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UK government makes several key changes to its DMU proposals

Out-Law News | 27 May 2022 | 1:11 pm | 7 min. read

Many proposals from last year’s consultation on the role, functions and enforcement powers of the Digital Markets Unit (DMU) will be taken forward by ministers with relatively minor modifications.

However, several key proposals for merger control rules specific to firms with strategic market status (SMS) have been amended - or indeed abandoned altogether. The government’s consultation response confirmed that the DMU’s core objective will be to promote competition in digital markets for the benefit of consumers, though it will not have a broader role to consider interests of ‘citizens’ more generally.

The DMU will also have a statutory obligation to consult with other regulators like the FCA, Ofcom and the ICO where proportionate and relevant, to ensure this new regime coordinates effectively with other regulatory systems – and in line with existing UK’s multi-agency approach to digital regulation.

Designation of firms with strategic market status

The new regime will target certain types of ‘digital activities’ of firms with SMS, but the government is still considering alternative ways of defining this in legislation. SMS designation will be “evidence-driven and focused on a small number of the most powerful firms”. Only firms found to have “substantial and entrenched market power in at least one digital activity, providing them with a strategic position” will be designated. The DMU must also establish a “UK nexus” – which is yet to be defined - to ensure focus on competition in the UK. Statutory deadlines will apply, and the DMU will have nine months to complete its SMS designation assessment, a time limit that is extendable by three months in exceptional circumstances.

Legislation implementing the DMU regime will specify how the DMU defines and groups ‘activities’, as well as how the concept of ‘strategic position’ will be applied. An exhaustive list of criteria the DMU must use to assess whether a firm has a ‘strategic position’ will be set out in the forthcoming legislation. The DMU will publish guidance on its interpretation and practical application of these concepts. Ministers are still “exploring options for how the criteria can be periodically updated in response to fast-moving digital markets.”

A new minimum revenue threshold, which is not yet confirmed, will be introduced for designating SMS firms to help give more clarity, and the DMU will be given discretion to prioritise its designation assessments - but must set out its prioritisation approach in published guidance.

Conduct requirements

According to the government’s proposals, conduct requirements will be tailored for each SMS firm, reflecting a more bespoke approach than under EU’s Digital Markets Act (DMA) regime. Legislation will set out certain categories of conduct requirements, and the DMU will then be able to formulate specific requirements within these categories for each SMS firm. The specific requirements imposed by the DMU will be binding, and non-compliance may result in the DMU making enforcement orders or issuing financial penalties.

Examples of conduct requirements categories include requiring SMS firms not to apply discriminatory terms, conditions or policies to certain users or categories of users, compared to equivalent transactions; preventing ‘bundling’, or tying the provision of its other products or services by making access to them conditional on the use of the relevant designated activity; and providing clear, relevant, accurate and accessible information to users.

Conduct requirements will be developed in parallel with the SMS designation process and the DMU will aim to finalise the conduct requirements by the time SMS designation is complete. But since a statutory deadline applies for the SMS assessment but not for setting conduct requirements, in theory a firm could find itself with SMS designation but no finalised conduct requirements to adhere to. DMU will publish guidance explaining how each SMS firm’s conduct requirements operate in practice.

An exemption will be introduced to ensure that conduct which brings about net consumer benefits will not breach conduct requirements - a decision which broadly reflects the weighing up of harm to competition vs consumer benefits under EU law. In some cases an SMS firm leveraging its strong position in one market “may present a healthy disruptive force to an adjacent market in which a different incumbent has market power”. SMS firms will need detailed DMU guidance, however, to understand how the exemption will apply in practice - particularly as one category of conduct requirements will be intended to prevent an SMS firm from leveraging other parts of the business to further entrench its power in a designated activity.

As part of considering whether terms are fair and reasonable, DMU will be able to intervene on price through the conduct requirements. The government is considering how a mechanism based on final offer arbitration would work in practice, taking into account advice from the CMA and Ofcom (87 pages / 123MB PDF) on platforms and content providers. The advice sets out how conduct requirements “will help to address the effects of the imbalance of bargaining power between platforms and content providers”. It concludes that the DMU must be able to intervene, where necessary, to address unfair and unreasonable terms that stem from the market power of SMS firms.

The DMU will also be able to respond quickly to breaches of conduct requirements by issuing interim orders which can pause or reverse actions taken, as well as through final enforcement orders. Safeguards will apply to ensure interim measures are used appropriately.

Pro-competitive interventions

The DMU will have broad discretion to impose pro-competitive interventions (PCIs), including the ability to implement ownership separation on SMS firms, which mirror the remedy design powers already available to the CMA following a market investigation under the 2002 Enterprise Act. PCIs will only be imposed where an “adverse effect on competition” can be demonstrated, which is an established legal test under the UK’s existing market studies and investigations regime. There will be safeguards to prevent the imposition of pro-competitive interventions which would harm consumers.

PCIs can be implemented anywhere within a SMS firm, so long as the intervention relates to a concern in a “designated activity”. Ministers intend to ensure that any anti-competitive leveraging of a firm’s market power across its ecosystem can be addressed. DMU will also be able to use PCIs flexibly, ranging from accepting binding undertakings from SMS firms, to trialling and iterating new remedies. The statutory deadline for completing PCI investigations will be nine months, with an optional three-month extension for special reasons, mirroring statutory deadlines for the SMS designation process.

Enforcement

For regulatory breaches such as non-compliance with conduct requirements or enforcement orders, the DMU will be able to impose financial penalties of up to 10% of SMS firm’s global turnover, along with an additional 5% of daily turnover each day the breach continues. DMU will also be able to seek disqualification of implicated company directors through court action.  

Firms can also be fined up to 1% of global turnover for failing to comply with information requests, with additional 5% daily penalties available for continued non-compliance. Civil and criminal penalties will be available for anyone knowingly or recklessly providing false information to the DMU. There will be the option to impose civil penalties on named senior managers who fail to ensure the firm complies with information requests. Safeguards will be implemented to prevent the imposition of conduct requirements and pro-competitive interventions which could negatively impact consumers.

Information gathering powers will be broad but subject to robust safeguards that ministers are yet to clarify. The DMU will be able to interrogate algorithms’ impact on competition and require that firms carry out field trials - including A/B testing - to evaluate the impact of new innovations or processes if necessary. The DMU will also be able to request compliance reports from SMS firms to assist in its monitoring of compliance with the regime.

The DMU’s decisions will be subject to review on judicial review principles and financial penalties under appeal will be suspended until a verdict is reached. Reflecting the majority view of consultation respondents, the DMU regime will focus on public rather than private enforcement, so new redress mechanisms will not be introduced at this stage.

SMS merger control

New mandatory reporting requirements will oblige SMS firms to notify the CMA before completing transactions. But the requirements for this have been narrowed so they apply only to their most significant transactions, including where the SMS firm acquires over a 15% equity or voting share after the transaction; the value of the SMS firm’s holding is over £25m; and the transaction meets the as yet undefined “UK nexus” test.

Last year’s consultation proposed lowering the threshold from “more likely than not” to a “realistic prospect” of a substantial lessening of competition as a result of the merger. But in light of feedback received, the government abandoned earlier proposals to lower the threshold for referring SMS firm mergers to a phase two review. Instead, once reported, the CMA will conduct an initial review of the merger to consider if further investigation is warranted. This is a positive step, as it will reduce the risk of over-enforcement in an environment where large technology firms are already facing intense merger control scrutiny by competition authorities, particularly the CMA.

Notably, according to the government the parallel reform proposals for the wider UK merger control regime will also apply to the new SMS reporting requirements. More clarity on this point, however, is needed.

Looking ahead

The government’s proposals at this stage are phrased in general terms. We will have to await concrete legislative proposals to more fully assess the extent and potential impact of the changes contemplated. Much will also depend on the various guidance that the DMU will be required to publish once its statutory powers are confirmed.

The consultation response from government states only that legislation implementing these proposals will be progressed “when parliamentary time allows”. In the Queen’s Speech earlier this month, ministers revealed that the proposed legislative changes will be made through the Draft Digital Markets, Competition and Consumer Bill (140 pages / 405KB PDF). Since the Bill is expected only in draft form, however, formal legislation is not expected to be introduced to parliament until the 2022-23 session.

New legislative powers underpinning the DMU regime will now be consolidated in the draft Bill that also takes forward the government’s broader competition law and consumer protection reform proposals. Ministers hope to use the year’s delay in formally introducing the Bill to reflect on the proposed reforms, ensuring they are aligned, proportionate and do not duplicate rules or create inconsistencies between the different regimes. It is currently unclear, for example, how the new ‘killer acquisitions’ jurisdictional threshold - proposed as part of wider UK merger control reforms - would align with mandatory reporting requirements for mergers involving SMS firms. The reforms should also not unduly increase the compliance burden for businesses.

Proposals to hold senior management personally accountable through the threat of financial penalties or even director disqualifications are intended to help “embed a culture of compliance” within SMS firms. But such powers will have to be used sparingly and be subject to robust safeguards given the risks to individuals and to avoid over-enforcement. Further detail will be keenly awaited by stakeholders.