Proposed reforms to competition regime and powers for new Digital Markets Unit
The UK government has proposed an extensive set of reforms to the competition law regime, together with proposed new powers to regulate certain digital firms with so-called “strategic market status”.
The reforms follow in the wake of a series of proposals in the last few years, such as those made by former CMA chair Lord Tyrie, the report on digital competition led by former adviser to President Obama (Professor Jason Furman) (the Furman Report), last year’s report by Conservative MP, John Penrose (the Penrose Report) and the CMA’s recent Digital Markets Taskforce report (the Taskforce Report).
Underpinned by a perception that some markets have become too concentrated and consumers are losing out, an overwhelming theme of the proposals is a desire for speed across investigations, the imposition of remedial (interim and final) measures and any appeals against decisions. Taken together, they constitute the biggest reform of UK competition and consumer policy since the creation of the Competition and Markets Authority in 2014.
Given the government’s stated commitment to ensuring the UK has strong and effective regimes in place which will drive innovation and growth, and will be fit for purpose in a 21st century post-Brexit UK, an important challenge will be how to balance the desire for speed against the need to ensure that businesses’ rights are respected, decisions are robust and intervention is proportionate, properly grounded in evidence and will not lead to adverse consequences for competition, innovation and consumers.
This blog sets out some of the key proposals for the competition regime and digital markets. Please see our separate blog “Proposed reforms to consumer law and enforcement” on the proposed reforms to the consumer regime. Please get in touch with us for more details. The proposals are open for comment until 1 October 2021.
Reforming UK competition policy
More active role for the government in shaping strategic competition policy
The proposals envisage a significantly more active role for the government in shaping competition policy and the CMA’s future work.
- Building on the Penrose Report, the government proposes that the CMA will become a “micro-economic sibling” to the Bank of England with responsibility for publishing regular reports on the state of competition in the UK.
- The government also intends to set more regular and granular strategic targets for the CMA. This would include specifying which sectors of the economy should be priorities for the CMA, as well as the government’s expectations of what the CMA should achieve and how its performance should be measured.
An open question at this stage, which businesses are likely to want to see addressed, is how the government will balance these objectives with its long-standing policy of independence for competition authorities and the importance of fair and impartial investigations.
Changes to the CMA’s markets regime
The government’s proposals to reform the framework for market studies and market investigations and the speed at which they are conducted are particularly ambitious.
- One proposal involves entirely replacing the current market study and market investigation system with a new single market inquiry tool. This process would have a shorter statutory timeline than the current regime but the CMA would retain the same broad powers to impose remedies as it does under the current market investigations regime.
- Alternatively, the government proposes retaining the current market study and market investigation system, but enabling the CMA to impose non-structural remedies at the end of a market study (with the CMA’s Board acting as the responsible decision-maker rather than independent Panel members).
- Other proposals include providing the CMA with new powers to impose interim measures and new powers to resolve competition concerns through binding commitments.
Given that “non-structural” remedies (including the sorts of data access-related and interoperability remedies envisaged by the government) are capable of being just as intrusive as “structural” divestment remedies, businesses are likely to want to consider whether the CMA’s Board will provide sufficient independence.
It will also be important to consider whether, given the government’s stated desire to ensure that the markets regime contributes to making “the UK the best place to start and grow a business”, the CMA’s timeframes will lead to robust and high-quality decisions that can provide long-term benefits to both businesses and consumers – particularly in complex and fast-developing sectors of the economy.
Recasting the UK merger control regime
The government notes that it considers the UK’s voluntary merger control regime is working well “on most metrics” and should remain a voluntary and non-suspensory regime. Nonetheless, and against the backdrop of the CMA’s increasingly expansive interpretation of the jurisdictional “share of supply” test, the government has proposed broad changes which it says are designed to increase speed, efficiency and predictability. These include:
- creating a merger control “safe harbour” for transactions where each party has a turnover of less than £10m;
- introducing a new jurisdictional threshold for all transactions where one party to the merger has both a share of supply of at least 25 per cent and a UK turnover of more than £100m – aimed at capturing so-called “killer acquisitions”; and
- refining the CMA’s merger investigation procedures, for example by allowing the CMA to agree binding commitments at an earlier stage in the phase 2 process and creating a new “fast track” merger route whereby parties can request an automatic phase 2 reference without needing to undergo a phase 1 investigation or concede that the merger could result in a substantial lessening of competition.
While the proposal to create a merger control “safe harbour” may increase predictability for some businesses, the proposed new threshold will expand the CMA’s jurisdictional remit considerably. This discussion will be particularly relevant given the new jurisdictional threshold incorporates the flexible “share of supply” test, which provides the CMA with considerable discretion in asserting jurisdiction (as shown by the recent Sabre/Farelogix litigation) and the ability to impose extensive hold separate orders (particularly in the case of completed transactions).
Stronger and faster enforcement in antitrust investigations
Building on the concerns expressed in the Penrose Report, the consultation contains a slew of proposals aimed at making CMA investigations faster and more flexible.
- exploring whether cartel leniency applications should be further incentivised by providing holders of full immunity from the CMA in the public enforcement process with additional immunity from damages claims. The government is also looking at improving the protection of whistle-blower’s identity;
- inviting views on the appropriate level of judicial scrutiny by the Competition Appeal Tribunal (CAT) and whether the appeal procedure itself should be amended – again raising the prospect of moving from a full merits review standard to a standard based on the principles of judicial review. Separately, the government has also suggested it will extend the CAT’s jurisdiction to grant declaratory relief;
- amending the territorial scope of the Chapter I and II prohibitions to allow the CMA to more easily investigate conduct taking place outside the UK where the anti-competitive conduct is likely to have a “direct, substantial, and foreseeable effect within the UK”;
- strengthening the CMA’s interim measures powers in Competition Act investigations – for example by removing the requirement that the CMA has to provide a business with access to its file before imposing interim measures and/or changing the standard of review if a business appeals an interim measures decision to the CAT;
- creating a new settlement tool for abuse of dominance investigations (“Early Resolution Agreements”) whereby the business under investigation would not be required to admit to an infringement of competition law to settle, nor would the settlement be binding as to matters of fact and liability in follow-on damages claims; and
- proposing new methods of streamlining the settlement process, including via binding admissions, short form decisions and granting the CMA greater freedoms to implement a “robust and efficient settlement process”.
In light of the cumulative effect of the government’s proposals to speed up and streamline CMA enforcement, businesses and other stakeholders are likely to be particularly interested in engaging with the government on the standard of review in CAT appeals to ensure that CMA decisions remain subject to proper judicial scrutiny. This is an issue that has proved highly controversial in previous consultations.
Enhanced CMA investigative and enforcement powers across the board
In anticipation of the CMA’s caseload growing in both number and complexity, the government also proposed to upgrade the CMA’s information gathering and enforcement powers to enable the CMA to conduct investigations more swiftly and effectively. The proposals include:
- tougher penalties for non-compliance with CMA investigations – for example, fixed penalties of up to 1 per cent of a business’ annual turnover, as well as an additional daily penalty of up to 5 per cent of daily turnover while non-compliance continues;
- upgrading the CMA’s evidence gathering powers, including in respect of witness interviews, the legal duty of parties to preserve evidence in CMA investigations and the ability to inspect domestic premises;
- requiring an individual whose company is responding to an information request to make a personal declaration regarding the accuracy of the information submitted, with flagrant breaches of this obligation to potentially provide grounds for director disqualification;
- extending the prohibition against providing false or misleading information to the CMA to also cover the CMA’s voluntary information requests;
- allowing the CMA to impose civil penalties on companies that fail to comply with CMA directions, orders, undertakings or commitments that the company has given to the CMA; and
- strengthening the CMA’s ability to cooperate with regulators in other jurisdictions.
The DMU and the creation of a new competition regime for digital markets
The government has also opened a second consultation on its proposal to create a new “pro-competition regime for digital markets”. The drive to create new rules for the digital space mirrors developments in other jurisdictions, such as the proposed Digital Markets Act in the EU.
The overarching objective of the proposals is to promote competition and competitive outcomes in digital markets, to the benefit of consumers through increased growth and innovation in the digital economy. The government’s proposals draw heavily on the previous recommendations in the Furman Report and the Taskforce Report. The proposals include:
- Creation and role of DMU: the creation of the DMU within the CMA, with a statutory duty to promote competition in digital markets for the benefit of consumers. The DMU is already established in a non-statutory “shadow” form within the CMA. While the government states that the DMU will need to be independent and credible, there is limited detail at this stage on the DMU’s governance, structure and decision-making – including what checks and balances any decisions by the DMU will be subject to.
- Enforceable codes of conduct for firms with “strategic market status” (SMS): granting the DMU the power to designate certain businesses as having SMS and requiring them to comply with an enforceable code of conduct in relation to designated activities. The government is inviting stakeholder views on how exactly this code of conduct should be formulated. Its current recommendation is to follow the approach taken by Germany by setting out high-level principles in legislation and then allowing the DMU to develop additional binding requirements in relation to these requirements.
- Pro-competitive interventions (PCIs): enabling the DMU to impose PCIs to address what it consider may be the root causes of substantial and entrenched market power. The government envisages that the DMU will have a broad discretion in designing PCIs, which could include imposing “data-related remedies and measures to enhance consumer choice”. Notably, the government states that it has not excluded whether certain PCIs, including ownership separation, should be excluded from the DMU’s toolkit. In recognition of the effect this could have on businesses, the government states that the DMU should adopt an incremental and proportionate approach, favouring smaller interventions at the outset. Businesses are likely to want to engage with the government on how this will be enshrined in legislation and what would constitute a “smaller intervention”, given that such remedies are capable of having a significant impact on business models and incentives to invest in continued innovation and product differentiation.
- Appeals: proposing that, in general, appeals against DMU decisions should be reviewable on a judicial review standard and not a full merits review. The government’s proposals are a departure from the current appeal standard for Competition Act investigations - despite the DMU having equally intrusive powers and, at present, a significantly less defined procedural rulebook from which businesses can draw comfort.
- Information gathering and enforcement powers: providing the DMU with similar information gathering powers as the CMA and Ofcom and granting the DMU the power to impose financial penalties, of up to 10 per cent of an undertaking’s worldwide turnover, for failures to comply with the proposed regime. The government is also inviting views on whether other enforcement mechanisms, such as senior management liability, would help incentivise compliance.
- A separate merger regime for SMS firms: while the government appears to have not yet come to a firm view on the recommendations in the Furman Report and Taskforce Report relating to mergers – the government’s preferred policy option in its impact assessment did not include a separate merger regime for SMS firms - it is still consulting on the following proposals:
- introducing a mandatory merger control regime for SMS firms based on a transaction value threshold, combined with a UK nexus test; and
- lowering the threshold for intervention during Phase 2 investigations – from the current test of whether a substantial lessening of competition is “more likely than not” (i.e. balance of probabilities) to whether there is a “realistic prospect” of a substantial lessening of competition as a result of the merger (i.e. lower than a balance of probabilities).
Given the parallel proposals to tackle “killer acquisitions” in the government’s other consultation (see above), it is not clear at this stage why another merger control regime is required in order to address similar concerns.
Overall, the stated aim of the government’s DMU proposals is to make competition fairer for smaller businesses and unleash a “wave of innovation” without making regulation overly burdensome on businesses. It remains to be seen whether respondents to the consultation consider that the new regime will contribute to strengthening the UK’s position as a competitive, attractive and innovative tech market, or if, as currently proposed, the proposals risk having a chilling effect on competition, innovation and trade, particularly in fast-moving markets which have contributed significantly in the delivery of accessible and innovative services for UK consumers and businesses. It also remains to be seen how the government will approach taking forward these proposals, particularly alongside the European Commission’s proposed Digital Markets Act.
To read more about these issues and developments globally, please see our Global antitrust in 2021: 10 key themes report – antitrust in a changed world. You can also get in touch if you would like to discuss any of the issues raised here.