Key Proposals Under the UK's Landmark Competition Reforms

On April 25, 2023, the UK government published the Digital Markets, Competition and Consumers Bill (the Bill), which proposes to introduce a number of significant changes to the UK’s competition and consumer protection law as well as a new “pro-competition” regime for digital markets in the UK. This long-awaited Bill marks the biggest reform to UK competition and consumer law since the creation of the Competition and Markets Authority (CMA) in 2014.

The Bill will now be debated in the Houses of Parliament and is expected to come into force in Q3/Q4 2024 (Royal Assent is expected in Q1/Q2 2024). The CMA is also expected to provide further guidelines on the application of the new rules, in particular with respect to digital markets, within that timeframe. This Sidley Update outlines the government’s key proposals.

For a comparison of the UK digital markets regime proposed under the Bill and the European Union’s Digital Markets Act (EU DMA), please see our Sidley Update here.

1. New Pro-Competition Regime for Digital Markets

The UK government has determined that the CMA’s existing toolkit is not adequate to address the challenges faced in digital markets. According to the government and the CMA, this is due to a number of factors, including that these markets have a tendency toward concentration, open up new possibilities for consumer harms, and their scale, scope, and pace of change is of a different order of magnitude to other sectors.

In response to these concerns, the government intends for the new pro-competition regime to enable the CMA to act more quickly and effectively.

a) Designation of “Strategic Market Status”

The CMA’s Digital Markets Unit (DMU) will designate certain companies with “strategic market status” (SMS) in relation to particular digital activities, defined broadly as “the provision of a service by means of the internet” or “the provision of one or more pieces of digital content” (SMS Firms). Designation is subject to:

• finding that the company has “substantial and entrenched” market power, for which the DMU is required to carry out a forward-looking assessment, taking into account a period of at least five years, to be satisfied that the company’s market power is “neither small nor transient”;
• finding that the company has a position of “strategic significance” in relation to the activity, which is based on either the company’s size or scale in relation to the activity, the number of users of the activity, the company’s ability to “extend its market power” to other activities, or the company’s ability to determine or substantially influence how other entities operate;
• there being a UK nexus to the activity in question – one of the following conditions must be met: (i) the activity has a significant number of UK users; (ii) the company carries on business in the UK; or (iii) the digital activity, or way in which it is carried out, is likely to have an immediate, substantial, and foreseeable effect on trade in the UK; and
• the company’s turnover exceeding (i) £25 billion globally or (ii) £1 billion in the UK.

The DMU will have discretion to prioritize which companies to assess first. The CMA has indicated that the DMU is likely to prioritize those sectors in which market studies have previously been carried out.

The DMU has been allocated up to nine months to complete the assessment process in each case (though the deadline may be extended by three months under exceptional circumstances).

b) Codes of Conduct for SMS Firms

SMS Firms will be subject to enforceable, bespoke codes of conduct that impose tailored conduct requirements in relation to the specific harms associated with their activities. The CMA says that these codes will be guided by the high-level principles of fair trading, open choice, and trust and transparency. The Bill sets out an exhaustive list of over a dozen conduct requirements that the DMU will be able to impose on SMS Firms, including requiring the SMS Firm to trade on fair and reasonable terms, provide users with options or default settings in such a way to enable informed and effective decisions, use data fairly, or to treat their own products and services on the same basis as those offered by third parties.

The requirements are framed broadly, allowing the DMU significant discretion to adapt each code of conduct to each SMS Firm. An SMS Firm may be exempt from certain conduct requirements where it can prove that there are net consumer benefits that outweigh any actual or likely detrimental impact on competition and the conduct is indispensable and proportionate to realize those benefits.

c) Pro-Competitive Interventions for SMS Firms

The DMU will also have the ability to make targeted “pro-competitive interventions” (PCIs) to address factors that are the source of an SMS Firm’s market power in a particular activity. These may consist of structural or behavioral remedies, or a combination of the two. Examples may include interventions relating to data sharing, interoperability among platforms or services, increasing consumer choice, addressing default behavior by consumers, or even ownership separation.

The DMU will be able to trial remedies with subsets of the SMS Firm’s users. In order to determine the most effective remedy, the DMU may choose to trial different remedies, or different versions of the same remedy, simultaneously.

d) Merger Control Reporting Requirements for SMS Firms

SMS Firms will be subject to a new mandatory requirement to report certain transactions to the CMA prior to completion. Transactions must be reported to the CMA where

• the SMS Firm will acquire at least 15% of the equity or voting rights in the target (subsequent transactions that lead to the SMS Firm holding equity or voting rights higher than 25% or 50% will trigger additional reporting obligations);
• the value of the consideration is at least £25 million; and
• the target carries on activities or supplies goods or services in the UK.

A similar notification requirement applies to the formation of joint venture vehicles by SMS Firms. Once the transaction is reported, the CMA will then assess it to determine whether it requires further information and/or will launch an investigation. A transaction cannot be completed until the CMA has accepted the report and a waiting period of five working days has expired.

e) Enforcement

The CMA reportedly intends to take a collaborative approach with SMS Firms, seeking in the first instance to resolve concerns through constructive engagement.

However, the DMU will also have robust enforcement powers, including the ability to impose (i) orders to comply, (ii) financial penalties (including up to 10% of a company’s global turnover for regulatory breaches and up to 1% of a company’s global turnover for failure to comply with investigative requirements), (iii) civil penalties on named senior managers for failure to comply with an information request, (iv) director disqualifications of up to 15 years for regulatory breaches, and (v) civil or criminal liability for anyone knowingly or recklessly providing false information.

The DMU will be required to consult with other regulators (where proportionate and relevant), building on the work already being undertaken by the Digital Regulation Cooperation Forum, to ensure the harmonious implementation of conduct requirements alongside other laws affecting SMS Firms, such as the Online Safety Bill, Media Bill or the Financial Services and Markets Bill. The DMU will be subject to the same governance oversight and accountability that applies to the broader CMA. Decisions of the DMU will be subject to appeal based on judicial review principles, which allows the DMU significant discretion in its decision-making.

2. Revised Merger Control Thresholds

The government is seeking to revise the existing thresholds for establishing CMA jurisdiction over M&A transaction. The current jurisdictional thresholds are met where either (i) the target’s UK turnover exceeds £70 million, or (ii) there is an increment and the parties have a combined share of supply in the UK exceeding 25%.

Under the revised thresholds, the target turnover test is increased to £100 million. There is also a new safe harbour to the existing share of supply test that applies where each party’s UK turnover is below £10 million. These changes will not apply in the case of public interest interventions in media mergers.

The new regime also introduces an “acquirer-focused” threshold designed to capture so-called “killer acquisitions” and other mergers that do not involve direct competitors where at least one party (not necessarily the acquirer) has a share of supply in the UK of at least 33% and UK turnover exceeding £350 million. In addition, the other party must fulfil a UK nexus test i.e., either be a UK business or body, carry out at least part of its activities in the UK, or supply goods or services to persons in the UK.

This new threshold would significantly expand the CMA’s jurisdictional remit, particularly in light of the share of supply limb, which provides the CMA with considerable discretion in asserting jurisdiction. For private equity companies, the new threshold is significant because it will apply across all of their portfolio, bringing an increased number of transactions within scope for review.

In light of the voluntary nature of the UK merger control regime (which is not impacted by these changes), guidance is expected from the CMA in terms of when to notify transactions which meet the new acquirer threshold.

Separately, there are procedural changes to the existing regime to allow for a more flexible process including (i) broader scope to request “fast-track” referral to a Phase 2 investigation, (ii) removing certain statutory duties on the CMA that currently limit the benefits and use of the existing, non-statutory fast-track procedure, and (iii) the ability for merging parties and the CMA to mutually agree to stop the clock during a Phase 2 investigation, which is likely to be helpful for early consideration of remedies, or in multi-jurisdictional mergers where several investigations are being undertaken in parallel. These changes are designed to speed up the CMA’s review, particularly for complex mergers.

3. Tougher Enforcement in Competition and Market Investigations

The proposed regime includes changes designed to improve the CMA’s investigative and enforcement powers, including the following:

• Increased territorial scope of competition investigations: The CMA will be able to investigate agreements, decisions and practices implemented outside the UK which are likely to have immediate, substantial and foreseeable effects within the UK. This will only apply to conduct that takes place following entry into force of the Bill so will not have retrospective effect.
• Increased powers to gather evidence in competition investigations: Among other changes, there will be an extension of the duty for companies under investigation to preserve evidence (e.g., by retaining contemporaneous documents) in the same way as for cartel investigations and the CMA will be able to interview any relevant person (regardless of their connection with the company under investigation), have additional powers to “seize and sift” evidence during inspections at domestic premises (aligning the powers available to the CMA where they are inspecting business or domestic premises), and have a strengthened ability to obtain information remotely. The CMA will also be able to provide investigative assistance to overseas regulators and have enhanced information sharing powers, signalling greater international cooperation where similar conduct is under investigation overseas.
• Significant fines for non-compliance: Companies that fail to cooperate with the CMA in competition and market investigations may be fined (i) up to 1% of their global turnover for non-compliance with investigative measures, and (ii) up to 5% of their global turnover for non-compliance with remedies, for instance, commitments and undertakings. The UK courts will also be able to award exemplary damages in competition cases (except for collective claims) that go beyond damages to compensate for the loss suffered by the anticompetitive conduct in order to punish particularly egregious conduct.
• Greater flexibility in the market investigation process: The CMA will be able to define both the scope of market studies and investigations and the process itself. This will include: (i) the ability to draw the scope of market investigations more narrowly to speed-up the process and focus resources; (ii) the ability to accept binding commitments (either in full or partially, the latter allowing the CMA to narrow the issues requiring further investigation) at any stage during the investigation process (as in competition investigations); (iii) and removing the requirement to consult on a market investigation reference within the first six months of a market study.

This flexible approach also applies to remedies: The CMA will be able to require companies to trial remedies and will have an enhanced ability to amend remedies found to have been ineffective in a 10-year period following the finding of an adverse effect on competition in a market investigation (subject to a two-year bedding-in period following the undertaking or order).

• Quicker and more efficient enforcement mechanisms: Tougher penalties will be introduced for companies that fail to comply with investigative measures or CMA orders, commitments, and undertakings as well as a stricter standard of review for appealing interim measures.
• Strengthened powers to enforce interim measures: The CMA will have new powers to issue civil penalties for breaches of interim measures, and the standard of review has been narrowed from full merits to judicial review.

In practice, these changes will likely lead to greater, faster, and bolder enforcement by the CMA (even in the absence of any established wrongdoing), further amplified by the broad discretion granted to the CMA and somewhat limited rights of defense. There is likely to be increased and heavier reliance on information requests during the investigation process, and it seems likely that sanctions on both companies and individuals for non-compliance during investigations will increase.

4. Reform to Consumer Protection Laws

The consumer protection chapter comprises approximately half of the Bill, highlighting the government’s focus on protecting consumers’ collective interests. As mentioned in the government’s State of UK Competition Report 2022, “strong consumer rights play an essential part in fair, free and competitive markets by providing consumers with the information and confidence to choose how and where to spend their money”.

The CMA will be able to enforce consumer protection law directly through administrative proceedings (i.e., as it currently does in the antitrust space) whereas before it had to litigate in court.

In addition to being able to impose significant fines for consumer law and procedural breaches, the CMA will also be able to order consumer compensation for breaches of consumer law.

Furthermore, the CMA will be able to intervene in relation to new categories of consumer harms, including the following:

• Fake reviews: Companies will be prohibited from advertising, facilitating, commissioning, or incentivizing any person to write a fake review, and digital platforms will be expected to undertake reasonable and proportionate checks on reviews.
• Subscription traps: Companies must communicate clearly with customers and provide customers with a user-friendly ability to cancel subscriptions.
• Pre-payment protections: Companies must fully protect customer pre-payments (e.g., in the context of saving schemes such as Christmas savings clubs) by way of insurance, bond, or trust accounts.

The government intends that these changes will lead to increased consumer protection in the UK, with the CMA having greater enforcement powers and broader scope to address additional consumer harms. While the CMA’s discretion will be tempered by the availability of full merits reviews, as seen in the antitrust space we can expect increased and faster enforcement as the CMA will no longer have to prove its case in court.

Conclusion

The reforms to the UK’s competition and consumer regime will have far-reaching effects across all business conducted in the UK. The CMA has already been creative in enforcing competition rules using its existing powers, both in relation to alleged abuses of dominance and in the merger control context. We can expect that with these far-reaching new powers the CMA will become even more proactive and assertive, particularly in sectors such as tech.

Digital companies that operate across Europe will also need to be mindful of the implications of the parallel application of the new UK regime as set out in the Bill and the EU DMA. For a comparison of the Bill and EU DMA, please see our Sidley Update here. For more information on the EU DMA, please see our Sidley Update here.