The UK’s Digital Markets, Competition and Consumers Act: A Targeted Approach to Tech Regulation

On May 24, 2024, the UK’s Digital Markets, Competition, and Consumers Act (DMCCA) received Royal Assent, the final stage of passing legislation into UK law. Following the announcement on May 22, 2024, of the snap UK parliamentary elections held on July 4, the bill was sped through Parliament under the so-called “wash-up” process, an accelerated procedure to implement or throw out legislation once Parliament is dissolved.

The DMCCA has been called the UK’s equivalent to Europe’s Digital Markets Act, as both are new ex-ante regulations aimed at the digital economy, laying out a variety of obligations and prohibitions for big tech companies. The DMA and DMCCA are intended to complement competition law, with obligations targeting specific behaviors and tactics companies have used to achieve and maintain dominance. Indeed, the UK and EU launched negotiations around a Competition Cooperation Agreement, which intends to complement the DMCCA by supporting international cooperation and information-sharing with other regulatory agencies.

However, despite some similarities in legislative goals, the DMCCA will operate quite differently from the DMA and is largely an Act giving new powers to the UK’s competition regulator, the Competition and Markets Authority (CMA). The CMA, specifically its new Digital Markets Unit (DMU), can designate firms they deem to have Strategic Market Status (SMS). These are firms that the CMA believes to have substantial and entrenched market power and a position of strategic significance that meets a quantitative threshold and provides Digital Activities (digital content and/or service provided over the internet) to the UK. The CMA will conduct investigations lasting up to nine months (extendable by three months), resulting in SMS designation along with tailored conduct requirements or Pro-Competition Interventions (PCIs). Rather than having a ready-made list of do’s and don’ts as the DMA does, the DMCCA attempts to create a more direct and targeted approach to address abusive tactics.

While this article will focus on SMS firm designation, conduct requirements, and PCIs, which will be under the purview of the DMU, it should be noted that the DMCCA has broader implications for merger control and consumer protection rules that apply to online platforms in the UK regardless of SMS designation, which the CMA will regulate.

Designating Strategic Market Status

Defining Digital Activities: While the DMA lists specific platform services, for example, operating systems or browsers, the DMCCA covers “digital activities” relating to the provision of a service or pieces of digital content over the internet and electronic communication services. This less prescriptive list means that the regulation is flexible in its possibility to include emerging technologies like generative artificial intelligence. Indeed, the CMA has noted that “AI and its deployment by firms will be relevant to the CMA’s selection of SMS candidates, particularly where AI is deployed in connection with other, more established activities.”

The approach means that in combination with assessing firm market power, the CMA will also assess the digital activities of the firm and if they have market power or strategic significance. Tom Smith writes that the CMA must ensure that defining digital activities must not be over or under-inclusive so as not to unnecessarily hinder a firm's activities or underregulate it. That said, the CMA’s guidance notes that a firm can be subject to multiple SMS designations with respect to distinct digital activities or can group several of a firm’s activities into a single digital activity. More specifically, the CMA can evaluate “how the potential SMS firm structures itself and its business model, how businesses and consumers use and access its products and any interlinkages among them.”

SMS Firms: To designate a firm as SMS, the firm must meet a turnover condition of either a global turnover exceeding £25 billion or if the total value of the UK turnover of an undertaking exceeds £1 billion, and the CMA must consider whether the undertaking maintains substantial and entrenched market power and a position of strategic significance. The CMA’s assessment of market power and strategic significance requires a forward-looking analysis over at least five years, considering criteria such as the firm's size or scale in digital activity, its use by other businesses, its potential to extend market power to other activities, and its ability to influence other undertakings' conduct. While such forward-looking assessments in fast-moving digital markets are challenging, Lara Dimitrova Stoimenova, an ex-regulator for Ofcom, notes they are not uncommon.

The CMA will begin the first SMS investigations later in 2024, meaning further elaboration on which firms will be designated and what conduct requirements will be subscribed to them will not be clear until 2025. According to Smith, the “CMA has said that it will only open three or four SMS investigations in the first year and that it will focus on the sectors it has already investigated (meaning search advertising, display advertising, social media, mobile operating systems, browsers, and app stores).” Previous investigations, like the CMA’s 2022 Mobile Ecosystems market study, provide insight into which firms could be designated SMS and the potential conduct requirements inflicted upon them.

Conduct Requirements and Pro-Competition Interventions

Conduct Requirements: After designating a firm as having SMS, the CMA can impose one or more conduct requirements or PCIs. These conduct requirements guide the practices of an SMS firm to address existing anti-competitive behavior and prevent firms from taking advantage of its substantial and entrenched market power. The CMA will tailor these requirements to individual firms, ensuring they align with one of three objectives: fair dealing, open choices, or trust and transparency. Conduct requirements must not be more onerous than necessary to achieve their aims, and the Competition Appeals Tribunals are expected to scrutinize the CMA’s decisions.

The CMA’s guidance clarifies what is meant by fair dealing, open user choices, and transparency. “Fair dealing” ensures that SMS firms should trade on fair and reasonable terms. For example, firms should not unfairly apply terms, conditions, or policies differently to different users or types of users. “Open choices” aim to increase fairness and intra-platform relations within a platform ecosystem, as consumers must be able to switch freely between services and avoid being locked into one ecosystem. “Transparency” refers to new consumer protections that the DMCCA mandates, such as clear and transparent contracts for consumers purchasing subscriptions or giving consumers a choice of options rather than tying them to defaults.

Pro-Competition Interventions: Alternatively, or in combination with conduct requirements, the CMA may undertake a PCI investigation if it finds that a factor or combination of factors is having an “adverse effect on competition.” The CMA retains significant flexibility in this determination and can rely on a “combination of factors [...] related to an SMS firm’s conduct, and include an action or failure to act, whether intentional or not, as well as any agreements between the SMS firm and other businesses.” Moreover, the adverse effect on competition does not have to stem from the firm’s conduct. For example, “it may be a structural characteristic of a sector such as high levels of market concentration or high barriers to entry or expansion.”

The CMA does not define what constitutes an “adverse effect on competition,” as the DMCCA does not establish or suggest a theoretical benchmark for comparison. To determine if an adverse effect on competition exists, the CMA will consider whether a set of factors “prevents, restricts, or distorts in some way the effective interaction of demand and supply or if there are ways in which it considers current competition could work more effectively absent the factor(s).” This approach signals a departure from traditional UK competition law, which requires defining the relevant market in order to establish if market power exists.

PCIs can include behavioral or structural remedies or a mix of both, and the CMA will consider not only the factors affecting competition but also the firm’s organizational structure. When creating conduct requirements or PCIs, the CMA will follow specific steps, such as evaluating the purpose of the requirement or PCI and identifying effective remedies. The CMA’s guidance also suggests potential PCIs, including restricting specific conduct, interoperability obligations, requirements to divest aspects of a business, or publicizing information to increase transparency. Thus, guidance on both conduct requirements and PCIs is broad and incredibly flexible, and the rules imposed on SMS firms will largely come down to the individual investigations carried out by the CMA. What is clear is that conduct requirements will be more prescriptive and targeted toward specific behavioral practices and consumer harms, whereas PCIs will address more systemic and fundamental problems of power accumulation.

The CMA has committed to a “participative regime” by engaging with SMS firms and other stakeholders when monitoring compliance. It can impose substantial fines for non-compliance, with appeals heard by the UK High Court. The maximum penalty for a fixed fine can reach up to 10% of a firm's global turnover, or up to 5% of daily turnover for a daily penalty.

Final Thoughts

Overall, the UK’s approach appears far more comprehensive and targeted than that of its European neighbor, the DMA, though its success will depend on several factors. First, the potential for regulatory capture deserves attention. Section 29(a) of the DMCCA allows the CMA to close a conduct investigation if a “countervailing benefits exemption applies.” Under such an exemption, firms can argue that their products and services offer consumer benefits that outweigh the abuse of dominance. Consequently, the CMA must remain vigilant to avoid being swayed by big tech and its potential lobbying efforts.

Related Reading: A New British Law Charts a Course Towards Reining in Big Tech

Another factor to consider is that the UK, now independent of the EU, is a much smaller market, albeit a wealthy one. If large firms do not like the new regulations, they could threaten to withdraw their services, as witnessed when Canada demanded that Meta pay news publishers for their content. Additionally, Oles Andriychuk points out that increasing contestability in certain digital markets could lead to other big tech firms entering those markets, reducing market concentration but still leaving the power in the hands of a few companies.

That said, the effects of the Act will become clear once the CMA sets the conduct requirements and determines how they will be executed, decides on PCI implementation, and whether the CMA will enforce structural changes. In the autumn of 2024, the CMA will launch its first SMS designation investigations, which will last nine months, with conduct requirements formulated in tandem. By next year, a fuller picture of the competition regime should emerge. In the meantime, UK businesses must stay informed about the general consumer welfare rules and new merger control thresholds taking effect later this year.