Hold the Queen’s virtual horses: an opportunity to consider further the UK’s new rules for digital firms and their place in the wider reform jigsaw?

Following Tuesday’s Queen’s Speech, it appears that both the broader reforms to the UK’s competition and consumer laws (see here) and the new regime for digital markets will be consolidated and consulted on together as part of a single Draft Digital Markets, Competition and Consumer Bill.

The government’s decision to consolidate, and delay the implementation of, these proposals, coming hot on the heels of the publication of its digital reform consultation response last week (the Response), opens the door for further careful consideration of the overall impact of the three competition, consumer and digital strands of its proposals – particularly on businesses, innovation and the UK’s future economic prosperity.

Given that only a Draft Bill is expected in the near term, with formal legislation not expected to be introduced in the 2022-2023 Parliamentary session, any changes to the UK’s competition and consumer law regimes – whether for digital markets or otherwise – will now very likely take effect after the EU Digital Markets Act (DMA) has come into force, and after the German Federal Cartel Office (FCO) has also made significant headway on using its new powers in the German Act against Restraints of Competition (GWB10). We explore below what this will mean for the interplay and coherence between these different regimes. 

More broadly, in relation to the CMA’s existing competition and consumer law powers, its public statements have been sending mixed messages: on the one hand, the CMA complains that its (extensive) existing powers are inadequate to address the issues raised in digital markets; and on the other hand the CMA has stated that it will employ those powers “to maximum effect”, with businesses in many quarters already having observed the effects of the CMA’s increasingly expansive enforcement stance. What is certain is that the UK looks set to continue to impose a testing regulatory landscape for all companies, regardless of their size or sector.

Looking ahead

1. Consolidation of two extensive sets of reforms

The previously separate Competition, Consumer and Digital reform proposals look set to form part of one consolidated Draft Bill to be consulted on in the coming year.

The consolidation of proposed new rules for certain digital businesses, together with broader competition and consumer law changes that will apply to all businesses including those same digital players, will require the government to consider the combined impact of its proposed changes in the round.

As a starting point, the now introduced focus on consumer benefits across the board is welcome, including the proposal in the Response for an exemption for firms that will be regulated by the new Digital Markets Unit (DMU) from complying with any Codes of Conduct or Pro-competitive Interventions (PCIs) imposed by the DMU, where the relevant firm can demonstrate its conduct brings about net consumer benefits. Indeed, this already stands in stark contrast to the EU’s DMA.

The delay in the proposals being granted any “legislative teeth” – and indeed their consultation once introduced – does however provide a broader opportunity to harmonise the UK’s proposed package of reforms in a way that strikes the right balance, particularly against the reported backdrop of calls to cool undue state intervention in the economy. 

In that context, at least the following questions could benefit from further consideration when the Draft Bill comes forward for consultation:

• enhanced intervention powers – how will the complex and intrusive DMU-governed PCIs proposed in the Response (such as interoperability and ownership separation remedies) work (or indeed be justified) alongside broader proposals for the CMA to enforce certain consumer protection legislation directly (rather than via the Courts, as it is required to do today);
• lowering the appeal standard – to what extent is the intended departure from a full merits review appeal standard for decisions adopted under the new digital regime necessary alongside parallel proposals to narrow the standard of appeal for interim measures imposed by the CMA under its broader competition law powers;
• information gathering and sharing – alongside the CMA’s proposed new powers to share information with international partners and obtain information on behalf of overseas authorities, the Response makes reference to the provision of information stored overseas and enforcement against conduct occurring overseas, which leaves open a number of questions around the adequacy of safeguards in relation to cooperation mechanisms and information gateways between the CMA and other regulatory authorities around the world; and
• remedy testing – the Response suggests providing the DMU with the ability to require firms to carry out specified field testing and A/B tests to assess the impact of new innovations and processes. Given the combination of the reform proposals, it is unclear to what extent a similar approach could find its way into the full remit of the CMA’s remedies toolkit (i.e., not just confined to SMS firms), particularly in the context of parallel proposals to create more flexibility in the CMA’s market inquiry regime, including remedies trialling and enhanced remedy amendment powers.

2. Timing and interplay with other regulatory regimes

Implementation of the new UK regime is expected to lag behind other regulatory regimes, including the DMA and GWB10. 

The regime will be implemented through legislation “when parliamentary time allows”, with formal legislation not expected to make the UK parliamentary agenda for the coming year.

Given the subsequent nine-month designation process for firms with so-called “strategic market status” (SMS) (extendable by three months), the regime is likely to lag significantly behind the EU’s DMA (which is expected to be in force from April 2023) and the FCO’s GWB10 powers (which are already in force and being used in a number of ongoing investigations against firms that the FCO has determined have “paramount importance for competition across markets”).

Given there is expected to be significant overlap in the firms designated under the UK, EU and German regimes, it is not clear how the future UK regime will interplay with other more established European regimes at the time of its legal powers coming into force, and to what degree the DMU will deliberately seek to impose different requirements on designated firms when assessing similar issues.

One observable difference to the designation criteria applicable to the EU’s DMA vs that envisaged by the UK government is that the UK does not plan to adopt quantitative criteria for SMS designation based on the number of end users and business users. Rather (and in response to consistent stakeholder feedback calling for clarity), the government is now proposing to adopt a (yet-to-be-determined) minimum revenue threshold, and to provide an exhaustive list of the criteria in legislation for assessing SMS designation.

3. Mergers and deal certainty

The UK Government is proposing a new mandatory and suspensory regime that will require SMS firms to notify all deals that exceed certain (low) thresholds. 

The Response proposes to limit the mandatory notification obligation to transactions where: (i) the SMS firm acquires a greater than 15% equity or voting share; (ii) the value of the SMS firm’s holding exceeds £25m; and (iii) the transaction meets a UK nexus test (which is yet to be determined).

This comes in addition to a parallel proposal to include a new jurisdictional threshold to tackle “killer acquisitions”, which would apply to all firms (see here).

Given the very low envisaged thresholds on both fronts, these proposals are some of the most controversial, particularly against the backdrop of the CMA’s already very expansive use of its jurisdictional “share of supply” test, on which the CMA has not hesitated even where a deal’s UK nexus is unclear.

In that context, it remains to be seen whether either (and certainly whether both) of these merger reform proposals are merited, particularly given their potential to have an acute – and wide-ranging – impact on businesses across many sectors.

One thing that is clear – notably following stakeholder feedback (including our own), the government has decided against one of the other most criticised aspects of its initial merger reform proposals, i.e., a proposal to lower the threshold for intervention during Phase 2 investigations from “more likely than not” to a “realistic prospect” of a substantial lessening of competition as a result of the merger.

To read more about these and other antitrust developments, refer also to our Global antitrust in 2022: 10 key themes report. Our Antitrust, Competition and Trade team is also available to discuss any of these points in further detail.