A “byte” of the pie – the CMA hints at its provisional approach to the new digital markets regime in the UK
The SMS Regime
The Digital Markets, Competition and Consumers Bill (the DMCCB) is designed to provide the CMA with powers to address competition issues in digital markets, and is aimed at the market power of the largest digital companies. The DMCCB establishes the framework for the new UK digital markets regime to identify and designate firms with “strategic market status” (SMS) and will be administered by the Digital Markets Unit (DMU), a unit within CMA (the SMS Regime).
Under the regime, the DMU will be able to investigate and designate firms as having “Strategic Market Status” in respect of one or more “digital activities”.
The DMCCB provides that a firm will be deemed to have SMS if it is found to have: (i) substantial and entrenched market power linked to the UK; (ii) a strategic position; and (iii) global turnover of more than £25 billion or UK turnover of more than £1bn. The SMS Regime prescribes time periods for these designations, which must be made within 9 months of the DMU commencing an SMS investigation.
Once a firm has been formally designated as having SMS, the DMU will be able to impose conduct requirements (CR) specific to that SMS firm provided that such CRs: (i) align with one of three statutory objectives (i.e., fair dealing, open choices, and trust and transparency); and (ii) are of a permitted type. Permitted types of CRs can generally be categorised as those restricting undesirable behaviour, such as CRs obliging an SMS firm to trade on fair and reasonable terms or preventing them from restricting interoperability.
In addition to setting CRs, the DMU will be able to investigate the “root causes” of a designated firm’s market power and make binding orders known as pro-competition interventions (PCIs) following an investigation. PCIs may be imposed on a part of the firm’s business, even if it is outside of the perimeter of activity for which it is designated. Mandatory reporting obligations will also apply to SMS firms for acquisitions that trigger specific thresholds concerning the share of equity/voting rights and the value of the consideration.
Any breach of these rules will render an SMS firm liable to a fine of up to 10% of the firm’s global annual turnover. The DMU will also be able to make enforcement orders or take court action.
The Commission and the CMA
The concepts underlying the Digital Markets Regime broadly align with the EU’s Digital Markets Act (DMA), which came into force in November 2022 and that requires compliance from 6 March 2024. In contrast with the DMCCB, however, the DMA automatically requires potential gatekeeper firms satisfying the requisite thresholds to notify the Commission that those criteria are met and prescribes the obligations with which gatekeepers must comply.
The Provisional Approach and the CMA’s call to action
The discretion afforded to the CMA gives rise to uncertainties around how the SMS regime will be implemented, particularly which firms and activities will be prioritised and what firms will be required to do, which the Provisional Approach aims to address, at least in part.
The Provisional Approach outlines 11 operating principles to inform the CMA’s initial approach and stakeholder engagement. The overarching themes include: (1) taking a targeted and proportionate approach; (2) focusing on outcomes that will have the most impact; (3) ensuring that risks are dealt with in a timely way; and (4) engaging with stakeholders and other regulators. These mission statements largely correlate with, and seem to echo, the CMA’s prioritisation principles –in considering a potential intervention, the CMA will assess the strategic significance and impact of such intervention, the resources required and the level of risk associated with it.
The discretion granted to the CMA under the SMS Regime is intended to allow the DMU to regulate a diverse range of markets and businesses. Indeed, even where two firms’ products are similar, their business models and conduct may be very different (cf. Android and iOS). Further, the flexibility is designed to “future proof” the regime by bringing innovative technologies and new ecosystems under the purview of the competition authority without having to predict or identify those within legislation. It will, therefore, be interesting to see how broad the CMA’s first designations are, and how the CMA looks to group activities into a single designation, including in light of the tension between the desires articulated in the Provisional Approach between (1) taking a targeted and proportionate approach (which could suggest narrow designations) and (2) focusing on outcomes that will have the most impact (which could suggest a broader approach).
The principles under theme (4) recognise that the global ways in which tech firms operate (and the issues that arise worldwide as a result) require a cohesive cross-border effort in order to address the geographic limitations of the relevant regulatory authorities. Therefore, the CMA is likely to take cues from other regulatory authorities when initiating investigations or may even go further to impose internationally binding commitments, as it did in its investigation into Google’s Privacy Sandbox browser. Even so, instances of diversion (most notably in the recent Microsoft/Activision and Booking/eTraveli mergers) highlight the difficulties in establishing regulatory alignment. Therefore, there remains a potential for divergence in both:
- the precise scope of designations under the DMCCB and DMA; and
- the nature and scope of any restrictions and obligations attached to equivalent designations.
This scope for divergence will be a potentially significant concern for SMS firms, who may face a patchwork of inconsistent requirements across their European service offering.
To ensure a coherent and uniform approach to the setting of CRs, the Provisional Approach articulates the following guiding principles:
- CRs must have an identifiable outcome. Where it is measurable and relatively easy for the CMA and third parties to assess, the CMA is more likely to impose an outcome-focused CR.
- If an outcome-focused CR is not appropriate or sufficient to achieve the intended aim, the CMA will impose one or more CRs specifying the actions that a firm must take.
- The CMA will generally set higher-level requirements when setting action-focused CRs, which will allow for flexibility in the specific steps the firm must take.
- Where necessary (i.e., where the firm has failed to comply effectively or where the firm needs to take specific steps to correct clearly identified harms), the CMA may build on these higher-level requirements by also imposing one or more CRs setting out more prescriptive requirements.
While these principles provide a starting point as to the CMA’s line of thinking, they do not clarify the granularity of CRs that the CMA expects to impose. It will be interesting to see how the CMA begins to tackle this and the direction that this will take in terms of their practical workability and efficacy.
These guiding principles also hint at the importance that the CMA will place on regular monitoring in order to maintain and streamline its targeted approach, and to refine its approach as markets and situations evolve. The CMA envisages that this will result in a careful, considered approach to CRs that can effectively take into consideration any nuances in the relevant markets.
The CMA will rely on SMS firms to provide information that builds on the CMA’s understanding of how they operate from a technical and business perspective. Further, to build an understanding of the concerns surrounding digital businesses, consumers, businesses, investors and third parties will be able to participate in a dialogue through two representative panels: one for consumers and civil society,; and another for businesses and investors. The CMA will also publicly consult on guidance and designations.
These considerations suggest that the CMA is willing and ready to engage. It remains to be seen, however, how much weight the CMA would attribute to a conflicting opinion and how (or whether) it will resolve any differences in lines of thinking, considering the limited appeal avenues available. Nonetheless, these channels present the best opportunity to establish meaningful communication with the CMA and interested parties should take full advantage, particularly in educating and informing the CMA of any unique features that might be of particular relevance to a relevant digital market.
Timing implications
The DMCCB is expected to receive Royal Assent in Spring 2024 and come into force in Autumn 2024. Accordingly, it is likely that the earliest SMS designations will come into force during Q2 2025. In between Royal Assent and its powers coming into force, the DMU is expected to consult on, and publish, more detailed guidance on the different mechanisms and procedure within the regime. This will play a crucial role in informing how the CMA has interpreted its powers. As highlighted above, the CMA is obliged to consult publicly on guidance and interested parties should fully engage with this process.
Conclusion
The Provisional Approach is useful in setting out the CMA’s current expectations for the Digital Markets Regime. Nonetheless, it remains to be seen how the CMA will exercise its powers in practice, with significant scope for a broadening of the CMA’s activities, leveraging the inherent flexibility in the DMCCB.
The publication of guidance in this respect is welcome and considering the obligation on the CMA to publicly consult on guidance and SMS designations, there is a valuable opportunity to engage effectively with the CMA and to help steer the SMS Regime in a constructive direction.
This article was co-authored by trainee solicitor Uwen Yap.
