The Digital Markets, Competition and Consumers Bill 2023 (DMCC) was introduced by the government on 25 April 2023 and will bring significant changes to the UK competition law landscape. Within the DMCC, there are two main areas of change: a new digital markets regime to enforce competition in digital markets and more general amendments to the competition regulator's powers, including merger control.
Changes have also been made to the consumer protection regime, and these are discussed in separate articles.
The proposed changes are significant: the new digital markets regime will be enforced by the Competition and Markets Authority (CMA) through the Digital Markets Units (DMU). It has generally been accepted that the CMA’s existing competition law powers are insufficient in the digital world and the DMU was created to address this. It was set up in principle in 2021 and has been shadowing the CMA since, but the DMCC will give it statutory powers to undertake scrutiny of digital markets.
This article considers the changes to competition law that have been proposed and will take effect in the UK when approved by Parliament. We expect its entry into force in Spring 2024.
Digital markets regime
Strategic market status
The new digital markets regime will affect those companies that the DMU has confirmed as having “strategic market status” (SMS) in respect of a digital activity linked to the UK. There are five cumulative conditions for the company to meet in order for the DMU to assign it such a designation:
- Carries on a digital activity - this is defined very widely and it captures: 1) the provision of a service by means of the internet; 2) the provision of one or more pieces of digital content; 3) any other activity carried out for the purpose of any activity under 1 or 2 above.
- Linked to the UK - the entity must have 1) a significant number of UK users; or 2) carry-on business in the UK linked to the digital activity or; 3) the digital activity is likely to have an immediate, substantial and foreseeable effect on trade in the UK.
- Substantial and entrenched market power - the DMU will undertake a five year forward looking assessment of the company to determine what the market would look like, including what would happen if the entity was not designated an SMS. In principle, this seems to be like a merger analysis where the CMA considers the counterfactual position where a merger did not take place.
- Position of strategic significance - there are four alternative tests set out in the DMCC. These are based on a number of factors: 1) the size or scale of the digital activity; 2) the number of other undertakings that use the firm's digital activity; 3) the ability of the firm to extend its market power to other activities; and 4) its ability to determine or substantially influence the way in which other undertakings conduct themselves, and
- Turnover requirement - the entity’s annual group turnover must exceed either £25 billion worldwide or £1 billion in the UK.
The regime is intended to capture the largest of the tech companies. If the DMU considers that it has reasonable grounds to designate an entity as having SMS, the process can take up to nine months including public consultation. Any such designation remains in place for up to five years, subject to revocation or variation. The tests are intended to afford the DMU significant discretion over the assessment and we await further guidance setting out in detail the scope of the rules and how the analysis will be undertaken.
Consequences of designation
The consequences of being designated as having SMS are significant and each company will have to comply with bespoke conduct requirements. These will be developed and enforced by the DMU and will operate alongside existing competition law and consumer protection rules.
The Codes of Conduct for each SMS firm will be based on a number of principles: fair dealing, open choices and trust and transparency. Further guidance on this will be given after a public consultation into proposed requirements, but it is understood that the DMU will have considerable flexibility and discretion as to what is included for each firm.
In addition to imposing and enforcing these conduct requirements, the DMU will also be able to undertake own-initiative investigations into potential competition issues in digital markets. The idea is similar to a fast-tracked market study/investigation and may lead to pro-competition interventions (PCIs) on SMS firms. These PCIs may take the shape of an order setting out either structural or behavioural remedies imposed on an SMS firm to address any competition issues that have been identified.
Finally, SMS firms will be subject to mandatory reporting obligations in respect of any proposed acquisition that triggers specific thresholds around share of equity or voting rights and value of consideration. This will be the case where a transaction results in an entity in the SMS group having:
- qualifying status: increase in equity or voting shares from less than 15% to 15% or more; 25% or less to more than 25%; and 50% or less to more than 50%
- in a UK-connected body corporate: where the target is or is intended to be active in the UK, and
- for consideration: at least £25 million.
Notification must take place prior to closing and the regulator has five days to consider whether the mandatory report is sufficient for it to determine whether to investigate under the normal merger rules.
Penalties for non-compliance
The DMU may impose significant penalties on SMS firms for breaching aspects of the DMCC:
- For any breach of a conduct requirement, PCI or order, the DMU will be able to impose penalties of up to 10% of the SMS firm’s annual worldwide turnover, along with an additional 5% of daily global turnover for every day the breach continues. Any company directors implicated in the breach may also be disqualified for up to 15 years.
- Failure to comply with any part of an investigation, including information requests, interviews, dawn raids, compliance reporting, or providing false or misleading information, may result in a penalty of up to 1% of the SMS firm’s worldwide turnover. There may also be daily penalties of up to 5% of daily turnover while the breach continues, and penalties on individuals of up to £30,000, a daily penalty of £15,000 or both.
- Failure to report a merger under the mandatory rules could lead to a fine of up to 10% of the company’s worldwide turnover.
In addition, in certain cases there may be civil or criminal sanctions imposed on individuals who knowingly or recklessly provide false information or who hinder any investigation.
Competition Law
As noted above, the DMCC also expands the CMA’s role in competition law, including:
Merger control
There will be a number of changes to the UK merger regime:
- The turnover threshold will be increased from £70m to £100m
- There will be a safe harbour/exemption for mergers where both parties have UK turnover of less than £10m
- A new merger threshold will be added to capture vertical and conglomerate mergers. The CMA will have jurisdiction if one of the parties to the transaction supplies at least 33% of goods or services in the UK and has UK turnover of over £350m, and the other party is a UK business, either directly active or supplying goods and services in the UK
- Merger parties may also request fast track to a Phase 2 investigation at any stage of the process. While the CMA will have discretion whether or not to accept this, if it does, it will be able to extend the investigation period for up to 11 weeks to ensure that there is time for the full investigation.
Chapter I prohibition
This will be extended to cover agreements or behaviours that are implemented outside of the UK but have their effect in the UK.
Investigative powers
The CMA will be given wider evidence gathering powers, including in relation to evidence/document preservation, interviews and flexibility in dawn raiding domestic premises.
Competition Appeals Tribunal (CAT) powers
These are enhanced, to allow the CAT to provide declaratory relief in the form of a declaration on how the law applies to the facts of a case.
Private claims
Both the CAT and the courts will have the power to award exemplary damages in competition law claims.
Market studies and investigations
Under the DMCC, the CMA will be able to accept undertakings from the parties at any stage of the process. In relation to market investigations, the CMA will have greater flexibility to define the scope of a market investigation and the requirement to consult on whether to refer to an investigation at six months into a market study will be removed. The CMA will also be able to conduct market tests to see if remedies will be effective and, where an adopted remedy is not having its intended effect, the CMA can adopt an improved one for up to 10 years.
What’s next?
These changes have been long discussed and awaited. Big Tech will need to ensure that it is up to speed with them.
There is increased global scrutiny into Big Tech and its impact on competition, and the UK is seeking to address this by bringing its regime and powers in line with those of other countries. It is key that tech companies understand the impact and act to ensure that they have adequate procedures in place to address concerns and respond to the regulators. Our competition experts are well placed to assist and have significant experience in tech mergers and investigations. We would be happy to meet with you to discuss the regime going forward.
