Leading up to Christmas 2019, the tension between competition oversight of M&A in children’s services and wider concerns about private providers of children’s services was illustrated once again. In mid-December, the Competition & Markets Authority (CMA) unconditionally cleared National Fostering Agency’s (NFA’s) acquisition of Outcomes First Group (OFG). But, shortly after, the Children’s Commissioner called on the Government to address the number of children placed outside their local area, and criticised the profits being made by private firms.

The CMA has a difficult balancing act when evidence on market shares, prices and customer choice point to an easy merger clearance (as with NFA’s acquisition of OFG), while at the same time significant concerns are being expressed by customers, other regulators, and/or lobby groups about the industry. The comments by the Children’s Commissioner are not isolated. They follow, for example, a call by the House of Commons Housing, Communities and Local Government Committee in May 2019 for a CMA investigation of the children’s residential care market.

Key findings from the CMA’s review of NFA’s acquisition of OFG

NFA and OFG are both active in the three main children’s services segments (i.e. fostering services, children’s residential homes and specialist schools). NFA is the UK’s largest private provider of fostering services, while OFG is a top 10 provider of children’s residential homes in England (albeit with a share of only 2%).

NFA’s purchase of OFG is part of a wave of consolidation in children’s services. To date, the CMA has not identified any significant concerns with these transactions. NFA’s acquisition of OFG was no exception. Nationally, private and charitable foster services has become more concentrated (with the ten largest providers having a 60% national market share), but ownership of children’s residential homes is still quite fragmented. (The ten largest operators have a 30% England-wide market share).

The CMA’s approach to the NFA/OFG transaction was consistent with past reviews.

  • In-house provision of children’s services by Local Authorities (LAs) is not regarded as competing with private or charitable providers. LAs will try to place children with in-house services before considering private or charitable providers.
  • In children’s homes, homes that cater for children with different needs (e.g. special educational needs vs. social, emotional and mental health conditions) are regarded as being in separate markets.
  • In fostering services, private and charitable providers are regarded as being part of a single product market, but with differentiation between providers based on specialisms and complexity of the children that are catered for.

(The CMA’s approach is discussed further in our recent competition risk assessment for children’s homes, and our September 2018 blog on NFA’s acquisition of Acorn Care and Education.)

NFA’s acquisition of OFG did not trigger the CMA’s 30% market share threshold for a more detailed review in any locality in relation to children’s homes or fostering services. In specialist schools, the 30% threshold was close enough to being breached in one area (in the West Midlands) for the CMA to take a more detailed look. However, it concluded that the NFA and OFG schools were not close competitors given that they cater for children with different needs.

A market study to address wider concerns?

The tension between the CMA’s easy merger clearance decision and wider concerns about private sector involvement in children’s services was shown in comments by the Children’s Commissioner for England just before Christmas. Publishing a report on Christmas Eve, the Commissioner called on the Government to address the number of children placed outside their local area in the review of children’s care promised in the Conservative Party election manifesto. She also criticised the profits being made by private firms providing residential care for children.

A market study (or a more detailed market investigation) can be a useful way for the CMA to get to the bottom of wider concerns about a market, and decide whether stakeholder concerns are a result of a poorly functioning market. The CMA can, for example, evaluate whether private sector profits are indicative of market power being exercised. This analysis, which is difficult to carry out when reviewing an individual merger, can inform recommendations for market reform and/or a different approach to merger control.

The 2019 digital markets review shows how this approach works. A broad-based review highlighted concerns about large tech firms acquiring small start-ups in a way that was slipping under the CMA’s radar. This led to a new digital markets strategy by the CMA and a more aggressive approach to reviewing acquisitions. The CMA is now reviewing recent acquisitions by both Amazon and Google. It is also taking a more detailed look at the digital advertising market. Similar experiences can be seen in other sectors including the groceries supply chain and private healthcare.

Our view is that the Government and the CMA may find a market study in children’s services a useful way of responding to stakeholder concerns. It would be consistent with the Government’s manifesto commitment, while also ensuring that the review is evidence-based and arm’s length. As such, we believe that providers of children’s services should bear in mind the possibility of such a review and, consistent with this, exercise care when formulating pricing and other market strategies.

To discuss the issues in this blog, feel free to get in touch with Andrew Taylor or Nick Warren via info@aldwychpartners.co.uk.