UK confirms its new Digital Markets Competition regime

On 6 May 2022, the UK Government confirmed its overall approach to the new competition regime for digital markets in the UK. In terms of next steps, we are now awaiting draft legislation, which will be known as the Digital Markets, Competition and Consumer Bill. Separately, the Government has also published wider competition and consumer policy reforms, please see our related updates here and here.

This article briefly summarises the key elements of the UK Digital’s Markets Competition Regime (Digital Markets Regime) and provides a comparative table against the EU’s recently adopted Digital Markets Act.

Background

The Digital Markets Regime will apply to digital companies designated as having ‘strategic market status’ (SMS) and will be enforced by the Digital Markets Unit (DMU), which is already operational within the Competition and Markets Authority (CMA). Although many aspects of the Digital Markets Regime have now been confirmed, certain elements are still to be determined and will either be set out in the draft legislation and/or guidance to be issued by the DMU/CMA.

Digital Markets Unit (DMU)

The DMU, already operational in ‘shadow’ form, will have a core objective to promote competition in digital markets within and outside the UK for the benefit of consumers. It will have the responsibility for designating firms with SMS, in addition to implementing and enforcing the Digital Markets Regime.

Strategic Market Status (SMS)

For a firm to be designated with SMS it will be required to meet: a UK nexus test (which the DMU will establish); minimum revenue threshold (which will be set out in legislation); and must have:

The DMU will be given discretion to decide which designations to take forward first, in line with its statutory objective. SMS designation could be prioritised based on the firm’s revenue, the characteristics of their digital activity, where there are likely to be significant network effects, economies of scale and scope, and/or if there are high fixed costs to entering that digital market. The DMU will however be required to publish guidance on the way it will prioritise its assessments.

There will be a statutory deadline of 9 months to complete a designation assessment, extendable by 3 months in exceptional circumstances.

The three key pillars of the Digital Markets Regime

There are three key pillars of the Digital Markets Regime to which SMS firms will become subject:

a. an enforceable and mandatory Code of Conduct (Code);

b. Pro-competitive Interventions (PCIs) implemented by the DMU; and

c. a new SMS merger regime.

a. Code of Conduct

Core Objectives

Compliance with a tailored Code will be mandatory for SMS firms and is based on three high-level core objectives: (i) fair trading, (ii) open choices and (iii) trust and transparency. The final precise wording of the objectives will be set out in legislation.

Conduct requirements

SMS firms will be subject to tailored conduct requirements in designated activities. Categories of conduct requirements will be set out in legislation, subject to the core objectives. The DMU will develop specific requirements within these categories for each SMS firm and will be able to remove or amend conduct requirements in circumstances which will also be set out in legislation. The DMU will also be required to publish guidance on how each firm’s conduct requirements will operate in practice.

The specific requirements will be binding, and failure to comply with the Code could result in enforcement action. It is expected that the tailored conduct requirements will be developed in parallel to the SMS designation assessment process, although there is no specified deadline.

SMS firms may also be exposed to a cross cutting category of conduct requirements which may be designed to prevent leveraging from other parts of the business to further entrench its power in a designated activity.

Exemption

The Government will introduce an exemption to ensure that conduct which provides net benefits to consumers will not breach conduct requirements. SMS firms will however be required to prove that the conduct is indispensable to achieving the benefits and that the benefits outweigh potential consumer harm.

Code Orders

The DMU will be able to issue both final enforcement orders and interim orders to address breaches of the Code, with a possible statutory deadline of six months for breach investigations. Various safeguards for interim orders will be put in place including clear thresholds in legislation and a requirement that the CMA must have formally opened an investigation, for which there must be reasonable grounds to suspect that conduct requirements are being breached. The scope of interim orders will also be restricted to pausing or reversing behaviour only.

b. Pro-competition Interventions (PCIs)

Where an adverse effect of competition can be demonstrated, the DMU will be able to implement PCIs anywhere within an SMS firm that relates to a competition concern in a designated activity. PCIs will be designed to tackle the root cause of market power and will need to be proportionate, evidence-driven remedies to address the identified adverse effect on competition.

PCI investigations will have a 9-month statutory deadline, with an optional 3-month extension for exceptional circumstances. The DMU will have a broad discretion over which remedies to implement (there will be no constrained list of remedies set out in legislation) and will be granted the same powers as already available to the CMA following a market investigation (via Schedule 8 of the Enterprise Act (including separation remedies)). We can expect a flexible approach to imposing PCIs, such as accepting binding undertakings from firms, along with trialling and iterating new remedies.

The DMU will be required to publish general guidance on the types of PCIs it will consider implementing in different circumstances, how trials will be run and how interventions will be monitored and reviewed. The types of interventions could include data-related interventions, interoperability (such as between platforms) and common standards.

c. SMS merger regime

The Government has decided to scale back the original proposed mandatory reporting and review requirements for mergers by SMS firms - instead the regime will focus on SMS firms reporting their most significant transactions prior to completion. This is likely to be when, subject to legislative drafting:

• the SMS firm acquires over a 15% equity or voting share following the transaction;
• the value of the SMS firm’s holding is over £25m; and
• the transaction meets a UK nexus test.

To complement this, the Government has also published refinements to the merger control regime. There will be a new acquirer threshold to be clearly targeted towards acquisitions by larger businesses (which is not limited to SMS firms). The new threshold will apply where an acquirer has both:

a. an existing share of supply of goods or services of 33% in the UK or a substantial part of the UK (compared to the 25% threshold consulted on); and

b. a UK turnover of £350m (compared to the £100m UK turnover threshold consulted on).

Penalties

Financial penalties will likely follow failures to comply with the Code or PCI orders. The DMU will be empowered to impose fines up to a maximum 10% of a firm’s global turnover for the most serious offences, with further daily penalties of up to 5% of daily worldwide turnover for continued breaches. Fines of 1% of global turnover may be imposed for information offences, supported by further daily penalties of 5% of worldwide turnover for continued non-compliance.

To promote a culture of compliance there will be the option to impose civil penalties on named senior managers who fail to ensure the firm complies with requests for information, and director disqualification for regulatory breaches. Civil and criminal penalties will be available for anyone knowingly or recklessly providing false information to the DMU.

Appealing decisions of the DMU

Decisions of the DMU will be subject to appeal based on judicial review principles, which aligns with the approach taken in respect of decision by other regulators, such as Ofcom.

Comparison to the Digital Markets Act

In parallel to the UK Digital Markets Regime, the European Commission has now adopted the Digital Markets Act (DMA). The DMA introduces an ex-ante regulatory framework that will apply to designated ‘gatekeepers’ who provide core platform services.

We have prepared a high-level comparison below of the two regimes.

For more information, please contact Anthony Rosen or Amy Donlevey

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