UK government consults on proposals for a new pro-competition regime for digital markets

On 20 July 2021 the government published a consultation on its proposals for a new pro-competition regime for digital markets.  The proposals are based on the recommendations set out in the Furman Review, the CMA’s final report of its market study into online platforms and advertising and the Digital Markets Taskforce report to government published in December 2020.  The Furman review concluded that the existing competition tools are not designed to address the unique challenges of fast-moving digital markets issues associated with the strategic market position of a small number of key digital firms.  Instead, the new pro-competition regime will aim to proactively shape the behaviour of digital firms with significant market power by making it clear how they are expected to behave. It should drive competition between digital firms and open up opportunities for innovative start-ups to compete with incumbents.

The key features of the new regime include:

  • A new Digital Markets Unit (DMU) within the CMA that will be in charge of  implementing and enforcing the new regime;
  • An enforceable code of conduct that governs the behaviour of firms designated with Strategic Market Status (SMS), setting out how they are expected to behave in relation to the digital activity providing them with a strategic position;
  • Pro-competitive interventions (PCIs) to address the sources of substantial and entrenched market power in digital markets and create opportunities for greater competition and innovation;
  • An SMS-specific merger control regime with a new reporting requirement for SMS firms, a broader and clearer jurisdiction for the CMA to review SMS mergers through the introduction of a transaction value threshold and an accompanying UK nexus test, and a mandatory review for the largest transactions with SMS.

Within this framework the consultation seeks views on a wide range of options and comments are invited by 1 October 2021.

The Digital Markets Unit (DMU)

The DMU was set up in a non-statutory form within the CMA in April 2021 in order to start preparing  for the new pro-competition regime for digital markets, including building teams, preparing draft guidance and supporting and advising government on establishing the new regime.

The statutory DMU will be responsible for designating firms with SMS, overseeing a mandatory code of conduct for SMS firms and implementing pro-competitive interventions. In order to ensure that SMS firms comply with the regime the DMU will be given formal powers of enforcement:

  • Financial penalties and other enforcement mechanisms: it is proposed that the DMU will have the power to impose penalties of up to 10% of the relevant undertakings’ worldwide turnover in the previous year, for breaches of the code of conduct and for failure to comply with pro-competitive intervention orders.  It will also be able to apply to the courts for an order requiring SMS firms to comply with a code order or a PCI. The government is considering whether enabling the DMU to hold senior management liable for compliance with the regime would further incentivise compliance.  The legislation will also provide for the DMU to investigate and enforce against conduct that takes place outside the UK but where there is a sufficient connection to the UK.
  • Monitoring and information gathering: the government proposes to give the DMU information gathering powers similar to those of the CMA and Ofcom. This will include powers to require the production of information (data, internal documents, written explanations), powers to interview individuals, dawn raid powers and the ability to compel evidence collection (requiring firms to collect, create and store information). The DMU will be able to impose penalties for non-compliance with requests for information, of up to 1% of an undertaking’s worldwide turnover in the preceding financial year and up to 5% of average daily worldwide turnover for continuing failure to comply.

Initial focus will be on public enforcement led by the DMU.  Individuals will have the right to bring private enforcement actions, but at this stage the government does not intend to prioritise private follow-on damages claims under the regime.

The DMU’s decisions should be judicially reviewable on judicial review principles before the Competition Appeal Tribunal.

Strategic Market Status

In order to make sure that the new regime will be proportionate and targeted towards firms and activities where the risk of harm is the greatest, the government proposes that the new regime will focus on firms designated by the DMU with Strategic Market Status (SMS).

To designate a firm with SMS the DMU will be required to test and conclude that a firm has substantial and entrenched market power in at least one activity, providing it with a strategic market position. It will use a range of qualitative and quantitative evidence in its designation process.

The government proposes that the assessment of whether a firm has substantial and entrenched market power should follow the CMA’s approach in its market studies and market investigations regimes.  For the relevant digital activity, the DMU should assess the quality and range of alternatives available to users of the products and services, as well as the possibilities for entry and expansion.

In making its assessment of a firm’s strategic market position, the DMU should consider whether the effects of a firm’s market power in the relevant activity are likely to be particularly widespread and significant taking into account, in the round, evidence in relation to the following criteria: the firm’s size and scale in relation to an activity, whether it is an important access point to consumers, whether the activity is a gateway for a range of other businesses and activities and whether the firm can use the activity to determine the ‘rules of the game’ for those users of the firm’s own ecosystem and also set practice for those businesses in the wider market.

The government recognises the importance for the strategic market position assessment to be sufficiently predictable and proposes to include in the legislation a definition of ‘strategic position’ and the criteria to be taken into account by the DMU.

The SMS designation process will take time and the DMU will need to balance the robustness of the process with its efficiency and speed. The designation process will include a public consultation process, with the opportunity for SMS firms and third parties to provide input before a final decision is made.  SMS status will last for a period of 5 years before being reviewed, but government proposes that an SMS firm will be able to make representations to the DMU if there has been a material change in circumstances relating to its designated activity. The DMU’s decisions on designation should be appealable to a court or tribunal.

An enforceable code of conduct

The code of conduct will manage the effects of market power, by setting out how firms with SMS are expected to behave, in order to influence their behaviour in advance and prevent negative outcomes before they occur.

The government proposes that the code of conduct will consist of high-level objectives and principles that specify the behaviour expected of SMS firms.

  • Code objectives: the objectives will set out the overarching aims and scope of the code and outline the types of pro-competitive behaviour it seeks to promote:
    • Fair trading – to ensure that users are treated fairly and are able to trade on reasonable commercial terms with firms with SMS;
    • Open choices – to ensure users face no barriers to choosing freely and easily between services provided by firms with SMS and other firms;
    • Trust and transparency – to ensure users have clear and relevant information to understand what services firms with SMS are providing and to make informed decisions about how they interact with the firm.
  • Code principles: legally binding principles will be derived from the objectives and will define the behaviour expected of SMS firms in order to comply with the code.
  • Code guidance: the DMU will be able to develop guidance to specific SMS firms, setting out its views on how the code’s legal requirements apply to that firm.  The guidance will assist with compliance but will not be legally binding and cannot require the firm to change its behaviour.
  • Code orders: the government proposes to give the DMU the power to issue code orders and interim code orders to address breaches of the code.  Code orders would specify behaviour changes required of SMS firms following an investigation and a finding of a code breach.  Interim code orders would allow the DMU to intervene more quickly, to address potential code breaches that may cause immediate harm, but would be restricted to pausing or reversing behaviour only.

Pro-competitive interventions

PCIs will exist alongside the code of conduct.  Whereas the enforceable code of conduct will aim to prevent harm that may result from the strategic market position of SMS firms by setting out the rules of the game in advance, PCIs will enable the DMU to implement measures that address the root causes of a firm’s substantial and entrenched market power. PCIs will have the potential to positively shift the structure of digital markets and drive greater competition.

  • Range of PCI remedies: the government proposes that the DMU should have a broad level of discretion in designing and implementing PCIs.  This would ensure that it can implement the most effective remedy to address the harm identified, provided it is proportionate and practicable.  The DMU will have to provide general guidance on the types of PCIs it may consider and the circumstance in which they would be used.  There will need to be a fair and robust process in place to ensure the remedies are evidence-based, targeted, proportionate and subject to appropriate legal safeguards.
  • Legal test: the government proposes that the DMU must prove there exists an adverse effect on competition (AEC) in order to implement a PCI.  This is in line with the legal test in the CMA’s market investigation regime.
  • Flexibility: the DMU will need to ensure that PCIs remain effective in addressing persistent and evolving competition problems within SMS firms.  PCIs will have to be agile and flexible to keep pace with fast-moving  and dynamic digital markets. The DMU should therefore have the power to: monitor, review and amend PCI remedies, strengthen remedies as well as de-escalate or terminate them, trial remedies before implementing a final PCI order, accept voluntary and enforceable undertakings from SMS firms during an investigation and use powers of direction to enforce PCIs and direct SMS firms to take or refrain from specified actions to ensure compliance with PCIs.
  • Prompt intervention: the DMU will need to react promptly to competition concerns in digital markets as market power can quickly become further entrenched.  Detailed CMA market investigations are completed within 18 months.  The DMU will have developed expertise during the SMS designation process and oversight of the code of conduct, and a PCI investigation into a single firm should be achievable in a shorter time frame.  The government is seeking views on the appropriate duration of the investigation period.

SMS merger regime

The government is proposing a bespoke merger control regime for SMS firms, operated by the CMA, in order to provide the CMA with greater scope to review mergers by SMS firms if necessary to protect consumers from potential harm.  The proposed new regime will consist of:

  • An ‘advance notice’ reporting requirement on firms with SMS, requiring them to send a report to the CMA before the completion of a transaction, in order to give the CMA a short time to determine whether to investigate the transaction before it completes;
  • A broader and clearer jurisdiction for the CMA to review SMS mergers, through the introduction of:
    • A transaction value threshold; and
    • An accompanying UK nexus test
  • A mandatory merger review for a subset of the largest transactions by firms with SMS;
  • Changing the threshold at which the CMA can intervene in a merger, by amending the probability threshold used in the phase 2 investigation.

The consultation is seeking views on how a transaction value threshold with an accompanying UK nexus test can be designed so that only larger and more competitively significant transactions are subject to review. The government considers that a transaction value threshold in the region of £100 million or £200 million would seem to strike a reasonable balance between capturing important transactions and filtering out those less likely to raise competition concerns.

In respect of the introduction of a mandatory review test for the largest transactions the government recognises the additional burden and resources this may impose on businesses.  As an alternative it is also seeking views on an option under which the SMS merger regime would continue to operate as a voluntary regime, but with a power for the CMA to call in for review any mergers which meet the jurisdictional tests.

Regarding changes to the substantive test, the government is minded to lower the phase 2 threshold for intervention in mergers involving SMS firms, from whether a substantial lessening of competition is ‘more likely than not’ to occur, to whether there is a  ‘realistic prospect’ of a substantial lessening of competition as a result of the merger (similar to the standard of proof required at phase 1 of the existing merger regime).

Stephen Wisking
Stephen Wisking
Global Head of Practice, Competition, Regulation and Trade, London
+44 20 7466 2825

Andre Pretorius
Andre Pretorius
Partner, London
+44 20 7466 2738

Kristien Geeurickx
Kristien Geeurickx
Professional Support Consultant, London
+44 20 7466 2544

Peter Rowland
Peter Rowland
Of Counsel, Brussels
+32 2 518 1847

CREATING A SAFE HARBOR BEFORE THE DIGITAL TOKEN SHIP SAILS

As we continue to witness the transformation from tangible to digital assets, countries around the world are grappling with the question of how to regulate these new asset classes and, of course, the platforms and service providers that underpin them.

The issues is that digital assets, particularly smart contracts, can be algorithmically programmed with any number of different features, making it difficult to find neat regulatory classification boxes from the “old world” of financial products and markets.  This means that the ability to apply relevant licenses, authorisations, registrations and reporting regimes across to the digital medium is a challenge that currently has no easy answer.

Yet the absence of a simple solution is not an excuse to do nothing. Regulators have, rightly, been clear that digital assets are not exempt from regulatory oversight and will be subject to regulatory action if non-compliant.

Less clear is how to practically license and register digital asset products and services.  In many respects we are already witnessing a game of ‘regulatory catch up’. This is simply because increasingly complex, new and creative methods of economic interaction, from fractionalised fundraising to yield farming, or from tethering and stable coins to non-fungible token (NFT) trading platforms, are yet to successfully reconcile to the traditional regulatory process. This is especially true in respect of products and services with functionality resembling securitisation. It is also evident amongst an increasingly frustrated cohort of crypto enthusiasts unwilling to become embroiled in regulatory test cases, but crying out for clear direction and legal processes.

Against this backdrop, earlier this year the Commissioner of the US Securities and Exchange Commission (“SEC”), Hester Peirce, announced an update to her proposal for a digital token “safe harbor” period.  Peirce’s proposal, if adopted, would provide those engaging in token generation events—such as Initial Coin Offerings (“ICOs”)—with a three-year grace period during which they are exempt from SEC regulations.

Suffice it to say that regulators across the globe are watching with interest as to whether this approach may be something of a panacea to this digital regulatory maelstrom.

All of this means that over the next 18 months it would be reasonable to expect an uptick in regulatory clarity globally.  In the interim, a US Style moratorium on prosecutorial action may be required to alleviate genuine concerns by legitimate digital actors that doing the right thing is easier said than done.

The safe harbor proposal would allow a startup three years to establish a decentralised blockchain network before, for example, needing to evaluate whether it complies with applicable securities laws, or if its token(s) still satisfies the definition of a security. While the approach is not without risk, as it may provide opportunity for scammers to operate during the moratorium period, the attraction of this approach is that it will buy some time for regulators and legislators to get the digital house in order. If other countries chose to follow suit, they may also decide to provide a shorter period of no-action.

To determine whether a network is sufficiently decentralised, Peirce’s updated proposal provides for greater transparency to enhance token purchaser protections, and guidance and clarity on how developers can demonstrate their project is operational. Developers must provide semi-annual updates to the development disclosure plan, a block explorer to allow investors to view transactions recorded on the blockchain for financial transparency and an exit report.  The exit report must include either (i) analysis by outside counsel explaining why the network is sufficiently decentralised; or (ii) an announcement that the tokens will be registered as securities under the Securities Exchange Act of 1934.

The proposal guides counsel in their analysis of whether the network is decentralised. Rather than a set check list, it balances guidance with flexibility for individual facts and circumstances including voting power, development efforts, and network participation.  The exit report must explain how the initial development team’s pre-network maturity activities are distinguishable from its ongoing involvement with the network.  The initial development team cannot be the unique driver of value, and all material information about the network must be publicly available, and not solely known to the initial development team.

Whatever happens, it is indisputable that the world is undergoing a rapid digital transformation.. The fusing of people, process and technology, on a global scale, is fundamentally changing the way business is done – optimising existing business models and creating new sources of value. The spotlight focusing on how that business is concluded – and regulated – will be shining brightly for some time to come.

Natasha Blycha
Natasha Blycha
Head of Digital Law, Perth
+61 8 9211 7298

Steven Jacobs
Steven Jacobs
Senior Associate, New York
+1 917 542 7603

Accelerating digitisation of UK financial services: Bank of England and HMT announce CBDB Taskforce amid new plans

On 19 April 2021, the Bank of England (BoE) and HM Treasury (HMT) released a statement announcing the joint creation of a Central Bank Digital Currency (CBDC) Taskforce. The Chancellor has also announced ambitious and complementary plans to encourage growth of UK fintechs and “cement the UK’s position as the world’s pre-eminent financial centre.

These announcements represent a significant endorsement of the recommendations made in the recently published Kalifa Review of UK Fintech and Lord Hill’s UK Listing Review.

CBDC Taskforce

The CBDC Taskforce will explore the viability of implementing a CBDC in the UK – a form of digital money issued by the BoE that households and businesses could use alongside cash and bank deposits.

No fixed decisions have been made on whether to introduce a CBDC in the UK, but the CBDC Taskforce will seek to engage with a wide variety of stakeholders on the opportunities and risks of doing so. According to the announcement, the CBDC Taskforce will:

  • “Coordinate exploration of the objectives, use cases, opportunities and risks of a potential UK CBDC.”
  • “Guide evaluation of the design features a CBDC must display to achieve our goals.”
  • “Support a rigorous, coherent and comprehensive assessment of the overall case for a UK CBDC.”
  • “Monitor international CBDC developments to ensure the UK remains at the forefront of global innovation.”

To support the CBDC Taskforce in its work, the BoE has also announced the creation of a CBDC Engagement Forum and a CBDC Technology Forum. Between them, these forums will gather strategic input on and assess the practicalities of the non-technological and technological aspects of designing, implementing and operating a CBDC. A CBDC Unit will also be established as a new division of the BoE to lead on the internal scoping and external engagement in relation to developing a CBDC.

As outlined in our previous blog post on CBDCs, the BoE has been considering how central banking might adapt to meet the needs of an increasingly digital economy (which favours a cashless society and demands innovation to keep up with users’ changing attitudes to payment services) for some time. Unlike cryptocurrencies such as Bitcoin, a CBDC would be a central digital currency, backed by the BoE and benefitting from the public trust inherent in traditional paper money as a non-volatile and widely accepted means of exchange.

Chancellor’s plans to boost UK fintech and financial services

The Chancellor’s plans include the creation of a new FCA “scale box” and a Centre for Finance, Innovation and Technology (CFIT), as well as consultations on changes to the UK’s prospectus regime and Listing Rules as part of the Government’s implementation of the recommendations arising from Lord Hill’s UK Listing Review.

The FCA will enhance its regulatory sandbox by rolling out a “scale box” – a package of measures designed to support start-ups and growth-stage firms. As a sign of the Government’s commitment to delivering on the transition to Net Zero by 2050, HMT will also launch the second phase of its Digital Sandbox which will focus on helping firms to tackle issues related to sustainability and other climate change-related challenges. To this end, Rishi Sunak has also called for the establishment of the CFIT to work closely with regional and national fintech bodies to oversee the implementation of these initiatives. CFIT will also help to identify and address challenges within specific sub-sectors of the wider fintech industry.

For further information on the UK legal and regulatory reform agenda for fintechs and other issues affecting the fintech sector, please see our April 2021 Fintech briefing.

Clive Cunningham
Clive Cunningham
Partner
+44 20 7466 2278

Mark Staley
Mark Staley
Senior Associate
+44 20 7466 7621

Harry Millerchip
Harry Millerchip
Associate
+44 20 7466 6447

The ‘Ten Tech Priorities’ behind the UK’s 2021 Digital Strategy

In March 2021, the UK Government unveiled its ‘Ten Tech Priorities’ that will form the foundation of the UK Digital Strategy. The priorities are high level but are nonetheless useful guides to the UK government’s key areas of focus for tech in the post-pandemic era.

Ten Tech Priorities
1. Rolling out world-class digital infrastructure nationwide 6. Unleashing the transformational power of tech and AI
2. Unlocking the power of data 7. Championing free and fair digital trade
3. Building a tech-savvy nation 8. Leading the global conversation on tech
4. Keeping the UK safe and secure online 9. Levelling up digital prosperity across the UK
5. Fuelling a new era of startups and scaleups 10. Using digital innovation to reach Net Zero

Here are our key takeaways:

Digitising the UK requires a blend of large-scale infra funding and investment in entrepreneurs

  • In keeping with the announcements in the March budget, much of the Ten Tech Priorities centre around a boost in investment for digital infrastructure, skills and R&D. Given the significant £5 billion government investment in 5G and broadband networks, it is unsurprising that the rolling out of digital infrastructure across the nation continues to sit high on the government’s agenda.
  • The priorities also emphasise the importance of government-led funding to establish innovative start-ups and retain high growth companies, with a focus on attracting private investment to the UK tech sector.
  • Providing government-funded apprenticeships and digital boot camps will help to close the digital skills gap and create a global-leading digital workforce. This is backed by a £520 million investment in ‘Help to Grow’ – the government’s latest scheme to help SMEs adopt the latest productivity-enhancing software and training – set to begin in autumn of 2021.

Regulation and safeguarding in the digital economy

  • The priorities aim to “boost digital competition” and “shape the global debate on how we govern tech companies”. This reflects increasing socio-political interest in the role of regulation in managing the ways in which technology impacts and alters our world, including how to address the increasingly-prominent role of tech companies and digital platforms. Two legislative proposals currently making headlines are a Digital Services Act (to address e-commerce and online harms) and a Digital Markets Act (focusing on new antitrust measures) (for more information, see our article here).
  • The UK government’s plans to introduce online harms legislation requiring companies to take responsibility for the safety of their users. The draft text of the new regulatory framework, the Online Safety Bill, is expected to be published during the first half of 2021.

Increased focus on tech policy to shape economic and strategic priorities

  • The UK Government is keen to foster innovation to establish the UK at the vanguard of the global tech sector. One of the key announcements was the establishment of a new National Artificial Intelligence (AI) Strategy, planned to be unveiled later this year, which will focus on: (i) growth of the economy through widespread use of AI technologies; (ii) ethical, safe and trustworthy development of responsible AI; and (iii) resilience in the face of change through a focus on skills, talent and R&D.
  • The government also recognises the critical role data plays in our society and economy and further emphasised the plan to use solutions enabled by existing digital technologies to achieve the goal of transitioning the UK economy to net zero by 2050.

Jeremy Purton
Jeremy Purton
Senior Associate
+44 20 7466 2142

Rebecca Heptonstall
Rebecca Heptonstall
Trainee Solicitor
+44 20 466 2150

Online platforms and digital advertising: UK Government endorses CMA’s recommendations for pro-competitive measures

On 27 November 2020, the UK Government published its response to the CMA’s recommendations set out in its final report of its market study into online platforms and digital advertising (the “Final Report”). The Government broadly endorses the CMA’s recommendations, though it identifies the need for further evidence and analysis before granting the full scope of enforcement and intervention powers recommended by the CMA.

The CMA’s recommendations

In its Final Report, published in July 2020, the CMA concluded that competition is not working well in the markets for search, social media and digital advertising (see our e-bulletin). To address these concerns, the CMA made four key recommendations to the Government, targeted at both the sources of market power and the behaviour of platforms with market power:

  1. Establish a new enforceable code of conduct (the “Code”) to govern the behaviour of platforms funded by digital advertising designated as having strategic market status (“SMS”).
  2. Establish a Digital Markets Unit (“DMU”) responsible for SMS designations, introducing and maintaining the Code and producing guidance. The DMU will sit within the CMA.
  3. Give the DMU powers to enforce the code on a timely basis (including powers to suspend, block and reverse actions of SMS platforms and to order their compliance with the code, as well as power to impose financial penalties for non-compliance) and to amend the principles of the Code in line with evolving market conditions.
  4. Give the DMU powers to make pro-competitive interventions, including: data-related interventions (such as consumer control over data, interoperability, data access and data separation), consumer choice and default interventions and separation interventions.

The Government’s response

The Government notes that the UK “has shaped the global debate on digital markets”, having already accepted the six strategic recommendations of the Digital Competition Expert Panel (or the ‘Furman Review’), including the establishment of the Digital Markets Taskforce (the “DMT”), responsible for advising the Government on the design and implementation of a new pro-competition regime (the DMT is due to report later this year).

The Government emphasises the importance of search, social media and online advertising services, and their contribution to “positively transforming our lives and economy”. However, it accepts the CMA’s findings that Google has market power in search and search advertising, and Facebook in social media and display advertising, and that this is leading to higher prices, lower innovation and less choice and control for consumers. The Government is concerned that “[w]ithout effective competition, we will not unlock the full potential for these digital services to contribute to economic growth and the UK’s recovery from COVID-19”.

As set out below, broadly the Government endorses all four of the CMA’s recommendations and proposes steps necessary to implement them. However, it emphasises the need for further evidence and consideration before concluding on whether it would be appropriate to grant the DMU the full range of powers recommended by the CMA, specifically, the power to enforce the Code and make pro-competitive interventions.

Recommendation 1: the Code and SMS

The Government agrees with the introduction of an enforceable code of conduct for firms with “substantial and enduring market power” in digital markets. It envisages that the Code will support timely intervention in fast-paced digital markets by providing “upfront clarity” for platforms on what is acceptable, as well as allowing “swift action” in the face of practices that may harm competition.

The Government notes that it has already asked the DMT to advise on the design and implementation of the Code, and also the approach to designating SMS. It considers that urgent action is required, and intends to pass the requisite legislation as soon as parliamentary time allows.

Recommendation 2: DMU to introduce and maintain the Code

The Government agrees that a DMU is needed to introduce, maintain and enforce the Code. It will establish the DMU from April 2021. It will sit within the DMU.

The Government will consult on the form and function of the DMU in early 2021, with a view to passing the relevant legislation as soon as parliamentary time allows. It will also liaise with the Digital Regulation Cooperation Forum (comprised of the CMA, the Information Commissioner’s Office (the “ICO”) and Ofcom) to ensure “coordination, capability and clarity” across the digital regulation landscape.

Recommendation 3: Powers to enforce the Code

The Government agrees that the Code should be both mandatory and enforceable, stating that a non-enforceable code would provide insufficient incentives to deter anti-competitive behaviour (and citing difficulties in establishing non-enforceable measures in e.g. Australia as cautionary tales).

It does not, however, commit to providing the DMU with the full scope of powers recommended by the CMA. Instead, it states that “careful consideration” will need to be given to the scope of the DMU’s powers, including how these will work alongside the existing roles of the CMA, the ICO and Ofcom.

Recommendation 4: Pro-competitive interventions

The Government agrees in principle to giving the DMU power to make pro-competitive interventions. However, it takes a cautious stance, noting that such interventions “are complex and come with significant policy and implementation risks”.

In order to fully understand the balance of benefits, risks and unintended consequences flowing from the CMA’s range of proposed pro-competitive interventions, the Government will consider the matter further in view of the advice of the DMT, the findings from the Governments’ National Data Strategy consultation (which closes on 2 December 2020), and the views of stakeholders in response to the forthcoming DMU consultation.

Next steps

The Government emphasises the need for rapid action in this area, and envisages three immediate next steps:

  • Considering the DMT’s advice on the design and implementation of the regime (due by the end of 2020);
  • Consulting on its proposals for a new pro-competition regime in early 2021; and
  • Legislating for pro-competition reforms as soon as parliamentary time allows.

Broader UK and international context

The Government also notes that its steps to promote competition in digital markets form part of two broader forthcoming work packages.

  • First, in 2021 the Government will consult on proposed reforms to improve the UK’s approach to competition policy.
  • Second, the Government views a new pro-competition regime as a key part of its forthcoming Digital Strategy, which will set out its “overarching approach to regulating digital technology”. In this context, the Government emphasises not only the need for regulation to boost innovation, ensure public trust and promote a democratic, open society, but also the need for a streamlined digital regulatory landscape which minimises overlaps and ensure coordination between regulators.

In addition, we note that the UK Government is not alone in considering new measures aimed at improving competitive conditions in digital markets. For example, the European Commission is expected to announce on 9 December its proposals for new legislation in digital markets. These remain hotly debated in Brussels, and based on a recent speech by Executive Vice President Vestager it is likely that the Commission will propose two pieces of legislation: (1) a Digital Services Act (“DSA”), updating the existing E-Commerce Directive including stricter liability for illegal content and dangerous products; and (2) a Digital Markets Act (“DMA”), which will include a list of “do’s and don’ts” for “gatekeeper” platforms, and new wide powers to investigate and impose remedies in markets (see our blog post here considering certain aspects of the Commission’s proposals).

Veronica Roberts
Veronica Roberts
Partner, London
+44 20 7466 2009

Kyriakos Fountoukakos
Kyriakos Fountoukakos
Partner, Brussels
+32 2 518 1840

Hayley Brady
Hayley Brady
Partner, London
+44 20 7466 2079

Aaron White
Aaron White
Partner, London
+44 20 7466 2188

Peter Rowland
Peter Rowland
Of Counsel, Brussels
+32 2 518 1847

Joe Williams
Joe Williams
Senior Associate, London
+44 20 7466 2303

National Security and Investment Bill: A new dawn for review of foreign investment in the tech and comms sectors in the UK

  • Yesterday the UK Government introduced the National Security and Investment Bill (the Bill) to Parliament, setting out significant legislative reforms which will overhaul the review of transactions on national security grounds in the UK, against a backdrop of tightening of foreign direct investment (FDI) regimes globally.
  • If passed, the Bill will introduce for the first time a distinct regime and standalone powers relating to the review of FDI in the UK, replacing the existing public interest merger regime insofar as national security interests are concerned.
  • The Government first made clear its intention to introduce a new review framework in its July 2018 White Paper (see our previous briefing), and subsequently included proposals in line with the White Paper framework in the December 2019 Queen’s Speech. However, the regime tabled before Parliament today notably deviates from the White Paper framework in a number of important ways, with potentially significant implications for investors.
  • Of particular note to those operating in the TMT sector, the Bill requires mandatory notification for at least some transactions in specified sectors, a number of which span parts of the technology and communications sectors.
  • We are currently analysing the detail of the Bill and its likely impact, and a further detailed briefing will follow. However, we highlight below some key initial takeaways for investors.

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Budget 2020 – Investing in digital infrastructure, skills and R&D

On 12 March 2020, the Chancellor of the Exchequer, Rishi Sunak, presented the 2020 Budget – the first since the UK exited the European Union (available here).

The following announcements (some of which are new, but others build on previously announced measures) are likely to be of particular interest to the Technology, Media and Telecoms sectors:

  1. Improving digital connectivity: the government, in an effort to increase broadband and mobile coverage throughout the UK, is committing:
    • up to £510 million in funding as part of the Share Rural Network agreement, which the government expects to be matched by industry; and
    • £5 billion investment in gigabit broadband rollout for 20% of the country which are considered to be “hard-to-reach” areas.
  2. Investing in R&D: the government announced:
    • an increase in economy-wide investment in R&D to 2.4% of GDP by 2027, with an increase in public spending for science, innovation and technology to £22 billion per year by the year 2024-2025 – bringing direct support to R&D to 0.8% of GDP. The government intends part of this funding to be used to pursue “moonshot” scientific missions in order to solve issues such as climate change or the ageing population;
    • an increase in the R&D Expenditure Credit to 13%;
    • a consultation on whether the R&D tax credit should include investments in data and cloud computing to be held in the context of the Comprehensive Spending Review; and
    • £900 million investment to ensure UK businesses maintain their leadership position in high potential technologies. The government intends for a portion of this funding to contribute to the wider investment of up to £1 billion to develop the UK supply chains for the large scale production of electric vehicles (originally announced in September 2019).
  3. Creating a blue-skies funding agency: the government will invest at least £800 million in a new blues skies funding agency, modelled on the American Advanced Research Projects Agency–Energy, to focus on high-risk, high reward research.
  4. Closing the skills gap: as part of its plan to upgrade the nation’s infrastructure, the government wishes to increase the ability of colleges and institutes of technology to train the population for the industries of the future by announcing:
    • £120 million capital investment in eight new Institutes of Technology; and
    • £2.5 billion commitment to a new National Skills Fund to improve technical skills of adults across the country. The government will hold a public consultation on how to target this fund effectively to ensure it focuses on helping people gain skills for rewarding, well-paid jobs.
  5. Cutting the VAT rate for e-publications: in an effort to reduce the cost of living and widen access to e-publications, the government will cut the VAT rate for e-books, e-newspapers, e-magazines, and academic e-journals to nil from 1 December 2020. The government expects the benefit of this measure to be passed on to consumers.
  6. Increasing start-up funding: the government will allocate resources to the British Business Bank to invest an additional £200 million in UK venture capital and growth finance in 2020-21.
  7. Supporting the Fintech sector: in an effort to maintain the UK’s leading position in financial services innovation, the government plans to:
    • enhance coordination between regulators to ensure the regulatory regime is proportionate and effective, especially regarding the regulation of payments and cryptocurrencies;
    • conduct a review of the UK fintech sector, led by Ron Kalifa, in order to encourage growth and competitiveness in the sector; and
    • convene a summit on the data needed to increase access to funding and credit for SMEs.
  8. Piloting the Digital Trade Network in Asia Pacific region: the Department for International Trade and the Department for Digital, Culture, Media and Sport will pilot the Digital Trade Network in Asia Pacific in an effort to give innovative UK companies opportunities to access new markets in the region, while increasing support for exporters from regions outside London. In addition, the government has launched a consultation on the creation of 10 new Freeports.

The Budget 2020 also includes announcements relating to the Digital Services Tax previously announced (see our Tax Briefing) as well as measures to unlock competition in digital markets.

Hayley Brady
Hayley Brady
Consultant, Head of Digital and Media, London
+44 20 7466 2079

Ghislaine Nobileau
Ghislaine Nobileau
Trainee Solicitor, London
+44 20 7466 7503

How secure is your IoT device? Government consultation promotes transparency and security by design

In response to what the government has identified as significant shortcomings in the security of consumer internet of things (IoT) devices, the government is consulting on proposals to regulate their security.
The consultation is aimed at a broad range of entities connected with the IoT, ranging from device manufacturers and IoT service providers to mobile application developers and retailers. Continue reading