Digital markets, competition and consumer law – from legislation to enforcement

Fiona:

Hello, and welcome to Ashurst Legal Outlook. This episode focuses on the UK's Digital Markets, Competition and Consumers Act. My name is Fiona Garside, and I'm a senior expertise lawyer in Ashurst's Antitrust, Regulation and Foreign Investment Team in London. I'm delighted to be joined today by one of our counsel, Chris Eberhardt, and Hayden Dunnett, who's a senior associate, both of whom are based in our London office.

Chris:

Hi both.

Hayden:

Hello Fiona, hi Chris.

Fiona:

Thanks for joining us. Listeners may recall our episode on the DMMC Bill in December last year. Since then, the Bill has received Royal Assent. While the majority of the provisions are not expected to enter into force until a little later this year, there are two notable exceptions relating to sector-specific merger provisions, and both of these are already in force. The first relates to the Secretary of State's ability to scrutinise newspaper enterprise mergers where a foreign power is involved, and the second to energy network enterprise mergers. But today, we're going to give an overview of what has changed since our last episode in December and what we can expect in the coming months.

As listeners may recall, the Act as three main pillars: a new digital markets regime, reforms to competition law and reforms to consumer law, in particular consumer law enforcement. So if we start with the digital markets regime, there are a couple of areas that were still in flux when we last spoke in December. Hayden, can you update on where the Act landed on these points?

Hayden:

Sure, thanks Fiona. So as a reminder to listeners, the new digital markets regime will enable the CMA to designate firms as having strategic markets status in relation to digital activities. Once a firm is designated, the CMA can then impose bespoke conduct requirements on those firms, as well as investigating the markets in which they operate in order to understand whether there are any features that affect competition. You recall that much of the debate in Parliament had centred around the standard of review that should apply to CMA decisions, and the government had proposed that substantive decisions such as SMS designation, conduct requirements, and pro-competition intervention orders should be challengeable only on more limited judicial review grounds. But that decisions to impose penalties and the amount of the penalty will be subject to a full merits appeal. At the time of the debates, the House of Lords and opposition MPs resisted this and argued that all CMA decisions should be subject to the judicial review standard.

Ultimately, when the Bill was rushed through Parliament in the wash-up before the election, this point wasn't pressed. And so the end result is that we have two standards of review: for substantive decisions, judicial review grounds, and for penalties and the amount of penalty, a merits-based review standard.

Chris:

Thanks, Hayden. And I think that's really interesting because it's interesting to see how that plays out in practice. Now obviously, it raises the prospect that in appeal proceedings, you're going to have both penalty and substantive decisions being appealed as part of the same proceedings, but with two different standards of review, and it's going to make it really interesting to see how the courts handle those types of cases in practice. Fiona, I think the other area of focus in review has been in relation to the role of the CMA in applying its new powers, and actually in particular, in relation to checks and balances on its decision-making powers.

Fiona:

Yeah, that's right, Chris, and the CMA was very quick to its draft guidance on digital markets. The consultation was actually released on the same night the Act received Royal Assent. That consultation has just closed recently, so we're still waiting for the final guidance, but does that draft provide any clarity, Hayden?

Hayden:

It's quite a lengthy read, coming in at 187 pages. And as an overarching point, I think it's fair to say that the guidance provides very little explanation on how the CMA will exercise its quite broad ranging powers in practice, and really gives the CMA maximum flexibility in the way in which it may use its powers. In various sections of the draft guidance, the drafting does a little more than explain what powers the CMA actually has. So, for example, the CMA has given very little guidance on the exercise of its powers to regulate market conduct and in the context of imposing pro-competition intervention orders, the CMA can order firms to test and trial different remedy design options.

Chris:

Yeah, and I think that's a really good example actually of where more of a steer on when that power could be exercised would be welcome. The draft guidance provides little guidance, really, on the circumstances when the CMA may require SMS firms to test their remedies: all it says is they'll really look at whether it's proportionate and feasible so that certainly remains quite a bit of uncertainty about when that particular tool may be used.

Hayden:

And another example relates to runoff and transition periods. Throughout the Act, the CMA has the power to impose transitional and savings provisions where an obligation ceases, such as the revocation of a conduct requirement, and the draft guidance notes in that context that the CMA can specify different obligations to ensure a smooth transition for the SMS firm and market participants, including users of the relevant digital activity.

Fiona:

Practically, does that mean that a conduct requirement or a transitory provision, in respect of a conduct requirement, could actually apply after an undertaking's SMS status has been revoked?

Hayden:

Yes, that's right. For conduct requirements, the CMA has the power to make transitional or saving provisions where SMS status is revoked and the Act states that the CMA can impose these provisions in order to manage the impact upon persons who benefit from an existing obligation. And in doing so, the CMA will impose provisions in a way that it thinks is fair and reasonable. Now, when you look at the draft guidance, it doesn't really provide any further colour on how these transition processes will be managed.

Fiona:

I think another area of confusion in the draft guidance relates to the CMA's proposed approach for assessing whether firms have substantial and entrenched market power.

Chris:

Yeah, that's right. So the draft guidance differentiates between, on the one hand, substantial and entrenched market power (so the test required to designate a firm as having SMS) and on the other, the concept of dominance under competition law principles. Now what the guidance says is that the CMA will not typically seek to draw on dominance case law when assessing SMS, but then in a footnote it goes on to say that the CMA may yet rely on evidence for analysis from its Competition Act investigations in that assessment, and also then says that a number of the usual analytical tools from dominance cases (things like share of supply or profitability levels) will also be relevant.

Fiona:

So in a way, this CMA seems to be combining some of its typical Chapter 2 investigation analytical tools with the more forward-looking assessment it has to undertake in merger control investigations when it's doing these five-year forward-looking assessments.

Chris:

Yeah, and I think that's certainly a good analogy, and again, it'll be really interesting to see how this works out in practice.

I think it's also worth mentioning a few points in relation to pro-competitive interventions. So as, I think, Hayden mentioned earlier, under the new regime SMS firms can be subject to conduct requirements or the CMA can investigate whether to make a pro-competition intervention. Now we were probably expecting the CMA to explain in the draft guidance the circumstances in which it will seek to impose conduct requirements versus when it might look at undertaking a PCI, but actually, I think, the draft is again fairly light on that point.

Hayden:

Yeah, that's right, Chris. And perhaps the most biggest and unsaid distinction in the draft guidance is that through a pro-competition intervention investigation, the CMA has the power to impose structural remedies on an SMS firm, including divestments. However, for behavioural remedies, as you said, the CMA could theoretically impose a conduct requirement through its assessment framework under the Act or launch a PCI investigation in order to impose a behavioural remedy similar to a conduct requirement. So I agree that further guidance on when the CMA will prefer CRs over a PCI investigation, and vice versa, would be welcome.

I also think another example relating to the pro-competition intervention investigations is the factors that a CMA will use to assess as to whether there is an adverse effect on competition. Crucially for this process, and indeed this applies when designating a firm as having SMS status, the CMA doesn't need to define a market. Now that's not particularly an unusual approach, but it does give the CMA more flexibility in its assessment.

Fiona:

That's interesting. And does the guidance provide any further insight into how the CMA will go about assessing whether a factor is preventing or distorting competition?

Hayden:

Yes. On that, there's another interesting point to note that you'd ordinarily assume the assessment is made by reference to a counterfactual, such as by comparing the current state of competition to a world without those factors. However, in a footnote in the draft guidance, the CMA explains that it will compare the prevailing circumstances with an idealised scenario of perfect competition. While the CMA is required to act rationally in its assessment, there is potential for a high degree of subjectivity to make its way into the assessment.

And then a final theme, just to pick up on the digital part of the Act, which came up in the debates, has been the extent to which the new regime will allow non-SMS firms to be involved in the process. The Act itself outlines the basics, but the accompanying guidance expands on this by detailing the mechanisms through which non-SMS firms can participate. And I think this marks a significant step in ensuring broader industry inputs and oversight, which many think will enhance the transparency and effectiveness of the regulatory framework. For example, before exercising a number of its powers, the CMA must seek input from a wide range of stakeholders, and the draft guidance provides some insight on that. In particular, third parties will have the opportunity to comment on proposed conduct requirements, which the CMA must publish on its website.

Fiona:

Thanks, Hayden. So if we move on from digital to consumer law, where we've also seen substantive changes to the Act since December. In our last episode, we focused more on the significant new powers that the CMA will have to enforce consumer law, in particular the ability to impose fines without going to court, and we're expecting further guidance from the CMA on how it proposes to use these new powers and how consumer law investigations are likely to work. So watch out for future updates on that.

Chris:

Yeah, that's right, Fiona. But also I think it's worth saying that since December, there have been updates on some of the more substantive changes to consumer law in the UK that have been introduced by the Act. So I was going to touch on a few of those.

We've known for a while that the Act would introduce substantial new protections and requirements on traders in relation to subscription contracts. Essentially, changes to seek to ensure that customers are fully aware of what they're signing up for at the outset, and also are provided with sufficiently timely and frequent reminders to enable them to terminate that contract if they choose to do so. What's changed in the last few months is that given the complexity of the regime and the new rules, the government has confirmed that certainly its current intention is that those new rules will not come into force before spring 2026 at the earliest, and that essentially is to give businesses time to adapt to the changes.

In terms of other changes, the Act now does include new banned practices in relation to fake reviews and also new protections in relation to drip pricing. These were mooted back in December, but it wasn't clear whether they would make the cut, and they now are part of the final Act. In relation to fake reviews, I think a key point to note is that as well as tackling the submission or commissioning of a fake review, the new rules also cover publishing or providing access to reviews without taking reasonable and proportionate steps to ensure that they are accurate and not misleading. What that means in practice is that traders, businesses, platforms which host reviews on their sites will all need to ensure that they have taken reasonable and proportionate steps to ensure those reviews are genuine. We're expecting guidance on what is meant by reasonable and proportionate steps, we haven't seen that yet, and it's also helpful that the previous government at least had said that it's not the intention to punish traders for a single fake review. But this really is an area where clarity will be needed to ensure that businesses can put in place appropriate mechanisms and procedures to ensure that they don't fall foul of the new rules and potentially find themselves facing enforcement action.

And then the other area which also made the final Act is drip pricing. So for those who are not familiar with drip pricing or drip fees, this essentially refers to where a price the customer has shown in the early part of a journey does not reflect the price it will actually pay at the end of the buying process once mandatory charges, fees, so on and so forth, have been added. So the Act now expressly requires traders to make clear either the total price or the products at the outset (so including upfront, any fees, taxes, or other charges) or if that can't be calculated in advance, essentially making clear how that total price will be calculated. So for example, if a delivery cost will vary depending on the customer's location, it may not be possible to include it within the total cost at the outset but it'll still be necessary to make it clear how this will be calculated and how it will affect the price so that customers are fully informed.

The final change I wanted to mention that's consumer law space, and one which I think certainly has the potential to be quite significant going forward, is that the Act gives the government a delegated power to amend the list of banned practices in the UK law through secondary legislation. What this means is that the government will really relatively easily be able to expand the scope of consumer law protections in the UK with those new protections then being subject to direct enforcement by the CMA and therefore potentially significant fines. In terms of what we might expect here, well, during the parliamentary process, there were a number of amendments proposed, ultimately rejected at that stage, but which may provide an indication of the types of protections that future governments might consider. And I think a particular area to watch is in relation to greenwashing. As listeners may know, the EU has recently passed specific new protections under its consumer law legislation related to greenwashing practices and also when an amendment have been posed in relation to the Bill, the Labour Party, then in opposition, have been fairly supportive. So this may well be an area that we'll see development fairly quickly.

Fiona:

Thanks, Chris. While we wait for the guidance from the CMA on how they plan to use their new consumer law enforcement powers, we have, as we've already mentioned, the draft digital markets guidance to grapple with and we just wanted to highlight a few points in relation to penalties there. There's a raft of obligations under the Act that can lead to penalties. In the digital market space in particular, penalties can be imposed for breaching conduct requirements, enforcement orders, commitments, pro-competition orders, and final offer orders, and those fines can be up to 10% of global turnover or a daily amount of up to 5% of the total daily turnover.

Hayden:

Yes, that's right, Fiona. I think it's also worth mentioning that there is a reasonable excuse defence. The draft guidance doesn't give much of a steer on when this will apply, however, it suggests that genuinely unforeseeable or unusual events will be factors that the CMA considers in deciding whether there is a reasonable excuse for a breach or not. However, the draft guidance does make clear that an excuse will not be reasonable if the CMA doesn't think that the SMS firm has made reasonable efforts to comply with the requirements.

Fiona:

Thanks, Hayden. And what does the guidance say about how the CMA will calculate penalties for substantive breaches?

Hayden:

The draft guidance sets out a very similar stepped approach to what's currently used in relation to fines for infringements under the Competition Act. So the first step the CMA will take is to come up with a starting number, which would be based on the undertakings UK turnover, to which the CMA will apply a seriousness factor of up to 30% in order to reflect the seriousness of the infringement. From there, the CMA will consider if an adjustment is required for deterrence, and then also consider any aggravating and mitigating factors before seeing if the penalty is proportionate and is not more than the statutory maximums you mentioned, so 10% of global turnover for a fixed amount or to 5% of turnover for a daily amount.

Fiona:

And what's also clear from the draft guidance is that the CMA is heavily focused on deterrence and the role that penalties play in ensuring compliance, so the digital guidance also refers to effective deterrence requiring a penalty to materially exceed the potential gains from a failure to comply, so not just neutralising those potential gains.

Chris:

Yeah, exactly, that's right. And actually deterrence, I think, is a key aspect of what the guidance discusses around penalties. In particular in relation to SMS firms, it notes that really by reason of their status, those firms are going to be large: the test is that they have at least £25 billion revenue worldwide or at least £1 billion in UK revenue. And the draft guidance expressly refers to this fact, i.e. the fact that these firms are by definition large, as a reason why significant penalties will be required to achieve a deterrent effect, which I think certainly may well provide an indication of the CMA's thinking around penalties.

Fiona:

So do we think we could see the CMA issuing penalties in the billions?

Chris:

I mean, yeah, it's certainly theoretically possible. We haven't historically seen that level of penalty in the UK, but we certainly have seen the Commission impose penalties, including against the big tech companies in the billions of euros.

Hayden:

I think it's also important to note here that, under the Act, the CMA can impose both a fixed and daily amount of penalty together, and the draft guidance suggests that daily penalties will apply to breaches that are still ongoing, which are aimed to incentivise timely compliance. As a result, we may therefore see SMS firms hit with both a fixed penalty and also a daily penalty until they comply with the relevant requirements.

Fiona:

And then outside the digital space, the CMA's also currently consulting on a revised statement of policy setting out its approach for calculating the appropriate amount of administrative penalties. Chris, what does that guidance cover?

Chris:

Yes, I mean as we discussed in our previous podcast, the Act has significantly expanded the CMA's ability to impose penalties for failures to comply with investigative steps. Now, in particular, it provides for increased fines for a failure to comply with steps such as information requests, new powers to find companies for breaching commitments or direct directions in antitrust cases, and also powers to impose fines for breaches of orders and undertakings in markets or merger cases. Under its existing guidance, the CMA already adopts a different approach to assessing administrative penalties from that which it applies in relation to substantive competition law infringements. So, in particular, rather than applying the stepped approach, such as the one that, I think, Hayden mentioned earlier that they're going to apply in relation to digital markets penalties, in relation to admin penalties, the CMA applies what's termed an "in the round" assessment. What this means is that the CMA is able to assess the penalty in the circumstances of the case and the relevant undertaking, applying really a number of different relevant factors, including things like seriousness, duration, the size of the company, the impact on the CMA's investigations, and so on. In practice, this obviously provides the CMA with much greater flexibility, but also means the process is much less certain for companies.

Fiona:

And the CMA is proposing that this "in the round" approach will also be applied in relation to breaches of undertakings and orders?

Chris:

Yes, and I think that raises an interesting question. So although the maximum level of fine in relation to breaches of undertakings and orders is lower than would be the case for substantive Competition Act infringements, in reality I think many commentators would consider breaches of those types of provisions (so undertakings, and in particular actually, orders, so final orders imposed following market investigations) really to be very similar to substantive infringements.

Hayden:

Yeah, I agree with that, Chris. These types of breaches are very similar to substantive infringements of the Competition Act, and it's therefore, quite surprising that they're being grouped together with more administrative failures such as a failure to produce documents.

Chris:

Yeah, exactly. And I think there may well be concern that penalties for these types of breaches will be assessed on the basis of the more flexible, less certain "in the round" approach, rather than applying a more rigorous type of assessment such as we see in relation to the Competition Act.

Fiona:

And on the topic of final orders imposed at the end of a market investigation, does the guidance give us any more comfort about the potential retrospective application of the new fining powers?

Hayden:

That's a good question, Fiona. The short answer is "no". And, just to remind listeners, there's been a concern that the CMA will be able to use its new powers to impose remedies for breaches of existing orders, such as those final orders made during a prior market investigation. And we do understand that the government has provided some reassurance to stakeholders that it's not the intention for this Act to be retrospective in effect, but the draft statement of policy is silent on this point. And while it is not directly a penalties point, and it's therefore not noted in this document, but it was an opportunity for the CMA to provide much needed certainty on this issue and they haven't done so in this draft.

Fiona:

Thanks, Hayden. So just before we wrap up, we've touched on what's been happening in the last couple of months, but what are we looking out for in the next few months as the CMA prepares for implementation of the Act?

Chris:

Yeah, so I think there are a number of things really that we're keeping a close eye out for. I think the first is a draft commencement order, so this will be the instrument, essentially, which will specify when the new provisions and powers in the Act will come into force. I think this is likely been delayed as a result of the election and the change of government. I think currently at least, the expectation remains that we'll probably still be looking at the Act commencing at a date in the autumn but I think given that time is obviously ticking, clarity on timing would probably be welcome sooner rather than later.

And then as they prepare for that commencement date, the CMA will also be continuing to publish and consult on drafts of the various guidance it would need to issue relation to all of its new powers under the Act. We've seen some of these already, and we've discussed some of them, but there's definitely more to come. I think in particular in relation to the new consumer law direct enforcement regime, and also in relation to merger control updates that we may well see guidance published fairly soon. But obviously, we'll be keeping a close eye on this over the coming months and we'll bring further updates as we have them.

Fiona:

Thanks, Chris. There's going to be a lot to keep an eye on in the coming months. We're still in the process of finalising our programme for this series of podcast episodes, so we do welcome any questions or suggestions from listeners. Please get in touch if there are any topics which you would like us to cover. And in the meantime, to ensure you don't miss out on any future episodes, subscribe to Ashurst Legal Outlook now on Apple Podcasts, Spotify, or your favourite podcast platform. And while you're there, please feel free to keep the conversation going and leave us a rating or a review. Until next time, thanks for listening, and goodbye for now.