Policy paper

Final offer mechanism: policy summary briefing

Updated 21 December 2023

Introduction

1. The Digital Markets, Competition and Consumers Bill will establish a new pro-competition regime for digital markets, targeted at a small number of firms which will be designated with ‘Strategic Market Status’ (SMS firms) in one or more digital activities. The regime will be overseen by the Digital Markets Unit (DMU) within the Competition and Markets Authority (CMA).

2. Once a firm is designated with SMS in respect of a particular digital activity, the DMU will be able to set enforceable conduct requirements. These tailored rules will manage the effects of market power and establish clear expectations on how each firm should treat consumers and other businesses.

3. Following consultation with stakeholders, the Final Offer Mechanism has been developed as a backstop measure to resolve breaches of conduct requirements relating to payment terms between SMS firms and third parties.

4. This mechanism was first proposed as a sector-neutral tool for the new pro-competition regime in the CMA and Ofcom’s advice to the government on platforms and content providers in November 2021. It has been designed as a tool of last resort that incentivises parties to engage sincerely at every stage.

Tackling unfair payment terms

5. Imbalances in bargaining power between some tech firms and other businesses make digital markets susceptible to unfair payment and pricing terms. The DMU will be able to create conduct requirements obliging SMS firms to deal on fair and reasonable terms, including for payment.

6. If the DMU suspects non-compliance with a conduct requirement, including as a result of a complaint by a third party or parties, it can launch a conduct investigation to determine whether a breach has occurred. SMS firms found in breach can be ordered by the DMU to bring their behaviour in line with the conduct requirement through enforcement orders, and the DMU can also issue fines. In most cases, we expect that these enforcement tools will bring the breach to an end.

7. However, there may be some scenarios where these enforcement tools do not result in compliance, particularly where there is prolonged disagreement between the parties about complex payment terms. In these cases, the DMU needs appropriate powers to resolve the breach.

8. Although the DMU will have the power to set prices directly, ​​digital markets are complex and fast-moving. This means that in some circumstances where conduct requirements to have fair and reasonable payment terms are breached, it may be challenging for the DMU itself to identify what constitutes fair payment and set prices.

How will the Final Offer Mechanism work?

9. Where direct price setting is not appropriate, and where the threshold for use set by the legislation is met, the DMU will be able to use the Final Offer Mechanism to resolve breaches of conduct requirements relating to unfair payment terms.

10. The Final Offer Mechanism will require the DMU to choose between two final offers made by the parties, without any ability to put forward alternative payment terms. This will incentivise parties to put forward a sincere ‘final offer,’ as the decision-maker will choose the offer which it considers to be more reasonable; a party that favours itself too much risks the other party’s bid being chosen.

11. This tool is designed to allow for, and to incentivise, sincere private negotiations between the two parties, and as such the DMU only has discretion to use it as a backstop if:

a) Sufficient opportunity has been allowed for compliance: This means an SMS firm has been found in breach of a conduct requirement to offer fair and reasonable payment terms, and the DMU has imposed an enforcement order which the SMS has subsequently breached.

b) The DMU’s other tools are unable to address the issue in a reasonable time period: This could include scenarios where other tools that might address the underlying bargaining power imbalance (such as interventions to increase transparency and give access to data) would not address the breach quickly enough to prevent significant harm or further harm to a third party.

12. The types of cases where the Final Offer Mechanism may be appropriate are likely to be complex breaches relating to payment terms, where the parties do not have access to the same information and it is therefore difficult for them to negotiate on an equal footing.

Benefits of the Final Offer Mechanism

13. The existence of the Final Offer Mechanism will drive parties to negotiate sincerely on payment terms, as both sides will prefer to reach an agreement independently rather than risk a process where the regulator may choose the other party’s final offer.

14. Where the tool is used, making use of the parties’ own commercial expertise will allow faster resolution and avoid unintended consequences, and therefore creating better outcomes for consumers.

15. This is a sector-neutral tool, reflecting the CMA’s remit to promote competition for consumers. It is designed to be future-proof, as in evolving digital markets we do not know in which digital markets payment disputes may arise as a result of bargaining power imbalances in the future.

16. The DMU’s core focus will be on addressing the underlying competition problems that create the conditions for unfair payment terms. We are confident that the other tools available to the DMU will both prevent many disputes arising between SMS firms and third parties and permit effective resolution where they do. However, it is important that the DMU has an effective way to address breaches of conduct requirements relating to unfair payment terms where alternative tools are not suitable.

Annex - Overview of Final Offer Mechanism

Trigger

DMU suspects breach of conduct of requirement to offer fair and reasonable payment terms.

Informal resolution

Negotiations between parties as part of normal participative approach prior to breach investigation.

Formal enforcement process

1. Breach investigation launched for suspected breach of ‘fair and reasonable terms’ conduct requirement.
2. Conduct requirement breach found - DMU issues enforcement order, alongside possible fine where appropriate.

Statutory threshold test

1. Non-compliance persists and the enforcement order is breached.
2. DMU considers whether other DMU functions would sufficiently address harm within a reasonable time period. If not, it can initiate the Final Offer Mechanism.

Determination between the final offers

1. The DMU carries out information gathering and sharing between the parties to allow them to make fully informed bids and to negotiate on an even footing.
2. Each party submits a ‘final offer’ on what they consider to be fair payment terms. The DMU would select one of the two offers presented.

Appeal

Parties may appeal the process (judicial review principles).