Lara Stoimenova / Jun 2021
Although the UK and EU initiatives to regulate digital services share many common objectives, there are significant differences in their approach. Closer alignment is a must to ensure the overall effectiveness of these rules and minimise regulatory arbitrage.
As a former regulator, I know first-hand how challenging it is to balance flexibility vs certainty when designing regulatory rules. And it is based on this experience that I believe UK needs to introduce more certainty, while the EU needs to inject more flexibility into their respective approaches.
I discuss three main areas where this needs to be achieved.
First, the UK and EU are advocating different approaches to determine who to regulate.
The UK advocates for a test to assess whether a firm has Strategic Market Status (SMS): an entrenched market power in a digital activity which provides it with a strategic position (for example, because it is a gateway to a diverse range of businesses). On the other hand, the Commission provides a list of the “core platform services” it intends to regulate, including the qualitative and quantitative criteria it will use to designate “gatekeepers”.
The UK’s firm specific approach risks not providing enough legal certainty, increasing the risk of appeals. It should specify, ex-ante, the list of digital activities it will focus on. It should also specify ex-ante, following consultation with stakeholders, those factors (common across all digital activities) it will assess when defining a firm’s “strategic position”. It can keep the list of activities and factors under review to reflect future developments in the sector.
Conversely, by making the quantitative criteria an integral part of its designation process the Commission risks creating perverse outcomes. For example, it may need to undertake a market investigation to designate firms which fall just under its proposed thresholds. Instead, it should designate relevant firms following a (short) market investigation where it analyses the evidence presented using its proposed criteria.
Second, the UK and EU diverge in their approach to identifying what rules to implement.
The UK proposal is to implement firm specific conduct and competition remedies following a formal investigation. The Commission has opted for the simpler approach of listing specific “do’s and don’ts” which will apply equally to all designated gatekeepers, irrespective of the digital activity they undertake.
Whilst the UK approach lacks certainty and risks introducing divergences when addressing similar issues across different digital services, more worrying is the Commission’s one size fits all approach. It is quite concerning that the Commission is proposing to impose certain technical rules (such as interoperability) without either undertaking an assessment of the competition/consumer issues it is targeting or ensuring the design of the remedy is fit for purpose.
There is an alternative approach which both the UK and the EU should consider. This would involve designing an overarching regulatory framework which sets out the rules that should be considered equally across all SMS firms/gatekeepers (irrespective of the digital activity they undertake) – this approach would provide certainty and clarify the rules of the game for both incumbent and challenger firms. This framework would then be supplemented with activity/platform specific rules which are designed through a market investigation (undertaken by the Commission in case of the EU), to target relevant competition and/or consumer issues.
There are similar precedents of this third alternative, which the Commission itself has designed successfully. For example, in telecoms, the Code sets out the general obligations (such as access, non-discrimination) that could be imposed on operators with wholesale market power. Detailed obligations are then designed by national regulators to target the competition issues specific to their markets.
Third, mergers is another area where the UK and EU proposed approaches diverge significantly.
Whilst the UK has proposed a revised merger framework for SMS firms, the Commission has yet to table any formal proposals.
To begin with, the Commission should assess whether its current merger rules are fit for purpose.
Next, the UK should revisit some of its proposals. One of the most important revisions requires the application of the current “substantial lessening of competition” test to a lower standard of proof. This is to enable interventions in mergers that have the potential to cause significant harm to UK consumers, but where this cannot be established under the current (higher) standard of proof.
If adopted, the SMS merger regime will create a two-tier merger clearance system in the UK, where mergers in other parts of the economy (equally supported by technological innovation, such as pharma) will continue to be assessed under the current regime. Surely this would be a perverse outcome. Furthermore, would we ever contemplate lowering the standard of proof in other parts of the legal system just because the requisite evidence is not available? Surely not. More work is required in this area where the proposed solutions do not risk creating unintended and serious consequences.
Stakeholders should continue to contribute to the ongoing debate, across both sides of the Channel, to secure a regulatory framework for digital services that is fit for its purpose.