techUK news and views
18 Dec 2023

Pro-competition regime for Digital Markets – House of Lords Stages

techUK welcomes the Digital Markets, Competition and Consumer Bill including the pro-competition regime for Digital Markets which plans to put the Digital Markets Unit (DMU) on a statutory footing.

techUK represents almost 1000 companies in the most dynamic sector of the UK economy. Our members include firms of all sizes affected by the Bill. This includes firms who may be designated as having Strategic Market Status (SMS), SMEs, competing firms and the broader tech sector.

If got right the pro-competition regime for Digital Markets Bill has the opportunity to, increase competition and innovation in the UK tech sector, allow consumers and businesses to access a wider range of digital services while also preserving the benefits that businesses and consumers get from large companies able to deliver at scale services and solutions.

Following clear evidence and targeted intervention the Bill should allow the regulator to support:

  • Greater choice for consumers over the kinds of digital services they can use such as messaging services, internet browsers and app stores.
  • Tackle anti-competitive practices: such as bundling, tying and anti-competitive leveraging
  • Increase interoperability and data sharing between different digital services, systems and companies.
  • Create more options for businesses over the software and solutions they can use.
  • Provide new business opportunities for firms to reach a wider audience with tailored products and services.
  • Maintain the benefits of scale through access to and partnerships with competitive services for both businesses and the public.

As the Bill continues its remaining stages through the House of Lords techUK sets out our view on the Bill as amended after the Commons Stages.

The Bill is broadly supported across the tech sector but there are differences of view on key provisions. Our position below reflects those views, including suggested amendments which are non-contentious within our membership as well as noting where there are differences of view. Peers are encouraged to engage widely with companies across the tech sector as they review the legislation.

Key points in techUK’s briefing:

  • Increase the accountability of the Digital Markets Unit through an annual report
  • Strengthen the envisaged participative approach through wide engagement and ensuring the confidentiality of evidence
  • Ensuring the regulator is effectively resourced and expert
  • Appeals standard - views on Government amendments
  • Countervailing benefits exemption
  • Private enforcement
  • Protecting Freedom of Contract - the Final Offer Mechanism

Increase the accountability of the Digital Markets Unit through an annual report: While the intention of the regime is to target a select number of highly concentrated digital markets, the DMCC Bill offers the DMU wide discretion over how it will exercise its powers including designations, conduct requirements and other interventions.

This has raised apprehension among many companies who are market leaders that would not consider themselves to fall within scope of regime, but where an expansive approach to the pro-competition regime could capture them. The regime however must remain flexible and therefore techUK suggests the Bill should be amended to require the DMU to lay an annual report before Parliament.

The first report should be set out shortly after the passage of the DMCC Bill and require the DMU to set out its intentions for its first year of operation. Subsequent reports should be issued every 12 months both setting out the forward plan as well as providing a chance for the DMU to reflect on its operations over the previous 12 months.

Such an amendment should mirror reporting requirements for Ofcom in the 2003 Communications Act and would not only provide clarity and reassurance to these market leaders, but would also help improve parliamentary oversight and scrutiny over how far DMU intends to go as well as signalling to the wider market and consumers the intentions of the DMU. The report need not be extensive and could be integrated into existing reporting requirements for the CMA to ease the burden on the regulator.

Strengthen the envisaged participative approach through wide engagement ensuring the confidentiality of evidence: The DMCC Bill envisages a participative approach to regulation that will allow the DMU to engage with a range of stakeholders from likely regulated firms to challengers to the wider tech sector and consumers. Currently this ‘participative approach’ is not spelled out in legislation and is to be set out by the DMU itself through guidance. This is a vital part of the regime and getting the participative approach right will have a significant bearing on how successful the DMU will be.

techUK notes a range of concerns raised by members on this issue that Peers should interrogate as the Bill completes its passage.

A key goal of the participatory approach is to engage other market participants in the design of conduct requirements and other interventions to maximise the likelihood that an intervention is effective from the outset. However, there is no proactive duty on the DMU to consult with third parties to inform the design of interventions before they are finalised and released for consultation. Parliament should seek assurances that the DMU will consult with these parties throughout each relevant process.

How information gathering powers will be used to support the participative approach is another important consideration. The regime will only be able to succeed with accurate, confidential, and timely information gathering engagement from industry and, where appropriate, other regulators. However, information gathering consumes large amounts of resources and capacity for all firms. The Government committed in its consultation that these powers would be used in a proportionate and targeted way and parliament should seek assurances on this point from the DMU.

In carrying out information gathering the DMU should also be encouraged to gather information and conduct market monitoring through a range of measures. This should include regular panels, networks of sector representatives and informal stakeholder engagement. This is important and should recognise that traditional processes used by competition authorities are less accessible and equitable for many parties.

By employing a range of methods the DMU will be better able to support continuous monitoring and information gathering without having to rely solely on formal powers. This is likely to increase the range and quality of evidence available to the regulator as well as reducing the potential compliance burden on some market participants.

Further concerns have been raised about the confidentiality of evidence submitted. It is vital that in guidance to be issued by the DMU the regulator finds a balance between allowing evidence to be submitted in a confidential manner by firms of all sizes while also allowing summaries of evidence to be shared as part of the participatory nature of the regime.

Doing so will mean creating clear processes for submitting evidence, including providing concrete reassurance to all participants that they can submit any relevant commercially sensitive evidence in a way that will not be disclosed to their competitors. While the Bill explicitly protects the confidentiality of designated firms, Parliament should also seek assurances that similar rights extend to other market participants.

Ensuring the DMU strikes the right balance on how it engages with businesses and consumers, takes a proportionate approach to the use of formal information gathering powers and ensures the confidentiality of information submitted will be fundamental to ensuring the regime can operate as intended.

Ensuring the regulator is effectively resourced and expert: The legislation implies the pro-competition regime will be supported by a sufficiently resourced and expert regulator, able to act quickly and flexibly. Parliament and the Government must ensure through its scrutiny of the regulator that the DMU remains sufficiently resourced and focused to carry out its duties as intended. This will not only mean regular scrutiny of the overall budget but also giving the CMA the flexibility to hire expert talent.

Ensuring regulators can offer flexibility on pay and benefits so they can attract the talent they need is a challenge across our regulator system, particularly as regulators increasingly focus on digital and AI regulation. There is also an uneven approach with some regulators and authorities having more flexibility than others. The CMA currently has less flexibility that comparable regulators such as Ofcom.

Peers should consider amendments to the Bill that will allow the CMA greater flexibility to set staff pay and benefits so the DMU can make suitable offers of employment in a highly competitive employment environment for those with digital and AI skills.

Appeals Standard, views on Government amendments: Appeals to the Digital Markets Unit must be heard quickly and be able to establish whether the decision taken by the DMU was correct or not. How exactly and under what standard appeals are heard has been a divisive issue, including within the tech sector.

Ahead of the Bill’s publication techUK called for appeals to be heard under what is referred to as the ‘JR+’ Standard and within a time limit of six months. While this was not the position of all members it aimed to strike a balance and reflected concerns across a range of firms in the sector about the need for additional checks and balances on the regime.

At Commons Report Stage the Government tabled amendments to the appeals standard. These confirmed that appeals on fines would be considered ‘on the merits’ while appeals on other decisions of the DMU would be taken on a JR standard. These amendments clarified that such appeals via a JR standard would be able to consider the proportionality of decisions. The amendments also introduced a requirement for the DMU to consider and assess the proportionality and expected consumer benefits ahead of conduct requirements being imposed.

While these amendments were not exactly what techUK had called for the Government has sought to recognise a range of concerns in the sector and to address them through their amendments.

Following conversations with our members there is no consistent view on whether the amendments have found the right balance. While a range of companies see the amendments as striking a balance on the issue of appeals, others would prefer the original unamended standard to be retained while others would prefer additional amendments to the standard of appeal.

Peers should review the Government’s amendments and consider whether a balance has been stuck here and if the appeals standard, as amended, allows sufficient checks and balances while also delivering on Government’s policy goals and enabling DMU to carry out its functions.

Countervailing benefits exemption: The countervailing benefits exemption provides a legal defence for a designated firm in the event of a conduct requirement being breached. The exemption is not intended to impact the process of defining conduct requirements themselves and is set to narrow and at a very high threshold.

In a position set out before Bill publication techUK took the view that this exemption must operate as an exceptional defence set to a high standard, but queried the use of the ‘indispensability’ threshold. Some techUK members were concerned that in the existing ex-post regime, this threshold has rarely been met and that this may carry over into a forward-facing regime.

The Government has amended the Bill to replace the indispensability threshold with ‘those benefits could not be realised without the conduct.’

It is vital that this exemption remains an exceptional defence and set to a high standard. techUK notes that this exemption was proposed late in the day and not consulted on during the consultation process and concerns about the implications of the exemption remain in some parts of the sector. Peers are therefore encouraged to scrutinise this exemption and the Government’s amendments closely.

Private enforcement: Concerns have been raised that clause 101of the DMCC Bill will allow for a wide range of private cases to be brought against designated firms claiming a breach of a conduct requirement has taken place without the DMU first having found and identified that a breach has in fact taken place.

Allowing private enforcement to seek compensation when a breach has occurred is a vital redress mechanism. However, without the right safeguards there is a risk of circumventing the regulatory process and resulting in a significantly increased case load for the Competition Appeals Tribunal with potentially many unmeritorious cases being brought.

There has been rise in cases being brought against the kinds of businesses whose activities are likely to fall within the scope of this regime, both in the early years of the regime and likely also for any designations that may happen in the future. Clause 101 as drafted therefore may significantly increase the legal jeopardy for firms who may be designated for their activities in the UK, unless additional safeguards are put in place.

This issue can be addressed while still supporting legitimate private redress via a gating mechanism.

This would be is similar to a mechanism that exists in section 104 of the Communications Act 2003, whereby the consent of Ofcom is required to bring a civil liability claim for a breach of regulatory conditions or commitments. A similar such gating mechanisms should be added to clause 101 of the DMCC Bill. This sits in line with techUK’s calls that the DMCC regime should be led by an expert regulator.

Protecting Freedom of Contract - the Final Offer Mechanism: techUK supports the Government’s intention to resolve price disputes through the Final Offer Mechanism (FOM). This mechanism can provide a clear and graduated approach to resolve pricing disputes with the aim to force a resolution between two willing parties who have agreed to contract but cannot agree on price.

While this approach is welcome it must not stray into determining commercial arrangements without the ability of either party to exit an agreement.

As it stands the Bill contains a regulatory power through the application of the conduct requirements and the FOM which could enable the DMU to force a designated firm to sign a contract with a third party, at a price / value determined by the regulator. This could lead to a situation where companies are forced to enter into arrangements that have no commercial value. We have concerns that if used in this way the regulation could threaten principles of freedom of contract.

Regulatory powers which override a company’s freedom to choose who it does business with have been considered the most intrusive form of regulatory intervention and have been used sparingly and with much greater procedural safeguards. This is most often in the regulation of utilities and to address issues of market power in sectors with certain characteristics such as in telecoms. This is not the intention here given the expectation that there would be viable alternatives in highly digitised markets.

Given the way the Bill is constructed we are concerned at the widespread implication that these provisions would be used to provide funding for specific sectors with news media regularly raised.

Ensuring media is well funded and independent is important for our society and democracy. However, given the specific aims of this clause and it being contained within a regime aimed at addressing market power this does not seem appropriate and likely would not address the long-term issue of news funding. Similar efforts in Australia have contained major deficiencies and have not addressed the key issue of media funding and plurality. Additionally using this mechanism to force regulated firms to fund specific sectors sets a worrying precedent.

The FOM mechanism is intended to resolve pricing disputes between an SMS firm and effected parties where these businesses choose to engage in a transaction, and this should remain its central function. Where the CMA can identify other competition concerns these should be addressed via the designation process and conduct requirements.

techUK understands that this is the Government’s intention and amendments should be made to the Bill to ensure that the focus on pricing disputes as part of a pro-competition regime is retained and respect for the principle of freedom to contract is included.

 

Neil Ross

Neil Ross

Associate Director, Policy, techUK

Archie Breare

Archie Breare

Public Affairs Manager, techUK

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