Within minutes of the UK Digital Markets, Competition and Consumers Act 2024 (the DMCC Act) receiving Royal Assent on the evening of 24 May 2024 (see our blog here), the CMA published draft guidance detailing how it intends to exercise its powers under the new digital markets regime (the Draft Guidance). Parties now have until 12 July to provide comments on the CMA’s proposed approach, ahead of the CMA’s new digital markets powers commencing – which is expected to be in October 2024.
We set out below some of the key points from the Draft Guidance which we expect will be hotly debated as part of the consultation.
Strategic Market Status
In order to be designated as having “strategic market status” under the DMCC Act, an undertaking must have “substantial and entrenched market power” and a “position of strategic significance” with respect to a relevant “digital activity”. The Draft Guidance seeks to add additional clarity in how the CMA will interpret these concepts:
- “Digital activities”: in contrast to the more rigid approach adopted by the EU Digital Markets Act (the DMA) which sets out a defined list of “core platform services”, the DMCC Act adopts a broad, single definition of “digital activity” which can be applied flexibly. It also envisages that multiple potential digital activities may be grouped together as a single “digital activity” if they have a similar purpose or can be carried out in combination to fulfil a specific purpose. When making this assessment, the Draft Guidance indicates that the CMA may consider any relevant aspect of how the products are made, marketed, sold, accessed, or consumed, as well as customer needs or preferences – rather than only technical complementarity. However, the limited guidance on the interpretation of these terms provides the CMA with significant flexibility – but may risk distorting competition if a consistent approach is not taken to SMS firms operating in similar spaces.
- “Substantial and entrenched market power”: the Draft Guidance states that this is a distinct legal concept from that of “dominance” used in competition law enforcement, reflecting that the digital markets regime is a new regulatory framework with a distinct purpose. However, the CMA may still have regard to evidence and analysis collected in abuse of dominance investigations – meaning the distinction between the two concepts may in practice not be all that clear.
- “Position of strategic significance”: the Draft Guidance sets out a number of broad evidentiary factors – including number of users, revenues, transactions made through the digital activity, past examples of new entry and the SMS firm’s role in setting standards – which the CMA will take into account when assessing whether the firm has a position of strategic significance. For example, when considering whether the undertaking is in a position to extend its market power in one digital activity to a range of other activities, the CMA will consider the firm’s ability to do so, rather than its incentives.
Conduct requirements and pro-competition interventions
The Draft Guidance details the steps the CMA will typically follow when designing conduct requirements (CRs) – tailored rules intended to guide the behaviour of SMS firms - and pro-competition interventions (PCIs) – targeted interventions by the CMA to tackle the source of an SMS firm’s market power.
With respect to both CRs and PCIs, the CMA will adopt a three-step process involving:
- Identifying what the CR or PCI is intended to achieve.
- Considering what CR (or combination of CRs) or PCI would be effective in meeting that aim.
- Ensuring that the CR(s) or PCI is proportionate. For both CRs and PCIs, the CMA expects parties to engage with the CMA early to identify what would be most appropriate – and the least onerous – to meet the intended aim of the CR or PCI, as well as any disadvantages that are disproportionate to the intended aim.
In adopting similar processes for the design of CRs and PCIs, the Draft Guidance further highlights the similarities in the two tools, which was already apparent from the examples of conduct that can be addressed by each and the types of requirements/remedies that can be imposed.
Additional clarity on when the CMA will choose to opt for a PCI over a CR will be important for potential SMS firms and to facilitate a participative approach as envisaged by the regime, particularly given the difference in processes and powers available to the CMA under each tool.
The CMA’s previous Digital Taskforce Report in December 2020 indicated that the CMA expected to take a stepped approach, using PCIs only when the issue lay outside the scope of CRs, or where CRs are clearly, or prove to be, insufficient. Such guidance, however, is not repeated in the Draft Guidance.
Trialling remedies
The Draft Guidance provides additional clarity on when the CMA may impose a pro-competition order (PCO) on a “trial” basis to help determine whether a proposed remedy will be sufficiently effective. Considerations the CMA will take into account include: (i) whether the proposed test or trial may provide valuable additional evidence; (ii) the technical and/or practical feasibility of running the trial; and (iii) whether the trial can be imposed so as to impact as small a part of the undertaking’s business as practicable.
The results of the consultation on this point are likely to inform how the CMA may use its new “trial” powers under the changes to the market investigations regime introduced by the DMCC Act, whereby the CMA will be able to require parties to trial remedies before settling on a final remedies package.
Participative resolution
The Draft Guidance notes that SMS firms are expected to engage directly with users and stakeholders to resolve any compliance concerns. Where those fail, the CMA will seek to resolve any issues through its enforcement powers or “participative resolution” techniques which can include:
- engagement between the CMA and SMS firm (and potentially third parties);
- a letter of concern from the CMA to the SMS firm outlining suggested resolutions; and
- voluntary undertakings which the designated firm could propose itself, with an expectation that the SMS firm will engage with affected stakeholders prior to the CMA accepting such undertakings. The Draft Guidance suggests that there is a narrow window for SMS firms to engage in commitments discussions in relation to alleged non-compliance with CRs, noting that it will be rare for the CMA to accept commitments once a CR investigation has been launched. Commitments negotiations can be important in the early days of a new regime where there are typically points on the scope of obligations which require further clarification.
Mergers
The draft Merger Reporting Notice accompanying the Draft Guidance – relating to the new merger reporting regime for SMS firms – sets out an extensive list of information that an SMS firm will need to provide to the CMA for qualifying transactions.
The list – including details of expected synergies and historic R&D efforts – goes materially beyond what parties are expected to provide in a briefing paper under the existing merger control regime (and also beyond the equivalent merger reporting requirements under the DMA).
Next steps
Parties can provide comments to the CMA on the Draft Guidance until the consultation window closes on 12 July. The CMA will consider the responses and then publish the final version of the guidance by around October 2024, ahead of the new digital markets powers coming into force.
This is the first set of draft guidance the CMA has issued relating to its enforcement under the DMCC Act. More guidance – including relating to changes to the markets regime and consumer protection enforcement – is expected to follow, likely shortly following the results of the General Election.
If you would like to discuss any aspect of the DMCC Act, please contact a member of the team or your usual Freshfields contact. You can also subscribe to our client toolkit for further updates and insights.
