Competition | UK Regulatory Outlook January 2024

Digital Markets Competition and Consumer Bill – impact on digital markets

Digital regulation has been on the agenda for some time and 2024 promises a number of developments in both the UK and EU that will see it starting to have real impact.

In the UK, the Digital Markets, Competition and Consumer Bill (DMCCB) continues to make its way through the parliamentary process with the Lords committee stage of the bill scheduled for 22 January 2024. It is currently anticipated that this legislation will come into force in the first half of 2024.

The legislation brings sweeping reforms to competition, especially in the area of digital markets. In this regard the proposed legislation will target the most powerful digital firms. To fall within the scope of the new regime enforced by the Digital Markets Unit (DMU) regime, a firm must satisfy:

• a UK nexus test (that is, have a sufficient connection to the UK in a particular digital activity);
• a revenue test; and
• an activity test (that is, conduct a digital activity, or digital activities, that fall within the scope of the regime).

The DMU will have the power to designate a firm that meets these tests with strategic market status (SMS), following a nine-month investigation, where it considers if the firm has substantial and entrenched market power in a particular digital activity, and whether this market power provides the firm with a "strategic position" in that digital market.

The DMU will be able to impose specific, tailored conduct requirements on a firm designated with SMS. These requirements will be designed to prevent an SMS firm taking advantage of its market strength. Additionally, the DMU will have the power to make targeted procompetitive interventions (PCIs) and SMS firms will face additional reporting requirements in relation to M&A activity. The DMU will have the power to issue fines of up to 10% of annual worldwide turnover for breaches of these conduct requirements or failure to comply with a PCI.

The possible impact of the DMCCB (and especially the preparations for the digital markets competition regime and DMU) will be informed by the Competition and Markets Authority's (CMA) horizon scanning report into Trends In Digital Markets, published on 14 December 2023. The report "draws on available evidence to discuss and present possible future developments and potential implications for competition and consumers.”

For more details on the digital aspects of the DMCCB, please see our recent Insight covering this development.

Digital Markets Competition and Consumer Bill – changes to competition law

The DMCCB also stands to have a significant impact on the wider competition landscape in the UK. In this section, we analyse the three main updates to UK competition law proposed by the DMCCB.

The bill gives extraterritorial effect to the UK prohibition against anti-competitive agreements. Currently the prohibition only applies to agreements implemented or intended to be implemented in the UK. The bill extends the prohibition to cover agreements which are likely to have an immediate, substantial and foreseeable effect on trade within the UK, thereby including agreements that are not implemented or intended to be implemented in the UK.

This "qualified effects" test is intended to ensure that UK trade and businesses and consumers based in the UK are protected from the detrimental effects of anticompetitive conduct, regardless of where that conduct takes place, even when an agreement is implemented in another jurisdiction. The expanded scope of this prohibition currently only applies to agreements made after the DMCCB becomes law. By legislating to include this qualified effects test the government is bringing UK competition law into line with UK and EU case law.

The DMCCB also increases the level of the turnover test, when the CMA has jurisdiction to intervene in a merger. This increase changes the jurisdictional thresholds from requiring the target to have at least £70 million UK turnover to £100 million. This is simply to update the test following inflation – the initial turnover test was established in the early 2000s.

Also addressed by the DMCCB is the issue of litigation funding, but only in opt-out cases heard before the Competition Appeal Tribunal. This follows the Supreme Court ruling in PACCAR which held that litigation funding agreements can be damages based agreements (DBAs) and if they are, have to comply with the DBA regulations. Although broadly welcomed by litigation funders, this amendment has been heavily criticised for not going far enough to address the ruling in PACCAR. Funders will be hoping changes are made to this section in the Lords committee stage of the DMCCB, scheduled for 22 January 2024.

Digital Markets Act

With the Digital Markets Act (DMA), the EU has already legislated to control competition in digital markets. The DMA has been in force since 2 May 2023 but the process for designating gatekeepers is not yet concluded – the first group of designations was completed on 6 September.

Gatekeepers will have six months after designation to comply (by or before 6 March 2024 for those already designated). Please see our previous Insight for an in-depth discussion of the DMA.

Six big tech companies have been designated in relation to social networks, online intermediation services, advertising, number independent communication services, video sharing, search, browsers and operating systems. Challenges have been lodged in relation to some of these designations. Notably there have been no designations or investigations launched into businesses offering cloud computing or virtual assistants. With the increased capability of virtual assistants based on artificial intelligence, they may play a bigger role in the future. The highly concentrated cloud computing market is arguably the most striking absence, given its critical role across both the private and public sectors – including its instrumentality in hosting generative AI models and apps.

The DMA allows the Commission to conduct market investigations to determine whether a service that does not meet the quantitative criteria should still be covered. It has launched such an investigation into iPadOS and we can expect more such investigations in other markets to come.

The DMA will have a substantial impact on digital markets and competition within the EU and beyond. As such, it is important for all businesses to remain aware of the DMA as the regulatory procedures it introduces bed in.

Changes to the National Security and Investment Act

On 13 November 2023, the Cabinet Office issued a call for evidence in relation to the National Security and Investment Act 2021 to collect views on how the national security and investment regime can be more business friendly while maintaining and refining the protections needed to protect national security. This call for evidence closes on 15 January.

The government is looking for views from cross-economy stakeholders in the UK and overseas. Oliver Dowden, the deputy prime minister, has indicated that the powers are to be pared back to make them “more business friendly” with the aim of “narrowing and refining” the scope of the regime. In particular, this evidence will help the government:

• hone the scope of the system’s mandatory notification requirements;
• improve the notification and assessment processes under the NSIA; and
• develop the government’s public guidance and communications on how the NSIA works and where the government tends to see risk arising.

Depending on the responses received, more detailed consultation on specific measures or legislative changes may be necessary. However, changes that require primary legislation are not currently being considered.

Notably, Dowden proposes removing internal restructures from the regime as the ultimate beneficial owner of the company remains the same in these scenarios. Additionally, junior business minister, Nus Ghani, has highlighted the need for the law to account for emerging threats, including the risk of hostile state actors accessing or buying companies with access to UK citizens' data.

The call for evidence is open until 15 January 2024. Businesses involved in M&A and private equity activity should remain aware of this development as the proposed alterations would implement significant changes to a number of parts of the regime. To discuss responding to this call for evidence please get in touch with your usual Osborne Clarke contact.

Green Agreements Guidance

On 14 December 2023, the CMA published informal guidance given to Fairtrade Foundation UK on the applicability of the prohibition of anticompetitive agreements to its planned Shared Impact Initiative for the sourcing of Fairtrade banana, coffee and cocoa products by participating UK grocery retailers. Participating grocery retailers would agree to commit to purchase minimum additional Fairtrade volumes of bananas, coffee and/or cocoa from a pool of Fairtrade producers on long-term contracts. This is the first such request for informal guidance under the "open-door" policy in the CMA's Green Agreements Guidance.

The agreement is considered to be an "environmental sustainability agreement" by the CMA and therefore Fairtrade is eligible to receive informal guidance on whether this agreement is likely to infringe UK competition law.

Some key factors in the CMA's analysis of this agreement are that it preserves competition between retailers and, to the extent that there are competitive restrictions, they do not go beyond what is necessary for implementation of the agreement.

With regard to the preservation of competition between retailers, under the agreement, retailers are still free to set retail prices independently. Importantly this includes whether the additional cost of Fairtrade products will be passed to consumers or absorbed by the retailer.

Although the agreement involves the exchange of information relating to future conduct, it is unlikely to reduce competitive uncertainty.

As to competitive restrictions, data collection and management will be done by third parties and retailers will not share information about how they are going to unilaterally deliver the core requirements.

Notably in relation to market share, although the Green Agreements Guidance states that agreements between competing undertakings are more likely to be acceptable when the undertakings have an aggregate market share of less than 10%, in relation to the supply of fair trade bananas the agreement is described as covering "less than 15%" of the relevant market. This indicates that the CMA is willing to consider exempting agreements which exceed the market share thresholds discussed in its guidance.

The CMA encourages businesses to get in touch if they are considering entering into an environmental sustainability agreement but are uncertain as to how the guidelines would apply. Businesses should remain aware of the possibility of doing so – such guidance can prove invaluable especially considering that the CMA has indicated it would be unlikely to issue fines against companies that have approached it for informal guidance. Given the increasing importance of ensuring sustainable business practices this is a crucial opportunity for businesses to be aware of.

If you are considering entering into an agreement with environmental or climate change objectives, the CMA green agreements guidance and commitment to take limited enforcement action against companies which approach it for informal guidance are important factors to consider.

See our Insight.