OFThinks

Monthly comment from the OFT: staff give our view on topical issues, recent work and future priorities.

This month Gaucho Rasmussen, Enforcement Director, on quick, discounted house sales.

April 2013 - Quick, discounted house sales

By its very nature the quick house sales market is more likely to be used by the vulnerable who, often in financial difficulty, are looking to get a fast sale to ease their money worries.

Providers of this service offer to buy a house or find a third party buyer very quickly and usually at a discount from the full market value. While some offer a valuable service, we have concerns that some practices might lead to homeowners receiving much less for their property than it is worth. Any losses can potentially be very high.

Our intelligence suggests there may be problems with the quick house sales sector, but we need more evidence before drawing firm conclusions. Whilst we had enough information to trigger a market study, we really needed to hear first hand whether people had experienced problems. It's not easy to get people to come forward, but within just a few days of launching our study last week more than 75 individuals had contacted us.

Practices in this sector we would be concerned about include:

• Unclear fee structures, for example imposing an unexpected fee following an encouraging initial valuation, as a condition for progressing the service.
• Reducing the price offered at the last minute after someone is financially committed to the transaction.
• Making misleading claims about the value of the property or the level of discount to be applied to the sale.
• Saying the property can be sold quickly then taking a long time to conclude the sale.

We also received a number of positive responses from firms operating in the sector who want to talk to us further. Some firms say they are committed to ethical trading and are equally concerned about firms who mislead consumers. They welcomed our interest in the sector and we are looking forward to a constructive dialogue with them.

The OFT has requested information on the business models and practices of over 50 quick house sale firms but we're also keen to hear from anyone with experience of this sector, be they valuation expert, estate agent, debt advisor or home owner.

More information on the study is available on the market study page, but anyone who wishes to contact the OFT can email quickhousesales@oft.gsi.gov.uk or call 020 7211 8608 by 16 May 2013. All information will be treated in confidence.

March 2013 - Developments in the merger regime

The UK merger regime is going through a particularly busy period. 

Whilst merger activity in the economy overall has been depressed, there have been more of the kinds of merger that the competition authorities need to scrutinise carefully.

The OFT expects to have taken about 100 decisions on mergers by the end of this financial year, which is about the same as the previous year and much higher than in the years before that. We're also making more references to the Competition Commission - about 15 per cent of cases this year, compared with a typical rate of around 10 per cent for the period since 2004.

The upsurge in activity looks to be very much driven by difficult economic circumstances, with a high proportion of the mergers that we see involving firms in the same markets coming together, and leading to consolidation in those market sectors.

These types of merger case present their own particular difficulties. We need to be able to work with firms to resolve issues without a referral wherever it's appropriate to do so, but we equally need to respond to evidence gathered which suggests that there is a reasonable prospect that consumers will suffer higher prices or reduced choice.

There are also some other important changes underway in the merger regime. In particular, we're deliberately taking a more robust approach to parties integrating merging businesses before the conclusion of our consideration of the merger. This has included, for the first time, requesting parties in some cases where a transaction has been completed to appoint a trustee to monitor their compliance with their initial undertakings to hold firms separate during the merger investigation. 

We're also now looking at more mergers in public services: we have considered our first two mergers between publicly-owned hospitals, and we fully expect that the OFT and then the CMA wil become more involved in looking at a wider range of mergers affecting public services.

I said more about these issues, and the other ways in which the OFT is maintaining delivery of competition work in its final year, in a speech earlier this month. Read the speech in full (pdf 221kb).

February 2013 - The reaction to the OFT fuel report

It was hard to miss the publication of our report on the petrol and diesel sector last week - few OFT projects have generated so much media coverage. 

Alongside factual coverage, the report has generated a lot of critical comment disagreeing with our conclusions because, as one commentator put it, drivers 'instinctively know that something's not right'.

It is certainly true that there is widespread mistrust in how the petrol and diesel market operates, but we need to look at the evidence.

Our aim was to gather the facts and analyse the evidence to see whether there were competition problems that we could address to improve the way this sector functions, and we approached the task with an open mind. We're certainly not reluctant to intervene in markets where we do identify problems - only last year we referred the private motor insurance industry to the Competition Commission because we identified competition concerns that could be leading to higher prices for motorists.

In the five months we spent looking at the fuel sector, we gathered views and information from companies, industry representatives, motoring groups, MPs, motorists and many others, as well as reading a raft of market reports, government studies and academic literature. We also carried out some in-depth econometric analysis to assess the factors associated with local variations in pump prices and to determine whether there is evidence to support the existence of 'rocket and feather' pricing.

We set out our conclusions in detail in our report and have now published a full suite of Annexes with supporting information.

Not everyone will have time to read the full report, so we have also prepared questions and answers which cover key issues that seem to be of most interest. To provide a taster, here are some of the headlines.

Our overall finding based on the available evidence was that at a national level competition is working well in the UK road fuel sector. Rises in pump prices for petrol and diesel over the last 10 years have largely been caused by higher crude oil prices and increases in tax and duty and not a lack of competition. Pre-tax, the UK has some of the cheapest road fuel prices in Europe.

Not surprisingly, we found that prices are lower where there are more competitors. Supermarkets play a particularly important role - their business model of operating larger sites mean they consistently offer lower prices than their competitors, and prices of other fuel retailers are lower in areas where there are supermarket forecourts. Other factors that we found influence prices are the amount a forecourt sells and the transport costs of getting fuel to it. (See Chapter 4 and Annexe D for more on this issue.)

We carefully examined claims that supermarkets' and major oil companies' practices may be making it more difficult for independent dealers to compete with them. But we didn't receive evidence of any anti-competitive practices that might lead us to take enforcement action. (See Chapter 5 for more on this issue.)

And despite motorists being convinced that prices rise more quickly than they fall, our analysis of so-called 'rocket and feather' pricing found very limited evidence to suggest it exists in practice - changes in costs appear to be passed on to motorists, with little discernible difference in the speed depending on whether they are going up or down. (See Chapter 6 and Annexe E for more on this issue.)

It has also been suggested that the OFT hasn't addressed some issues - such as the rise in gross margins for diesel - or considered particular options for change - such as making wholesale prices transparent to consumers. Both of these issues are covered in Annexe A.

In brief, the evidence indicates that the rise in diesel margins predominantly relates to refining and is explained by an increase in demand to which UK refineries are not well placed to respond. 

On transparency of wholesale prices, it's difficult to see how knowing the wholesale price would help drivers to make better choices about where they buy fuel. If anything, it might distract attention from retail prices which is what motorists should be focusing on if they want to get the best deal. 

While overall we think competition is working well in this sector, it is clear that in some places competition is stronger and more effective than others. There will always be areas of the country which cannot support lots of competing forecourts. This is a tough issue to address - we can't order oil companies or supermarkets to open forecourts, nor can we investigate the prices that are charged by every forecourt, and every wholesaler supplying them, to check that they are reasonable.

What we can do is make sure that what competition there is in these areas does not get stifled by anti-competitive behaviour. This is why we have made it absolutely clear that where we receive credible evidence of anti-competitive behaviour, we will look to take action, as we have done in many other markets. (Annexe F provides guidance on the law and on how to complain to help those who want to submit such evidence.) We have recently opened a competition investigation in the Western Isles of Scotland where we do have such evidence.

And we have raised concerns about high prices at motorway service stations - we think that it would help drivers if they could see the price before they've pulled off the motorway and we're calling on the Department for Transport to consider putting signs on the side of road. We await their response, but greater price transparency on motorways could help exert downward pressure on prices.

In summary, we reached our views after careful consideration and on a solid base of evidence. We welcome informed debate. We encourage those who disagree with our conclusions to study our report and tell us if our analysis is wrong. And we would welcome hard evidence of businesses colluding to fix prices or engaging in other unlawful behaviour. This is a key sector and one where we will intervene if the evidence justifies it.

January 2013 - OFT publishes working paper on the 'orderly exit' of failing public service providers

Recent failures in public markets, such as the collapse of the residential care
provider Southern Cross, reiterate the importance of government and other public authorities being able to respond to failure when it occurs.

As the government opens up public services to more competition, the failure and possible closure, merger or takeover of poorly performing public service providers is likely to become more common.

For many goods and services that we buy, we are used to companies failing - often when they have been overtaken by cheaper, more innovative and efficient rivals. There can be virtually no disruption to consumers as they are readily able to buy similar products from rivals. This is a key way that competition delivers improvements in efficiency, productivity and quality.

But we recognise that there can be stark differences between the provision of public and private services. Concerns about whether the security contract for the Olympic Games would be delivered showed the real risks public services face if things do go wrong. If managed badly, the exit of a provider can lead to significant disruption for people who use the service, and place potentially heavy burdens on taxpayers.

However, when managed carefully, the exit (or the credible threat of exit) of a public service provider can be an important driver of competition, creating opportunities for better suppliers to take over services, and incentivising those working in public service organisations to relentlessly focus on improving performance.

The purpose of our latest paper on public markets is to look at ways in which government and others can protect users of public services without removing the drivers for competition. The findings will help inform future OFT advice and guidance on how exit can be managed to protect people and ensure uninterrupted service whilst also preserving the credible threat of exit to drive competition. 

The working paper finds that: 

• Competition in public service markets can go a long way in reducing the impact of service disruption when providers fail if a diverse range of successful and robust providers are encouraged to enter, compete and bear the costs of their own actions in the market.
• However, for some public services strong competition will not be enough to prevent provider failure from being disruptive. Government and other authorities need to find ways of ensuring services remain continuously available where the impact of short-term discontinuity of service on users is likely to be high and where discontinuity is probable.
• How continuity regimes are designed matters. A well designed continuity regime can support a competitive system of service delivery if it mitigates the risk of service disruption rather than the risk of exit and failure.

Ultimately, we believe there is no reason to prevent failing providers of public services from exiting a market. But the challenge faced by government, regulators and contracting authorities is how they facilitate the 'orderly exit' of failing public service providers in a way which minimises disruption and protects people who use these services.

November 2012 - Annual Plan consultation and Strategic Assessment

Today we've published our Annual Plan consultation document and a new Strategic Assessment of risks to markets and consumers. This is the first time we have shared, in such a transparent and open way, thinking behind how we prioritise our work and our Annual Plan themes.

Those themes proposed for 2013-14 are:

• vulnerable consumers and consumers challenged by the adverse economic climate
• pricing used as a barrier to fair choice and competition
• novel and developing markets and business practices
• public services markets 
• closer working with economic regulators.

The Strategic Assessment signals our wider commitment to intelligence-led enforcement. It flows from a programme of work, our 'Enforcement Debate', to review our approach to enforcement and identify the challenges we face to improve it: enhancing skills, encouraging the right attitude and culture for successful enforcement work, and the importance of intelligence. We have set up an 'Enforcement Academy' to help us achieve the first two aims along with a number of recent appointments to strengthen our senior enforcement team.

The Strategic Assessment marks a start in delivering a more intelligence-led enforcement function. It is evidence-based research that highlights 50 risks to markets and consumers. It identifies some key developments and trends in the macro-economic, regulatory, political and social environment and considers the risks in this context.

Of course, the Strategic Assessment does not present an exhaustive list or  fixed set of issues that we will definitely work on. Rather, it is a clear articulation of how we see the risks to consumers and markets today. By consulting on our Annual Plan and publishing the Strategic Assessment at the same time, it gives others the chance to challenge and improve our assessment. It sets the context for the selection of the five themes we are consulting on in our Annual Plan, which are intended as the areas we will focus on in 2013-14. I would urge you to read it, and to respond to our Annual Plan consultation.