Consultation outcome

DMCCA 2024: government response to the consultation on turnover and control regulations

Updated 2 December 2024

Regarding:

The Digital Markets, Competition and Consumers Act 2024 and Consumer Rights Act 2015 (Turnover and Control) Regulations 2024,

The Competition Act 1998 (Determination of Turnover for Penalties) Regulations 2024, and 

The Enterprise Act 2002 (Mergers and Markets Investigations) (Determination of Control and Turnover for Penalties) Regulations 2024

Introduction

In July 2024, the government published a consultation to gather views on 3 draft statutory instruments (SI) which set out how the Competition and Markets Authority (CMA), civil courts or other enforcers will estimate or calculate turnover for the purposes of the Digital Markets, Competition and Consumers (DMCC) Act 2024.

The consultation sought views on the draft provisions to enable the calculation of turnover for determining penalties for the purposes of the DMCC Act, and for the estimation of turnover for the purposes of designating companies with Strategic Market Status (SMS) under the new digital markets regime established by the DMCC Act.

The consultation received 7 responses, in line with our expectations since the provisions are largely consistent with precedents elsewhere in competition law. The responses were primarily from trade associations and media organisations. One response came from an internal government arm’s length body (ALB), and another from a technology campaign group. We are grateful for the time these stakeholders have taken to review and respond to the consultation.

The majority of the comments made by respondents were supportive of our draft provisions. This response outlines all changes made in response to the consultation and responds to suggestions made by respondents.

Please note that since the publication of the consultation, there have been some technical amendments to the way the instruments are drafted. These amendments were made to improve clarity and precision. However, no changes have been made to the underlying policy.

Notably, to ensure the regulations are as clear and user-friendly as possible, the government has taken the decision to separate the provisions governing the concept of control and the calculation of turnover in respect of consumer penalties into those that govern penalties under the DMCC Act and those that govern penalties under the Consumer Rights Act 2015. The policy and drafting of the relevant provisions have not changed, and Schedule 3 to the regulations continues to apply to both equally.

The government will lay these SIs by negative procedure on 29 November 2024.

Executive summary

There were 7 responses to the consultation.

The majority of the comments made by the respondents were supportive of the provisions in the draft statutory instruments.

In particular, respondents’ comments reflected support for:

• consistency with existing secondary legislation and regimes
• the built-in flexibility of the provisions regarding the CMA’s estimation of turnover relating to UK users for the purposes of SMS designation
• that the draft provisions will capture all forms of revenue, including digital revenue

Government will lay these instruments in parliament by negative procedure, per the DMCC Act. The 3 instruments will set out the process for the CMA to calculate statutory maximums for penalties, the concept of control, and the manner of estimation of turnover for SMS designation investigations.

Summary of consultation response and government response

How turnover will be estimated or determined

Associated consultation questions

1. What are your views on the amounts listed to be taken into account, including the treatment of subsidies, for:

a) SMS designation

b) Digital markets penalties

c) Competition penalties

d) Motor fuels penalties

e) Consumer penalties

f) If you disagree with the proposed approach, please explain why you do not think these provisions are appropriate

2․ In relation to SMS designation, what are your views on the draft provisions for determining whether turnover relates to UK users or UK customers?

a) If you disagree with the proposed approach, please explain why

Consultation responses

There were 6 supportive comments made by 5 respondents related to question 1, which generally welcomed the provisions, with 2 mentioning support for the particular wording used in the drafting, such as use of the word ‘products’ that ensured that revenue from free digital services is captured, and 2 reflecting support for alignment with existing merger control regimes.

Four respondents made comments that suggest improvements to add clarity to the draft provisions. One comment indicated that the instruments should outline how appeals to any calculation of turnover should be handled. Another comment suggested that it was not clear that services that are free to the end-user (such as digital advertising revenue) will be included in the turnover calculation. On the provisions that deal with subsidies, 2 respondents outlined that some grants and gifts are not covered by the current wording of the draft instruments, such as charitable donations.

The majority of comments in answer to question 2 were supportive of the draft provisions in relation to the CMA’s estimation of turnover in relation to UK users or customers. There were 4 supportive comments. Of these, 3 mentioned support for the built-in flexibility of the provisions, and one mentioned support for consistency with merger control regimes.

One respondent suggested that there was a need to make the provisions more flexible than drafted.

Government response

The government welcomes the overall support for the policy and drafted legal language of the instruments in response to questions 1 and 2. This confirms that the government’s approach to the amounts that should be included in the estimation or calculation of turnover are appropriate for the listed purposes under the 2024 Act.

While we acknowledge the importance of the appeals process for CMA decisions and actions, it is not necessary to include provisions on the process of appeal in the instruments themselves. This is because appeals to the CMA’s decisions are handled through the Competition Appeal Tribunal (CAT), which is set out in separate legislation under Competition Act 1998 and the Enterprise Act 2002. The CAT rules are being updated specifically for 2024 Act in separate regulations.

The government can confirm the intention that revenue generated from free services will be included in the turnover calculation or estimation. This is because many firms subject to this calculation will generate revenue from free services, such as digital advertising. To ensure that this point is sufficiently clear in the instruments, new wording has been added.^{[footnote 1]}

In relation to the treatment of subsidies, the intention is that any grant or subsidy that is not covered by the provisions will not be included in the calculation of turnover. This is because gifts, grants, donations or similar one-off amounts are deemed to be outside of an undertaking or person’s ordinary course of business, and therefore not appropriate for the calculation or estimation of a turnover figure.

The government notes the comment suggesting that more flexibility should be built into the provision listing the factors which the CMA must have regard to when determining whether turnover relates to UK users or customers.

Since this provision already gives the CMA sufficient discretion with regard to the factors that it must consider when determining whether turnover relates to UK users, under regulation 6(2)(c) of Schedule 1, it is not necessary to add further flexibility in the drafting. The government welcomes the views of the 4 other respondents who indicated that these provisions were suitably flexible.

Period and trigger event for the determination of turnover

Associated consultation questions

3․ What are your views, if any, on the definitions of the relevant accounting period and trigger events for the calculation of turnover for the purposes of digital markets, consumer, competition and motor fuel penalties?

4․ What are your views, if any, on the CMA or the court selecting the period immediately before the relevant accounting period if the turnover was higher in that earlier period (as it is done in SMS designation) for the purpose of the digital markets, consumer, competition and motor fuel penalties?

Consultation responses

Four respondents provided comments on the period and trigger event for the determination of turnover in response to questions 3 and 4.

One respondent was supportive of the provision set out in question 4, that the CMA can select the period immediately before the relevant accounting period if the turnover in that period is higher, in relation to firms with SMS designation. The respondent argued that these firms, due to their strategic importance in the market, could cause significant harm to competition and therefore calculating a penalty according to a higher turnover was proportionate.

However, the respondent did not consider this measure was appropriate in relation to consumer penalties. They argued that the smaller firms that may be subject to consumer penalties could end up paying disproportionate penalties, because their turnover is more likely to fluctuate from year to year.

Another respondent supported the measure, highlighting that the flexibility to choose the preceding period if turnover was higher in that period was helpful in guarding against the use of accounting mechanisms to engineer a lower figure, but they argued that this measure would be even more effective if the highest figure for the last 3 years could be used instead.

Government response

Government welcomes the comments on the period and trigger event for the determination of turnover. Whilst we note the concerns over the possibility of smaller firms with fluctuating turnover being subject to disproportionate fines, we believe there are adequate safeguards in place. The regulations set out the turnover the CMA or court must use to calculate the maximum level of penalty that can apply. That figure does not determine the actual penalty that will apply, which must be appropriate in each case.

The government is confident that the CMA or courts will impose penalties that are appropriate to the particular breach. The CMA has consulted on its approach to calculating penalties. This approach includes assessing the proportionality of a penalty and making appropriate revisions as a result. In both court and CMA proceedings firms will have an opportunity to make representations on the size of the penalty relative to turnover and wider financial position.

Finally, the recipient of a CMA notice imposing a penalty will have a full-merits right of appeal against, among other issues, the amount of the penalty.

Enabling the CMA or court to use the previous period if the turnover is higher than the relevant period provides some protection against firms using accounting mechanisms to engineer a lower turnover figure for the purposes of penalty calculation. Whilst we consider this provision to be a reasonable measure if a firm’s turnover in its relevant period is not representative, using the highest figure in the previous 3 years could result in disproportionate fines, particularly for businesses with fluctuating turnover due to challenging circumstances.

However, we emphasise that this is only in cases where the turnover in the relevant period is not representative. The CMA would look at the facts and circumstances in each case and use an appropriate period in calculating the turnover.

Overall, government considers the provisions setting out the period and trigger event for the determination of turnover are balanced and proportionate with suitable safeguards in place.

Special provisions

Associated consultation questions

5․ What are your views, if any, on the way in which the SI sets out how the CMA will determine turnover for financial institutions, insurance undertakings and credit institutions, including hybrid institutions, for:

a) SMS designation

b) Digital markets penalties

c) Competition penalties

d) Consumer penalties

e) Motor fuels penalties

f) If you disagree with the proposed approach, please explain why you do not think these provisions are appropriate?

Consultation responses

In total, 3 respondents provided comments on the special provisions for financial institutions, insurance undertakings, and credit institutions, including hybrid institutions.

Of these, one respondent outlined how they consider the provisions to be ‘future proof’. Two comments mentioned support for the explicit inclusion of institutions and undertakings based outside of the UK, and one highlighted that specifying ‘gross’ income is appropriate for a wide range of relevant entities.

Two respondents made comments in opposition to the proposed provisions. One respondent questioned whether special provisions were needed, and another left several comments, one of which highlighted that the legislative references in accordance with which the listed ‘income items’ are to be interpreted (in order to calculate the turnover of credit or financial institutions) use slightly different terminology for such income items and may therefore be hard to interpret. The respondent made several other comments outlining that there may be difficulties in interpreting the income items within current accounting standards.

Government response

The government thanks stakeholders for their engagement with question 5. The supportive comments confirm that our approach to financial institutions, credit institutions and insurance undertakings meets our aim to capture the turnover for all types of institutions accurately, including those based overseas.

The government would like to take this opportunity to clarify the need for these provisions. Since the product of these types of entities is financial in nature, ordinary methods of calculating turnover are not appropriate as they may capture financial products as revenue, leading to an inaccurate turnover figure. This is why special provisions are included in UK legislation that deals with turnover, including relevant competition law precedents. The government hopes that this clarifies the need for these provisions for the concerned stakeholder.

In regards to the ‘income items’ list, we thank the respondent for pointing out that the precise terminology used for the income items in our provision is different from the terminology used in the UK legislation we have referenced (in accordance with which we want these income items to be interpreted). We agree that this may make it slightly difficult to interpret the listed income items. Accordingly, we have reconsidered our approach.

As such, the income items are now to be interpreted by reference to the relevant EU accounting directive which uses the same terminology for the income items as this instrument. This approach to interpreting the income items is the same as the approach taken in existing secondary legislation concerning turnover under competition law as well as the National Security and Investment Act, 2021 and thereby provides greater legal certainty.

Exchange rates where accounts filed in a different currency

Associated consultation questions

6․ What are your views, if any, on the outlined approach to exchange rates where accounts are filed in a different currency?

Consultation responses

Three respondents provided comments on the approach to exchange rates where accounts are filed in a different currency. All responses were supportive of the government’s approach. Exchange rates are relevant while calculating turnover of the company for the purpose of SMS designation and penalties.

One respondent supported the approach taken as it aligns with the existing legislation and thereby provides certainty and is likely to prevent disputes. Another respondent stated that they were supportive of the proposal as it provides a clear-cut and sensible approach that will be straightforward for companies. A further respondent supported the discretion provided to the CMA to calculate currency conversion rates in the way it considers appropriate.

Government response

The government welcomes the support in response to question 6 which confirms that the proposed approach to exchange rate calculation is appropriate. The government’s approach will allow the determination to be made in sterling, allowing the decision maker to apply an exchange rate and rounding figure as they consider appropriate.

Control

Associated consultation questions

7․ Are there other factors or considerations the government should include when defining how someone may have control over an enterprise?

Consultation responses

Five respondents responded to this question. Respondents were generally supportive of the approach taken to defining ‘control’ for the purposes of s204 of the Act and paragraph 16H of Schedule 5 to the Consumer Rights Act 2015. Supportive respondents welcomed that the tests applied in the regulations are consistent with existing legislation that has been shown to reflect the realities of corporate control.

One respondent expressed concern that the words ‘materially influence the policy of’ could be interpreted restrictively, in such a way that non-financial influence, or influence on actions, could be excluded.

Government response

The government is confident that the concept of materiality is sufficiently broad and legally well understood that it will capture types of influence other than purely financial, and that the reference to the policy of the body corporate will capture situations where the control or influence has been sufficient to affect a course of action or behaviour.

Respondents

Respondents to the consultation included:

• DMG Media
• News Media Association
• Which?
• Epic Games
• The Coalition for App Fairness
• The Financial Reporting Council
• Linklaters LLP

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1. For example, see words ‘directly or indirectly’ in paragraph 2(1) of Schedule 1 to the Digital Markets, Competition and Consumers Act 2024 and Consumer Rights Act 2015 (Turnover and Control) Regulations 2024 ↩