A year in market studies

Market studies are one of the key tools available to the CMA and sector regulators (such as the Office for Rail and Road (ORR) and the Office for Communications (Ofcom)) to assess whether markets are functioning competitively and producing good outcomes for consumers. This year we have seen a prevalence of these studies, in particular within markets that have a clear and direct impact on consumers and essential spending.

HSF acts for a number of clients engaging with market studies by the CMA and other regulators in 2023.  In this blog post, we look back at a year of market studies and the outlook for these as we move into 2024.

Background

The powers of the CMA and sector regulators to conduct market studies stem from the Enterprise Act 2002. At the end of a market study, the relevant regulator may: (a) opt to take no further action; (b) issue recommendations for remedial action, such as to improve customers' access to information, encourage self-regulation, or introduce public policy changes; or (c) refer the market to a longer and more intensive market investigation. Market studies have a defined timeline – by statute, within 6 months of commencing a market study the relevant regulator must decide whether to propose a market investigation reference, and within 12 months must publish a final report setting out its findings and the action(s) it proposes to take.

Market studies in 2023

Railway station catering services

Yesterday (12 December 2023) the ORR published its interim report on its ongoing market study into railway station catering. The ORR has decided not to refer the relevant market to the CMA for an in-depth market investigation. However, the ORR considers that competition may not be functioning as effectively as it could be. The ORR found that there is a lack of effective competition for the occupation of railway station outlets. The main barriers to competition that it identified are limited available space at railway stations, that a minority of leases are protected tenancies under the Landlord and Tenant Act 1954 (making it difficult for station operators to terminate leases), and that station operators typically propose a lease renewal or an extension with incumbent operators, rather than conducting open competitive tenders.

The ORR decided that the most appropriate and proportionate way of addressing its findings is in its capacity as sectoral regulator. The final phase of the ORR's market study will explore possible remedies and it is currently working on three areas: namely, contributing to the Law Commission's review on the legal framework for protected leases, issuing recommendations to station operators to make the most of their station catering proposition, and engagement with public funders of railways. The ORR's final report is due by 15 June 2024.

It is notable that the ORR's interim report expressly considered that there may be an element of trade-off between the interests of passengers and taxpayers, which is no doubt a key consideration for the ORR given its wider regulatory responsibility for the rail sector. As rent paid to station operators is often partly turnover-based, additional revenue generated by railway station catering providers increases the rent payable to station operators, thereby lowering the subsidy required from the taxpayer. Another interesting aspect of the ORR's interim report is its decision to focus on 'softer' regulatory measures, which it sees as the most proportionate way of addressing the issues identified. This is perhaps unsurprising given that the ORR did not find clear evidence of widespread harm that might have justified stronger intervention.

Road fuel

Arising out of a high level review of the road fuel market in July 2022 (urgently requested by the then-Secretary of State for Business, Enterprise and Industrial Strategy, Kwasi Kwarteng), the CMA opened a market study to assess whether increases in pump prices came as a result of ineffective competition amongst suppliers operating at different levels of the fuel value chain. After its initial update report in December 2022, the CMA narrowed its review to focus primarily on the retail level.

In its final report published in July 2023, the CMA found that a weakening in competition between retailers had contributed to the increase in prices for diesel and unleaded petrol. The CMA considered that this was exacerbated by a lack of meaningful access for drivers to real-time information on pump prices.

The CMA chose not to make a market investigation reference in this case, instead recommending two remedies to the government to address the concerns identified: (1) a mandatory open data fuel finder scheme, under which fuel retailers would have to publish pump prices for all of their petrol stations on a regular and ongoing basis; and (2) tasking a public body with a new 'fuel monitoring function'. The government welcomed the CMA's recommendations and is due to launch a public consultation on the open data scheme before the end of the year.

The recommendation for a new 'fuel monitoring function' has since manifested itself in new powers for the CMA in the Digital Markets, Competition and Consumers (DMCC) Bill, which is currently making its way through the House of Lords. The Bill would allow the CMA to issue mandatory information requests to fuel suppliers and retailers on an ongoing basis, and to issue fines for non-compliance.

During its market study the CMA issued fines of £60,000 on Asda for failures to comply with information requests fully and in a timely manner (including for sending a representative to attend a compulsory interview that was 'not equipped to provide evidence' on certain topics). This again highlights how seriously the CMA takes compliance with the full range of its tools and functions.

Housebuilding 

Launched in February this year, the CMA's housebuilding market study comes at a time of considerable political and media commentary around the sector's inability to meet the government's annual new housing targets.

In its update report published in August, the CMA set out potential concerns it had identified regarding (1) the impact of "land banking" (i.e. the practice of buying and holding land for development); and (2) the private management of public amenities on housing estates. On the same day, the CMA issued a public consultation on a decision to commence a market investigation as a result of these concerns.

The CMA is continuing to explore these issues, as well as concerns with the current planning system, and aspects of building quality and related customer redress.

As part of the market study, the CMA has made use of a number of tools to set out and seek views on its emerging thinking, such as publishing a series of working papers, and hosting roundtables with industry stakeholders – such tools being more typically seen in the context of a market investigation or Phase 2 merger review.

The CMA is due to issue its final report into the housebuilding market study in February 2024.

Cloud services

Ofcom's market study into cloud services concluded in October this year and resulted in Ofcom making a market investigation reference to the CMA. The scope of the market study covered public cloud services and cloud infrastructure services. In its decision, Ofcom referenced the concentrated nature of the cloud services market and barriers to switching cloud service providers (which a majority of respondents had expressed concerns with).

The CMA has since opened its market investigation into cloud services, in which it is examining, among other concerns, whether there are barriers to switching providers and to "multi-cloud" (i.e. using cloud services from more than one provider) posed by technical barriers and by the existence of data transfer fees.

The CMA is also considering whether existing cloud providers' structuring of discounts, and their software licensing practices (related to both pricing and quality), act as a barrier to entry and expansion for other cloud providers.

The deadline for the CMA's market investigation is 4 April 2025.

What's in store for the CMA's review of markets in 2024 and beyond?

Increasing flexibility – In November, the Court of Appeal overturned a decision by the Competition Appeal Tribunal that had previously found that, where the CMA does not consult on a market investigation reference at the 6-month point in a market study, it would not be able to change its mind at the end of the market study (in the absence of a change of circumstances, or new information coming to light). The DMCC Bill (which continues to work its way through the parliamentary process) proposes to expressly provide the CMA and sectoral regulators with this flexibility.

Greater use of 'general monitoring' powers – Aside from its formal market study and mandatory information gathering powers, we see an increasing use by the CMA of its general monitoring powers when assessing competition in markets. While the CMA is unable to compel responses from market participants in such cases, these less formal market reviews have the benefit of not having statutory limits on timing or subject matter, and as such the scope and timeframes may be extended as the CMA's thinking develops. Following (or even during) these reviews, the CMA can issue recommendations in the same way as after a market study.

Recent ongoing examples include the CMA's reviews of the groceries and the veterinary services markets.

Focus on consumer impact – This year's market studies and general monitoring reviews have focused on markets with a clear and direct impact on consumers – which is not surprising in the context of the cost-of-living crisis, and given the CMA's pledge as part of its 2023/2024 Annual Plan to focus on areas of essential spending. The CMA's draft 2024/2025 Annual Plan, which is under consultation currently, proposes to retain this focus and we expect to see market studies and similar informal enquiries continue to follow this trend.