Conveyancing
The CMA’s review of the new home structural warranty market: implications for conveyancers
David Bowden summarises the Competition and Markets Authority’s investigation, and looks at what else is on offer to new home buyers in this market.
About the author
David Bowden is a SolicitorAdvocate.
For over 80 years, the National House-Building Council (NHBC) has been providing cover in case defects appear in new homes. Today, NHBC still has over 90% market share.
NHBC gave written undertakings, in 1995, to the then Department of Trade and Industry (DTI) not to make changes to its rules. This did not improve competition in the market, and these undertakings have now been considered afresh by the Competition and Markets Authority (CMA).
In December 2017, the CMA accepted new undertakings from NHBC on structural warranties. The new undertakings replace those of 1995 and will remain in force for 15 years.
Meanwhile, at least 16 other warranty providers have entered the market, with some offering nationwide cover and others concentrating on niche markets such as self-build. These providers have different product features, but what they have in common is a lower product price than that charged by NHBC for its Buildmark product. NHBC charges its builder members a non-refundable application fee of £994 plus VAT. Once registered, there is an annual renewal fee based on the number of homes registered for warranty during the previous calendar year.
The CMA in its provisional decision says that currently NHBC has 14 competitors. Of these, the following providers have gone through a tortuous approval process and are now approved by nearly all major mortgage lenders: Buildzone; Checkmate; CRL Management Ltd; Global Home Warranties Ltd; MD Insurance Services Ltd (This insurance broker launched Premier Guarantee in 1997, which is a 10-year structural warranty. In 2007, it acquired and relaunched the structural warranty product local authority building control (LABC) as LABC Warranty, which works in partnership with LABC.
These providers are accepted by a smaller number of mortgage lenders to new home buyers: Advantage Homebuilders Construction Insurance; Aedis Warranties Ltd; ARK Insurance Warranties; Building LifePlans Ltd; Capital Warranties; Federation of Master Builders Insurance; International Construction Warranties Ltd; Protek; and Q Assure Build Ltd. The NHBC Buildmark product is only available at the outset of a new home’s development.
However, some of these newer market entrants offer retrospective warranties which can be bought when a development is complete. Although these warranties can be more expensive, they represent a cash- flow lifeline to smaller builders.
Buildmark offers a 10-year Buildmark warranty, which provides cover to a home buyer where a builder becomes insolvent before completing a development. For two years after completion, NHBC offers a resolution service to home buyers in which NHBC puts pressure on a builder to complete any snagging to a home buyer’s satisfaction. After this time, NHBC’s Buildmark provides the following:
- long-tail insurance for structural damage to certain parts of the home (subject to policy exclusions);
- protection for some breaches of building regulations, but only where NHBC has been appointed for building control; and
- contaminated land cover for brown- field new homes.
Of NHBC’s competitors, some are challenging it on volume while others are seeking to fill gaps where NHBC’s Buildmark scheme does not offer adequate cover.
- Self-build Protek offers a self-build insurance product which provides site insurance and structural warranties for new build, renovation, extension and conversion projects irrespective of whether the work is being carried out by builders or as part of a self-build, custom-build or DIY renovation project. Like Buildmark, Protek also offers cover for 10 years. Its cover is underwritten by a Lloyd’s syndicate. Protek’s self-build structural warranty policy covers defects in the design, workmanship, materials or components of the project. If any of these elements fail, and cause damage or weatherproofing issues, cover is provided by Protek’s policy. Prices for cover are individually assessed.
- Social housing Although HAPM is no longer offering this cover, other providers such as Buildzone have stepped in to fill the breach. It provides housing associations and registered social landlords with either 10 or 12 years structural warranty cover on new build and converted developments. Unlike NHBC, Buildzone does not charge builders a registration fee. It can provide its landlord clients with the following:
- additional cover for loss of rent;
- contaminated land cover;
- cover for the health and safety of occupants; and
- cover for removal of debris. This is especially important to landlords building on brown field sites. (Cover for social landlords is also provided by Q Assure.) - Longer term cover Checkmate offers 12 years’ cover.
- Geographic cover Not all providers seek to cover the whole UK in the way NHBC does. For example, Global Home Warranties has a particular niche in providing cover to properties built in both Northern Ireland and the Republic of Ireland.
- Conversions Structural warranty cover can be provided by Aedis Warranties, whose policies are underwritten by Evolution Insurance Company Limited. Again, prices for cover are assessed individually.
- Prefabricated buildings Ark Insurance provides latent defects insurance to manufacturers of prefabricated buildings providing cover for up to 20 years.
- Commercial buildings International Construction Warranties provides warranty cover on commercial buildings.
Data about NHBC’s dominant market share is surprisingly difficult to pin down. In 1990, the Monopolies and Mergers Commission (MMC) estimated NHBC’s market share to be 90%. In 2015/16, data from the then DCLG can be interpreted as showing NHBC’s market share has increased to 91% despite the MMC’s undertakings, the 1990s’ property crash and the banking crash.
The then DCLG defines a ‘volume builder’ as one that completes over 2,000 units a year. The then DCLG’s figures show that the market share of volume builders has nearly doubled between 2008 and 2015. Disappointingly, the market share of small builders (ie, those completing between 1 and 100 units a year) has, in the same period, fallen from 28% to 12%.
In May 1990, the MMC was asked to investigate the supply in the UK of structural warranty services. The report was published in March 1991. The MMC said that it had ‘been impressed by NHBC’s achievements’, but went on to say that NHBC had ‘only one competitor’ (at the time, Municipal Mutual Insurance Ltd) which had entered the market in 1989 and had a ‘very small market share’ (pages 1 and 2).
The MMC was highly critical of NHBC’s rule 12 on dualsourcing, saying that the result was ‘roughly to double the unit warranty costs’ of an NHBC member that wanted to submit new homes to another warranty provider because inspection and insurance costs would be incurred in both schemes (page 1). The MMC criticised NHBC’s rules 38 and 41, which the MMC said: ‘considerably restricted’ the ‘ability of an NHBC member to cancel his membership’ (page 1).
Following the MMC’s report, NHBC signed written undertakings, addressed to the Secretary of State for Trade and Industry, on 7 December 1995. NHBC agreed not to ‘make any amendment or addition’ to its rules of membership unless the Director General of Fair Trading had previously given his written consent (para 1(1)). These undertakings did not have a ‘sell-by date’, and continue to bind NHBC.
On 13 January 2017, NHBC wrote to the CMA asking the authority to review and release NHBC from the undertakings it gave to the DTI in 1995. NHBC claimed that there had been a ‘material change of circumstances’ since 1990, and that the market now was ‘sufficiently different’ and its undertakings were no longer relevant ‘in the current market’ (pages 1 and 27 respectively).
After a short period of reflection, the CMA, on 21 March 2017, announced that it would review the ‘long-standing undertakings’ relating to NHBC.13 The CMA has a duty under Enterprise Act (EA) 2002 Sch 24 to review undertakings made under Fair Trading Act 1973 s88.
The CMA said that it received 27 responses to its questionnaires; in addition, the CMA held meetings and telephone interviews with 11 stakeholders. The CMA was able to publish only three responses, ie, from NHBC itself, from a lender and from a market insider that wanted to keep its identity secret, with some critical details removed from the document published on the CMA website. New market entrants, such as CRL Management Ltd, welcomed the investigation.
On 18 October 2017, the CMA announced that it had ‘determined’, in its final decision, to ‘seek new undertakings’ from NHBC that were ‘more focused and closely targeted on encouraging effective competition’ than those given by NHBC to the DTI in 1995. The CMA said that it was consulting on those new undertakings, which NHBC had offered.
The undertakings would ‘oblige the NHBC to clearly display on its website that builders who are members of the NHBC can source structural warranties from both the NHBC and other providers, or from another provider alone’. These new undertakings would remain in force for 15 years. On the basis that the undertakings will come into force in early 2018, they will bind NHBC until 2033.
At the same time, the CMA published its final decision for a short period of public consultation. The CMA said that it was ‘not appropriate to release the undertakings’ NHBC had given in 1995 because NHBC continued to ‘enjoy a very strong’ market position and dual sourcing and switching warranty provider remained ‘very limited’ (page 4). Disappointingly, the CMA said that it would not need NHBC to submit future rule changes to it for prior clearance, but would instead rely on self-assessment by NHBC or complaints from others made to the CMA to monitor compliance.
The CMA relies on the following factors for the continuing need for undertakings from NHBC.
- Mortgage lender approval House builders are reluctant to buy warranties from a company that does not ‘have approval from a substantial number of mortgage lenders’, but that the process for obtaining this is ‘potentially lengthy and complex’ (pages 14 and 15). Some lenders are ‘not interested in considering any new providers’, there is no requirement for a lender to even consider new warranties and the approval process takes ‘between twelve months and six years’ (pages 15 and 16).
- Consumer code membership In 2010, the Consumer Code for Home Builders (the Code) was launched after an Oÿce of Fair Trading market study concluded that greater protection was needed for new home buyers.
However, warranty providers have found tremendous obstacles put in their way in joining the Code, with one trying unsuccessfully for two years to become a member. Only LABC Warranty, NHBC and Premier Guarantee are members.
The Consumer Code for New Homes has four warranty providers as code users. Code membership is in effect now a ‘requirement for full entry into the warranty market’ ; however, it is expensive for niche providers because the annual running costs of these schemes is around £300,000.
There is a ray of sunlight because the UK’s largest mortgage lender, Lloyds Banking Group, now accepts warranties from providers as long as they are a member of any code approved by the Chartered Trading Standards Institute.
- Awareness and recognition of NHBC The CMA states not only that there is a ‘very high level of awareness’ among builders, banks and others of NHBC, but disturbingly there is a ‘lack of awareness that there were alternatives to NHBC’.
- Geographic coverage Only NHBC and one other provider have the capability to offer UK wider coverage of building inspections.
- Role as an insurer Warranty providers said that ‘sourcing an insurer willing to take a ten-year risk had not been easy’ and this was a ‘barrier to entry’.
- Loyalty discounts to large builders New entrants say that they ‘cannot persuade larger builders to switch’ warranty providers because of NHBC’s practice of paying them premium refund.
The CMA says that while three of the UK’s five largest house builders are dual sourcing, this is only to ‘a very limited extent’ and because of the following factors:
- Scale Many warranty providers and small builders said that the NHBC scheme ‘was geared to large builders and did not meet the needs’ of smaller ones.
- Service quality
- Price One large builder admitted that ‘other providers were generally cheaper than NHBC,’ and another conceded that ‘it was able to source warranties more cheaply’ elsewhere, and ‘make significant savings’, because NHBC’s prices ‘had risen each year’. In a hard-ball approach, NHBC will not negotiate on price with its registered builders even for bespoke developments.
- Development type NHBC admitted that it has withdrawn completely from the self-build sector.
- NHBC premium rating scheme Builders with one of NHBC’s top premium ratings, awarded on the basis of historic claims records, pay less for cover.
- Premium refunds Some competitors of NHBC maintain that its premium refund system restricts builders’ ‘incentive to dual source’.
- Switching provider Builders have to pay an annual fee to NHBC to be a member, which is an ‘unnecessary expense’ for smaller builders if they are not planning on buying its products.26 Smaller builders are more likely to switch warranty provider ‘to avoid the cost of paying a registration fee’.
One new warranty provider, with a market share of between three and five per cent, told the CMA that its builder clients were ‘almost exclusively new entrants to the new homes market’ who had ‘not worked with NHBC’ before. NHBC data for 2016-17 records that of 50 builders who left their scheme, only 10 left to join another scheme. Small builders who switched away from NHBC spoke of their ‘experience of poor service from NHBC around inspections’. Where a builder leaves the NHBC register, ‘it is no longer eligible for any further premium refunds’. The largest premium refunds NHBC paid to a builder were £2.7m in 2012, and just over £747k in 2016.
NHBC registered builders are eligible for a premium refund if over the last 20 years they have:
- paid at least £100k in premiums;
- registered over 750 homes or more; and
- currently have one of the NHBC’s three highest premium rating levels.
It is not clear why a 20-year period has been selected. The CMA concludes that dual sourcing and switching has ‘only happened to a limited extent’ and that NHBC’s premium refund scheme plays ‘some role in disincentivising switching’.
Draft undertakings were offered to the CMA under EA s92(2) (ii). Implicit in the draft undertakings was a desire by NHBC to avoid action for past breaches of competition law because the introduction stated that the giving of the undertakings ‘does not constitute any admission of wrongdoing by NHBC’ (page 5). However, this wording did not appear in the final version of the undertakings.
The main meat was a new draft undertaking by NHBC not to introduce any amendments to its membership rules which ‘have the object or the effect of preventing or discouraging registered builders from dual sourcing from, or switching to, structural warranties’ provided by its competitors.
In addition, NHBC has undertaken to ‘place an announcement’ on its website ‘confirming that all registered builders are entirely free to dual source or switch’ to other providers (page 38). However, it has been left vague as to how prominent this announcement will be, and where, or for how long, it will be displayed on the NHBC website. The NHBC also undertook to notify the CMA of ‘any amendments or additions’ to its membership rules at the same time as these are notified to NHBC members (page 38).
Finally, NHBC proposed that after 10 years it would finally break free from all undertakings to competition law regulators; however, the CMA disagreed and set 15 years as the time limit instead. The CMA said that a structural warranty is a ‘long tail insurance product’ and that it considered 15 years was a ‘period long enough’ for it to believe that market changes ‘should have manifested themselves’ in that time (page 39). The CMA says that its published market studies guidance makes clear that it would ‘normally assess the continued need to the remedy within 10 years’, but it did not ‘envisage prioritising a further review’ within this 10-year period (page 40).
The consultation on the CMA’s proposed final decision closed on 1 November 2017. At some point, the CMA will have to issue either a press release or a feedback statement. It seems highly likely that the new 15-year undertakings proposed to the CMA by NHBC will be endorsed and then will come into effect at some point in 2018.
Newer entrants such as CRL say that there ‘are certainly issues in any industry where dominant market participants look to limit options for customers, and we believe that this is to the detriment of the market as a whole. We would welcome a level playing field where all builders, large and small have a real choice’.
The price of structural warranties is ultimately borne by a buyer of a new home who benefits from the insurance cover it provides for defects which appear in a new house within the period of time (usually 10 years) set by the policy. Large builders seem to turn to NHBC as a default provider. Smaller, newer or niche entrants to the market seem to offer better cover, better service and a better price.
However, consumers are not able to benefit from this where they are buying a new home from a larger builder. CRL stresses that ‘there is choice in the market, and it is important for customers to have a clear understanding of those choices and how that benefits them’. In many ways, a consumer’s eye is off the ball as they have many other concerns to address when buying a new home. It is disappointing that the outcome the CMA proposes will continue to sell consumers short.