The (not so) new frontier: long-awaited digital, competition and consumer law reforms finally reach the UK Parliament
On 25 April 2023, the UK Government introduced the long-awaited draft Digital Markets, Competition & Consumers (DMCC) Bill, implementing wide-ranging reforms to competition and consumer protection laws. The legislation will put the Digital Markets Unit (DMU) on statutory footing and introduce a new regulatory regime for digital markets. The legislation will also bring in other reforms to UK competition law outside the digital space, including changing the jurisdictional thresholds for mergers and strengthening the CMA’s investigative toolkit, as well as significantly bolstering the CMA’s consumer law powers.
These reforms have been discussed and broadly consulted on for many years and the content of the draft legislation largely aligns with the reforms set out in the Government’s April 2022 announcement. The DMCC will now have to be passed by the two houses of Parliament and receive royal assent.
There remains a long road ahead: even if the Bill is given top legislative priority and passed by the end of this year or early next, it is unlikely to come into force before the second half of 2024. The digital markets rules are likely to start applying to the designated tech companies only in 2025 following the nine-month designation process.
The Bill is a monster: at 388 pages it could be the subject of a book, but in this post, we look at the key changes to the UK’s competition and consumer protection regime as set out in the draft legislation.
Keeping up with the EU: DMU to finally have statutory powers
After early indications that it would be a trailblazer, the UK fell behind other regulators in implementing regulation to tackle perceived competition issues associated with the largest tech companies. While the basic shape of the UK regime introduced in the bill was first announced in 2020, political turmoil has seen it drop down the legislative agenda, with the DMU which opened in April 2021 only operating in shadow form. In the meantime, the EU has forged ahead with the Digital Markets Act (DMA) that entered into force in November 2022. Its obligations will bite from March 2024. Germany also introduced new rules in January 2021 and has further reforms afoot relating to DMA enforcement.
Strategic Market Status designation
A cornerstone of the draft legislation is the DMU’s power to designate firms as having Strategic Market Status (SMS) in respect of a digital activity linked to the UK.
- “Digital activities” is a very broad term that captures the provision of services by means of the internet as well as the provision of digital content (and any activities carried out for the purposes of those provisions). The DMCC is not limited in scope by reference to a fixed list of products or services (as the DMA is for the ten “core platform services”).
- A digital activity is considered to be “linked to the UK” if it has a significant number of UK users, the undertaking carries on business in the UK in relation to the digital activity, or if the activity (or the way it is carried out) is likely to have an immediate, substantial and foreseeable effect on trade in the UK. These are alternative, not cumulative, conditions and will be easily met by most tech majors.
- SMS is based on whether a firm has “substantial and entrenched market power” and “a position of strategic significance”. The DMCC sets out certain broad conditions for each requirement. However, absent further guidance it appears that the DMU will have a considerable degree of latitude in assessing these conditions.
A revenue threshold applies so that only firms with global turnover exceeding £25bn, or UK turnover exceeding £1bn are within scope of the legislation. This will likely exclude (at least for now) some significant tech companies including Spotify, Epic Games and TikTok which do not currently exceed these thresholds.
The SMS regime is not self-executing; designation can only occur after an SMS investigation (that can take up to 9 months). An investigation can be initiated if the DMU has reasonable grounds to consider that it may be able to impose the SMS designation. However, the regulator does not have an obligation to investigate every company that potentially meets the criteria and retains discretion on which designation assessments to prioritise. In practice, it is expected that the DMU will prioritise designations of a handful of the largest tech companies that the CMA has already been scrutinising in recent years through market studies and competition investigations.
Consequences of SMS designation
Codes of Conduct. The DMU will develop firm-specific Codes of Conduct to regulate each SMS firm’s behaviour in relation to the activities for which they have been designated (following a public consultation). The DMCC sets out “permitted” types of conduct requirements based on principles of fair trading, open choices and trust and transparency and the scope of what is permitted is incredibly broad, giving the DMU extremely broad latitude in deciding what should be included for each firm. While it is likely that the Codes of Conduct will include many of the same requirements as in the DMA, we expect that aspects of the UK regime will go beyond the DMA interventions and be more targeted to each SMS firm. The precise content of the Codes of Conduct will not be finalised until the time of designation (end 2024 / early 2025, at the earliest), but there will be public consultation on the proposed requirements before that.
The DMU will have power to fine firms up to 10% for breaching the Code of Conduct, and also to resolve suspected breaches of Codes of Conduct through a commitments route.
Pro-competitive interventions (PCIs). The DMU will have the ability to impose PCIs that address the “root causes” of market power in the designated activity, similar to its market study/investigation tools, but on a shorter (nine month) timetable. It may begin a PCI investigation when it has reasonable grounds to consider that factor(s) relating to a digital activity may be having an adverse effect on competition in the UK. Following an investigation, the DMU may issue pro-competition orders ranging from behavioural remedies to structural / operational separation of business units within a firm.
Mandatory reporting of mergers. SMS firms will be required to report transactions which result in an entity in the SMS group having:
- “qualifying status” i.e. shares/voting rights increase from less than 15% to 15% or more; 25% or less to more than 25%; and 50% or less to more than 50%;
- in a “UK-connected body corporate” i.e. an undertaking that carries on activities in the UK, or supplies goods and services to person(s) in the UK;
- for a consideration of at least £25m.
Unlike the general UK voluntary merger control regime, reporting is mandatory and must be done prior to closing. The CMA will publish a notice setting out the form and content of the report, but it will be significantly more limited than a full merger notice and its purpose is only to give the CMA sufficient information to determine if it wants to open a full investigation under the regular merger control regime. The CMA will have five working days to confirm if the report is sufficient, and the transaction cannot close in this period.
The CMA appears to have significant latitude regarding the timeline given it needs to be satisfied that the report is sufficient. In practice this is likely to create a practice of “pre-report” engagement with the CMA that will need to be factored into deal planning for SMS firms.
Standard of 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. As we’ve outlined previously, 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.
A limited exception is made for certain categories of financial penalties, which will be reviewed in line with S.114 Enterprise Act. This will allow the CAT to quash a penalty, reduce the amount of penalty and change the date on which a penalty is payable.
Beyond tech – super-charging the existing competition regime
As anticipated, the DMCC also introduces changes to the existing competition regime that apply across the economy. Some of these continue to expand the CMA’s role, allowing the review of an even greater number of foreign-to-foreign deals and capturing extraterritorial antitrust conduct.
Merger control: enhancing the CMA’s already elastic jurisdictional thresholds
The UK is known for its uniquely elastic jurisdictional thresholds which the CMA has utilised to review foreign-to-foreign deals, especially in the tech and life sciences space. The DMCC updates these thresholds, designed to expand jurisdiction in potential competition and non-horizontal cases (although there are modest changes that ostensibly reduce regulatory burdens).
- A new “acquirer-focused” threshold that will be met if one of the parties supplies at least 33% of good or services in the UK and has UK turnover of over £350m, and the other party is a UK business, carries on at least part of its activities in the UK, or supplies goods and services in the UK. This appears directed at so-called “killer acquisitions” and other non-horizontal mergers where the acquirer is a significant player in the UK. This expanded threshold will likely capture all acquisitions by SMS firms that are subject to mandatory reporting.
- The turnover threshold will be increased from £70m to £100m in line with inflation. This will have little to no practical impact on the number of global cases reviewed, given the voluntary nature of the regime and the fact that substantive issues rather than turnover thresholds tend to drive which cases the CMA looks at.
- Safe harbour for mergers where each party’s UK turnover is less than £10m. This is again a fairly narrow exception since in almost all cases reviewed by the CMA, the acquirer at least has material UK turnover.
The UK merger control regime will remain voluntary and non-suspensory. Although a greater number of transactions will now meet the jurisdictional thresholds, the CMA will still prioritise merger investigations in line with its enforcement priorities.
The DMCC will also effect a number of procedural changes to the merger control regime including: (i) allowing a fast-track Phase 2 reference on request from the merging parties; (ii) extending the Phase 2 timetable following consent of the parties; and (iii) publishing merger notices on the CMA’s website.
Antitrust: stronger (extraterritorial) enforcement
The Chapter I prohibition (the UK’s Article 101 TFEU equivalent) will be amended to apply to agreements implemented outside of the UK, where there are (or are likely to be) direct, substantial, and foreseeable effects within the UK. As we noted last year, this signals a reversal of the UK’s historical resistance to the extraterritorial application of its laws.
In line with the consultation last year, the CMA will be given a range of new powers including enhanced evidence-gathering powers (including stricter requirements for parties to preserve and retain evidence) and the ability to act as a “specified prosecutor” to enhance criminal cartel enforcement.
Enhanced powers for the Competition Appeal Tribunal
The CAT’s jurisdiction will be extended to grant declaratory relief in individual and collective claims relating to the Chapter I and II prohibitions. This will allow the CAT to provide a declaration on how the law applies to the facts of the case and avoid the need for claimants to formulate their claims as damages claims or applications for injunction. The DMCC also allows the CAT and the courts to make awards for exemplary damages in private competition law claims, although not in collective claims.
Market inquiries: more efficient, flexible and proportionate
The DMCC introduces some reforms to the market inquiries regime, while retaining the two-stage market study and market investigation system. It will bring improvements to the CMA’s procedures by: (i) allowing the ability to accept undertakings at any stage of a market study or investigation; (ii) allowing the CMA greater flexibility to define the scope of market investigations; and (iii) do away with the rigid requirement to consult on whether to make a market investigation reference six months into the market study process (which recently saw the CAT find that the CMA’s Mobile Ecosystems and Cloud Gaming Market Investigation was ultra vires in Apple’s recent successful appeal to the CAT). To ensure imposition of workable remedies, the CMA may require businesses to “trial” remedies before finalising a remedy package.
Enhanced consumer protections
The DMCC provides for two regimes for the enforcement of consumer protection law: a court-based regime based on the existing Enterprise Act 2002, and a new direct enforcement regime that will be monitored by the CMA, dispensing with the need for lengthy court processes.
The consumer law reforms will apply across the economy and are very significant, giving the CMA power to make findings of consumer law breaches and impose (significant) fines for the first time. There is also specific regulation of “subscription traps” and fake online reviews.
Subscription traps: need for informed consent
The DMCC imposes specific duties on traders in relation to “subscription contracts”, i.e. fixed term contracts with auto-renewing or early cancellation features (certain contracts in relation to utilities, banking, healthcare, rent, etc. that are subject to separate regulation are excluded).
The government is concerned that consumers are often locked into subscriptions that they may later regard as poor value for money. New obligations on businesses will make it easier for customers to provide informed consent and opt out of the contracts:
- Before subscribing. Businesses will need to provide clear “pre-contract information” to consumers before they enter a subscription contract;
- During subscription. Business must issue clear reminders before a free-trial or low-cost offer comes to an end, and before a contract auto-renews;
- Cancelling subscriptions. Businesses must allow customers to exit a subscription contract in a straightforward, cost-effective and timely way.
Online shoppers to be protected against fake reviews
The DMCC includes a delegated legislative power to add to, amend and delete the commercial practices prohibited under the Consumer Protection Regulations (CPR). This currently provides a list of 31 commercial practices that are subject to a blanket prohibition i.e. without need to prove actual or likely impact on the average consumer.
The Government is seeking to use its delegated powers to add practices related to “fake online reviews” to the CPR. This will prohibit businesses from: (i) commissioning or incentivising any person to write and/or submit a fake consumer review of goods or services; (ii) hosting consumer reviews without taking reasonable and proportionate steps to check they are genuine; and (iii) offering to submit, commission or facilitate fake reviews (or advertising to do the same).
While this will have clear consumer benefits, there will be significant implications for all online businesses that host reviews which will have to take “reasonable and proportionate” steps to verify that the reviews are genuine. The delegated powers will also give the Government wide discretion to update the blanket prohibitions in the CPR.
Significant financial penalties for breach
These reforms are coupled with greater enforcement powers, and the possibility of significant financial penalties. This represents a significant step-change for businesses in terms of risk with fines for consumer law breaches being as high as those for competition law infringements.
- Breach of consumer laws. Fines of up to 10% of global annual turnover of a business, or £300,000 in the case of an individual.
- Non-compliance with an information request. Fines of up to 1% of a business’ annual turnover plus 5% of daily turnover for each day of continued non-compliance with an information request during non-compliance. For failure to comply, penalties of up to £30,000 with an additional daily penalty of £15,000.
- Failure to comply with a direction. Fines up to 5% of a business’s annual global turnover, with an additional daily penalty of 5% of daily turnover during non-compliance. For failure to comply, penalties up to £150,000 with additional daily penalty of up to £15,000.
The DMCC introduces wide-ranging reforms to the UK competition and consumer regime and, if passed, will give the CMA (and the DMU sitting within it) significant additional powers. While undoubtedly tech companies will feel the effects most strongly, all businesses active in the UK will need to get to grips with what the changes mean for them.
Over the next weeks we will be publishing a series of deeper dives into the detail of the DMCC on our TechInsights page. To access our global insights and resources please register for our Linklaters Knowledge Portal.