On 20 July 2021, the UK government announced a consultation, titled “A new pro-competition regime for digital markets” (the Consultation), which proposes a number of radical changes that would introduce a new regulatory regime applying to the largest digital platforms operating in the UK.
The government’s proposed reforms build on the recommendations made by the Digital Competition Expert Panel (the Furman Report), which called for the need to update the rules governing merger and antitrust enforcement in digital markets as well as the recommendations of the Digital Markets Taskforce comprised of the CMA, the Office of Communications (Ofcom) and the Information Commissioner’s Office (ICO). These recommendations, together with the CMA’s market study into “Online platforms and digital advertising”, have informed the changes proposed in the Consultation.
The DMU started to operate informally earlier this year (April 2021), but the Consultation would formally set up the unit by statute, setting out its duties and powers. It is proposed that the DMU will oversee an entirely new regulatory regime for digital markets which would place significant additional obligations and regulation on digital platforms found to have strategic market status.
Designating firms with ‘strategic market status’
The foundation of the new regime is the designation of certain firms, active in digital markets, as having SMS. In order to be found to have SMS, it is proposed that three requirements would need to be met:
- the firm has substantial market power;
- the substantial market power is entrenched; and
- the market power must provide the firm with a strategic position such that the effects of its market power are particularly widespread or significant.
The Consultation sets out details of how the government proposes that the DMU would conduct the SMS assessment, and the process for conducting this analysis. Given the significant additional regulatory burdens proposed to apply to firms with SMS, it appears likely that the designation of a firm with SMS will be hotly contested.
A new regulatory regime for SMS firms
The Consultation proposes a range of additional regulatory obligations and interventions that would apply to firms designated as having SMS.
These include a Code containing legally binding principles grouped under three objectives:
- Fair trading
- Open choices
- Trust and transparency
In addition, the government proposes to give the DMU the ability to make PCIs designed to address the sources and effects of the SMS firm’s market power. The Consultation proposes that PCIs would be available to the DMU where the market power has an adverse effect on competition and consumers. The proposals would provide the DMU with a broad discretion to design and implement PCIs where competition concerns arise.
The Consultation proposes that the DMU would have the power to make PCI orders, specifying changes to behaviour of SMS firms required to comply with the Code. The DMU would also be granted a range of investigatory and enforcement powers, including the ability to impose financial penalties amounting to up to 10 per cent of worldwide turnover for breaches of the Code or failure to comply with PCI orders.
Changes to the merger regime for SMS firms
One of the key principles of the UK merger regime is its voluntary nature, which allows firms to complete mergers without first obtaining regulatory approval.
The Consultation proposes a number of radical changes designed to increase the CMA’s role by requiring it to review all acquisitions by companies with SMS. The changes specifically include:
- requiring firms with SMS to report all mergers to the CMA (this would only be a reporting obligation, not a requirement for pre-closing clearance);
- a new transaction value jurisdictional threshold for firms with SMS, giving the CMA jurisdiction to review transactions with a value of £100 million – £200 million which also meet a “UK nexus test”;
- a subset of larger acquisitions by firms with SMS would be subject to mandatory pre-closing clearance by the CMA; and
- a proposal to lower the standard of proof required for the CMA to find competition concerns at Phase 2 from a balance of probabilities standard (i.e. 50 per cent) to a lower “realistic prospect” standard.
Concluding comments
The Consultation contains a radical new regulatory regime that would apply to digital firms identified as enjoying SMS, including a series of new behavioural obligations, the ability of the DMU to intervene to require changes to the firms’ existing conduct and a significant change to the operation of the UK merger control regime.
Although, the topic of interventions in digital markets to promote competition is widespread among global competition regulators, the proposed new regime would be among the first to impose significant up-front regulation on the most powerful digital companies.
Companies interested in responding to the Consultation have until 1 October 2021.
Client Alert 2021-207
