Britain’s competition watchdog has raised concerns over Sony Music Entertainment’s $430m (£312m) deal to buy AWAL, the artist services company that has released music by artists including Little Simz, Nick Cave and the Bad Seeds and Billie Eilish’s brother and collaborator Finneas.

The Competition and Markets Authority (CMA) said the distribution of recorded music in the UK was dominated by three big groups – Universal Music, Sony Music and Warner Music – and the deal could lead to worse deals for musicians. Had the deal not gone ahead, AWAL could have continued to grow into a significant alternative competitor, the CMA said.

Independent providers of artist and label services, such as AWAL, offer streamlined support and a “DIY platform” for musicians that allows artists to retain ownership of their music and a greater percentage of royalties.

“We’re concerned that this deal could reduce competition in the industry, potentially worsening the deals on the table for many artists in the UK, and leading to less innovation across the industry,” said Colin Raftery, the senior director of mergers at the CMA. “The music industry forms an important part of the UK’s flourishing entertainment sector, and it is essential that distributors continue to compete to find new and creative ways of working with artists.”

The CMA, which has given Sony five working days to offer legally binding proposals to address its competition concerns or automatically face an in-depth investigation, announced it was examining the deal in May, a day after Sony completed the takeover.

The competition watchdog said that Sony intended to expand its own subsidiary, The Orchard, which focuses on emerging and smaller artists, which would have led it to compete more directly with AWAL.

“This competition between Sony and AWAL could have benefited artists by improving the terms of their deals with distributors, potentially allowing them to keep a larger share of their earnings and to have more ownership over their music rights,” the CMA said.

Sony Music Entertainment said that it was “perplexed” by the CMA’s findings and that the deal had been approved by regulators in other markets.

“This decision by the CMA is perplexing and based on an incorrect understanding of AWAL’s position in the UK,” said a spokesperson for SME.

“We strongly believe this transaction is unambiguously pro-competitive and that our investment in AWAL is key to its continued growth, and future success. Every other regulatory body that has reviewed this transaction has agreed with our view and approved it quickly. We will continue to work closely with the CMA to resolve any questions they might have.”