UK digital markets regime under attack, but still on course

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The Digital Markets, Competition and Consumers Bill is now in the Report Stage in Parliament before it heads to the second chamber, the House of Lords.  Trawling through the 87 pages of proposed amendments this week, I was tempted to reach for a hackneyed Winston Churchill quote:

Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.

That would be unfair though.  As you would expect, the Bill has been subject to intense lobbying by the firms who expect to be designated as having strategic market status (SMS) under the digital markets regime. It has also been subject to scrutiny by elements of the ruling Conservative Party who distrust regulation and see the Bill as handing too much power to a regulator and hindering the freedom of businesses.  They do not seem persuaded by the argument that opening up digital markets will be good for business and good for innovation. However, the truth is that the Bill seems to have emerged relatively unscathed.  Despite a long list of amendments that would push the regime in the SMS firms’ favour, it remains an excellent piece of work. It represents a flexible and targeted approach to some of the most complex problems in competition policy.

Government (and Conservative MP) amendments

As part of the Parliamentary process, any member of parliament (MP) can table amendments. However, it is the Government amendments that have a much greater chance of being adopted as they control a majority of the votes. This week has seen amendments from the Government, from the opposition Labour Party, and from individual MPs. This blog post will discuss some of the key ones.

Overall, the Government’s amendments proposed this week will make the task of the Competition and Markets Authority (CMA) harder. They will slow it down, and they will provide additional fodder for companies that appeal CMA decisions. Whether that is a good or a bad thing obviously depends on whether a given CMA decision goes in your favour. Importantly, the amendments do not fundamentally undermine the Bill’s objectives.

On the biggest battleground of all, the appeals process, the Bill maintains its judicial review standard for all of the decisions that will dictate the success of the new regime.  There is an enhanced full merits appeals process only regarding the level of any fines for rule breaches, which is unproblematic because it will not hold up the operation of the regime and therefore the benefits it will bring to businesses and consumers.  Note, however, that appeals against fines from sectoral regulators such as Ofcom (telecoms), Ofgem (energy), Ofwat (water) are all subject to judicial review rather than the enhanced full merits review, so Big Tech is getting special treatment here. There is also an amendment tabled by a backbench MP (Sir Robert Buckland) that would introduce a more extensive appeal process for the first three years of the new regime, but this seems unlikely to be adopted.

Government amendments increase the requirements that the CMA must meet before imposing conduct requirements or pro-competitive interventions, which are the two primary avenues for CMA intervention. The CMA must prove the proportionality of its approach in each case. This is an extra hoop for the CMA to jump through, and therefore another potential appeal ground.  There is no proportionality requirement in other similar CMA processes such as the market investigation tool. Instead, existing public law caselaw imposes that requirement through the judicial review process. This raises the question of what precisely the amendment adds to existing caselaw. The concern is that the court will need to interpret it as requiring a new and heightened level of proportionality because otherwise there is no need for the amendment. Even though the CMA is accustomed to justifying its interventions on proportionality grounds under its existing processes, this amendment is therefore unhelpful. It would be better if the drafters of the amendment could explain precisely what it adds to existing caselaw, but it seems that they do not have an explanation.

In a similar vein, another amendment requires the CMA to explain the consumer benefits of each conduct requirement (but not its pro-competitive interventions).  Again, another hoop to jump through, and therefore another potential appeal ground.  It won’t be too difficult for the CMA to explain how increased competition will flow through to consumer benefits in most cases, although this will be more difficult in some business-to-business markets.  The CMA will need to adduce evidence to prove it, and consult interested parties on the evidence, so the process will not always be straightforward.

At a late stage in the Bill drafting, following complaints from the Big Tech firms, an exemption was drafted whereby a rule breach can be justified if it gives rise to countervailing benefits such as efficiency, security or privacy. For European competition lawyers accustomed to Article 101(3) TFEU, the drafting seemed familiar. The Big Tech firms strongly disliked the requirement that the conduct needed to be “indispensable and proportionate to the realisation” of the claimed benefit. The Government has therefore removed the word “indispensable” in an apparent attempt to avoid the EU case on that issue (c.f. the Oscar Bronner case). It is replaced with a slightly fuzzier version, which seems to say the same thing using different words.  It is still a difficult test for a business to satisfy.

In a move to increase the oversight of the CMA, the CMA’s guidance documents must be approved by the Secretary of State.  This seems unobjectionable at first glance, but it is in fact unwelcome because it potentially delays the regime while the CMA waits for sign off.  We already know that the CMA plans to work on its guidance documents only after the Bill has passed into law, and that it does not intend to start the designation process until after the guidance has been finalised. This political sign-off is therefore on the regime’s critical path for implementation, but it has no deadline. It would be better to impose a 30-day deadline for approval, especially as the Secretary of State can get up to speed well before the final version is available.

Another amendment changes the CMA’s decision-making procedures, presumably again to increase to political accountability. Some key decisions under the new regime will no longer be made by senior CMA management because they must be made by a Board committee (the Board is politically appointed).  Anything involving the Board delays things as the individuals are not in the building every day, and papers need to be written for them in time for set-piece meetings.  The CMA staff will therefore decide what they want to do and then need to go through an extra process of persuading the Board members.  Again, this is not necessarily objectionable in itself, but it is another complication for the CMA.

One of the MPs who is most knowledgeable and passionate on competition policy, John Penrose, has tabled an amendment that would require the CMA to justify itself annually by publishing a report on “the economic cost of regulatory burdens that have been created and removed over the previous year”. The regulatory burden must be “zero or less”. The CMA does already provide these types of calculations for their annual reports already.  It has an existing target of causing benefits to the British economy of 10 times its annual budget, which it tends to comfortably exceed.  In this case, digital markets are large, so the calculations will tend to look good from the CMA’s point of view. This seems like a requirement the CMA can live with.

Finally, one Government amendment that does seem welcome relates to the bargaining process that will govern negotiations between the platforms (particularly Google and Meta) and the news publishers, and potentially other industries. In line with the CMA’s report on the subject, the amendment proposes to give news publishers the explicit ability to engage in collective bargaining when invited to do so by the CMA. This will save all involved the inefficiency of assessing hundreds of different methodologies for calculating a fair price for news content.

Labour Party amendments

From a non-SMS firm’s point of view, the most worrying part of the Bill is the way in which they are excluded from the CMA’s processes.  When undertaking an investigation or other process under the new regime, the CMA is obliged to involve the SMS firm from the start, but other firms do not see the details until the much later public consultation, at which point the CMA’s mind will be less open to new ideas. It is therefore very welcome that the opposition Labour Party tabled a series of amendments that would give non-SMS firms the right to receive various documents at an early stage of each CMA process and therefore contribute their views and expertise. They are arguably just as affected by CMA decisions as the SMS firms, potentially more so if their ability to compete relies on an SMS firm’s ecosystem being opened up.

Labour also seeks to expand the so-called leveraging principle. This provision relates to the concern that the regime’s targeted approach of designating and then regulating specific activities, rather than the whole SMS firm, will leave an enforcement gap. The market power of Google, Amazon or Apple does not neatly stop at the boundaries of a specific activity; it can be leveraged into other activities to the detriment of competitors and competition. The Labour amendment would mean that the CMA can intervene more readily in harmful conduct that occurs outside the designated activity in certain circumstances.

I do not know the chances of the Labour amendments being adopted, but they very clearly should be.

The weirdness of the political conversation

The political conversation has centred entirely around the risk of over-enforcement by a power-hungry regulator. No-one is talking about the risk of under-enforcement, which is surely a much greater risk given the difficulty that agencies around the world have had in promoting competition in digital markets. It is reported that some of the SMS firms have billion-dollar legal budgets, and we should remember that Apple is a company that has successfully appealed the CMA’s decision merely to open an investigation into mobile browsers and cloud gaming. That case is now in the deep freeze and probably will never be restarted. This blog has previously discussed the difficulties in achieving the App Store’s compliance with Dutch and Korean law. Are we really sure that over-enforcement is the biggest risk here?

The amendments would increase the oversight to which the CMA is subject, and the obstacles over which the CMA must jump before imposing new rules. However, apart from the Labour Party’s amendments, they are all one-sided in the SMS firms’ favour. It is very clear which side of the argument is being served. They do not improve the ability for non-SMS firms to contribute to the regime, they only improve the SMS firms’ ability to obstruct it. The most potentially problematic Government amendments are the ones that: (1) introduce requirements for the CMA to set out proportionality and consumer benefits analyses, and (2) introduce the need for Secretary of State approval for CMA guidance documents.  However, from my point of view, I would happily accept all of the Government amendments if it meant that Labour’s amendments on the non-SMS consultation rights were adopted.  

In short, the Bill is still on course. We will see what happens next.

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