Task Force Calls For Enhanced Digital Regulation in UK

The UK may soon reform its competition and consumer laws visa vis digital markets.

A United Kingdom (UK) entity has recommended that Prime Minister Boris Johnson and his Conservative government remake digital regulation in the UK, especially with respect to competition policy. A task force has returned an extensive set of recommendations requiring legislation and increased coordination and a new focus for existing regulators. The timeline for such action is not clear, and Downing Street would have to agree before anything happens. However, the UK’s new regulatory scheme and the European Union’s ongoing efforts to revamp its regulatory approach to large technology firms will both likely affect United States (U.S.) multinationals such as Facebook and Google. It may also serve as a template for the U.S. to remake its regulation of digital competition.

The United Kingdom’s Competition & Markets Authority (CMA) led an effort consisting of the Office of Communications (Ofcom) and the Information Commissioner’s Office (ICO) in the form of the Digital Markets Taskforce. The Task Force follows the 2019 “Unlocking digital competition, Report of the Digital Competition Expert Panel”, an effort led by Obama Administration Council of Economic Advisers Chair Jason Furman and the more recent July 2020 “Online platforms and digital advertising market study.” In 2019, the Task Force issued its “Digital Markets Strategy” that “sets out five strategic aims, and seven priority focus areas.”

The Task Force acknowledged its efforts in the UK were not unique. It referenced similar inquiries and plans to reform other nations’ regulation of digital markets in the U.S., the EU, Germany, Japan, and Australia.

The Task Force summarized its findings:

The accumulation and strengthening of market power by a small number of digital firms has the potential to cause significant harm to consumers and businesses that rely on them, to innovative competitors and to the economy and society more widely:

• A poor deal for consumers and businesses who rely on them. These firms can exploit their powerful positions. For consumers this can mean they get a worse deal than they would in a more competitive market, for example having less protection or control of their data. For businesses this can mean they are, for example, charged higher listing fees or higher prices for advertising online. These higher prices for businesses can then feed through into higher prices for consumers for a wide range of products and services across the economy.
• Innovative competitors face an unfair disadvantage. A powerful digital firm can extend its strong position in one market into other markets, ultimately giving itself an unfair advantage over its rivals. This means innovative competitors, even if they have a good idea, are likely to find it much harder to compete and grow their businesses. This can result in long-term harmful effects on innovation and the dynamism of UK markets.
• A less vibrant digital economy. If powerful digital firms act to unfairly disadvantage their innovative competitors, these innovative firms will find it harder to enter and expand in new markets, meaning the ‘unicorns’ of tomorrow that will support jobs and the future digital economy will not emerge.

The Task Force calls for the establishment of a new Digital Markets Unit (DMU) that would be particularly focused on policing potential harm before it occurs. Thus, the Task Force is calling for a regulator that is proactive and nimble enough to address risks to competition and consumers any harm happens. The DMU would oversee a new “Strategic Market Status” regime, and the Task Force is recommending that the government and Parliament revisit and refresh consumer and competition laws. The Task Force stated that the “government should put in place a regulatory framework for the most powerful digital firms, alongside strengthening existing competition and consumer laws…[and] [i]n considering the design of this regulatory framework we have sought to strike the right balance between the following key principles:

• Evidence driven and effective – regulation must be effective, and that means ensuring it is evidence based, but also that it can react swiftly enough to prevent and address harms. The activities undertaken by the most powerful digital firms are diverse and a ‘one size fits all’ approach could have damaging results.
• Proportionate and targeted – regulation must be proportionate and targeted at addressing a particular problem, minimising the risk of any possible unintended consequences.
• Open, transparent and accountable – across all its work the DMU should operate in an open and transparent manner. In reaching decisions it should consult a wide range of parties. It should clearly articulate why it has reached decisions and be held accountable for them.
• Proactive and forward-looking – the DMU should be focused on preventing harm from occurring, rather than enforcing ex post. It should seek to understand how digital markets might evolve, the risks this poses to competition and innovation, and act proactively to assess and manage those risks.
• Coherent – the DMU should seek to promote coherence with other regulatory regimes both domestically and internationally, in particular by working through the Digital Regulation Cooperation Forum which is already working to deliver a step change in coordination and cooperation between regulators in digital markets.

The Task Force provided more detail on the new SMS scheme:

The entry point to the SMS regime is an assessment of whether a firm has ‘strategic market status’. This should be an evidence-based economic assessment as to whether a firm has substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position (meaning the effects of its market power are likely to be particularly widespread and/or significant). It is focused on assessing the very factors which may give rise to harm, and which motivate the need for regulatory intervention.

Those firms that are designated with SMS should be subject to the following three pillars of the regime:

• An enforceable code of conduct that sets out clearly how an SMS firm is expected to behave in relation to the activity motivating its SMS designation. The aim of the code is to manage the effects of market power, for example by preventing practices which exploit consumers and businesses or exclude innovative competitors.
• Pro-competitive interventions like personal data mobility, interoperability and data access which can be used to address the factors which are the source of an SMS firm’s market power in a particular activity. These interventions seek to drive longer-term dynamic changes in these activities, opening up opportunities for greater competition and innovation.
• SMS merger rules to ensure closer scrutiny of transactions involving SMS firms, given the particular risks and potential consumer harm arising from these transactions.

The SMS regime should be an ex ante regime, focused on proactively preventing harm. Fostering a compliance culture within SMS firms will be crucial to its overall success. However, a key part of fostering compliance is credible deterrence and the DMU will need to be able to take tough action where harm does occur, requiring firms to change their behaviour, and with the ability to impose substantial penalties. The ability to take tough action sits alongside enabling resolution through a participative approach, whereby the DMU seeks to engage constructively with all affected parties to achieve fast and effective results.

The Task Force sketched its ideal timeline during which Parliament would enact its recommendations, which would be next year at the earliest:

We believe the case for an ex ante regime in digital markets has been made. We therefore welcome the government’s response to the CMA’s online platforms and digital advertising market study, and its commitment to establishing a DMU from April 2021 within the CMA. We also welcome government’s commitment to consult on proposals for a new pro-competition regime in early 2021 and to legislate to put the DMU on a statutory footing when parliamentary time allows. We urge government to move quickly in taking this legislation forward. As government rightly acknowledges, similar action is being pursued across the globe and there is a clear opportunity for the UK to lead the way in championing a modern pro-competition, pro-innovation regime.

The Task Force summarized its recommendations to the government:

A Digital Markets Unit

Recommendation 1: The government should set up a DMU which should seek to further the interests of consumers and citizens in digital markets, by promoting competition and innovation.

• Recommendation 1a: The DMU should be a centre of expertise and knowledge in relation to competition in digital markets.
• Recommendation 1b: The DMU should be proactive, seeking to foster compliance with regulatory requirements and taking swift action to prevent harm from occurring.

A pro-competition regime for the most powerful digital firms

Recommendation 2: The government should establish a pro-competition framework, to be overseen by the DMU, to pursue measures in relation to SMS firms which further the interests of consumers and citizens, by promoting competition and innovation.

Recommendation 3: The government should provide the DMU with the power to designate a firm with SMS.

• Recommendation 3a: SMS should require a finding that the firm has substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position.
• Recommendation 3b: The DMU should set out in formal guidance its prioritisation rules for designation assessments. These should include the firm’s revenue (globally and within the UK), the activity undertaken by the firm and a consideration of whether a sector regulator is better placed to address the issues of concern.
• Recommendation 3c: The designation process should be open and transparent with a consultation on the provisional decision and the assessment completed within a statutory deadline.
• Recommendation 3d: A firm’s SMS designation should be set for a fixed period before being reviewed.
• Recommendation 3e: When a firm meets the SMS test, the associated remedies should apply only to a subset of the firm’s activities, whilst the status should apply to the firm as a whole.

Recommendation 4: The government should establish the SMS regime such that when the SMS test is met, the DMU can establish an enforceable code of conduct for the firm in relation to its designated activities to prevent it from taking advantage of its power and position.

• Recommendation 4a: A code should comprise high-level objectives supported by principles and guidance.
• Recommendation 4b: The objectives of the code should be set out in legislation, with the remainder of the content of each code to be determined by the DMU, tailored to the activity, conduct and harms it is intended to address.
• Recommendation 4c: The DMU should ensure the code addresses the concerns about the effect of the power and position of SMS firms when dealing with publishers, as identified by the Cairncross Review.
• Recommendation 4d: The code of conduct should always apply to the activity or activities which are the focus of the SMS designation.
• Recommendation 4e: The DMU should consult on and establish a code as part of the designation assessment. The DMU should be able to vary the code outside the designation review cycle.

Recommendation 5: SMS firms should have a legal obligation to ensure their conduct is compliant with the requirements of the code at all times and put in place measures to foster compliance.

Recommendation 6: The government should establish the SMS regime such that the DMU can impose pro-competitive interventions on an SMS firm to drive dynamic change as well as to address harms related to the designated activities.

• Recommendation 6a: With the exception of ownership separation, the DMU should not be limited in the types of remedies it is able to apply.
• Recommendation 6b: The DMU should be able to implement PCIs anywhere within an SMS firm in order to address a concern related to its substantial entrenched market power and strategic position in a designated activity.
• Recommendation 6c: In implementing a PCI the DMU should demonstrate that it is an effective and proportionate remedy to an adverse effect on competition or consumers. A PCI investigation should be completed within a fixed statutory deadline.
• Recommendation 6d: PCIs should be implemented for a limited duration and should be regularly reviewed.

Recommendation 7: The government should establish the SMS regime such that the DMU can undertake monitoring in relation to the conduct of SMS firms and has a range of tools available to resolve concerns.

• Recommendation 7a: Where appropriate, the DMU should seek to resolve concerns using a participative approach, engaging with parties to deliver fast and effective resolution.
• Recommendation 7b: The DMU should be able to open formal investigations into breaches of the code and where a breach is found, require an SMS firm to change its behaviour. These investigations should be completed within a fixed statutory deadline.
• Recommendation 7c: The DMU should be able to impose substantial penalties for breaches of the code and for breaches of code and PCI orders.
• Recommendation 7d: The DMU should be able to take action quickly on an interim basis where it suspects the code has been breached.
• Recommendation 7e: The DMU should be able to undertake scoping assessments where it is concerned there is an adverse effect on competition or consumers in relation to a designated activity. The outcome of such assessments could include a code breach investigation, a pro-competitive intervention investigation, or variation to a code principle or guidance.

Recommendation 8: The government should establish the SMS regime such that the DMU can draw information from a wide range of sources, including by using formal information gathering powers, to gather the evidence it needs to inform its work.

Recommendation 9: The government should ensure the DMU’s decisions are made in an open and transparent manner and that it is held accountable for them.

• Recommendation 9a: The DMU’s decisions should allow for appropriate internal scrutiny.
• Recommendation 9b: The DMU should consult on its decisions.
• Recommendation 9c: The DMU’s decisions should be timely, with statutory deadlines used to set expectations and deliver speedy outcomes.
• Recommendation 9d: The DMU’s decisions should be judicially reviewable on ordinary judicial review principles and the appeals process should deliver robust outcomes at pace.

Recommendation 10: The government should establish the SMS regime such that SMS firms are subject to additional merger control requirements.

Recommendation 11: The government should establish the SMS merger control regime such that SMS firms are required to report all transactions to the CMA. In addition, transactions that meet clear-cut thresholds should be subject to mandatory notification, with completion prohibited prior to clearance. Competition concerns should be assessed using the existing substantive test but a lower and more cautious standard of proof.

A modern competition and consumer regime for digital markets

Recommendation 12: The government should provide the DMU with a duty to monitor digital markets to enable it to build a detailed understanding of how digital businesses operate, and to provide the basis for swifter action to drive competition and innovation and prevent harm.

Recommendation 13: The government should strengthen competition and consumer protection laws and processes to ensure they are better adapted for the digital age.

• Recommendation 13a: The government should pursue significant reforms to the markets regime to ensure it can be most effectively utilised to promote competition and innovation across digital markets, for example by pursuing measures like data mobility and interoperability.
• Recommendation 13b: The government should strengthen powers to tackle unlawful or illegal activity or content on digital platforms which could result in economic detriment to consumers and businesses.
• Recommendation 13c: The government should take action to strengthen powers to enable effective consumer choice in digital markets, including by addressing instances where choice architecture leads to consumer harm.
• Recommendation 13d: The government should provide for stronger enforcement of the Platform to Business Regulation.

A coherent regulatory landscape

Recommendation 14: The government should ensure the DMU is able to work closely with other regulators with responsibility for digital markets, in particular Ofcom, the ICO and the FCA.

• Recommendation 14a: The DMU should be able to share information with other regulators and seek reciprocal arrangements.
• Recommendation 14b: The government should consider, in consultation with Ofcom and the FCA, empowering these agencies with joint powers with the DMU in relation to the SMS regime, with the DMU being the primary authority.

Recommendation 15: The government should enable the DMU to work closely with regulators in other jurisdictions to promote a coherent regulatory landscape.

• Recommendation 15a: The DMU should be able to share information with regulators in other jurisdictions and should seek reciprocal arrangements.
• Recommendation 15b: The DMU should explore establishing a network of international competition and consumer agencies to facilitate better monitoring and action in relation to the conduct of SMS firms.

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