The UK’s new digital regime regulating firms with “strategic market status”: who is within scope?

This is the second in a series of articles analysing specific features of the digital and competition reforms contained in the recently published Digital Markets, Competition and Consumers Bill (the Bill). It follows our initial ‘first impressions’ overview of the reforms introduced by the Bill, available here.

This article looks more closely at who will be caught by the proposed new digital regulatory regime, and how the designation process will work.  In short, the new regime for firms with ‘strategic market status’ is only expected to apply to a small number of businesses, which meet certain conditions regarding their position and market power in a digital activity.  They can only be regulated following a process of designation by the UK Competition and Markets Authority (CMA).  But the Bill is careful to future proof the regime and ensure it is as flexible as possible, meaning there is much discretion left to the CMA in terms of scope and procedure. This contrasts with the approach taken to digital regulation in the EU Digital Markets Act (DMA) which we highlight in this piece.

The Designation Test

The Bill introduces a new regulatory regime for the digital sector which will apply to firms designated as having ‘strategic market status’ (SMS).  The application of the new regime therefore turns on this key designation, but there are several other conditions that also need to be satisfied for the CMA to be able to make the designation.  Specifically, the regime applies to firms (i) that have SMS; (ii) in respect of a digital activity; (iii) which has a UK nexus; and (iv) provided certain turnover thresholds are met.  The Government has always been clear that only ‘a small number of firms’ will be caught.  Given the flexibility and discretion which the Bill builds into the test, we will have to wait for CMA guidance and practice to have a clearer idea of how this bears out in practice. 

Strategic Market Status

An undertaking will have SMS where is has, in respect of a digital activity:

• Substantial and entrenched market power, and
• A position of strategic significance

“Substantial and entrenched market power” is not specifically defined in the Bill. Its assessment will rely on a CMA investigation, which under the Bill will be forward-looking over a period of at least 5 years.  There is however limited other detail in the Bill regarding this limb.  We will likely see guidance from the CMA on its proposed approach in due course and we expect it is likely to follow existing precedents for market definition and market power assessment under competition law.

A position of strategic significance will be held where:

• The undertaking has achieved a position of significant size or scale in respect of the digital activity;
• A significant number of other undertakings use the digital activity as carried out by the undertaking in carrying on their business;
• The undertaking’s position in respect of the digital activity would allow it to extend its market power to a range of other activities; and/or
• The undertaking’s position in respect of the digital activity allows it to determine or substantially influence the ways in which other undertakings conduct themselves, in respect of the digital activity or otherwise.

The Government’s response in May 2022 had promised a list of exhaustive legislative criteria for the determination of a ‘strategic position’, which has now been refined to be a position of ‘strategic significance’. The Bill does this with a mix of quantitative and qualitative conditions, but does leave considerable scope for the CMA to apply its discretion, particularly given that the test can be satisfied by one or more of the above conditions being met. CMA guidance is likely to provide further clarity in due course.  But it is clear that, consistent with the May 2022 response, a priority for the Government is to ensure the test is future-proof and can be applied dynamically and flexibly by the CMA.  This marks a sharp contrast to the generally applicable quantitative tests under the EU DMA.

Digital Activities

“Digital activities” are broadly defined and include:

1. The provision of a service by means of the internet;
2. The provision of one or more pieces of digital content;
3. Any other activity carried out for the purposes of an activity within a. or b. above.

This potentially includes a large number of activities, including ancillary support activities for internet services or content sharing.  The Bill also provides that the CMA can treat several activities as a single digital activity by a single undertaking where they have substantially the same or similar purposes or they are combined for a specific purpose.  This gives the CMA legislative discretion to address artificial partitioning of activities to evade regulation.  Here again the Bill takes a very different approach to the EU DMA, which regulates a specified list of activities, such as search engines and app stores, which can be periodically updated. 

The Bill has opted not to look at ‘markets’ but to focus on specific activities, rather than a firm’s overall activities (which can be disparate).  It is also not limited to ‘digital platform activities’, as was initially suggested but regarded as too narrow. 

UK Nexus

The Government has been keen to ensure the new digital regulatory framework has sufficient UK nexus to limit the role of the UK as a global policeman (particularly given the risk of multiple conflicting regimes at a global level).  Accordingly, the conditions for designation require the relevant digital activity to be linked to the UK, which will be the case where:

• The digital activity has a significant number of UK users;
• The undertaking that carries out the digital activity carries on business in the UK in relation to that activity; or
• The digital activity or the way in which the undertaking carries it on is likely to have an immediate, substantial and foreseeable effect on trade in the UK.

While this does place some limit on the scope of the regime, as digital markets are often considered to be global it is possible that the third limb gives the CMA significant scope for discretion in deciding who may or may not be within the regime’s scope.

Turnover Thresholds

Finally, the Bill introduces minimum revenue thresholds below which firms will be outside of scope for designation.  This was intended to provide greater certainty to the regime without sacrificing flexibility – since the CMA retains discretion to decide how to prioritise making designations (see further below).  An SMS undertaking can only be designated where its annual turnover exceeds either:

• £25 billion globally, or
• £1 billion in the UK.

Assessment of whether this threshold is met takes into account all turnover generated by the undertaking, not just turnover related to the digital activity in question, and turnover at group level. Nevertheless, this requirement is likely to narrow the scope of the SMS regime.

The designation process

SMS Investigations

In order to designate an undertaking as having SMS, the CMA is required to carry out an SMS investigation. The CMA may initiate one where it has reasonable grounds to consider an undertaking may have SMS. It will have 9 months from the day it gives notice to the relevant undertaking to complete its investigation. Should the CMA fail to notify its decision within this time period, the CMA is deemed to have decided not to designate the undertaking as having SMS or (in the case of an already designated undertaking) deemed to have given a revocation notice. This statutory deadline can be extended by three months in exceptional circumstances.

Much of this process will be public:

• The CMA must give notice to the undertaking under investigation, including a description of the digital activities to which the investigation relates. The CMA must also publish a statement summarising the notice, and provide copies of the notice itself to other UK Regulators (the Financial Conduct Authority, Ofcom, Information Commissioner (which together with the CMA form the Digital Regulation Cooperation Forum), as well as the Bank of England and Prudential Regulation Authority).
• The CMA is required to consult publicly on its proposed SMS decision.
• Where the CMA gives notice of the outcome of its investigation to the investigated undertaking, it must publish a statement summarising the contents of the ‘decision notice’ as soon as reasonably practicable.

The regime is designed to be able to flex to reflect changes in market dynamics where appropriate. For this reason:

• The fact that the CMA has previously carried out an SMS investigation and not designated an undertaking does not prevent it from starting another SMS investigation related to the same undertaking and digital activity.  So the regime will in theory be able to flex to reflect changes in market dynamics where appropriate.
• A designation decision applies for 5 years unless it is revoked. If the CMA wishes to designate the same undertaking in respect of the same digital activity after the initial 5 year period is up, it must do so following another SMS investigation.
• The CMA is able to revoke SMS decisions at any time should it consider it appropriate to do so.

Prioritisation

The CMA is able to decide how it will prioritise undertakings for SMS assessment.  Guidance on the CMA’s approach to this prioritisation is expected in due course – guidance was the Government’s way of addressing concerns about a lack of clarity in this process and a move away from legislating the designation process.  It is likely the CMA will at first focus on sectors and digital activities which it has already examined through competition investigations and market studies.

Initial indications are that only a small number of undertakings are expected to meet the designation criteria – this was certainly the Government’s explicit intention and is the outcome of its impact assessment of the Bill. However, except for the turnover thresholds, much of the analysis for SMS designation includes scope for the CMA to act with discretion. The new regime is therefore likely to be flexible and adaptable in line with market changes, consistent with the Government’s wish for an ‘efficient and agile’ regime.

Challenges to the CMA’s decision-making under the Bill are subject to judicial review standard.  Therefore attempts to overturn designation decisions may be met with significant judicial deference to the CMA’s expertise, and turn out to be difficult in practice. 

Conclusions

The Bill provides some clarity on the scope of the new SMS regime, particularly as regards the safe harbour turnover thresholds below which firms are out of scope.  But there are multiple areas which will require further, detailed guidance on the CMA’s interpretation and procedures. It also leaves the CMA much discretion in this regard. 

Once an undertaking is designated as having strategic market status or SMS, the CMA has the power to impose conduct requirements on the SMS undertaking, directing how they can behave on the market. The CMA can also impose pro-competitive interventions or “PCIs” where it considers appropriate.  We will consider conduct requirements and PCIs in more detail in the next LawNow in this series.