Digital Markets, Competition and Consumers Bill: New regulatory regime for digital firms with Strategic Market Status

Introduction

The Digital Markets, Competition and Consumers Bill (the Bill) was introduced into Parliament on 25 April and is expected to enter into force in 2024. The long-awaited Bill follows the Government’s responses to the “reforming competition and consumer policy” and “a new pro-competition regime for digital markets” consultations published last year. The legislation will, among other things, underpin and provide statutory powers for the Digital Markets Unit (DMU), within the Competition and Markets Authority (CMA), which will oversee a new digital regulatory regime, intended to promote greater competition and innovation in digital markets and protect consumers and businesses from unfair practices. The Bill will materially increase regulatory oversight of the digital sector, giving the regulator various powers, including powers to impose new conduct requirements on the largest firms.

The new regime

Purpose and scope

The Bill establishes a new, targeted regime, overseen by the DMU. The DMU will be given a suite of new powers: these include powers to designate firms with Strategic Market Status (SMS) in respect of a digital activity, oversee conduct requirements for those SMS firms, implement “pro-competition interventions” (including remedies and potential structural separation) and issue fines for non-compliance with obligations under the regime.

Strategic Market Status

The DMU will designate companies that are SMS firms in respect of a digital activity. This will be limited to companies with turnover of either £25 billion globally or £1 billion in the UK – and only if the digital activity is linked to the UK and the firm meets the “SMS conditions” for that activity:

• A digital activity is linked to the UK if: (a) the digital activity has a significant number of UK users; (b) the firm carries on business in the UK in relation to the digital activity; or (c) the digital activity or the way in which the firm carries on the digital activity is likely to have an immediate, substantial and foreseeable effect on trade in the UK. Factors such as the location of a firm’s headquarters will therefore be irrelevant.
• The SMS conditions are two-fold regarding the digital activity, requiring the firm to have:
  • substantial and entrenched market power – based on a forward-looking assessment over at least five years, taking into account expected or foreseeable developments if the firm was not designated as having SMS in respect of the digital activity, and which may affect the firm’s conduct in carrying out the activity; and
  • a position of strategic significance – which will be the case if any of four criteria are met: (i) the firm has significant size or scale in respect of the digital activity; (ii) a significant number of other firms use the activity in their business; (iii) the firm’s position in respect of the activity would allow it to extend its market power to a range of other activities; or (iv) the firm’s position in respect of the activity allows it to determine or substantially influence the ways other firms conduct themselves.
• In terms of what constitutes a “digital activity”, this appears to be relatively broad under the Bill, capturing: (a) the provision of a service by means of the internet (for consideration or otherwise); (b) the provision of one or more pieces of digital content (for consideration or otherwise); or (c) any other activity carried out for the purposes of an activity within (a) or (b). Services provided for free are therefore caught.

SMS firms will be designated after an investigation which can last up to nine months. Under the new regime, SMS firms will have to abide by certain requirements, including specific conduct requirements in relation to digital activities in respect of which they are designated as having SMS.

Enforcement powers

The DMU will be able to intervene and set tailored rules on how SMS firms behave and operate. Conduct requirements will be able to be imposed on SMS firms if considered appropriate for one or more of three objectives (the “fair dealing objective”, the “fair choices objective” or the “trust and transparency objective”), and provided the conduct requirement is of a “permitted type” (of which there are 13 set out in the Bill, some of which oblige an SMS firm to act in a certain way, such as trading on fair and reasonable terms, whereas others prevent certain conduct, such as applying discriminatory terms, conditions or policies).

For example, an SMS firm may be instructed to provide more choice and transparency to their customers, to give their customers greater flexibility when purchasing products online, to remove technical barriers that block users from using products on different devices and systems, or instruct firms to increase the transparency of how their app store or review systems work.

If firms do not comply with these rules, the DMU will have the power to fine them up to 10 per cent of their global turnover and to disqualify directors. The DMU will also be empowered to tackle deeper competition issues in digital markets by carrying out targeted pro-competition interventions, potentially opening new paths for SMEs that have previously struggled to grow and compete in these markets.

Another key aspect of the SMS regime is that SMS firms will be subject to new mandatory merger control requirements to report transactions for review where the SMS firm (or any member of its group) will obtain a “qualifying status” in respect of shares or voting rights in relation to a UK-connected body corporate, and the value of all consideration they provide is at least £25 million. A qualifying status means acquiring 15 per cent or more, more than 25 per cent or more than 50 per cent of shares or voting rights. Joint ventures will also be caught.

Appeal process

Firms will generally be able to challenge DMU decisions through the mechanism of judicial review in the Competition Appeal Tribunal. This limits the scope of decisions which can be challenged to those where the CMA has not followed processes correctly, rather than so-called merits appeals where the decision itself may be deemed incorrect. Companies will therefore have fewer ways to overturn a decision.

Comment

Sarah Cardell, Chief Executive of the CMA, said of the Bill: “This has the potential to be a watershed moment in the way we protect consumers in the UK and the way we ensure digital markets work for the UK economy, supporting economic growth, investment and innovation… It will establish a tailored, evidenced-based and proportionate approach to regulating the largest and most powerful digital firms to ensure effective competition that benefits everyone.”

Certainly, the Bill represents an important milestone for the CMA which has long pushed for more powerful tools to regulate digital markets. By providing, in effect, the UK’s first digital regulatory framework, the Bill has the potential to enable significant intervention in digital markets. The Bill also brings the UK closer into line with the EU in its regulation of digital markets.

However, it remains to be seen how firms of all sizes operating in digital markets respond to the DMU’s new remit and powers. The Government will not want to discourage investment and innovation in the UK with an overly restrictive regime. Notwithstanding this, we expect the CMA to apply their new powers eagerly, given the importance of digital markets for UK consumers. Companies affected by the new regime will no doubt be pleased to be able to review the draft legislation at last, but there is still likely to be considerable debate over the interpretation and application of these provisions in practice and it will be interesting to see whether there are any notable changes as the Bill passes through the Parliamentary process.