The UK Competition and Markets Authority (“CMA”) has published advice to the UK Government on the design and implementation of a new regulatory regime for digital markets. The new regime, if implemented, will apply to certain digital businesses that are designated as having Strategic Market Status, or “SMS”. It will provide for ex ante regulation that governs the conduct of key aspects of SMS firms’ activities, including a mandatory merger filing regime for SMS firms. The new regime will be administered by a new Digital Markets Unit (“DMU”) that will sit within the CMA.

The CMA’s recommendations are released at a time when scrutiny of, and regulatory changes for, digital markets are common across a number of jurisdictions. This includes the EU where the Digital Services Act and Digital Markets Act are expected to be published before Christmas. This blog post highlights some key elements of the proposed new digital markets regime.

Background to the CMA’s recommendations

In March 2020, the UK Government commissioned the Digital Markets Taskforce (the “Taskforce”), led by the CMA, to make recommendations on the establishment of a regulatory framework for digital markets. The commissioning of the Taskforce followed a period of close scrutiny of digital markets in the UK, including the following:

• In March 2019, the report of the Digital Competition Expert Panel (“DCEP Report”), chaired by Jason Furman, was published. The DCEP Report made a number of recommendations for changes to the UK’s competition regime to respond to structural changes to the economy spurred by the growth of digital markets. Recommendations included the creation of a DMU that would: (a) establish a Code of Conduct applicable to those digital businesses designated as having SMS; (b) pursue data interoperability, mobility and open-standard systems to promote further innovation and consumer choice; and (c) enable secure access to non-personal and anonymised data in order to lower data-related barriers to entry and expansion.
• In March 2020, the UK Government accepted the recommendations made by the DCEP Report and instructed the Taskforce to “consider the practical application of the potential pro-competitive measures set out by the DCEP”.
• In parallel, in July 2020, the CMA completed and published the results of a market study into online platforms and digital advertising. The CMA recommended a number of measures to address competition concerns it had identified, including the creation of a DMU to enforce a Code of Conduct for certain designated digital players, and the introduction of data access and interoperability requirements.
• In November 2020, the UK Government set out its broad acceptance of the CMA’s four main recommendations following the online platforms and digital advertising market study, including the decision to form a DMU to be housed within the CMA.

Digital markets —a new ex ante regime

The final report of the Taskforce sets out detailed advice to the UK Government on the design, scope and administration of a new ex ante digital markets regulatory regime. The recommendations include:

1. Establishing a new DMU to become a hub of sector expertise. The DMU would be responsible for designating certain digital firms as having SMS, promoting competition and innovation, and proactively regulating digital markets “focused on preventing harm and shaping markets to deliver greater competition and innovation”.
2. Creating a new “pro-competition framework” applicable to SMS-designated firms. This regime would incorporate three primary elements: (a) a legally binding Code of Conduct to regulate the conduct of SMS firms; (b) proactive interventions targeted at SMS firms, including interventions relating to personal data mobility, interoperability and access to data in order to promote competition and innovation; and (c) SMS merger rules, which would require SMS firms to report all transactions to the CMA, and would impose mandatory and suspensory notification requirements for transactions that meet clearly defined thresholds.
3. Enforcing compliance with the Code of Conduct through a transparent enforcement process administered by the DMU, with financial penalties of up to 10% of worldwide turnover for breach of the Code.
4. Strengthening competition and consumer protection laws and processes to “ensure they are better adapted for the digital age”. In particular, the CMA considers that enhancements of the markets and consumer protection regimes (focused on, for example, data mobility and interoperability, online reviews and facilitating consumer choice) would appropriately supplement its digital markets recommendations and would help to deliver better consumer outcomes.

Designation of Firms with “SMS”

The CMA’s proposals set out, in detail, a framework for how the designation of firms with “SMS” would occur. In particular, the CMA suggests that such designation should only occur after a finding that a firm has “substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position”.  SMS designation would relate to individual activities carried out by a firm, and associated remedies should apply to the designated subset of the firm’s activities (for example, the Code of Conduct and pro-competitive interventions would apply in relation to those activities for which the firm has been designated as having SMS). The SMS merger rules would apply to all transactions entered into by the SMS firm.  The CMA proposes that SMS ‘status’ would, however, apply to the entire corporate group, thereby bringing the group within the  scope of the DMU’s information-gathering powers and potential liability for non-compliance.

The CMA recommends that the criteria for making a designation determination should be transparent and robust. Considerations should include: (a) the firm’s revenue; (b) the activities undertaken by the firm; and (c) whether a sector regulator is better placed to address issues of concern. The process should be interactive, with a consultation on the provisional decision and the assessment to be completed within a statutory deadline of no more than 12 months.

Code of Conduct

In relation to the Code of Conduct, the CMA recommends that it should outline a robust set of principles for SMS firms to follow. Structurally, the CMA envisages a Code of Conduct comprising high level objectives (covering fair trading; open choices; and trust and transparency), supported by principles and guidance. This form of ‘outcomes-based regulation’ is common across the UK, with regulators including the Financial Conduct Authority, the communications regulator, Ofcom, and the energy regulator, Ofgem, applying similar frameworks.

The Code of Conduct would apply to the core activities which are the focus of SMS designation. The CMA acknowledges that applying the Code of Conduct more broadly to activities that fall outside the area of SMS designation could have significant adverse effects, for example, by dampening incentives to innovate or enter new markets. The DMU will be responsible for drafting the Code of Conduct in consultation with interested third parties. SMS firms would then have a legal obligation to ensure compliance with the Code of Conduct.

Proactive interventions

The CMA also recommends that the DMU engage in proactive interventions in respect of an SMS firm to drive “dynamic change”, as well as to address harms related to the designated activities. For example, remedies such as personal data mobility and interoperability would not be mandated by the Code of Conduct; rather, the CMA recommends that the DMU is granted powers to implement these and other remedies through the design of targeted, evidence-based and proportionate “pro-competitive interventions”.

Examples of such interventions include: (a) data-related interventions; (b) interoperability and common standards; (c) improving consumers’ ability to choose default settings; (d) obligations to provide access on fair and reasonable terms; and (e) separation remedies —  limited to operational and functional separation, rather than legal or structural separation (which the CMA believes should only be possible following a full market investigation under the Enterprise Act 2002).

Mandatory merger regime for SMS firms

The CMA recommends that SMS designated firms should be subject to additional merger control requirements, to ensure that acquisitions of control, irrespective of the size of the target and transaction, are appropriately  scrutinised. The CMA’s proposals on merger control for SMS firms would be a significant departure from the UK’s existing, voluntary, regime. However, this recommendation responds to what the CMA characterises as “widely-held concerns about historic under-enforcement against digital mergers in the UK and around the world”.

SMS designated firms would be required to report (but not necessarily notify) all transactions to the CMA. In addition, transactions that meet clear-cut thresholds would be subject to mandatory notification, with completion prohibited prior to clearance. This mandatory regime would apply only to acquisitions of control, although the CMA would likely retain the right to review any acquisition of less than control (for example, an acquisition of ‘material influence’).

The CMA recommends that competition concerns should be assessed using the existing substantive test (whether or not the merger would result in a substantial lessening of competition or “SLC”), but applying a lower standard of proof: whether there is a “realistic prospect” that the merger would lead to an SLC (rather than such an SLC being more likely than not).

Wide-reaching proposals reflect increased global scrutiny of digital markets

The CMA’s proposals are far-reaching and will dramatically change the regulatory landscape for digital markets in the UK. While the CMA has proposed procedural and legal safeguards for the new regime—for example, transparent and robust procedures when making any designation, pro-competitive intervention, or enforcement decisions; and judicial review of such decisions — much detail for the new regime remains to be developed.

The CMA’s proposals reflect increased scrutiny and regulation of digital markets globally. The European Commission is expected to publish the Digital Services Act and Digital Markets Act before the end of 2020. In the USA, the House Judiciary Antitrust Subcommittee published extensive proposals relating to digital platforms. Jurisdictions including Germany, Australia and Japan have also introduced targeted changes to their competition regimes for digital markets.

Next steps

Following receipt of the CMA’s advice, the UK government has committed to consult on proposals for a new regime in early 2021 and to legislate to put the DMU on a statutory footing when parliamentary time allows.