The Competition & Markets Authority (CMA) is conducting a review of the new home structural warranty market and in particular undertakings given by the National House-Building Council (NHBC). Here, Geoff Wilkinson looks at the progress to date pending the final announcements expected in October 2017
Buying a new home is one of the largest financial decisions that consumers make. The CMA review will look at how the market for new home structural warranties currently operates to protect homebuyers. It is a market that has been dominated for many years by the NHBC, which currently provides structural warranty for over 1.6m homes in the UK. This is commonly known as Buildmark.
The NHBC’s own website estimates that Buildmark provides warranty schemes for approximately 80% of new homes, making it dominant in the market. The warranty is a form of insurance that is supposed to compensate the consumer or fix faults in the new property if there are problems within the first 10 years.
In 1995, an investigation by the Monopolies & Mergers Commission (MMC) found that the NHBC rules restricted competition from companies looking to offer alternative warranty schemes. As a result, NHBC gave an undertaking to remove the restrictions and enable its members to use other warranty providers. It also agreed not to make any further changes to its rules that might have an adverse effect on competition without written consent from the competition authorities. Lastly, and somewhat bizarrely, it was made to review and approve any other new home warranty offered by its competitors to ensure it offer similar cover.
The CMA took over the joint functions of the Office of Fair Trading (OFT), the Competition Commission (CC) and the MMC in 2014. It has a statutory duty under the Enterprise Act 2002 to keep under review undertakings, such as the NHBC undertakings, that were made under Section 88 of the Fair Trading Act 1973 in order to protect the free market.
Although it may come as a surprise to readers, the review was in fact commenced at the request of the NHBC itself. It argued that there is now far more competition in the marketplace and that housebuilders have a wide choice of structural warranties available to them. The NHBC also felt that changes to regulation and consumer protection removed the need for it to approve other home warranty schemes.
In June, the CMA published its initial findings, which if implemented will amend, but not entirely remove, the original undertakings. This is based on evidence that shows competition from other warranty providers has indeed grown, with housebuilders buying some or all of their new home warranties from other providers. However, it also found that the NHBC still has a very high market share and its competitors remain relatively small in scale.
The proposed new undertakings will ensure that builders who are registered with NHBC can continue to buy warranties from other providers, but will remove the requirements for NHBC to oversee other warranties. The full terms of the proposed change to the undertakings are set out in the CMA’s provisional decision document.
The MMC’s concerns centred on the behaviour of NHBC in restricting registered builders’ access to competitor products. The NHBC claims that it has not restricted registered builders’ access to competitor products since 1995.
The market has changed significantly, with around 15 active competitors to NHBC. However, NHBC competitors and six registered builders have continued to complain about barriers to entry, and the CMA reached the provisional conclusion that “the extent of dual sourcing and switching remains very limited”.
The CMA also found that the NHBC’s market position remains dominant, concluding that NHBC’s market share in 1990 was approximately 90% and has only slowly declined throughout the years due to the emergence of new competitors. However, there are no official figures confirming the market shares for the new home warranty market. The NHBC contends that the home structural warranty market is highly segmented, and that it has zero share of the self-build market and a very small share of the converted/change of use market. It argued that these should be included in the overall assessment of market share, not just the traditional view of mass housebuilding.
One final major hurdle for the NHBC is the public and press perception of the way it operates its premium refund system. Earlier this year, a Guardian newspaper investigation revealed that NHBC is paying around £10m to £15m every year to housebuilders through what it claimed is effectively a profit-share agreement.
In response, the NHBC described the Guardian’s figures as “speculative and incorrect”. It said it does not normally discuss commercial transactions and underwriting terms but, “in order to avoid further incorrect reporting”, confirmed that £4.5m was paid out in premium refunds in 2015-16 compared to £90m paid in claims during the same year.
This promises to be a very interesting case and the final decision is expected to be published in October.
Geoff Wilkinson
Managing Director
Wilkinson Construction Consultants
Twitter: @geoffwilkinson
