A new regulatory regime for the UK’s digital economy

On 25 April 2023, the UK’s much anticipated Digital Markets, Competition and Consumers Bill (the Bill) was published. The Bill has three distinct strands:

• Part 1: The introduction of an ex-ante regulatory framework for certain firms operating in digital markets in the UK (on a broadly similar basis to the EU’s Digital Markets Act (DMA));
• Part 2: Amendments to the existing competition regime which are aimed at enabling the Competition and Markets Authority (the CMA) to conduct “faster and more flexible competition investigations”; and
• Part 3: significantly stronger enforcement powers in respect of consumer protection issues, including granting the CMA the power to take infringement decisions and issue fines of up to 10% of global turnover.

For the purposes of this article, we focus on Part 1 of the Bill which, if passed as introduced, will grant significant new statutory powers to the CMA’s Digital Markets Unit (DMU) to oversee the regulation of firms designated under the Bill.

The emergence of a far-reaching regulatory framework - four key takeaways

• A new sector regulator: The CMA established the DMU in shadow form in 2021 in the anticipation of the statutory powers to be granted under the Bill. The DMU will be funded separately to the rest of the CMA, by way of a levy imposed on those firms it regulates (in a similar manner to other UK sector regulators such as Ofcom and the FSA). Just like the European Commission with the DMA, the CMA now faces a balancing act between its new role as a sector regulator, and its more established one as an active enforcer of competition law in respect of certain digital firms.
• New regulatory burdens for the digital economy: For those firms within the scope of the DMU’s powers, the shift to a regulated business model represents a dramatic change, adding significant costs to doing business. The DMU will have a range of investigation types at its disposal, from examining specific conducts to more general market failures, together with a well-equipped investigatory toolkit. A new well-resourced sector regulator is likely to be active in pursuing suspected problems, while affected firms can be expected to challenge the parameters of the DMU’s powers.
• New firm-specific conduct requirements: While the DMA sets out broad dos and don’ts for designated gatekeepers, the UK framework will impose firm-specific conduct requirements. In practice, the two frameworks are likely to result in very similar outcomes for the same firms, but the DMU will have some flexibility to impose wider requirements firms and/or to tailor those requirements to specific business models. By veering away from standardised requirements there is also a risk of inconsistency in how the rules are applied across the industry.
• A new mandatory merger reporting system, with a standstill obligation: Until now, the UK merger regime has been voluntary and firms have been free to complete transactions without waiting for a clearance from the CMA. However, under the Bill, regulated firms will be required to report to the DMU on almost all transactions undertaken and to wait for the DMU to approve the report as complete before closing a transaction. This requirement appears to be a safety net for the CMA, which already has significant merger monitoring activities, to ensure no transactions will slip under the radar. The converse of this prospect is the overwhelming number of reports it could potentially face under this provision.

Which firms will be regulated under the new regime?

The new regulatory regime will apply to firms which, following an investigation, are designated by the DMU pursuant to section 2(1) of the Bill as having Strategic Market Status (SMS) in respect of a digital activity, where prescribed turnover thresholds are met and the DMU considers that: (a) the digital activity is linked to the UK; and (b) the firm meets the SMS conditions in respect of the digital activity. 

These provisions introduce a number of new concepts which will need to be satisfied in order to designate a firm for regulation, including as follows:

• Provision of a digital activity: This will include providing a service on the internet, providing digital content (and any other activities carried out for the purposes of those providing a service on the internet or digital content) (section 3);
• Satisfaction of the SMS conditions in respect of the digital activity: The SMS conditions comprise the holding of:  (i) a substantial and entrenched market power; and (ii) a position of strategic significance (section 2(2)). In order to designate a firm as having SMS, the DMU will be required to conduct an investigation to assess whether these conditions are met;
• Link to the UK: This can be satisfied on the following alternative bases, if the digital activity has a significant number of UK users, the undertaking carries on business in the UK in relation to the digital activity, or the digital activity or the way in which the undertaking carries on the digital activity is likely to have an immediate, substantial and foreseeable effect on trade in the UK (section 4).
• Satisfaction of the turnover thresholds: Only firms meeting the thresholds, namely a global turnover above £25 billion, or UK turnover above £1 billion, will fall within the Bill.

How will firms be designated by the DMU?

In order to designate a firm under section 2(1), the DMU will need to establish that the firm satisfies each of the SMS conditions by way of an SMS investigation. Section 5 and 6 of the Bill provide the respective tests for establishing the SMS conditions:

• In order to assess whether a firm has substantial and entrenched market power in respect of a digital activity, the DMU will carry out a forward-looking assessment of a period of at least 5 years, taking into account developments that: (a) would be expected or foreseeable if the DMU did not designate the firm as having SMS in respect of the digital activity; and (b) may affect the firm’s conduct in carrying out the digital activity.
• A position of strategic significance in respect of a digital activity may be established where one or more of the following conditions is met:
  • the firm has achieved a position of significant size or scale in respect of the digital activity;
  • the firm has a significant number of business users;
  • the firm could potentially leverage its position in respect of the digital activity to extend its market power to a range of other activities; or
  • the firm can determine or substantially influence the ways in which other businesses conduct themselves, in respect of the digital activity or otherwise.

The Bill provides a detailed set of procedures in respect of SMS investigations, which must be concluded within a period of 9 months (extendable by a further 3 months).  Where the CMA decides to designate a particular firm, the designation will last for 5 years. The Bill also provides for further SMS investigations to be carried out in respect of the same firm.

What are the implications for designated SMS firms?

• Conduct requirements: Once a firm has been designated under the Bill, the DMU will have the ability to impose “conduct requirements” for the purposes of achieving “fair dealing”, “open choices” or “trust and transparency” objectives. The DMU procedure anticipates a specifically tailored code of conduct for each designated SMS firm, with requirements to avoid conduct such as self-preferencing, restricting interoperability, and using data unfairly. Before the conduct requirements are imposed, they will be subject to a public consultation.
• The DMU will have power to investigate suspected breaches of conduct requirements and to impose fines of up to 10% for breaches. It may also impose interim enforcement orders during the course of an investigation as well as final enforcement orders following an investigation.
• Pro-competition interventions in relation to SMS firms: The DMU will also have the ability to make a pro-competition intervention (PCI) following an investigation initiated under section 45 of the Bill if it has reasonable grounds to consider that factor(s) relating to a digital activity may be having an adverse effect on competition. Following an investigation, the DMU may issue pro-competition orders which may include behavioural remedies or structural / operational separation of business units within a firm.
• Mandatory reporting of mergers: A designated SMS firm will have new mandatory reporting obligations in respect of transactions which could result in it having:
  • “qualifying status” defined as an increase in shares/voting rights 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” meaning an undertaking that carries on activities in the UK, or supplies goods and services to person(s) in the UK;
  • for a consideration of at least £25 million.

Under the Bill, the DMU is expected to publish a notice which will provide details on the form and content of the report to be submitted in respect of such transactions. Its purpose is to provide the CMA with sufficient information to determine whether to open a full investigation under the merger control regime. The CMA will have just five working days to confirm if the report is sufficient and the parties are obliged not to complete the transaction in this period.

When will the new regulatory framework be in place?

The Bill is likely to have a smooth passage through Parliament and to come into force early next year, with designation of the first SMS firms expected to be complete by the end of 2024. We anticipate new DMU guidance to be consulted on in advance.

Our timeline below, provides a summary guide on what to expect.