techUK responds to Government's consultation on a new pro-competition regime for Digital Markets

techUK has responded to the DCMS/BEIS consultation on the new pro-competition regime for digital markets. Through this new regime the Government intends to address anti-competitive practices in digital markets, specifically in activity areas where some digital firms have significant and far-reaching market power.

techUK welcomed the publication of the pro-competition regime proposals 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 consultation follows in-depth studies of digital markets including the recent CMA market study into online platforms and digital advertising and the Furman Review, where the Government committed to establishing a dedicated Digital Markets Unit (DMU) responsible for designating firms with ‘strategic market status’ (SMS), overseeing a mandatory code of conduct for those firms and implementing pro-competitive interventions.

This consultation is hugely significant as while the proposed Digital Markets Unit will predominately engage with firms designated to have strategic market status (SMS) the effects of the regime will be felt across digital markets in the UK.

techUK has worked with companies from across our membership to respond to this consultation. The key points of techUK's response to the consultation are:

The Digital Markets Unit (DMU)

The main goal of the DMU should be to promote competition. However, techUK members have been open to the concept of providing the DMU with a supplementary duty to take regard for innovation. Such a duty however should be tightly targeted to require the DMU to consider the impact on innovation across digital markets when regulating SMS firms, for example considering any downstream effects of regulatory action such as preventing other companies from using a service provided by an SMS firm or restricting partnerships. Following the objectives of the Government’s Plan for Digital Regulation the duty for innovation should aim to leave open the use of non-regulatory interventions which could meet the competition objectives set by the regime, for example encouraging firms to innovate and update products to address competition issues identified by the DMU before taking enforcement action.

In the consultation the Government asks whether the DMU should have broader duties beyond digital markets. techUK's view is that the DMU should remain focused on addressing competition issues only in digital markets. The UK digital economy is a busy space for regulatory action and one of the benefits of the DMU proposals are its specificity and focus, with other regulators better placed to take decisions on other areas of digital policy. The DMU should also be funded from the Exchequer, as moving to a full or partial levy funding could create perverse incentives. This would be a particularly sensitive issue as the DMU by its very nature will only be engaging with a small group of firms.

techUK also agrees with the Government’s view that that providing wider monitoring powers for the DMU could duplicate the responsibilities of other regulators creating a more confusing and less effective regulatory environment.

Strategic Market Status

techUK supports the Government’s aim to limit the scope of the activities assigned with SMS to those where digital technologies are “a core component of”, rather than just “material to” the activity. We also believe the DMU should keep the SMS designation tightly focused on particular activities, rather than capturing multiple arms of a firm. This we see as the core benefit of the regime, allowing the DMU to zero in where anti-competitive practices exist while still enabling fair competition between SMS firms where neither one is dominant in a particular activity.

techUK supports the three SMS test criteria which we believe provides a sufficiently clear and high threshold for assigning SMS. techUK also does not in principle oppose the methods set out in the consultation to assess SMS status.

techUK broadly supports the proposed SMS designation process, however where possible the Government should seek to apply SMS status to firms at the same time. It is possible in the initial rollout of SMS status competitors in one market or designated activity will each be assigned SMS status in a separate market or designated activity. Due to some of the cross-firm proposal suggested in this consultation, such as on mergers, this could see one firm face a competitive disadvantage for a significant period of time (9 -12 months or longer) while its competitor is still being assessed. Competition between firms with SMS status brings benefits for consumers and the UK should aim to ensure that where this takes place outside of SMS designated activities this is on a level playing field. 

An enforceable code of conduct

The code of conduct sets out how firms designated with SMS -in the specific activity or set of activities- are expected to behave, with the goal of prevent negative outcomes before they occur. We agreed with the Government that the three objectives of the code should be fair trading, open choices, trust and transparency as they provide a fair identification of the behaviours the code should seek to address.

Of the three options set out for code principles, techUK supports a model based on option 3. However, we believe to achieve the aims of the DMU option 3 should only involve setting legislative proposals as high-level guiding principles, with the vast majority of the legally binding principles should be developed by the DMU at the individual firm level. This will allow the system to function effectively in line with the DMU's objectives while also providing adequate flexibility and proportionality.

We also recommended to remove principles that affect the entire firm, such as the principle 2(e), as we do not see leveraging as inherently problematic and it can even promote competition in markets where a SMS company operates. The DMU should not stand in the way of this kind of disruptive entry.

Pro-competitive interventions (PCIs)

PCIs are measures designed to address the root causes of substantial and entrenched market power in digital markets. techUK agrees with the Furman review, the CMA’s Online platforms and digital advertising market study, that PCIs are highly invasive measures that should be used with caution. Therefore, we recommended the DMU take a scalable approach to PCIs with these being held in reserve as an intervention of last resort. PCIs should be narrow in scope focused on reducing the harm caused and should be based on large amounts of evidence.

Furthermore, we believe PCIs should be addressed only to activities where the firm is found to have SMS, consistent with the aim of increasing competition in an area where the designated firm has significant market power. We do not recommend it, but if the government wants to allow the use of a PCI outside of the designated activity of an SMS firm, this should be subject to an extremely high test and wide consultation.

The process to monitor, review and amend PCI remedies is hugely important and should not just come from the DMU itself, but allow for SMS firms, affected or interested third parties to request a review of the effectiveness of these interventions. Such a review should serve to assess the effectiveness of the PCI, whether circumstances have changes and whether the PCI remains proportionate to the anti-competitive behaviour it was instigated to address..

Regulatory Framework

We agree with the Government that the legitimacy of the new regime, which will have ramifications well beyond the UK's borders, will be dependent largely on the perceived fairness of the DMU’s procedures. techUK members welcome the Government's position that the DMU must ensure that all its measures are "objective, proportionate, and evidence-based".

We are concerned, however, that any mistaken judgement by the new regime could have serious consequences for the competition and innovation of the whole sector. Given the potential far reaching implications of the regime, as well as the fact that the regime is novel and untested, we believe having a full merits review standard, rather than the judicial review standard suggested is fundamental to ensuring the regime is proportionate and perceived as fair by the industry.

Merger Reform

Ensuring the UK remains an attractive destination for investment will be vital in the upcoming years, as the UK must send strong signals that it is open for business. A big risk is that as the global economic recovery gets underway there is hesitancy around investing in the UK. This is particularly risky to tech and M&A activity, Deloitte’s Q2 2021 CFO survey shows firms are focused on investment in tech and digital and M&A activity as key to accelerating growth over the next three years.  

We understand and share the idea that any anti-competitive behaviour in digital markets should be addressed. We also recognise that mergers and acquisitions (M&A) can be a significant component of market concentration in particular situations, requiring the development of appropriate regulatory frameworks to tackle down these specific circumstances. However, we are concerned that the measures described in the consultation document do not strike the right balance and may lead, to a reduction in M&A activity in the UK economy. This is particularly when we consider the further major overhauls that are being made to the M&A regime in the UK such as the CMA’s merger assessment guidelines published in March 2021 and the new National Security and Investment regime due to go live from early 2022.

While we await the DCMS response to the consultation, techUK will continue to closely monitor the debate on digital market competition, working closely with the government to provide input and feedback from our members.

techUK’s complete submission on the proposed pro-competition regime for digital markets can be found here.

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