Solicitors' estate agency services in Scotland: A report on the supply of residential estate agency services in Scotland

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On 13 March 1996 the Director General of Fair Trading (DGFT) asked the MMC to investigate and report on the possible existence of a monopoly situation in the supply of residential estate agency services in Scotland. Our terms of reference, which were modified on 30 April 1996 (see Appendix 1.1), require us, in investigating this question, to limit our consider-ation to two particular practices arising from the operation of Solicitors' Property Centres (SPCs).

In Scotland, unlike England and Wales, it is commonplace for solicitors to provide estate agency services. SPCs provide Solicitor Estate Agents (SEAs) with property advertising facilities in the form of centrally located showrooms and published property lists. They allow house buyers to browse through a range of properties in one place; they offer SEAs and their clients consider-able economies of scale in the advertising of property; and they are highly regarded by the public.

The first practice we have been asked to investi-gate is one which prevents non-solicitor estate agents (NSEAs) from using SPCs. We call this `the direct access rule'. The second practice, which is not adopted by all SPCs, prevents solicitors from using an SPC to advertise properties which are also being advertised by NSEAs. We call this `the joint agency rule'. In referring these practices to us, the DGFT said that he was concerned that they could stifle competition from NSEAs and limit consumer choice for both estate agency and conveyancing services.

Estate agents in Scotland handle around 68,000 residen-tial property sales a year. We estimate that SEAs, of which there are around 700 in Scotland, handled some 48 per cent of the total between them; and we have established that at least 37 per cent of the total is handled by SEAs who are members of SPCs. SEAs have a particu-larly strong presence in Edinburgh, Tayside, Aberdeen and other areas in the east and south-west of Scotland where they have 70 per cent or more of the market. There are far fewer NSEAs in Scotland but they include some large chains. They have a prominent position in west-central Scotland, with around 70 per cent of the Greater Glasgow market, but are more thinly spread in other areas.

We have found that a complex monopoly situation exists in respect of the supply of residential estate agency services in Scotland and that it exists in favour of eight SPCs in Scotland and all SEAs which use those SPCs.

We commissioned an extensive consumer survey which revealed, among other things, a high level of satisfaction with the estate agency and conveyancing services provided by solicitors in Scotland. Satisfac-tion levels were equally high for services provided by NSEAs. We would have expected a greater degree of dissatisfaction if a lack of competi-tion were adversely affecting these services.

We found that SEAs' fees, whether for estate agency, conveyancing or the two services combined, tended to be higher in areas where SEAs had a higher share of the estate agency market. But the relationship between SEAs' fees and their market share was not consistent across Scotland; and the regional variations in fee levels were generally small. Moreover we found that average SEAs' fees for estate agency services (at 1.12 per cent of the house sale price over Scotland as a whole and ranging from 1.0 to 1.28 per cent in the different regions) were lower in all areas than those charged by NSEAs (1.42 per cent overall and ranging from 1.37 to 1.49 per cent).

Some NSEAs were able to negotiate low-priced conveyancing services on behalf of clients. We found that the typical conveyancing fee charged under these arrangements, when added to the average NSEA fee for estate agency services, broadly equalled the average fees charged by SEAs for estate agency and conveyancing services combined.

The pattern of fees being charged by SEAs did not in our view indicate a lack of effective competition for estate agency or conveyancing services. Nor did we consider that the relationship we had identified between fee levels and market share demonstrated that the operation of the SPCs or of the direct access or joint agency rules was leading to higher fees.

It was put to us that, in certain areas, SPCs offered such substantial coverage of properties for sale that estate agents excluded from them would not be able to offer alterna-tive methods of advertising property which potential clients would consider worth-while. In other words, these SPCs had become `essential facil-ities'.

In examining this suggestion, we first considered whether or not NSEAs could set up facilities similar to the SPCs. We saw no evidence that NSEAs would want to operate property showrooms on a collaborative basis. They could in our view collaborate effectively on the publication of property lists. NSEAs in Edinburgh and Glasgow already do so. We believe that, properly produced and marketed, these lists would find a ready readership among house buyers and could give NSEAs the visibility they need to attract clients. But we share doubts expressed to us by both SEAs and NSEAs about the willingness of NSEAs to collabor-ate in this way beyond their existing initiatives.

We then examined the alternative property advertising options available to NSEAs, particularly advertising in the newspapers. Our consumer survey showed that, even where SPCs had substantial coverage of the local property market, sellers and buyers continued to regard local and national newspapers as an important way of advertising property. We found that newspapers provided NSEAs with a range of advertising choices and were used widely by SEAs as well as NSEAs. We concluded that newspaper advertising enabled NSEAs to offer their clients an adver-tising strategy which represents a cost-effective alternative to the SPCs.

We do not therefore regard SPCs as essential facil-ities and we conclude that the direct access rule is not adversely affecting the public inter-est. Indeed, we believe that it has certain benefits to the public interest. SEAs and NSEAs each offer a service which e-ntails a different package of consumer safeguards and to some extent a different and competing style of property marketing. The SPCs' direct access rule helps to avoid any ambiguity as to which of these packages of service and consumer safeguards is on offer. There is also a risk that SPCs could be weakened by losing the support of certain SEAs if they were opened up to NSEAs. If this were to happen, there could be severe consequences for a service for which the public has a high regard. We think it unlikely that NSEAs would help to sustain SPCs if they started to lose the support of solicitors.

We identified two distinct categories of joint agency affected by the joint agency rule. We have referred to them as `passive joint agency' and `active joint agency'.

In passive joint agency, the solicitor is essentially a conduit for the NSEA to advertise a property in an SPC on behalf of a client. We see this as no more than a slight variation of the situation in which NSEAs themselves would have direct access to an SPC. In so far as the joint agency rule applies to passive joint agency, we view it in the same way as the direct access rule; and we conclude that it does not give rise to detriments to the public interest.

The joint agency rule raises more significant issues of consumer choice where it applies to active joint agency in which both an SEA and an NSEA are actively involved in marketing a property. We identified a variety of arrangements of this kind. However, it was clear from our consumer survey and the evidence of both SEAs and NSEAs that there is very little demand for this form of joint agency in Scotland. The small number of cases which did arise tended to involve special situations and were often in areas where the local SPC did not operate a joint agency rule. It is also possi-ble to use forms of active joint agency which are not affected by the joint agency rule. We have concluded that the joint agency rule as it applies to active joint agency does not, in practice, have adverse effects on the interests of consumers.

Establishment of SPCs may have helped SEAs to develop and consolidate their competitive position. But SEAs had a high share of the Scottish estate agency market before the SPCs were introduced. NSEAs have successfully exploited local circumstances to emerge as the predominant force in west-central Scotland. In many other parts of Scotland, factors such as the solicitor's traditional role in selling property, the tendency for the family solicitor still to be seen as the `man of business' and the need for legal advice to be sought early in the Scottish house-selling process are, in our view, particularly important in explaining the continuing predomi-nance of SEAs. We have found no evidence of a lack of effective competition in the Scottish markets for either estate agency or conveyancing services. SPCs are highly valued by the public but NSEAs have a range of other options which allow them to offer cost-effective property advertising to their clients. The direct access rule does not adversely affect the public interest and indeed has public interest benefits. Nor does the joint agency rule, in practice, have adverse effects. We have therefore concluded that neither of the two rules we have been asked to investi-gate operates, or may be expected to operate, against the public interest.

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