The DMT’s recommendations follow the UK Government’s endorsement of the proposals set out in the CMA’s online platforms and digital advertising market study - a key proposal was the creation of a Digital Markets Unit (DMU) with duties to address the market power of the most powerful digital firms. The DMT’s recommended approach is to implement a regime that, unlike traditional enforcement, can respond quickly to competition concerns in digital markets in a participative and remedial, rather than punitive, manner to embed cultures of compliance at SMS firms.
SMS designation – by the DMU
The DMT recommends that there should be an evidence-based assessment as to whether the relevant firm has SMS, meaning that the firm has “substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position”. This is to avoid imposing the SMS regime in instances where such power is transitory and likely to be competed away in the short term. The DMT also recommends that the DMU’s market power assessment should not require a formal market definition analysis, enabling it to effectively capture the interconnected nature of digital products and regulate “dynamic” competition.
The DMT clarifies that only a firm’s ‘digital activities’ should be relevant for an SMS assessment and not the entire firm. The term ‘digital’ should cover “any situation where digital technologies are material to the products and services provided as part of the activity”. An online marketplace would most likely meet the test, whereas a high-street retailer launching an online store is less likely to fall within scope. A single firm can have multiple designated activities. For example, Google may have separate SMS in relation to Search and the Play Store and, accordingly, be subject to separate codes of conduct.
At this stage, the DMT anticipates that few digital firms are likely to have SMS designated activities. The key factors for the DMU to consider will be: whether the firm’s annual UK revenue is in excess of £1 billion and whether the firm’s activities are in key sectors such as online marketplaces, app stores, social networks, web browsers, online search engines, operating systems and cloud computing services.
Code of conduct
The DMU should be able to establish an enforceable code of conduct for each SMS firm in relation to its relevant activities, comprising high-level objectives supported by principles and guidance. It should consult on and establish each code as part of its designation assessment, and each code’s objectives should be set out in legislation.
The DMU should have wide-ranging monitoring and information-gathering powers in relation to the conduct of SMS firms.
Another recommendation is that the DMU should be empowered to impose an unlimited range of pro-competitive interventions, except for ownership separation measures (these are still available to the CMA following a market investigation). Such interventions should only be made were the DMU has proved they constitute an effective and proportionate remedy to an adverse effect on competition or consumers. They should be time-limited and reviewed regularly.
Penalties and interim measures
The DMU should be able to impose penalties of up to 10% of an SMS firm’s world-wide turnover for breaching its code of conduct or failing to comply with a prescribed remedy, as well as interim measures, particularly where an SMS firm changes terms and conditions or algorithms which can have immediate material consequences.
Appeals process available to SMS firms
To ensure that the DMU’s decisions are made in an open and transparent manner, the DMT recommends that its decisions should be treated as expert regulatory decisions and, therefore, should be subject to ordinary judicial review principles.
Exceptional merger control requirements for SMS firms
The implementation of additional merger control requirements for SMS firms is recommended, such that SMS firms should be required to report all transactions to the CMA, with clearance a pre-requisite to completion. A lower standard of proof (‘realistic prospect of’ as opposed to ‘more likely than not’ to result in a substantial lessening of competition) should also apply to mergers involving SMS firms.
The UK Government has already committed to:
- Establish and resource the DMU from April 2021
- Consult on proposals for the new regime in early 2021
- Legislate to put the DMU on a statutory footing.
Parallel developments in Europe
On 15 December, the European Commission announced a package of digital markets legislation intended to give the Commission powers to more effectively regulate major online platforms and protect European consumers and businesses: the Digital Services Act (DSA) and the Digital Markets Act (DMA). The DSA would introduce several measures of general application to online platforms, including content-moderation duties and transparency obligations relating to advertising practices. The DMA focuses on what the Commission terms “gatekeepers”- broadly comparable to the DMT’s definition of platforms with SMS - and creates a list of obligations that providers of “core platform services” must comply with to prevent unfair business practices and ensure contestability on digital markets. In light of Brexit, neither the DMA nor the DSA will apply in the UK, but it is anticipated that any action taken by the Commission under these Acts will be informative for parallel action in the UK, and vice versa.
The DMT’s recommendations clearly make the case for a new ‘ex ante’ regime in relation to the most powerful digital firms. It is to be hoped that the effective regulation of SMS firms will unlock the potential for digital services to spur economic growth generally, whilst also being pivotal to the UK’s recovery from the COVID pandemic. Time is now of the essence and the UK Government should grasp this opportunity, implement the DMU’s new pro-competition regime and enable the UK’s competition authorities to continue to spearhead international standards for the regulation of digital markets.