Further to the UK Government's plans, announced at the end of 2020, to set up a new digital competition regime (summarised in our earlier article "Big Tech" under pressure - new Rules for Digital Platforms in the EU and UK (twobirds.com) ), a consultation was published in July 2021 on the final design of the new "strategic market status" (SMS) pro-competition regime for digital markets and the establishment of the new Digital Markets Unit (DMU).
The Consultation builds on the draft proposals set out by the Digital Task Force at the end of last year and seeks view on the core components of the new digital regime, as follows:
- The DMU – the DMU, which has been operating in shadow form since April 2021 within the UK's Competition and Markets Authority (CMA), will be given a formal legal basis and it will have responsibility for designating firms with SMS, overseeing an enforceable code of conduct and implementing the pro-competitive interventions. The Government has stated that the DMU's statutory duty should be to promote competition (which includes promoting competitive outcomes) in digital markets for the benefit of consumers. However, the Government is seeking views on whether there should be a supplementary duty to have regard to innovation. There are also proposals governing regulatory co-ordination and information sharing and co-operation with sectoral regulators, including Ofcom, the Information Commissioner's Office and the Financial Conduct Authority and other aspects of the DMU (such as its funding).
- The scope of the SMS regime and designation process – the new SMS regime will focus on firms designated as having SMS and the Government is consulting on the SMS criteria and test (substantial and entrenched market power in at least one activity and this market power must provide the firm with a strategic position). This would include consideration of whether the firm has achieved very significant size and scale in an activity; whether the firm is an important gateway to consumers; whether the firm can use the activity to further entrench or protect its market power in that activity, or extend its market power into a range of other activities; or whether the firm can use the activity to determine the rules of the game. The Government is not presently minded to set quantitative thresholds for the designation assessment but will instead rely on both qualitative and quantitative criteria in the evidence-based assessment. It will also consider a firm's global or UK revenue and characteristics of the activity (including network effects, economies of scale and scope, barriers to entry/costs)) in prioritising intervention. In terms of process, the Government is considering whether to introduce a 9 month designation process (with a consultation after 6 months).
- Code of Conduct - to manage the SMS firm's conduct, firms will need to comply with the code of conduct which will be based on 3 core objectives (fair trading, open choices and trust and transparency) combined with a set of legally binding principles supported by guidance (not legally binding). The Government considers that the high-level principles together with the objectives should be enshrined in legislation with the DMU having the ability to develop firm specific legally binding requirements based on the legislative principles. The DMU will also have the ability to issue both final and interim code enforcement orders (with a possible procedural deadline of 6 months).
- Pro-competitive interventions – the Government is proposing that the DMU will have the ability to impose PCIs which will sit alongside the code of conduct. This will provide flexibility for the DMU to implement remedies in an incremental, proportionate and coherent way (different from the current market investigation (MI) process in the UK which allows for one-off intervention). The DMU will have a broad discretion to design and implement the PCIs (but the Government has not formed a view on structural remedies at this stage and welcomes views). The legal standard for intervention will be whether there exists an "adverse effect on competition" – the same standard as under the existing MI regime. The DMU will enforce the regime and the Government proposes a short time frame for intervention (possibly 9 months).
- Regulatory framework – there will be a robust enforcement regime with the DMU at its core. It will have strong investigatory powers and enforcement powers with fines of up to 10% of worldwide revenues (and fines of up to 1% of worldwide revenues for failing to respond to information requests supported by further daily penalties of 5% of worldwide revenues for continued non-compliance). The Government is also considering further measures including court order and senior management liability but for now is not providing for follow on damages actions or giving the DMU the power to require redress for damage caused. Firms will have the ability to appeal decisions based on standard judicial review although the Government is seeking views on whether a higher standard of review that takes into account the merits of the case may be appropriate in certain circumstances (for example where significant fines are imposed).
- SMS Merger Regime – the final element is the new merger control regime for mergers involving SMS firms. This will involve a new reporting requirement to inform the CMA of all mergers, the introduction of a transaction value (between £100-200m) and UK nexus test (material impact in the UK) and a mandatory merger control process (for a subset of the transactions that satisfy the jurisdictional thresholds) as well as amending the substantive review criteria for Phase 2 mergers to a realistic prospect probability standard of whether the transaction will result in a substantial lessening of competition.
Interested parties have until 1 October 2021 to respond to the Consultation A new pro-competition regime for digital markets - GOV.UK (www.gov.uk). We can then expect a Government response before introducing legislation to put the regime on a statutory footing (expected next year).
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