The UK’s new digital competition regime is on the horizon – are you ready?

On 25 April 2023, the UK’s Digital Markets, Competition and Consumer Bill (“Bill”) was finally put before Parliament. Currently at the ‘committee stage’ in the House of Commons, implementation of the Bill is anticipated to take place next Spring (2024).

The Bill establishes a new digital competition regime that will be overseen by the Digital Markets Unit (“DMU”) within the CMA that will use a proportionate approach to tackle the challenges in digital markets. Firms designated as having strategic market status’ (“SMS”) will be subject to:

  • a range of tailored remedies to ensure fair dealing, open choices and trust and transparency, designed to manage the effects of market power and ensure markets are open to competition and innovation;
  • potential pro-competitive interventions to address the root cause of the firms’ market power;
  • a requirement to report all mergers and acquisitions above a certain threshold to the CMA; and
  • a new “Final Offer Mechanism” which enables the DMU, as a last resort, to address unfair payment terms and resolve disputes between SMS firms and third parties.

Digital Market Regime - Highlights

Strategic Market Status

This new targeted regime for digital markets will be overseen by the DMU and give them the opportunity to intervene pro-actively. Firms with substantial and entrenched market power in at least one digital activity (where this digital activity provides them with a strategic position) will be designated with SMS status by the DMU and will be subject to the new regime.

The CMA may designate an undertaking (following an investigation) as having SMS in respect of a digital activity carried out by the undertaking where:

  1. The CMA considers that the digital activity (defined generally as the provision of a service via the internet or the provision of digital content (including any activities carried out for these two purposes)) is linked to the UK and the undertaking meets the SMS conditions in respect of the digital activity, namely:
    • substantial and entrenched market power (to assess this the CMA must carry out a forward-looking assessment of a period of at least five years); and
    • a position of strategic significance in respect of the digital activity.
  2. The turnover condition is satisfied. This is where the CMA reasonably estimates that the undertaking’s UK turnover in the relevant 12-month period exceeds £1 billion or that its global turnover in the relevant period exceeds £25 billion. Only one of these thresholds needs to be met. If the undertaking is part of a group, then the turnover of the whole group should be considered.
  3. If an undertaking is designated as having SMS status in respect of a digital activity, the designation period is for five years.

It is anticipated that firms who have been the subject of the CMA’s investigations and market inquiries are likely to be the first to be designated with SMS status.

Conduct requirements

Moving away from the code of conduct that was suggested in the previous draft of the Bill, we now have conduct requirements. 

Firms with SMS status will be required to comply with specific, tailored, conduct requirements that set out how they should or should not behave in respect of their digital activities (this is unlike the Digital Markets Act (“DMA”) in the EU, that provides for blanket prohibitions and conduct requirements). Conduct requirements relate to how undertakings with SMS status interact with other businesses and consumers, specifically in relation to the activities for which they have been designated. 

The obligations that may be imposed on SMS firms should fall within a prescribed set of objectives based on (i) fair dealing, (ii) open choices, and (iii) trust and transparency. Each category is framed broadly, enabling the CMA to tailor the requirements for each SMS firm.

Conduct requirements are ‘permitted’ or of a permitted type if they are for the purpose of:

obliging a designated undertaking to:
preventing a designated undertaking from:
  • trade on fair and reasonable terms;
  • have effective processes for handing complaints and disputes;
  • provide clear, relevant, accurate and accessible information;
  • give advance notice and explanations of material changes in relation to the digital activity; or
  • provide options or default settings in a way that enables users to take informed and effective decisions.
  • applying discriminatory terms, conditions or policies to different users or types of users;
  • using its own position in relation to the relevant digital activity to treat its own products more favourably than those of other undertakings;
  • carrying out activities in any part of an SMS firm’s business that could materially enhance its market power or bolster the strategic significance of its position in relation to the relevant digital activity;
  • engaging in tying/bundling practices;
  • restricting interoperability;
  • restricting the use of and access to the digital activity;
  • using data unfairly; and
  • restricting the use of other undertakings’ products.

It is possible for an SMS firm to justify its conduct if it can show that the conduct resulted in net benefits for users, and that it is indispensable and proportionate to attain those benefits.

Pro-competition interventions

In addition to the tailored remedies and conduct requirements above, the CMA will also have additional powers to address the root cause of the firms’ market power. Where the CMA finds that a factor relating to a digital activity has an adverse effect on competition, the threshold for intervention will be met. In deciding whether to make a pro-competitive intervention, the CMA can have regard to any benefits to UK users or customers that result or that could result from the factors having an adverse effect on competition. A pro-competitive intervention can take the form of an order, a non-binding recommendation made by the CMA, or a commitment made by a designated undertaking.

Additionally, the CMA can impose behavioural or structural remedies on any part of a firm’s business.

Mergers: mandatory reporting

SMS firms will now be subject to a mandatory merger reporting requirement prior to closing, especially where:

  • The SMS firm acquires at least 15% of the shares or voting rights in a company carrying on activities in the UK or supplying goods or services in the UK, with further reports required if its stake passes 25% or 50%.
  • The value of the SMS firm’s total holding is at least £25 million.

Unless the CMA consents, the transaction may not close until five working days after the CMA has accepted the notification as sufficient. This is designed to give the CMA enough information and time to decide whether to open an investigation under the merger control regime. This is a move away from the UK’s non-suspensory merger control regime.

Additionally, and more generally, the UK merger control turnover thresholds will increase from £70 million to £100 million (for the UK turnover of the target entity). There will also be a new threshold for merger review designed to capture so-called “killer acquisitions” where an acquirer of the merging enterprises has at least 33% share of supply of goods or services in the UK and a UK turnover of greater than £350 million. Finally, there is also a safe harbour for transactions where at least one of the merging enterprises has a UK turnover below £10 million.

Enforcement, penalties, and appeals

A variety of new investigatory powers will be granted to the CMA, including standard information gathering powers similar to competition law. 

The CMA can impose penalties of up to 10% of worldwide turnover, and up to 5% of daily worldwide turnover in the case of breaches of orders or commitments for each day a breach continues. The CMA may impose a fixed penalty on an undertaking of up to 1% of the undertaking’s worldwide turnover, or a daily penalty of up to 5% of the undertaking’s daily worldwide turnover for each day non-compliance continues, or both. The CMA may impose a fixed penalty on an individual of up to £30,000, or a daily penalty of £15,000, or both. Within those limits, the level of penalty will be an amount that the CMA considers appropriate given the circumstances of the case.

The CMA can impose civil sanctions and criminal sanctions.

A director can be disqualified (for up to 15 years) because of their involvement in an infringement of a requirement relating to conduct requirements or pro-competition interventions.

Firms may appeal CMA decisions under the new digital markets’ regime to the Competition Appeal Tribunal on a judicial review basis (subject to limited exceptions), rather than on the merits. Such challenges can be brought by any party with sufficient interest, including third parties.

It is also possible for third parties to bring private actions for damages against firms in respect of certain breaches.

Comparison with the EU Digital Markets Act

For reference, we also set out below some of the key differences between the DMA and the new UK SMS regime.

Provision
EU—DMA
UK—SMS regime
Status

 Platforms acting as ‘gatekeepers’:

  • have a significant impact on the internal market
  • serve as an important gateway for business users to reach their customers, and
  • enjoy, or will foreseeably enjoy, an entrenched and durable position

Rebuttable presumption of gatekeeper status if three quantitative criteria are met (Article 3(2) of the DMA).

  1. The company will have a significant impact on the EU:
    • if the undertaking achieves an annual turnover in the EU of ≥ € 7.5 billion in each of the last three financial years; OR
    • if the undertaking’s average market capitalisation or its equivalent fair market value amounted to ≥ € 75 billion in the last financial year; AND
    • it provides the same Core Platform Service ('CPS') in at least three Member States.

  2. The CPS will be an important gateway if it has at least:
    • 45 million monthly active end users established or located in the EU; AND
    • At least 10,000 yearly active business users established in the EU in the last financial year.

  3. It will be entrenched and durable if the requirements in (2) above are met in each of the last 3 years.

If all three quantitative criteria are not met, the Commission may designate a company as a gatekeeper based on a qualitative assessment following a market investigation.

Strategic Market Status (SMS):

  • a substantial, entrenched market power (non-transitory)
  • in at least one digital activity, and
  • which provides the firm with a strategic position.

Assessment and designation undertaken by the DMU.

The CMA may designate an undertaking as having SMS where:

  • the digital activity is linked to the UK and the company meets the SMS conditions in respect of the digital activity;
  • the turnover condition (of > £25 billion globally or > £1 billion in the UK) is satisfied; and
  • The CMA has carried out an SMS investigation.
Scope/Activities

Core platform services include:

  • online intermediation services,
  • online search engines,
  • online social networking services,
  • video-sharing platform services,
  • number-independent interpersonal communication services,
  • operating systems,
  • web browsers,
  • virtual assistants,
  • cloud computing services,
  • online advertising services.

(Article 2(2) of the DMA).

'Digital activities' are defined in section 3 of the Bill and consist of:

  • a service provided via the internet (paid or otherwise);
  • the provision of digital content (paid or otherwise); or
  • any other activity carried out for the purposes of providing an online service or digital content.
Rules

General list of Dos and Don’ts which 'gatekeepers' will need to comply with (not tailored).

Must be complied with six months after one or more of the core platform services they provide have been identified as fulfilling the thresholds of the proposed regulation (Article 3(8) of the DMA).

The CMA will have the power to impose conduct requirements on designated SMS firms. Conduct requirements may be imposed in pursuit of certain objectives:

  • the fair dealing objective,
  • the open choices objective, and
  • the trust and transparency objective

The DMU will develop specific tailored requirements for each SMS firm.

The CMA can issue enforcement orders and interim enforcement orders to address breaches.

Pro Competition interventions (PCIs).

Merger control

An obligation for designated gatekeepers to inform the Commission of any proposed concentration within the meaning of the EU Merger Regulation (EUMR) involving another core platform service provider or any other service provided in the digital sector, regardless of whether it is notifiable under merger control at the European or national level (Article 12 of the DMA).

New guidance regarding Article 22 of the EUMR, allowing the Commission to encourage and accept referrals in cases where the referring Member State does not have initial jurisdiction over the case (but where the criteria of Article 22 are met).

New SMS mandatory notification regime for transactions that meet new thresholds. Designated SMS firms will be required to report acquisitions of shares or voting rights which increase the SMS firm's holding:

  • from less than 15% to 15% or more;
  • from 25% or less to more than 25%; or
  • from 50% or less to more than 50%.

Under general competition law merger thresholds (and not specifically SMS), the turnover threshold will be increased to £100 million and there will be a safe harbour for mergers between small business (with UK turnover below £10 million). A new threshold to enable the CMA to investigate mergers where at least one party has a UK share of supply of 33% and has UK turnover of more than £350 million will also be introduced to tackle so called “Killer Acquisitions”.

Regulator
European Commission but national competition authorities will assist.
DMU, within the CMA, which has been operational since April 2021.
Fines

10% of worldwide turnover (although can be increased to 20% of worldwide turnover for repeated infringement).

Additional fines for failing to comply with information requests and other procedural infringements.

10% of worldwide turnover.

Additional fines for failing to comply with information requests and other procedural infringements.

Breakup
Yes—remedy of last resort for systemic breaches.
Yes – where appropriate and other remedies are insufficient (although the UK already has such powers under the existing market investigation regime).
Private enforcement
No specific rules on private actions.
No specific rules on private actions, however, consumers will have the 'right to redress' under the Bill and may bring a civil claim where a trader has engaged in a 'prohibited practice'.

For more information, please contact Anthony Rosen, Tenisha Burslem Rotheroe and Alice Drain.

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