FirstRand, SA’s biggest banking group, may well find itself on the hook for a costly penalty over alleged anticompetitive behaviour involving its vehicle financing subsidiary, WesBank.
The Competition Commission announced on February 3 that it had referred FirstRand, WesBank and Toyota Financial Services SA (TFS-SA) to the Competition Tribunal for prosecution due to alleged collusive behaviour. It also said it had asked the tribunal to fine the companies 10% of their turnover, which is where the matter gets rather interesting.
That is because a 10% fine on FirstRand’s turnover would be huge — in the region of R10bn if one uses the R109.5bn total revenue figure cited in the group’s 2021 integrated report. Though FirstRand does not disclose WesBank’s turnover figures in its results it is safe to assume it is far smaller given that it is a subsidiary, while TFS-SA’s would be smaller still.
Yet the details of the case contain a considerable amount of devils, thanks to a confusing and poorly drafted statement by the commission. Neither the commission nor FirstRand have been keen on clearing up the confusion when contacted by Business Day.
The original statement by the commission states that TFS-SA was created via a shareholder agreement between FirstRand, TSA Investment Holdings and Toyota Motor Finance (UK), with each party holding 33.3%. The commission says this agreement contained clauses prohibiting WesBank from financing certain vehicles sold at Toyota dealerships, which it argues was a ploy to selectively divide customers among the two entities without having to compete to win business.
But if it was FirstRand that entered into the shareholder agreement that created TFS-SA then it stands to reason that it was the mastermind behind any alleged collusion rather than its subsidiary (WesBank). This matters because it would imply FirstRand’s far larger revenue should be used to calculate any potential fine rather than WesBank’s.
Though the commission’s original statement was not clear on whether it was FirstRand or WesBank that had entered into collusive agreements — in fact, it mentioned both entities as being party to such agreements in different parts of the same statement — subsequent correspondence suggests FirstRand is also on the hook.
Commission spokesperson Siyabulela Makunga told Business Day that FirstRand’s name is also on the charge sheet, though he declined to share the document.
The question that arises then is which of the three parties does the commission want fined? FirstRand, WesBank, TFS-SA or all three?
Business Day asked FirstRand to clarify whether it was the entity that entered into the allegedly collusive agreement to create TFS-SA or whether it might have been WesBank. However, it sidestepped the question by getting WesBank’s spokesperson to respond lest it inadvertently lends any credence to the notion that it might’ve been involved.
“We are not in a position to provide any further insight at this stage,” WesBank’s Lebo Gaoaketse, said in an emailed response.
While it is understandable that FirstRand would not want to implicate itself in a matter that could result in it paying a hefty fine, the legal mechanics involved suggest several outcomes are possible.
Ofentse Motshudi, a competition law expert at Fullard Mayer Morrison Attorneys who previously worked for the commission, says while it is difficult to surmise what might transpire without seeing the filed legal papers, the tribunal may opt to fine FirstRand up to 10% of its revenue if it finds the company was the ultimate architect of the alleged collusive behaviour in which WesBank participated at its behest.
However, he says FirstRand may invoke the concept of “affected turnover” to argue that the parent company’s revenue should not be used as the basis for calculating a potential fine. This concept is mentioned in the commission’s own guidelines for determining administrative penalties and states: “The affected turnover is the firm’s turnover derived from the sales of products and services that can be said to have been affected by the contravention.”
That implies that even if FirstRand is found to be the chief architect of the alleged collusion a fine levied on affected turnover would likely only apply to the entities whose revenue would’ve benefited from the alleged infraction: WesBank and TFS-SA.
“In my experience, the affected turnover argument is the more seductive approach,” says Motshudi.
“Asking for a penalty on total turnover might be seen as stretching your hand a bit. The tribunal is unlikely to issue a fine that is seen to be too large and extending across the revenue streams of entities not involved in the alleged contravention. However, FirstRand’s own [apparent] participation in the alleged collusive behaviour by concluding the impugned shareholder’s agreement may work against it.”
But that is not where the intrigue ends, as Motshudi says FirstRand may even escape sanction altogether if it succeeds in convincing the tribunal that the agreement that restrained WesBank from competing with TFS-SA is permitted under competition law.
“If they can prove that there was a legitimate purpose in creating the joint venture and that restraining WesBank was reasonably required for the purposes of implementing such legitimate purpose they could argue that their intention was not to subvert competition but to achieve some other pro-competitive primary goal,” he says.
“If they can convince the tribunal of that it might be viewed as justified.”
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