Furman report on unlocking digital competition

by Allen & Overy LLP

Allen & Overy LLP

On 13 March the UK Government published a report by an expert panel established by the Chancellor and led by Harvard economist and former White House economic adviser, Jason Furman, on reforms to competition rules and regulation in the digital sector: “Unlocking digital competition”.

Executive summary

The report was commissioned in the context of global calls for regulation of the digital economy. Some proposals discussed in political circles are truly radical. In the US, for example, on 8 March presidential candidate Senator Elizabeth Warren stated that if elected, she would introduce laws to break up the so-called “Big Tech” and give regulators the power to unwind anticompetitive mergers. EU Competition Commissioner Margrethe Vestager – who is widely viewed as one of the most aggressive enforcers of competition policy in the digital sector – said that breaking up Internet giants would be the “last resort” under EU law, and that the European Commission is focused on using existing antitrust rules to rectify market behaviour.

The Furman Report, whilst falling short of suggesting break up measures, makes far reaching, in some cases entirely new, recommendations for the government. If implemented, they would amount to a radical overhaul of the UK competition rules in the digital sector which would be unprecedented in the current regulatory landscape.

In many respects the report chimes with a number of proposals suggested by the CMA on 25 February and summarised here. Summarised below are the key Furman Report proposals.

  • Creating a new digital markets unit (either independent or as a function of an existing authority/regulator) with specific powers (i) to set a code of conduct for companies with “strategic market status”; (ii) on data mobility and open standards; and (iii) to secure access to non-personal anonymised data.

  • Adapting the merger control rules so that the Competition and Markets Authority (CMA) can “better stop digital mergers that are likely to damage future competition, innovation and consumer choice”. This would include an obligation on digital companies that have been designated with a strategic market status to make the CMA aware of all intended acquisitions, the CMA giving priority to the scrutiny of mergers in digital markets and, most importantly, the CMA’s assessment taking account of the scale as well as the likelihood of harm.

  • Strengthening regulators’ competition enforcement powers so that breaches can be dealt with more quickly and easily, adjusting also the standard of judicial review for antitrust infringements and use of interim powers.

  • Launching a formal CMA market study into the digital advertising market “which is dominated by two players and suffers from a lack of transparency”.

Creating a new digital markets unit

One of the most radical proposals is the establishment of a digital markets unit, either as a function within the CMA or Ofcom, or as an independent body linking to both.  The unit would have a remit to use tools and frameworks that will support greater competition and consumer choice in digital markets, and backed by new powers in legislation to ensure they are effective.

Significantly, this proposal would involve the unit developing a code of competitive conduct – notably with the participation of stakeholders – applicable “only to particularly powerful companies”, i.e. those designated as having ‘strategic market status’ The panel’s recommendation chimes with the notion of “participative antitrust” promoted by Nobel-Prize-winning economist Jean Tirole as a means of addressing competition problems in digital markets.

The unit would pursue personal data mobility and systems with open standards “where these will deliver greater competition and innovation”. Addressing the perceived challenges of adapting the regulatory framework to the challenges of a fast moving sector, the unit would also be empowered to impose measures where a company holds a strategic market status – with enduring market power over a strategic bottleneck market.

Adapting the UK merger control rules

Another radical set of proposals relate to mergers; for the CMA to:

  • Further prioritise scrutiny of mergers in digital markets and closely consider harm to innovation and impacts on potential competition in its case selection and in its assessment of such cases;

  • Require digital companies that have been designated with a “strategic market status” to make the CMA aware of all intended acquisitions (this mirrors a similar step proposed in Australia, which, like the UK, operates a voluntary merger control regime); and

  • Update its merger assessment guidelines to reflect the features and dynamics of modern digital markets, to improve effectiveness and address under-enforcement in the sector.

As detailed in our February Global trends in merger control enforcement report, the policing of “killer acquisitions” – where large firms buy up smaller players who have the potential to become rivals – is currently a hotly debated topic. The solution: a change to legislation to allow the CMA’s merger assessment to use a more economic ‘balance of harms’ approach which takes into account the scale as well as the likelihood of harm in merger cases involving potential competition and harm to innovation. It will be interesting to see how this novel proposal is received by the Government. It will be considering it alongside the suggestion in a 9 March House of Lords Select Committee on Communications report Regulating in a digital world that the Government consider implementing a public-interest test for data-driven mergers and acquisitions, namely the management of the accumulation of data, allowing the CMA to intervene.

Strengthening antitrust enforcement powers

Critical of the infrequent use of enforcement powers and the long duration of cases, the panel’s solution is for:

  • The CMA to amend its procedures and administrative rules to facilitate greater and quicker use of interim measures to protect rivals against significant harm;

  • A change to the review applied by the Competition Appeal Tribunal to antitrust cases, including interim measures, to more limited standards and grounds, “more closely related to that of judicial review”, and the introduction of more independent CMA decision-making structures for antitrust enforcement cases, if appeal standards are changed;

  • Competition and consumer law enforcers to have sufficient and proportionate information gathering powers;

  • The CMA to continue to prioritise consumer enforcement work in digital markets, and alert government to any areas where the law is insufficiently robust; and

  • The CMA to carry out a retrospective evaluation of selected cases not brought and decisions not taken (particularly those relating to potential abuse of dominance), where infringements were suspected or complaints received, to assess how markets have subsequently evolved and what impact this has had on consumer welfare.

The panel also flags potential concerns over the greater use of personalisation, “in particular personalised pricing, where companies use their data-driven insights into consumers to set prices according to the individual’s willingness to pay”. It prompts the government, CMA and the Centre for Data Ethics and Innovation to continue to monitor how use of machine learning algorithms and artificial intelligence evolves to ensure it does not lead to anti-competitive activity or consumer detriment, in particular to vulnerable consumers.

A market study into the digital advertising market

Pressure is mounting on the CMA to conduct a market study into digital advertising. This latest report follows an earlier, February, independent report, The Cairncross Review: a sustainable future for journalism, which recommended the CMA conduct a market study into the online advertising industry, the Secretary of State for Digital, Culture, Media and Sport’s, Jeremy Wright, statement to the House of Commons of the same day fully supported a CMA market study “to examine whether the online marketplace is operating effectively, and whether it enables or prevents fair competition” and the 9 March House of Lords report repeating the call for a market study into digital advertising to see how the market is operating and to ensure that it is “working fairly for consumers and businesses”.

The panel would like to see the CMA’s market study encompass the entire value chain. “The market operates through a complex chain of advertising technology layers, where subsidiaries of the major platforms compete on opaque terms with third party businesses.”

What will the CMA do? With limited resources, the nature of Brexit will be determinative. Should a deal be agreed with an implementation period or there is a significant extension to the UK’s EU membership, the CMA’s clear desire to intervene “to ensure digital markets evolve in consumers’ interests” articulated in its Annual Plan 2019/20 makes a market study very probable. However, so long as the outcome of EU exit negotiations remains confused, the CMA will shrink from prioritising such “new discretionary work”. A no deal scenario, requiring the CMA to immediately divert staff to casework returning to the UK from Brussels, is likely to substantially delay any start date. Indeed, the CMA’s statement in response to the Furman report reiterates that “its ability to launch new projects is heavily dependent on the outcome of EU Exit negotiations”. The Chancellor’s 13 March Spring Statement 2019 notes that, subject to an orderly exit from the EU and therefore resources, the CMA “will carry out a review to assess how regulation affects competition in the UK business environment” and he has asked the CMA to prioritise a decision.

International engagement and cooperation.

Noting the international nature of the problem, the panel encourages the UK to take the lead in ensuring competition authorities share best practice and develop a common approach to issues. This fits with the CMA’s ambition to strengthen its international profile.

See all documents relating to the panel’s review here, and the CMA’s press release welcoming the report’s recommendations here. Indeed, many of the suggestions in the report will be well received at the CMA since, as the CMA itself has noted, “many of the proposed reforms to the competition regime announced last month by CMA Chairman Lord Tyrie are supported by the panel’s recommendations”. Click here for information on the CMA’s February preliminary proposals for legislative and institutional reforms to competition and consumer protection law and policy. The UK government is expected to formally respond to Furman Report in the summer.​​​​

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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