The UK competition watchdog has said there is a “strong argument” for the creation of a regulator to oversee the activities of digital ad-funded online platforms along with an enforceable code of conduct.

A code could be a “valuable tool in improving transparency and hence trust in the market”, the Competition and Markets Authority has said in its interim market study report into online platforms and digital advertising.

The report followed calls for the CMA to look at the dominance of Facebook and Google in the digital ad market as news publishers struggle to compete with the two tech giants, known as the Duopoly, for revenue.

The suggestion to develop a regulator and code of conduct builds on recommendations set out in the Furman Review and the Cairncross Review.

The new regulator could be given powers to audit and scrutinise the workings of “opaque algorithms”, which the CMA said were a concern for online news publishers.

The watchdog said it had heard from several newspapers that “unexpected changes” to the Google search and Facebook News Feed algorithms had resulted in “dramatic reductions in traffic to certain newspapers overnight”.

The watchdog said: “Publishers broadly are of the view that they do not get sufficient warning of algorithm changes or sufficient explanation of their impact or of what they might do to mitigate any loss of traffic.

“A number of publishers have suggested that there should be a role for a regulator to monitor and report on the main Google and Facebook search ranking algorithms.”

It added: “While we recognise that these algorithms have to be updated frequently and that too much transparency may lead to gaming behaviour, we acknowledge publishers’ concerns that sudden, unexplained and significant algorithm changes can have harmful financial consequences for them which they are unable to predict or manage.”

Despite this, news publishers told the CMA that Facebook and Google are “must have” partners and “by far the most important digital platforms for their businesses”.

Together the Duopoly provide just under 40 per cent of the total traffic to large publishers (the CMA spoke to The Sun, Mail Online, Independent, Telegraph, Reach, Sky and Vice for the figure).

The watchdog’s report reflected the findings in the Cairncross Review, published in February, with publishers claiming that their reliance on Facebook and Google led to an “imbalance of bargaining power”.

The CMA said Facebook and Google had “grown to dominate the UK digital advertising market” with Google taking more than 90 per cent of the £6.4bn search advertising spend in 2018.

Total spend on display advertising last year was £5.1bn, of which almost half went to Facebook, the CMA estimated.

The watchdog said digital advertising is a “vital source of revenue” for online newspapers and that if problems in the digital ad market mean they receive a lower share of ad revenues than they should “this is likely to reduce their incentives and ability to invest in news and other online content, to the detriment of those who use and value such content”.

It added: “At a broader social level, a thriving and competitive market for independent news and journalism is essential for an effective democracy.”

The watchdog’s report said publishers had also argued there was an increasing tendency for content to be consumed “within the Google and Facebook ecosystems”, with Facebook Instant Articles and Google’s Accelerated Mobile Pages keeping readers on their sites.

The CMA said an enforceable code of conduct may help address a number of these concerns. It said some of the code’s overarching principles could relate to “fair trading, open choices and trust and transparency”.

However, it has said it will not refer a full market investigation into the digital advertising market at this stage, saying it believes there are “good prospects” that its recommendations will be implemented by the Government which has been “committed to regulatory reform in this area.”

The watchdog will set out its conclusions and recommendations in its final report, to be published by 2 July next year.

Read the full interim market study report online.

Press Gazette has called on the Duopoly to stop destroying journalism and pay more back to news publishers on whose content they rely.