The UK’s new digital markets regime: Unfettered discretion and power for the CMA
Background
On 24 May 2024, royal assent was granted to the UK Parliament’s Digital Markets Competition and Consumers Act (“DMCC”) (available here), a year after the Bill was first introduced to Parliament. The DMCC brings the most significant reforms to UK competition and consumer law in two decades, enhancing the existing powers of the Competition and Markets Authority (“CMA”) that apply across the economy.
The DMCC introduces three key areas of change: (i) the introduction of a new ex ante digital markets regime; (ii) the strengthening of the CMA’s consumer law enforcement powers; and (iii) the bolstering of the CMA’s administrative and investigative powers more generally. The UK Government announced its timeline for the Act’s commencement on 9 September 2024. The first part was the digital markets and competition reforms. This is due to begin in December 2024/January 2025. The regime will be run by the Digital Markets Unit (
“DMU”), a new directorate that sits within the CMA, which has been preparing in “shadow” form since 2021 to take up its new role.The incoming SMS Regime will sit alongside the CMA’s economy-wide powers and hand it a powerful new toolkit specifically tailored for the “digital age”, to complement them and fill perceived gaps. While the objectives of the regime are very similar to the European Union’s Digital Markets Act (“DMA”), the UK regime is significantly more flexible, targeted and tailored. The SMS Regime, unlike the DMA, which has presumptions and rules written by the European Parliament is flexible: there are no thresholds and no rules until the CMA creates them. The CMA intends to take a new ‘participative approach’ to regulation under the SMS Regime, which will involve inclusive and transparent engagement with all stakeholders throughout the regime’s enforcement. Moreover, the CMA intends to take a new ‘participative approach’ to regulation under the SMS Regime, which will involve inclusive and transparent engagement with all stakeholders throughout the regime’s enforcement.
We summarise below the new rules that could apply to the designated addressees and how the CMA is expected to implement the SMS Regime in practice. Overview of the SMS Regime
The SMS Regime started its journey with the Furman Review
(a report on competition in digital markets by independent experts, commissioned by the government and concluded in 2019), which recommended establishing a dedicated digital markets unit and the implementation of ex ante rules to better regulate platforms identified as having “strategic market status”. This was closely followed by a Digital Markets Taskforce (
“Taskforce”
) led by the CMA in 2020, providing advice and recommendations to the UK government on the potential design and implementation of such a regime. In parallel, the CMA also conducted various investigations into the functioning of certain digital markets using its market study tools (including its Digital Advertising and Mobile Ecosystems Market Studies), the findings of which provided yet further impetus for the need for regime change to tackle the perceived competition concerns in digital markets.Despite various political setbacks, the DMCC was eventually introduced to Parliament in Spring 2023 and gained royal assent a year later. While there was much debate on the regime during the Parliamentary process, its core elements have not changed significantly since the Bill was introduced and contain most of the key elements envisaged from the Taskforce and Furman Review. SMS Designation
Designation is the gateway to the SMS Regime, from which all powers and obligations will flow. Once designated, the firm will remain under the SMS Regime for at least five years. It will also be subject to various monitoring requirements and obligations, as determined by the CMA. The CMA will have broad powers and discretion to design and impose various obligations on firms in relation to the relevant designated activity. Instead, once designated, the CMA will then have broad powers and discretion to design and impose various obligations on firms in relation to the relevant designated activity.
The CMA may designate a firm as having SMS where it demonstrates, following a 9-month investigation period (extendable by 3 months), that on the balance of probabilities, the following tests are met:
Turnover:
as an initial threshold test, any potential SMS firm must reach minimum turnover requirements (across its corporate group, including from non-digital activities) of: (i) PS25 billion global turnover; or (ii) PS1 billion UK turnover (s. 7 DMCC). While this test is significantly lower than e.g., the DMA’s quantitative turnover threshold, the intention is to provide clear legal certainty to smaller firms against potential designation, with the CMA’s expectation being that in reality only a handful of the largest firms will actually be designated.
Digital activity:
- The CMA must identify a relevant digital activity operated by the firm to designate. This can include all services offered by the firm via the internet or digital content (e.g. Mobile apps, gaming content, and music content are all included in this. As well as any activities performed for these purposes (s.3 DMCC). The CMA will, unlike the EU’s DMA determine and define each digital activity through separate investigations. It has a wide discretion to group the activities of an enterprise into a single designation, provided they have substantially similar/similar purposes or can be performed in combination to fulfill a specific purpose (section 3(3) of the DMCC). This discretion allows the CMA the opportunity to streamline multiple investigations and consolidate them into one. However, it also presents the risk that without adequate limitations, this could be a backdoor by which the CMA designates activities where there is no substantial market power. This is a broad interpretation and will be difficult for the CMA prove. where the digital activity has a significant number of UK users, it carries on business in the UK, or is likely to have an effect on trade in the UK (see s. 4 DMCC).Substantial and entrenched market power (“SEMP”):
- the CMA must show that the firm has both substantial and entrenched market power (two separate tests), assessed by a forward-looking analysis projected into at least the next 5 years (taking account of any expected or foreseeable developments if the firm were not designated) (see s. 5 DMCC). The DMA does not have any quantitative thresholds to presuppose the existence of SEMP. The CMA has also stated that, despite the similarities between the “Significant Market Power Framework” in the OFCOM context and the CMA’s draft Digital Markets Competition Regime Guidance, (see CMA194con)), the SEMP test would not (as OFCOM currently does) draw upon the concept of “dominance”, and it would not apply highly relevant lessons from abuse of dominant enforcement on “market-power” and “dominance”. The test, therefore, hands a great deal of discretion to the CMA to produce a finding of SEMP.
- Position of strategic significance: Designation also requires a firm to have a position of strategic significance in relation to the relevant digital activity. As with SEMP there are no quantitative thresholds to raise a presumption. The CMA is required to demonstrate that the relevant digital activity meets one of four broad criteria, i.e. The CMA may use a wide range of quantitative and qualitative evidence to make such a finding (para 2.63 of CMA 194con), and it is likely that the strategic significance test will be a low bar for the CMA to prove. The CMA can use a wide range of quantitative and qualitaitive evidence to make a determination (para 2.63 in CMA 194con) and it’s likely that the strategic importance test will be a low bar to prove. The CMA expects that the initial designation of firms will reflect those already under scrutiny elsewhere (e.g. The CMA will only consider firms that are already under scrutiny (e.g., ‘gatekeepers” under the DMA), and where there is a history of concern (e.g., recent or ongoing market / antitrust investigations). In practice, the first designations won’t be made until late-2025. Nine months after the commencement, and unlike the DMA not all rules will apply at once. The CMA will have a separate process to design and impose obligations to designated firms. This is described in more detail below. The CMA will then have the ability to vary and iterate these obligations throughout the SMS firm’s 5-year designation period. The CMA will then have the ability to vary and iterate these obligations throughout the SMS firm’s 5-year designation period.
- Conduct Requirements (CRs)Where a firm is designated as having SMS, the CMA will develop a bespoke code of conduct setting out the firm’s CRs for the designated activity/activities.
- The CMA’s power to write conduct requirements is extremely broad – the only real requirement is that CRs must be “proportionate” (the proportionality test being arrived at following much Parliamentary debate) in the pursuit of principles of fair trading, open choice, trust and transparency (s 19(5 DMCC). The DMCC defines these principles very broadly, giving the DMU a wide range of discretion to decide which obligations should be imposed to each firm. Although it is likely that the CRs will contain many of the same requirements that are in the DMA we expect that some aspects of the SMS Regime go beyond the DMA intervention (as they will be more targeted to each SMS company) while others will be less restrictive. (For further comments on this aspect please see here). As mentioned above, in order to maximize efficiency, initial CRs will be developed for prospective SMS companies (and they will be consulted) simultaneously with the SMS designation investigation. The CMA will then be able impose the CRs immediately after the firm has been formally designated. The exact content of the CRs is therefore finalised along with designation (i.e. The CMA can, of course, decide to change or iterate additional CRs on the SMS firm at a later date. The CMA may decide to change or iterate the CRs at a later time. The CMA can launch a six month conduct investigation if it has reasonable grounds for suspecting a CR violation (see ss. During this period, it can also impose interim enforcement orders and has the power to accept commitments from SMS firms in lieu of enforcement (s. 32 DMCC). As part of the investigation into conduct, an SMS company may also provide evidence that the benefits of its conduct to users outweighs the harms caused by the breach, and that these benefits “couldn’t be realised” without the conduct (see ss. 29 and 29(2) DMCC). This is called the “countervailing benefit exemption” and it effectively establishes an defence against a breach. The bar for achieving this exemption is high and focuses on the user benefit. Unlike other traditional competition law tools, it is not simply a case of identifying an “objective justification” argument.
The CMA also has the power to subject SMS firms to the final offer mechanism (“FOM”
) as a backstop for CR non-compliance. The CMA can apply the FOM when it has already imposed the CR that the SMS firm must trade on fair and reasonably priced terms and the SMS company fails to comply with the CR enforcement order. FOM is a way to ensure “fair” conditions between SMS firms, and those who deal with them. The CMA does not need to act as a regulator of prices in such circumstances. The CMA will then invite both the SMS firm and third party to submit an offer of payment terms that they deem fair and reasonable. The CMA will select between the two offers. The FOM is designed to address the imbalance of bargaining power between SMS companies and other businesses by incentivizing parties to negotiate honestly and fairly on payment conditions (i.e. as the CMA will only choose between two offers, parties will be motivated to submit offers that are closer to a fair share of the joint value in order to increase their chances of being selected) (for more information on FOM, please see here
). While the concept of FOM is derived from the context of negotiations between platforms and publishers (first considered in the CMA and Ofcom’s joint advice to the UK Government on Platforms and Content Providers
in 2021), under the DMCC, the CMA is not limited to only using FOM in such contexts.
Pro-competition interventions (PCIs)
The CMA will also have the ability to impose PCIs that address the ‘root causes’ of market power in the designated activity. These powers are similar to the ones that the CMA had under a Market Investigation Reference but with a shorter timetable (nine months). It can begin a PCI when it has reasonable grounds for believing that a digital activity is having an adverse impact on competition in the UK. The CMA will issue a PCI Decision Notice if it finds that there is an AEC. Within four months, if it would be proportionate, it may impose procompetition orders, ranging from behavioural remedy to structural/operational separation of SMS business units. The order can also include requirements to test different remedies or remedy design options in a limited manner before imposing PCIs on an ongoing basis (s.51 DMCC). CMA can accept SMS firm commitments in lieu of a procompetition order. When assessing whether a factor or combination of factors is having an AEC, the CMA will also consider in its assessment any competition-enhancing efficiencies that have resulted, or may be expected to result, from such factor(s) (see para 4.13 CMA 194con).
The CMA has also suggested that it may launch possible PCI investigations within a few months of commencement of the DMCC (see para 1.7 of the DMCC Roadmap).
Digital merger reporting requirementsThe DMCC imposes certain mandatory merger reporting obligations on SMS firms, which contrasts against the typically voluntary nature of the UK’s merger control regime. In particular, SMS firms will be obliged to report all material acquisitions (i.e., deal values of PS25m and over) to the CMA which will result in the SMS firm’s group having “qualifying status” (i.e., where shares / voting rights cross thresholds of 15%, 25% or 50%) in any undertaking that carries on activities in the UK, or supplies goods and services in the UK.The CMA has published details of its proposed SMS Merger Reporting notice as part of its consultation on guidance for the SMS regime.
More generally, and outside the scope of this article, the DMCC also brings a host of other significant changes to UK merger control processes, which applies equally to all firms, irrespective of their ‘digital’ status (see here
).
Appeals
Most decisions of the DMU will be subject to a review by the Competition Appeal Tribunal (CAT) on ‘judicial review’ grounds, and any person with sufficient interest can apply for review. This restricts the grounds on which a decision can be challenged: the CAT will only be able to intervene on grounds such as procedural fairness and errors of law, not purely on the basis that it would have reached a different conclusion.
Appeals of fines will be different: fines for breach can be appealed ‘on the merits’, while categories of financial penalties for procedural breaches, which will be reviewed in line with s.114 Enterprise Act which allows the CAT to quash a penalty, reduce the amount of penalty and change the date on which a penalty is payable.
Ultimately, this means that judicial oversight of many of the DMU’s most consequential decisions (e.g., to designate a firm as having a SMS and impose conduct requirements) will remain limited, both in itself and by comparison to comparable regimes. The Secretary of State must approve the SMS Regime guidance, which is critical in a regime with such broad and vague power. This provides some parliamentary oversight over the CMA’s abilities. The CMA will also report to Parliament on the DMCC as part of its Annual Report.
ConclusionAs the CMA prepares for the commencement of the DMCC in late 2024/early 2025, greater clarity is emerging on how it intends to administer the SMS Regime, including on how firms may engage in the process. The CMA has issued its DMCC Roadmap and a consultation on its proposed SMS Regime guidance (which will ultimately need to be approved by the Secretary of State – a late amendment to the legislation during the Parliamentary process intended to make the CMA more accountable to Parliament).
The DMCC hands the CMA incredibly broad powers to administer a regime that – if it achieves its stated goals – will be more flexible, targeted and proportionate than its EU counterpart in the DMA. The CMA has a great deal of discretion in deciding which rules to apply and who should be regulated. While the SMS regime will undoubtedly look a lot like the DMA in many ways, the CMA can go beyond the DMA where it feels it is appropriate. The CMA will also be under pressure to make sure that the UK doesn’t appear ‘unfriendly to tech businesses’. This creates an interesting tension that will undoubtedly loom over the operation and the CMA’s ability to navigate these potentially conflicting demands will be fascinating.
