‘Sending out an SMS’ – UK proposes powers for regulating digital markets

Background

On 20 July 2021, the UK Government announced a consultation (‘A new pro-competition regime for digital markets’) in which it seeks views on the objectives and powers of the Digital Markets Unit (DMU) that was formally launched in April on a non-statutory basis (see our previous update UK’s Digital Markets Unit: referee has been appointed, now is your chance to help write rules of the game).

Interested parties have until 1 October 2021 to provide their views and feedback. The Government will then consider input it has received and provide a response to the consultation.  Thereafter, it aims to legislate to put the DMU on a statutory footing "as soon as Parliamentary time permits".

Proposals

The main proposals set out in the consultation are as follows:

SMS designation: power for the DMU to designate tech companies as having ‘Strategic Market Status’ (SMS) where they hold ‘substantial and entrenched market power’, thus ensuring the regime is focused only on firms viewed by the DMU as having the greatest capacity to create potential harm.

The assessment of SMS is also based on particular activities rather than all of a company’s activities – focusing only on the parts of a potential SMS company’s business model which are viewed as posing the greatest risk to competition.  This will be based on a market power assessment taking into account a range of quantitative and qualitative factors.  The DMU will focus on a prioritised selection of the strongest candidates for intervention.

Code of Conduct:  a new mandatory code of conduct to govern the behaviour of companies designated as having SMS – setting out expectations in terms of fair trading, open choices, trust and transparency vis-à-vis their relationships with customers and competitors.

Enforcement powers: 

• robust investigation and enforcement powers underpinning the code, including powers to impose fines of up to 10% of global turnover for the most serious breaches; and

• powers to suspend, prohibit and ultimately unwind code-breaching behaviour by SMS firms – for example, requiring changes to propriety algorithms, terms & conditions of use, and/or ordering them to take specific actions to comply with the code.

Pro-competitive interventions: permitting the DMU to intervene and impose measures to tackle the “root causes” of competition concerns in digital markets – for example, facilitating compatibility between digital platforms, customer switching as well as ensuring consumers are given choice and control over the collection and use of their data.

SMS merger control:

The Government is also considering whether the Competition and Markets Authority (CMA) should have specific powers to scrutinise and intervene in certain mergers involving SMS designated companies (and what substantive standard should be applied where a review takes place). 

Jurisdictional changes

The Government is proposing some significant changes to the merger review thresholds for SMS firms.  They are proposing mandatory merger reviews for the largest SMS transactions (with a possible fast-track review of deals that clearly do not raise concerns).  In addition, there is also a proposed obligation for SMS tech companies to report all proposed acquisitions, regardless of the market in which the target is active. 

The consultation also proposes an amendment to the voluntary regime for SMS firms: a ‘transaction value’ threshold subject to a ‘UK nexus test’.  This is designed to capture low turnover deals, including ones involving promising start ups that might otherwise fly under the CMA’s jurisdictional thresholds. 

Substantive issues

The Government is proposing to keep the ‘substantial lessening of competition’ test but to reduce the probability threshold in Phase 2 inquiries to match that used at Phase 1: moving from "more likely than not" to "realistic prospect".  This means that the CMA would be applying the same test at Phases 1 and 2 – the only differences would be procedural (length and depth of investigation, and different decision-makers).  This is an area where the Government has particularly emphasised its openness to views put forth by stakeholders.

Get in touch!

Get in touch to discuss the consultation and the impact some of the proposals might have on your business. We have a deep understanding of the regulatory landscape and detail of what has been discussed so far. We also have extensive experience of working inside government, and advising corporations on the machinery of government and policy priorities.  Let us help you to engage with the Government and relevant stakeholders as part of this important consultation process.

Authored by Christopher Hutton, Alice Wallace-Wright, Matt Giles and Robert Gardener.