UK Digital Markets, Competition and Consumers Bill - the wait is over

The highly anticipated Digital Markets, Competition and Consumers (DMCC) Bill was introduced to Parliament on 25 April 2023. Described by Sarah Cardell, CEO of the UK Competition and Markets Authority (CMA) as a "flagship bill" with the "potential to be a watershed moment", the Bill sets out far-reaching changes to the competition and consumer law regimes here in the UK, as well as a new ex ante regime for scrutiny of Big Tech.

The Bill follows a lengthy process of multiple Government consultations and commissioned reports, each highlighting a need for far-reaching reform, particularly in the digital space

This briefing discusses the digital markets and competition law aspects of the Bill. See our separate briefing for details of the new consumer law regime.

Digital Markets: Three new routes for scrutiny
Digital Markets Unit (DMU)

Strategic Market Status (SMS)

Conduct Requirements

Pro-Competition Interventions

Merger Reporting

Key Take-Aways
Competition Law reforms
Merger Control

Extra-territoriality: 'Effects' doctrine for anti-competitive agreements

Stronger investigative powers

What about Market Inquiries?

Other noteworthy reforms
What's next?

Now Reading

Digital Markets: Three new routes for scrutiny

Digital technologies are at the heart of the UK Government's vision for driving economic growth. However, in the Government's view, there is "compelling evidence" that digital markets have become increasingly concentrated with the same large, global tech companies; and that, whilst size is not inherently bad, concentration of entrenched market power amongst a small number of tech companies may be undermining effective competition and harming consumers.

Even without the new regime, the CMA has had a busy portflio of digital cases in recent years, spanning its markets, mergers and antitrust functions. The CMA has also signalled its digital priorities through the appointment of a number of tech experts. However, existing competition tools are widely viewed as inadequate for the specific challenges of digital markets (given, for example, the backward looking and lengthy nature of competition law enforcement).

So what does the Bill provide for the digital space?

1. Digital Markets Unit (DMU)

In brief, the Bill provides three routes for enhanced scrutiny of Big Tech.

The powers granted will be exercised by the Digital Markets Unit (DMU), already set up in shadow form within the CMA. The DMU will have powers to designate the biggest digital players with Strategic Market Status (SMS) and, for those designated firms: (1) set ex ante Conduct Requirements i.e. rules on what those firms must and must not do; (2) enforce ex post Pro-Competition Interventions in order to remedy competition problems; and (3) require the reporting of M&A activity before deals are completed.

The DMU (with around 70 staff as at November 2022) plans to scale up to around 200 staff, with a mix of legal and technical experts: which we understand will be significantly larger than the European Commission's digital unit following the recent introduction of the EU Digital Markets Act (DMA).

2. Strategic Market Status (SMS)

Five criteria must be satisfied in order for the DMU to designate a firm with 'Strategic Market Status'.

a. Digital activity

The firm must be carrying out a "digital activity", the scope of which is wide.

The DMU's assessment will focus on whether a firm has SMS in respect of particular activities, rather than all of its activities. A formal market definition analysis is not expected to be required (with a digital activity potentially being either wider or narrower than an economically defined market).

Digital activities are defined as:

a. The provision of a service by means of the internet (whether for consideration or otherwise).

b. The provision of one or more pieces of digital content (whether for consideration or otherwise).

c. Any other activity carried out for the purposes of an activity within (a) or (b) above.

b. UK nexus

The digital activity must be "linked to the UK". Given the breadth of this test, we expect this condition to be easily satisfied.

Digital activities will be 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.

Whilst the EU nexus requirement under the DMA for designating a digital firm as a "gatekeeper" is similar (requiring there to be a "significant impact on the internal market"), there are also some important differences. The EU regime's designation criteria all focus on the size of the specific digital services firm in question, with impact on the internal market being automatically presumed if certain group-wide turnover or market capitalisation thresholds are met. In so far as the EU regime considers the number of users for purposes of designation, the Commission must consider the specific firm's number of EU end users and business users – as opposed to considering the total number of users of the digital activity across the whole market(/s) as seems to be the case in the UK. It remains to be seen whether and how these differences may lead to divergence between the two regimes going forward.

c. Substantial and entrenched market power

Firms must be found to have 'substantial and entrenched market power' in respect of that digital activity in order to be designated (based on a forward-looking assessment of a period of at least 5 years). The DMU may take account of developments that would be expected to happen if the firm was not designated.

Guidance is keenly awaited on how the DMU will consider this aspect in practice, and how closely the assessment will follow a typical dominance assessment (especially given, as noted above, the digital activity may or may not correspond to an economically defined market). To the extent that established dominance principles are used, this is one area where divergence may be seen with the EU (which, rather than requiring a market power assessment, looks at whether the firm has an 'entrenched and durable position', a notion which is not expressly tied to market power but instead seems to focus more on the extent to which the firm is: protected from open competition, e.g. due to vertical integration and other barriers to market entry; and has been able to maintain a significant user base for at least three years.

d. Position of strategic significance

Next, and broadly aligned with the EU regime, the firm must have a 'position of strategic significance' in respect of that digital activity. The Bill provides four alternative routes for this limb to be satisfied: based on the size or scale of the digital activity, the number of other undertakings that use the firm's digital activity, the ability of the firm to extend its market power to other activities, and its ability to determine or substantially influence the way in which other undertakings conduct themselves.

In the EU regime, to be designated, the relevant digital activity must constitute an "important gateway" between third-party business users and end users, with this being presumed if certain user number thresholds are fulfilled (45 million end users; 10,000 business users). However, outside of the quantitative thresholds which trigger a presumption, the EU can consider a broad range of factors, broadly similar to the more holistic test under the UK regime.

e. Turnover thresholds

A firm can only be designated if it meets certain turnover thresholds, designed to capture only the largest players. The relevant turnover does not need to relate to digital activities: total turnover is the relevant measure. Whereas it remains unclear how the other criteria mentioned above will be applied in practice (absence further guidance), these turnover criteria will provide certainty to many digital firms that the UK regime does not apply to them.

The turnover thresholds are met where the CMA estimates that the total group-wide turnover of the firm exceeds £25bn globally and £1bn in the UK (i.e. relating to UK users or UK customers).

It is worth noting that, whereas turnover is a key driver as to whether the UK regime applies (permitting only the largest firms to be brought within scope), the EU's regime does not necessarily require any particular turnover thresholds to be met. Firms might be presumed gatekeepers if certain EU annual turnover (EUR7.5 billion) or global market capitalisation (EUR 75 billion) are fulfilled, but the Commission has the ability to designate below these thresholds by reference to a much broader range of factors.

Query whether this may lead to a greater range of firms falling within the EU's "gatekeeper" status in practice and, if so, whether the EU's regime could result in more onerous obligations than here in the UK, especially given the more prescriptive nature of its regime (see below).

f. Process

The DMU may begin an SMS investigation where it has reasonable grounds to do so. The DMU will have 9 months to complete the investigation and issue a designation notice (extendable by 3 where there are special reasons to do so). The UK process may well be quicker than under the EU regime unless the Commission opts to use its fast track route by which firms are designated pursuant to quantitative thresholds (see above). For firms below those thresholds, the Commission is only required to endeavour to complete its process within a 12 month period. In practice however, the EU's largest digital firms are likely to be designated far quicker (subject to court appeal), with those firms fulfilling the quantitative thresholds only being able to avoid designation in exceptional circumstances and on limited grounds.

A UK SMS designation decision will be subject to public consultation, and will last for 5 years (subject to certain powers to extend or revoke). Designation decisions are appealable to the courts or Competition Appeal Tribunal (CAT) but, importantly, only on judicial review grounds. Given the wide degree of judgment afforded to the CMA in the assessment of the SMS criteria, concerns have been voiced over how effective such a review will function in practice.

So, what will an SMS designation give the DMU the ability to do?

3. Conduct Requirements

The DMU will have the power impose so-called "Conduct Requirements" on SMS firms in relation to activities for which they are designated. These requirements will govern the way in which an SMS firm must conduct itself in relation to the specified digital activity (seemingly covering its interactions with both users/consumers and other undertakings). Whereas the EU's regime provides prescriptive rules that will apply in a uniform way to all 'gatekeeper' firms (subject to further specification in some cases), the the UK's DMU will set tailored rules for each firm, albeit these need to be drawn from a wide list of options (see below).

Conduct Requirements must be for the purposes of one of the following objectives:

Fair dealing – to ensure that (potential) users are treated fairly and able to interact, directly or indirectly, with the SMS firm on reasonable terms.
Open choices – to ensure that (potential) users are able to choose freely and easily between the services/digital content provided by the SMS firm and services/digital content provided by other undertakings.
Trust and transparency – to ensure that (potential) users have the information they need to be able to understand the services/digital content provided by the SMS firm (including the terms on which they are provided) and make properly informed decisions about whether and how they interact with the SMS firm.

Conduct Requirements must also be of a particular type, as set out in a permitted list (subject to amendment by regulation). The list is extremely broad (including, for example, requirements to trade on fair and reasonable terms, and a prohibition on using data unfairly) and allows the DMU significant discretion in formulating the scope of the requirements as it sees fit.

Permitted Conduct Requirements

Requirements for the purpose of obliging an SMS-designated firm to:

Trade on fair and reasonable terms.
Have effective processes for handling complaints by and disputes with (potential) users
Provide clear, relevant, accurate and accessible information about the relevant digital activity to (potential) users.
Give explanations, and a reasonable period of notice, to (potential) users of the relevant digital activity, before making changes that are likely to have a material impact on the (potential) users.
Present to (potential) users any options or default settings in relation to the relevant digital activity in a way that allows them to make informed and effective decisions in their own best interests.

Requirements for the purpose of preventing an SMS-designated firm from:

Applying discriminatory terms, conditions or policies to certain (potential) users or descriptions of (potential) users.
Using its position in relation to the relevant digital activity, including its access to data relating to that activity, to treat its own products more favourably than those of other undertakings.
Carrying on activities other than the relevant digital activity in a way that is likely to increase the undertaking’s market power materially, or bolster the strategic significance of its position, in relation to the relevant digital activity.
Requiring or incentivising (potential) users of one of the firm's products to use one or more of the firm’s other products alongside services or digital content the provision of which is, or is comprised in, the relevant digital activity.
Restricting interoperability between the relevant service or digital content and products offered by other undertakings.
Restricting whether or how (potential) users can use the relevant digital activity.
Using data unfairly.
Restricting the ability of (potential) users to use products of other undertakings.

Conduct Requirements are subject to public consultation, and the DMU is also under a duty to keep requirements under continuous review. As well as revoking or amending imposed requirements, the DMU also has the ability to introduce additional ones: the regime is very much an ongoing process for designated firms.

So what happens if an SMS firm breaches a Conduct Requirement?

Breaches may result in enforcement orders (requiring the SMS firm to stop the breach, prevent it from happening and/or address any damage) or commitments may be accepted. A specific route (a 'final offer mechanism') is provided to resolve breaches relating to requirements to trade on fair and reasonable terms.

However, during the course of a breach investigation, the SMS firm may claim a 'countervailing benefits exemption' (similar to the individual exemption regime for anti-competitive agreements). Broadly speaking, this exemption will apply where the benefits for users outweigh the detriment to competition.

        The countervailing benefits exemption applies where:
    
The conduct to which the investigation relates gives rise to benefits to users or potential users of the digital activity in respect of which the Conduct Requirement in question applies,

Those benefits outweigh any actual or likely detrimental impact on competition resulting from a breach of the Conduct Requirement,

The conduct is indispensable and proportionate to the realisation of those benefits, and

The conduct does not eliminate or prevent effective competition.

Importantly, the DMU does not have fining powers at this stage. It can, however, issue fines of up to 10% of global turnover if a second step is carried out: i.e. if a breach of an enforcement order is found.

4. Pro-Competition Interventions

With some similarities to the CMA's existing market investigation regime, the Bill also provides a route for the DMU to "remedy an adverse effect on competition" through so-called "pro-competition interventions" (PCIs). A PCI can take the form of either:

An order imposing requirements as to how an SMS firm must conduct itself in relation to a designated activity (including the option for an order on a "trial basis" where the DMU considers the PCI may contribute to, or be "of use" for, solving the harm to competition).
A recommendation as to steps to be taken by anyone exercising public functions (e.g. the FCA or another concurrent regulator, but also more broadly).

Again, PCIs are subject to public consultation, and investigations may be resolved through undertakings.

PCIs can be enforced through fines (of up to 10% of total global turnover): and, unlike the Conduct Requirements regime, these fines can be imposed at an earlier stage (without an enforcement order having to be issued first).

So, why the need for PCIs when the CMA already has market investigation powers? Whilst the devil is in the detail, the new PCI regime is expected to provide greater flexibility and streamlining to the existing processes (not least, for example, in the ability for the DMU to make orders on a trial basis, even where the substance of that order may not remedy the entirety of competition problem.

5. Merger Reporting

The Bill introduces a new, widely-drawn reporting obligation on SMS firms to report possible M&A activity before it takes place.

Deals must be reported where:

The SMS firm increases its percentage of shares or voting rights in a "UK-connected body corporate" through certain thresholds (i.e. less than 15% to 15% or more, 25% or less to more than 25%, or 50% or less to more than 50%), and
The total value of all consideration (covering the time of the merger or beforehand) provided by the SMS firm for those shares and voting rights is at least £25m.

A "UK-connected body corporate" is widely defined as a target (wherever established or recognised) that carries on activities in the UK or supplies goods or services (whether for consideration or otherwise) to persons in the UK.

A similar reporting obligation applies to the formation of joint ventures, where the value of all capital and assets contributed to the JV vehicle, and all other consideration provided, by the SMS firm is at least £25 million.

Once a deal is reported to the DMU (through a specific notification form), the parties must wait for a period of 5 working days before completion. That 5 day period only starts once the DMU has accepted the form as "sufficient". Whilst the process appears to be quicker and more streamlined than the UK's current 'briefing paper' route (available for all deals), it remains to be seen how long the process of accepting the form will take in practice, and the frequency of follow-up questions in order to do so.

Within that 5 day period, the CMA may opt to open a Phase 1 investigation in line with usual merger control procedures. Whilst the Government notes that there is significant uncertainty over likely reporting numbers, it is noteworthy that its impact assessment only expects around 3 to 4 new investigations each year from this regime (amounting to approximately 10% of the reported deals).

6. Key Take-Aways

There is much to be clarified in the way in which the DMU will determine SMS designation, and how each of the tests will be applied in practice. However, in possible contrast to the EU's regime, the UK regime will only capture the very biggest digital players (those with significant turnover and a level of market power). Also, any conditions imposed on SMS firms will be tailored to the firm in question, leading to the potential for each SMS firm to be subject to different obligations, and potential differences with any obligations required under the EU's DMA. Whilst some firms may welcome the flexibility of tailoring, others may regard this with more scepticism given the discretion that it confers on the CMA, and the potential for divergence in treatment between firms even within the UK .

Competition Law reforms

The Bill also introduces a range of general competition law reforms, in large part strengthening the CMA's investigative powers. Two specific key reforms, however, relate to the introduction of a new merger control threshold to catch so-called 'killer' acquisitions, and widening the extra-territorial effect of the UK's prohibition on anti-competitive agreements.

1. Merger Control

Expanded jurisdiction

A new threshold designed to catch acquisitions of nascent competitors (so-called 'killer' acquisitions) and to broaden the CMA's scope to review vertical and conglomerate mergers will be introduced.

The CMA will have jurisdiction to review deals where:

One of the parties has:

At least a 33% share of supply of goods/services in the UK or a substantial part of it (increased from the 25% proposed in the consultation); and
UK turnover of £350 million (increased from the proposed £100 million); and

Another party to the transaction satisfies a 'UK nexus test' i.e. that party is a UK company (or equivalent), carries on activities in the UK or supplies goods or services in the UK.

This new threshold will complement the existing thresholds and the new basis for review of digital mergers.

        The existing merger control thresholds will be retained, and amended, as follows:
    
Increased turnover threshold: The target has UK turnover of over £100 million (an increase from the current £70 million threshold to reflect inflation). (Although public interest interventions in media mergers (PIIN) cases will remain at £70 million).

'Share of supply test' maintained… The transaction would result in the creation or enhancement of at least a 25% share of the supply of particular goods or services in the UK, or a substantial part of it.

… but subject to new safe harbour (designed to increase certainty over the application of UK merger control to ‘foreign to foreign’ mergers with little or no UK turnover): Transactions will only satisfy the 'share of supply test' where at least one of the parties has UK turnover of more than £10 million.

There is some debate over whether the new set of thresholds is necessary, given the CMA has already demonstrated its very flexible approach to the existing share of supply test (for example in Sabre/Farelogix). There are also concerns about just how broad the new set of thresholds is: potentially capturing deals where there is absolutely no overlap between the activities of a target and the description of goods/services in which an acquirer may be found to have a 33% share. However, it must be borne in mind that the Bill retains the UK's voluntary notification regime (despite earlier calls from Lord Tyrie for some kind of mandatory notification system post-Brexit) and hence guidance as to the types of deals that the CMA is likely to be interested in will be key. It is also noteworthy that the Government's impact assessment only expects 2 to 5 new investigations each year from this new threshold, so Phase 1 investigations are not expected to be opened as matter of course.

Fast-track to Phase 2

In welcome news to parties seeking to align in-depth parallel merger investigations, an enhanced 'fast track' procedure will give the CMA discretion to automatically refer a merger straight to Phase 2 where the merging parties have requested this. That request can be made at any stage of pre-notification or the Phase 1 investigation. Importantly, merging parties will not need to accept that the merger may create a substantial lessening of competition (in contrast to the little-used current fast track system).

2. Extra-territoriality: 'Effects' doctrine for anti-competitive agreements

The Bill will remove the existing requirement for agreements to be implemented in the UK in order to fall under the UK Chapter 1 prohibition. It will be sufficient, in line with the EU position, for agreements to have effects on trade within the UK: an important change given increased globalisation and the loss of the CMA's ability to investigate breaches of Article 101 TFEU post-Brexit.

It remains to be seen just how much this change shifts the dial in practice: although one can imagine it will ease the CMA's burden in proving jurisdiction to find certain infringements, for example a cartel implemented in another part of the globe which relates to products that are imported into the UK.

The Government does not see an as-compelling reason to update the jurisdictional test for the Chapter II prohibition (abuse of dominance) – i.e. the business carrying out the conduct must still have a dominant position within the UK or any part of it.

3. Stronger investigative powers

The Government has decided to adopt a raft of measures to strengthen the CMA's (and concurrent regulators') powers to investigate. Set out below are some key examples.

Document preservation. A significant change, in particular for in-house lawyers dealing with document retention policies during investigations, is the introduction of a new duty to preserve evidence, underpinned by civil penalties. Businesses are currently only required to preserve evidence in a civil Competition Act investigation if that evidence falls within the scope of an active information gathering notice or other investigative measure (such as a dawn raid). However, the Bill provides (in line with equivalent provisions governing criminal cartels) a general duty to preserve evidence where it is known or suspected that an investigation is, or is likely to be, carried out. (The duty applies equally to all types of investigation, including those by the DMU and the CMA more generally).
Interview powers. The CMA's will be able to compel interviews from any person (not just individuals who are connected to a business under investigation). This means, for example, that suppliers or customers could be required to answer questions. In a nod to recent working practices, remote interviews are permitted.
Information requests. Notices requiring the production of information and documents will be given extra-territorial effect: such that notices can be issued to persons outside of the UK, and can require the production of documents and information held outside of the UK. This amendment is not unexpected given the recent ruling in BMW v CMA.
Inspections. Powers to ‘seize-and-sift’ evidence when inspecting domestic premises under warrant (as is currently the case for inspecting business premises under warrant) will be introduced. These changes have been brought about by increasingly flexible working patterns post-pandemic – although privacy and human rights issues may be expected to be raised. Further, in order to deal with increasing use of cloud-storage systems, warrants may be granted, and effected, on the basis of documents that are "accessible" from the premises (and not only documents "on" the premises).
Increased administrative penalties. To bring the UK in line with the EU position, the potential level of penalties on businesses for failure to comply with an investigative measure (e.g. failing to comply with an information request) will be increased significantly. Fixed penalties of up to 1% of a business’ annual turnover will be available, as well as additional daily penalties of up to 5% of daily turnover while non-compliance continues. These same civil penalties will now also apply to businesses where they (i) supply 'false and misleading' information; (ii) conceal, falsify or destroy evidence; or (iii) obstruct an investigation.
Wider scope for penalties. The CMA will be able to impose civil penalties for breach of remedies and commitments across the range of its investigations (Competition Act, mergers, and markets).
Personal liability. For the first time, individuals (e.g. company directors) will be able to be fined for failure to comply with the CMA's investigative measures: fixed penalties of up £30,000 are available, as well as additional daily penalties of up to £15,000.

4. What about Market Inquiries?

The current two-stage process will be retained (i.e. a primary market study stage, followed by a more in-depth market investigation), but with certain amendments to:

Enable the CMA to accept binding undertakings from businesses at any stage in market studies and market investigations.
Provide the CMA with greater flexibility to define the scope of market investigations in order target investigations more easily.
Remove the requirement to consult on a market investigation reference within the first 6 months of a market study.
Permit the CMA to conduct "trials" to assess the likely effectiveness of final undertakings and orders.
Introduce civil penalties for breaches of market investigation orders, directions, undertakings and interim measures.
Permit the CMA to adopt an improved remedy for a period of up to 10 years following the finding of an adverse effect on competition (without requiring a fresh market investigation) where the CMA believes that a remedy is not achieving its intended effects. However, this will be subject to a 2 year cooling-off period starting at the end of a remedy review (in which the CMA may not, of its own volition, conduct a further review of the same remedy). As with any proposed remedy, the CMA would be required to consult.

Whilst many of these aspects will be welcome, there remains some uncertainty about how the ability to amend remedies will work in practice. Where there are clear market developments that make an amendment non-controversial, this change will no doubt improve the system to both the benefit of parties and the CMA. However, questions remain about the risk of the CMA side-stepping a full analysis of the market in question.

5. Other noteworthy reforms

Duty of expedition

The Bill sets out a new statutory duty of expedition (which was previously advocated for by Lord Tyrie), reflecting the Government's desire for faster decision making.

Judicial review appeal standard for Competition Act interim measures

With the aim of enhancing efficiency, appeals against interim measures decisions in Competition Act cases will be on judicial review grounds, rather than the current "on the merits" standard.

Private claims: exemplary damages and declaratory relief

The Bill gives the courts and CAT the discretion to award exemplary damages in competition law claims. This change stems from the fact that awards of exemplary damages were prohibited in competition law by the EU Damages Directive (implemented in 2017). However, in a post-Brexit landscape, the Government seeks to provide an additional deterrent for competition law breaches. Exemplary damages will not however be permitted in collective proceedings.

The Bill also permits the CAT to grant declaratory relief, i.e. a legally binding statement on the application of competition law to the given set of facts.

Relationship with reforms to consumer enforcement regime

Finally, the Bill also makes very significant changes to the CMA's powers to enforce consumer protection law. It will be interesting to see how far the CMA looks to use its greatly enhanced powers in this area in conjunction with the new powers to intervene in digital markets and/or its strengthened powers for competition investigations and market inquiries.

What's next?

Whilst timing may shift depending on parliamentary priorities, and the extent of any opposition, the Bill is currently expected to receive Royal Assent around Spring 2024. The final statutory instrument, and supporting Guidelines, are expected by the end of 2024.

Certain provisions of the Bill, once they become law, will come into effect without delay (for example the CMA's enhanced investigatory powers). However, others will take time. By way of example, the DMU will need to have designated a firm as having SMS status before it is able to impose any Conduct Requirements. It could, therefore, be around mid-2025 until we see any enforcement action under the new digital regime.

Read Stephen Whitfield Profile