UK Government Draft Bill Proposes Significant Reforms for Consumer Protection and the Digital Sector

Finally, the long-awaited Digital Markets, Competition, and Consumers Bill is here. This is an ambitious and large piece of legislation, so the following is a summary of the key competition and consumer issues. In light of the fact that this legislation is only in its infancy, it is difficult to estimate when - or in what form - it might become law and, therefore, when its full impacts may be felt. In any case, now is the time to assess potential impacts, so businesses can be prepared as legislation advances.

Brief background

Despite significant delays, the UK government has introduced draft legislation reforming digital, competition and consumer protection regulations. This bill significantly strengthens the Competition and Markets Authority's (CMA's) powers and responsibilities.

Consequently, the UK government intends for the CMA to have a much broader and more powerful toolkit for competition, digital regulation and consumer protection that will enable it to regulate digital markets and protect consumers. Consumer rights infringements would be subject to a higher enforcement platform - similar to what we see with competition infringements.

How does this bill protect consumer rights?

Although consumers in the UK have statutory rights to enforce consumer law, the Department of Business, Energy and Industrial Strategy (now replaced by the Department for Business and Trade) identified a number of weaknesses that needed to be improved (reported in the Consumer Protection Study 2022).

The study found that consumers are losing £54.2 billion each year due to unresolved disputes with traders, according to the research. It also determined that enforcement action is slow, which makes it harder for consumers to receive redress. As a result, traders are also little deterred from violating consumer protection laws. The UK is the only G7 country without civil penalties for common consumer protection violations.

New enforcement powers for consumer protection law violations

The bill proposes to significantly strengthen the enforcement of consumer protection law by giving civil courts new penalty powers, along with allowing the CMA to use its out-of-court powers to determine and sanction violations:

Expanding the power of civil courts: New powers will be granted to civil courts to impose civil monetary penalties for violations of consumer protection laws under the bill. Local authorities and the CMA, for example, can apply to the courts for penalties of up to £300,000, or 10% of a company’s global turnover, whichever is greater.

CMA’s new powers: A new administrative model of consumer law enforcement is introduced in the bill, giving the CMA authority to impose monetary penalties (up to 10% of a business’ global turnover) if certain consumer laws are violated. The CMA will therefore be able to enforce consumer law with powers similar to those currently afforded for competition law enforcement.. A higher penalty will be imposed on those who fail to comply with investigative requirements (e.g. failing to comply with information notices or providing false or misleading information) and penalties based on business turnover for noncompliance with CMA orders, undertakings and accepted commitments. These powers will allow the CMA to take on more cases faster. The purpose is to protect consumers and create a level playing field.

Consumer rights are enhanced and expanded

Regulations (which are the UK’s implementation of the EU’s Unfair Commercial Practices Directive) governing protection against unfair trading are repealed. In spite of this, these regulations won’t be going anywhere, as the bill largely recreates the prohibitions on unfair commercial practices as set out in the CPUT Regulations, aimed at preventing harm to consumers’ collective interests.

Consumer saving schemes are proposed to be regulated in order to prevent inertia selling (the sending of unsolicited goods to potential customers in the hope of closing the sale) and subscription traps.

Increased focus on enforcement and compliance

Businesses will need to examine their processes to ensure they are robust enough to respond to CMA requests for information (and stay compliant with any undertakings, orders or commitments) given the CMA’s greater investigative powers and the ability to impose high, turnover-based penalties.

Furthermore, the CMA’s ability to impose significant turnover-based fines without going to court will likely lead to increased enforcement of consumer law. CMA enforcement decisions can be appealed on merits under the bill; however, courts should intervene only if they find the decision ‘materially wrong’. Businesses should therefore ensure their consumer-facing communications and practices adhere to the updated rules.

Consumers in the UK are being targeted by the CMA due to potentially harmful online selling practices. The CMA’s open letter to UK businesses was published on 29 March 2023 and sets out its advice in relation to urgency and price reduction claims in the digital retail space. Business should consider the CMA’s advice on online choice architecture and selling practices given the expansion of its enforcement powers.

What changes are proposed for regulating competition and digital markets?

A new regulatory framework for digital markets will apply to large digital companies with UK activities. The CMA can designate such companies providing internet services and digital content as having strategic market status (SMS). This regime will apply only to companies that are designated as SMS providers.

CMA designations will be determined according to whether a company has substantial and entrenched market power, a position of strategic significance in the market, and a global turnover exceeding £25bn globally or £1 billion in the UK. This approach is similar to that taken by the EU in its Digital Markets Act ("DMA") and is specifically focussed the big digitally players. Smaller digital firms are unlikely to face significant additional compliance requirements.

There will also be a set of obligations specific to each SMS firm focusing on fair dealing, open choice, and trust and transparency and the CMA will conduct a formal evaluation process to determine which entities hit the necessary requirements to be designated SMS. It's worth noting that whilst the EU and UK SMS testing requirements will have some common ground, there may be differences between the companies regulated under the different regimes.

For example, unlike the EU's DMA, the bill does not take a one-size-fits-all approach to the obligations each SMS firm will have to meet. Instead, requirements will vary depending on the company's activities, position in the market, and potential CMA concerns. As a result, a greater degree of flexibility will be available and the regime will be more effective, according to the UK government.

It is the CMA's responsibility to select appropriate "conduct requirements" to achieve one or more of the following objectives:

  • Fair dealing ensures everyone gets treated fairly
  • Open choice allows users and potential users to choose among different services and content offered by companies
  • Transparency and trust for those using or seeking to use services or content provided by designated companies

SMS firms will be required to follow certain conduct requirements, which will be relevant to all third parties. These requirements will either require SMS firms to provide users with clear and accessible information or to avoid certain actions and behaviours (for example, avoiding discriminatory policies, terms, and conditions).

The CMA will also require SMS firms to provide compliance reports explaining how they are complying. Additionally, SMS firms will be required to appoint compliance officers to ensure compliance.

Regulatory reforms will give CMA an expanded digital toolkit

The CMA will also have the power to conduct “pro-competitive interventions” with SMS firms, addressing any factors it determines are adverse to competition after carrying out an investigation. They may be able to order SMS firms to divest and apply structural remedies.

Final offer mechanisms will be used as a backstop tool to enforce fair and reasonable payment terms. In this way, the CMA can require SMS firms to submit what they consider fair payment terms for a proposed transaction, and the CMA will decide.

The CMA will have robust enforcement powers. Fines of up to 10% of global turnover can be imposed for breaches of the conduct requirements, along with daily fines of up to 5% of global turnover for continued violations.

In general, the draft legislation gives the CMA the option of using its normal competition law powers or its digital regulatory powers when taking action in the digital space. Regulatory activity is therefore expected to increase.

CMA expands reviewable mergers to tech

As part of the bill, the CMA will review mergers where (i) either party has a 33% share of supplies or purchases in the UK (or substantially so), (ii) that party has more than £350.

This will enable the CMA to intervene more easily in mergers where there is no obvious competitive overlap between the parties, or where the target is particularly small but is being acquired by a large purchaser. The test aims to close a gap in UK merger control legislation. However, the UK nexus requirement suggests that the CMA’s jurisdiction will not automatically extend to acquisitions of uncommercialised products if their activities are conducted outside the UK.

While this change will apply to all sectors, a more sector-specific proposal is for SMS firms and their groups. Going forward, they would need to report to the CMA all acquisitions worth at least £25 million, where 15%, 25%, or 50% equity or voting is being transferred (including joint ventures), and where the transaction has a UK connection. Until the CMA confirms that the report has been completed, the SMS firm cannot close the transaction. By changing this rule, the CMA will gain a greater understanding of SMS firms’ investment activities and will be able to review investments and acquisitions using its existing powers, if needed. Similar requirements are currently included in the EU’s DMA, pursuant to which gatekeepers must notify the EU before completing acquisitions.

When will we know more about its impact?

Currently, the bill is in the legislative process and is expected to enter into force by spring 2024, depending on the parliamentary timeline.

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