14 July 2010 by

Tracking firms found guilty of anti-competitive behaviour

Netstar, Matrix Vehicle Tracking, Tracker Network (collectively referred to as the 'SVR players') and the Vehicle Security Association of South Africa (VESA) have been found guilty of anti-competitive behaviour. 

The complaint against the four respondents was brought by the Commission following a complaint by Tracetec.

In the late 1980's, because of the unprecedented vehicle thefts at the time, it became necessary for security companies to create other means to minimise risk for motorists. That saw the development of stolen vehicle recovery products (SVR products) that could track vehicles after they were stolen and enable them to be recovered. This created a market for SVR products, distinct from other vehicle security devices that could not track and recover vehicles.

Over time, large insurers through their industry association, the South African Insurance Association (SAIA), sought a regulator to set standards for the industry. SAIA's justification for the request was that it would reduce the insurance costs of vetting companies and ensure higher standards. The SVR players decided to co-operate with VESA to satisfy SAIA's request. SAIA members adopted a policy in which they refused to endorse a company's SVR product unless it was approved by VESA.

The criteria created by VESA were both technical and performance based. It is the performance based aspect of the criteria that formed the genesis of the complaint. In short, for a firm to qualify as a member of VESA it had to have been in operation for at least one year, have installed at least 3000 units, and have made 100 recoveries. Whilst by law it was not necessary to be a VESA member in order to operate, the criteria was allegedly, a de facto barrier to entry, preventing non-VESA members from competing effectively in a market where the customer base was primarily the insured motorist. Since the overwhelming number of insurers were SAIA members, they adopted the SAIA position which was to give discounts on premiums only to motorists who installed a VESA approved devise. Thus a new entrant had to meet the performance criteria during a period when the major source of demand in the industry - the insured motorist - was effectively foreclosed to it.

The Tribunal agreed with the Commission's conclusion that VESA and the SVR players contravened the Act and made a declaratory order that the conduct of VESA and the SVR players constituted a prohibited practice. The Tribunal found that the standards set by VESA created barriers to entry that prevented competitors of its members from competing in that market. The Tribunal also found that the standards were of an exclusionary nature, self-serving and irrational.

The standards benefited the SVR players only and led to a substantial prevention and lessening of competition. The Tribunal rejected the argument by the SVR players that the standards were set by consumers, finding instead that they were the product of agreement between competitors. The Tribunal concluded that, once competitors have been found to set a standard, there is at the very least, an evidential onus on them to justify that they had not set an exclusionary standard. The SVR players failed to do so.

No administrative penalty was imposed against VESA and the SVR players as a penalty is not competent for a first time contravention of section 4(1)(a) (which prohibits an agreement between competitors which has an effect of substantially preventing or lessening competition without any concomitant pro-competitive or efficiency gains) and section 8(c) (which prohibits a dominant firm from engaging in an exclusionary act - an act which impedes a firm from entering or expanding within a market).

In addition, the Tribunal did not impose any form of behavioural sanction as, in May 2004, the SVR players resigned from VESA and following their resignation, the industry fundamentally changed, and VESA approval is no longer a requirement for the approval of insurance products offered by the SVR players. As the conduct before the Tribunal was historic, a declaratory order was found to be sufficient to conclude the matters.

Chris Charter, Director, Competition
Scarlate Nkiwane, Associate, Competition

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