Getting the scope right for regulating digital markets
It is always a sensitive question which companies are “in” and “out” for major regulations. It is particularly sensitive when being “in” can mean material additional costs, unwelcome constraints on the service provided to consumers and complex compliance processes.
On the one hand, consumers can lose out if services they rely on are caught up in regulations that were not really meant for them, potentially even leading them to shut down useful products. That might mean smaller companies that just meet the threshold for inclusion in a new regulation, or services that technically qualify but were not really what policymakers had in mind when they passed a certain law.
On the other hand, it can create a real competitive imbalance if you have two companies that are otherwise very similar, competing with one another, but subject to fundamentally different regulatory requirements. It can be hard for regulators to avoid putting their thumbs on the scale and driving market outcomes. In some cases, this can even mean firms avoid growing or launching new services in order to avoid being caught up in challenging regulatory regimes.
There is no easy answer here. This challenge needs to be understood as one price to be paid when passing new laws and another reason to avoid them being overly-ambitious or burdensome. However, regulators will almost certainly get better results if they fit regulatory attention to the scope of the risks that the regulation is designed to address, rather than working backwards from a small selection of well-known brands or an artificial category such as “tech”.
For example, the UK Office of Communications (Ofcom) has proposed criteria which will determine the obligations that services will face under the Online Safety Act, currently being considered by Michelle Donelan as Secretary of State. The criteria includes whether services provide a broadly defined “content recommender system” and have a certain number of users (e.g. registered online users). This broad definition could mean that some product listings on a purely online e-commerce service could be in scope of the highest risk category under the Act, and under onerous obligations for moderation. On the other hand, a supermarket selling the exact same kind of product in a physical store would not face the same level of regulation. Neither of these businesses were the Government’s intended focus of the Act and their importance for UK retail is pretty similar, but there will be an inequality in how they are regulated with obvious commercial consequences. This could easily be remedied by amending the thresholds to exclude all retail marketplace services before the categorisation is finalised.
There is another example in financial services. The Financial Conduct Authority (FCA) recently reported on the latest stage in its investigation into the potential impact of data asymmetries between leading technology companies and financial services. The investigation is simultaneously far too broad and far too narrow. It covers technology companies that differ wildly in the nature and extent of their engagement with financial services markets. At the same time, however, the FCA analysis started from the premise that a loosely defined category of larger technology companies were of interest instead of looking across the market (including financial services incumbents, financial services challengers and all kinds of market entrants with backgrounds in other sectors) and considering where there might be data asymmetries or other potential risks to competition.
Even though FCA found no evidence of significant harm, instead of looking elsewhere they still proposed pushing ahead with potential interventions. The investigation speculated about what might happen if there was a transformation in the market position of companies which mostly remain potential partners or challengers in financial services. This reflects its artificial scope, speculating about what concerns might arise with a particular set of companies, rather than taking an open look at markets and where problems were arising.
With major new laws being passed, regulators should be aiming for the most pro-competitive and proportionate implementation possible. Consumers will pay the price if regulators add to the burden artificially and go beyond the already ambitious intent when the laws were passed.
