Tech Britain could soon be more bureaucratic – even than Brussels
Regulators are to be given control to intervene in digital markets, arguably our biggest post-brexit test
‘Regulation of digital markets is the first big test of how the UK sees its future outside the EU’
To really gauge how slowly the ship of state turns, consider how the social media landscape has been transformed in the time it has taken this Government to conceive a new law designed to crack down on the power of Big Tech. Tiktok has burst onto the scene and crashed Facebook’s social media party. Google and Facebook have lost ground to Amazon, and others, in the digital advertising market. Many tech firms are having to make painful cuts to their staffing after making big bets on future growth during the pandemic.
But as people learn more about the Digital Markets, Competition and Consumers Bill, they may wonder if it has been hurriedly pushed through by a Government eager to be seen to “do something”. It hands massive control to the regulator.
The proposed new law will give what one Linklaters author described as “enormous, almost quasi-legislative power” to the Competition and Markets Authority, which the Digital Markets Unit will sit within.
Regulation of digital markets takes on a greater significance when you consider that this is the first big test of how the UK sees its future outside the EU. Unlike other areas of policy, where the question is whether we want to diverge from existing EU law, this is about creating altogether new laws of our own. And as we attempt to navigate this regulation, the EU is doing similar, seeking to achieve its objectives through a Digital Markets Act which was broadly finalised last year. The UK Bill, was announced last month, is in many ways similar to the DMA. Both will apply new constraints on how larger digital platforms use data, change their products, connect their services and expand into new markets. In both the UK and EU, they must satisfy the regulator that their commercial terms are fair and reasonable.
And in both cases, the question should be put to legislators whether this is necessary or desirable. Digital markets change fast. Consumers enjoy exciting new services that this sort of regulation can stifle. In theory, regulation will curb the power of existing players; in practice, it could make it harder for tech firms to enter each other’s markets, limiting competition. The incentive to develop new networks could be diminished.
But there are stark differences in the EU and UK’S approach. Brussels is creating expansive powers for the European Commission, yes, but it is much more specific about who is going to be regulated and what constraints they will operate under. If two businesses are the same size and operate in the same segment of the market, they will be subject to the same rules in the EU.
In the UK, however, the regulator will designate companies based on an assessment of whether they have “strategic market status”.
If so, they will be subject to a separate code of conduct, enforced by potentially massive fines, with limited rights of appeal.
In some cases, the regulator will get involved even more directly. One of the most common elements in those codes of conduct is likely to be that the platforms negotiate “fair and reasonable” terms with their commercial partners. If that process fails to deliver an outcome, CMA is expected to directly decide the right answer (prices and other commercial terms) between two final offers.
This regulatory discretion has its advantages, including making the UK regime more flexible than its European counterpart. But discretion has its downsides. As we have witnessed time and again, it means an administrative state where laws are set by regulators and bureaucrats rather than by elected representatives.
In this instance, regulators will be given an immensely broad remit to intervene in new markets. And this is being created by a Conservative government at a time when many conservative thinkers have expressed profound concern over what an administrative state means for democratic governance.
Further, this economic power might clash with other policy objectives. Consider Warren Buffett’s criticisms of the CMA for blocking Microsoft’s acquisition of Activision Blizzard based on its speculation about the future of the cloud gaming sector. Businesses want predictable, stable rules from the Government.
Despite the insistence from politicians that Britain is open for business, companies and investors may doubt whether the same CMA will be judicious and restrained in its interventions in the wider market.
It feels like an awkward fit for a Prime Minister who has tried to showcase the UK as a destination for tech investment. Add it to the ledger alongside rising taxes and the threat to end-to-end encryption under the Government’s Online Safety Bill, and post-brexit Britain looks like an increasingly unfavourable environment in which to build a digital business. Already, there are concerns that major messaging apps such as Whatsapp may quit the country.
The risks don’t stop there. In the longer term, this regulation could have diplomatic consequences.
If the CMA decides to in effect tax American tech firms and use that money to subsidise UK businesses, this could be seen as a hostile move by future US administrations.
Not every US president will view this law through the lens of their own conflicts with the tech sector (particularly given growing tech competition with China). Weighing these costs and benefits is the job of politicians, not regulators alone.
Changes in government since the last general election have put phenomenal pressure on ministers. They are expected to deliver rapidly against long-standing objectives, often building on foundations they did not choose. They are expected to deliver outputs at a pace which means longer-term outcomes are not properly thought through.
One of the merits of Brexit should be that the UK can more easily think again. Even if you agree with some of the principles behind this regulation, it would not be too hard to inject additional layers of scrutiny and make the new power for the regulator less of a blank cheque.
This Bill is arguably our biggest post-brexit challenge to date. Leaving the European Union was always an opportunity, never a guarantee. If we press ahead with this regulation, many will be left fearing if it is an opportunity Britain will never seize.