DMCC Act: CMA consults on revised guidance on administrative penalties

After receiving Royal Assent on 24 May 2024, the Digital Markets Competition and Consumers Act (DMCC Act) has entered a new phase of implementation (see our May 2024 update). As indicated in our previous updates, the Government and CMA will need to publish a wide range of guidance on how the new rules and powers will be exercised. On 11 July 2024, the CMA published a consultation on its proposed approach to administrative penalties (referred to by the CMA as the draft CMA4). The draft statement proposes to apply an "in the round" approach to the assessment of the appropriate administrative penalty, including pursuant to new powers to fine companies for breaches of undertakings and orders in mergers and markets cases.  

The draft statement does not cover penalties imposed for substantive infringements under the Competition Act 1998 (CA98), or for breaches of digital markets competition requirements, or under the new consumer protection law direct enforcement regime, all of which are subject to separate guidance.

Key takeaways

• The CMA is consulting on updated guidance on its approach to calculating the amount of the penalty in the case of administrative penalties.
• The updated guidance will apply to penalties imposed in relation to breaches of investigatory requirements and breaches of commitments, undertakings or orders agreed with or imposed by the CMA.
• The CMA proposes to assess the appropriate amount of any administrative penalty (including in respect of breaches of undertakings and orders) "in the round".

The CMA's new investigatory powers

As set out in our June update, the DMCC Act introduces a number of amendments to the CMA's investigatory powers under the CA98 (Chapters 1 and 2) and the CMA's process and investigatory powers when conducting market studies and investigations. The changes are designed in particular to offer the CMA greater flexibility when conducting investigations. The DMCC Act also gives the CMA enhanced powers to fine companies which fail to comply with CMA investigations. There are two categories of requirements set out in the draft CMA4: investigative requirements and remedies requirements. 

Investigative requirements: the DMCC Act gives the CMA enhanced powers to issue civil penalties for a failure to comply with investigative steps taken by the CMA, with maximum penalties of: 1% of the undertaking's turnover for fixed penalties; and/or 5% of the undertaking's daily turnover for daily amounts.

Remedies requirements: the DMCC Act gives the CMA additional powers to:

• fine companies for breaching commitments made following an investigation, interim measures orders or directions made by the CMA to bring an infringement to an end. Under the Act, the CMA will be able to impose a fixed penalty of up to 5% of global turnover and/or a daily amount up to 5% of global daily turnover; and
• impose penalties for breaches of orders and undertakings in markets or mergers cases. This means that if a company fails to comply with CMA orders or undertakings, the CMA can impose fixed penalties of up to 1% of the business’s annual worldwide turnover and/or daily penalties of up to 5% of daily worldwide turnover.

Consultation on CMA's statement of policy

Under the DMCC Act, the CMA is required to publish a statement of policy on its approach to applying such penalties. On 11 July 2024, it published a consultation on an updated version of its statement of policy on the CMA's approach to administrative penalties.

The current version of CMA4 applies to the CMA's existing power to impose fines for (i) breaches of investigatory requirements under CA98 and the Enterprise Act 2002 (currently limited to fixed penalties of £30,000 and daily penalties of £15,000); and (ii) breaches of interim measures in merger cases (a fixed penalty of up to 5% of global turnover).  

The new draft CMA4 will apply more widely, covering the broader enforcement powers introduced by the DMCC Act. CMA4 will not apply to:

• the CMA's approach to the appropriate amount of a penalty for substantive infringements of the CA98 (which is set out in separate guidance);
• penalties for breaches of digital markets competition requirements (save for breaches of IEOs and the merger-reporting requirements), which are covered by the separate Digital Markets Guidance (currently in draft); and
• penalties (including administrative penalties) under the new consumer protection law direct enforcement regime, which will be covered by separate guidance.

The CMA's approach to 'administrative penalties'

Currently, the CMA applies an "in the round" approach when determining the appropriate amount of administrative penalties (as set out in the current CMA4). By contrast, for substantive CA98 infringements, the CMA adopts a "stepped approach" which requires the CMA to consider a series of discrete steps in order to calculate the appropriate amount of the penalty. Under the draft Digital Markets Guidance, the CMA also proposes to adopt the stepped approach for substantive digital markets infringements. 

Unlike the stepped approach, an in the round approach enables the CMA to assess "all the relevant circumstances" of the case, by determining the factors that it considers appropriate to the assessment and assessing those factors in the round (para 2.15 of the draft CMA4).

The draft CMA4 guidance proposes that an in the round approach will apply to all administrative penalties, including both investigative requirements and regulatory requirements. 

Relevant factors in the assessment

The draft CMA4 explains the types of factors that the CMA will consider in its assessment, including:

• the seriousness of the breach: "the CMA is likely to set very large penalties for the most serious failures to comply" (para 2.16 of the draft CMA4);
• the need for deterrence, taking into account the company's size, the administrative and financial resources available to it, and the need to ensure that a company does not profit from a breach.
• any aggravating factors that increase the seriousness of the breach, including (i) the risk of the breach having a significant adverse impact on the CMA's investigation or its ability to carry out its functions; (ii) whether the breach had a significant, actual or potential, impact on competition, customers, consumers and/or the public interest; (iii) the duration of the breach; (iv) advantages derived from the breach; and (v) the company's actions, including whether the breach was committed intentionally, whether it was brought to the CMA's attention or concealed, whether the breach continued after being identified, whether the company had appropriate systems, control and processes in place; and
• any mitigating factors that may reduce the seriousness of the breach, such as whether the company (i) promptly reported the breach and took appropriate and prompt action to end the breach; (ii) voluntarily provided appropriate compensation to those affected; and (iii) took appropriate steps to improve its systems and processes.

Consistent with an in the round assessment, the draft guidance emphasises that the factors described are non-exhaustive and that not all factors will apply in all cases. In particular, it notes that factors such as the assessment of the impact on consumers are more likely to be relevant in the context of remedy requirements than for breaches of investigatory requirements. 

Comment

The CMA's proposal that penalties for what are essentially substantive infringements (e.g. for breaches of undertakings or orders following merger or market investigations) will not be assessed using a stepped approach may raise some concerns. The CMA's consultation document explains that "[t]he CMA considers that continuation of this approach is appropriate, which has provided a transparent but flexible approach to administrative penalty setting for breaches of the type covered by the Draft CMA4, tailored to the circumstances of each case" (para 2.19 of the CMA's consultation document). However, given the nature of the instruments involved and the scope for significant penalties to be imposed, there are likely to be calls for a more rigorous approach to be applied. 

Separately, it is notable that the policy document does not address the current uncertainty about whether the new fining powers are intended to apply only to market investigation orders which are made (or undertakings which are given) after the Act enters into force or if they may also be applied retrospectively. Although we understand that the previous Government had indicated to stakeholders that the fining powers were not intended to apply retrospectively, the CMA has not taken the opportunity in this consultation to clarify the point.

The consultation on the draft Statement of Policy is open until 23 August 2024.

With thanks to Isabella Hunt for her contribution.