Protecting prosperity and innovation in the UK’s digital economy

The Digital Markets, Competition and Consumers Bill (the Bill) is before Parliament. This Bill would grant extensive powers to a new Digital Markets Unit (DMU), to be formally constituted from a current informal grouping within the UK Competition and Markets Authority (CMA). The aim of the law is to update the post-1998 UK competition law settlement to address supposed problems in technology markets.

These problems include previously competitive markets becoming dominated by a small number of big players, who can tip the market into a winner-takes-all scenario. This enables the dominant businesses to utilise their customers, data, and technology in multiple adjacent markets to boost their own products by promoting them to users above products made by rivals. This phenomenon has agitated antitrust regulators around the world over the last decade, and this Bill is the British attempt to wrestle with it. 

However, many of the proposals in this Bill are heavy-handed, and provide unprecedented regulatory powers to the CMA, with reduced accountability. If unamended, the Bill will implement an unpredictable new regulatory regime for the digital economy with numerous unintended consequences, and it is unlikely to solve the problems it claims to fix. 

It will be essential to get the details right in any reform. This paper explores the concerns behind the desire for legislation and compares this with the detailed legislative proposals. While the paper appreciates the view of the Bill that aspects of digital markets differentiate them, it also raises concerns with detailed aspects of the Bill which are unlikely to support high-quality regulatory outcomes.

The principal features of the Bill¹ can be summarised briefly:

1. Designation. The DMU would gain the power to designate companies as having strategic market status, and subject them to new regulations.
2. Broad power to regulate. Provided that the CMA can show “substantial and entrenched market power” and a “position of strategic significance” then deep regulation can happen across the entire corporate group.
3. Conduct regulation and intervention powers. Two core regulatory avenues then arise: (1) a Code of Conduct and (2) Pro-Competitive Interventions. Both allow the DMU to order significant changes to business conduct, including product design, without a substantial evidence base for doing so. 
4. Powerful procedural changes. There are also very extensive procedural powers including: an ability to delegate work into designated companies; to require a GDPR-like Reporting Officer; and investigation of perceived potential breaches without warrants.
5. Regarding mergers, the Bill requires all acquisitions by designated companies, without the finality of a reasonable time period for challenge, increasing costs and frictions to investing in the UK. 

While there are legitimate concerns about the application of orthodox competition law instruments to online markets, the above aspects raise concerns about overreach which should be addressed in the Parliamentary process.

Concerns with the Bill

Chief among these is a major concern about the adoption of a discretionary and potentially arbitrary approach to regulation by the CMA, moving away from the evidence-based system we have today. The Bill removes the evidence requirements usually imposed on the regulator for acting, thereby reducing its predictability and transparency, instead of modernising evidence assessment to take account of the uniqueness of digital markets. The paper assesses stronger and weaker aspects of the Bill and recommends beneficial changes, with particular attention to the underlying evidence base and the expert recommendations which gave rise to it.

The paper recommends the following changes to the Bill:

1. Turning designation criteria into binding Terms of Reference for the DMU’s investigations. The current proposal does not track intervention back to the underlying concern giving rise to designation. The designation criteria should instead track the relevant issues, and not the company boundary, in transparent Terms of Reference which govern investigations. 
2. Introducing a requirement for a transparent evidence basis for Codes of Conduct and Pro-Competitive Interventions (PCIs). The Bill proposes a wide range of Conduct regulation and PCIs on a loose objectives-based approach. The powers should instead be restricted to the relevant issues from the Terms of Reference to prevent mission creep. A consistently framed evidence base is important as it can be used to define things like changes to orders and compliance with them, by tracking back to the underlying Terms of Reference.
3. Targeting the costly reporting requirements in the mergers regime. Regarding mergers, there is a serious risk of the system being overwhelmed by thousands of notifications. This should instead be targeted on the concerns driving designation. There are also serious due process concerns and a need to trim notifications to the power that can be used to address them.
   
   There is a significant underlying question: if wishing to see growth via investment in small companies, is there not a critical role for larger ones buying up smaller ones, in those scenarios where competition concerns are absent? Many technology companies lack intellectual property protections, so merger activity is critical both to investment and to scaling up. 
   
   The proposed very extensive reporting requirement will discourage investment precisely by those most able to make it. This contradicts important policy aims relating to innovative company formation and impedes the spread of a Silicon Valley Sand Hill Road startup culture to the UK – a major loss, apparently based on unscientific suspicion of large companies, since there is no targeted expression of concern. 
4. Rowing back on the proposed enforcement overreaches. There are serious overreach issues in the current proposals. These include powers of entry without a warrant, and powers to fine individuals. There are new powers to order trials even outside investigations. The DMU would be able to require the creation of evidence even absent an open investigation. Combined with the conceptual expansion of the regime, these process concerns will remove any meaningful checks and balances unless altered.
   
   The Bill expands regulatory power on a market-wide regulation model, increases the regulator’s punitive abilities, while reducing due process at the same time. This cherry picks between regulatory rulemaking and adjudicationand it will lead to dangerous conceptual confusion.
5. Due process. There are concerns with finality and with the overreliance on judicial review, which contradicts the relevant expert recommendation which emphasised speedy resolution rather than revisiting questions. Thus, this paper recommends tying back investigations to the underlying concerns to encourage promptly getting it right the first time. This helps to prevent reopening investigations into companies without proper evidence, which would be a recipe for permanent challenges, delay, and unclarity.
   
   To ensure proper access to justice for investigated companies, the paper recommends using a hybrid appeal standard, rather than judicial review. This will allow for the proper scrutiny of the regulator’s decisions. It comports to the recommendations of experts like Jason Furman. Fundamentally, the DMU has nothing to fear from appeal if its work is of a high standard, especially as it would still retain significant policy discretions on this hybrid approach. 

Unless Parliament speaks up now, its voice will be lost to technocratic discretions. While that would be appropriate if the Bill were to apply an objective technical evidence base, such as market power, there is instead an attempt to apply broad multi-variate aims which are political in character. This should be rejected in favour of attention to true areas of technical concern by comportment to the recommendations of the pertinent expert reports, notably the Furman Review. These are technical, rather than political, in nature – as should be any new law.

This article was co-authored by Stephen Dnes & Fred de Fossard

1. All references to the Bill refer to the 12 July Public Bill Committee version – Bill 350 2022-23 (as amended in Public Bill Committee). ↩︎