UK Digital Markets, Competition and Consumers Bill: One step closer to becoming law

On 21 November 2023, the Digital Markets, Competition and Consumers Bill passed its third reading in the House of Commons.  Consideration of the Bill has now moved to the House of Lords, which held its second debate on the Bill on 5 December 2023 before the Lords' Committee stage scheduled for late January 2024.  

In our second update on the Bill, we provide an overview of the key areas of debate and the most significant amendments made since the Bill was introduced in April 2023 (see our April 2023 update and December 2023 podcast episode).

On 11 January 2024, in response to a request from Ministers, the CMA published an overview of its provisional approach to implementing the new Digital Markets regime, explaining how it will carry out its Digital Markets functions, including: its operational readiness, how it will engage with potential SMS firms and other stakeholders, how it will be held to account, and its indicative timing for the implementation of the new regime.

Key takeaways

• The key reforms set out in the Bill are largely unchanged, with extensive reforms proposed across digital markets, competition and consumer law.
• The CMA's new digital powers and, in particular, the standard of review for decisions taken by the CMA have been the most hotly debated topics.
• In recent amendments, the government has introduced additional checks and balances on the CMA's new digital market powers, including: clarification of when conditions can be imposed on designated firms, limitation on the powers that the CMA board can delegate, and the introduction of merits-based appeals for penalties imposed under the regime.
• The debate continues in relation to proposals to add additional unfair practices to those that currently exist under UK consumer law.
• Additional amendments have been included in relation to issues that have arisen since the Bill was drafted, such as the re-introduction of damages-based agreements for opt-out collective actions, greater flexibility to make a market investigation reference following a market study, clarifications that the CMA's information gathering powers are extra-territorial in nature, together with a bespoke CMA information gathering power in the road fuel sector.
• The exact timing will invariably depend on the Lords' views on the Bill and whether amendments are required; however, the Bill is expected to pass through Parliament and receive Royal Assent in Spring 2024. The CMA has indicated that it currently expects the digital markets regime to commence in October 2024, with the first SMS designations and conduct requirements in place from July 2025.

Background

The DMCC Bill has three main parts:

• Digital Markets - The Bill will give the CMA the power to impose tailored conduct requirements on firms that are found to have substantial and entrenched market powers in a digital activity (Strategic Market Status or SMS), with breaches of those conditions potentially resulting in fines of up to 10% of a SMS firm's global turnover. The CMA will also have the power to make pro-competition intervention orders;
• Consumer Law - The CMA will be given the power to directly enforce consumer protection laws through administrative enforcement in a manner similar to its Competition Act powers. The CMA will also be able to fine companies up to 10% of global turnover for consumer law breaches, as well as to award compensation to consumers; and
• Competition Law - A number of amendments are proposed to the current Competition Act and merger control regimes, including revised merger control thresholds, additional Competition Act investigatory powers (including powers to obtain information from non-UK companies and when carrying out raids of domestic premises) and greater flexibility in undertaking, and enforcing the outcomes of, market investigations.

For a detailed overview of the Bill as introduced, please see our April 2023 update.  This article considers the key debates and amendments made to the Bill since its introduction in the House of Commons earlier this year.

Key changes to the CMA's digital markets powers 

The Bill will give the CMA significant power to regulate the digital activities of tech companies and impose very significant fines for non-compliance.  However, concerns have been expressed that the original proposals would give the CMA too much discretion and that there were insufficient checks and balances on its powers. 

To alleviate these concerns, the Bill has been amended to include a number of additional checks and balances, including:

• Merits review for penalty decisions: a significant amendment has been made to allow companies to appeal the imposition (or amount) of any fines on the merits. Originally, such decisions were subject only to judicial review, requiring companies to establish an error of law, irrationality or procedural unfairness.
• Judicial review only for substantive decisions: there was significant debate in the Commons as to whether companies should be able to challenge substantive decisions on their merits. The government has decided not to amend the Bill and therefore substantive decisions will still only challengeable by way of judicial review.
• The CMA board will be the key decision maker: amendments have been introduced to prevent the CMA board delegating its decision making functions in respect of a number of additional matters. The CMA board will be the key decision maker in relation to the operation of the digital regime and is now responsible for all decisions relating to SMS designations, imposing or revoking conditions, making a pro-competition intervention order and adopting a final-offer mechanism. The board is also responsible for making enforcement orders and imposing penalties.
• Approval of guidelines: The Secretary of State will now be required to approve the CMA's guidelines on the assessment of SMS.
• Collective bargaining as part of the final offer mechanism: the Bill has been amended to allow the CMA to invite third parties to make joint submissions in the context of the final-offer mechanism process. The CMA can implement the final offer mechanism where: an SMS firm and another company fail to agree fair and reasonable terms, the failure is a breach of a CMA enforcement order, and the CMA cannot satisfactorily address the breach using its other functions. The government has indicated that collective bargaining may help to address power imbalances that third parties, especially smaller organisations may experience when negotiating payment terms and conditions. Where competitors prepare a joint submission under a the final offer-mechanism, their interactions may be caught by the Chapter 1 prohibition of the Competition Act 1998 if their submission involves the discussion of competitively sensitive information. Third parties will need to aware of this risk when preparing such submissions and uncertainty on this issue might make third parties less likely, or willing, to engage in a collective process.
• Enhancing the threshold for imposing conduct requirement on SMS firms – conduct requirements must be proportionate to achieving their objectives. The CMA is also required to consider the direct and indirect benefits that will likely result from the conduct requirements as part of its assessment process.
• Confirming that the CMA is required to provide reasons for imposing a conduct requirement, including why it is proportionate and the likely benefits arising from the requirement. This provides companies with more transparency, and potentially further insight in the decision making process which may assist companies seeking to challenge CMA decisions.
• Clarifying the countervailing benefits exemption by making it clear that the benefits to be assessed are only those that cannot be realised without the conduct that infringes a conduct requirement.

What can we expect from the Lords?

It is unlikely that the key provisions of the Bill will be amended significantly.  In particular, it is notable that the Chair of the House of Lords Communications and Digital Committee has previously indicated broad support for the Bill.

However, it is anticipated that the Lords will focus on the issues that have already considered in the House of Commons: most notably, the standard of review on appeal and whether designated undertakings can challenge SMS designation decisions or decisions to impose (potentially onerous) conduct requirements on the merits.  During the second reading in the House of Lords, concern was expressed that the amendments passed by the Commons had "watered down" the Bill. This area is expected to be the subject of extensive scrutiny during the Committee stage.

The Lords may also seek to clarify the interaction between the collective submission process as part of the Final-Offer Mechanism and the Chapter 1 prohibition in the Competition Act 1998 to ensure that the collective submission process is capable of being used effectively by third parties.

What has the CMA said?

Driven in part by concerns expressed by both Houses of Parliament about how the CMA would implement the new regime and its capability and readiness to do so, Ministers asked the CMA on 4 January 2024 to provide a roadmap setting out its plans and proposed timelines.

On 11 January 2024, the CMA published an overview of its provisional approach. Key points to note include:

• Subject to the Parliamentary process, the CMA expects to publish draft guidance around the time of Royal Assent, in preparation for the regime to commence in around October 2024. The CMA anticipates SMS investigations commencing shortly thereafter, with the first SMS designations and conduct requirements being in place from July 2025. The CMA expects to initiate 3 to 4 SMS investigations within the first year.
• The Digital Markets Unit currently has around 60 people, with another 60 working in the Data, Technology and Analytics unit. The CMA expects to have around 200 people working in its digital markets functions by commencement in October 2024.
• As part of its aim to ensure transparency and engagement with a wide range of stakeholders, the CMA plans to establish two representative panels, one for consumers and civil society and one for businesses and investors.

The CMA has also outlined four principles which it expects to apply when setting conduct requirements:

• CR Principle 1 – the CMA will identify the outcome it intends the conduct requirement to achieve, providing the SMS firm with a clear outcome but allowing the firm to determine for itself how to achieve that outcome.
• CR Principle 2 – if an outcome focused conduct requirement is not appropriate, the CMA will impose requirements specifying the actions that should be taken.
• CR Principle 3 – action focused requirements will generally set higher-level, less detailed, requirements, whilst allowing the firms greater flexibility in determining the specific steps needed to comply.
• CR Principle 4 – where necessary, the CMA will impose more detailed requirements.

Key changes to the UK consumer law regime

As outlined in our April 2023 update, the Bill proposes sweeping changes to consumer law enforcement in the UK, in particular by giving the CMA the powers to directly enforce consumer law and to issue fines of up to 10% of worldwide turnover, as well as potentially awarding compensation to consumers.  Other consumer law enforcers will also be able to seek the same penalties by applying to the courts. 

As these enforcement changes have broad cross-party support, much of the debate in the House of Commons centred around whether the government should be taking the opportunity to supplement substantive consumer law protections in the Bill.  In particular, MPs proposed amendments reflecting calls from consumer groups for new practices to be added to the list of unfair trading practices in the Bill, which restates the existing law on unfair commercial practices.  

There has been extensive debate about whether new practices should be added in relation to fake reviews, misleading green claims, drip pricing and additional protections against the sale of fake or counterfeit products online. 

Although these proposals have not been included in the Bill at this stage, it is expected that these issues will be debated further in the House of Lords.  A number of speeches during the second reading in the House of Lords focused on proposals to supplement the substantive consumer law changes under the Bill. At the time of writing, several amendments have been put forward for consideration, including in relation to drip pricing and greenwashing.  

The government is also separately consulting on whether legislative changes may be required in respect of a number of these issues (in particular fake reviews, drip pricing and online product safety) so it is likely that the government may look to make use of the new power under the Bill to amend the list of unfair practices using secondary legislation, even if new laws are not introduced in the Bill itself. 

Another area to keep an eye on is a proposal to extend the "opt-out" collective action regime in the Competition Appeal Tribunal (CAT) to include claims based on consumer protection law.  An amendment was put forward during the Commons debate, but not accepted.  However, the issue has been raised again during the second reading in the House of Lords and is likely to be reconsidered during the Lords' Committee stage. 

Key changes to competition law sections of the Bill

Although the new digital markets and consumer law enforcement powers have been the main focus of debate and attention, the Bill also introduces a raft of reforms affecting the UK's existing competition law regime, including merger control, market studies and investigations and competition enforcement powers.  The government has also taken the opportunity, including in recent amendments, to address perceived issues that have arisen as a result of recent court decisions. 

Penalties for breaches of market investigation orders or undertakings

The Bill includes significant amendments to the enforcement of market investigation orders and gives the CMA the ability to impose penalties of up to 5% of global turnover for failure to comply with orders imposed (or undertakings accepted) at the end of a market investigation.

This was introduced to respond to concerns that the CMA does not have sufficient powers to ensure compliance with these orders.  However, a key question that remains unresolved is whether the fines will be imposed for breaches of existing orders or only for breaches of orders adopted following future investigations. 

Industry concerns have been raised about the potential for these amendments to have retrospective impact. Given the potential (market-wide) scope and technical nature of such orders, there is potentially huge scope for firms to incur fines for technical or minor breaches of undertakings agreed or orders imposed years ago at a time when the orders did not envisage, and were not drafted to be consistent with, a penalties regime.

Amendments to litigation funding arrangements for opt-out collective proceedings

Earlier this year, the UK Supreme Court held that funding arrangements entered into by two proposed class representatives in collective actions against the Trucks cartelists are void and unenforceable as they are "damages-based agreements" as defined in section 58AA of the Courts and Legal Services Act 1990 and did not comply with the requirements of the Damages-Based Agreement Regulations 2013 (see our July 2023 update).

The amendments aim to unwind the court's decision in respect of opt-out collective actions to allow litigation funders to fund opt-out collective actions where they receive payment based on a percentage of the award.  The amendments are retrospective in order to mitigate the impact of the Supreme Court's decision.  While there is some uncertainty as to whether the amendments achieve this goal, there has also been criticism that the amendments are too narrow in scope and do not apply to opt-in collective proceedings and funding arrangements for other types of claims.  Funding arrangements for these claims will need to either comply with the DBA Regulations or be based on an alternative return mechanism, such as the percentage of cost incurred.

Extra-territoriality of statutory information gathering powers

The Bill also includes amendments which confirm that the CMA's compulsory information gathering powers are extra-territorial in nature.  This amendment arose from the CAT's decision earlier in the year finding that the CMA cannot compel companies without a UK nexus to produce material to it (see our February 2023 update).  The CMA appealed the CAT's decision and a decision is pending following hearings earlier in November 2023.  However, the amendments were not unexpected as the CMA indicated that the inability to obtain information from companies outside the UK significantly hampers its investigatory powers.

More flexibility to make market investigation references after a market study

Additional amendments have been introduced to give the CMA more flexibility to make a market investigation reference after issuing a market study notice.  

The amendments allow the CMA to make a reference: (i) two years or more after the publication of the market study report; or (ii) if there has been a material change in circumstance.  

This amendment arose from another CAT decision regarding the CMA's mobile ecosystem market study, where it held that the CMA could not make a market investigation reference using its standalone powers in relation to the same subject matter of a market study outside of the time limits prescribed in the market study (i.e. 12 months).  

Interestingly, in a judgment published after the Bill had passed to the House of Lords, the Court of Appeal overturned the CAT's decision and confirmed that the CMA's standalone power to make a market investigation reference (outside the market study process) is not time-limited simply because the same matter was considered as part of a market study. As long as the statutory conditions to use the standalone power are met and the power is exercised for a proper purpose, the CMA is capable making of making a market investigation reference.

Bespoke information gathering powers for the motor fuel sector

The House of Commons introduced amendments which set out a bespoke regime to allow the CMA to require companies involved in the distribution, supply or retail of motor fuel to provide information.  The CMA's new powers will allow it to assess competition and to make proposals to the Secretary of State on actions designed to increase competition or benefit consumers for the next five years.  The Bill also includes the possibility of penalties (of up to 1% of total value of global turnover or 5% of daily global turnover) for companies which fail to comply with these information requests.

Next steps

The Bill will now move to detailed consideration during the House of Lords' Committee stage with the Committee scheduled to sit on 22, 24, 29 and 31 January to consider the Bill.  The exact timing of the Bill's passage through the Lords will invariably depend on the Lords' views on the Bill and whether further amendments are required. In that case, the Bill would need to go back to the House of Commons for further consideration.  The current expectation is that the Bill will receive Royal Assent in Spring 2024, with the new digital markets and consumer law enforcement regimes expected to come into force in Autumn 2024.

Ultimately, we are not expecting the Lords to make significant changes to the Bill, however, it will be subject to extensive scrutiny and it is likely that many of the issues considered in the Commons will be the subject of further debate.