The UK’s pro-competition regime for digital markets: how do we make it a success for UK tech?
Across the world, governments are taking steps to develop new approaches to regulating competition in digital markets. This ranges from the EU’s Digital Markets Act which sets specific ex-ante rules that large platforms (so called “gatekeepers”) will have to implement, to the US where action is being taken via an anti-trust route in the courts.
What is the UK approach:
The UK Government’s proposals for a pro-competition regime for Digital Markets aims to take a third way between the approaches taken by the EU and US and will be implemented in the upcoming Digital Markets, Consumer and Competition (DMCC) Bill.
Instead of setting uniform rules for a large number of platforms or through court cases the UK’s pro-competition regime for Digital Markets will establish a specialised regulator within the existing Competition and Markets Authority (CMA), the Digital Markets Unit (DMU). This follows in-depth research from the Furman Review and CMA Digital Markets Taskforce.
The DMU will be given powers to investigate specific digital activities to determine whether firms operating within these have Strategic Market Status (SMS). These firms not only need to be shown to have substantial and entrenched market power but their market power must also give them a strategic position that could have adverse effects on competition with implications for innovation and consumers.
The regime will differ from traditional competition policy by taking an ‘ex-ante’ and ‘participative’ approach to regulation, where rather than the regulator (the DMU) intervening after the fact it instead will have an established ongoing relationship with the companies that have been designated as having SMS status as well as working with impacted stakeholders such as competing firms and consumers. This combination of an ex-ante and participative approach is designed to increase the speed and flexibility of the regulator, recognising the dynamic nature of digital markets.
The regime will be structured around ‘conduct requirements’ and ‘pro-competition interventions’ (PCIs). Conduct requirements and PCI’s will be targeted by the DMU to address the sources and consequences of market power in digital activities with ‘SMS’ firms.
Conduct requirements will be legally binding and tailored to the digital activities and individual business(es) where SMS has been identified. The conduct requirements will require changes in SMS firm behaviour to promote fair trading, open choices and trust and transparency. The Government has said the conduct requirements will seek to enforce behaviour changes including, not applying discriminatory or exclusionary terms, preventing the bundling, or tying of products or services and providing clear and relevant information to users.
PCIs are further actions the regulator can take, over and above the conduct requirements. These will be able to be designed a tailored and flexible way and will be aimed at addressing the root causes of entrenched market power. Interventions could include requiring interoperability and data portability between services or even structural changes to a business or its products.
Following the aim of the regime to be targeted the DMU will principally focus on the areas where SMS status has been identified. This means that generally only certain business activities of the SMS designated firm will be captured by the regime. However, some aspects of PCIs and ‘conduct requirements may impact on the entire SMS firm,’ for example on mergers and principle 2e.
Is the UK’s approach the right one?
techUK has welcomed the pro-competition regime. We see this as a more effective approach to addressing competition concerns in digital markets than comparable regimes, such as in the EU or the USA.
Empowering a specialist regulator to work with in-scope firms and the wider market to design targeted remedies could prove more effective than the broad rules in the EU DMA. While the specialist and focused nature of the DMU will allow the regime to be more flexible than traditional market investigations or anti-trust rules, as remedies can be modified or extended over time or withdrawn when they are no longer needed.
The structures of the DMU are not just for today’s market dynamics and must stand the test of time. We have therefore worked with our membership to identify where policy questions have arisen and need to be addressed to ensure this landmark regime works for the tech sector.
What more needs to be done to get the pro-competition regime to work for UK tech?
The ultimate aim of this regime is to address the consequences and sources of market power that lead to SMS positions. The pro-competition regime must therefore be able to make targeted and well-informed interventions that remedy anti-competitive behaviour and stop anti-competitive practices, enhancing the contestability of digital markets with benefits for innovation, consumer choice and competition within the UK tech sector.
Getting this right will require adhering to four principles:
- The DMU takes the lead: by ensuring the pro-competition regime clearly empowers the regulator to take the initiative in designing and enacting competition remedies,
- Interventions are evidence based and consulted on: the DMU must work with all market participants, including competing firms and consumers, so that solutions to address entrenched market power and anti-competitive behaviour can be as well informed as possible.
- There is clarity over the structures and processes of the pro-competition regime: by ensuring the aim for the regime to be flexible and act at speed is balanced with clear structures in legislation, giving clarity over how the pro-competition regime will operate in practice,
- The regime contains appropriate checks and balances: this means ensuring the DMU acts proportionately and includes checks and balances including redress mechanisms for regulated companies.
Below we identify some key remaining areas where further clarity and decisions from Government are needed to meet these four principles.
- Definition of ‘digital activities’
- Consultation on competition remedies
- Pro-competition interventions
- Consumer benefits exemption
- Principle 2e
- Final offer mechanism (FOM)
- Information gathering powers
- Appeals standard
- Ensuring effective engagement with firms during Bill passage
- Ensuring the DMU is well resourced and maintains expert staff
- Accountability of the regulator
Definition of ‘digital activities’: The pro-competition regime will be focused on specific ‘digital activities’, terminology that will be defined in legislation.
The Government should continue to engage with the sector ahead of any final definition being produced in legislation. Any definition must recognise the diversity of digital activities that take place within a range of markets. Digital markets are often complex, include non-digital components and have a range of substitution options, challenges around interoperability and varying market contestability. An isolated focus on purely ‘online’ or ‘digital’ activities or just B2C or B2B would not be appropriate.
Any definition should therefore review all the components of activities where digital is a ‘core’ element and focus on identifying and seeking to address the circumstances that give rise to SMS and the consequences of that market power.
Consultation on competition remedies: one of the benefits wider market participants see from the UK’s pro-competition regime is that the DMU will initiate and design remedies based on the evidence it gathers from SMS firms and the wider market. This is one of the main advantages of the UK’s pro-competition regime over the EU DMA.
It is important that there are clear consultation and evidence gathering requirements for the DMU. These must ensure the DMU works fairly with SMS firms, challengers, smaller firms and consumers throughout the process, ensuring that the design of conduct requirements applied to SMS firms and PCIs consider evidence from all sides allowing interventions to be targeted and capable of delivering effective outcomes. This kind of engagement will be vital to ensuring the regime can meet its objectives.
The DMU must also allow evidence to be submitted in confidence as well as engaging in wider public consultations where appropriate.
Pro-competition interventions: PCI’s aim to provide a flexible and graduated approach to addressing adverse effects on competition identified by the DMU. Going further than conduct requirements, these interventions give the DMU open ended powers. At their maximum interventions could see the regulator make significant decisions about an SMS firms business model and could include structural remedies at a product or business level.
Ahead of the introduction of a PCI, the DMU must be required to evidence the adverse effect on competition it wants to address, explain the target outcome of a proposed PCI, how it will monitor implementation and set out general metrics/ outcomes for success that it will use to determine whether the intervention has been effective. Where appropriate PCIs should also be tested before being rolled out to the wider market, for example in sandboxes.
Consumer benefits exemption: techUK is supportive of the Government’s intention to provide additional protection to consumers via a consumer benefit exemption. However, this is providing the right balance can be struck.
The countervailing consumer benefit test must operate as an exceptional defence i.e an appeal to conduct requirements and be subject to a high bar.
The ‘indispensability test’ currently proposed by the Government has raised concerns over workability. Under existing competition law the indispensability test is almost never met. This could be even more challenging in an ex-ante regime where no detailed effects analysis will be required by the regulator. Further, the indispensability test can lead to significantly resource intensive investigations for all parties and lengthy timelines.
The Government did not consult on the consumer benefit exemption in the original consultation and given the concerns raised should review whether the indispensability test is appropriate.
Principle 2e: The Government has proposed that there should be a category of conduct requirement which prevents a designated firm from entrenching its position in its designated activity via changes to other parts of its business. techUK understands the general aims of principle 2e however it is not clear how it will work in practice. To be effective the Government must be clear about the policy intent.
In our view principle 2e should be a focused tool that seeks to meet the aims of the pro-competition regime. To do this the Government needs to be clearer about what it intends.
Conduct requirements in the pro-competition regime seek to level the playing field between SMS firms and their competitors. Principle 2e should therefore be aimed at preventing SMS firms from finding routes to gain unfair advantages in their designated activity area or circumnavigate their other conduct requirements.
2e however should not seek to create a hazard or cautious approach to innovation or product launches or other improvements outside of the area where SMS has been designated. 2e must also not prevent SMS firms from engaging in fair competition with other incumbents in other markets.
The Government needs to therefore provide additional clarity on the behaviours that are in and out of scope of this conduct requirement, be clear the aim is to prevent unfair advantages and set out how the consumer benefit exemption applies to this principle.
Final offer mechanism (FOM): the Government has indicated it plans to include a proposal for a final offer mechanism (FOM) to settle pricing disputes within the pro-competition regime. This mechanism was not included in the initial consultation and it remains unclear what the Government’s policy proposal is given no specific use cases have been set out beyond disputes between platforms and news publishers.
Both the CMA Digital Markets Taskforce and Cairncross review have questioned suitability of an arbiter as envisaged in an FOM mechanism to determine a fair value of exchanges. Instead the Digital Markets Taskforce favoured the DMU seeking to determine whether terms are fair and reasonable through conduct requirements, taking into consideration the volume of content published, the price paid, and the service provided.
The Government needs to provide further detail on this policy and how it will interact with the fair-trading principle of the conduct requirements.
Key outstanding questions over the policy remain including:
- The Government must clarify the aims of a FOM. In particular whether it is limited only to B2B relationships, whether it is exclusively related to pricing disputes or whether it covers wider agreements that do not include an exchange of money (such agreements are utilised widely across the digital economy).
- The Government must also set out what safeguards will be included to ensure that any FOM mechanism does not short-circuit the conduct requirements and lead to an over reliance on litigation or to general price setting.
- Clarification around the rules of the proposed arbitration process.
techUK does not in principle oppose the introduction of a FOM. However, there are questions about how such a mechanism would work in practice. Additional clarification and engagement with businesses of all sizes should be undertaken before such a proposal is included in a Bill.
Information gathering powers: the DMU should have information gathering powers equivalent to Ofcom and the CMA. Information gathering powers should be used in a targeted way and avoid over-burdening segments of a market or types of companies, particularly competing firms.
The Government has recently raised proposals to give the DMU power to gain access to the IT systems and equipment of SMS firms and force live tests. Such a power goes significantly beyond information gathering and has not been consulted on widely. Such a change would set a concerning precedent given wider regulatory changes on algorithmic transparency and access by regulators across the digital economy.
The Government needs to set out clearly the reason such additional powers would be needed (given the CMA already has significant power to scrutinise algorithms) and consult more widely with the industry.
Appeals standard: The way companies can appeal decisions of the DMU is fundamental for the success of the regime. Appeals must be heard quickly and be able to establish whether the decision taken by the DMU was correct or not.
Decisions by the DMU which could be subject to appeal include, the designation of SMS status and creation of conduct requirements, fines of up to 10% of global turnover and the application of PCIs which could include structural remedies for individual products or the business as whole. Appeals are made to the Competition Appeals Tribunal (CAT).
The Government is currently proposing that the standard of appeal should be based on Judicial Review (JR) principles. Purely reviewing on JR would mean appeals would only be available on process, i.e. whether the DMU had followed the right steps in reaching its decision. Such an approach would not consider the merits of the case, such as whether the DMU made a materially wrong decision, for example in the application of a fine.
The Government has said that a JR standard offers increased speed and is comparable to other regulatory regimes. However it is not clear that this is the case, as set out in a legal analysis by Sir Jonathan Jones KC.
The pro-competition regime must have an appeals process that is fast, fair and allows appeals to be made on whether the DMU has made the correct decision given the significant powers available to the regime. Whether court proceedings are fast can depend on factors such as court lists and barrister availability as well as other factors independent of whether the judicial oversight is based on a ‘full merits’ or a ‘JR’ standard. However, steps can be taken to speed up the process.
techUK proposes the Government look again at the appeals standard and considers the application of what is known as the Judicial Review plus (JR+) standard in the Bill.
The JR+ standard is applied by the CAT in ex-ante telecoms regulation. Further the Government should amend the rules of the appeals body, the CAT, to ensure appeals made against the decisions of the DMU are taken within a short, fixed, timeframe.
- Through the JR+ standard the CAT would consider appeals against DMU interventions ‘on judicial review principles, but take due account of the merits’. This will depend on the grounds of the appeal and the significance of the DMU action.
- Under a JR+ standard appeals against the basic functions of the regulator, such as designations, information requests, conduct of investigations etc. would likely only be subject to an appeal on pure JR grounds. Significant decisions such as in the case of major fines and pro-competition interventions would likely see the CAT consider the merits of the case and not just whether the DMU had followed the right processes.
- The Government should change the rules of the CAT to introduce a time limit on appeals against DMU decisions. This should be no more than 6 months. A 6-month time period has been sufficient to conclude telecoms cases under an ex-ante regime and there are similar statutory limits in other sectors, e.g. in financial services and energy.
- Further the Government should ensure that the CAT prioritises DMU appeals and applies equal fixed time periods for parties to submit evidence. This should further speed up the appeals process.
By taking these steps the Government can find a balance between allowing appeals based on the merits of the decision but also ensuring appeals are concluded quickly supporting the objectives of the pro-competition regime.
Ensuring effective engagement with firms during bill passage: as part of the passage of the legislation Parliament and the Government must create opportunities for firms of all sizes to engage with legislators in confidence. To provide effective scrutiny to the DMCC Bill, MPs and Lords will need to understand the complex relationships that exist in digital markets, where many firms will not be able to explain in public due to legitimate commercial sensitivities.
The Government, Select Committees, Standing Committees and APPGs are therefore encouraged to run private and closed sessions, where appropriate, to allow individual firms to provide feedback on the legislation.
Ensuring the DMU is well resourced and maintains expert staff: given the highly technical and likely demanding nature of the DMU’s work it is vital for the success of the regulator that it is sufficiently well resourced and is able to recruit and retain expert staff.
The activities of the DMU will be funded by the Exchequer, but with costs partially recouped by a levy on SMS firms, similar to existing models such as between Ofcom and its regulated companies. As part of its regular monitoring of the CMA’s activities Government – and the NAO here appropriate – should engage with the sector on whether the DMU is proving to be adequately resourced to carry out its statutory duties effectively.
Accountability of the regulator: Overall techUK has welcomed the UK’s approach to digital regulation, with legislation framing policy objectives for regulators (such as boosting competition in digital markets and aiming to make the UK the safest place to be online) and then giving those regulators the flexibility to work with the industry and stakeholders to achieve those goals.
Once on a statutory footing, DMU will gain significant power to direct policy that could have widespread impacts on our society and economy. As part of this enhanced role for the regulator it is vital that further steps are taken to ensure greater accountability and scrutiny.
This can be done via structures within the regulator itself, for example by through the wider use of independent panels within the DMU to assess decisions as well as through stronger accountability mechanisms via strategic steers and exchanges of letters between the Government and the regulator, as well as greater parliamentary oversight.
Such accountability mechanisms must be supported through consultation and feedback from the industry and wider stakeholders. Recent examples of these types of mechanisms working in practice can be found between DCMS and the Digital Regulation Cooperation Forum which has helped promote efforts to improve transparency.
techUK will continue to engage with DSIT on the policy development of the UK’s Pro-competition regime.
Neil Ross
As Associate Director for Policy Neil leads on techUK's public policy work in the UK. In this role he regularly engages with UK and Devolved Government Ministers, senior civil servants and members of the UK’s Parliaments aiming to make the UK the best place to start, scale and develop a tech business.
Margherita Certo
Margherita is the Head of Press and Media at techUK, working across all communications and marketing activities and acting as the point of contact for media enquiries.
