Competition Authority Decision of 12 October 1998 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/9/98 - Fiat Auto Financial Services Ltd./ Bank of Ireland Finance Ltd.   

Decision No. 521 
										
Introduction

1.	Notification was made by Fiat Auto Financial Services Ltd.  (“Fiat”) and Bank of Ireland Finance Ltd. (“BIF”) on 1 September 1998 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 grant a certificate, a licence under Section 4(2) in respect of a financial services agreement.

The Facts

(a)	Subject of the Notification

2.	This notification concerns the terms and conditions upon which BIF will provide financial services (the “Services”) including systems, accounts, collection and other back office services to Fiat and to purchasers, hirers and lessees of motor vehicles from the dealer network of Fiat Auto Ireland Ltd.  (The “Fiat dealer network”).  Additionally, BIF will facilitate Fiat in the provision of Fiat’s own auto-finance products (the “Products”) to purchasers, hirers and lessees of motor vehicles from the Fiat dealer network.

(b)	The Parties Involved
	Fiat S.p.A

3.	Fiat and BIF are involved in the provision of loan and hire-purchase auto-finance products in Ireland.

4.	The ultimate parent of Fiat is Fiat S.p.A. which has its registered address at Via Nizza 250, 10126 Turin, Italy.  Fiat S.p.A’s shares are listed on the Milan Stock Exchange.  Fiat S.p.A is a multinational business with an automotive core, which aims to increase its operations world-wide and to grow in the service areas related to its business.  For the year ended 31st December 1997, the turnover of Fiat S.p.A was 89,566bn lira.  Fiat is a wholly-owned subsidiary of Fiat Auto (UK) Ltd.,  which is, in turn, ultimately wholly-owned by Fiat S.p.A.  The principal activity of Fiat is the provision of hire-purchase and similar products to customers of the Fiat dealer network.  The turnover of Fiat, assessed in terms of the level of advances made, is not yet available as it only began trading on 1st January 1998.  However Fiat has projected new business, defined in terms of advances, of approximately £20 million during its first year of operation.

	Bank of Ireland Group

5.	The Governor and Company of the Bank of Ireland (“Bank of Ireland”) was incorporated by Royal Charter in 1783 and is the second largest commercial bank in Ireland, with total Group assets of IR£39.361 billion at year-end 31 March 1998.  Bank of Ireland is the parent of a group of subsidiary companies operating in the financial services sector.  The Group’s total operating revenue was £1.2 billion in the financial year ended 31 March 1998.

6.	Bank of Ireland has a network of 291 full-time branches in Ireland, as well as branches in Northern Ireland and in Great Britain.  In Ireland, Bank of Ireland also owns a merchant banking subsidiary, Investment Bank of Ireland Ltd., as well as a finance company, BIF.  Both of these companies are licensed banks.  Other subsidiaries in Ireland include two life assurance companies (Lifetime Assurance Company Ltd and New Ireland Assurance), a building society (ICS Building Society), and a stockbroker (J & E Davy Ltd).  Outside Ireland, Bank of Ireland held a 23.5% interest in Financial Group Inc., “Citizens”, a U.S. bank (which stake was disposed of to Royal Bank of Scotland plc in August 1998), and owns Bristol and West plc, a former UK building society with over 150 branches.  The Bank also owns banking subsidiaries in Jersey and the Isle of Man.

7.	BIF is a licensed bank and a wholly-owned subsidiary of the Bank of Ireland Group.  It provides leasing, loan and hire-purchase finance and facilities to both corporate and personal customers.  Bank of Ireland Car Loans Ltd., a subsidiary of Bank of Ireland Finance Ltd., provides loans for the purchase of cars.  BIF measures its annual turnover in terms of the level of advances made.  On the basis of Irish Finance Houses Association (IFHA) figures, BIF’s turnover amounted to IR£485.6 million during 1997.  The figures for turnover in the relevant market reflect the total level of advances which were made.  BIF had a turnover in the relevant market of £296.1 million in 1997.  Bank of Ireland Car Loans Ltd. had a turnover in the relevant market of £160.8 million in the year to 31.3.98.  Based on the parties’ estimate of the size of the Irish auto-finance market in 1997 of IR£3 billion, BIF’s market share of the auto-finance market is approximately 9.8%.  Including Bank of Ireland Car Loans Ltd., Bank of Ireland’s market share in total is estimated at approximately 15%.  

8.	Neither Fiat, BIF nor any of their respective subsidiaries holds a minority interest in any company engaged in business in the relevant market.

(c)	The Products and the Markets

9.	The parties claimed that the market, for the purposes of this notification, is the market for the provision of auto-finance products.  These products include hire-purchase agreements, financial leasing agreements, motor loans, bank term loans and personal contract purchases.  The parties stated that the level of demand-side substitutability is high, as purchasers of auto-finance may use any one of these products to finance the purchase of a motor vehicle.  Supply-side substitutability is also high, as the providers of auto-finance are in a position to shift capital resources to alternative forms of finance.

(d)	Structure of the Market

10.	There are a variety of different types of auto-finance providers operating in Ireland, including banks, hire-purchase companies, leasing companies, building societies, manufacturer-linked finance companies (such as Fiat itself) and credit unions.  Currently, there are 40 members of the Irish Finance Houses Association (IFHA), approximately 80% of which provide auto-finance.  IFHA Membership has increased from 27 members in 1994 to 40 members in 1998.  Consequently, the market has increased in volume with the addition of new entrants, such as, for example, the remaining building societies, AVCO Trust plc., Beneficial Bank and Eureko Ireland Finance Ltd.  Thus, the auto-finance market is a highly competitive market where the customer has a wide choice.  In addition, the IFHA figures do not include auto-finance which is provided by its members’ retail branch networks, nor does it include auto-finance which is provided by credit unions.

11.	The parties believe that the auto-finance market is structured broadly into three segments.  First, most financial institutions market auto-finance through motor dealers, who have a wide range of financial institutions to whom they forward applications for finance.  The primary function of motor dealers is to sell cars, so they usually offer the customer the first finance house which is willing to accept the proposal.  In addition, certain motor companies may recommend certain auto-finance providers.  For example, Irish Permanent is the “Primary Finance House” for both Nissan and Opel.  Bank of Ireland, AIB and National Irish Bank provide auto loans directly to customers.  Finally, there are a number of manufacturer-linked finance companies such as Fiat, Nissan and Ford Motor Credit, which provide finance via their own dealer networks to consumers.

12.	Auto-finance products are offered to all types of vehicle purchaser including personal and corporate customers, sole traders, partnerships, clubs and societies.  The parties believe that the geographical market is the Republic of Ireland.  The parties were not aware of overseas companies selling auto-finance products into the State.  The parties submitted that the best way of assessing the size of the overall market is to look at the overall level of advances of auto-finance products by companies competing in it.  Although there are no published figures, the parties estimated the value of the Irish auto-finance market in 1997 at approximately IR£3 billion.  It is open to all banks, credit institutions, building societies and finance houses (whether or not linked to a motor manufacturer).  The parties have estimated that BIF’s market share of the Irish auto-finance market in 1997 was 9.8%.  The market shares listed below are estimates because of the difficulty in obtaining accurate information in relation to market share.  In addition, the parties are not aware of the market share of a number of other competitors.  Clearly, there is no dominant player in the market and the expansion in IFHA membership has the effect of reducing existing market shares.  Estimated 1997 market shares of the main competitor finance houses are as follows:

			*	Allied Irish Finance: 9.3%
			*	Woodchester: 8%
			*	Lombard & Ulster Banking: 3.3%.

13.	The parties stressed that the finance houses which are mentioned above also compete with all other providers of auto-finance.  The parties stated that it is important to note that these IFHA figures do not include the advances which were made by the retail network of the banks/building societies nor do they reflect the level of advances which were made by credit unions in 1997.  The level of these advances is estimated by the parties at IR£2 billion in 1997.

14.	In considering the agreement, the Authority considers that the relevant markets include the market for the provision of backup financial services, the market for car loans and the market for automobiles.  The market for the provision of financial backup services is contestable as, notwithstanding the limited number of financial institutions that are available to perform them on Fiat’s behalf, it is also possible for Fiat to provide these services themselves.  The Authority considers that auto-finance is a derived demand from consumers’ demand for cars.  In this manner, the markets for cars and car finance are intrinsically linked and it is important to examine the impact of the agreement in both markets.

Table 1:  New passenger cars registered up to August 1998
Marque	Passenger vehicle registrations	Market Share	
Toyota	14,650	11.59%	
Ford	14,573	11.53%	
Opel	13,692	10.83%	
Nissan	12,263	9.70%	
VW	11,020	8.72%	
Fiat	9,671	7.65%	
Renault	8,371	6.62%	
Peugeot	4,846	3.83%	
Mazda	4,251	3.36%	
Mitsubishi	4,222	3.34%	
Rover	4,157	3.29%	
Honda	3,599	2.85%	
Citreon	3,132	2.48%	
Hyundai	3,035	2.40%	
Seat	2,872	2.27%	
Others	12,075	9.55%	
TOTAL	126,429	100.00%	
		Source:  Irish Motor Industry, SIMI, September 1998.

15.	From Table 1, we can see that Fiat/Alfa Romeo have 7.65% of the market (in terms of new car registrations) for passenger cars in the State in the year to date, and is ranked sixth in terms of car sales.  Fiat has projected that approximately £20m of these sales will be financed by Fiat itself during its first year of operation.  On this projection, sales of Fiat Products would account for approximately 0.6% of the Irish auto-finance market.  In 1994, 3.8% of the total number of cars on the road in the State (939,022 in total) were Fiat/Alfa Romeo.  In 1995, the equivalent figure was 3.78% of the total of 990,384 private cars licensed in the State.  In 1996, the proportion of Fiat/Alfa Romeo cars rose to 3.96% out of a total of 1,057,383 private cars licensed in the State.

16.	It is more difficult to get a clear picture of the market for auto-finance, given that it includes both new and second-hand cars.  As the parties pointed out, the best available estimates come from the IFHA.  From this data, it appears that, although BIF is one of the major players in the market, the market is only moderately concentrated.  In addition, the Authority considers that the market is highly contestable, as the degree of supply-side substitutability and the increasing integration of European financial markets tends to limit ability to gain market power in this sector.  

(e)	The Notified Arrangements

17.	This Notification relates to the agreement (signed on 12 October 1997) between Fiat and BIF for the provision of financial services to customers through a manufacturer-linked finance company, Fiat itself.  In this arrangement, BIF evaluates the customer application, with the final decision on whether to provide finance at the discretion of Fiat or BIF, in accordance with criteria and procedures set by Fiat.  If accepted, the provision of finance is the responsibility of Fiat, which bears the sole risk.  The initial term of the agreement is three years.  In Part II of the agreement relating to Standards, BIF undertakes to keep the Fiat Database confidential.  In the Second Schedule to the agreement, there is a Licence Agreement whereby Fiat licenses the use of the Fiat and Alfa Romeo trademarks to BIF for the currency of the agreement.  

18.	The Fiat dealer network includes authorised “Dealers” of Fiat and Alfa Romeo motor vehicles in Ireland.  There are currently 28 such dealers within the network.  The principal types of auto finance provided by Fiat and BIF are loan and hire-purchase auto-finance.  BIF provides auto-finance products to a wide range of personal and corporate customers.  Fiat, however, provides its own Products to customers of the Fiat dealer network.  In relation to the Products to be provided by Fiat, the agreement states that each of a number of different types of agreement are to be regarded as a “Product”.  These include:

	(a)	Hire-purchase agreements;
	(b)	financial leasing agreements;
	(c)	motor loans;
	(d)	additional agreements developed or marketed by BIF;
	(e)		  ditional agreements required in the provision of Finance under the
				  agreement.

(f)	Submission by the Notifying Party

19.	The parties believe, following the approach of the Competition Authority in Woodchester Bank Ltd./UDT Bank Ltd. (Decision No. 6), that these separate “Products” are alternative means of financing the purchase of motor vehicles and are to be regarded as substitutable for one another.  Due to the high degree of substitutability in the auto-finance market, these separate Products may be regarded as forming part of the overall auto-finance market.  The parties claimed that the auto-finance market is highly competitive with very low margins, where all participants engage in active competition.  Customers are introduced through credit intermediaries, banks, building societies, and as a result of direct marketing and advertising.  All credit intermediaries (which includes motor dealers) must be authorised by the Director of Consumer Affairs and must display their credit intermediary authorisation.  Individual motor dealers act as intermediaries for a variety of finance houses.  Motor finance is effected through a variety of different financial instruments, including loans, leases, consumer hire and hire-purchase arrangements.  Given the expansion of IFHA membership and the fact that motor dealers have access to all IFHA members who recognise them as credit intermediaries, rigorous competition exists between providers of finance in the auto-finance market.  Both motor dealers and purchasers of vehicles have access to a wide range of finance houses.  Even where a dealer acts as an intermediary for a manufacturer-linked finance house, the purchaser remains free to seek alternative forms of finance.  The parties do not believe that there are any significant barriers to entry into the market.

20.	The agreement forms part of a policy to offer consumers a first-class service for the purchase of their vehicles.  It has been part of the policy of the Fiat Group to set up finance companies such as Fiat, with appropriate support arrangements, wherever the Fiat Group is operating a distribution operation.

21.	The parties pointed out that Ford Motor Credit provides financial facilities though motor dealers.  Customers are free to finance Ford vehicles in any other way they choose.  Similarly, Fiat wish to provide additional options to customers in a free market. 

22.	The parties claimed that the agreement does not contain any provisions which may restrict the parties in their freedom to take independent commercial decisions.  However, the parties drew the Authority’s attention to Clause 6.  That clause includes provisions whereby Fiat and BIF accept certain restrictions as to the conduct of their business in the State.  These provisions are as follows:  

23.	Clause 6.2:  BIF Exclusivity.  The effect of clause 6.2 is to restrict BIF, and any of its subsidiaries, for the duration of the agreement and for a 12-month period thereafter, from providing finance facilities for the purchase, lease or hire of any motor vehicles to or through the dealer network.  BIF is also restricted, for the duration of the agreement and for 12 months thereafter, from targeting finance facilities or financial products (which are the same or similar to Fiat’s products as to any special, unique or differentiating term, provisions or selling point) at purchasers or dealers of Fiat or Alfa Romeo motor vehicles.  BIF is also restricted from using any confidential information during and after the agreement. 

24.	Clause 6.3:  BIF Non-Compete  The effect of Clause 6.3 is that BIF shall not, for the duration of the agreement, directly offer or provide loans, hire-purchase, leasing or similar facilities in relation to Fiat or Alfa Romeo motor vehicles through the Fiat dealer network.  Instead, BIF must refer all enquiries for such finance facilities to Fiat.  The effect of Clause 6.4: Fiat Exclusivity is that, during the term of the agreement, Fiat shall not appoint any other financial institution to use or trade under the Fiat or Alfa Romeo “Names” for the purpose of providing loans, hire-purchase, leasing or similar facilities through its dealers to any purchasers of Fiat or Alfa Romeo vehicles.

Arguments in Support of the Issue of a Certificate.

25.	The parties submitted that the exclusivity, non-compete and confidentiality provisions contained in Clause 6 of the agreement do not have the object or effect of preventing, restricting or distorting competition in the State contrary to Section 4(1) of the Competition Act, 1991.

26.	The parties claimed that, under the agreement, an efficient business relationship was created between Fiat and BIF, which brought together the financial acumen of Fiat with the proven technical ability of BIF, to provide auto-finance products in the Irish market.  The parties stated that Fiat is dedicated to the provision of a first- class service to its dealers and their customers and they believed that the agreement brings a number of benefits to the competitive structure of the Irish auto-finance market.

27.	The parties stated that the Fiat corporate strategy was to provide financial facilities where the Fiat Group operates distribution outlets for its vehicles.  The agreement therefore forms part of a policy to offer consumers an efficient and convenient service for the purchase of Fiat and Alfa Romeo vehicles from the Fiat dealer network.  The parties claimed that the services being provided by BIF may be seen as forming part of a “package” being offered by the Fiat Group to consumers for the purchase of these vehicles.  This “package”, which is available through each of the Fiat dealers, is designed to give consumers the convenience of buying a vehicle from, and arranging finance through, the Fiat Group.

28.	The parties stated that it is the policy of the Fiat Group to set up finance companies such as Fiat, with appropriate support arrangements, wherever the Fiat Group is operating a distribution operation and the agreement seeks to achieve this aim.  Fiat believed that it would not have been able to enter the Irish market to provide the “package”, as described above, without the backup support of a finance house such as BIF.

29.	The parties further stated that the agreement enabled Fiat to concentrate on the development of its financial Products to suit its customers’ needs without having to set aside valuable facilities for the purposes of sale and distribution of the Products.

30.	The parties claimed that, under the agreement, Fiat brought considerable capital and financial resources into the auto-finance market and, together with the supporting experience of BIF, it stimulates rather than restricts further competition in the Irish auto-finance market.  Furthermore, the parties claimed that, even where a dealer acts as an intermediary for Fiat, purchasers of Fiat or Alfa Romeo vehicles remain free to seek alternative forms of finance.  In this sense, the agreement does not restrict competition between finance providers, but introduces further competition into the market.

31.	Thus, the parties claimed that the restrictions on the freedom of the parties contained in Clauses 6.2 - 6.4 do not restrict competition, but are essential to create a synergy between the parties, bringing different skills and resources to the auto-finance market. 

32.	It is therefore submitted by the parties that the agreement does not have as its object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State under the 1991 Act.  The parties stated their belief that it would be appropriate for a certificate to be issued in relation to the notified agreement.

Arguments in Support of the Grant of a Licence

33.	Arguments were made in support of the granting of a licence which are not relevant in this case.
(g)	Submissions by Third Parties
34.	There were no submissions by third parties.

Assessment

(a)	The Undertakings and the Agreement

35.	Section 3(1) of the Competition Act defines an undertaking as “a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of  a service”. Fiat is engaged in the provision of auto-finance for gain and is an undertaking.  BIF is engaged in the provision of financial services for gain and is also an undertaking. Both parties are, therefore, undertakings and the agreement is an agreement between undertakings. The agreement has effect within the State.

(b)	Applicability of Section 4(1)

36.	In coming to a view on individual clauses in the agreement, the Authority notes that, in the markets for cars and car finance, neither Fiat or BIF can be considered to have appreciable market power.  The Authority further, notes that, notwithstanding the limited number of financial services companies in the market for the provision of financial backup services, it is possible for a company such as Fiat to provide these services internally.

37.	The Authority specifically examined the clauses dealt with below.

38.	In Clause 6.2(a), BIF covenants - 

	“that it shall not during the term of this agreement or for a period of 12 months thereafter, provide financial facilities for the purchase, leasing or hire of Vehicles to or through any Dealer otherwise than pursuant to and in accordance with this agreement...”.

	Clause 6.2(a) incorporates a 12 month post-termination non-compete provision.  In essence, for 12 months after the agreement is terminated, BIF cannot be involved in the provision of finance for the purchase, lease or hire of Fiat/Alfa Romeo vehicles to or through the current Fiat dealership network.  As part of the agreement, Fiat affords BIF access to its database of customers and potential customers.  This is material of a sensitive business nature.  The restriction in 6.2(a) affords Fiat some time-limited protection of its intellectual property in its database.  In the opinion of the Authority, there is a legitimate concern on the part of Fiat that such information not be used in a manner inimical to the interests of Fiat.  For this reason, in the opinion of the Authority, the non-compete provisions in Clause 6.2(a) do not contravene Section 4(1) of the Act.

39.	In Clause 6.2(b), BIF covenants - 

		“that it shall not during the term of this agreement or for a period of 12 months thereafter (save pursuant to and in accordance with this agreement) offer, market, sell or provide finance facilities or financial products for the purchase, leasing or hire-purchase of motor vehicles which are either:-

	(i) targeted specifically or primarily at purchasers of Vehicles bearing the Names or at Dealers;  

	(ii) the same as, or in all material respects similar to, any of the Products as to any special, unique or differentiating term, provision or selling point contained therein, provided that the prohibition in this sub-paragraph (ii) shall lapse if, and to the extent that, such term, provision or selling point is adopted or adapted for use by a financial institution (not being a member of BOI Group) or motor manufacturer in its own activities.”

	This affords exclusivity to Fiat during the currency of the agreement, and also a one year post-termination non-compete provision, which forbids BIF from offering finance products/facilities for the purchase, lease or hire-purchase of motor vehicles which are aimed at purchasers or Dealers of Fiat/Alfa Romeo cars.  As discussed above, Fiat affords BIF access to its database of customers and potential customers.  This is material of a sensitive business nature and the 12 month non-compete provision affords Fiat some time-limited protection of its intellectual property.  For this reason, in the opinion of the Authority, the non-compete provisions in 6.2(b) do not contravene Section 4(1) of the Act.

40.	BIF is also precluded, in Clause 6.2(b)(ii), for a period of 12 months post-termination, from offering similar products which it now uniquely offers to Fiat customers and Dealers.  The Authority considers that the products currently being offered by Fiat to its dealers and customers which have any “special, unique or differentiating term, provision or selling point” which have not been “adopted or adapted” for use by other financial institutions or other motor manufacturer, represent an intellectual property interest for which Fiat are entitled to seek some protection for a limited period such as 12 months.  In this regard, in the opinion of the Authority, the restriction embodied in Clause 6.2(b)(ii) does not contravene the Act.

41.	Under Clause 6.3, BIF covenants that it shall not at any time during the term of this agreement offer or provide finance facilities in any form -
	“to any purchaser, hirer or lessee of a motor vehicle bearing the Names or any of them, but shall instead refer all enquiries and applications for such finance facilities in respect of such motor vehicles to Fiat for the provision by Fiat of such facilities here under.”  

	The Authority considers that the obligation on BIF not to compete with Fiat during the currency of the agreement does not contravene Section 4(1) of the Act.  Non-compete clauses during the currency of agreements are no more than is necessary to ensure that both parties to an agreement have coincident interests and, in the opinion of the Authority, do not contravene Section 4(1) of the Act.

42.	The exclusivity granted to BIF by Fiat in Clause 6.4 is no more than is required by BIF to ensure its full participation in the agreement and does not, in the Authority’s opinion, contravene Section 4(1) of the Act.

43.	The Licence agreement in the Schedule to the notified arrangement does not, in the opinion of the Authority, contravene Section 4(1) of the Act, since it is no more than ancillary, and indeed a necessary and minor adjunct, to the main agreement between the parties.

The Decision

44.	In the Authority’s opinion, Fiat and BIF are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, and the notified agreement is an agreement between undertakings.  In the Authority’s opinion, the notified agreement does not contravene Section 4(1) of the Competition Act, 1991.

The Certificate

45.	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 dated 12 October 1997 for the provision by BIF of financial services to Fiat, notified under Section 7 of the Competition Act, 1991, on 1 September 1998, does not contravene Section 4(1) of that Act.

For the Competition Authority

Declan Purcell
Member
12 October 1998