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CMA homes inquiry: a house of pain for builders?

February 2024

 

1. What Has Happened?

The housebuilding sector in Great Britain is currently facing significant scrutiny following the conclusion of a market study by the Competition and Markets Authority (CMA). The study, conducted over the course of a year, revealed fundamental concerns regarding the persistent under-delivery of new homes and issues surrounding estate management charges and housing quality.

Additionally, the CMA has opened a new investigation into suspected anti-competitive conduct by eight housebuilders. This investigation, stemming from evidence gathered during the market study, focuses on potential breaches of competition law related to the sharing of commercially sensitive information.

2. Understanding the CMA Market Study

Market studies aim to take a helicopter view of a market and establish whether or not it is working well for consumers.  Where it is not, the CMA may adopt a number of remedial measures, such as imposing structural measures or behavioural requirements or advocating for a change in the law, if the regulatory backdrop does not support effective competition.

In previous cases, the CMA ordered the break-up of BAA plc following an investigation into the airport sector.  A more recent investigation into the rail signalling sector (by the Office of Road or Rail) resulted in Network Rail being requested to change its procurement practices in a way that would promote competition and tackle the effects of an entrenched duopoly.

The CMA’s market study aimed to assess the dynamics of the housebuilding market in England, Scotland, and Wales. It identified key factors contributing to the shortage of new homes, including the complex and unpredictable planning system and the limitations of speculative private development. Furthermore, concerns were raised about estate management charges and the quality of newly built homes.

Through extensive research and analysis, the CMA uncovered systemic issues within the industry, highlighting deficiencies in planning regulations, speculative building practices, and inadequate consumer protections.  More specifically, the problems highlighted included the following:

• Planning Rules:
  • Complex and unpredictable planning systems in England, Scotland, and Wales.
  • Under-resourced planning departments with outdated local plans and unclear targets.
  • Consultation requirements leading to delays caused by holding responses and late feedback.
• Speculative Private Development:
  • Over-reliance on speculative private development for housing delivery.
  • Private developers prioritize profitability over diversity and affordability of housing stock.
  • Lack of incentives to address varied community needs may exacerbate inequalities in access to housing.
• Land Banks:
  • Land banking by housebuilders as a symptom of regulatory and market challenges.
  • Strategic response to uncertainties in the planning process, but contributes to perceived housing supply constraints.
  • Requires reforms to streamline planning and incentivize efficient land use.
• Private Estate Management:
  • Growing trend of privately managed public amenities within residential estates.
  • Estate management charges often opaque, burdensome, and hinder homeowners’ ability to switch providers.
  • Inadequate information and oversight lead to substandard maintenance and service quality.
• Quality:
  • Insufficient incentives for builders to compete on quality, resulting in substandard construction practices.
  • Increasing prevalence of snagging issues and structural defects in newly built homes.
  • Calls for enhancing quality assurance mechanisms and strengthening consumer rights.

The findings supported a need for intervention to address these shortcomings and ensure the delivery of sufficient, high-quality homes to meet demand.

3. Cartel Investigation Arising from the Market Study

In parallel with the market study, the CMA launched a separate investigation into suspected anti-competitive behaviour by eight housebuilders. This investigation focuses on allegations of information sharing among competitors, which could potentially influence site development and new home prices.

The CMA has not reached any conclusions regarding the existence of competition law infringements but has initiated a thorough investigation into the matter. The implicated housebuilders include Barratt, Bellway, Berkeley, Bloor Homes, Persimmon, Redrow, Taylor Wimpey, and Vistry.

At this stage, no wrongdoing has been established.  The CMA may issue a Statement of Objections to the parties under investigation.  Fines could be imposed of up to 10% of group, worldwide turnover if the evidence indicates there has been an infringement.  There may also be the potential for follow-on compensation actions by parties which may have suffered from any unlawful practices (e.g. if they have ended up paying inflated practices as a result).  The CMA may alternatively close its file if it considers the evidence does not support these conclusions.

4. What Happens Next?

Following the completion of its market study, the Competition and Markets Authority (CMA) has outlined several key recommendations and proposals aimed at addressing the identified issues in the housebuilding market.  These include the following:

1. Increased Homebuilding: The CMA emphasizes the need for a substantial intervention to increase the overall supply of homes, particularly in areas of high demand, to alleviate affordability pressures.
2. Improved Quality and Consumer Protections: Efforts are needed to ensure consistently better outcomes in new-build quality, with effective routes for consumers to seek redress. Recommendations include establishing a New Homes Ombudsman and implementing a single mandatory consumer code to address quality issues.
3. Reduction of Consumer Detriment: Measures are proposed to reduce consumer detriment arising from private management of public amenities on new-build estates, including requiring councils to adopt amenities on all new housing estates and enhancing consumer protections for homeowners on existing privately managed estates.
4. Recommendations to Government bodies: The CMA has urged lawmakers to consider recommendations include streamlining the planning systems, incentivizing builders to diversify tenures and types of homes delivered, and increasing the build-out of housing sites. The report highlights the importance of local authorities having clear targets in local plans, streamlining planning processes, and increasing the capacity of council planning departments.
5. Potential Interventions: Policymakers are encouraged to consider more fundamental interventions beyond market mechanisms, such as a significant increase in non-speculative house building led by local councils and housing associations.
6. Chapter I investigation: As highlighted in the previous section, the CMA will pursue an investigation into possible unlawful information sharing by eight housebuilders which may have contravened Chapter I of the Competition Act 1998. This is not seen as a major factor contributing to the systemic issues within the sector although it may weaken competition.  Aside from possible penalties that may or may not be imposed at the end of the investigation, other housebuilders would do well to consider whether the inquiry highlights any practices commonplace in the sector which need to be avoided.

Overall, the CMA’s recommendations and proposals aim to improve outcomes for homeowners and the housebuilding market, addressing key challenges identified in its market study. Policymakers are urged to consider these recommendations and explore further interventions to ensure the delivery of sufficient, high-quality homes that meet the housing needs of Great Britain.

5. Barratt-Redrow merger (announced 7 February 2024)

If any additional intrigue were needed, two of the parties under the CMA spotlight are currently seeking clearance from the CMA for a proposed merger under the Enterprise Act 2002 in a separate process.  It remains to be seen whether the general findings of the study will complicate this process for the parties (e.g. from the fall out of increased concentration on the supply side).  It is quite possible however there will be no effect on the overall outcome.  Third parties may raise concerns they have with the possible merger which the CMA will take into account in reaching its final decision.

6. Conclusion

These developments highlight significant challenges within the housebuilding sector, impacting both consumers and industry stakeholders. The first issue concerns the general sentiment that the current state of the housebuilding market fails to adequately serve consumers’ needs. Homeowners frequently encounter issues with estate management charges and housing quality, with limited recourse for redress.

Moreover, the information provided to the CMA during the market study has raised concerns about potential breaches of Competition Law by eight housebuilders. This has prompted a separate investigation into allegations of anti-competitive behaviour, specifically regarding the sharing of commercially sensitive information. While the exact nature of these practices remains unclear, they may exert undue influence on site development and new home prices, ultimately disadvantaging consumers.

These developments underscore the imperative for vigilance and compliance within the housebuilding industry. Companies must exercise caution when engaging with competitors and ensure strict adherence to competition law regulations. Collaborative efforts should be approached with care to prevent inadvertent participation in practices that could distort competition or harm consumer welfare.

There are two takeaway messages from us.  First, companies should ensure they have in place comprehensive compliance programs to avoid risky anti-competitive behaviour that could attract penalties or damages actions.  A whistleblower program can help identify and stop unlawful conduct where it occurs, whether deliberately or inadvertently (which from a risk perspective may be of minor significance).  Training programs prevents rogue employees from resorting to the defence of not having realised their conduct could lead to liability for the company.

Second, it is important to seek legal advice when requested to participate in investigations into your sector.  Whilst cooperation with regulatory inquiries is of paramount importance, replies to questions and information requests should be presented carefully and materials provided should be tailored and responsive to the request.  The regulator must never be misled nor responsive material concealed.  Equally, the language of responses should be carefully chosen so as not to “start hares running” or give an inaccurate impression that the organisation is noncompliant with legal obligations.

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