The Digital Markets, Competition and Consumers Bill - new competition rules for digital markets

1. INTRODUCTION The Digital Markets, Competition and Consumers Bill (the “Bill’) was introduced in the House of Commons on 25 April 2023. It is expected to receive Royal Assent in early 2024 and to come into force by the end of that year, subject to any delay caused by the General Election. The Bill is very substantial, comprising six parts, 317 Sections and 26 Schedules providing: • A significant expansion of UK competition and merger law; • A new competition regime for digital markets; and • New enforcement powers for UK consumer protection laws. The Bill is scheduled to complete its passage through Parliament by the Spring of 2024. However, with the General Election due to take place before November 2024, there is a risk that the legislation may not get on to the statute book this side of the Election. Given the size of the Bill and its broad coverage, this Briefing Note will cover the new competition rules for the digital sector. The proposed changes to UK competition and merger law and the new enforcement powers for UK consumer protection will be covered in separate MW Briefing Notes. 2. THE DIGITAL MARKETS UNIT In 2019, the Government commissioned the Furman Report, which concluded that there was a need to develop a regulatory regime specific to digital markets and proposed that a specialised Digital Markets Unit (“DMU”) be formed with the object of protecting and promoting competition and innovation in digital markets. In 2021, the DMU was established as a distinct unit within the Competition and Markets Authority (“CMA”) responsible for developing a new regime for regulating digital firms with “strategic market status”. There followed a public consultation on the subject and the Government’s response published in May 2022 confirming its intention to proceed with the proposal. 3. WHAT IS THE DIGITAL MARKET? The Bill defines digital markets as follows: “markets where businesses develop and apply new technologies for the benefit of other businesses and consumers or create brand new products or services using digital capabilities, connecting groups of users in new and innovative ways.” Examples of businesses operating in digital markets are social media platforms such as Meta (Facebook) and Twitter, on-line marketplaces like eBay and Amazon and other tech-driven firms like Alphabet (Google) and Apple. 4. THE OBLIGATIONS UNDER THE BILL APPLY ONLY TO DIGITAL UNDERTAKINGS The proposals under the Bill would seek to: • Empower the CMA to “designate” businesses (known as “Designated Undertakingsthat have “substantial and entrenched market power”, in particular digital activities linked to the UK with an annual group turnover exceeding £25 billion, giving them “Strategic Market Status”; • Ensure that those designated undertakings comply with rules (called “conduct requirements”) on how they treat consumers and other businesses in relation to activities for which they have SMS; • Give the CMA power to regulate competition in digital markets; • Require designated undertakings to be more transparent about mergers which pose risks to competition; and • Allow the CMA to enforce obligations on designated undertakings and impose penalties including fines of up to 10% of a firm’s global turnover for breaches. 5. LINKED TO THE UK The designated undertakings will be “linked to the UK” where the digital activity has, (a) a significant number of users; or (b) the firm carries on business in the UK in relation to the digital activity; or (c) the digital activity (or the way it is carried out) is likely to have an immediate, substantial and foreseeable effect on trade in the UK. 6. SUBSTANTIAL AND ENTRENCHED MARKET POWER In determining the existence of “substantial and entrenched market power”, (“SMS”), the Bill requires that the CMA carry out an assessment covering a period of at least five years, incorporating a counterfactual analysis of the market. 7. STRATEGIC MARKET STATUS (SMS) A digital company will only qualify as a Designated Undertaking if the firm is found to have SMS. This requires that one or more of the following conditions set out in the Bill are met: (a) the firm has achieved a position of significant size or scale in respect of the digital activity; (b) the digital activity carried on by the undertaking is used by a significant number of other companies to run their business; (c) the firm’s position in respect of the digital activity would allow it to extend its market power to other activities; (d) the firm’s position in respect of the digital activity allows it to determine or substantially influence the ways in which other companies conduct themselves in respect of the digital activity or otherwise; (e) the CMA estimates that the firm’s total annual turnover exceeds £25 billion globally or £1 billion in the UK. 8. THE CMA DESIGNATION PROCESS The CMA will commence the designation process where it determines that the conditions described above are likely to be satisfied. Such determination must be formally carried out within nine months of the start of the process, within which period it must make a designation decision. The designation procedure will involve a public consultation. If the CMA decides in favour of SMS designation, it will remain in force for a period of five years unless terminated earlier. 9. WHAT ARE THE IMPLICATIONS OF SMS STATUS? Once the CMA has decided that a Designated Undertaking has SMS status, the CMA will have power to formulate behavioural rules known as “conduct requirements” setting out how the designated firm must act in relation to relevant digital activity. Conduct requirements must align with at least one of three objectives: (a) fair dealing; (b) open choices; and (c) trust and transparency. Permitted types of conduct are listed in the Bill and are largely based on the UK and EU jurisprudence in abuse of dominance cases under the Chapter II Prohibition CA98 and what is now Article 102 of the Treaty on the Functioning of the European Union. 10. PRO-COMPETITION INTERVENTIONS The Bill provides that the CMA will have broad powers to make Pro-Competition Interventions (“PCIs”) in relation to a designated firm with SMS where, following investigation, the CMA concludes that the firm’s conduct has or is likely to have an adverse effect on competition and may require remedies. 11. SPECIAL MERGER RULES FOR SMS FIRMS The Bill proposes that SMS firms will be required to pre-notify the CMA of any merger or acquisition prior to completion where the SMS firm (or a member of its group) acquires an equity or voting share in a “UK connected body corporate” that increases from less than 15% to 15% or more, from 25% or less to more than 25% or from 50% or less to more than 50% and the value of the consideration provided by the SMS firm (or a group member) is at least £25 million. In the case of joint ventures, the threshold for participation by the SMA firm is 15% or more voting or equity share and the value of the consideration in the joint venture must be £25 million or more. The CMA will have five working days to decide whether the mandatory merger report is sufficient and the transaction cannot complete during this period. This allows the CMA time to decide whether to carry out a full merger investigation under the Enterprise Act 2002. If an SMS firm fails to notify a reportable merger, without reasonable cause, the CMA can impose fines of up to 10% of worldwide turnover. Julian Maitland-Walker 27 July 2023

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The Digital Markets, Competition and Consumers Bill - new competition rules for digital markets

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The Digital Markets, Competition and Consumers Bill - new competition rules for digital markets