The Digital Markets, Competition and Consumers Act 2024 received Royal Assent on May 24, 2024, ushering in the most significant reforms to the UK’s competition and consumer protection laws in a generation. The Act introduces significant changes to the role and responsibilities of the UK Competition and Markets Authority (CMA), importantly with respect to digital markets, where it will play a key role in proactively regulating the conduct of large digital firms.
In this LawFlash we address five main areas of change and highlight what businesses can do to ensure compliance. The main provisions of the Act are only likely to come into effect in autumn 2024 when implementing legislation has been passed, giving businesses an opportunity to prepare in the interim.
For more background on the Act, see our earlier thought leadership.
1. New regulatory regime for digital markets gets the green light; CMA launches consultation on draft guidance
Part 1 of the Act establishes the UK’s digital markets regime. Progress toward this regime has been several years in the making. Pending approval of the Act, the CMA’s Digital Markets Unit (DMU) has been operating in shadow form. With the Act’s passage, the UK now has its own sector-specific regulation of digital markets (just as the European Union has the Digital Markets Act).
The digital markets regime focuses on regulating the largest digital firms that have “substantial and entrenched market power” and “strategic significance” in respect of a digital activity, that is, the provision of a service by means of the internet or the provision of digital content, regardless of whether either is paid for. Only firms meeting a specified revenue threshold (>£25 billion globally or >£1 billion in the UK) are caught by the regime.
The DMU will be responsible for designating such firms as having Strategic Market Status (SMS). In anticipation of the Act there have been informal discussions between the CMA and firms that think themselves likely to receive SMS designation. The formal process is expected to commence toward the end of 2024 with formal designations not expected before mid-2025.
Firms designated as having SMS will be subject to special rules on how they may conduct themselves (known as conduct requirements). The Act gives the CMA wide-reaching powers to make so-called “pro-competition interventions.” These allow the CMA to impose remedies or other structural solutions in digital markets where, following investigation, the CMA thinks that competition is not working. The CMA has the power to require businesses to make changes on a “trial basis” (i.e., to test its efficacy).
Designated SMS firms will also be under a duty to report prospective M&A activity, including in respect of noncontrolling acquisitions of minority stakes (>15%) or the formation of joint ventures, where the total consideration exceeds £25 million and involves a business carrying on activities or supplying goods and services in the UK.
This change is driven by a desire to monitor M&A activity in the digital markets and avoid a “killer acquisition” scenario where firms acquire material influence over or full control of smaller innovative rivals that may not otherwise have been caught by the CMA’s current merger regime.
Wasting no time, on the same day the Bill received Royal Assent, the CMA launched a public consultation on its draft guidance for how it intends to operate the digital markets regime. The consultation seeks feedback from businesses, expert groups, and key stakeholders regarding the CMA’s proposed approach to regulating digital markets.
Key areas for consultation include how the CMA will approach
This consultation closes on July 12, 2024.
2. Merger control reforms close potential enforcement gaps but voluntary system remains; new exemption to give more comfort to extraterritorial mergers
A key feature of the UK’s current merger control regime under the Enterprise Act 2002 (EA) is that there is no obligation on merging parties to notify the CMA of a merger. This is different from the vast majority of global regimes where the obligation to notify—if applicable thresholds are met—is mandatory and suspensory, meaning a deal cannot close until regulatory approval has been received.
Under the EA, the CMA has the power to review and call in for review any “relevant merger situation” provided that certain jurisdictional thresholds have been met. Often this means that parties that exceed the thresholds do in fact notify the CMA about any deals before closing to avoid the CMA taking steps to impose “hold separate” orders or even to retroactively unwind a closed deal.
Despite calls being made for the UK to adopt a more predictable, mandatory regime, legislators did not heed such calls.
Instead, they chose to modify the existing EA thresholds and introduce an additional one, meaning now that if any of the three limbs below are met, the CMA has jurisdiction to review a merger:
The new threshold has been introduced to capture situations where a company that may have market power acquires an entity that itself might not have revenue or a share of supply, e.g., an innovative startup. This is to address concerns seen globally regarding so-called killer acquisitions, particularly in the digital and pharmaceutical spaces, where an incumbent acquires a nascent competitor with the alleged purpose of removing an emerging competitive threat.
The new threshold also makes it easier for the CMA to review in “vertical deals,” i.e., mergers between parties active at different levels of the supply chain that do not compete directly.
In the past the CMA has relied on a novel interpretation of the share of supply test to review such deals, but not without controversy and litigation. This new threshold will provide greater clarity for dealmakers weighing the likelihood of the CMA initiating a merger investigation.
The CMA has also introduced a formal exemption that would create a safe harbor for mergers where the share of supply test is met and the annual turnover of both parties in the UK is less than £10 million. This is a welcome development for dealmakers as the CMA has previously taken jurisdiction over transactions falling within this safe harbor.
3. Consumer protection powers move onto same footing as competition powers; businesses with subscription models/drip pricing to be aware of new changes
For several years, the UK’s consumer protection laws have been relatively light touch and cumbersome, with the CMA (and other enforcers) needing to apply for court orders to restrain harmful practices. Under the Act, the CMA now has powers similar to those it has in respect of competition law breaches, including the ability to impose fines of up to 10% of parties’ global annual turnover for consumer protection breaches.
The CMA will also be able to sanction companies for procedural breaches in a CMA investigation (e.g., providing false information, refusal to cooperate), and individuals who are an accessory to an infringement or procedural breach may also face monetary fines.
Businesses that provide goods or services on a subscription payment basis should check to ensure their model complies with the new laws, which require specific precontract disclosure of information and automatic reminders. Likewise, the Act also sets out rules around “drip pricing,” i.e., advertising a low initial price but adding extras throughout the sale process. This follows from the CMA’s previous case work into certain practices, e.g., autorenewal.
In relation to consumer reviews, the CMA has added the writing or commissioning of fake reviews (or not disclosing that a review was paid for or incentivized) to a list of unfair trading practices. Likewise, companies that publish such reviews without taking reasonable and proportionate steps to prevent or remove them from their website can face liability.
Areas that the CMA is likely to prioritize with its new enforcement powers include online choice architecture, greenwashing, secondary ticketing, AI foundational models, and lettings.
4. A heftier price for failing to comply
While under the competition law regime the CMA may impose hefty fines on companies for breaching antitrust laws, comparatively, it has had limited power to impose fines for procedural breaches, such as failure to provide information in response to statutory information requests in a merger control or antitrust context).
The Act changes this by allowing the CMA to impose a fine of up to 1% of annual worldwide turnover on defaulting parties, with additional penalties of up to 5% of daily global turnover for continued noncompliance. Individuals also face personal fines of up to £30,000 and a daily penalty of £15,000. Notably, a failure to cooperate with the CMA under the Act includes the obstruction of a dawn raid.
Furthermore, businesses that breach commitments or undertakings, directions, orders, or interim measures will face civil penalties of up to 5% of a company’s annual worldwide turnover, plus maximum daily penalties of up to 5% of daily global turnover while noncompliance continues.
The UK has already become an attractive forum for follow-on private damages actions, be they collective actions or individual claims. The Act now enables claimants to seek exemplary damages for competition law breaches. Parliament declined to extend this to collective actions, however.
5. CMA gains a more robust, challenge-proof set of investigative tools
In the last year the CMA has faced several legal challenges to its powers to request or seize information from overseas entities and at domestic premises. In both instances, it lost the challenges at first instance, although those decisions were later overturned on appeal. The Act addresses these challenges.
In respect of the extraterritorial nature of the CMA’s powers, the CMA now has explicit powers to pursue overseas businesses. It can do so by investigating conduct taking place overseas (if that conduct is or is going to be implemented in the UK or if it is likely to have an immediate, substantial, and foreseeable effect on trade within the UK) and demanding relevant documents and/or information held outside the UK.
Under Part 2 of the Act, the CMA also gains the ability (in cases where a warrant is granted) to exercise “seize and sift” powers in respect of domestic premises. This means inspectors from the CMA will have the power to remove items such as laptops and personal devices from an individual’s private home or office to enable the CMA’s digital forensics teams to examine them offsite.
Significantly for businesses’ document retention practices, the duty on companies investigated by the CMA to preserve documents now also extends to a situation where a person knows or suspects that an investigation by the CMA is likely to be carried out (i.e., not just where an investigation has commenced and there is an active information request).
These changes arrive alongside a swathe of other enforcement powers, including the new power of the CMA to conduct compulsory interviews of individuals who are not connected with businesses under investigation.
The CMA’s ability to impose interim measures (i.e., measures that are put in place to halt anticompetitive behavior before the CMA has the chance to fully investigate) is also likely to be harder to challenge in the future as the Act shifts the standard from a full merits-based review to a judicial review standard. The latter is a higher bar: a company seeking to lift an interim measure would have to persuade the court that the CMA had acted in some way unlawfully or irrationally.
Next Steps
The Act was passed in the immediate aftermath of the UK prime minister’s decision to call a general election for July 4, 2024 and before the current parliament was dissolved. The various provisions of the Act are expected to come into force at different times in the autumn of 2024 depending on when the new government passes the relevant regulations.
If you have any questions about this alert and how your business may be affected, please reach out to your Morgan Lewis contact.
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