A new (lower) bar for dawn raids on domestic premises
Surprise regulatory inspections, or "dawn raids", naturally took a back seat during the pandemic and are now back on the rise – with the Competition and Markets Authority (CMA) also having to grapple with how to carry out dawn raids now so many people work from home.
A recent case has bolstered the CMA's ability to carry out dawn raids at home, further supported by new powers in the Digital Markets Competition and Consumer Act. In-house legal and compliance teams should plan for dawn raids of colleagues at home and may need to update policies and training accordingly.
The High Court has ruled that, when applying for warrants for dawn raids of domestic premises, the CMA does not require additional evidence of a "propensity to destroy documents". However it did confirm that a warrant to conduct a dawn raid on domestic premises required additional scrutiny on human rights grounds.
On 22 April, the High Court held that the Competition Appeal Tribunal (CAT) was wrong to hold that it would be insufficient to infer a propensity to destroy documents from the mere existence of a cartel in relation to warrants to enter and search domestic premises.
This decision stems from an application to the CAT by the CMA for warrants to enter and search both business and domestic premises. In December 2023, the CAT substantially granted the CMA's application. The CAT held that the CMA was entitled to infer a propensity to destroy documents from the mere existence of a cartel in relation to business premises. This is because a cartel, by nature, is secretive, and the CMA's power to investigate should not be unduly fettered. This confirms the existing legal position of competition dawn raids on business premises.
However, in relation to domestic premises, the CAT considered that the mere existence of a cartel was not enough to justify the issuance of a warrant, and something more to suggest a propensity to destroy documents needed to be shown, particularly where the premises are occupied by others.
The CMA challenged the CAT's decision. While it accepted that domestic premises warrants required a higher degree of scrutiny, the CMA submitted that the CAT was wrong to interpret the legislative provisions governing domestic and business warrants differently, given that the wording of the respective provisions are identical in the legislation.
Ultimately, the High Court agreed that the CAT had been wrong. There may be cases where such inference is justified without any additional evidence, and this would be a matter to be decided on the facts of each case. Relevant facts include the seniority of the individual being raided and their level of involvement in the cartel.
Dawn raids of domestic premises have become increasingly common with the rise of homeworking and electronic communication. The Digital Markets, Competition and Consumers Act also adds to the CMA's dawn raid powers by including powers to enter a premises under a warrant when there are reasonable grounds for believing the document(s) may be accessible from the premises, the power to operate equipment (most likely computers or laptops) to access the document(s) and the power to require assistance in accessing these. Consequently, businesses must ensure their competition compliance training reflects this as it is possible that the CMA (or other authorities) could surprise employees on domestic premises at any time and obstruction of these officials can lead to fines. It is also vital that employees are aware of their privacy rights in relation to personal documents and images.
Digital Markets, Competition and Consumers Bill
The highly-anticipated Digital Markets, Competition and Consumers Act (DMCC) received Royal Assent on 24 May 2024. This followed a lengthy process of deliberation by both the House of Commons and the House of Lords. We explain the five things that businesses need to know in our recent Insight. The first action being that businesses have until 12 July 2024 to respond to the CMA's consultation on how it proposes to use its digital powers.
When thinking about the CMA's powers, how it might use them and the political pressure it might be under, it is interesting to understand the sticking points in the legislative process. We saw the House of Lords pushing back on certain House of Commons amendments, which the Lords saw as restricting some of the freedom of the CMA to intervene in digital markets. However, amendments proposed by the Lords were rejected by the House of Commons on 30 April 2024. Opposition parties in the Commons largely supported the Lord's amendments but were out-voted by the Conservative majority by a margin of approximately 100 each time. This has drawn criticism from some in the Labour Party, who complain of a "watered-down version" of the legislation, raising the question of whether a potential Labour government might bolster the CMA's confidence as a more interventionist regulator. Undoubtedly, we can expect the CMA to become more political as it flexes its new muscles.
The DMCC returned to the House of Lords on 14 May 2024. This time, the Lords accepted three key amendments made by the House of Commons:
Merits based review
As the DMCC was initially drafted (and before consideration by Parliament), an appeal of any decision made by the CMA under this legislation would needed to have been made by way of judicial review. This is a relatively high bar to meet. However, the House of Commons considered that appeals against the quantum of fines imposed by the CMA should be determined on a full merits basis. The House of Lords amendments sought to return the bill to its original state, by requiring appeals against the quantum of fines to be brought on the judicial review basis. The House of Commons held firm and did not agree to the Lord's amendment. The appeals basis has been something of a sticking point during recent months, but the Lords have now backed down and accepted the House of Commons' amendment. The bill therefore becomes law with the merits-based standard for appeals to the quantum of fines imposed by the CMA.
Countervailing benefits exemption
At high level, the DMCC will require the CMA to close a conduct investigation where the relevant undertaking shows that the conduct being investigated provides benefits to consumers that outweigh the detrimental impact on competition resulting from a breach of the relevant conduct requirement, and that the conduct is required for the realisation of those benefits.
The Lords' position was that the countervailing benefits exemption should only apply where the conduct in question was "indispensable" to the benefit to consumers. By contrast, the Commons preferred a less restrictive approach that would apply where conduct was "proportionate" to realise the benefit to consumers.
In the latest round of amendments, the Lords has accepted the Commons' amendment, and it appears that, as a result, potentially anti-competitive conduct of firms with strategic market status (SMS) will be permitted where it is proportionate to achieve consumer benefits – introducing a process more akin to traditional competition law.
Pro-competition interventions and proportionality
The DMCC will give the CMA power to impose conduct requirements on SMS firms and to make pro-competitive interventions in order to remedy behaviour that would otherwise lead to an adverse effect on competition. Some have argued that the House of Commons has sought to fetter this power by requiring the CMA to act "proportionately" in relation to conduct requirements and pro-competition interventions. The Lords disagreed with the House of Commons' approach and preferred that the CMA have the power to act where it was "appropriate", without needing to ensure that action taken was "proportionate". Although largely a point of legal interpretation, this nevertheless has the potential to be a key background for interpretation of the digital markets regime in future.
The Commons rejected the Lords' final amendment on 21 May 2024 and proposed an amendment in lieu. For more discussion of the Lords' amendment, please see our Consumer law section. Following the prime minister's announcement on 22 May of a general election, the Commons' amendment was finally accepted by the Lords the following day and Royal assent on Friday 24 May – demonstrating the weight of support behind this significant piece of legislation.
Competition and financial services
The Financial Conduct Authority (FCA) has issued its feedback statement on the Call for Information (CFI) on potential competition impacts from the data asymmetry between Big Tech firms and firms in financial services. The initial CFI was published in November 2023 following feedback received on a discussion paper on this topic.
The FCA's analysis found that while there are currently no significant competition harms arising from the data asymmetry, there are three key issues that could adversely affect competition in retail financial markets in the future.
Firstly, there is a risk of data asymmetry increasing barriers to entry and expansion in financial markets over time, which the FCA considers could lead to Big Tech firms gaining market power. The FCA says that the value of Big Tech firms' data in financial services is still unclear, but there are potential use cases in areas such as consumer credit and insurance.
Secondly, the FCA suggested there is a risk of Big Tech firms' platforms becoming the primary access channel for retail financial services. The FCA's view is that as digital wallets evolve and offer a range of financial services, Big Tech firms could become gatekeepers, adversely impacting competition in downstream financial markets.
Lastly, the statement suggests that there is a risk of financial services firms' upstream partnerships with Big Tech firms being concentrated, limiting the bargaining power of financial services firms. This could affect competition in downstream financial services markets and reduce firms' ability to innovate.
To address its concerns, the FCA has outlined four next steps. These include:
- monitoring Big Tech firms' activities,
- identifying and piloting use cases to test the value of Big Tech firms' data,
- examining how firms' incentives can be aligned to share valuable data, and
- working closely with the Payments Systems Regulator (PSR) to understand the risks and opportunities associated with digital wallets.
Also notable was the concern raised by some financial services firms that competition enforcement is backward looking. The FCA committed to working with the Digital Markets Unit, which now has its powers under the Digital Markets Competition and Consumer Act saying that "establishment of the new pro-competitive regime for digital markets will proactively drive more dynamic markets and mitigate harmful practices that hold back innovation and growth".
National Security and Investment Act
The UK government has announced a timetable for changes to the National Security and Investment Act 2021 (NSIA) regime. This follows the Cabinet Office publishing the outcome of its call for evidence, seeking views on how to make the NSIA regime more business-friendly while maintaining national security protections. Please see our Insight for more information on this.
Under the NSIA regime, the government can intervene in transactions on national security grounds in 17 high-risk sectors. On 21 May, the government published an updated statement on how it intends to exercise the call-in power and updated market guidance, including factors for assessing risk and the application of the NSIA regime to academia, research, and outward direct investment.
In April the government committed to launching public consultation on updating the Notifiable Acquisition Regulations will be launched in the summer. These regulations specify the 17 sensitive areas subject to mandatory notification requirements. In the autumn, the government intends to lay legislation on technical exemptions to the mandatory notification requirement which will involve undertaking a national security risk assessment. Whether this consultation takes place and the status of this legislation is uncertain as a result of the general election being called.
The Labour Party's stated approach to the NSIA regime suggests handling the 17 areas through three clusters: clean energy, digital, and advanced manufacturing. The party also suggests incentivising British funds and companies to invest in promising British companies while maintaining a clear position on using NSIA powers to defend against foreign investment posing security risks. However, the paper emphasises the need for deeply connected supply chains with trusted partners such as Australia, the US, Japan, and the EU.
Businesses seeking investment or involved in M&A may be disappointed that the call for evidence has not led to as many changes as expected. The government's plans for targeted exemptions for internal reorganisations will only be considered after a further risk assessment and would require additional legislation. This additional legislation appears unlikely to happen in the short term, especially with the recently announced election.
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