UK Competition and Markets Authority Publishes Provisional Roadmap for Digital Markets Regime

The UK Competition and Markets Authority (CMA) published a roadmap on January 11, 2024 setting out its provisional approach for the implementation of Part 1 of the Digital Markets, Competition and Consumers Bill (DMCC). The roadmap provides high-level principles as to how the CMA will implement the DMCC and enforce its newly established powers under the regime.

The roadmap followed a request from the UK government for such a document to assist with the ongoing parliamentary scrutiny and prepare relevant stakeholders for the new regime’s implementation. The roadmap is only provisional, and the CMA’s approach to implementation is likely to evolve as the bill progresses. The CMA will also need to consult on and publish detailed guidance in due course. The indicative timeline in the report notes that finalized guidance on the DMCC is likely to be issued in October 2024.

For more background on the DMCC bill, see our previous LawFlash.  

OVERVIEW OF NEW REGIME AND DECISION-MAKING ACCOUNTABILITY

Once the DMCC is in force, the CMA will be empowered to designate firms with Strategic Market Status (SMS) in relation to one or more digital activities (i.e., providing services by means of the internet or providing digital content or activities carried out for those purposes). The CMA will also be able to impose conduct requirements (CRs) on such firms and carry out pro-competition interventions (PCIs) and will have greater control and oversight over SMS-designated firms’ merger activities.

The designation of firms as having SMS will be evidence-based and the CMA states in the roadmap that it intends the process to be “participative,” involving constructive engagement with SMS firms and other stakeholders.

The CMA will carry out its functions relating to the DMCC through the newly established Digital Markets Unit (DMU). The DMU—which is already operating in a shadow form—is set to have approximately 200 employees when the new regime commences and will consist of a diverse mix of employees including data scientists and engineers, technologists, behavioral scientists, digital forensics specialists, economists, lawyers, policy officials, and independent advisors.

It is clear from the roadmap that the CMA is keen to reassure Parliament that, despite the additional powers it will be acquiring, it takes accountability seriously and there will be sufficient safeguards in place regarding its decision-making.

Decisions taken under the DMCC will be regulated by the mechanisms contained within Part 1 of the DMCC, such as through the requirement for the CMA to publish guidance as to how it will perform its new functions. Those subject to CMA decisions will also have the right to appeal to the Competition Appeal Tribunal, applying judicial review principles.

Further, several decisions that can be taken by the CMA under the DMCC can only be made by the CMA Board—which is directly accountable to Parliament—or a committee of the Board constituted of at least two non-executive board members, with at least half of the committee members being non-executives or independent CMA panel members. The CMA will also detail work undertaken within the new regime in its annual report that is to be placed before Parliament.

OPERATING PRINCIPLES

The CMA has outlined 11 operating principles detailing how the agency will carry out its new functions under the DMCC. The principles fall into the following four categories:

• Ensuring a targeted and proportionate approach: The CMA proposes to tailor its actions to address specific problems, considering proportionality and effectiveness of its solutions. It promises to be “open-minded,” recognizing the diversity that is present across digital markets (Principle 1).
• A focus on positive outcomes: The CMA intends to target its actions to areas that will have the most impact for individuals, businesses, and the economy and will undertake prioritization exercises as part of this. This will include the CMA weighing whether it is best placed to act compared to other cross-border initiatives and using an evidence-based approach to set up feedback loops to determine whether the regime is operating as expected (Principles 2-3).
• Addressing and preventing harm quickly and sustainably, primarily through promoting competition: The CMA recognizes that it will need to move quickly to stay abreast of key developments. It sees the promotion of competition—e.g., removing barriers to entry, ensuring access to key inputs, facilitating consumer choice, improving interoperability—as the primary lever through which it can achieve its goals, but also recognizes that in some cases it may need to take direct action to tackle abuse. Any interventions it proposes will be technology-neutral (i.e., not tailored to current technology or supply chain structures but future-proofed in a manner allowing for flexibility). The DMCC regime will also complement the CMA’s existing toolkit (Principles 4-8).
• Designing a participative and transparent process and ensuring a coherent approach with other regulators: The CMA acknowledges that its ability to deliver effective outcomes will be hindered unless it engages with the sector and all relevant stakeholders. It pledges to operate with transparency and encourage SMS firms to be transparent with their own actions. Finally, the CMA recognizes that it will need to work with its international counterparts as well as domestic UK regulators to share learnings, remove duplication, and ensure regulatory coherence (Principles 9-11).

POTENTIAL MARKET HARMS UNDER DMCC

The CMA notes that its work to date has identified several characteristics of digital markets that could lead to substantial and entrenched market power, including the following: (1) digital products and services are more valuable the more users they have; (2) switching costs means that users tend to use one version of a product or service considering that if they switch to another one they lose their data (e.g., their contacts); (3) costs fall as output rises; and (4) access to lots of data is disproportionately valuable for improving products and services. This market power, the CMA posits, can lead to potential market harms where a firm chooses to exploit its position.

Such harms include actions that lead to (1) the reinforcement of a firm’s entrenched position (e.g., using online design to lock in consumers or restricting interoperability); (2) an extension of market power into other markets (e.g., self-preferencing or bundling conduct); (3) blocking or restricting new markets and innovation (e.g., preventing interoperability or denying access to key inputs); (4) direct harm to consumers (e.g., providing poor or false quality information or using online design to mislead consumers); and (5) the exploitation of market power (e.g., charging high prices or collecting excessive amounts of data).

The CMA identifies certain methods designed to tackle such harms, including ensuring markets stay open, seeking ways in which to increase competition in these spaces, and combating the misuse of market power where competition is not in a position to serve as an adequate constraint.

INSIGHT INTO POTENTIAL CONDUCT REQUIREMENTS

Under the DMCC as currently drafted, the CMA will be empowered to hand down CRs to those firms designated as having SMS. When doing so, the CMA is obliged to hand down a notice explaining its rationale for the given CRs.

Some discussion was provided in the roadmap as to what CRs may entail under the DMCC bill. The CMA will only impose CRs on a firm with SMS if doing so would be proportionate to one or more of three legislative aims, namely fair dealing for users when interacting with SMS firms, open choices for users between services or content provided by SMS firms and other firms, and trust and transparency, ensuring that users can make informed decisions regarding the services or digital content received from SMS firms.

The CMA flagged that CRs must relate to one or more of the following, either obliging a firm with SMS to

• trade on fair and reasonable terms;
• have effective complaint-handling processes with users or potential users;
• provide clear, relevant, accurate, and accessible information regarding the relevant digital activity to users or potential users;
• provide explanations and a reasonable period of notice to users or potential users of the relevant digital activity before making changes in relation to the said activity where those changes are likely to materially impact users or potential users; and
• present to users or potential users options or default settings regarding the relevant digital activity in a manner that allows informed decisions to be made in a user’s best interests;

OR preventing a firm with SMS from

• applying discriminatory terms, conditions, or policies on users or potential users;
• using its position regarding the relevant digital activity, including its access to data relating to that activity, to treat its own products more favorably than those of other undertakings;
• carrying on activities in a manner likely to materially increase a firm’s market power or materially strengthen its position of strategic significance regarding the relevant digital activity;
• requiring or incentivizing users or potential users of its products to use one or more of the undertaking’s other products alongside services/digital content, the provision of which is, or is comprised in, the relevant digital activity;
• restricting interoperability with digital content and products offered by other undertakings;
• restricting whether or how users or potential users can use the relevant digital activity;
• using data unfairly; or
• restricting the ability of users or potential users to use products of other undertakings.

The CMA noted that it intends to follow a number of principles when setting CRs to ensure a consistent approach. This will ultimately see CRs that are focused on outcomes intended to be achieved by the firm subject to them or specifying certain action(s) or “higher-level requirements” a firm must take to ensure compliance.

The CMA noted that following Royal Assent draft guidance will be published for consultation, setting out the proposed approach to imposing and monitoring compliance with CRs.

KEY TAKEAWAYS AND TIMELINE

The CMA’s working assumption is that the ongoing parliamentary process will conclude in spring 2024 and the agency’s responsibilities will commence in autumn 2024. The indicative timeline provided would also see final guidance on the DMCC issued in October 2024.

Initial designations of firms with SMS will likely take place by July 2025 after a series of investigations conducted by the DMU. The CMA expects to initiate approximately three to four SMS investigations in the first year of the regime.

While the CMA noted that it had not yet decided which digital activities to focus on first, it did highlight that it is likely to build on and leverage its experience from previous studies into platforms funded by digital advertising (including search and social media) and mobile ecosystems.

The CMA also stated that the new regime is intended to address what it has described as “the far-reaching market power of a small number of technology firms.” Businesses operating within digital markets should be aware of the CMA’s intended proactive approach to regulate this space and should be mindful of any future commentary issued by the CMA.

One major open question is how the DMCC regime will interact with the European Union’s existing DMA regime. The European Commission’s experience in enforcing the DMA will no doubt inform the CMA’s approach in terms of what its strategic priorities will be and how best to invest its resources.

It may be that the DMA regime initiates changes in digital markets by, e.g., forcing incumbents to grant access to their platforms, which will in turn create further “second order” competition issues that often arise in partially “liberalised” markets (e.g., telecom, energy). The CMA may well seek to focus its enforcement resources on addressing such second order issues under the DMCC regime.

Morgan Lewis is committed to assisting its clients as they navigate the development of digital market regulation and what is set to be a new era of CMA enforcement.