Has the UK Digital Markets Unit regime become a damp squib?

While the UK was previously at the forefront of attempts to regulate digital markets following publication of the oft-cited Furman Review and subsequent initiatives, the Competition and Markets Authority (CMA) now looks set to fall behind other regulators, including those in the EU, Germany and the US. Despite the significant legislative gap vis a vis Europe, there are also some notable (and welcome) amendments in the latest proposals for the CMA’s Digital Markets Unit (DMU), including dropping plans to lower the standard of proof for mergers involving Big Tech.

No timeframe for the DMU’s powers

Late last week, the UK government published its response to the consultation on a new pro-competition regime for digital markets. While the government reaffirmed its intention to put the DMU on a statutory footing, it gave no concrete timeframe for this, and its omission (as anticipated) of the final bill from today’s Queen’s Speech (only a draft bill was included) means that the legislation will not come into force next year, as previously hoped by many at the CMA, companies in publishing and advertisers.

The DMU consultation 

As we previously wrote about, the government published its consultation on the operation of the DMU in July 2021. The consultation opened with much fanfare and provoked intense debate in the competition and tech communities, given the far-reaching nature of the proposals to regulate digital firms.

Strategic market status

The cornerstone of the proposals is the power for the DMU to designate firms as having Strategic Market Status (SMS), to be assessed on the basis of broad qualitative criteria. Such firms would be required to follow enforceable (bespoke) codes of conduct, and the DMU would have robust investigation and enforcement powers, in addition to broad powers to make ‘pro-competitive interventions’.

Mergers

On the merger control side, the proposals included (i) broad notification thresholds (including buy side turnover thresholds), (ii) a requirement for SMS firms to give advance notification to the CMA of their acquisitions and, (iii) most controversially, introducing a lower standard of review at Phase 2 for acquisitions by SMS firms.

The government response: a more flexible targeted regime?

In its response the government explains “how we will empower our regime to proactively shape the behaviour of the most powerful technology firms with Strategic Market Status”. It explicitly references the UK’s exit from the EU and states that compared to other emerging international regulatory regimes, the UK is building a more flexible and targeted regime “that can better support innovation”.

Power to designate SMS

The government has confirmed that the DMU will “in due course” have the power to designate firms with SMS, and that it is committed to ensuring that SMS designation “is evidence-driven and focused on a small number of the most powerful firms”.

The regime will designate firms that are found to have substantial and entrenched market power in at least one digital activity. It will also require the DMU to establish a UK nexus but it is not yet clear how it proposes to do so; not least as this issue insofar as it applies to remedies orders is currently being litigated in Meta v CMA at the CAT.

In addition, in response to calls for legal certainty, the government will (i) adopt a minimum revenue threshold in legislation to make it clear which firms are out of scope of an SMS designation; and (ii) clarify how the DMU defines and groups ‘activities’ and how the concept of ‘strategic position’ will be applied.

Changes to merger control proposals

Regarding merger control there are more fundamental changes, as the government has rowed back on proposals for (i) mandatory reporting of SMS deals, (ii) mandatory review of the largest transactions involving SMS firms, (iii) alternative merger review thresholds for SMS deals and (iv) changing the test used to review deals at Phase 2 from the “balance of probabilities test" to the lower and more cautious Phase 1 test of “a realistic prospect” of a “substantial lessening of competition”.

The government makes reference to the range of views submitted in response to the consultation, “including potential impacts on innovation and investment”, which mean that it no longer intends to take forward the changes to the Phase 2 threshold for merger intervention.

SMS firms will only have to report their most significant deals before completion and this will only apply when (i) the SMS firm acquires equity or voting shares of more than 15%; (ii) the value of the SMS firm’s holding is more than GBP 25m; and (iii) the merger meets a UK nexus test.

Finally, accepting the risk of introducing different merger jurisdictional thresholds for SMS deals, the government intends to bring changes to the CMA’s merger jurisdiction, which will also apply to the new SMS reporting requirements. The wider proposed changes, which include a new ‘no-increment’ share of supply jurisdictional test for any global deal where only one party has significant UK presence, will enable the CMA to capture so-called ‘killer acquisition’ deals and fill at least some of the gap for the no-defunct proposed DMU thresholds.

So what’s next for tech regulation in the UK?

With the EU’s Digital Markets Act now agreed and expected to come into force in spring 2023, the delay to the UK legislation will mean that the UK falls behind its biggest neighbour and trading partner. Given the global nature of digital markets, it is likely that many tech firms will focus their compliance efforts on the EU.

The enabling legislation for the DMU could be delayed by a year to next year’s Queen's Speech, but even that appears difficult to predict with any certainty, as government appetite seems to have waned ahead of the next general election in 2024. Indeed, the FT has reported that the prime minister’s deputy chief of staff has told colleagues that “Conservative governments don’t legislate their way to prosperity and growth.”