This is the third in a series of articles analysing specific features of the digital and competition reforms contained in the recently published Digital Markets, Competition and Consumers Bill (the Bill). It follows our first in the series which looked specifically at merger control changes (available here) and our update on which entities will be in scope as “SMS firms” (available here). For our initial ‘first impressions’ overview of the reforms introduced by the Bill, please click here.
We examine below the powers the regulator will have available in order to regulate firms with ‘strategic market status’ (SMS). The UK Competition and Markets Authority (CMA), and more specifically the Digital Markets Unit (DMU) housed within the CMA, will have a powerful new toolkit to pre-emptively regulate firms designated as having SMS. The purpose of this new ex ante regulatory regime is to address criticisms that competition law previously provided too little too late.
Once a firm is designated as having SMS, the CMA has the power to impose conduct requirements directing how it can behave on the market and aimed at tackling the effects of its market power. The CMA can also impose pro-competition interventions (PCIs) where it considers appropriate – these are wide and potentially intrusive powers aimed at addressing the root cause of the firm’s market power. We consider each of these in more detail below.
Conduct requirements
Once a firm has been designated as having SMS, the CMA will be able to impose bespoke conduct requirements on it. Conduct requirements will manage the effects of market power by setting out how firms are expected to behave in respect of the specific activities in which they are designated with SMS status.
The CMA will be able to impose a conduct requirement on an SMS firm simply by giving it written notice (subject to the public consultation requirements described below). This written notice will identify the conduct requirement, the digital activity to which it relates, and the objective of the requirement. Conduct requirements will also be made public as soon as they have been provided to the SMS firm.
Aim of conduct requirements
Conduct requirements must further one (or more) of three objectives:
- Fair dealing – ensuring users (or potential users) of a relevant digital activity are (i) treated fairly, and (ii) able to interact with the SMS firm on reasonable terms;
- Open choices – ensuring users can choose freely and easily between the services or digital content provided by the SMS firm, and those provided by its competitors; and
- Trust and transparency – ensuring users have the information they need to (i) understand the services or digital content provided by the SMS firm (including the terms on which they are provided) and (ii) make properly informed decisions about whether and how they interact with the SMS firm.
Types of requirements which can be imposed
The Bill contains a long list of the sorts of conduct requirements the CMA will be able to impose on SMS firms. These include:
- requirements to act in a certain way (e.g. to trade on fair and reasonable terms, to have effective processes in place for handling complaints and disputes, and to provide clear, relevant and accessible information about the SMS firm’s activities to users); as well as
- requirements not to act in a certain way (e.g. not to apply discriminatory terms or conditions of use, not to ‘self-preference’ i.e. use their market position to treat the SMS firm’s own products / services more favourably than those of other firms, not to carry on other activities in a way that is likely to increase market power materially, and not to use data unfairly).
The breadth of the above categories will effectively give the DMU a wide discretion to formulate conduct requirements. However, generally conduct requirements are more likely to regulate existing products and offerings, rather than to introduce material changes in an SMS firm’s business model. (These would be more likely be the preserve of PCIs – see further below.)
The conduct requirement categories and objectives above also leave much open to interpretation, for example regarding the meaning of “clear, relevant and accessible” information, “using data unfairly” or of “materially” increasing market power. It is true that the way the Bill is structured is that a conduct requirement imposed on an SMS firm must be “for the purpose” of one of the categories set out. One would therefore expect that conduct requirements actually imposed will be more specific than the permitted categories – we do not expect to see a conduct requirement to “trade on fair and reasonable terms”, but rather something more specific and tailored to the SMS firm and concerns identified. But the point remains that this is a matter for wide CMA discretion and we will not know until we see it in practice.
It is also worth noting that many of the above requirements reference potential users (as well as existing users), which for some digital services could conceivably include any person in the UK over a particular age. We expect that further details on ‘potential’ user groups for digital activities will need to be outlined in CMA guidance or included in the conduct requirements themselves.
Public consultation and ongoing review
The CMA will be required to publicly consult on any proposals to impose conduct requirements on SMS firms, as well as on any proposals to revoke existing conduct requirements. We anticipate that the CMA will consult on SMS investigation decisions (i.e. to determine whether a firm has SMS) and on proposed conduct requirements concurrently to ensure that the requirements apply as soon as possible after designation once the regime enters into force.
The CMA will also be required to continually review any conduct requirements imposed (as well as SMS firms’ compliance with the requirements). This is an example of how the regime has been designed to flex and respond to changing market dynamics where appropriate, in comparison to the more rigid requirements of the EU Digital Markets Act. It does, however, create some uncertainty for SMS firms if regulatory requirements are frequently changed.
Exemption from compliance with conduct requirements
The Bill provides for an exemption from compliance with conduct requirements where an SMS firm can demonstrate all of the following:
- specific non-compliant conduct benefits users (or potential users) in some way;
- these benefits outweigh any actual or likely detrimental impact on competition from the non-compliant conduct;
- the non-compliant conduct in question is indispensable and proportionate to the realisation of the benefits; and
- the non-compliant conduct does not eliminate or prevent effective competition.
This exemption (which is modelled on the individual exemption available in competition law for potentially anti-competitive agreements) gives SMS firms a potential defence to any accusation of failure to comply with conduct requirements, provided each element can be established.
Interestingly, the countervailing benefits exemption, as currently framed in the Bill, appears to apply only in relation to a CMA enforcement action. However, the Bill also provides for private enforcement cases to be brought for breach of conduct requirements, and in such cases the exemption appears not to apply. This is in marked contrast to the application of the exemption from the Chapter One prohibition on restrictive agreements in section 9 of the Competition Act 1998 (on which the exemption is modelled), which applies to both public and private enforcement. This apparent lacuna in the architecture of the proposed legislation should be corrected so that, if standalone private enforcement for breach of conduct requirements is going to be retained in the Act, the exemption applies to both private and public enforcement.
Pro-competition interventions
In addition to conduct requirements, the Bill also allows the CMA to remedy an existing adverse effect on competition through so-called "pro-competition interventions" (PCIs). A PCI could be:
- An order setting out how the SMS firm must conduct itself, either in relation to the relevant digital activity or otherwise; and/or
- A recommendation to any person exercising public functions (e.g. regulatory authorities) of steps the CMA considers they should take in relation to an SMS firm, the relevant digital activity, or otherwise.
PCIs are therefore potentially much wider in scope than conduct requirements. They will seek to remedy the adverse effects on competition of certain market characteristics, in circumstances where conduct requirements are not sufficient to address the root cause of the issue. The CMA’s powers to make PCIs mirror the CMA’s existing powers following a market investigation reference, which are broad and include the power to order structural remedies or divestments.
In contrast to the current market investigation procedure, however, the Bill envisages PCIs being imposed on a trial basis to assist the CMA in establishing requirements which would effectively remedy, mitigate, or prevent adverse effects on competition or any associated negative effect on consumers. This tool should assist the CMA in ensuring that PCIs imposed are effective and proportionate. The Bill also introduces the possibility for similar trials in the market investigation procedure.
When can the CMA impose PCIs?
In order to impose a PCI, the CMA must, as noted above, first complete a PCI investigation. A PCI investigation will begin with the issuance of an investigation notice to the affected SMS firm, after which the CMA will then have a period of nine months to carry out the investigation and make a final decision (extendable by three months where the CMA considers there are special reasons for doing so).
If the CMA determines as a result of the investigation that (i) a factor (or factors) relating to a relevant digital activity is having an adverse effect on competition (AEC) without any associated benefits, and (ii) that making a PCI would be likely to mitigate the AEC, it can impose PCIs where appropriate.
A factor relating to a digital activity will have an AEC if it prevents, restricts, or distorts competition in respect of that digital activity in the UK. While AECs will be a familiar concept to competition practitioners from the CMA’s market investigation regime, the wording used in the Bill appears to leave some scope for PCIs to be employed for a wider purpose than just addressing the AEC (as would be the case in a market investigation context). This may be a compromise to address concerns that, with a sole focus on competition, using the AEC standard is a move away from initial recommendations that new powers be used to address effects on consumers as well (e.g. by giving them more control over their data and/or enabling them to be adequately compensated for providing their data, as was recommended by the CMA in its guise as the Digital Markets Taskforce).
Examples – Conduct requirements vs PCIs A few examples of the sorts of situations in which conduct requirements might be used to address existing competition issues can be found in the 2019 Cairncross Review, which presented an overview of challenges facing high quality journalism in the UK. To address these challenges, the Review gave several recommendations relating to the conduct of online platforms, including that a code of conduct be imposed to rebalance the relationship between online platforms and publishers, and that certain news quality obligations be placed on platforms to improve the reliability of news sources for users. These sorts of conduct requirements mitigate the negative effects of market power by governing the behaviour of firms. In contrast, PCIs will aim to tackle sources of market power directly. They will be used to remedy more entrenched competition issues, such as those described by the CMA in the 2020 market study into online platforms and digital advertising (which is the origin of the key concepts of the Bill). In this market study, the CMA found that certain structural elements of digital markets, including extensive vertical integration, can give rise to conflicts of interest and allow companies with market power at one stage of the value chain to undermine competition at other stages. The CMA suggested these issues be addressed through more aggressive interventions, such as by mandating third party access to data, setting requirements for software interoperability, and imposing separation remedies similar to those available in a merger context (but stopping short of full ownership separation). PCIs accordingly will aim to temper or remove the root cause of the market power causing the identified competition issue, meaning they will also have a far greater impact on the business models of affected firms. |
Public consultation and ongoing review
The CMA must publicly consult on any PCI it proposes. When making its final decision on an investigation, the CMA must provide its findings in writing to the affected SMS firm and outline any proposed PCIs, with reasons for the findings and decision. The CMA will then have four months to implement the PCI, extendable by up to two months where the CMA considers there are special reasons for doing so. Should the CMA ultimately decide not to make a PCI after carrying out this process, it must provide the SMS firm with a further written explanation of this decision. All decision notices provided to SMS firms must be published as soon as reasonably practicable.
In addition, the CMA must review on an ongoing basis:
- the effectiveness of the PCI order;
- the SMS firm’s compliance with the PCI order; and
- whether to take enforcement action against any firm that breaches a PCI order.
The frequency of review of PCI orders will be at the CMA’s discretion, provided any PCI order made includes the date of the next review. We may see guidance from the CMA setting out more detail of its approach to review of PCIs in due course.
Standard of review
One key feature of the Bill is that the proposed standard of review for appeals is the judicial review standard. This has proven to be the largest area of debate as the Bill passed through the Committee Stage in the House of Commons. This proposed standard would apply to any decision made by the CMA in connection with its digital markets functions, with the exception of decisions in relation to mergers.
This proposal sits in contrast to the competition law enforcement regime where a merits appeal standard applies. Concerns raised by stakeholders that this standard is too high appear to be particularly acute in relation to the proposed powers to impose conduct requirements and enforce against breaches thereof, where the CMA has particularly wide discretion. The driver of the high standard sits in concerns that ex post enforcement has been to slow to keep up with these fast-moving markets and that merits review would take time. However, in the context of a brand new regime where the CMA is being provided with broad powers and significant discretion, this does raise questions of fairness and accountability, which have led to calls for a merits review standard or potentially an alternative standard that falls somewhere between appeals on the merits and judicial review. This question deserves serious consideration, and is likely to be a focus as the Bill is debated further in the House of Lords.
Next steps
The Bill is currently completing Report stage in the House of Commons. It is likely to progress to the House of Lords later this year and is expected to receive Royal Assent in Spring 2024, entering into force later that year.
Firms which are likely to fall within the scope of the regime should start considering what type of conduct requirements and PCIs they could face and prepare accordingly. Parties likely to fall outside of the regime’s scope should consider whether they wish to have in place procedures for making third-party representations to the CMA in relation to any conduct requirement or PCI consultations which could affect their businesses.
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