Irish Competition Authority Decisions

1. Arrangements for the transfer of engagements of Midland and Western Building Society (MWBS) to EBS Building Society (EBS) in accordance with Part X of the Building Societies Acts, 1989, were notified to the Competition Authority on 11 May, 1994. 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 April 1994, whereby MWBS proposes to transfer its engagements and EBS undertakes to fulfil its engagements. The agreement does not include any non-compete clauses.

3. MWBS and EBS 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 7 remained by December 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 2,400 34.9

First National(a) 1,440 21.0

EBS 1,225 17.8

ICS 957 13.9

Irish Nationwide 589 8.6

Irish Life (a) 136 2.0

Norwich Irish 87 1.3

Midland & Western 33 0.5

Total 6,867 100.0

(a) The Irish Life B.S. transferred its engagements to the First National B.S. during 1993.

Source: Annual Reports.

6. The four largest societies between them account for almost 90% of total building society assets. EBS is the third largest society in terms of assets accounting for 18% of total society assets. MWBS accounts for only 0.5% 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.

8. Details of the public's holdings of money and other liquid assets are given in Table 2.

Table 2: Money and Other Liquid Assets (% 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

1993 5.6 37.1 17.2 20.5 19.5 100.0

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

Source; Central Bank Bulletin.

8. In 1993 the building societies combined share of such holdings was almost 21%. 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. The table shows how market shares have fluctuated over time as a result of competition between the different types of deposit institutions.

Table 3: Non Government Credit (% 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

1993 41.6 23.1 24.3 3.0 8.1 100.0

Source; Central Bank Bulletin.

9. Building societies accounted for 24% of non-government credit in 1993. This is slightly more than the share of the non-associated banks. In contrast the associated banks accounted for almost 42% of non-government credit. The societies share of non-government credit has been rising steadily for the past three years as has that of the other institutions category, albeit from a smaller base.

Table 4: Mortgage Funds Advanced. (% 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

1993 25.1 62.9 1.1 0.0 10.9 100.0

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

10. The total amount of mortgage lending by all agencies in 1993 was £1.34bn, down slightly on the 1992 total. The table shows that building societies accounted for 63% of the value of mortgage lending in 1993, down almost 8% on the previous year. The associated banks having seen a significant drop in their market share in the previous two years regained market share during 1993 and now account for a far higher proportion of mortgage lending than was the case in the early 1980s.

EBS MWBS Combined Share

1992 12.1 0.3 12.4

1993 14.9 0.1 15.0

Source: Annual Reports.

11. EBS accounted for almost 15% of total mortgage lending in 1993 compared with 12% in 1992. In contrast MWBS accounted for just 0.1% of total mortgage lending in 1993. The two societies combined accounted for 15% of total mortgage advances in 1993.

12. The agreement relates to the transfer of engagements of MWBS to EBS. The Instrument of Transfer of Engagements provides for the transfer of all the engagements of the MWBS to the EBS. The effect of the transfer is that the business of MWBS will be absorbed in the business of EBS. Its deposits will become deposits of EBS, its shareholders will become shareholders of EBS and its borrowers will become borrowers of EBS. The transfer was approved at an extraordinary general meeting of MWBS on 28 April 1994. The agreement was notified to the Minister for Enterprise and Employment under the Mergers Acts and no order was made. 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. Clause 7.02 contains certain restrictions on what the MWBS and its directors could do between the date of the Transfer of Engagements and the date of its registration with the Central Bank.

13. The parties have argued that the arrangement does not have the object or effect of preventing, restricting or distorting competition. They argue that as the MWBS has only a very small share of the relevant market the arrangement will have little or no impact on competition. They pointed out that although MWBS is largely rural based there are a large number of competing societies in the market. In addition they argued that, given the large number of competitors and the extremely competitive nature of the home loan market, the arrangement would not reduce competition.

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 EBS and MWBS 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 MWBS will be transferred to EBS and MWBS will cease to operate. The arrangements are in many respects the equivalent of a merger or takeover of MWBS by EBS and they were in fact notified to the Minister under the Mergers Acts. The Authority has already approved similar arrangements in respect of the transfer of engagements of the Irish Life Building Society to First National Building Society. Consequently the present arrangements can be dealt with fairly briefly in this decision.

17. The Authority does not believe that the type of financial services provided by building societies constitute a separate market. Rather it believes that the appropriate markets are those for deposits, particularly personal deposits, and personal lending, particularly mortgage lending. The figures in Tables 2, 3, 4 and 5 do not indicate that the arrangements will have a significant impact on the level of market concentration in the deposit market, the overall lending market or the residential mortgage market.

18. There are a large number of financial institutions competing in the various markets involved. In the case of personal deposits these include the associated banks as well as the building societies and the TSB. In addition the ACC Bank 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 MWBS the arrangements will not result in any lessening of competition in that market.

19. 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.

20. 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 EBS 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.

21. Finally there is the question of the restrictions on MWBS and its directors from the time of the date of the transfer of engagements until its registration with the Central Bank. Again the Authority sees little need to consider these at any length. These restrictions were simply to ensure that no significant material change in the financial position of MWBS occurred prior to the completion of the transfer of engagements. Such provisions do not offend against section 4(1).

22. In the Authority's opinion, EBS Building Society and Midland & Western 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 MWBS to EBS 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 MWBS to EBS does not, in the Authority's opinion, offend against Section 4(1) of the Competition Act, 1991.

23. 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 Midland & Western Building Society to EBS National Building Society, (notification no. CA/11/94), notified on 11 May 1994 under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

19 May 1994.