Structural warranty services in relation to new homes: A report on the existence or possible existence of a monopoly situation in relation to the supply within the United Kingdom of structural warranty services in relation to new homes

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Summary

On 23 May 1990 we were asked to investigate the supply in the United Kingdom of structural warranty services in relation to new homes (the reference services) (see Appendix 1.1).

We have found that the National House Building Council (NHBC) supplies over 90 per cent of the reference services. The main issues of the inquiry centred on the effects of certain of NHBC's rules on competition in the reference services market where its Buildmark scheme, in our view, has only one competitor: Municipal Mutual Insurance Ltd's (MMI's) Foundation 15 scheme, which has a very small market share. MMI entered the market for the first time in 1989.

The effect of NHBC's Rule 12 is broadly to require its members to prenotify to it all the homes they propose to build and thus trigger the process of inspection, insurance and payment of the current fees. The result is roughly to double the unit warranty costs of an NHBC member who wishes to submit new homes to another scheme either on a sampling basis or on a long-term basis as a second source of warranty services, because inspection and insurance costs are incurred in both schemes. We have found that Rule 12 operates and may be expected to operate against the public interest because, by preventing, without financial penalty, dual sourcing and the sampling of alternative schemes, it restricts competition.

The ability of an NHBC member to cancel his membership in order to be able to place new homes to be built in the future in another scheme is considerably restricted by the content and implementation of Rules 38 and 41, and by the omission from the rules of any right in the builder so cancelling to receive NHBC cover for those homes already notified to NHBC, which are either in the course of construction or completed but unsold at the date of cancellation. Furthermore the rules contain no provision for protection by the terminating member of his period of membership in the event of his subsequently returning to NHBC after spending a period with another scheme. We have found that these omissions from NHBC's rules, and Rule 41 itself, operate and may be expected to operate against the public interest. In our view they restrict competition by discouraging builders from voluntarily seeking cancellation of their membership of NHBC for the purpose of transferring to another scheme.

We have made detailed recommendations to remedy these matters by making amendments to Rules 12 and 41, and by certain additions to NHBC's rules. In particular we recommend that members of NHBC may, without financial penalty, sample or dual source reference services from Foundation 15 and other schemes of broadly comparable standard.

Both NHBC's and MMI's warranty schemes provide the services of registration of builders, inspection of homes during construction, setting of building standards and insurance. We have considered whether the interests of home buyers and of the promotion of competition require the splitting up of the various elements within NHBC's warranty scheme. In our view the advantages of integration are real, and we therefore accept the arguments of NHBC and MMI on the value of fully integrated structural warranty schemes.

Our report is critical of certain of NHBC's rules and of some omissions from them. They are long-standing and require clarification and amendment, especially in the relatively new situation where direct competition is being provided by MMI, and to ensure that they do not deter further entry to the reference services market. Overall, however, we have been impressed by NHBC's achievements, which have been actively encouraged by the Government over the years, in improving housing standards and providing much needed safeguards for the purchaser of a new home, and which we are anxious to preserve.

One member has dissented from the conclusions in paragraph 1.3 and from the associated recommendations. In his opinion the wider public interest requires that Rule 12 should be preserved in order to ensure that, at least as far as NHBC is concerned, the choice for the builder is to belong to the NHBC scheme or another. Then the consumer will have the assurance that having chosen an NHBC builder he will have the benefits and warranties that the NHBC scheme confers. He has concluded that Rule 12 does not and may not be expected to operate against the public interest.

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