DCMS sets out plans for a new pro-competition regime for digital markets: How will it impact the tech sector?
On Friday 6 May, the government issued a response to the consultation on A new pro competition regime for digital markets. The objective of the proposed new regime is to “actively boost competition and innovation by tackling the harmful effects and sources of substantial and entrenched market power.”
The Government response sets out a more developed design of the new proposed regime which was based on feedback from more than 100 written contributions.
In its response to the consultation, techUK welcomed the new regime as a focused, well informed and targeted approach to updating competition policy in the UK post Brexit, comparing favourably to similar proposed regimes in the EU and the US.
The proposals include establishing a dedicated Digital Markets Unit (DMU) responsible for designating firms with ‘strategic market status’ (SMS), overseeing mandatory ‘conduct requirements’ for SMS firms and implementing pro-competitive interventions (PCIs). The design also includes proposals to strengthen regulation over mergers in digital markets.
Commenting on the proposals, Neil Ross, Associate Director for Policy at techUK said:
"techUK welcomes the UK’s approach to delivering a new pro-competition regime for digital markets. The strength of the UK’s approach is in its targeted nature, which seeks to address concerns over anti-competitive practices in specific areas while not intervening where the market is working well and already delivering for consumers.
"The government's decision to help clarify the scope of the regime and ensure codes of conduct are flexible and tailored is a welcome step forward, as is the more targeted approach to merger reform and the minimum revenue threshold which will provide smaller companies with certainty that they won't be in scope.
"However, the consultation response raises major outstanding questions over key terms and arbitration mechanisms. It is also not clear when the new regime will be implemented. We urge the Government to engage with the sector to resolve these issues to support the wider UK economy."
The Government's response: how will it impact the tech sector?
The Digital Markets Unit
The DMU will be responsible for implementing and enforcing the new pro-competition regime. Its core objective will be to promote competition in digital markets within and outside the UK for the benefit of consumers. The DMU will have to actively consider the impact on innovation when it takes action, but it won’t be included explicitly as a core duty.
techUK welcomes the creation of the DMU as an independent regulator. We believe specificity and focus are the most effective ways to oversee competition in a busy space for regulatory action, with other regulators better placed to make decisions on other areas of digital policy.
techUK welcomes that the Government followed industry's recommendations of not broadening the regime's remit by giving the DMU wider powers beyond competition, as well as introducing a statutory requirement for the DMU to consult and communicate with other regulators such as Ofcom and the FCA.
The activities of the DMU will be funded by the Exchequer, but with costs partially recouped by a levy on SMS firms. techUK advised the government against moving to a full or partial levy funding as this could create perverse incentives. As the Government moves forward with the regime we would welcome greater clarity on how the levy will be constructed.
Strategic Market Status
The regime will remain focused on specific ‘digital activities’, however the Government has said it needs to do further consultation to define this in terminology in legislation.
techUK welcomes the Government’s continued assertion that Strategic Market Status will only be applied a small number of firms which meet the criteria of having substantial and entrenched market power in an activity, providing the firm with a strategic position.
The introduction of a strong UK nexus test so the designation is focused on the competition impacts in the UK, and the proposal for a minimum revenue threshold to make it clear which firms are out of scope of the designation are welcome and will help ensure the SMS designation is focused.
The list of criteria used to assess whether a firm has a strategic position will be exhaustive and set out in legislation, and there will be a requirement for the DMU to publish guidance on these concepts, including how they will be applied in practice. techUK believes this is a step in the right direction, providing certainty to businesses about how the SMS designation process will work, however guidance should be designed considering input from industry.
The DMU will have discretion to decide how to prioritise which cases to take forward in line with its statutory objectives and duties. Moreover, the statutory deadline to complete the SMS designation assessment has been set out at 9 months, against the advice from industry and the Digital Market Taskforce of 12 months.
Concerns have been raised on the government's approach in response to some of the SMS designation process proposals. For example, it does not expressly address what would happen if competing firms are designated with SMS at different times, nor what mechanism will be in place to remove SMS status if the market changes. Providing this certainty to business will be key for the success of the new regime.
Conduct requirements
Codes of conduct for SMS firms will include principles set at a high level in legislation (Fair Trading, Open Choices, Trust and Transparency) but will largely be specific legally binding codes tailored to individual firms through a process of consultation with the DMU. This will allow the system to function effectively in line with the DMU's objectives while also providing adequate flexibility and proportionality. This was the approach suggested by techUK and it is welcome to see this reflected in the Government’s response.
The categories of conduct requirements will include a category which prevents a firm from leveraging other parts of the business to further entrench its power in an activity where it is deemed to have SMS. However, the Government has also suggested it does not want to prevent leveraging and will seek to ensure that SMS firms can continue to invest in markets where they do not have market power.
techUK is unclear how these two objectives will be satisfied. If applied incorrectly it could lead to firms with SMS status scaling back investment in markets where they are the new entrant or are seeking to compete with market leaders. Ultimately with poor outcomes for consumers.
The Government has also stated that they are are minded to introduce a mechanism, as proposed by the CMA and Ofcom, based on binding final offer arbitration to address pricing-related disputes. This would be for use in the event that the DMU’s codes of conduct and pro-competition interventions cannot address these alone. techUK has concerns about how such a mechanism would work in practice, as if applied incorrectly or at two low a threshold, such a mechanism risks short circuiting the DMU by encouraging arbitration rather than market-based solutions via an expert regulator. techUK will work closely with the Government to establish further clarity on this proposal.
The DMU will be able to respond to breaches of conduct requirements by issuing interim orders, which can pause or reverse actions taken, as well as through final enforcement orders. techUK supported the use of interim code orders in principle, however the thresholds for triggering their use should be high. The use of interim code orders must also be subject to appeal and redress if used incorrectly.
Pro-competitive interventions (PCIs)
Pro-competitive interventions are proposed to tackle the ‘root causes’ of entrenched market power. These will not be limited to a constrained list of specific remedies set in legislation. Instead the DMU will have broad discretion over which remedies to implement at the end of the pro-competitive intervention process. Remedies may go from including the ability to enforce interoperability between platforms or services, to implement ownership separation remedies, which is expected to be used only where other remedies are insufficient.
The government’s approach in this section follows techUK’s advise that PCIs should be proportionate, evidence-driven and that the DMU should take an iterative approach to intervention. techUK believes PCIs, particularly first instance PCIs, should be narrow in scope tightly focused on addressing consumer harms where they can be identified.
The DMU will also be able to take a flexible approach to imposing pro-competitive interventions, from accepting binding undertakings from firms to trialling and iterating new remedies. The pro-competitive interventions investigation will have a 9 month statutory deadline, with an optional 3 month extension for special reasons.
Concerns arise as the DMU will be able to implement a pro-competitive intervention anywhere within a Strategic Market Status firm (provided that it relates to a competition concern in a designated activity).
As set out in our response to the consultation, if the government wants to continue with the alternative of implementing a PCI outside of the designated activity of an SMS firm, this should be subject to a high test and wide consultation, and in our view should only be undertaken where the DMU can demonstrate a flagrant violation of the objectives of the code of conduct (Fair Trading, Open Choices, Trust and Transparency).
Regulatory framework
The DMU will be able to impose financial penalties of up to 10% of a firm’s global turnover, along with an additional 5% of daily turnover each day the offence continues, for regulatory breaches and up to 1% of global turnover for information offences, with additional 5% daily penalties available for continued non-compliance.
Civil and criminal penalties will be available for anyone knowingly or recklessly providing false information to the DMU. There will be the option to impose civil penalties on named senior managers who fail to ensure the firm complies with requests for information, and director disqualification for regulatory breaches.
The DMU will be able to interrogate algorithms’ impact on competition and require that firms carry out field trials (including A/B testing) to evaluate the impact of new innovations or processes if necessary.
Decisions of the DMU will be subject to review on judicial review principles following the approach taken in respect of decisions by other ex ante regulators such as Ofcom. This approach goes against industry’s advice that the appeal body must be able to examine the appropriateness of the DMU's judgements and outcomes, not merely the procedure used to get them.
Merger reform
The final set of proposals include the introduction of a new mandatory reporting requirement for firms designated with Strategic Market Status. Prior to completion of transactions which exceed the proposed thresholds, SMS firms will be required to report them to the CMA. The CMA will then have an initial review of the mergers to consider whether it would warrant further investigation.
In response to the consultation, techUK recommended that the government narrow the scope of its merger reform changes, such as not lowering the standard of proof for Phase 2 mergers involving SMS firms from 'more likely than not' to a 'realistic prospect' of a substantial lessening of competition, given that this could harm innovation and investment. The announcement that no changes to the Phase 2 merger intervention criteria will be adopted is welcomed by techUK.
Next steps:
While the consultation response provides new levels of detail on how the proposed new pro-competition regime will work in practice, it leaves open to further consultation key terms and mechanisms. There is also significant uncertainty over when the regime will actually be introduced through legislation and how as a result the UK’s regime will interact with similar reforms being undertaken by the EU.
techUK will continue to closely monitor the debate on digital market competition, working closely with government, parliament and the DMU to provide input and feedback from our members.
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