Irish Life Assurance plc / First National Building Society [1999] IECA 548 (16th April, 1999)

1 Notification was made by Irish Life Assurance plc on 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 Tied Agency Agreement between Irish Life Assurance plc and First National Building Society (FNBS).

3 The notifying party, Irish Life Assurance plc, has its registered offices at Lower Abbey Street, Dublin 1. The company transacts all forms of individual life assurance, group pension schemes, pensions for the self employed, annuities and investment savings. Irish Life’s total assets in 1997 were £6.4bn and its gross premium income was £520m.

4 The First National Building Society has its registered offices at Skehan House, Booterstown, Dublin. The society’s core business is the advancement of loans for mortgages. FNBS and its subsidiaries are also involved in a number of personal financial service areas. Its total assets under management in 1997 amounted to £4,885m. Loans and advances to customers were £2,593m in the same period. In September of this year FNBS changed its status from a building society to a public limited company named First Active plc.

5 The markets affected by this agreement are (i) that for the sale of life assurance products in Ireland and (ii) that for the services of insurance intermediaries for life assurance. The insurance products covered by the Agreement are: whole life and endowment assurances; s.60 and s.119 life assurances; serious illness cover; personal pensions for self employed persons; employers pension schemes for employees; group and individual permanent health schemes; single premium life assurance and investment contracts; Additional Voluntary Contribution contracts. These may constitute one product market or several separate product markets. The Authority considers that it is not necessary to determine which products form separate markets since the Agreement applies to all the products.

7 Insurance products are complex in nature. Most customers are not able to evaluate products accurately at the time of buying, since only after some years have passed does it become possible to know whether the investment was good or poor. Customers typically cannot make buying decisions as between insurance products without either significant search costs or specialist advice.

8 In its Decision No. 495, [1]the Authority found that the total premium income received by all life offices selling life products was IR£1,622bn and total claims were £1.3 bn in 1995. Moreover, in that decision the Authority also found that most life products are sold through agent or broker intermediaries; approximately 53% for new Annual Premium business and 59% for new Single Premium business (1995 data), 23% of Annual Premiums and 28% of Single Premiums of new business was sold through employees and 21% Annual Premiums and 8% Single Premiums were sold through tied agents. The remaining 3% Annual Premiums and 5% Single Premiums were sold through over the counter sales or some through telephone sales.

9 The terms broker, agent and tied agent are defined in the Insurance Act 1989. "Intermediaries" as used in the Agreement is an umbrella term for brokers, agents and tied agents. The service provided by an insurance intermediary is a combination of services to the insurance company and to the retail customer. They are not clearly, or exclusively, or continuously the agent of either the insurer or the customer. To the retail customer, brokers and agents offer a service of information about a number of insurance products, which a customer would otherwise have to collate from different insurance companies. These intermediaries may also offer the customer the service of advice as between the different products. Tied agents and company employees can offer only the service of explaining one or more products of a single insurance company. Intermediaries are not paid directly by the customer for their services but by the insurer whose product they ultimately sell. To the insurer, the intermediary is selling the service of promoting and distributing its product.

10 Irish Life have indicated that there are several companies competing in the Irish market for the products in question. In terms of ‘investment type’ products, life offices compete with retail banks, building societies and An Post. According to the notifying party the market for the distribution of life products is highly competitive with direct sales forces competing with insurance intermediaries and other independent financial advisors such as accountants or solicitors. There are few limits on entry to the market for life insurance intermediary services. Recent entry into the market by Ark Life and Equitable Life demonstrates that barriers to entry into this market have not been prohibitive.

11 Irish Life submits that its sales figures in respect of the products/services affected by this agreement for 1993 was £61.7m. It estimated that First National’s turnover in Irish Life’s products for 1994 was [ ] and that this represented [ ] of the total market for all companies in these services in Ireland. It further submitted that its market share of the life assurance and pensions business has declined in the 1990s. Its market share in the relevant products/services in Ireland has declined from [ ] in 1991 to [ ] in 1994.

12 This notification concerns a draft Tied Agency Agreement whereby the FNBS has agreed to market and sell the insurer’s contracts to the public and to service customers of such contracts. FNBS has acted as the “tied insurance agent” (as defined in the Insurance act 1989) of Irish Life Assurance plc since 1, April 1991. The agreement is of an indefinite duration.

13 FNBS is empowered to act as a tied agent for the sole purpose of a) procuring and endeavouring to procure the completion of proposals to the insurer in respect of the insurer’s products by persons with whom the society deals and b) advising persons with whom the society deals about the insurance products, about the sale of such products and about the exercise of rights conferred or derived from such products.

14 The provisions of the agreement relate for the most part to obliging the Tied Insurance Agent to comply with the requirements imposed on Tied Insurance Agents under the Insurance Act 1989. Other provisions in the agreement relate to maintaining the image and integrity of Irish Life products and the responsibility of Irish Life for acts or omissions of a Tied Insurance Agent.

15 Under the agreement the society must act according to the law in carrying out its functions; bring to the attention of the insurer any breach of the act, the code of conduct for intermediaries or this agreement; not engage any employee in the marketing or sale of the insurer’s products who would be unacceptable to the insurer; ensure that all employees are subject to proper training and supervision; pay promptly all sums due to the insurer by the society or any client of the society; indemnify the insurer and maintain adequate insurance to cover all liability.

17 Clause 6 of the notified agreement relates to commission. It provides that the commission is “subject always to the maximum levels of commission allowable under the current version of the Insurance Industry Federation’s agreement on maximum rates of remuneration for life business.”

18 The insurer may terminate the agreement if the society breaches any provision of the agreement, Act, or code of conduct, or is adjudged insolvent. Each party may terminate the agreement by giving 6 months’ written notice. On termination of the agreement the society agrees to no longer represent itself as a tied agent or intermediary of the insurer, returning all property and stationery of the insurer. The tied agent may not transfer any of its rights under the agreement without the prior consent of the insurer.

“not to procure directly or indirectly any policy holder of the insurer in respect of which the Society was originally, or at any time, the selling agent, to relinquish, cancel, surrender, discontinue or otherwise dispose of any contract or other business with the insurer or to in any way directly or indirectly approach or solicit any policy holder for such purpose.”

20 Irish Life submits that the agreement has neither the object nor the effect of preventing, restricting or distorting competition in the State. It submits that no clause of the draft agreement enforces absolute territorial protection. Furthermore, there is no restriction on intra-brand competition as the services in question are available from more than one source (brokers, agents, direct sales forces).

21 Irish Life submits that the arrangements contribute to improving the provision of services by extending the availability of Irish Life products to customers of FNBS. Customers of the FNBS are also customers of retail banks operating in the market for life assurance. Irish Life believes that the effect of the agreement is to increase competition and choice for the consumer.

22 Finally, Irish Life submits that the arrangement does not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the services in question. The only restriction on FNBS is to act as a tied agent which they believe is necessary to ensure the improvement in distribution. There is no agreement amounting to absolute territorial protection. The exclusivity of the agreement does not afford Irish Life the opportunity of preventing other life companies from entering or expanding in the relevant market.

23 On 10 December 1998, the Authority issued a Statement of Objections to the notifying party indicating its intention to refuse to issue a certificate or grant a licence to the notified arrangements because these arrangements required that the parties adhere to the Insurance Industry Federation agreement on maximum rates of remuneration for life business. By letter dated 14 January, the notifying party stated that it no longer adhered to the IIF agreement and it was fully aware of its obligation not to do so. Accordingly, on 16 February 1999, Irish Life Assurance plc. issued a letter to First Active plc. (formally First National Building Society) stating that “ on 5 February 1998, Decision No. 495 of the Competition Authority found the Irish Insurance Federation’s Agreement on Maximum Rates of Remuneration for Life Business (the IIF Agreement) to be anti-competitive and in contravention with Section 4(1) of the Competition Act, 1991 and that it did not satisfy the conditions of Section 4(2). In the interests of ensuring that both of our organisations can demonstrate compliance with the Authority’s ruling, we confirm that Irish Life will not enforce any provisions relating to the maximum levels of commission payable under IIF Commissions Agreement and waives any rights relating to such provisions”.

24 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.”

26 The parties to the agreement are Irish Life Assurance plc and FNBS. Irish Life Assurance plc is involved in the transaction of life assurance and pension business in Ireland and the provision of investment management services. It is also involved in other areas of personal financial services. Irish Life , therefore, is an undertaking within the meaning of Section 3(1) of the Competition Act. FNBS is also an undertaking engaged in the provision of a service associated with the same goods, i.e. the distribution of life and pension products in the State. The Agreement is an agreement between undertakings having effect within the State.

27 The agreement creates an agent-principal relationship between FNBS and Irish Life plc. The Authority considers that FNBS is an intermediary between Irish Life and the purchasers of life assurance and pension schemes. It concludes the sale of products on behalf of Irish Life. The Authority considers that FNBS is an auxiliary organ forming an integral part of Irish Life’s distribution business, and it concludes that FNBS can be considered to be a commercial agent of Irish Life.

28 The Authority has stated in the Conoco consignee agreement [2] that the relationship of principal and agent does not in itself contravene section 4(1), and that certain restrictions which are necessary to that relationship also do not offend. The arrangement is such that FNBS as a tied agent for Irish Life must “refer all proposals of insurance to the undertaking with whom he has made or entered in to the agreement or arrangement.” As such, FNBS is prevented from selling the products of other life offices. The Authority takes the view that the “exclusivity” of the agreement does not prevent other life offices from distributing their life and pension products through other intermediaries (agents, brokers and tied agents) or their direct sales forces. Moreover, there is nothing in the agreement that prevents FNBS from entering the market directly or becoming the tied insurance agent of another insurer. FNBS may switch to another life office with 6 months notice. The Authority considers, therefore, that the agreement between Irish Life and FNBS, insofar as it creates an exclusive agency relationship between the principal and the commercial agent, does not contravene Section 4(1).

29 Even though the basic arrangement of commercial agency may not contravene Section 4(1), certain clauses in the agreement might occasionally do so. Clause 8.3 of the agreement precludes FNBS from procuring any policy holder of the insurer in respect of which the Society was the selling agent for a period of one year after the termination of the agreement. During the term of the agreement the special relationship of the agent and principal means that the agent is wholly integrated into the distribution system of the principal and is privy to the principal’s affairs, with contacts with the principal’s customers which could enable him to compete unfairly with his principal or the agent who succeeds him. The EU Directive on Commercial Agents provides for a maximum post term non-compete clause of 2 years from termination. As the provisions of this clause are restricted to clients of which FNBS is agent and for a period of one year only, the Authority considers that this clause does not contravene Section 4(1).

30 Clause 6 provides that commission shall be “subject always to the maximum levels of commission allowable under the current applicable version of the Insurance Industry Federation’s Agreement on maximum rates of remuneration for life business” (“the IIF Agreement”).

31 In its Decision 495 [3],the Authority refused to issue a certificate or grant a licence to the IIF Agreement. It concluded that that Agreement had both the object and the effect of preventing, restricting or distorting competition between insurers in the market for life insurance products in the State, and that it did not meet the requirements for a licence. In that decision, the Authority established that virtually all distribution of life products in the State is through intermediaries and a fixed charge for this form of distribution is paid by virtually all customers. The charge is not disclosed and is not related to the actual cost of distribution to the individual customer. In that decision the Authority stated its view that it is restrictive of competition to fix the maximum commission payable to intermediaries. It does not provide an insurance company with the incentive to compete for customers’ business by reducing the level of commission payable by the customer, as intermediaries are more likely to sell the products of those companies offering higher commission. Moreover, fixing maximum rates of commission facilitates the sharing by competitors of information about an element of their costs. It removes some of the uncertainty as to competitors’ prices which is a important component of price competition. [4]

32 The Authority also considered that the maximum rates of commission may be treated by insurers as a minima which may have the effect that all insurers will pay the same level of commission, thereby eliminating competition between them as regards an element of their costs. Furthermore, the Authority believed that fixing a maximum commission has the effect of removing any incentive for competition between brokers, agents and tied agents on price and quality of service.

33 The agreement under consideration here is a vertical agreement between Irish Life and its tied insurance agent, FNBS. Insofar as its vertical aspects are concerned, the Authority considers that the agreement does not contravene Section 4(1). However, Clause 6 of the agreement requires the parties to adhere to the IIF Agreement, a horizontal industry-wide agreement which the Authority has already found to be in breach of Section 4(1). The Authority considered that this requirement contravened Section 4(1). On 16 February 1999, Irish Life confirmed to First Active that it had waived all rights to and would not enforce any provisions of its agreement with First Active (formally First National Building Society), which related to the IIF Commission’s agreement. It has sent a copy of this letter to the Authority. In the opinion of the Authority, therefore, the agreement between Irish Life and its tied insurance agent, FNBS, does not prevent, restrict or distort competition within the meaning of Section 4(1) of the Competition Act, 1991.

34 The Competition Authority considers that Irish Life Assurance plc and FNBS are undertakings and that the Tied Agency Agreement is an agreement between undertakings. In the opinion of the Authority, the agreement as amended by letter of waiver dated 16 February 1999 does not contravene Section 4(1) of the Competition Act, 1991, as amended.

2. The Competition Authority certifies that in its opinion, on the basis of the facts in its possession, the Tied Insurance Agency Agreement between Irish Life Assurance plc. and First National Building Society (Notification No. CA/1045/92E), notified on 30 September 1992, and amended by letter of waiver dated 16 February 1999, does not contravene Section 4(1) of the Competition Act, 1991, as amended.

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Irish Competition Authority Decisions

Irish Life Assurance plc / First National Building Society [1999] IECA 548 (16th April, 1999)