The Global Consequences of Europe’s New Digital Regulatory Regime

EU lawmakers believe the new rules will address longstanding concerns about online trading of illegal goods and services, the sharing of harmful content, the use of manipulative algorithmic systems to spread misinformation, and the control of essential ecosystems in the digital economy by a few large platforms. The European Commission also insists that the new rules will protect users, drive growth in digital services and create a level playing field for smaller players.

However, like most new regulations of its scale, the DSA has many complex requirements that could impact its enforceability. Ambiguities in definitions and methodologies are also a concern to industry leaders as they could create new liability and risks for companies.

This white paper provides an overview of the DSA and key obligations. It also contains recommendations on what companies can do now to prepare. The broad scope of the DSA, both in terms of organizations to which it is applicable and the steps required to reach and maintain compliance, means that preparations should begin sooner rather than later. While the industry and supervisors need to do more work to understand the full scope of the rules, companies should use these recommendations as a blueprint to prepare for the new regulations and to gain a head start on bringing their current digital content management and governance practices closer to compliance.

On the Horizon: Sweeping Impact

The DSA is one of two significant pieces of digital legislation (the other is known as the Digital Markets Act or DMA) that, combined, will likely reverberate beyond Europe. Together, these rules will provide a concrete regulatory blueprint for policymakers in other jurisdictions who also seek to regulate the digital space and big technology firms. A perfect example is the socalled Digital India Act, proposed legislation modeled on the DSA and the DMA that is expected to be introduced in India during the upcoming winter session of parliament.

Approved by the Council of the European Union and published in the Official Journal of the European Union in October 2022, the DSA entered into force November 16, 2022. Very large online platforms and search engines have only four months after the rules are in effect to comply, while smaller companies can apply for an exemption from certain requirements. Most companies will have to comply with many of its provisions beginning February 2024.

The new rules will directly impact hosting services, large online platforms, and search engines. But, given the global nature of the internet and the business of large technology companies, the DSA also has broad implications for technology firms of all types, both small and large, and some nontech enterprises. In a statement following the Council’s formal approval, Jozef Sikela, minister for industry and trade, said he is convinced the DSA “has the potential to become the gold standard for other regulators in the world.” ^[1]

Notably, many DSA obligations are commensurate with companies’ offerings (e.g., hosting services, online platforms) and size (e.g., micro, small, large, very large). For instance, the DSA contains specific rules for platforms reaching more than 10% of Europe’s 450 million consumers. Micros and small companies, as defined by the DSA, have separate and proportional obligations, including exemption from specific costly requirements.

Complexities in the rules

While the DSA has been adopted by the European Parliament and will apply broadly across Europe, there are some aspects that may differ between countries. For example, one of the core objectives of the DSA is to prevent the spread of illegal content online; the text broadly defines illegal content to be “information relating to illegal content, products, services, and activities,” and the nature of illegality is defined by EU law and/or national law. Therefore, companies will need to understand how each country defines illegal content, products, services, and activities and adjust processes to monitor and manage content as needed across jurisdictions.

Skepticism across the industry

Reaction from the global tech industry to the DSA agreement has been broad and mixed. While the industry supports the overarching objectives of the new rules (to make the internet safer for all), many are skeptical about the technical details and the required implementation. For example, there’s some concern about the rules exposing platforms to liability from illegal content of which they are not aware. Concerns have also been raised about how the law defines harmful content, which the industry argues is culturally subjective and often legally ambiguous, whether the transparency measures in the DSA would also protect user privacy, and the feasibility of the implementation timeline.

How will the DSA be enforced?

The DSA imposes significant financial penalties on infringing companies; they could be fined up to 6% of their total worldwide annual turnover. A five-year review of historical EU fines shows that potential DSA fines would be significantly higher or consistently in the multibillion-dollar range if levied against some of the largest global service providers.

For regulators, enforcing these financial penalties and other mandates of the DSA will require significant investment in investigative resources and time. They need more funding and people with the right expertise to effectively police the internet (i.e., investigating, supervising, enforcing, and monitoring compliance) across many jurisdictions.

While the European Commission has announced funding to acquire additional investigative resources, critics fear that limited resources and manpower will result in ineffective enforcement of the DSA. To remedy this criticism and effectively enforce the DSA, the European Commission put forth a layered enforcement approach that involves partnering with national regulators or Digital Service Coordinators and relying on the support of a newly established entity known as “the Board.”

Below is a summary of the responsibilities for the enforcement regime.

Actions Companies Should Take Now

As the DSA’s effective date looms, global technology organizations will need to make a strategic decision regarding how they plan to align to its jurisdictional requirements. A similar conundrum surfaced in 2016 with the passing of the EU’s General Data Protection Regulation (GDPR). International organizations had to decide whether to limit the scope of the GDPR remediation work to EU data only, saving costs up front, or apply the remediation enterprise-wide and add efficiency for future privacy regulations that will inevitably come. As such, global technology organizations will need to decide if they are going to take a lowestcommon-denominator approach in developing enterprise programs to meet the DSA’s Europeanspecific requirements.

The DSA’s broad mandates and varying implications for different types of organizations mean there is no one-size-fits-all solution for preparing; however, there are overarching strategic approaches and more tactical operational actions that business leaders should consider.

Strategic Considerations

When planning for 2023 and beyond, organizations should consider the impacts that the DSA may have on the overall strategy of their operations.

• Innovation and product development — Balancing compliance with the DSA’s new obligations while continuing to drive innovation and fuel growth is a challenge that all organizations will face. As the new requirements impose certain constraints on how an organization’s platforms and products function and operate, companies will need to consider how they will continue to innovate and develop new products. Businesses should consider DSA requirements and impacts as part of their existing product-development and change-management processes.
• Market entry — Organizations will need to determine their market-entry and merger-andacquisition strategies, particularly as they consider entering European markets or acquiring companies that serve the European customer base.
• Ownership and accountability — Organizations will need to assign internal ownership and determine accountability of the DSA. With its requirements touching all parts of an organization, from legal to risk and compliance to engineering, creating a governance structure that supports an integrated approach to compliance will be essential.
• Skill set assessment — To understand the complexity of the programs that will be needed to support compliance with the DSA, organizations should consider how their current staff is equipped to evaluate, implement and monitor the programs required under the DSA. For instance, when considering the large shift in transparency of artificial intelligence models and required self-assessments, compliance and audit teams may need additional technical skill sets to meet the DSA’s obligations. On the contrary, product and engineering teams may benefit from employing risk and control professionals in the first line to instill a risk and controls mindset more proactively and seamlessly across the organization.

Immediate Operational Actions

Organizations should consider taking action to prepare for DSA compliance as soon as possible. There are several actions organizations can take immediately:

• All organizations should perform an impact assessment of the DSA to understand which requirements will apply to the company immediately upon the DSA effective date and in the future, based on growth projections.
• Organizations should review applicable requirements against their current governance framework and structure, including policies, processes, and tools, to understand where the most significant compliance gaps are. This may include evaluating current activities and identifying how to strengthen efficiency of compliance efforts, (e.g., utilization of artificial intelligence/machine learning for content monitoring).
• Organizations should initiate a centralized governance structure to mobilize and operationalize efforts to address compliance gaps and generally prepare for the DSA effective date. This may require regular touch points with senior leadership and escalation of impact on the company’s strategic decisions, such as new market or product entry and/or organizational structure. Specific activities that the centralized governance structure may manage include:
  • Assessing how the organization conducts investigations aimed at detecting, identifying, and removing illegal content from its platforms;
  • Assessing and preparing a clear written explanation about the company’s use of algorithmic decisionmaking, artificial intelligence, and human review of online content
  • Reviewing all relevant contracts in force and establishing process to identify gaps in processes, controls, monitoring, resources, training and communication as they relate to content management
  • Seeking independent auditors to evaluate DSA preparedness efforts with the goal of ensuring that proper processes and standards are clearly established and consistent with DSA requirements.

[1] https://www.consilium.europa.eu/en/press/press-releases/2022/10/04/dsa-council-gives-final-approval-to-the-protection-of-users-rights-online/