Digital Markets, Competition and Consumers Bill

Written evidence submitted by UK Finance (DMCCB13)


1. UK Finance is the collective voice for the banking and finance industry. Representing around 300 firms, we act to enhance competitiveness, support customers and facilitate innovation.

2. We welcome the opportunity to feed into the Committee’s consideration of the Digital Markets, Competition and Consumers Bill (the "Bill").

3. The Bill represents a positive development for both competition and consumers, not least through the new regime for regulating digital markets to ensure that customers can reap the benefits of market competition.

4. As has been recognised by the CMA and the FCA, Big Tech’s digital activities have the potential to materially impact on the provision of financial services. Indeed, Big Tech’s entry and expansion in retail financial services is increasingly blurring the lines between financial services firms and technology firms. This is making it more difficult to clearly define the boundaries of financial services regulation, ensure a level playing field between providers and give customers an appropriate degree of protection.

5. We are supportive of proactive regulation to ensure that digital market activities are conducted fairly and in a pro-competitive manner, while noting that the CMA should (as intended by the Bill) focus its activities on other sectors, as well as ensuring constructive engagement and effective coordination with the financial regulators. On the latter, we welcome the obligation on the CMA to consult with the FCA on a proposal to exercise a regulatory digital markets function relevant to financial services.

6. We do, however, have concerns over two specific proposals within the Bill that we believe would damage regulatory predictability, introduce uncertainty for businesses and diminish the attractiveness of the UK for investment.

CMA powers to amend or expand market investigation remedies

7. We do not consider that additional CMA powers to amend or expand market investigation remedies, as provided for by clause 133’s amendments to the Enterprise Act 2002 (EA02), are justified or necessary.

8. Many of our members have recent experience of being involved in the CMA’s largest market investigations to date (Retail Banking), as well as other substantial historic investigations such as PPI and the supply of banking services by clearing banks to small and medium-sized enterprises. They have found that cooperating with a CMA market investigation and implementing the resulting remedies is extremely resource-intensive over long periods of time for firms in the sector under review. This takes up considerable time and the attention of a firm’s management, as well as those involved in the day-to-day running of the business. Costs for the industry of participating in the investigation itself can be substantial, and multiples of this are often then spent in implementing the consequent remedies to address the competition concern identified. Such an expansion of the CMA’s powers risks making the UK’s regulatory regime even more interventionist and more of an outlier when compared to other international markets.

9. The CMA is rightly subject to several procedural safeguards regarding the conduct of market investigations, including statutory thresholds for initiating and concluding an investigation and for imposing remedies which, once finalised, cannot and should not be amended. A dilution of these safeguards in the Bill, by effectively lowering the thresholds for such significant interventions by the CMA and reducing certainty as to when and what basis the CMA can intervene, would: 1) significantly increase the resource and financial burden on firms 2) may lead to changes that do not take sufficient account of developments in market and consumer behaviour, such that they may not be in the best interest of promoting competition 3) lead to ongoing business uncertainty for an extended period of time following completion of the market investigation, and 4) greatly increase the CMA’s discretion to intervene in a market (given how broadly the Bill is drafted). This has clear implications for the impacted parties, and will likely result in a reduction of innovation as a focus on compliance takes resources and attention from innovative new projects.

10. The financial services sector is already unique in being subject to both the FCA’s and PSR’s conduct and competition powers, in addition to those of the CMA, as well as further oversight from the PRA. Given the overlap between financial services activities and other sectors, and the number of active regulators, it is important that there is clear regulatory co-operation in market interventions with an aim of minimising disruption to innovation and competition that might be caused by repeated variation of a remedies package. The CMA should draw on the expertise of sectoral regulators like the FCA and the PSR and should also consider any parallel regulatory initiatives that are ongoing or anticipated which might be effective in addressing its concerns.

11. The Bill should at a minimum be amended to clarify that the new powers will apply only to market investigations that have commenced after it has been passed by Parliament. Previous market investigations were carried out on the basis – by the CMA as well as market participants – that there was limited scope to vary the resulting remedies. This shared understanding inevitably influenced the nature of past market investigations and the design of the remedies that resulted from them. Granting the CMA the power to amend remedies imposed prior to these reforms would effectively amount to retrospective regulation, which is at odds with the principles of sound public governance. The Bill should also be amended to set out requirements for an impact assessment to be carried out on the new powers, and the CMA should provide guidance on their application. The CMA should also be required to consult industry before the new regime is introduced, as this would help to ensure that any future proposals are workable and proportionate.

12. This is particularly important in the context of Open Banking, which was one of the 15 remedies imposed following the Retail Banking Market Investigation. Whilst the Order was created in 2017 the CMA only recently determined the implementation phase to be complete and it remains open. The project was intended to last 18 months and cost the industry £20 million but the actual cost has been far greater . In addition, the broader cost of Open Banking to the industry is now estimated to be over £2 billion. Retrospective revision of the Open Banking remedy to provide a new basis for ongoing CMA intervention in this market would be inappropriate, particularly as HM Treasury consider the long-term legislative framework and the FCA and PSR take forward further work to improve Open Banking and develop a new commercial framework.

CMA powers to levy fines for breaches of market investigation remedies

13. We believe the proposed ability for the CMA to levy fines to an upper limit of five per cent of a firm’s annual global turnover for breach of a market investigation remedy (as provided for in new section 167A of EA02, set out in schedule 9 to the Bill) is neither necessary nor proportionate to any harm that may be caused. The risk posed by the proposed penalties will add to the financial and compliance burden on UK businesses, which will reduce the resources available to invest in other innovative projects that encourage economic growth.

14. The CMA’s current approach to market investigation remedies makes it difficult for firms to demonstrate that they are taking appropriate and proportional steps to ensure compliance. The CMA states in its guidance that "any instance" of noncompliance with an obligation will be viewed as a breach regardless of any effect on competition or consumers, and that all breaches, and potential breaches, must be reported to the CMA, regardless of how they occurred for the CMA to determine whether it considers the issue to be material. Coupled to this, while the CMA states in its guidance that it determines materiality on a case by case basis (and takes into account impact and potential impact on customers, consumers or competition, as well as duration), it has a low threshold for what it considers to be material. For example, it cites that a breach of an information requirement might not be considered material if it occurred for a very small group of customers - defining 'small' as fewer than 50 customers, far lower than can reasonably be expected to have an impact on market competition. This means it is often unrealistic to achieve 100 per cent compliance with the CMA’s obligations. This approach means firms are at a risk of potential enforcement action in some cases for even the most technical and granular breaches, leaving members exposed to disproportionate reputational and financial repercussions.

15. Given the pre-existing concerns around the CMA’s approach to reporting and enforcing compliance, the need for a review would become urgent if the regulator is granted new fining powers. As a market investigation is focused on specific features of the market, and not on wrongdoing or illegality of any given market participant, it would be wholly disproportionate for the CMA to be able to impose fines of a similar order of magnitude to those available for a price fixing or a market sharing cartel, when sufficient analysis on the adverse consequences for both businesses and consumers hasn’t been carried out. Compliance with behavioural market investigation remedies should not be conflated or confused with compliance with competition law. Moreover, at present, our members self-report breaches to the CMA. Any additional changes to the reporting process are likely to make it more complicated, which will increase the administrative burdens on the CMA and firms.

16. It is also important to distinguish between the fining powers for market investigation remedies and fining powers for remedial action in other areas, such as in relation to merger control, which is also provided for in the Bill. The latter can require a higher threshold as merger control interventions are often related to one-off high-stakes transactions, and the remedies are often straightforward to implement (for instance, a divestment of the target business following a prohibition decision). This contrasts sharply with market investigation remedies, which often present ongoing, typically technical and granular compliance obligations. Breaches of market investigation remedies can often happen inadvertently due to technical issues faced when, for instance, developing and implementing new IT infrastructure necessary for compliance. As we have outlined, it is the experience of our members that the CMA often takes a more technical view of breaches than the financial services regulators.

17. We therefore believe that a significantly reduced fine cap should be used in the first instance, and be applied to UK turnover only, particularly as the Bill provides the Secretary of State with the power to increase the fine threshold if it is seen as unworkable in the future. We would strongly urge the government to consult further on the current fine proposals to help offer clarity at the outset. It is also essential that the CMA’s Statement of Policy (which we note cannot be published without the Secretary of State’s consent) clearly sets out: 1) how the new powers to fine will fit with the current enforcement regime 2) whether the current CMA guidance on the enforcement of market investigation remedies is proportionate 3) how it views the concept of "reasonable excuse"; 4) the relevant factors for determining the appropriateness and magnitude of fines, which should include transparent and clear parameters on what would constitute a fineable breach factoring in materiality and consumer impact (i.e. the seriousness and duration of the breach) and the possibility of rectification and remediation (i.e. how the CMA will allow sufficient opportunity for firms to engage with the CMA and to fix the problem before enforcement action is taken); 5) why the five per cent annual limit is appropriate 6) the circumstances in which it would be appropriate to look at a firm’s worldwide turnover, rather than UK turnover in the relevant market and 7) a time limit beyond which past breaches could not incur a fine.

18. The ability to fine individuals in relation to breaches of market investigation remedies was not proposed or consulted on prior to publication of the text of the Bill, with the original BEIS consultation and Government response referring merely to "stronger penalties for companies that fail to comply". There has therefore been no assessment of whether this power is needed or justified, or the circumstances in which it would be appropriate. We understand that it may be intended to apply to individuals who are personally subject to such a remedy, but this needs urgent clarification.

19. In addition, we would strongly urge the government to make clear in the Bill that the new fining powers will only apply to breaches of obligations and remedies imposed after the Bill has been passed. This would ensure procedural fairness, given market participants had given undertakings and made representation on proposed remedies in circumstances where their understanding of the potential consequences of breach were entirely different. It would also align with the Better Regulation Framework and provide firms with certainty that they will not face the prospect of indefinite potential liability for future breaches of existing remedies.

20. Ultimately, there are already significant reputational and financial repercussions for breaches of market investigation remedies ( e.g. public breach letters, directions and third party monitoring at the firm’s cost), and there is no evidence that firms are deliberately breaching market investigation remedies for lack of deterrence. Therefore, any power to impose fines should only be reserved for situations where the CMA’s existing enforcement toolkit has proved ineffective – such as where a firm persistently fails to self-report material, known breaches, or whether a firm has failed to comply with Legal Directions.

21. Thank you for taking the time to consider this submission . In closing, we would like to reemphasise our support for the government’s underlying objective of preserving effective competition in the interests of consumers. We want to help the government deliver this while maintaining the UK’s reputation as a predictable and business friendly jurisdiction. We will continue to work with our members to discuss the Bill and will look to provide commentary when appropriate.

13 June 2023


Prepared 15th June 2023