New UK regulatory regime on the horizon to tackle digital platforms

By Anthony Rosen, Patricia Wing

07-2020

CMA publishes final proposals to introduce a new pro-competition regulatory regime to tackle digital platforms.

Article summary: 
  • The CMA has concluded its investigations into digital advertising and online platforms.

  • The study explored how these digital platforms may be weakening competition through their strong incumbency advantages, including network effects, economies of scale and unmatchable access to user data.

  • The CMA considered that it does not have sufficient powers to address its concerns and recommends a new regulatory approach.

  • The CMA's new regulatory approach includes a code of conduct for online platforms with strategic market status governed by the Digital Markets Unit with powers to enforce the code of conduct and enable swift pro-competitive interventions.

  • There is now an open consultation to inform the new regime being taken forward by the Digital Markets Taskforce (Taskforce) and the consultation runs until the end of July and the Taskforce will give its advice by the end of the year. A new Digital Regulation Cooperation Forum has been created (between Ofcom, the ICO and CMA) to address privacy concerns.
Introduction

The Competition and Markets Authority in the UK (CMA) has completed its market study into online platforms and digital advertising, building on the recommendations of the Furman review[1] and published its final report[2] on 1 July 2020.

The CMA recognised that platforms funded by digital advertising provide highly valuable services, allowing people to find information in an instant and connect with family and friends from around the world – all at no direct cost to the consumer. Some of the largest platforms have been highly profitable for many years, many of whom have grown by offering better products than their rivals (and they continue to innovate). However, the CMA recognised that these large platforms are protected by such strong incumbency advantages – including network effects, economies of scale and unmatchable access to user data – that potential rivals can no longer compete on equal terms.

The CMA considered that these issues matter to consumers. Weak competition in search and social media leads to reduced innovation and choice, and to consumers giving up more data than they would necessarily like. Weak competition in digital advertising increases the prices of goods and services across the economy and undermines the ability of newspapers and others to produce valuable content, to the detriment of broader society.The CMA considered its existing powers were not sufficient to address its concerns and recommended a new regulatory approach – one that can tackle a range of concerns simultaneously, with powers to act swiftly to address both the sources of market power and its effects, and with a dedicated regulator (the Digital Markets Unit (DMU)) that can monitor and adjust its interventions in the light of evidence and changing market conditions.

With this in mind the CMA held fire on opening a detailed 18 month market investigation which could have resulted in a series of remedies (even structural) but instead proposed a series of recommendations for regulatory reform. The CMA stated that the Government should legislate to introduce a new regulatory regime for digital platforms led by a new DMU comprising both an enforceable code of conduct and pro-competitive interventions.

More specifically, the CMA made 4 high-level recommendations to Government:

Recommendation 1 – to establish a code of conduct for online platforms with strategic market status

The CMA recommends establishing an enforceable code of conduct, which sets out the principles or rules to govern the behaviour of platforms funded by digital advertising that are designated as having strategic market status (SMS).

The CMA identified three core principles around which the code should be formed:

Fair trading - which would require the SMS platform to trade on fair and reasonable terms for services where they are an unavoidable trading partner as a result of their market position;

Open choices - which would be intended to require the SMS platform to allow users to choose freely between elements of the platform’s services and those offered by competitors;

and

Trust and transparency - designed to ensure that SMS platforms provide sufficient information to users, including both consumers and businesses which transact with the platform. The CMA suggests the code requires that platforms provide clear information to consumers about the use of their data, present their advertising in a way which is clearly distinguishable from organic content, give fair warning about changes to the operation of algorithms where these are likely to affect consumers and provide more transparency regarding their fees charged.

These principles are aimed to ensure that the platforms act in a way that ensures consumers and businesses dealing with them are fairly treated and vigorous competition can take place.

Timely Intervention - The CMA notes a key benefit of introducing a code of conduct will be the ability to address behaviour and impose remedies more rapidly than is possible through ex post competition enforcement. The CMA envisages that formal investigations into the possible breaches of the code by SMS firms could be completed within a limited and more immediate timescale, as compared to the current lengthy timescale of current competition enforcement cases which typically take many years, to reach a conclusion.

Recommendation 2 – Require the DMU to undertake SMS designation and maintain the Code of Conduct

As part of the new regulatory approach, the Government has accepted the recommendations made by the Furman Review, which included the establishment of the DMU. The CMA recommends that the DMU be required to establish the code of conduct as mentioned above and be armed with powers to deploy a powerful set of data-related tools to create new opportunities for competition, including data mobility, open standards and data openness, and produce detailed supporting guidance.

The DMU's role will be informed by the work of the Taskforce which will include advice on: a potential methodology to designate digital platforms with SMS; the form and content of the code of conduct; and the case for data-related remedies, including any additional powers required to implement these.

Recommendation 3 – to give the DMU the necessary powers to enforce the principles of the code

The DMU should have the legal power to enforce a code of conduct to ensure that platforms with a position of market power do not engage in exploitative or exclusionary practices or practices likely to reduce trust and transparency, and to impose fines if necessary. These powers would allow the DMU to enforce the principles of the code on a timely basis, and amend its principles in line with evolving market conditions.

Recommendation 4 – to give the DMU the necessary powers to introduce a range of pro-competitive inventions

The CMA recommends that in order for the DMU to introduce "pro-competitive interventions" to tackle sources of market power and increase competition, the DMU needs to be given the necessary powers.

These powers should include data-related interventions (including consumer control over data, interoperability, data access and data separation powers), the power to increase consumer choice through the introduction of choice screens, the powers to restrict the ability of platforms to control default settings where these restrict choice and inhibit entry to and from rivals and the power to separate platforms where integration creates conflict of interest or undermines competition to the detriment of consumers.

Next steps for the Digital Markets Taskforce[3] – consultation

As a next step to inform the new regime, the CMA will be leading the work of the Taskforce, working with Ofcom and the Information Commissioner's Office (ICO) and commissioned by the Government to provide expert advice on the action that is necessary to promote competition and innovation in digital platform markets. The CMA has now (as of the 1 July 2020) formally launched this work by publishing a call for inputs, writing to a number of platforms, seeking views and information. They will provide advice to Government by the end of the year. Reponses to the call for input are due by the end of July.

The call for input[4] requests views on the scope and application of the new regime, potential remedies and the procedure and structure of the new regime. The Taskforce will draw on a wide range of evidence to inform its advice, including the findings and recommendations of the CMA's market study, while its scope will be extended to all online platforms, including those that are not funded by digital advertising.

Creation of Digital Regulation Cooperation Forum to address privacy and online platforms use of data collection

Privacy was another important aspect of the CMA's review. The CMA found in its investigations that the collection and use of personal data by these big online platforms for personalised advertising, in many cases with no or limited controls available to consumers, is another indication that these platforms do not face a strong enough competitive constraint.

The CMA noted that the General Data Protection Regulation is still in its early stages and the CMA is concerned that big platforms could be interpreting it in a way which favours their business models, instead of in a way which gives users control of their data. For example, big platforms might share user data freely across their own sizeable business ecosystem, while at the same time refusing to share data with reputable third parties – which could have a detrimental impact on smaller players.

The CMA’s market study advocates a competitive-neutral approach to implementing privacy regulation, so that the big platforms are not able to exploit privacy regulation to their advantage. To tackle these issues, the CMA, the ICO and Ofcom have together, on 1 July 2020, formed a Digital Regulation Cooperation Forum[5].

These interventions are not limited to the UK, as noted our last month's competition newsletter[6], the European Commission is consulting on a range of options to address digital platforms as part of the Digital Services Act which include proposals for ex-ante interventions as well as a consultation on a new competition tool aimed at addressing perceived gaps in the current EU competition framework and allowing for "timely and effective intervention against structural competition problems across markets".

For further information, contact: Bird & Bird Legal Director Anthony Rosen or Trainee Solicitor Patricia Wing.

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf

[2] https://assets.publishing.service.gov.uk/media/5efc57ed3a6f4023d242ed56/Final_report_1_July_2020_.pdf

[3] https://www.gov.uk/cma-cases/digital-markets-taskforce#the-taskforce

[4] See link to the call for input here: https://assets.publishing.service.gov.uk/media/5efc5e433a6f4023c77a135c/Call_for_information_July2020.pdf

[5] Please see link to the announcement of the forum here: https://www.gov.uk/government/publications/digital-regulation-cooperation-forum

[6] Please see link to June's competition newsletter here: https://www.twobirds.com/en/news/articles/2020/global/commission-seeks-views-on-gatekeeper-platforms-and-a-new-competition-tool