Today, an important milestone has been reached in the UK. The Government has published its long-awaited consultation (welcoming views from all interested parties) on the operation of the new Digital Markets Unit (DMU).
This is the latest instalment on the future regulatory landscape in the UK, following, for example, the conclusions in the CMA’s Online Platforms and Digital Advertising Market Study (July 2020), the Digital Markets Taskforce Advice (December 2020) and the establishment of the DMU in April this year (on a non-statutory basis). Now we are seeing the governments’ approach crystalise.
The consultation confirms a number of the proposals for the regulation of digital markets in the UK and, once implemented, will signal a significant shift in the regulatory landscape for firms which fall within its remit. We set out the highlights below:
Strategic Market Status
- The Government has confirmed it intends the DMU to have the power to designate firms as having Strategic Market Status (SMS), on the basis of the seemingly broad qualitative criteria of “firms with substantial and entrenched market power, in at least one digital activity, providing them with a strategic position”.
- This designation is not automatic and instead the consultation proposes that designation will be imposed after a 12-month consultation process. The DMU will prioritise SMS designation assessments on the basis of a number of criteria - including a firm’s revenue and the characteristics of the relevant activity, meaning that the DMU is likely to set its early sights the largest digital players: with Google and Facebook in the vanguard. It is envisaged that designation will last five years.
Code of Conduct
- Designation will require firms to follow an enforceable code of conduct.
- The consultation proposes various options for implementing the high-level objectives and principles behind the code, which in particular, question whether the high-level principles behind the code should be set in legislation or not. On this issue, the consultation is weighing up the benefits of a tailored approach to each SMS firm vs the simplicity and consistency of broad-brush approach. Essentially this is the difference between a bespoke business model approach versus the EU conduct directed, one size fits all Digital Markets Act approach.
Investigation and enforcement
- The regime will be underpinned by robust investigation and enforcement powers, including powers to suspend, block and reverse code-breaching behaviour by designated firms and issue fines of up to 10% of global group turnover for serious breaches.
Pro-competitive intervention powers
- The proposal to allow “pro-competition intervention” powers would allow the DMU to be able to impose measures to “tackle the root causes of competition issues in digital markets” – such as requiring platforms to allow the public to share contacts from one platform to another, thereby supporting cross-platform interoperability.
- The DMU is to have broad discretion in designing and implementing these pro-competition interventions.
Merger review powers
- Building on a general concern that certain mergers by big tech may have slipped through the net in the past - with big tech players widely reported to have completed hundreds of transactions with little to no regulatory review (and no deals to date being blocked) - the consultation considers whether to give the CMA greater powers to scrutinise and intervene in harmful mergers, e.g. by requiring SMS firms to give advance notification to the CMA of their acquisitions.
- In perhaps one of the most controversial aspects of the regulatory debate to-date, the consultation document takes the view that any change to the substantive test for the prohibition of SMS firm transactions (in essence maintaining the “realistic prospect” test for phase 2 prohibition) “will need to be carefully considered … but we believe it would be beneficial”.
- This will be hotly contested by digital players and many lawyers who will struggle to see the justification for a lower standard of evidence applying to a specific sector and secondly one characterised by dynamic technical change (which make the future more difficult rather than easier to predict). As set out in our Platypus statistics, intervention rates in phase 2 have been high in recent years (currently running at c.67% of deals in phase II being blocked or abandoned) under the current legal threshold.
The consultation runs until 1 October 2021, with the accompanying press release confirming that “government aims to legislate to give the DMU its new powers as soon as parliamentary time allows”.
Today’s consultation is an important milestone towards building a world-leading, pro-competition regime to drive technological innovation and protect consumers in the digital age.