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1. Arrangements for the transfer of engagements of Irish Life Building Society (ILBS) to First National Building Society (FNBS) in accordance with Part X of the Building Societies Acts, 1989, were notified to the Competition Authority on 12 May, 1993. The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence.

2. The notification relates to an Instrument of Transfer of Engagements in accordance with section 96 of the Building Societies Act, 1989, dated 19 March 1993, whereby ILBS proposes to transfer its engagements and FNBS undertakes to fulfil its engagements. The agreement does not include any non-compete clauses.

3. ILBS and FNBS are both building societies as defined in section 2 of the Building Societies Act.

4. Section 95 of the Building Societies Act allows two or more building societies to amalgamate by forming a building society as their successor. Section 96 allows a society to transfer its engagements to any extent to another society which undertakes to fulfil those engagements in accordance with that section. Section 97(7) provides that where all its engagements have been transferred a society shall be dissolved. The transfer of engagements must be confirmed by the Central Bank.

5. Building societies, with one exception, are constituted as mutual institutions [1]. They traditionally specialised in raising funds from members and depositors for lending to members largely for house purchase by way of a mortgage loan. Prior to the enactment of the Building Societies Act, 1989 societies were not permitted to engage in unsecured lending and were thus confined to mortgage lending. The latter Act provides that societies may, subject to the approval of the Central Bank, engage in a wider range of lending activities. The 1980s saw a decline in the number of societies as a result of a series of amalgamations. Whereas there were 16 societies in 1981, only 8 remained by early 1993. The present arrangements will see a further reduction in the number of societies. Details of the assets of existing building societies are given in Table 1.

£M % of total.

Irish Permanent 2,236 33.6

First National 1,440 21.3

EBS 1,225 18.4

ICS 957 14.4

Irish Nationwide 589 8.8

Irish Life 135 2.0

Norwich Irish (a) 73 1.1

Midland & Western (a) 30 0.5

Total 6,685 100.0

(a) Based on figures for the year ended 31 December 1991.

Source: Annual Reports.

6. The four largest societies between them account for almost 88% of total building society assets. FNBS is the second largest society in terms of assets accounting for 21% of total society assets. ILBS accounts for only 2% of total society assets.

7. Societies compete with other financial institutions for deposits. Traditionally societies concentrated on personal sector deposits although in recent years they have begun to compete for wholesale deposits. Up to the mid 1980s societies enjoyed certain fiscal privileges which gave them an advantage in attracting personal deposits. These have now been removed. On the lending side the bulk of societies' business is still accounted for by mortgage lending although, since the passage of the Building Societies Act, a number of societies have begun to offer unsecured loans to the personal sector. Some societies have also begun to provide a limited range of money transmission services. The ending of the societies' fiscal privileges in respect of deposits and other regulatory changes undertaken during the 1980s have resulted in other financial institutions such as the associated banks becoming much more actively involved in the mortgage market. Thus the building societies do not provide products or services which are unique to them but rather they offer financial services in competition with other financial institutions. The relevant market is that for deposits and lending particularly mortgage lending.

(% distribution)

Year Currency Associated Non- Building State Total

Banks Associated Societies

1990 6.4 36.1 19.1 19.2 19.2 100.0

1991 6.5 35.6 16.7 20.9 20.3 100.0

1992 5.9 32.4 19.7 22.0 20.0 100.0

Notes: State includes Government savings instruments as well as deposits with the POSB, TSBs, ACC and ICC.

Source; Central Bank Annual Reports 1991 and 1992.

8. Details of the public's holdings of money and other liquid assets is given in Table 2. In 1992 the building societies combined share of such holdings was 22%. The societies' share is similar in size to that of the non-associated banks and the State sector but is significantly less than that of the 4 associated banks.

(% distribution)

Year Associated Non-Associated Building HP Cos Other Total

Banks Banks Societies

1991 35.5 32.6 20.5 3.6 7.7 100.0

1992 41.6 24.8 22.8 3.2 7.6 100.0

Source; Central Bank Annual Report 1992.

9. Building societies accounted for almost 23% of non-government credit in 1992. This is slightly less than the share of the non-associated banks. In contrast the associated banks accounted for almost 42% of non-government credit.

(% distribution)

Year Associated Building Local Housing Other Total

Banks Societies Authorities Finance

Agency

1980 4.6 74.3 19.3 0.0 1.8 100.0

1985 8.3 64.3 11.9 15.0 0.6 100.0

1990 34.5 51.0 2.1 0.0 12.4 100.0

1991 28.9 54.4 2.0 0.0 14.7 100.0

1992 17.4 70.8 1.6 0.0 10.3 100.0

Source: Department of the Environment: Annual Housing Statistics Bulletin.

10. The table shows that building societies accounted for 71% of the value of mortgage lending in 1992. Having lost market share significantly in the late 1980s the societies have regained much of the lost ground in recent years. Although the associated banks' market share has fallen sharply since 1990 they still account for a far higher proportion of mortgage lending than was the case in the early 1980s.

FNBS ILBS Combined Share

1991 18.8 2.3 21.1

1992 18.9 1.2 20.1

Source: Annual Reports.

11. FNBS accounted for almost 19% of total mortgage lending in each of the past two years [2]. In contrast ILBS accounted for just over 1% of total mortgage lending in 1992 down from 2% the previous year. The two societies combined accounted for over 20% of total mortgage advances in 1992 and over 28% of advances made by building societies.

12. The agreement relates to the transfer of engagements of ILBS to FNBS. The Instrument of Transfer of Engagements provides for the transfer of all the engagements of the ILBS to the FNBS. The effect of the transfer is that the business of ILBS will be absorbed in the business of FNBS. Its deposits will become deposits of FNBS, its shareholders will become shareholders of FNBS and its borrowers will become borrowers of FNBS. The transfer was approved at an extraordinary general meeting of ILBS on 22 April 1993. The agreement was notified to, and cleared by, the Minister for Enterprise and Employment under the Mergers Acts. It was also notified to the Central Bank in accordance with section 98 of the Building Societies Act. The agreement does not include any non-compete clauses.

(f) Submissions of the Parties

13. The parties have argued that the arrangement does not have the object or effect of preventing, restricting or distorting competition. They argue that the transfer of ILBS engagements to FNBS will add less than 2% to the latter's market share. In addition they argue that as the building societies account for only 17% of the assets of all credit institutions, the enlarged FNBS will account for less than 4% of this total.

14. Section 4(1) of the Competition Act 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 trade in any goods or services in the State or in any part of the State are prohibited and void.'

15. 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.' Both FNBS and ILBS are engaged for gain in the provisions of services specifically mortgages and other loans.

16. The present arrangements therefore constitute an agreement between undertakings whereby effectively the business of ILBS will be transferred to FNBS and ILBS will cease to operate. The arrangements are in many respects the equivalent of a merger or takeover of ILBS by FNBS and they were in fact notified to the Minister under the Mergers Acts. The Authority has stated in previous decisions that so long as such an arrangement did not result, or was not likely to result in, a diminution of competition, then, in its opinion, it would not offend against section 4(1) [3].

17. The Authority clarified its views further in Scully/Tyrrell where it stated that:

´Among the factors which the Authority believes needs to be considered in order to decide whether a merger would result, or would be likely to result in a diminution of 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 [4].

18. The Authority went on to state that:

´The Authority believes that it would generally be accepted that a market where the four firm concentration ratio fell below 40 percent is effectively competitive.....It follows from this that, if the four firm concentration ratio following a merger is less than 40 percent, the Authority would regard it as unlikely that the merger could prevent, restrict or distort competition and hence offend against Section 4(1).'

19. As pointed out the Authority does not believe that the type of financial services provided by building societies constitute a separate market and that the appropriate markets are those for deposits, particularly personal deposits, and personal lending, particularly mortgage lending. These are now considered in turn.

20. The figures in Table 2 give some indication of shares of different types of financial institution in the deposit market. A more detailed breakdown would be required to establish the four firm concentration ratio. There is a strong probability that the ratio exceeds 40 percent [5]. Table 3 shows that the four associated banks accounted for over 40% of private sector lending in 1992 while building societies had just over 20% of the market. Table 4 indicated that over 70% of mortgage lending was accounted for by the 8 building societies. The three smaller societies operating at that time accounted for a relatively small proportion of this, (as noted ILBS accounted for just over 1%), so that the share of the four largest societies exceeded 40%.

21. Inadequate date makes it difficult to estimate the four firm concentration ratio in any of the markets with a high degree of accuracy [6]. The Authority is satisfied nonetheless that there is evidence of a relatively high degree of concentration in each of the relevant markets. In Scully/Tyrrell the Authority stated that it did not believe that where market concentration following a merger was found to be relatively high the merger would necessarily restrict competition. It went on to state that;

´where the degree of concentration in a market post merger is relatively high it will conduct a more detailed examination of the agreement than would otherwise be the case. [7]'

22. There are a large number of financial institutions competing in the market for personal deposits within the State. These include the associated banks as well as the building societies and the TSB. In addition the ACCBank and ICC also compete to some degree in this market particularly in respect of larger deposits in the latter case. The Post Savings Bank is a further competitor for small savings. Various Government savings schemes such as savings certificates also represent an alternative to deposits for personal sector savings. The Authority believes that given the relatively small share of the personal deposit market held by ILBS the arrangements will not result in any lessening of competition in that market.

23. In the case of personal lending other than residential mortgages the Authority again believes that the arrangements will not lead to any decrease in the level of competition. It is relevant in this context that until relatively recently the building societies were legally excluded from non-mortgage lending and consequently account for a very small proportion of such lending.

24. The Authority notes that there has been a sharp increase in competition in the mortgage lending market in recent years with the associated banks and certain other institutions now far more important in this market than was the case a decade ago. While the building societies still have a substantial share of this market, this appears to be a result of the competitive process, and not due to any fiscal or regulatory distortions which appear to have restricted the ability of other institutions to compete in this market in the past. As a result of increased competition mortgages are apparently more readily available than in the past. There has also been a considerable expansion in the range of mortgage products offered, providing consumers with greater choice and with the option of choosing a mortgage more suited to their particular needs. In such circumstances the Authority does not believe that the potential increase in FNBS market share and in the degree of concentration in the mortgage lending market as a result of this arrangement is likely to lead to any lessening of competition in this market.

25. In the Authority's opinion, First National Building Society and Irish Life Building Society are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the transfer of engagements of ILBS to FNBS constitute an agreement between undertakings. In the Authority's opinion the arrangements will not have the effect of preventing, restricting or distorting competition within the State. It is also satisfied that the object of the agreement was not to prevent, restrict or distort competition within the State. The agreement for the transfer of engagements of ILBS to FNBS does not, in the Authority's opinion, offend against Section 4(1) of the Competition Act, 1991.

26. 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 agreement for the transfer of engagements of Irish Life Building Society to First National Building Society, (notification no. CA/17/93), notified on 12 May 1993 under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

9 June 1993.

1. Changes in legislation have enabled building societies to change from being mutual institutions to quoted companies and there are indications that a number of societies intend to change their status.

3. Competition Authority decision no. 6 Woodchester Bank Ltd.,/UDT (CA/10/92), 4 August 1992.

4. Competition Authority decision no. 12, Scully/Tyrrell & Company and Edberg Limited, (CA/57/92), 29 January 1993.

5. Some of the non-associated banks are wholly owned subsidiaries of the four associated banks so that combining these subsidiaries' share of deposits with that of their four parent companies would almost certainly give this group more than forty percent of the market.

6. For this reason it was not possible to estimate the HHI as was done in Scully/Tyrell.

7. para. 55.