In the UK’s slow journey towards its Digital Markets Unit (“DMU”) regime, the Government has published its formal response to last summer’s consultation document (the “Response Document”). We now know that the necessary legislation will not be included in the next session of Parliament, and therefore will not be enacted within the next year, but at least this document confirms that it is still Government policy to do it “in due course” and “when Parliamentary time allows”.
The Response Document
The fundamentals of the regime are re-confirmed, for example:
- The DMU will be part of the Competition and Markets Authority (“CMA”);
- The DMU will designate the activities of certain firms as having Strategic Market Status (“SMS”);
- The legal test for SMS will be based on substantial and entrenched market power in at least one digital activity, providing the firm with a strategic position;
- The DMU will write bespoke codes of conduct for each SMS firm;
- The DMU will have the ability to impose pro-competitive interventions (“PCIs”) such as interoperability to tackle the root causes of the SMS firms’ market power;
- SMS firms will be subject to an enhanced merger control regime; and
- The DMU will be able to impose penalties of up to 10% of worldwide group revenues, and will have powers to impose interim measures and final orders.
This is all welcome. The UK’s framework for dealing with the digital gatekeepers is nicely crafted and sophisticated. Indeed, it is an excellent template for regulating in a fast-moving and complex industry without hindering innovation and investment.
The Response Document also includes some useful details, although it would be a lot more useful to see the wording of the draft legislation rather than another vaguely worded policy document.
Some of the details that jumped out at me included:
Objectives: The DMU’s objectives will be narrowly focused on competition and consumers rather than including a wider duty to protect the interests of “citizens”. In my view, this is a mistake because the DMU should have the duty to take account of issues such as privacy and press sustainability, which have always been core to the DMU proposals. The duty to consult with the other regulators such as the Information Commissioner’s Office and Ofcom will make up for the omission to some extent, but not entirely because the DMU will still take the final decision and it may choose to define the concept of “competition” narrowly.
Deadlines: Decisions to designate SMS firms and PCI decisions must be taken within nine months, extendable by a further three months. Tight deadlines like this have pros and cons for regulators. It will feel tight for the DMU case team, but it will also help the DMU to scope its inquiries proportionately and reject calls to dig deeper and deeper into issues ad infinitum. (I have always felt that antitrust investigations would benefit from statutory deadlines, but that’s a debate for another day).
Safe harbour: There will be a minimum revenue threshold below which companies will have certainty that they cannot be designated as having SMS. The usefulness of this threshold obviously depends on how high it is set, so it is a shame that we still have no suggested figure to debate. Given that the Government has announced the regime will only apply to a “handful of firms”, we might assume that the threshold will (rightly) be set high enough to exclude non-gatekeeper firms such as Airbnb and Booking.com.
PCI test: The test for intervention will be based on finding an “adverse effect on competition”, which is the same test as the CMA’s existing market investigation test. The difference between the two regimes is more on the remedy side of things, where the PCI regime will enable more regular testing and tweaking of remedies.
Individual liability: There is a clear desire to make sure senior managers are made personally accountable for an SMS firm’s compliance. This is an important aspect of a regime that seeks to regulate the conduct of firms whose decisions are made overseas. The DMU will be able to disqualify individuals from acting as directors of companies (a power that has been effective for the CMA in competition cases) and it will be able to impose civil penalties on individuals.
Exemptions: One issue that policy officials have been considering in recent months was how to take account of conduct that may breach the rules, but has some wider countervailing benefits to consumers. The solution looks familiar to competition lawyers because it echoes the wording of Article 101(3) of the Treaty on the Functioning of the European Union. I hope that it is interpreted in practice as narrowly as that provision because otherwise SMS firms will be able too easily to plead privacy or innovation benefits for many breaches.
Merger control: The merger control provisions were quite confused in last summer’s consultation and therefore looked a bit under-cooked. It is therefore no surprise that this is where some of the more significant changes have been made. The Response Document sensibly tries to make the SMS regime align with the announced changes to the jurisdictional tests in the general merger control regime. SMS firms will be required to make mandatory notifications to the CMA for certain types of transactions, although it is not clear whether this will mean they are prevented from closing the transaction prior to CMA clearance. However, the CMA will be disappointed to see that the Government has rejected its proposals for lowering the standard of proof for intervening in mergers at Phase 2. I do wonder if the CMA’s prohibition of Meta/Giphy played a part here. If the CMA can block a foreign-to-foreign merger on (inter alia) horizontal unilateral effects grounds where the target business has no current activities in the UK, it does not seem that the standard of proof needs lowering! Of course, the outcome of Meta’s appeal in this case is still pending, so we have not heard the last word in that case.
Information powers: The DMU’s information gathering powers will be enhanced compared to the Competition Act and Enterprise Act, both of which now look outdated in the digital age. The DMU will have the explicit ability to gather data held overseas, it will be able to interrogate how algorithms function, and it will be able to order SMS firms to carry out field testing, including A/B testing.
Funding: The regime will be funded by a levy on the SMS firms.
Overall, the Response Document is sensible and contains decisions that we would have expected. We can only hope that we now see some draft legislation as soon as possible.
News bargaining code
On the same day, the CMA and Ofcom published their advice to Government on a possible code that would govern the imbalance of power between platforms and content providers such as news publishers. This advice was given last November, so we must assume that its publication had been blocked by the Government up until now so as to make it coincide with the Response Document.
The CMA and Ofcom have advised that a bargaining code like the one already enacted in Australia would be effective. They would impose the code alongside some PCIs that would aim to address the source of the SMS firms’ market power.
The code would have four aims:
- addressing concerns about the transparency of algorithms;
- giving publishers appropriate control over the presentation and branding of their content;
- improving the sharing of user data between publishers and those platforms that host their content; and
- redressing the imbalance in bargaining power in negotiations between publishers and platforms by providing a framework for the determination of fair financial terms for publishers’ content where this is hosted by large platforms with SMS.
The Government has agreed with their recommendation and is considering a final offer arbitration mechanism as a backstop for when the platform and the news publisher cannot agree a price. The details of this mechanism will be very interesting.
There are plenty of initiatives in the tech sector in the UK at the moment that are seeking to promote competition in the years ahead. For example, the Digital Regulation Co-operation Forum, which is the alliance of UK regulators, has asked for submissions to inform its work on algorithms (the deadline for submissions is 8 June 2022). And the CMA has ongoing antitrust investigations into Google, Apple and Meta (Amazon has so far escaped their attention).
However, it is now over three years since the Furman Report recommended the DMU regime. While the UK waits for “Parliamentary time”, the EU is racing ahead in enacting the Digital Markets Act and will be defining the meaning of core concepts such as interoperability, self-preferencing and leveraging. Brexit Britain will follow in the EU’s footsteps.
The CMA should revisit the conclusion of its online platforms and digital advertising market study, which was to rely on the Government to enact the DMU legislation rather than using its own extensive market investigation powers to achieve a similar outcome. If the CMA had launched a market investigation following the market study in July 2020, it would have completed it by now.
The CMA cannot wait forever, and it is by no means certain that the Government will ever enact the DMU legislation. A market investigation could implement some of the most urgent remedies, and these could then be folded into the DMU regime when, and if, it ever arrives. It would enable the CMA to hedge against continued Government inaction.
The CMA is currently proposing to make the same mistake a second time in its mobile ecosystems market study, the final report for which is due by 14 June 2022. Its interim report in December 2021 did foresee the situation in which we now find ourselves:
“We may, for example, revisit our present decision not to make a reference if the legislation required to bring the proposed new regime into force is not laid before Parliament for some time, or its anticipated scope materially altered, such that it no longer appears to us that action by the DMU represents the most effective and timely means of addressing the issues we have identified.” (para 9.12)
Time to revisit.