The United Kingdom (UK) Government's recent announcement (27 November 2020) of its intention to establish a dedicated Digital Markets Unit (DMU) to protect competition in respect of digital platforms is a significant step, albeit one of a number of measures being taken by the Government to regulate the digital sector.

The DMU will be housed within the Competition and Markets Authority (CMA) and will work alongside regulators including the Office of Communications (Ofcom) and the Information Commissioner's Office (ICO) to produce and enforce a new statutory code of conduct – which will govern the behavior of companies designated as having 'Strategic Market Status' (SMS).

The new regime implements the recommendations of a market study focused on online platforms and digital advertising which was published by the CMA at the request of the Government earlier this year. That report concluded that the UK needed "a new, regulatory approach – one that can tackle a range of concerns simultaneously, with powers to act swiftly to address both the sources of market power and its effects, and with a dedicated regulator that can monitor and adjust its interventions in the light of evidence and changing market conditions."

The establishment of a DMU was originally proposed in the final report of the Digital Competition Expert Panel published in March 2019 (known as the 'Furman Report') – our blog on the report can be found here.

The scope of the DMU's powers and the nature of the regime that it will operate are yet to be confirmed by the Government. However, the Digital Markets Taskforce (Taskforce) – a body led by the CMA, involving other regulators (such as Ofcom and the ICO), and informed by input received from various stakeholders – has now also published its advice. This 89-page document sets out the views of the Taskforce regarding the design and practical implementation of this new digital regime – specifically in light of measures set out in the Furman Report but also recommendations made on the back of the CMA's recently concluded market study into online platforms and digital advertising.

In its advice the Taskforce supports the creation of the DMU and urges that it be a proactive body that seeks to foster compliance with regulatory requirements and that takes swift action to prevent harm when and where identified. To this end, the Taskforce recommends a new regulatory framework which would, in effect, lead to the imposition of onerous rules and obligations on digital players that allegedly occupy strong market positions and are assigned SMS status (more detail on this below). Though this advice was commissioned by the government, the extent to which its proposals will ultimately be implemented remains unclear.

Recommendations of the Digital Markets Taskforce

Statutory code and pro-competitive interventions

Broadly, the advice of the Taskforce envisages an ex ante approach to regulation in which legally binding statutory codes of conduct are tailored to the relevant activities of each technology company deemed as having SMS.

Under the proposed framework, the DMU would undertake the assessment of whether a firm has SMS. The recommended test applies to certain specified activities (rather than to the company as a whole) and includes an evidence-based consideration of whether the company has substantial market power, which will arise where users of a product or service "lack good alternatives to that product" and there is "limited threat of entry or expansion by other suppliers." The Taskforce expects that only a small number of firms are likely be deemed as having SMS.

The Taskforce also makes recommendations on the scope of the DMU's power, advising that the DMU should have the ability to make wide-ranging 'pro-competitive interventions' which may include:

• The imposition of 'interoperability requirements' which would ensure that there are no limits on the ability of software to exchange and make use of information. 
• Data-related interventions which would support consumers' ability to maintain control over their data (and how it is used).
• Separation remedies (limited to operational and functional separation) which could be used where different units within a SMS company are operated independently of one another.

The Taskforce recommends that the DMU should have a range of tools available which will enable it to monitor compliance with statutory codes and to address any problems. Such tools could include (amongst other things) – an ability to gather or require periodic and ad hoc information from SMS designated entities, the ability to conduct checks and reviews of practice, and to hold confidential discussions with stakeholders.

Where a problem is identified, the Taskforce recommends that the DMU should have the ability to impose interim measures, undertake formal investigations and scoping assessments, and (in circumstances where a breach is committed "negligently or intentionally") impose substantial financial penalties up to a maximum of 10 percent of the relevant entity's worldwide turnover.

SMS merger regime

The recommendations of the Taskforce also extend to the introduction of a wide-ranging SMS merger regime – a system which would be distinct from the pre-existing CMA merger regime and tailored to transactions taking place in digital markets.

Under the regime which would be operated by the CMA, it is envisaged that SMS firms would be required to report all transactions to the CMA (within a short period of signing) and that certain transactions which meet clear-cut thresholds (which are yet to be determined) should be subject to a mandatory notification process prior to completion. It is proposed that transactions qualifying for the mandatory procedure would need to obtain clearance prior to signing.

EU Digital Markets Act

The UK's decision to establish the DMU comes before the European Commission's publication of its proposed Digital Markets Act (DMA), currently expected on 15 December 2020. The DMA is expected to govern the activity of certain 'large online platforms,' that may set in part the rules of the game for their users and competitors. The European Commission is yet to designate the platforms that will be subject to the obligations imposed by the DMA although it says they will be identified on the basis of a set of clear criteria such as "significant network effects, the size of the user base and/or an ability to leverage data across markets." It remains to be seen how that concept (i.e., 'large online platforms') will align with the CMA's concept of SMS.

The DMA will also contain plans for the New Competition Tool which will give the European Commission powers to intervene in markets facing structural competition problems. As legislation that will be passed after the Brexit transition period, the DMA will not become part of UK domestic law as retained EU law under the UK's Withdrawal Act.

Alongside the DMA, the EU will publish a proposed Digital Services Act (DSA) which will update the current regime, under the e-Commerce Directive, that governs the liability of online platforms. As with the DMA, any new framework established in the EU by the DSA will not automatically form part of UK domestic law as retained EU law. Notably, as of July 2020, the UK government stated that it "has no current plans to change the UK's intermediary liability regime," which currently reflects the e-Commerce Directive. This presents another area of potential (and significant) UK-EU divergence for digital services regulation.

In terms of expected obligations under the DMA (and based on the impact assessment carried out by the European Commission earlier this year), the objectives of the DMA appear very similar to those pursued under the DMU's likely statutory code. 

In short, the DMA seeks to address perceived imbalances in bargaining power between certain online platforms on the one hand and their users and competitors on the other, including the role of those platforms in controlling the platform ecosystem by, for example, leveraging access to data obtained from the provision of one service to develop new services in adjacent markets. 

The DMA proposes to do this by introducing an ex ante regulatory framework for certain platforms. This regime will prohibit or restrict certain unfair trading practices (or 'blacklisted practices') and empower regulators to: (a) collect information from such platforms to gain insights into their business practices, and (b) impose tailor-made remedies on a case-by-case basis, possibly by way of a new regulatory authority.

UK's wider regulation of the digital economy

The UK Government's decision to establish the DMU aligns with its broader policy objectives and its increasing regulation of the digital economy.

Separate developments include the government's planned publication of legislation on the regulation of online harms, data protection laws, and the introduction of the digital services tax – the latter of which was established in April 2020 and applies to large, multi-national enterprises whose revenue is derived from the provision of certain digital services.

Next steps

The "form and function" of the DMU is yet to be finalized. In addition to considering the advice of the Taskforce, the UK government will also consult on the DMU in early 2021, drawing upon industry and technical expertise, and with the intention of legislating to establish the DMU as soon as parliamentary time allows. 

Meanwhile, in relation to the EU's DMA, trialogue negotiations (informal tripartite meetings on legislative proposals between representatives of the European Parliament, the European Council, and the European Commission) will commence following the publication of the draft legislation in the coming weeks.

Given the potential impact and the risk of divergent approaches, proposals on both sides of the Channel will no doubt draw significant interest from a wide range of stakeholders.

Authored by Charles Brasted, Matt Giles, Telha Arshad, Stelios Charitopoulos, and Morven Macaulay.