UK competition, consumer and digital regulation reforms
Key issues for business as the Government reviews consultation responses
We have now responded to the UK Government’s consultations on wide-ranging reforms to the competition and consumer law regimes, as well as a new regulatory regime for digital markets. Officials at the Department for Business, Energy & Industrial Strategy (BEIS) and the Department for Digital, Culture, Media & Sport (DCMS) respectively will now consider responses and advise Ministers on which proposals to take forward in legislation.
Some of the more far reaching proposals – particularly when looking at the competition, consumer and digital regulation proposals together – need further consideration. Key issues include the underlying drivers for new powers and sanctions and how to weigh the benefits of preserving strong innovation and investment incentives for the economy and consumers with the costs and uncertainty associated with an increased risk of regulation and intervention for businesses.
The Government is, however, committed to strengthening the tools needed for the Competition and Markets Authority (CMA) (and in some cases sector regulators) to intervene in more deals, markets and practices, to impose ‘remedies’ more quickly and deliver more pro-active enforcement, including in digital markets. Whatever the outcome, businesses should prepare for changes ahead. Building on our previous blogs (available here, here and here), we have drawn together the key issues for business at this stage.
Competition law reforms
More political direction in policy and enforcement
Back in 2014 when the CMA was created, a key policy goal was for the new authority to be free from Ministerial influence but accountable to parliament. Since then, once a parliament, the Government has issued high-level strategic steers setting out its long-term goals in relation to competition and growth, whilst stressing that the steers are non-binding and should not compromise the CMA’s independence.
As part of a more ‘pro-active’ approach, the Government is now proposing to increase the frequency and strategic direction of these steers, as well as asking the CMA to prepare regular reports on the state of competition in UK markets to inform policy (with accompanying new information gathering powers). Much of the underlying rationale for this more directive approach is that markets have become more concentrated in recent decades to the detriment of consumers. Although the CMA’s analysis is debatable, current political thinking points to a more interventionist approach ahead – with clear implications for companies active in markets likely to be in the spotlight due to perceived concerns about concentration levels, excessive profitability or consumer satisfaction.
Strengthened investigatory powers and tougher sanctions for non-compliance
The reforms include a package of new information gathering powers to help the CMA prepare state of competition reports and/or gather evidence during competition investigations and market inquiries. Notably, these include extending compulsory interview powers to individuals without a connection to a business under investigation for possible infringement of competition law and extending the legal duty to preserve evidence in competition investigations. The Government is also considering granting the CMA power to ‘seize and sift’ evidence during inspections of domestic premises. To back up these powers, financial penalties for non-compliance may be increased, directors may be required to make personal declarations that information is full, complete and correct and fines may be imposed for false or misleading information submitted in response to voluntary requests. Stronger penalties for companies that fail to comply with remedies imposed or accepted by the CMA have also been proposed.
A key issue for debate is the impact of more formal powers and tougher sanctions on business incentives to cooperate informally and promote a constructive, on-going relationship. If taken forward, businesses will need to adapt their internal policies, procedures and resources in order to respond to more information requests, whilst mitigating the risk of non-compliance and heavy sanctions being imposed on both the company and on individuals.
New and strengthened powers to impose interim measures during investigations
Market investigations are a unique feature of the UK’s competition toolbox as they enable the CMA to ‘remedy’ business practices and structural barriers to competition in the absence of any wrongdoing by market participants. As part of a package of reforms designed to make more use of this powerful tool and reach solutions more quickly, the Government proposes giving the CMA new powers to impose interim measures where it considers it necessary as a matter of urgency to prevent significant damage or to protect the public interest. A similar extension of interim measures powers is also being considered in relation to the proposed Digital Markets Unit regime (see below). As these measures can be highly interventionist, if taken forward, this proposal will need to ensure appropriate safeguards similar to those when seeking an injunction are in place to protect rights of defence.
The Government is also proposing to strengthen the CMA’s current powers to impose interim measures in competition investigations by limiting a company’s right to access the CMA’s underlying file of evidence and narrowing the standard of review from full merits to judicial review. Again, taken together, these proposals threaten to significantly reduce parties’ rights of defence in proceedings and are out of line with international norms in relation to proceedings which can have a considerable adverse effect on the conduct, finances and reputation of affected parties.
A new merger threshold for all businesses capturing a wider class of transactions and an additional new ‘digital’ mergers regime for businesses with ‘strategic market status’
Among a set of reforms designed to bolster the CMA’s expansive jurisdictional powers is a new threshold to allow the CMA to review mergers if either party (rather than both parties, as is the case today) has a 25 per cent share of supply of goods or services supplied or acquired in the UK and UK turnover of more than £100m.
The stated rationale is to enable the CMA to more clearly review deals which do not involve any obvious ‘competitive overlap’ but which may facilitate the extension of a party’s perceived market power (e.g. vertical or conglomerate deals) or acquisitions by larger players of pre- (or low) turnover businesses (or potential pipeline products) which could potentially compete in the future (so called ‘nascent competitors’).
Given the uptick in CMA intervention in deals on this basis, coupled with separate proposals for a new ‘digital’ mergers regime, it is unclear whether such an additional threshold is necessary. While, on the one-hand, the proposals could help to re-establish a ‘bright-line’ jurisdictional test, whereas on the other, thresholds based on the activities of only one party are likely to capture a disproportionately high number of benign low risk deals. Greater clarity is needed in relation to the impact on: review timetables, the interplay with the CMA’s ‘informal briefing paper’ process and the overall strength of the ‘voluntary’ nature of the UK merger control regime.
The Government also continues to consider whether to introduce a separate, and modified, merger control regime for businesses in the digital sector designated as having ‘strategic market status’ (SMS):
- Additional regime: given the breadth of the existing UK merger control regime, and the proposals to expand it further, it is questionable whether such a new regime is also needed, or indeed what more it would add and/or how it would work in tandem with the expansive reform proposals outlined above.
- Modified regime: proposals to lower the standard of proof for in-depth Phase 2 investigations for digital firms with SMS also present a significant risk of undermining the pro-competitive and pro-innovation effects of M&A activity and complicating (if not dampening) overall investment in the UK’s fast moving digital economy.
Rather than adding additional merger control thresholds and regimes and lowering the evidential standard required to demonstrate any harmful effects on competition resulting from mergers, we consider the Government should evaluate the existing merger control regime and make appropriate modifications (e.g. to the share of supply threshold) to provide more certainty for businesses.
Consumer law reforms
The consultation proposes various changes both to substantive consumer law and to the means by which it is enforced in the UK. The most significant change proposed is to empower the CMA to enforce consumer law directly (as it enforces competition law), rather than through the civil courts. This is coupled with powers to impose fines of up to 10 per cent of worldwide turnover directly on companies found to breach consumer protection law.
Digital markets and consumer preferences are fast-evolving and there is a focus in the proposals on empowering consumers with more information, choice and transparency. This will mean that care will be needed to ensure the changes proposed are proportionate and do not lead to unintended consequences for businesses. These could include additional red tape and onerous (and quickly outdated) compliance requirements and, as a result, may disincentivise investment in innovation and in the UK.
Subscription contracts and fake reviews
Due to an increased prevalence of subscription contracts in the UK, the Government is concerned that consumers may be inadvertently tied into subscriptions, particularly those which roll over/renew automatically. The proposals therefore suggest wide-ranging changes to tackle ‘subscription traps’, seeking views not only on the imposition of more onerous transparency requirements, but also on more onerous requirements for businesses fundamentally to change their business models by introducing non-auto-renewing products, and putting in place significant website engineering changes via the introduction of, for example, automated refund mechanisms.
Transparency-based obligations which improve clarity about what consumers should expect from their subscription are in both business’ and consumers’ interests. However, nuanced statutory guidance reflecting on, for example, wide-ranging differences in consumer preferences relating to subscription contracts depending on the service, may be more appropriate than changing the law itself - particularly if this could risk creating a ‘one-size fits all’ which could quickly become outdated.
The Government has also identified that as a result of digitisation of consumer reviews and the ease of posting, the sale of ‘fake reviews’ has emerged as an increasing practice from which both businesses and consumers require greater protection. We see that central to this question will be how to define a ‘fake consumer review’ in a way that does not stifle growing consumer demand for legitimate paid endorsements or reviews by technical experts and media influencers.
Enforcement of consumer rights
The Government acknowledges that consumers in the UK already have a strong set of rights enshrined in law, but considers those rights are not backed by effective enforcement systems and that the current enforcement regime could be strengthened so as to achieve quicker and better results.
The consultation proposes significant changes to align the regime for the enforcement of consumer law with that for the enforcement of competition law. Specifically, where the CMA or another designated enforcer believes a business may have infringed consumer law, it is proposed that it could take action (including imposing fines) against that business directly, without needing to obtain a court order to do so (as is currently the case).
It is also proposed that the CMA be empowered to impose significant fines for such suspected breaches, and for non-compliance with Requests for Information: for the former, up to 10 per cent of annual turnover and up to 1 per cent of annual turnover for non-compliance with Requests for Information with a daily additional penalty of 5 per cent daily turnover while non-compliance continues.
It is unclear why such extensive civil penalties are necessary or proportionate, not least because contempt-based sanctions already carry the ultimate threat of criminal fines and individual imprisonment.
In the context of parallel proposals to expand significantly the CMA’s competition law powers, coupled with plans also to introduce a ‘pro-competition’ regime for digital markets, it is important that the Government adopts a holistic approach which avoids over-burdening businesses in a way that risks stifling innovation and investment in the UK, and which creates consumer harm that does not otherwise exist today, particularly in fast-moving digital markets.
Further regulation for digital businesses
The Government is also consulting on a new ‘pro-competitive’ regime, headed by a Digital Markets Unit (DMU) sitting within the CMA, to regulate digital businesses that are designated as having SMS.
While we support measures to adopt a targeted and principles-based approach to any new regulatory regime for digital markets, further consideration is needed to: (i) ensure any regime is proportionate and flexible; and (ii) enshrine adequate procedural safeguards in legislation, including appropriate appeal standards and enabling regulated firms to justify their conduct based on pro-competitive efficiencies, consumer benefits or other objective justifications. As a minimum, we consider these considerations are crucial to ensuring any new regulatory regime aligns with the Government’s stated commitment of ensuring the UK has strong and effective regulatory regimes which drive innovation and growth in a post-Brexit UK.
In relation to the operation of any new regime, the Government proposes that:
- Codes of Conduct: regulated firms should each be subject to a binding Code of Conduct framework, based on three identified objectives (‘Fair Trading’, ‘Open Choices’ and ‘Trust and Transparency’) and related principles, with the DMU tasked with considering additional legally binding requirements for each firm in relation these objectives and principles.
- Pro-competitive interventions: regulated firms can be subject to ‘pro-competitive intervention’ orders capable of going to the heart of any perceived entrenched market power identified. The Government is proposing to give the DMU broad discretion in this respect, which means such orders could require fundamental changes to the business models of regulated firms. In addition, non-compliance could entail very high fines and sweeping remedies of a quasi-criminal nature.
Given the parallel proposals to significantly bolster the UK’s existing competition and consumer law regimes, further consideration is needed to assess whether the chosen principles and additional requirements that would arise from any additional new regulatory regime: (i) relate to harms that are specific to the regulated firm or arise on an industry-wide basis (if the latter, it would seem inappropriate for any requirements to be applicable only to a handful of firms); and (ii) could cut across existing legislation and obligations, such as those in place under the GDPR. Given the wide reach of the markets involved, it is important that the Government does not adopt measures which distort competition and ultimately harm consumers.
We consider that developing these principles and additional requirements requires detailed meaningful stakeholder engagement and evidence and, as a minimum, appropriate safeguards that will ensure counterbalancing pro-competitive efficiencies, pro-consumer benefits or objective justifications are properly analysed, and which meaningfully support businesses’ rights of appeal.
At this juncture, it is still unclear whether the consolidated impact of the reforms being considered will, as a whole, have a net positive impact on competition, innovation and investment in the UK.
Please get in touch with a member of our antitrust, competition and trade team for more information.