The UK Competition and Markets Authority ('CMA') has issued advice to the UK government on new competition rules to address competition issues in digital markets, which will be implemented by a new Digital Markets Unit ('DMU').
The advice follows shortly on from the announcement that the DMU will be set up by April 2021 (see our blog post about the announcement here) to regulate the behaviour of digital platforms. The recommendation to establish a DMU arose from the conclusions of the CMA’s digital platforms and advertising market study, in which the CMA found existing regulatory tools were not sufficient to protect competition in digital markets (our thoughts on the study's conclusions can be found here).
Strategic Market Status
The CMA’s advice focuses on firms with Strategic Market Status ('SMS') – those with substantial and embedded market power. If a firm has SMS then the CMA recommends it be subject to an enforceable code of conduct; pro-competitive interventions; and specific merger rules.
Designating SMS firms
The DMU will be responsible for assessing whether a firm has SMS. The advice recommends looking at a firm’s market power to test whether it is substantial, i.e. are there good alternatives, or limited competition? The market power must also be entrenched and not transitory, such that there is a low likelihood of a rival emerging. The CMA’s advice emphasises that this assessment will relate to a specific digital activity; not the firm’s activity as a whole.
The CMA has recommended that the DMU publishes guidance on how it designates SMS firms, but suggests that the DMU should investigate firms with more than £1 billion annual revenue in the UK, and particularly those with more than £25 billion in global revenues, perhaps with an initial focus on particular sectors such as online marketplaces, app stores, social networks, search engines, operating systems or cloud computing services.
Code of Conduct
The suggestion of a code of conduct for each firm is designed to stop SMS firms from taking advantage of their market power. Each SMS firm would have a code, which would set out objectives, specific principles for behaviour and provide guidance on how to interpret the principles, so that each firm knows what conduct is appropriate. The code would be developed as part of the assessment of whether a firm has SMS.
The CMA recommends the code’s objectives should be legally binding (as these would apply to all SMS firms and would not be tailored to individual firms). Example objectives include treating users fairly, open choices and trust and transparency (giving users clear information to understand services). SMS firms would be expected to take steps to ensure compliance with the objectives and the code overall.
Interventions
The advice also recommends that the DMU has powers to intervene when an SMS firm’s market power becomes an issue at a market level (and therefore cannot be addressed by the code of conduct), e.g. obligations to provide access on fair and reasonable terms; separation remedies to ensure different business lines in a company are operated independently and data-related interventions.
Merger control
The current UK merger regime is voluntary. The CMA’s concern is that SMS firms may impede competition by purchasing smaller, possible competitors without appropriate scrutiny by a regulator.
It has therefore suggested a requirement for all SMS firms to make the CMA aware of any transactions, with those transactions that meet certain thresholds requiring mandatory detailed notification (with discretion to intervene where the thresholds are not met). Transactions that are notified will not be able to close until the CMA has completed its review of the transaction.
The CMA has not yet suggested the specific thresholds at which a transaction would require a full notification, but has indicated it would prefer a ‘size of transaction’ test. It has also not suggested detailed assessment criteria, but expects the DMU to use the existing ‘substantial lessening of competition’ approach.
Other reforms
The CMA’s advice focuses on SMS firms. However, it also advises that the DMU should monitor digital markets to ensure there are no wider problems – for example, by having broad information gathering powers, gathering market intelligence, identifying matters for enforcement and publishing guidance and recommendations.
The CMA also believes the DMU should be able to make or recommend Market Investigation References (MIRs). MIRs result in a detailed examination by a regulator of specific problems in a market and can lead to industry-wide changes – for example, the CMA’s 2016 energy market MIR.
The CMA also recommends that the government strengthen powers to enable effective consumer choice, reduce online harms and prevent illegal activity on digital platforms, as well as more effective enforcement of the Platform to Business Regulation
The CMA also recognises that the DMU will need to work with other regulators, both in the UK (for example, the ICO, FCA and Ofcom) and internationality.
Next steps
The changes proposed by the CMA are wide-ranging and have the potential to significantly affect how companies within digital markets can operate. It remains to be seen as to how much of the CMA’s advice is adopted by the government. The UK government has committed to consult on proposals for a new pro-competition regime in early 2021 and to legislate to put the DMU on a statutory footing when parliamentary time allows.
New EU legislation
Firms operating in the EU will also need to account for new EU digital markets rules, which were proposed shortly after the CMA’s advice was published. The EU proposals have similarities to those suggested in the UK in that they are designed to regulate firms that have a level of market power to enable them to keep others out of the market. The proposed EU legislation would cover all digital services, creating:
- A new Digital Services Act for services connecting consumers to goods, services, or content; and
- a new Digital Markets Act about fair markets, focusing on platforms who act as ‘gatekeepers’, e.g. platforms who control how other firms can access the platform
However, the EU rules are unlikely to be in force in the near term as the EU Commission’s consultation on the proposals closes on 10 February 2021 and then the proposals will need to go through the European Parliament.
If you would like further information on the matters covered in this article, please contact Chris Worrall or David Varney.
This article was written by Shachi Nathdwarawala.