Furman Inquiry: UK digital competition expert panel calls for regulatory changes for the digital economy

On 13 March 2019, the UK’s Digital Competition Expert Panel, led by advisor to former US President Barack Obama, Professor Jason Furman, released its report setting out its proposed changes for effective regulation of the digital economy (the Report). UK Chancellor, Phillip Hammond, who commissioned the Report, has come out in support of the recommendations in principle.

Set out below are the key recommendations.

1. Establishment of a “digital markets unit” (DMU)

The Report calls for the establishment of a DMU, which would be an independent body (whether or not part of the CMA or Ofcom) and would be given the remit of using tools and frameworks that will support greater competition and consumer choice in digital markets.

The DMU would have three functions. It would be required to:

• Develop a principles-based code of competitive conduct, to be applied only to certain powerful companies with “strategic market status” (companies in a position to exercise market power over a gateway or bottleneck in a digital market) in order to avoid creating new burdens or barriers for smaller firms. Such principles would include providing access to platforms on a “fair, consistent and transparent basis”.
• Enable greater personal data mobility and systems with open standards where these tools will increase competition and consumer choice. The Report notes that the UK Open Banking initiative provides an “instructive example” of how policy intervention can overcome technical and coordination challenges and misaligned incentives. This would apply to a broader range of firms than those with “strategic market status”.
• Advance data openness where access to non-personal or anonymised data will tackle the key barrier to entry, where deemed necessary and proportionate to achieve the aims of the DMU, and while protecting privacy. Proposals include allowing data to be shared in a controlled environment to which approved businesses would have access to test new innovations.

2. Changes to UK merger control law and policy

The Report suggests a number of significant changes to merger control policy in particular for digital / tech companies. These include:

• Updating the merger assessment framework to provide more opportunities to intervene and to focus attention on technological developments and the possible loss of “potential competitors” as well as actual competitors.
• Designating certain companies with “strategic status” and requiring them to notify the CMA of “all intended acquisitions”. While not clear, the implication is that this obligation would relate only to transactions affecting the UK market. This is a surprising suggestion that could see the UK authorities notified of numerous benign transactions and would appear to discriminate unduly against certain companies.
• A “balance of harm” merger test allowing the CMA to be able to weigh-up (i) the potential harm from losing a powerful rival; and (ii) the magnitude and likelihood of potential benefits to consumers (including enhancements to valuable innovation).

3. Greater use of interim measures and revising applicable appeal standards

While the Report suggests less far-reaching proposals for the CMA’s already extensive investigatory powers in relation to anticompetitive conduct, it suggests that the CMA should prioritise consumer enforcement work in digital markets, and should complement this with sufficient information gathering powers applicable to the digital economy.

In particular, it suggests:

• Interim measures. The antitrust enforcement regime should be updated to enable greater use of interim measures to prevent harm to competition during a pending antitrust investigation.
• Revised appeal standards. Appeal standards should be changed (e.g., more closely aligned with the standards for judicial review - illegality, irrationality, procedural impropriety - and removing the ability to adduce new evidence in the course of an appeal) in order to equip the CMA with greater discretion.

4. A global approach to digital enforcement

The Report concludes by calling for a more integrated global approach to the digital economy, including: (i) ensuring the effectiveness of remedies; and (ii) reviewing the impact of the GDPR on competition. The Report echoes suggestions made at the European Commission’s digitisation conference in January that an unintended consequence of GDPR may be that it enables large digital companies to impose unreasonable duties on smaller competing firms, thereby reinforcing their market dominance.

Impact of the Report

Helpfully, the Report dismisses calls to reverse the burden of proof in merger transactions involving the acquisition of small start-up companies (which some have called “killer acquisitions”) on the basis that: (i) most acquisitions by large digital companies are likely to be benign or beneficial for consumers; and (ii) acquisition is an important exit strategy for start-ups, providing incentives to innovate.

The majority of the proposals will require primary legislation and so will not have an immediate impact. To the extent that Furman is suggesting that there should be more acceptance of “false positives” (mergers that are blocked that should not have been), the proposals will be controversial and could see mergers requiring remedies, or even being blocked, on the basis of speculative issues. Likewise, the proposals for the DMU to require greater data sharing will need to carefully balance other competing policy perspectives, in particular the demand for a greater degree of privacy.

Following Brexit, the CMA will assume responsibility for reviewing a large number of mergers that were previously under the jurisdiction of the European Commission. The CMA has significant ambitions to become a leading global enforcer on a par with the US Department of Justice and the European Commission. However, there are concerns that if all of the proposals are taken up the CMA may create a climate that is unduly hostile to digital businesses following Brexit.

For more on regulatory intervention in the digital economy, see our 10 Key Themes chapters on Regulating the disruptors and Digital M&A.