Background

Tightening the regulation of digital markets has long been on the policy agenda in the UK. It has also been part of a worldwide trend. For a while it seemed that the UK was gearing up to open the regulatory path, taking some important early steps. However, as priorities were reshuffled, the UK was overtaken by other jurisdictions, most notably by the EU where the Digital Markets Act was adopted with speed and came into force on 1 November 2022.

The origins of the Bill (published on 25 April 2023) can be traced to the recommendations of the influential Furman Report in 2019, but the current form of the proposed regime is the product of a consultation on digital market regulations held between July 2021 and May 2022.

Our previous piece in this series (Power to the CMA – UK publishes flagship draft Digital Markets, Competition and Consumers Bill) outlined at a high level the reforms envisaged by the Bill. In this alert we take a deeper dive into the scope and potential impact of the new digital markets regime. In the coming weeks, we will publish further deep dives on the Bill’s reforms to competition law and consumer law.

Designation – which entities can be caught?

The designation conditions

The proposed regime is designed to target companies which have Strategic Market Status (“SMS”), i.e. companies that have “substantial and entrenched market power” and a “position of strategic significance” in relation to a digital activity that the CMA considers to be linked to the UK. Breaking down these elements:

• Digital activities include the provision of a service by means of the internet, or of one or more pieces of digital content (in each case, whether paid for or otherwise), as well as activities supplementing the above.

• A digital activity is linked to the UK if it has “a significant number of UK users”, the relevant undertaking carries on business in the UK in relation to the digital activity, or the digital activity (or the way in which it is carried on) is likely to have an “immediate, substantial and foreseeable effect on trade in the UK”.
• To assess whether a company has substantial and entrenched market power the CMA will carry out a forward-looking assessment over a period of at least five years. This will take into account factors including expected or foreseeable counterfactual developments should the CMA not designate an undertaking, as well as any developments that may affect the undertaking’s conduct in carrying out the digital activity.
• A company will have a position of strategic significance where at least one or more of the following conditions is met:

• it has achieved a position of significant size or scale in respect of the digital activity,
• a significant number of other undertakings use the digital activity in carrying on their business,
• its position in respect of the digital activity would allow it to extend its market power to a range of other activities, or
• its position in respect of the digital activity allows it to determine or substantially influence the ways in which other undertakings conduct themselves.

Even if these conditions are met, the CMA will only be able to designate a company as having SMS if it satisfies the turnover condition, i.e. if in the most recent 12 month period for which the CMA is able to make an estimate (or the preceding 12 month period in certain circumstances):

• The group’s total global turnover arising out of any of its activities exceeds £25 billion, or
• The group’s total UK turnover arising out of any of its activities exceeds £1 billion.

The designation procedure

The CMA must first undertake an “initial SMS investigation”. Such investigations may last up to nine months (extendable by up to three months in limited circumstances) and can only be undertaken where the CMA has reasonable grounds to consider that it may be able to designate a company as having SMS. The CMA has wide discretion in the designation process. It can decide to close investigations early (and potentially to reopen them at some later date) or to start new initial investigations where it has previously decided not to designate an undertaking.

Once designated, the undertaking will be considered to have SMS for five years. During this period, the CMA can undertake “further SMS investigations” (which, again, may last up to nine months and can be extended by three months in limited circumstances) into whether a designation ought to be revoked or renewed at any time (but must conduct such investigations at least nine months before the expiry of a designation).

Practical observations on designation

The CMA's margin of discretion: The Bill does not define many key concepts, giving the CMA a wide margin of discretion in designating companies as having SMS. For example, the meaning of a “significant” number of UK users and an “immediate, substantial and foreseeable effect on trade in the UK” (in the context of the UK nexus test), as well as the meaning of a “significant size or scale” and an ability to “substantially influence the ways in which other undertakings conduct themselves” (in the context of the position of strategic significance), are each left to the CMA to determine. However, the turnover threshold condition is clear-cut.

Multiple designations: By design, an individual undertaking can have SMS for multiple activities. This can place significant compliance obligations on companies which may operate across multiple digital activities, with multiple “further SMS investigations” carried out every five years.

Transparency: The CMA must publish a statement summarising the contents of an investigation notice, and will carry out a public consultation on any SMS designation decision.

Conduct requirements

The Bill empowers the CMA to impose conduct requirements on designated undertakings (i.e. requirements on how to conduct themselves in respect of a digital activity) if it considers that it would be appropriate for the purposes of at least one of the following objectives:

• Fair dealing: to ensure that (potential) users are treated fairly and are able to interact with the undertaking on reasonable terms.
• Open choices: to ensure that (potential) users are able to choose freely and easily between the services provided by the relevant undertaking and by other undertakings.
• Trust and transparency: to ensure that (potential) users have the necessary information to understand the provided services or content and the terms on which they are provided, and to make properly informed decisions about whether and how they interact with the undertaking.

The Bill limits the CMA’s discretion in this area by mandating that any conduct requirements must be of a “permitted type”, i.e. they must fall within one of the broad categories of requirements outlined in the Bill itself. This “menu” of options covers the sort of remedies which competition authorities have sought to include in similar laws, including the EU Digital Markets Act. These include possible requirements to be transparent, to give notice ahead of changes to terms and to use choice menus, as well as prohibitions on self-preferencing, bundling, misuse of data and restricting interoperability.

Conduct requirements will likely be issued together with SMS designation decisions and will be subject to public consultation. The CMA must also publish guidance about how the requirements will operate in practice, and will keep requirements under review to assess their effectiveness and to determine whether they should be varied or revoked (any change will also require a public consultation).

Enforcement

The CMA may open a “conduct investigation” lasting up to six months (extendable by a further three months in certain circumstances) where it has reasonable grounds to suspect a breach of a conduct requirement.

Designated undertakings may make representations to the CMA, including to demonstrate that the “countervailing benefits exemption” is met. This exemption aims to ensure that conduct which produces net consumer benefits and which satisfies specific conditions (similar to the conditions for anticompetitive agreements to be exempted from the Chapter I prohibition on the basis of efficiencies) will not breach conduct requirements. Undertakings may also make voluntary commitments to change their behaviour which, if accepted, will avoid the finding of a breach.

Where the CMA finds a breach, it may make an enforcement order imposing obligations to stop the breach, prevent it from reoccurring and / or address any resulting damage. The CMA may also make interim enforcement orders where it considers it necessary to act during an ongoing investigation.

Where a designated undertaking has breached an enforcement order in relation to a conduct requirement about payment terms with third parties, the Bill includes a targeted conflict resolution mechanism. The mechanism provides that, if certain conditions are met, the CMA may require the parties to share information (with the CMA and / or between themselves) and to submit “final offer payment terms” to the CMA. The CMA will then make an order selecting the terms of the relevant transaction (and any subsequent transaction between the parties which is substantially the same as the proposed transaction).

Pro-competition interventions

The Bill also gives the CMA the power to make a pro-competition intervention (“PCI”) in relation to designated undertakings where the CMA considers that:

• factors relevant to a digital activity are having an adverse effect on competition (i.e. prevent, restrict or distort competition), and
• making a PCI would be likely to contribute to, or otherwise be of use for the purpose of, remedying, mitigating or preventing the adverse effect on competition.

To determine whether these conditions are met, the CMA must first conduct a PCI investigation which may last for up to nine months (extendable by three months in limited circumstances) and which will be run alongside a public consultation. In considering whether to make a PCI at the end of this process, the CMA may take into account any existing or expected benefits to UK users or customers resulting from the digital activity under investigation.

At the end of the process, the CMA will have a wide power to make pro-competition orders (i.e. orders imposing requirements on how undertakings must conduct themselves in relation to digital activities, including the full remit of structural and behavioural remedies, on a permanent or trial basis) or to make recommendations to other regulators. The CMA will also have the power to accept commitments to close an investigation.

The CMA must carry out a review of each pro-competition order made at a date specified in the original order notice, and determine whether to revoke or replace it. Pro-competition orders will cease to have effect if an undertaking's SMS designation lapses or is removed.

These PCI powers are very similar to the existing powers of the CMA to conduct market studies and investigations on competition grounds.

Merger control

Undertakings designated as having SMS must report to the CMA all acquisitions of businesses or creations of joint ventures which carry on activities in the UK or supply goods or services to persons in the UK, where:

• the designated undertaking increases its share or voting rights in the undertaking above thresholds of 15%, 25% or 50%, and
• the consideration provided for the acquired shares or voting rights (or, in the case of a joint venture, the consideration plus all capital and assets provided by the designated undertaking to the joint venture) is at least £25 million.

In contrast to the voluntary reporting obligations under the wider UK merger control regime, this reporting obligation is mandatory and must take place prior to closing. Following receipt of the report, the CMA will have five working days to determine whether to open an investigation under the standard merger control regime in the Enterprise Act 2002. The parties cannot close the transaction during this five working day period.

Investigations and Enforcement

The CMA has been given extensive powers to investigate breaches and impose penalties.

Investigatory powers: In the exercise of any of its digital markets powers, the CMA may request information (including information stored outside the UK) by issuing an information notice to the relevant undertaking. If the CMA considers that an undertaking has not complied with such a notice, it has the power to access (including without a warrant) its premises, equipment, services information or employees and interview relevant persons to supervise the collection of information, observe the undertaking’s conduct in relation to users or observe a demonstration/test of the relevant digital activities.

Nominated officers: Designated undertakings must nominate a senior manager to be responsible for monitoring and ensuring compliance with all undertakings and for cooperating with the CMA. The nominated officer will also have to produce a compliance report for the CMA setting out whether and, if so, how the officer considers that the undertaking has complied with the requirements as well as any other information specifically requested by the CMA.

Fines on companies: The CMA may impose fines of up to 10% of global group turnover (backed by daily fines of up to 5% of group daily turnover) on designated undertakings which have, without reasonable excuse, failed to comply with an imposed requirement or a given commitment in the context of a conduct requirement or PCI. Failure to comply, without reasonable excuse, with an investigative requirement, or providing false or misleading information, may lead to a fine of up to 1% of global turnover (backed by daily fines of up to 5% of group daily turnover).

Fines on individuals: The CMA may also impose fines on individuals such as senior managers and nominated officers for failure, without reasonable excuse, to comply with investigative requirements, or for the provision of false or misleading information to the CMA. Such fines may not exceed a maximum of £30,000 (for a fixed fine) or £15,000 per day (for a daily fine).

Director disqualification: The CMA may disqualify individuals from serving as directors for up to 15 years for non-compliance with a conduct requirement or PCI without requiring a court order.

Criminal offences: The Bill introduces offences which may result in a fine or, in more serious cases, imprisonment for up to two years (or both), for:

• destroying or falsifying information required to be provided to the CMA or any other person as part of an investigation,
• intentionally or recklessly providing false or misleading information to the CMA in connection with its digital markets functions, and
• obstructing an officer of the CMA acting in the exercise of its investigatory powers.

Private actions: the Bill expressly provides that a conduct requirement or requirement imposed (or a commitment given) following a PCI is to be treated as a duty owed to any person who may be affected by a breach. This would allow any such person to bring civil proceedings seeking damages if they can show that they suffered loss resulting from a breach.

Appeals to the Competition Appeal Tribunal (the “CAT”)

The CAT must apply judicial review principles when reviewing any decision made by the CMA in connection with its digital market functions (with a limited exception relating to fines). This is in line with the approach to the merger control regime under the Enterprise Act 2002, but may be contrasted with the position under the Competition Act 1998 where (with a few limited exceptions) appeals are determined on a full merits basis.

Looking forward

We can expect ongoing evolution of the regime, both as the Bill makes its way through Parliament and subsequently, through guidance and developing practice. It will also be some time before we see the first SMS designations. It is nonetheless important for all firms with a presence in digital markets (whether they may be designated as having SMS status or have business relationships with such firms) to prepare for the new regime and to understand what it means for their businesses, especially in combination with the competition and consumer law reforms that the Bill introduces. We will publish further deep dives into the implications of these other changes in the coming weeks.

Please get in touch with us to discuss the impact that the UK’s new digital markets regime and competition and consumer reforms could have on your business, and how we can help you prepare for the changes.

Authored by Stelios Charitopoulos, Angus Coulter, Christopher Hutton, and Mez Azizi.