes;
• provide clear and accessible information to users or give explanations and notice to customers before changing the services provided; or
• make it easy for customers to understand and change away from default settings.

Conduct requirements can also impose specific prohibitions on:

• applying discriminatory terms and conditions;
• using the business's position in the relevant digital activity to advantage itself in other products or markets;
• requiring users of one product to use one or more other products;
• restricting interoperability with products offered by other businesses;
• restricting how customers use their services or those offered by other businesses; and
• using customer data unfairly.

The above list will ring a bell with those familiar with the concept of abuse of dominance in competition law, as many of the practices (e.g. discrimination, self-preferencing and tying / bundling) feature regularly in abuse of dominance cases, including cases against the tech businesses likely to be SMS-designated. However, abuse cases are difficult, time-consuming and expensive for the CMA and other regulators to enforce, including because they are usually subject to extensive (and sometimes successful) appeals. The Bill will therefore allow the CMA to prohibit certain conduct in advance – or ex ante in the competition jargon – rather than having to establish and punish an abuse of dominance after the event (ex post).

An SMS-designated business will be required to name a "nominated officer" with responsibility for monitoring compliance and cooperating with the CMA.

The CMA will also have the power to carry out 'pro-competitive interventions' to remedy any adverse effects on competition caused by the practices of SMS firms. This appears to be similar to the CMA's existing market investigation powers – the CMA will need to establish an adverse effect on competition within the market before it can then impose a 'pro-competition order', which is effectively the same as a final order following a market investigation reference under the Enterprise Act. The remedies available would therefore reflect those which can be imposed in response to market investigations, although the time period for investigation would be shorter at only nine months and there would be no requirement for an independent decision-making panel to be appointed.

SMS-designated businesses will be required to notify the CMA of certain mergers and acquisitions in advance – we will cover this in more detail in Part 2 of our blog series on the Bill.

How will this be enforced?

The CMA will be able to impose an enforcement order requiring an SMS business to take specified actions where the CMA finds that it has breached any conduct requirements imposed on it. Failure to comply either with the original conduct requirements or with the requirements imposed in an enforcement order comply with such an order will attract heavy fines of up to 10% of the business's global group turnover (i.e. the same maximum fine as a competition law breach). However, the CMA will not be able to impose a penalty, or make an enforcement order, where the breach is covered by the "countervailing benefits exemption" – i.e. where the conduct benefits customers in a way that outweighs any harm from the breach and is indispensable to achieving that (similar to the section 9 exemption in the Competition Act 1998). Notably, that exemption is not mirrored in the EU equivalent of the Bill, the Digital Markets Act ("DMA"). The CMA can also accept commitments in lieu of making an enforcement order.

The Bill will also give the CMA powers to investigate compliance with these elements of the legislation through carrying out "dawn raids" on SMS-designated businesses, conducting interviews and requiring the provision of information (with SMS businesses having to identify a senior manager within the business who will be personally liable for compliance with information requirements). It will also create a series of criminal offences for failing to comply with investigations. Directors of designated businesses will also be liable to disqualification if the business fails to comply with conduct requirements or pro-competition interventions.

Interestingly, a failure to comply with conduct requirements, commitments or pro-competition orders is also enforceable by any person "who may be affected by a breach", who can ask the court to order the SMS-designated business to do something or stop doing something (an "injunction" in England and Wales or "interdict" in Scotland) or seek damages for any loss suffered as a result of non-compliance. Those actions will be capable of being brought in the High Court or the Court of Session, or alternatively in the Competition Appeal Tribunal ("CAT"), either as a "standalone" action or, if the CMA has already made a finding of non-compliance, as a "follow on" action in which the CMA's finding will be binding on the court and the CAT.

Conclusion

The Bill brings clarity on the Government's intended reforms following months of speculation. While amendments are likely as it passes through Parliament, we now have a clearer idea of the regulatory regime intended for "big tech". The Bill is expected to become law by spring of 2024, and is part of a broader trend in the UK, EU and United States to intervene more aggressively in the digital economy.

For more information on the competition law aspects of the Bill please parts two and three in this series: changes to the UK merger control regime and investigating and enforcing competition law breaches. For more information on the consumer protection aspects of the Bill please see part four: the Impact on UK Consumer Protection Law.