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UK taskforce makes recommendations on digital markets regulation

Digital network abstract map

The UK government is to consult on proposed changes to the regulation of digital markets in early 2021 after a major overhaul was recommended by regulators.

The digital markets taskforce, which comprises representatives from the Competition and Markets Authority (CMA), telecoms regulator Ofcom, and data protection authority the Information Commissioner's Office, said "it is crucial government takes action to ensure digital markets are competitive and continue to deliver the innovative products and services which are now so fundamental to our daily lives".

Among the advice it has shared, the taskforce recommended that a new system of regulation be established for digital companies believed to have ‘strategic market status’ (SMS). Those companies would be subject to an enforceable code of conduct bespoke to the specific activities that have been designated as falling within the SMS category "to prevent it from taking advantage of its power and position".

Richard Snape

Associate, Pinsent Masons

The new regime will allow for continuing interventions in digital markets as and when necessary.

Responsibility for designating activities of digital companies as falling within the SMS category should rest with a new digital market unit (DMU), the taskforce said. The government has already said it will establish the DMU within the CMA. The taskforce said the DMU should develop formal guidance around SMS designation assessments, though it outlined some overarching principles that it believes should shape the legal test for an SMS designation.

"The SMS test should, at least, involve an assessment of whether a firm has substantial, entrenched market power in an activity," the taskforce said. "In our view it should also involve an assessment of whether the firm’s market power in that activity provides the firm with a strategic position."

The taskforce said that "only a small number of digital firms" are likely to fall into the SMS category and that an SMS designation should be for a fixed period only and subject to review.

In addition to a code of conduct rooted in statute, SMS firms would also be subject to a "pro-competitive interventions" by the DMU, under the taskforce's plans.

"Pro-competitive interventions (PCIs) are an important tool to enable the DMU to intervene in markets to promote dynamic competition and innovation," the taskforce said. "Whilst the code will seek to prevent SMS firms being able to take advantage of their powerful positions in the activities that give rise to their SMS designation, PCIs will seek to address the root cause of market power."

"Remedies like personal data mobility and interoperability cannot be achieved via the code but are critical in addressing features, such as barriers to entry, which prevent innovative new competitors driving greater competition and innovation. Powers to implement these types of remedies are essential if the DMU is to be able to drive long-term dynamic changes in markets, opening up opportunities for innovation to the benefit of consumers, businesses and the economy more widely," it said.

The taskforce said the DMU will need "strong information gathering powers" to support its work and that it should be given scope to open formal investigations into potential breaches of code obligations or PCI orders. It said that the DMU should seek to resolve concerns "using a participative approach" first, where appropriate, but that where it investigates and finds a breach by an SMS firm, that DMU should have the power to impose fines of up to 10% of the company's worldwide turnover.

Competition law expert Richard Snape of Pinsent Masons, the law firm behind Out-Law, said: "The DMU’s pro-competitive intervention regime will build on the CMA’s current market investigation powers, which also contain the potential for structural and behavioural remedies. However, unlike the market investigation regime which often only offers a one-time chance to change the direction of a market, the new regime will allow for continuing interventions in digital markets as and when necessary."

Snape also said that the taskforce's recommendations in relation to changes to the UK's merger control regime were also significant. Under its proposals, businesses designated as falling within the SMS category would be obliged to notify major commercial transactions, such as mergers and acquisitions, to the CMA within a short period after signing.

"It is notable that the revised merger control regime will apply to the SMS firm as a whole, not only for those activities which are relevant to the assessment of SMS designation," Snape said. "The standard of proof which will need to be met for the CMA is still being discussed; however it may be lower than its existing merger notification regime. The intention is to allow the CMA greater scope to investigate so called 'killer acquisitions' whereby a digital markets incumbent acquires a new entrant prior to the target potentially becoming a more significant competitor."

Snape said the reforms proposed by the digital markets taskforce must be viewed in the context of Brexit, and the enhanced role that will mean for the CMA, and also be considered alongside parallel reforms under consideration at EU level and elsewhere around the world.

"The CMA is not alone in its work to increase its oversight of digital markets," Snape said. "The EU is in the process of introducing a new digital services package which, among other things, is designed to regulate digital gatekeepers. Similar interventions are being considered in the US, Japan, Australia and many other jurisdictions. The challenge for companies will be navigating the various regimes governing what are largely services that are provided on a cross border basis."

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