My what big teeth you have! A closer look at the sharp end of the CMA’s Digital Taskforce Advice & the impact for Big Tech (Part 4)

This fourth and final instalment in our series on the proposed changes to the UK’s antitrust regulations for Big Tech focuses on the potential for serious enforcement action. More precisely, how the codes of conduct for SMS firms will be enforced, and the scope for radical pro-competitive interventions that strike at the heart of tech giants’ market power. 

The stakes are high: firms caught by the SMS regime (essentially those with substantial, entrenched market power in digital markets where they have a strategic position) may face penalties in the tens of billions (up to 10% of global turnover). But it doesn't stop there: we may also see intervention orders reshaping the entire sector via transformative changes such as third-party data access, interoperability or even functional (but not ownership) separation.

Codes of conduct – with teeth

The UK Government has already committed to the creation of a new Digital Markets Unit from April 2021 to administer the proposed SMS regime (see Part 1 of the series for an overview). Each firm caught by the SMS regime will be subject to its own legally binding code of conduct, enforced by the DMU. These codes will – amongst other things – enshrine principles intended to prevent exploitative and anti-competitive practices before they occur. 

But what happens in the case of non-compliance? The DMU’s enforcement tools may include:

• Participative approach: The lightest tool in the box will see the DMU “engage constructively” with affected parties to quickly resolve problems.
•  Formal investigations: The CMA wants the DMU to have the power to run formal investigations into code breaches with a formal six-month deadline. Where a breach is found, the DMU would order the SMS firm to change its behaviour.
• Imposing penalties:  It is proposed that the DMU be able to impose substantial penalties for code breaches of up to a maximum of 10% worldwide turnover (also applicable to breaches of PCI orders – but more on those below).
• Interim measures: The CMA wants the DMU to have powers enabling it to mitigate or prevent harm from suspected code breaches while an investigation is ongoing. Interim orders would specify what steps the SMS firm must take and may also include bespoke reporting obligations.

Interestingly, the CMA's push for individually-tailored codes of conduct stands in contrast to the comparatively rigid list of dos and don'ts that will apply to digital firms designated as "gatekeepers" under the European Commission’s Digital Markets Act proposal. From an enforcement perspective the CMA may hope that SMS firms find the bespoke approach easier to swallow, even if it means their behaviour will be forensically scrutinised!

And when the codes of conduct don’t cut it: pro-competitive interventions 

Whilst the codes are focused on preventing SMS firms from exploiting market power, pro-competitive interventions (PCIs) will go even further and attempt to address the root causes of that power. The CMA believes this capability is essential if the DMU is to successfully “drive long-term dynamic changes in markets”.

The power to impose PCIs is broad ranging: the CMA does not want the DMU to be constrained by a static list of powers that cannot keep pace with the new challenges of emerging technology.

PCI remedies are likely to include:

• Data-related interventions, such as mandating third-party data access, implementing data silos or granting consumers greater power over their own data.
• Interoperability and common standards, to support aims such as data mobility as well as ensuring software or systems compatibility.
• Consumer choice and defaults interventions, aimed at the design of choice architecture that influences consumer decision-making.
• Obligations to provide access on fair and reasonable terms, including obligations to provide access to an online marketplace.
• Operational and functional separation, that is requiring different units within an SMS firm to be run independently of each other (but still under common ownership).

Only one limit on the DMU’s powers of intervention is contemplated, with respect to the imposition of full ownership separation. This power will still exist, but will be wielded by the CMA itself after a full market investigation (which the DMU will be able to initiate via a referral system).

The DMU’s early priorities will likely include examining whether Google’s vertical integration and conflicts of interest in open display advertising warrant some form of separation remedy; this is directly hinted at in the CMA’s advice. Indeed, the CMA is already investigating Google’s “Privacy Sandbox” browser changes – which would remove third party cookies and other functionalities from Chrome – and might refer that matter to the DMU once it is established.

The CMA has proposed that PCI investigations would be publicly announced and follow a formal process with a 12-month statutory deadline. This would allow the SMS firm – as well as interested third parties – an opportunity to comment on the design of any remedy. As with all of DMU’s decisions, the CMA is asking the Government to make PCI remedies subject to judicial review only (i.e. there would be no scope for a full appeal on the merits).

Global harmonization?

The CMA has compared PCIs to the interventionist powers of the UK’s Office of Communications, which have been used to promote competition through measures such as the operational separation of BT. However, this may be comparing the regulation of chalk (domestic communications infrastructure) with cheese (global tech giants whose products reach customers all over the worldwide). The former does not necessarily provide an instructive roadmap for the latter.

Following a domestic, unilateral template is a particular risk given any UK measures would ideally work in harmony with similar initiatives by competition authorities around the world, notably the European Commission as well as the US Department of Justice and Federal Trade Commission. 

It will be interesting to see if the new Biden administration in the US prioritises a similar regime, and if so, whether that causes the UK to move toward a multilateral solution instead.

Looking to the future

At the time of writing, most of the CMA’s recommendations remain merely that: recommendations. Only the codes of conduct seem certain to be part of the framework when the DMU is launched later this year. Everyone in the sector – from the biggest tech giants to the most fledgling of start-ups – should be paying attention when the UK Government announces its final policy. When it does, you can be sure the Linklaters team will have it covered in our Tech Insights.