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Avoid 'broad-brush' regulation of online platforms, says CMA chief

Policy makers have been warned not to impose new "broad-brush" regulatory requirements on online platforms by the head of the UK's main competition authority.27 Oct 2015

Alex Chisholm, chief executive of the Competition and Markets Authority (CMA), said there should be more emphasis on using retrospective competition law powers to address issues of consumer harm in the platforms market than on setting new regulations. Chisholm's comments come as the European Commission considers whether to subject online platforms to tighter regulation.

In a speech in Bonn in Germany, Chisholm questioned whether "any type of broad-brush legislation or economic regulation could provide satisfactory outcomes" in the market for online platforms given the diverse nature of those platforms and their operations.

"Is there sufficient commonality in the evolving ecosystem of the web for us to judge that certain business models ought to be subject to regulation or enforcement action?" Chisholm said. "I challenge you to tell me what characteristics the following online models uniquely share: communications and social media platforms; operating systems and app stores; audiovisual and music platforms; e-commerce platforms; content platforms (itself a diverse group); search engines; payment systems; sharing platforms … and the list could go on. Different platform characteristics will give rise to different issues, and regulation must remain case-specific if we are to minimise the risk of applying the wrong rule to a novel situation."

Chisholm said that an 'ex ante' approach to the regulation of online platforms could have negative effects on the market. 'Ex ante' regulation is where individual markets are identified as containing features that inhibit competition and where some businesses in that market are placed subject to conditions on the way they can operate in an effort to promote better competition as a result.

Chisholm instead said competition law tools that can be applied retrospectively, or on an 'ex post' basis, remain relevant for regulating digital markets and addressing issues of consumer harm.

"In terms of the timing of any intervention, I see three types of risk [of ex ante regulation]: (i) acting prematurely, (ii) inadvertently ossifying evolving market structures, and (iii) acting too late," Chisholm said. "The most significant risks, in my view, arise from premature broad-brush ex ante legislation or rule-making in markets that are still rapidly evolving."

"The risks of getting it wrong suggests that we need to begin to shift from broad-brush ex ante regulation to ex post antitrust enforcement, which is better adapted to responding to the rapidly changing innovative markets online platforms operate in," he sad. "Ex post tools have the inherent advantage of being more targeted and proportionate by examining the extent to which actual harm may have occurred based on empirical evidence on a case-by-case basis."

Competition law expert Guy Lougher of Pinsent Masons, the law firm behind Out-Law.com, said Chisholm's speech "highlights the practical difficulties in achieving 'Goldilocks' regulation for online platforms".

"If the authorities intervene too early, whether using their competition or consumer powers, they risk over-regulating transient technologies or businesses, or potentially even distorting the development of nascent markets," Lougher said. "Conversely, if the authorities intervene too late then important consumer-facing markets may have already become distorted by incumbent dominant players. In short, there are significant issues of when and how the authorities should intervene in relation to online platforms."

"Even if a competition authority decides to intervene in a particular case using its competition powers, there are significant dangers of doing so using already outdated approaches to market definition that do not adequately take into account the rapid evolution and interlinking between online platforms performing an intermediation role and the providers of the underlying goods or services," he said. "The CMA is absolutely right to approach this area with considerable caution."

In his speech, Chisholm admitted some competition law concepts are not easily applied in the context of digital markets, and that competition authorities need to find ways to respond to problems in digital markets faster when operating under the 'ex post' model of regulation.

"Investigations, even where litigated through the courts, should not take 10 years to complete, and arrive only when the market has changed beyond recognition," Chisholm said. "This means considering opportunities for expedited action, including interim measures to prevent harm arising while we investigate, as well as means to achieve earlier outcomes through commitments or settlements."

The CMA chief executive said businesses can help make the case for the shift towards less pre-emptive regulation to more of a retrospective approach by being more transparent about the way they operate, taking steps to win consumer trust on data protection and privacy and by continuing to innovate.

Whilst making the case for more 'ex post' regulation of online platforms, Chisholm did suggest steps could be taken to address issues in the market. Measures could include clarifying consumer protection issues, setting new data protection standards and imposing minimum privacy rights, he said. Chisholm said that deregulation in the platforms market could also be explored and help improve consumer outcomes.

"Policymakers and regulators should be open to the idea that a review of existing regulation and its suitability in the context of online platforms may in certain cases actually result in a withdrawal of such regulation - creating a reasonably level playing field by ‘levelling down’ as opposed to ‘levelling up’," Chisholm said.

"The benefits brought about by certain online platforms may provide good arguments for pursuing a deregulatory approach. For instance, they can expand the range of options and information available to consumers, by facilitating reputational feedback mechanisms, thereby potentially reducing the problem of asymmetric information between producers and consumers. This could lower or even remove the need for regulation, allowing more scope for market competition to fix problems," he said.