Digital regulation 2.0: UK to set up new competition regime for digital markets

2021 promises to be an important year for the regulation of digital markets. Alongside other reforms in the UK and the EU, April is set to see the establishment of a new stand-alone regulator in the UK, dedicated to monitoring and enforcing a new regulatory regime for digital markets; the Digital Markets Unit.

We now have further details on what that regulatory regime may look like, following the publication of the Digital Markets Taskforce's advice to the government.

The Taskforce has proposed a fundamental shift in the way competition is regulated in the digital world - moving from after-the-event enforcement to pro-active measures to prevent market distortion by companies designated as having "strategic market status". The regulatory tools will include a code of conduct and pro-competitive interventions, such as enabling personal data mobility, interoperability and data access. The Taskforce also proposes greater intervention in M&A by companies with "strategic market status". As attention turns around the word to the regulation of digital markets, the next steps will be closely watched as the UK establishes its post-Brexit regulatory stance.

The need for change

The advice builds on the extensive work already undertaken in analysing the effectiveness of competition in digital markets in the UK. A dedicated digital markets regulator was recommended following an independent review into digital markets commissioned by the government in 2018 ("the Furman Review").

The Competition and Markets Authority (CMA) then launched a market study into Online Platforms and Digital Advertising in the UK, which saw the regulator recommend a new pro-competition regime be established to address harms it had identified in digital markets. The Digital Markets Taskforce, which is led by the CMA, was asked to provide recommendations to the government on how to achieve this.

Two-tier regulation

The UK government had pre-empted the Taskforce's headline recommendation - that it establish a dedicated Digital Markets Unit (DMU). In its response to the CMA's market study on 27 November 2020, the government committed to establishing and resourcing the DMU from April 2021.

This advice provides detail on how the new regulatory regime, which the DMU will oversee, is likely to operate. The Taskforce has recommended two separate regimes:

• The Strategic Market Status (SMS) regime (a pro-competition regime for the most powerful digital firms), involving:
  • an enforceable code of conduct which will apply to SMS players;
  • pro-competitive interventions to drive greater competition and innovation; and
  • a new mandatory merger regime to apply to SMS mergers
• A modern competition and consumer regime for digital markets: although the Taskforce's recommendations focus on the SMS regime, it notes that the right tools need to be available across digital markets more widely to drive competition and address harm.

How will SMS players be designated?

An organisation will fall within the scope of the SMS regime if it is assessed to have ‘strategic market status’. The test will be whether the firm has entrenched market power in at least one digital activity, providing it with a strategic position.

Any provisional decision on a firm's designation will be subject to consultation If the test is subsequently found to be met, the designation of SMS status will apply to the firm for a set period, after which it will be reviewed.

What will the code of conduct look like?

The code will consist of:

• High level overarching objectives, including fair trading, open choices, and trust and transparency (if the Taskforce's proposed objectives are accepted), which will be set in legislation.
• Supporting principles and guidance, which will be determined by the DMU.

During the designation assessment, the DMU should consult on and establish the code to be applied to each firm, taking into consideration the particular activities which are the focus of its SMS designation and tailoring it accordingly.

Enforcement tools

The Taskforce recommends that the DMU should be given enforcement tools that include the power to impose operational and functional separation on SMS firms. The Taskforce is not suggesting the DMU should be able to impose full ownership separation. This power would remain open only to the CMA following a market investigation, reflecting the serious nature of ownership separation as a remedy, and the political implications of such an action.

Mandatory notification

The UK merger regime currently operates a voluntary notification system. The Taskforce is proposing a change of approach for certain transactions involving firms with SMS status. All SMS firms would be required to report transactions to the CMA and certain SMS firms would face additional requirements, with completion prohibited prior to clearance.

International cooperation

The Taskforce has also recommended that the DMU works closely with international regulators to promote a coherent landscape, including a proposal to establish a network of international competition and consumer agencies to facilitate better monitoring and action. While the CMA is certainly setting out its stall as a world leader in competition post-Brexit, it is encouraging to see that the regulator is favouring an outward, cooperative approach. This will hopefully lead to regulatory certainty for companies, minimising the need to comply with different rules in different jurisdictions, even if there is a risk of greater intervention.

That aim will be tested before the DMU even gets off the ground. On 15 December 2020 the European Commission published the draft EU Digital Markets Act, which sets out the European Commission's rules for designation of "gatekeepers"  (i.e. the equivalent to the UK's SMS players) and the rules that will apply (the UK's code of conduct). It will be interesting to see how closely aligned the DMU's proposals are when we have more detail on these points. One point of divergence already apparent from the proposals is that while the Taskforce appears to be suggesting a tailored SMS regime for each major platform, the EU is suggesting a standard set of dos and don'ts as a starting point, potentially offering less flexibility.

Increased market powers?

There are several recommendations to increase market powers for the DMU. The Taskforce proposes enhancing the existing market tools and giving the DMU a separate duty to monitor digital markets, both to review SMS players' compliance with the code and to give the DMU a better understanding of how digital business operate. The CMA already has strong market investigation powers; this is a signal that companies in the digital space should expect ongoing scrutiny/engagement with the CMA/DMU in the years to come.

Beyond competition

The Taskforce has been clear that its proposed framework cannot exist in isolation, and will need to be considered as part of the wider regulatory landscape. The full picture needs to take account of sectoral regulation, data protection regulation and the new regime for harmful online content, among other things.

Of particular note is the renewed call for increased competition and consumer powers across digital markets, building on the significant reforms proposed by the CMA to BEIS in February 2019. Reforms of that nature would be far-reaching and would affect the sector more broadly, not just those with strategic market significance.

What next?

The government has committed to begin consultations on the Taskforce's recommendations for a new regime in early 2021 and to legislate to put the DMU on a statutory footing as soon as parliamentary time allows. Noting that similar measures are being proposed across the world, the CMA has urged the government to take swift legislative action in order for the UK to take the lead in 'championing a modern pro-competition, pro-innovation regime.'

Given the timeline for the European Commission to get approval for the Digital Markets Act, there is certainly an opportunity here for the UK government to move more quickly in introducing its regulation. The Taskforce and the CMA are on standby to assist the government with any preliminary work needed to ensure the regime and the DMU will be functional. Notably, the Takskforce suggests that the CMA could begin to undertake SMS designation assessments for certain firms as soon as the government has taken decisions on the recommended SMS designation test.

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