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Introduction.

1. Notification was made by Irish Life Assurance plc on the 30 September 1992 with a request for a Certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to issue a certificate, a licence under Section 4(2), in respect of a Shareholding Agreement and related Sale and Purchase and Hive Down Agreements between Irish Life Assurance plc, Irish Life Finance Group, Irish Life Finance Ltd and the Irish Intercontinental Bank Ltd (IIB).

2. The notification concerns agreements dated 30 March 1990 between Irish Intercontinental Bank Ltd (IIB), Irish Life Assurance plc, ILF Group and Irish Life Finance Limited (ILF) relating to the acquisition by ILF Group of shares in Irish Homeloans Ltd and the acquisition by the IIB and Irish Life of share in ILF Group. The agreements notified are a Sale and Purchase Agreement, a Hive Down Agreement and a Shareholders Agreement which were all dated 30 March 1990. The share acquisition was notified to the Minister for Industry and Commerce under the Mergers Acts and no order was issued.

3. Irish Life Assurance plc is the Life Company and wholly-owned subsidiary of Irish Life plc, a publicly quoted company on the Irish and UK stock exchanges. The principal activities of the group are the transaction of life assurance and pension business in Ireland, the UK and the US, and the provision of investment management services. Its total assets at the 31 December 1997 was £9.2 billion. The substantial holders of its equity as at the 28 February 1998 included Bank of Ireland Asset Management (13.5%), Kredietbank NV (6.1%), Irish Life Assurance plc (5.9%), AIB Group (5.7%) and Standard Life (3-5%). In addition to wholly owned insurance and investment/property management subsidiaries it holds 33.3% of the equity in Irish Life Finance Group Ltd and Framework Homeloans Ltd, a UK company. Up to April 1993 it also had an involvement in the Irish Life Building Society which it had established in 1979. In 1991 the Irish Life Building Society had 2 % of the market for mortgage funds advanced but this business was sold by Irish Life and absorbed into the business of First National Building Society in April 1993. [1] The total assets of Irish Life Assurance at 31 December 1997 were 6.4 billion. The registered offices of Irish Life Assurance plc are at Lower Abbey Street, Dublin 1.

4. ILF Group was incorporated in December 1985 and at the date of the agreement was engaged in the business of providing short term and medium term loan and leasing facilities. It is now engaged primarily in the provision, through its subsidiaries, of home mortgage finance with an estimated 8% share of the market. [2] It is also engaged in the provision of lease finance, insurance premium financing and commercial mortgages. At the date of the agreement it had an issued share capital of £2 all of which was held by the IIB. Currently it has an issued share capital of £3.5m which is held by IIB as to 66.6% and Irish Life Assurance plc as to 33.3%. [3]

5. Irish Life Finance Ltd was incorporated in September 1989 and at the date of the agreement was a wholly owned subsidiary of ILF Group with an issued share capital of £2. Its issued share capital is now £1.5m of which £1,499,999 is held by the ILF Group and £1 by Irish Intercontinental Bank Nominees Ltd.

6. Irish Homeloans Ltd was established as a 66/33% joint venture between IIB and Irish Life in 1988 and commenced business in February 1989. It is engaged in the provision of home mortgage finance which it largely funds by bank borrowings. In late 1995 part of its loans book was securitised to the extent of £100m by the transfer to a stand alone company and the funds raised used to repay an Irish Homeloans lender. At the date of the agreements it had an issued share capital of £2m which was held by the ILF Group as to 66.6% and Irish Life as to 33.3%.

7. Irish Intercontinental Bank Ltd (IIB) is a merchant bank established in 1973 with total assets of 1.44 billion at 31 December 1993. It is owned by Kredietbank as to 75% and by Irish Life as to 25%. Kredietbank is part of the Alman-Kredietbank group, a publicly quoted Flemish bank, based in Antwerp, which provides financial services nationally and internationally. Since 1987 IIB has begun to venture beyond the corporate market and tap into the retail market. IIB has entered the retail market by teaming up with its minority shareholder Irish Life. It has established residential mortgage companies in Ireland and the UK, and a finance company in Ireland. The products are sold through the Irish Life network of tied agents in the UK and insurance brokers in Ireland. The results of a number of its Irish subsidiaries are consolidated in Kredietbank’s accounts. These included IIB, ILF Group, ILF and Irish Homeloans Ltd.

8. Growth in the residential mortgage market is extremely robust driven by historically low interest rates and a buoyant economy. The Central Bank Report for Autumn 1997 shows that total lending by credit institutions for residential mortgages rose by £2.2bn during 1997 to £13.35bn, representing an increase of 19.6% over the 1996 figure. The last year for which the Central Bank shows the respective shares of the market as held by the different segments (building societies, licensed banks and others) is 1996. In that year total lending by credit institutions for residential mortgages was £11,325m which included £6,241m (57.1%) by building societies, £3,873m (35.4%) by all licensed banks and £812m (7.5%) by other institutions.

9. Until the late 1980s the building societies had the residential mortgage market largely to themselves. However, the banks have begun to aggressively chase mortgage business. The result has been a steady erosion of the share of the mortgage market held by the building societies, including the Irish Permanent. According to the Department of the Environment, the building societies share of the total mortgage market fell from 62.9% in 1993 to 36.1% in 1997 (see the table below).

It is important to note, however, that the Irish Permanent converted to a bank in the latter part of 1994. Prior to the Irish Permanent converting to a bank, building societies accounted for two thirds of all mortgages. With the Irish Permanent included in the banking category the banks now account for two thirds of the mortgages. According to Davy Equity Research the building societies’ share of gross advances peaked in 1992 at 71.9%. In subsequent years their share steadily declined, falling to an estimated 53.7% in 1995 but has recovered steadily since then, to 57.1% in 1996 and 58.8% in 1997. [5] Davy Equity Research have also estimated shares of mortgage advances for the main providers as follows:

10. In 1994 the Irish Permanent floated as market leader with about 25% market share. Since then its market share has declined to approximately 19.8%. Irish Permanent still has the biggest mortgage book in the country, followed by the AIB, Bank of Ireland and the First National Building Society. [6] These four credit institutions control some 62.9% of the residential mortgage market. In fact the market share controlled by these four companies is higher, at 67.8%, if one combines market share of the ICS building society and Bank of Ireland. [7] A combined market share of 19.7% would place the Bank of Ireland as a market leader in mortgages.

11. In their submission ILF Group indicated that their share of the mortgage lending market in 1992 was 5.2%. The group is also engaged in the provision of lease finance. It had an estimated 4% of that market in 1992. Currently, ILF Group [8] the joint retail venture with Irish Life controls some 7 to 8% of the mortgage market. Between its businesses they have residential home loan advances of £180m. The company is now the sixth biggest provider of mortgages in the market, ranking ahead of traditional lenders like the TSB and the Irish Nationwide Building Society. [9]

The market is moderately concentrated in this case as demonstrated by a HHI 1327.04 .[10]

12. Competition in the mortgage market is evident by the fact that the largest mortgage provider, Irish Permanent, dropped its £150 mortgage application charge in a move to boost its 20% market share. Furthermore, in order to compete commercial banks such as ACC, ICC, IIB and Anglo -Irish are putting together syndicated deals for some of the larger home loans.

Although the market for mortgage credit is still not completely open, barriers to entry would appear to be low. Financing techniques of mortgage institutions vary from country to country reflecting cultural and historical differences. However, with the changeover to the Euro cross border provision of mortgage credit will be boosted. Due to the historical and cultural differences in the market for mortgage credit entry into this market is more likely to take the form of take-overs or joint ventures. For example, IIB have entered the market through a joint venture with Irish Life while Abbey National entered the Irish mortgage market through a 9% stake in the Irish Permanent.

In this instance, the Authority considers that the relevant market is the market for mortgage credit. The geographic market is at least the State.

13. Essentially the notified arrangements involved the sale by Irish Life of its one third interest in Irish Homeloans Ltd. to ILF Group and the acquisition by Irish Life of a one third interest in ILF Group. The business of ILF Group was transferred to its subsidiary ILF Ltd. and a shareholders’ agreement was made between IIB and Irish Life. These arrangements involved 3 agreements made on 30 March 1990:

14. The parties to this agreement made on 30 March 1990 are IIB, Irish Life, ILF Group and ILF. The agreement provides for the following transactions:

The agreement also provides for warranties by IIB and the completion arrangements.

15. The parties to this agreement made on 30 March are ILF Group and its wholly owned subsidiary ILF Ltd. The agreement provides for the acquisition by ILF Ltd. of all the assets, including the goodwill, of ILF Group’s business in consideration for the issue of 1,499,998 shares of £1 each to ILF Group. The business transferred is that of providing short term and medium term loans and leasing facilities but specifically excludes the ownership of the entire issued share capital of Irish Homeloans Ltd.

16. The parties to this agreement made on 30 March 1990 are Irish Life Assurance plc, IIB and ILF Group. The agreement was made in pursuance of agreements that ILF will operate the business of provision of loans and leasing facilities, as a subsidiary of ILF Group, and that a business of providing mortgage finance for homes shall be established which may involve the establishment of further subsidiaries (in addition to Irish Homeloans Ltd whose entire capital had been acquired by ILF Group) to trade as Irish Homeloans.

The capital of ILF Group is split into ‘A’ and ‘B’ shares of which ‘A’ shares each have two votes and ‘B’ shares have 1 vote. Irish Life shall subscribe for the ‘A’ Ordinary shares and IIB for the ‘B’ Ordinary shares as follows:

17. The agreement provides for the share subscriptions as provided for in the Sale and Purchase agreement. Irish Life Assurance plc and IIB shall be entitled to appoint 3 directors each to the boards of ILF Group, ILF Ltd. and each of the Homeloan subsidiaries. Furthermore, one of the Directors shall be appointed Chairman of the board subject to the two parties agreeing. Neither IIB nor Irish Life Assurance plc may transfer its shares in ILF Group for a period of 2 years after the date of the agreement. Clause 11 provides that the agreement supersedes all existing contracts commitments and understandings in relation to the establishment of Irish Homeloans Ltd under an earlier agreement between the parties dated 14 March 1989.

18. Irish Life stated that the commercial arrangements, which are governed by the shareholders agreement, contain no covenant which would have the effect of restraining trade and that there were no restrictions imposed on the parties by virtue of the arrangements. The purpose of the agreement was to co-operate in the provision of mortgage finance and related endowment policies for domestic householders, and financial products for individuals and small companies.

19. Section 4(1) of the Competition Act, 1991, as amended, states that “all agreements between undertakings, decisions by associations of undertakings and concerted practices, which have as their object or effect the prevention, restriction or distortion of competition in goods or services in the State or in any part of the State are prohibited and void.”

20. Section 3(1) of the Competition Act defines an undertaking as “a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.” IIB is engaged in merchant banking and the provision of mortgage finance through its subsidiaries and is therefore an undertaking. Irish Life Assurance plc is engaged in the business of life assurance and the provision of financial services for gain and is also an undertaking. ILF Group through its subsidiaries, including ILF Ltd., is engaged for gain in the provision of mortgage and loan finance and they are undertakings. The notified agreements are agreements between undertakings. The agreements have effect the State.

21. The agreement involves the backing-in of Irish Homeloans into Irish Life Finance Group with Irish Life substituting its one-third share in Irish Life Finance for the one-third share it held in Irish Homeloans. Some elements of the transaction could be viewed as the creation of a merger or sale of business which was concluded prior to the coming into force of the Competition Act. In a Notice dated 4 May 1993, the Authority expressed its view that the merger or sale of business element of pre-October 1991 transactions did not come within the scope of Section 4(1). However, other aspects of the transaction involve the restructuring of the corporate relations between Irish Life Assurance plc and Irish Intercontinental Bank, and the reallocation of functions among their subsidiaries. The Authority considers that these aspects do come within the scope of Section 4(1). Rather than attempt to disentangle the various aspects of the transaction, the Authority has opted to consider the effect on competition of the arrangements as a whole.

22. The Authority has expressed its view in several previous decisions [12] that a merger or sale of business per se does not offend against Section 4(1). On 2 December 1997 the Authority published a Category Certificate which would apply to agreements relating to mergers and/or agreements for a sale of a business. This Certificate sets out the conditions under which the Authority considers that a merger or sale of business agreement would not offend against Section 4(1). It also provides a guide to the Authority’s thinking on all aspects of such agreements, including any non-competition clauses which they may contain. It is therefore proposed to apply the analysis set out in the Category Certificate to the current transaction. The category certificate is relevant to all mergers and sales of business without limitation as to the size or turnover of the undertakings involved.

23. A merger or a sale of business would, in the Authority’s opinion, contravene Section 4(1) where it resulted in, or would be likely to result in, a lessening of competition in the relevant market such as would allow, for example, the merged undertaking or all of the remaining firms in the market to raise their prices, as the effect of the arrangement would be to restrict or distort competition. Other factors, such as the ease with which new competitors could enter the market, are also relevant in assessing a merger or sale of business in the Authority’s view. Among the factors which the Authority believes needs to be considered in order to decide whether a merger or sale of business would have the effect of preventing, restricting or distorting competition is the actual level of competition in that market, the degree of market concentration and how it is affected by the merger, the ease with which new competitors may enter the market and the extent to which imports may provide competition to domestic suppliers.

24. Under the notified arrangements Irish Life sold its one third share in Irish Homeloans Ltd to the majority shareholder of that company, ILF Group, and as a consideration, together with the acquisition of further shares for cash, became owner of one third of the total issued share capital of the ILF Group itself. Through its 25% interest in IIB, Irish Life already had a 25% interest in ILF Group so that its effective interest in ILF Group increased to 50% under the arrangements. In the Authority’s opinion these transactions do not lead to a diminution of competition within the State. The number of competitors in the market are not affected. The net addition arising from the arrangements was that Irish Life became a one third direct shareholder, or an effective 50% shareholder, in ILF Group’s loan and leasing business in addition to the one third share, or effective 50% share, they already had in ILF Group’s Irish Homeloans business. Irish Life Assurance plc was not directly engaged in providing loans or leasing facilities. There are no restrictions under the agreements on Irish Life Assurance plc engaging directly in either business itself and the notified arrangements do not contain any restrictive covenants on the parties. The Authority considers that the individual clauses of this agreement do not contravene Section 4(1).

25. The Authority believes that the notified arrangements are pro-competitive. Prior to the notified arrangements IIB and Irish Life Assurance plc operated jointly in the market for homeloans via Irish Homeloans Ltd. These arrangements simply reconstitute the original joint venture. While the joint venture eliminated a potential competitor to the Irish Life Building Society, this society had an insignificant market share of 2% in 1991 and was subsequently sold to the First National Building Society in 1993. Currently, the First National Building Society has a market share of 13.5% while Irish Life Homeloans has a market share of approximately 8 per cent.

26. The Authority considers that the market for mortgage credit is competitive. Currently, there are approximately 11 providers of mortgage credit operating within the State. Moreover, barriers to entry into the market for mortgage credit are low. While foreign finance companies may not be able to immediately enter this market because of cultural and historical differences they can effectively enter the market through a joint venture or takeover. The notified agreement has facilitated the entry of IIB into the market for mortgage credit providing further competition to the banks and building societies in the home loans sector. The changeover to the Euro will further boost cross border provision of mortgage credit. The Authority therefore considers that, in so far as its horizontal effects are concerned, the notified agreement does not offend against Section 4(1).

27. The notified arrangements also involved the hiving off of Irish Life Finance Group’s loan and leasing business to a wholly-owned subsidiary, Irish Life Finance Ltd. In its Decision on AGF/Irish Life Holdings plc [13], the Authority considered in detail the question of whether an agreement between companies which were members of the same group could be regarded as preventing, restricting or distorting competition within the meaning of Section 4(1) of the Competition Act, 1991. The Authority concluded that:

“A group relationship normally arises where there is common ownership or control of undertakings. The individual undertakings within a group would not normally enjoy commercial independence in such circumstances. The group would therefore normally be regarded as constituting a single economic entity even though it may be composed of a number of separate undertakings. Clearly an economic entity does not compete with itself.”

In the Authority’s opinion, these arrangements merely involve a reallocation of functions within the group and do not contravene Section 4(1).

28. In the Authority’s opinion Irish Intercontinental Bank Ltd, Irish Life Assurance plc, Irish Life Finance Group Ltd and Irish Life Finance Ltd are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, as amended, and the notified arrangements are agreements between undertakings. In the Authority’s opinion, the notified agreements do not prevent, restrict or distort competition and thus do not contravene Section 4(1) of the Competition Act.

The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the shareholders agreement dated 30 March 1990 between Irish Life Assurance plc, Irish Intercontinental Bank Ltd. and Irish Life Finance Group Ltd, and the related sale and purchase agreement involving the above named parties and Irish Life Finance Ltd, and hive-down agreement between Irish Life Finance Group Ltd. and Irish Life Finance Ltd, both dated 30 March 1990, notified under Section 7 of the Competition Act on 30 September 1992 (notification no. CA/962/92E) do not contravene Section 4(1) of the Competition Act, 1991, as amended.

For the Competition Authority.

Isolde Goggin

Member

19 November 1998

[13] Decision No. 2, 14 May 1992