The Digital Markets, Competition and Consumer Bill (DMCC Bill) has now been published and introduced before Parliament. This Bill is long awaited, having been delayed by parliamentary priorities and timing considerations. Its scope and implications are wide-ranging, and follow on both from a previous consultation on changes to the UK competition and consumer protection regimes, and proposals for a new pro-competition regime for digital markets. The key reforms which the Bill intends to bring about include:
- Implementing the UK’s new digital markets regime, which will see the most powerful technology firms with strategic market status having their conduct regulated by the CMA and being subject to a new mandatory merger reporting requirement;
- Significant changes to the UK’s competition law regime, such as introducing a new merger control threshold and strengthening the CMA’s enforcement powers (including tougher penalties for failing to comply with statutory information requests); and
- Substantially strengthening the CMA’s role in the enforcement of consumer protection legislation, including enabling it to enforce legislation directly against companies rather than going through the courts. The Bill also includes enhanced consumer protection rights, ensuring they keep pace with market developments, in particular the trend towards online retail and advertising.
THE NEW EX-ANTE REGULATORY REGIME FOR DIGITAL MARKETS
The DMCC Bill creates a new pro-competition regime for digital markets designed to proactively shape the behaviour of the most powerful technology undertakings with strategic market status. It is the UK’s equivalent of the EU Digital Markets Act (DMA) regime, although the government claims it has consciously taken a different route to that of the DMA, avoiding setting out a list of prohibited actions for digital companies. It considers its approach is more tailored, lighter on the detail as to what would be prohibited conduct, allowing for a more flexible and more nuanced enforcement regime. It remains to be seen how much the two regimes will in the end really differ in practice.
Strategic Market Status
In order to ensure that the new regime will be proportionate and targeted towards firms and activities where the harm is greatest, the new regime focuses on firms designated with strategic market status (SMS). The CMA may designate an undertaking as having strategic market status in respect of a digital activity that is linked to the UK and where the undertaking has a substantial and entrenched market power and a position of strategic significance in respect of the digital activity.
In addition, in order to be designated as having SMS an undertaking must meet the following turnover conditions:
- The total value of the global turnover of the undertaking (or where it is part of a group the global turnover of that group) exceeds £25 billion, or
- The total value of the UK turnover of the undertaking (or where it is part of a group the UK turnover of that group) exceed £1 billion.
Digital activity
Digital activities are described as:
- The provision of a service by means of the internet (whether for consideration or otherwise).
- The provision of one or more pieces of digital content (whether for consideration or otherwise).
- Any other activity carried out for the purposes of the above.
Link to the UK
A digital activity is linked to the UK if it has a significant number of users, if the undertaking that carries out the digital activity carries out business in the UK in relation to the digital activity, or if the digital activity is likely to have an immediate, substantial and foreseeable effect on trade in the UK.
Substantial and entrenched market power
In order to assess whether an undertaking has substantial and entrenched market power the CMA must carry out a forward-looking assessment of a period of at least 5 years, taking into account developments that:
- would be expected or foreseeable if the CMA did not designate the undertaking as having SMS in respect of the digital activity, and
- may affect the undertaking’s conduct in carrying out the digital activity
Position of strategic significance
An undertaking has a position of strategic significance in respect of a digital activity where one or more of the following conditions are met:
- The undertaking has achieved a position of significant size or scale in respect of the digital activity.
- The digital activity is used by a significant number of other undertakings in carrying on their business.
- The undertaking’s position in respect of the digital activity would allow it to extend its market power to a range of other activities.
- The undertaking is in a position to determine or substantially influence the way in which other undertakings conduct themselves in respect of the digital activity.
The legislation sets out the procedure for the CMA’s SMS investigations, which must be concluded within a period of 9 months (extendable by a further 3 months in exceptional circumstance) from the day on which the CMA starts its investigation by giving the undertaking concerned an SMS investigation notice, setting out the purpose and scope of the investigation. Where the CMA decides to designate an undertaking as having SMS in respect of a digital activity, the designation period is 5 years following the day on which the designation notice is given.
Conduct requirements
Once an undertaking is designated with SMS the CMA will set out how it is expected to behave in respect of the activities for which it is designated, through conduct requirements. The conduct requirements are subject to the overarching objectives of fair trading, open choices and trust and transparency.
Permitted types of conduct requirements are listed in section 20 of the Bill and typically relate to requirements to trade on fair and reasonable terms, having effective complaints and dispute resolution systems and providing clear and accessible information. Other conduct requirements will also be permitted where they are for the purpose of avoiding abuse of dominance type conduct such as self-preferencing, tying practices, restricting interoperability, refusal to grant access, exclusivity requirements etc.
There is an exemption for conduct that results in net consumer benefits but would otherwise result in a breach of conduct requirement. Undertakings with SMS will need to put forward the necessary evidence and the CMA will need to be satisfied that the conduct is indispensable in order to achieve the benefits and that the benefits outweigh the potential harm (the same criteria apply here as those under section 9 of the Competition Act 1998, the UK equivalent of Article 101(3) TFEU).
Pro-competition interventions
Pro-competition interventions (PCIs) will exist alongside the conduct requirements. Whereas the conduct requirements aim to prevent harm that may result from the strategic market position of undertakings with SMS status, by setting out the rules of the game in advance, PCIs will enable the CMA to implement measures that address the root causes of an undertaking’s entrenched market power. The legal threshold for imposing PCIs is whether there exists an adverse effect on competition (AEC), in line with the legal test under the CMA’s market investigation regime.
PCI’s are not limited to a specific list of remedies set out in the legislation, but may include any remedy in line with the final orders that can be imposed in the context of a market investigation, which includes a range of structural and behavioural remedies.
The CMA may accept appropriate commitments from an undertaking with SMS status as to its conduct in respect of and AEC or a detrimental effect on UK users or customers, where the CMA considers that compliance with the commitment would contribute to remedying, mitigating or preventing these adverse effects on competition.
Mergers
A new mandatory reporting requirement to the CMA, prior to completion, is being introduced for the most significant transactions by undertakings designated with SMS status. This will be the case where:
- The merger results in the designated undertaking having “qualifying status” in respect of shares or voting rights in in a target that carries out activities in the UK, or supplies goods or services to a person in the UK; and
- The value of all consideration provided by the designated undertaking for the shares or voting rights in the UK connected body corporate is at least £25 million.
The “qualifying status” condition is met where the transaction results in an increase in the shares or voting rights in relation to a UK-connected body:
- from less than 15% to 15% or more;
- from 25% or less to more than 25%; or
- from 50% or less to more than 50.
The mandatory reporting requirement will also be met where:
- The designated undertaking enters into a joint venture that will be a UK-connected body corporate in which it will hold at least 15% of the shares or voting rights; and
- The total value of its consideration provided to the joint venture is at least £25 million.
The CMA will then undertake an initial assessment of the merger in order to determine whether or not the transaction warrants further investigation before it can be completed.
Investigatory powers
The CMA’s investigatory powers under the digital markets regime are similar to those it has under the Competition Act 1998 regime and include the power to require information, the power to require any individual to attend an interview and answer questions for the purpose of a digital markets investigation (in line with the CMA’s powers under section 26A of the Competition Act 1998) and the power to carry out dawn raids at business and domestic premises.
Enforcement
The CMA will have the power to impose penalties on a designated undertaking of up to 10% of worldwide turnover and daily penalties of 5% of daily worldwide turnover for each day a breach continues, where the undertaking is in breach of a conduct requirement, a PCI order or a commitment.
Failure to comply, without reasonable excuse, with investigative requirements (information requests, interviews, dawn raids, compliance reporting), including providing false or misleading information, may result in a penalty of up to 1% of the undertaking’s worldwide turnover and daily penalties of up to 5% of daily turnover for each day a breach continues. The CMA will also be able to impose penalties on individuals of up to £30,000 or a daily penalty of £15,000 or both.
Directors who are involved in a breach of a conduct requirement or a PCI may face director disqualifications of up to 15 years.
CHANGES TO THE UK COMPETITION REGIME
The Bill makes a number of significant changes to the UK’s competition law regime, following on from a previous UK Government consultation in this area.
Enforcement against anti-competitive conduct
The Bill contains a number of reforms to the CMA’s powers and processes aimed at enhancing the scope and efficiency of Competition Act investigations. The main changes included in the Bill are:
- An extension of the territorial scope of the Chapter I prohibition under the Competition Act 1998, so that the prohibition applies to agreements implemented outside the UK but which have an effect within the UK. This amendment seeks to ensure that conduct remains within the scope of the CMA’s investigative powers, even when an agreement is implemented in another jurisdiction;
- Stronger evidence-gathering powers for the CMA, including wider powers to interview individuals as part of Competition Act investigations, an extension of the legal duty to preserve evidence (e.g. where a business receives a case initiation letter from the CMA), and more flexible dawn raid powers for domestic premises (including “seize and sift” powers);
- Altering the standard of review to be applied by the CAT on appeals against interim measures decisions under the Competition Act, so that such appeals are determined by reference to the principles of judicial review rather than the current full merits appeal standard.
Enforcement across competition tools
The Bill also introduces a range of changes that will apply across the CMA’s competition functions (competition investigations, mergers, and market studies and investigations):
- The Bill introduces tougher penalties for parties that commit procedural infringements. The CMA can currently fine a business £30,000 and/or a daily rate of £15,000 if it fails to comply with its information gathering powers. This level of penalties is significantly lower than that imposed by other competition authorities in Europe.
- For businesses, fixed penalties will now be up to 1% of a business’ annual worldwide turnover in respect of failure to comply with an investigative measure, including failing to comply with an information request, concealing, falsifying or destroying evidence and providing false or misleading information. In the case of daily penalties, penalties may be imposed up to a maximum level of 5% of daily worldwide turnover;
- For natural persons, the maximum fixed penalty for concealing, falsifying or destroying evidence, or providing false or misleading information, will be £30,000, and the maximum daily penalty will be £15,000.
- Civil penalties for companies that fail to comply with the CMA’s directions, orders or undertakings or commitments the company has given to the CMA will now be capped at 5% of annual worldwide turnover. In the case of daily penalties, the maximum level will be 5% of daily worldwide turnover.
- Amendments in the Bill also provide for the extraterritorial application of notices given by the CMA to persons outside the UK, and in relation to production of documents or information held outside the UK.
Market studies and investigations
The Bill sets out a number of procedural reforms in relation to the CMA’s market studies and market investigations regime. These reforms include:
- Providing more opportunity for binding commitments to be accepted at any stage of a market study or market investigation.
- Greater flexibility for the CMA to define the scope of market investigation.
- Removing the requirement to consult on a market investigation reference within the first six months of a market study.
- Enabling the CMA to conduct trials in order to determine the final format of certain remedies.
- Introducing a new power enabling the CMA to vary undertakings accepted or orders imposed by it which are subsequently identified to be ineffective, for a period of 10 years from the CMA’s finding of an adverse effect on competition. This will be subject to a two-year “cooling-off” period during which the CMA cannot conduct a review of a remedy.
Merger control
The Bill makes a number of significant changes to jurisdictional thresholds under the UK merger control regime, and to merger investigation procedures:
Jurisdictional thresholds
- The turnover-based threshold relating to the target of a merger will be raised from the current £70 million to £100 million.
- A new “small merger safe harbour” will be introduced exempting transactions from review where each party’s UK turnover does not exceed £10 million (targeted at reducing the regulatory burden faced by small and micro businesses).
- A new additional merger control threshold will be created, under which the CMA will have jurisdiction where the following conditions are satisfied: (i) existing share of supply of goods or services of at least 33% in the UK or a substantial part of the UK; (ii) UK turnover exceeding £350 million; and (iii) a UK nexus criterion. This threshold is aimed at capturing certain vertical and conglomerate mergers, in particular acquisitions perceived as reducing dynamic competition and risking the development of new products or services.
Merger investigation procedures
- The Bill introduces a “fast-track” route for merging parties, allowing parties to request a fast-track referral to Phase 2 at any stage of pre-notification or Phase 1 (with discretion for the CMA regarding whether or not to accept the fast-track referral request). Where such requests are accepted, the CMA will be able to extend the statutory timetable for up to 11 weeks (as opposed to the usual 8-week extension applicable to a normal Phase 2 investigation) – this is aimed at ensuring there is sufficient time for a full Phase 2 investigation in fast-track cases.
- The Bill also provides for a mechanism to extend time limits in Phase 2 merger investigations by mutual consent (with the length of an extension period as agreed between the CMA and merger parties). The Explanatory Notes to the Bill suggest that this is most likely to be helpful in support of early consideration of remedies, or in multi-jurisdictional mergers that are being reviewed in other countries in parallel to the UK.
Other reforms to UK competition law
- The Bill introduces a power for the CAT to grant declaratory relief in individual or collective claims regarding Competition Act infringements. This will avoid the need for parties to formulate their competition claims as damages claims or applications for an injunction, when what would be most useful is a declaration of how the law applies to the facts of the case.
- The Bill provides for discretion for the CAT to award exemplary damages for breaches of competition law, in order to create additional deterrence (this excludes collective proceedings). Exemplary damages, in common law, are awarded beyond what is compensatory for loss or harm in relation to particularly egregious conduct.
CHANGES TO THE CONSUMER PROTECTION REGIME
The Bill introduces a major reform of the UK consumer protection regime, both in relation to the consumer rights protected under the regime and the enforcement process of consumer protection legislation.
Consumer rights
The Bill makes a number of changes to consumer protection legislation in order to improve and modernise consumer rights, ensuring they keep pace with market developments, in particular the trend towards online retail and advertising.
Protection from unfair trading
The Consumer Protection from Unfair Trading Regulations 2008 (CPRs) will be revoked and its unfair commercial practices are instead included in the Bill. A commercial practice will be unfair if it is likely to cause the average consumer to take a transactional decision it would otherwise not have taken, as a result of a misleading action or omission, an aggressive practice or a breach of the requirements of professional diligence. This will include practices such as fake reviews. Commercial practices that are in all circumstances considered unfair are listed in Schedule 18 of the Bill.
Subscription contracts
The Bill clarifies and improves existing pre-contract information requirements for subscription contracts. Traders will be required to send reminders to consumers before a contract rolls over or auto-renews. They will also need to remind consumers that a free trial or a low-cost introductory offer is coming to an end, and will need to ensure that consumers are able to exit a contract in a straightforward and timely manner. A cooling-off period of 14 days will have to be available both at the start of the contract and at the renewal stage.
Consumer savings schemes
The Bill provides greater protection for consumer prepayment schemes under which they make payments as a form of saving for goods, services or digital content to be supplied by the trader at a later date. Traders will have to mitigate the risk of loss to consumers from their insolvency by setting up either an insurance or a trust arrangement.
Enforcement
CMA’s direct enforcement powers
The Bill strengthens the CMA’s consumer law enforcement powers, bringing them more closely in line with its competition law powers, for the core pieces of consumer protection legislation as set out in Schedule 14 of the Bill. This includes the legislation relating to unfair commercial practices and unfair contract terms and other legislation that deals with closely related subject matter and where the CMA has relevant experience.
Breach of consumer protection legislation
Instead of having to apply to the courts for an enforcement order against companies in breach of the legislation, it will be up to the CMA to determine when a company infringes the rules. When adopting an infringement notice the CMA will be able to impose fines of up to 10% of worldwide turnover for infringing undertakings and fines of up to £300,000 where an individual breaks the law.
Non-compliance with information requests, including providing false or misleading information
Under the new administrative enforcement model the CMA will also be able to impose fines of up to 1% of annual worldwide turnover for failure to comply with statutory information requests, providing false or misleading information or destroying or concealing information, with an additional penalty of up to 5% of daily worldwide turnover where non-compliance continues. Where an individual fails to comply the CMA will be able to impose fixed penalties of up to £30,000 with an additional daily penalty of up to £15,000 while non-compliance continues.
Breach of undertakings given to the CMA
Breach of an undertaking given or a direction imposed by the CMA will be subject to a fine of up to 5% of annual worldwide turnover, with an additional penalty of 5% of daily worldwide turnover while non-compliance continues. For similar breaches by an individual the CMA will be able to impose fixed penalties of up to £150,000 and a daily penalty of up to £15,000 while non-compliance continues.
Appeals against the CMA’s enforcement decisions which can directly or indirectly lead to a monetary penalty will be subject to a full merits appeal. All other non-fining decisions, actions or omissions taken by the CMA in the course of the administrative enforcement process will be subject to a judicial review standard on appeal.
Court-based enforcement regime
Other consumer protection measures (set out in Schedule 13 of the Bill) will continue to be enforced under a court-based regime, which has been simplified and strengthened. Public consumer enforcers will be able to apply to the civil courts to impose similar penalties to those that can be imposed by the CMA.
For further information, please contact:
Stephen Wisking, Partner, Herbert Smith Freehills
stephen.wisking@hsf.com
