UK Digital Markets, Competition and Consumers Bill: Extraterritorial Regulation Affecting the Tech Investment Climate

Although the UK government plugs its post-Brexit commitment to charting a less intrusive, pro- investment regulatory course, a great deal of heavy-handed, Brussels-style tech regulation is seeping into British legislation. Going down the Brussels path of selective, ex-ante enforcement—like that seen in Europe’s Digital Markets Act (DMA)—promises to dampen investment in this vital sector, the health of which is essential for Britain to increase productivity and drive down inflation.

Moreover, Brussels-like legislation that would use arbitrarily sized thresholds to discriminate against U.S. firms, while leaving home-grown companies and strategic rivals like TikTok untouched, will threaten the singular U.S.-UK partnership on technology, innovation, and economic security. Given that the United Kingdom’s digital sector accounted for nearly 1.9 million jobs in 2022 and contributed over £140 billion to the UK economy in 2020, the UK government should tread carefully in adopting the pending legislation.

Background

In March 2019, the government-commissioned Furman Report concluded that competition in digital markets required a “new approach.” Embracing this goal, in April 2023, the UK government proposed the Digital Markets, Competition and Consumers bill (DMCC) to “promote growth in the UK economy by ensuring free and vigorous competition amongst businesses,” both online and in physical operations. Responding to domestic political pressure to reign in U.S. big tech, this bill is part of the broader legislative and regulatory framework aimed at stamping out unfair practices and promoting competition. The DMCC marks a huge shift toward more intrusive procedures, where regulators can intervene largely at their discretion and stand as judge and jury with limited procedural protections for designated firms.

The DMCC Bill

The bill, currently pending in the House of Lords, is a work in progress. It formally establishes the Digital Markets Unit (DMU), a group already operating within the Competition and Markets Authority (CMA), which will take on responsibility for promoting and regulating competition in digital markets. The DMU's core objective is to promote competition in digital markets both within and outside the United Kingdom for the benefit of consumers. The legislation gives the DMU power to designate firms as having strategic market status (SMS) when regulators determine the firm has “substantial and entrenched market power” in at least one activity, providing it with a “strategic position.”

The DMU will prioritize SMS designation assessments based on criteria including the firm's revenue, the characteristics of the activity in question, and whether other UK regulators are better placed to examine the issue. SMS designation would mean that a new mandatory code of conduct will govern the behavior of these companies. Robust enforcement powers will underpin the code with pro-competitive market interventions by the DMU. The government’s consultation document also proposes a specific process for determining which firms would be assessed for SMS first. 

The DMU will pursue what is described as “participatory regulation,” the tool that UK lawmakers believe will put the United Kingdom on a middle path between regulation in Europe and the United States. According to the CMA, the bill “addresses challenges that have dogged traditional competition law approaches to keeping digital markets competitive and open to future innovators.” But in contrast to EU regulation, the UK draft regime does not stipulate universal conduct requirements and instead, aims to be “highly tailored, flexible, proportionate, and characterised by ongoing, constructive dialogue.” In an unusual give-and-take process, UK regulators will work one on one with target companies (those designated as holding substantial and entrenched market power) to develop behavioral expectations that can be enforced by the agencies. The CMA will be empowered to order “designated undertakings,” outlining specified changes in behavior and business practices for companies who have received SMS designation.

While the European DMA does not provide for exemptions, SMS firms in the United Kingdom may be exempted from certain behavioral mandates if they can demonstrate that the consumer benefits from continuing the behavior “outweigh the actual or likely detrimental impact on competition resulting from a breach of the conduct requirement.” Known in the draft statute as the “countervailing benefits exemption,” this provision gives the DMU leeway to authorize certain consumer-cherished activities even when they are deemed anticompetitive—a nuanced tactic that indeed moves beyond Europe’s one-size-fits-all approach under the DMA. Given this exemption, an SMS firm could hypothetically justify self-preferencing on its phone’s operating system if, for instance, it could demonstrate the software harmonization significantly improved user security.

In another process innovation, the DMU is expected to work closely with other key regulators to ensure coherent and streamlined regulatory processes. For instance, there will be a statutory obligation for the DMU to consult with the Financial Conduct Authority, the Office of Communications, the Information Commissioner’s Office, the Bank of England, and the Prudential Regulation Authority where appropriate. This collaboration aims to manage any overlaps in regulatory remits and ensure that the work of the pro-competition regime is appropriately informed by the expertise of a knowledgeable regulator.

The legislation touts consumer benefits and states the importance of considering the impact on innovation in digital markets. Although the DMU’s core duties do not include a formal legal requirement to consider innovation, the DMU will have to actively forecast the impact on innovation when taking action to ensure consumers can realize the benefits that innovation in digital markets can bring.

While DMCC subtly improves on the DMA in these respects, its penalty system is just as punitive as its EU counterpart’s. To set predictable funding, the activities of the DMU will be financed by the Exchequer, with partial cost recovery through a new noncompliance fine for SMS firms, which are anticipated to be U.S. firms only. The CMA will be able to determine without a court order when consumer law has been infringed and fine companies up to 10 percent of annual global turnover. For U.S. tech giants like Apple, a single violation could thus cost over $38 billion—over a third of the company’s annual profit. Senior managers of SMS firms could also be individually fined up to £300,000 for breaching consumer protection rules. Moreover, the CMA could require businesses to compensate consumers in addition to adapting their business practices to improve compliance.

Digital markets are defined—less than precisely—in the bill’s explanatory notes as “markets where businesses develop and apply new technologies for the benefit of other businesses and consumers or create brand new products and services using digital capabilities, connecting groups of users in new and innovative ways.” Examples of businesses operating in digital markets are social media platforms like Meta (Facebook) and X (formerly Twitter), online marketplaces like eBay and Amazon, and other tech-driven firms like Alphabet (Google) and Apple. The draft legislation states the CMA can ban a firm from “[treating] its own products more favorably than those of other undertakings” (self-preferencing), “applying discriminatory terms,” and “using data unfairly.” The lack of explicit definitions on regulated activities gives the CMA substantial leeway to regulate U.S. firms as it sees fit. While the UK government describes the DMA as “pro-innovation,” the CMA’s interpretation of its broad mandate will be crucial to determining if there is any truth behind this contention, particularly since companies’ ability to appeal CMA decisions will likely be limited.

The DMCC will also grant the CMA significant power to oppose mergers even when they have limited connection to the United Kingdom. This aspect of the regulation appears directed at so-called killer acquisitions, where the acquirer is a significant player in the United Kingdom and appears to be purchasing a firm to preempt competition. Specifically, the CMA will have jurisdiction to intervene when any party to a merger controls at least 33 percent of the supply of a good or service in the UK and a UK turnover exceeding £350 million. In the world of big tech, both thresholds are extremely low. Google, for instance, is the market share leader for search engines. Under the proposed DMCC, Google would be required to report nearly all mergers to the CMA, regardless of whether the target undertakes digital activities or has any business in the United Kingdom.

Conclusion

In June 2023, the United States and United Kingdom signed the milestone Atlantic Declaration promising a new economic security framework covering “ever-closer cooperation on critical and emerging technologies,” prioritizing the harnessing of technological breakthroughs to drive broadly shared growth and exploring ways to deepen the bilateral trade and investment relationship. Perhaps due to the opposition of the Biden administration to a U.S.-UK free trade agreement, the United Kingdom now seems to be headed in the direction of less cooperation with the United States. While Europe continues to construct a heavy-handed regulatory environment for the tech sector, absent cooperation with the United States, this may not be the best path for the United Kingdom, which should prefer policies that grow the Western tech sector generally.

In fairness, the DMCC improves on its European counterpart in some respects by including a countervailing benefits exemption, doing away with overarching blanket regulations in favor of a more tailored approach, and requiring synchronization across regulators. Giving an unprecedented amount of power to a single regulatory body with few checks and balances, however, promises to transform the UK business environment for digital firms, creating serious concerns for the attractiveness of the United Kingdom for tech investment. These dramatic changes should be weighed with care and circumscribed judiciously—particularly for UK entrepreneurs, who may find a more accommodative regulatory environment in Boston or Silicon Valley.

Meredith Broadbent is a senior adviser (non-resident) with the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Meredith Broadbent thanks John Strezewski for his helpful research contributions to this commentary.

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Meredith Broadbent
Senior Adviser (Non-resident), Scholl Chair in International Business