The Competition and Markets Authority ("CMA") has said that it intends to launch a market study into the housebuilding sector. This followed correspondence with Levelling Up Secretary Michael Gove MP, who had requested a study on the basis that significant changes had occurred within the sector since the last review in 2008, including as a result of the financial crisis (he noted that SME builders' share of the market has halved since 2007 and the level of market competition is variable across the UK). The CMA responded by confirming that in principle homebuilding should be prioritised as the CMA's next market study. The CMA will specify the precise scope of the project before putting the proposal to its Board for final approval within the next few weeks.
What is a market study?
A CMA market study is an initial look at a market to consider whether there are problems in how that market works that may have an adverse effect on consumers and, if so, what steps might be taken to remedy any problems. They are typically conducted where enforcement action under the Competition Act 1998 is not necessarily appropriate, for example where issues do not appear to be the result of anti-competitive agreements or abuses of dominant market positions. If the CMA has reasonable grounds for believing that the market has problems, the study may lead on to a full "phase 2" market investigation. At that stage the CMA has the ability to make orders directing market players to change their behaviour. The CMA can also accept formal undertakings from key market players in lieu of a full market investigation.
Market studies scrutinise public as well as private distortions of competition, so can assess how government policy or legislation is negatively affecting market functioning, as well as the conduct or structure of the market participants. The CMA can therefore recommend that the Government change regulations or public policy, as well as recommending behavioural and/or structural changes in the private sector. The Secretary of State has expressed particular interest in understanding barriers to SME entry and expansion, including as a result of the planning system and land market, and also whether the market structure is stifling innovation and constraining supply.
Once the decision to launch a market study has been taken, the CMA must publish a market study notice specifying the timetable within which the CMA will complete the study, the scope of the study and the period during which representations may be made to the CMA. The CMA is likely to approach market participants for comment, and is able to compel the production of information and evidence that it considers necessary to carry out the study, including through in-person evidence sessions.
Possible outcomes
The CMA must publish an interim report after six months and its final report within a year, setting out its findings and the resulting actions to be taken. That report may conclude that no action is required on the basis that the market is operating effectively. Alternatively, if the market is failing to meet consumer needs then the CMA may make proposals (which are not legally binding) on how the problem(s) can be remedied. Potential recommendations can include:
- recommending consumer-focused action (i.e. encouraging consumers to make better purchasing decisions);
- encouraging companies to make behavioural changes designed to improve conditions for consumers (e.g. by removing onerous clauses within terms and conditions or by affording greater access to consumer redress); and
- recommending legislative or policy changes to government.
Alternatively, a market investigation can be commenced where the CMA has reasonable grounds for suspecting that one or more features of a UK market are preventing, restricting, or distorting competition. Market investigations empower the CMA to impose a wide range of legally binding remedies, including orders regulating the behaviour of market participants and even requiring the breaking up of certain (usually the largest) market players.
CMA focus on housing
The CMA's decision to launch a market study into the housebuilding industry continues its focus on the accommodation sector, as part of its commitment "to act in areas of essential spending and where people are under particular financial pressure, including accommodation". The CMA already has an ongoing investigation into consumer protection law in the leasehold housing market, which has prompted certain industry players to give various undertakings including about removing particular clauses from their contracts.
The housing sector therefore needs to be conscious of the CMA's regulatory gaze. Firms should be prepared to be contacted as part of the market study, as there are significant penalties for misleading the CMA, or for failing to respond to a requirement for information. Information gleaned from market studies and investigations can also lead the CMA to take enforcement action if it suggests that businesses may have breached competition law. Businesses will therefore want to make sure they have their houses in order (no pun intended!), both in terms of their ability to provide information to the CMA and to ensure they have compliance measures in place to mitigate the risks of breaching competition law.
If you need assistance with any of those issues please get in touch with your usual Brodies Housebuilding team contact or with our Competition & Antitrust team.
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