CN16 - UK Government launches consultations on reforming competition policy

On 20 July 2021, the Department for Business, Energy & Industrial Strategy ("BEIS") published two consultations.  The first consultation concerns reforms to competition and consumer policy (the "Policy Reform Consultation"), which follows the publication of the Penrose Report in February 2021 (see our March 2021 newsletter article).  

The second consultation, published jointly with the Department for Digital, Culture, Media & Sport, concerns a new pro-competition regime for digital markets (the "Digital Markets Consultation"). The Digital Markets Consultation draws upon recommendations made in the Furman Report in 2019 (see our March 2019 newsletter article) and by the Digital Markets Taskforce ("DMT") in 2020 (see our December 2020 newsletter article). 

Key takeaways

 

Policy Reform Consultation 

• The Policy Reform Consultation sets out a series of broad-ranging reform proposals with the objective of strengthening UK competition policy, consumer rights and consumer law enforcement.
• The results of the Policy Reform Consultation are likely to require significant legislative reform, including granting new enforcement powers to the Competition and Markets Authority ("CMA"), and greater rights and routes of redress to consumers.

Digital Markets Consultation

• The Digital Markets Consultation is the latest step towards establishing a new regulatory regime in the UK for digital markets.
• The UK Government's reforms are intended to introduce an enforceable code of conduct for firms designated as holding Strategic Market Status ("SMS"). Firms with SMS would additionally be subject to a bespoke merger control regime, including a requirement to report all mergers to the CMA, with the largest transactions being subject to mandatory merger control review.

The Policy Reform Consultation 

The Policy Reform Consultation is categorised into three broad areas: competition policy, consumer rights, and consumer law enforcement, which are summarised below.  

Proposed reforms to UK competition policy

The Government is consulting on a five-point plan to update the UK's competition law regime, which includes: 

• A more effective market inquiries (which comprises market studies and market investigations) process, including changes enabling the CMA to impose interim measures, greater flexibility to define the scope of market inquiries, and additional powers for the design and monitoring of remedies.
• A "rebalanced" merger control regime, including revised turnover thresholds, a new jurisdictional threshold to better address emerging threats to competition (such as so-called ‘killer acquisitions’).
• Reforms to the CMA's panel to deliver faster and more consistent decisions in merger and market inquiry cases.
• Incentivising businesses to report anticompetitive conduct, providing the CMA with stronger interim measures powers, greater flexibility in its decision making and more effective procedures for concluding investigations. The UK Government is also welcoming views on whether there should be alternative standards of review or changes to the Competition Appeal Tribunal's procedures in the context of appeals.
• Stronger powers for the CMA to obtain information and sanction companies that refuse to cooperate, as well as powers facilitating cooperation and collaboration between UK and international competition authorities.

Proposed reforms to UK consumer rights 

The Government has identified two main developments which provide an opportunity for consumer rights to be updated: the rise of online shopping (accelerated by the COVID-19 pandemic) and the increase in subscription contracts. 

In connection with these developments, the Government is proposing a number of updates to tackle "subscription traps", including strengthening and clarifying rules on pre-contractual information, 'nudging' consumers and making it easier for them to exit subscriptions.

In addition, the Government is consulting on measures aimed at preventing the online exploitation of consumers through strengthening rules preventing the posting of fake reviews and championing "fairness by design" principles for how online transactions are presented, as well as amendments to ensure better pre-payment protection for consumers.

Proposed reforms to consumer law enforcement

The Government is proposing a package of reforms including stronger enforcement powers for the CMA to mirror its powers in the context of competition law enforcement.  The Government is testing the case for extending these powers to other economic regulators, which would include fines of up to 10% of global turnover for traders that breach consumer protection law, and sanctions for traders that obstruct the enforcement process (e.g. failing to respond to CMA information requests).

Other measures being considered by the Government include providing support and oversight for consumers and traders to resolve more disputes independently, supporting local authority trading standards services tackling 'rogue traders', and giving businesses support and education to comply with UK consumer law.

The Policy Reform Consultation closes on 1 October 2021. The broad scope of the Consultation means that it is likely to have significant implications for the functioning of the competition regime and consumer law enforcement in the UK. However, given the number of changes that would need to be made to primary legislation, it may be several years until the new regimes come into force. 

Digital Markets Consultation

The launch of the Digital Markets Consultation follows a series of earlier policy developments by the UK Government and the CMA towards addressing the particular challenges presented by competition issues in the context of digital markets. 

In March 2019, the UK Government published the Furman Report, which considered the appropriateness of the current UK competition law regime in dealing with the emerging digital economy (see our April 2019 newsletter article).  The report made a number of policy recommendations on how the digital markets sector should be regulated by competition law.

The CMA subsequently published the final report of its market study into online platforms and digital advertising in the UK (see our July 2020 newsletter article), concluding that existing competition laws are not suitable to effectively regulate competition concerns in this area.  

In December 2020, the DMT published its advice concerning proposals for pro-competitive regulation of digital markets to drive greater competition and innovation in digital markets. The DMT's recommendations included that the UK Government establishes a Digital Markets Unit ("DMU") to oversee the new regulatory regime.  In April 2021, the DMU was established within the CMA in 'shadow form' (see our May 2021 newsletter article).

On 20 July 2021, BEIS and DCMS launched the Digital Markets Consultation, setting out their proposals for a new pro-competition regime for digital markets, including:

The criteria and mechanisms that will identify which firms fall within scope of the regime

The new regime will only be applicable to firms with designated SMS. No formal market definition is proposed for a robust assessment of market power and SMS designation. However, in the Government's view, SMS designation would be based on the DMU demonstrating that a firm has "substantial and entrenched market power in at least one activity, providing it with a strategic position" based on a combination of qualitative and quantitative evidence. 

The current proposals for SMS designation envisage a 12 month designation process, which includes a public consultation nine months after beginning the designation assessment process.  However, the Government is considering whether this period should be shortened (to, for example, nine and six months respectively).  SMS designation would then last for a period of five years and apply to the whole corporate group forming the firm. 

The objectives of the Digital Markets Unit 

The DMU's proposed statutory duty is  "to promote competition (which includes promoting competitive outcomes) in digital markets for the benefit of consumers", which is closely aligned with the statutory duty of the CMA. The Government rejected the DMT's proposal to have a broader statutory duty that potentially took into account wider policy concerns (such as data privacy and media plurality). 

The approach to a new code of conduct to promote open choices, fair trading and trust and transparency

Firms with SMS will be required to follow a code of conduct.  In this regard, BEIS is proposing to set high-level principles (as well as objectives) in legislation but, where appropriate, to give the DMU powers to develop additional legally binding requirements in relation to those principles to the extent needed. 

The DMU will have the power to issue code orders and interim code orders to address breaches of the code, which would specify the behavioural changes required of SMS firms, such as: requiring suspension, total cessation or reversing of harmful behaviour; or specifying the steps necessary to resolve a breach. 

The approach to ‘pro-competitive interventions’ that will address the root causes of "substantial and entrenched market power"

Under the Government's proposals, the DMU will have the power to impose a wide range of 'pro-competitive interventions' ("PCIs"). 

In this respect, the DMU would ultimately be able to grant similar remedies to the CMA in the context of market investigations where needed to address an "adverse effect on competition", but the DMU would have the flexibility to implement remedies in an incremental manner.  For example, by accepting voluntary, enforceable undertakings from firms designated with SMS during the course of an investigation, or by introducing remedies on a trial basis prior to implementing a final order.

The powers that the Digital Markets Unit will need to ensure the regime is effective

The Government envisages that the DMU will ensure that firms designated as having SMS comply with the regime by combining a participative approach with the use of formal powers.  Through a participative approach, the DMU would engage constructively with all affected parties, resolving issues through advice and informal engagement.

The DMU would also have more formal powers to impose financial penalties on firms with SMS for code breaches and failure to comply with code or PCI orders. The Government is also considering whether to enable the DMU to hold senior management liable for compliance with the code of conduct, or to have the power to apply to the courts for an order requiring an SMS firm and its officers to comply with a code order or a PCI.   

A distinct merger regime for firms designated as having SMS

A bespoke merger control regime is proposed for firms with SMS. These firms would be required to report all mergers and acquisitions to the CMA prior to completion. 

A new mandatory and suspensory merger control regime is also proposed for a subset of the largest transactions involving firms with SMS. The obligation to notify a transaction to the CMA for prior clearance would be based on a transaction value threshold coupled with a UK nexus test, with the possibility of a fast-track process for acquisitions that clearly do not raise competition concerns. 

A further notable change in this regard is the proposal that the standard of proof at Phase 2 will be lowered from the "balance of probabilities" to a "realistic prospect" of a substantial lessening of competition.

With thanks to Helen Chamberlain and Victoria Beswick of Ashurst for their contribution.