Department of Finance - Report of the
Review of Regulation of Bank Charges
in Ireland
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • The Department of Finance conducted a desk based assessment of fee income
relative to banks of a similar scale and business model to Irish banks in key
benchmarks in Europe. The review also examined the existing regulatory regime
and consulted with key stakeholders on their views of the regime. The Department
of Finance sets out a number of recommendations with regard to the application
of Section 149 of the Consumer Credit Act 1995, as amended.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 1 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • The Department would like to thank the stakeholders that were consulted during the review including
AIB, Bank of Ireland, Irish Banking Federation, the National Consumer Agency, the Competition
Authority, the Central Bank of Ireland and the Irish Small and Medium Enterprises Association. Their
willingness to contribute to the review is greatly appreciated.
The Department is also grateful to SNL Financial for allowing the use of their financial analytics tool in
preparing Part 2 of this Report.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 2 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • EXECUTIVE SUMMARY
The Programme Documents (the Memorandum of Understanding on Specific Economic Policy
Conditionality and the Memorandum of Economic and Financial Policies) agreed following the 10th
Review of the EU-IMF Programme of Financial Support include a commitment to carry out an
assessment of banks’ fee income by end-December 2013 as follows:
The authorities will assess banks’ fee income relative to peers in selected other
jurisdictions. Based on this assessment they will complete an external review of the
regulation of bank fees.
The Department of Finance undertook this assessment and review.
Summary
This report initially describes the existing regulation regime.
The review found that:
• net fee and commission income divided by average assets in Irish banks was well below the
average of their peers,
• net fee and commission are lower in the Irish banks than in their European peers relative to net
interest income,
• fee and commission income have become a more important source of income to the banks in
recent years and that the banks have been able to increase fee and commission income since
2009 despite the restrictions imposed by section 149, as illustrated in Part 3 of this report,
• competition in the Irish banking sector has reduced significantly since the onset of the economic
crisis and that this reduction is not related to Section 149,
• it is too early to say whether the recent changes in legislation (under the Central Bank
Supervision and Enforcement Act 2013) have been successful in attracting new entrants to the
Irish banking sector,
• Section 149 does appear to exert a restraining effect on the development of innovative products
by the existing banks in Ireland but this may not be to the detriment of consumers,
• Section 149 may lead to inefficiency in pricing of financial products by the banks in Ireland, and
• Low customer mobility may mean that banks can increase prices without fearing a loss of
customers.
The review considered a number of possible changes to the existing regime.
The review concluded that it would not be appropriate to repeal Section 149 at this point in time.
The lack of competition in the banking sector means that the removal of section 149 would give
unfettered price setting power to the incumbent banks. This issue should be revisited when
competition in the banking sector has improved significantly.
Department of Finance
December 2013
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 3 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • TABLE OF CONTENTS
Executive Summary
Introduction
Part 1 – Analysis of the existing regime
Part 2 – Significance of fees and charges for Irish
banks
Part 3 – Efficiency, competition and price regulation
Part 4 – Proposals from Stakeholders
Part 5 - Recommendations
Appendices
5
7
12
19
24
28
30
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 4 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • INTRODUCTION
Price regulation is considered anti-competitive and ultimately acts against the best interests of both the
product or service provider and the consumer. It is Government policy to promote competition.
Competition benefits consumers, businesses and the economy as a whole. In 2002, the Competition
Act established the Competition Authority, which is the State body responsible for enforcing Irish and
European competition law in Ireland. In general there are no controls on pricing in Ireland with a few
limited exceptions – the energy and utilities sector and the financial services sector. The rationale for
introducing price regulation with regard to bank charges was to protect consumers at a time of rising
costs. The measures have been defended and criticised in equal measure and the arguments for
retaining price controls have to be weighed against the need to both increase competition and protect
the consumer in a difficult economic climate.
Ireland is unique in regulating bank fees and charges in the manner that it does. Some other countries
have controls in place around the unilateral increase by a credit institution in the interest rates, fees and
charges that it charges consumers (see Appendix 1). Ireland however is the only country, based on
the available data on financial regulation in other jurisdictions, to operate a system of price regulation of
financial services through a statutory body. Section 149 of the Consumer Credit Act 1995 came into
effect in 1996 and currently requires that credit institutions, prescribed credit institutions and bureaux de
change must make a submission to the Central Bank if they wish to introduce any new customer
charges or increase any existing customer charges in respect of certain services. Section 149 does not
cover interest rates; it applies to fees and commissions only. Prior to the legislation taking effect
regulated credit institutions were allowed to notify a list of charges to the Director of Consumer Affairs
that ‘stood notified’ and were not subject to the provisions of Section 149. Essentially banks in Ireland
have been applying discounts for certain bank fees and commissions within the limits that were
approved in 1996. The Department of Finance understands that for the most part the maximum limits
have been reached for almost all of these approved charges.
The EU-IMF delegation expressed concerns that the Irish banks may not be pricing fully for their
services and therefore may not sufficiently recover their costs. Banks have reported difficulty in
recovering their costs and the EU-IMF made several references during meetings to the ‘fee-free’
banking system. As of December 2013, all but one of the banks offering current accounts in the Irish
market had introduced fees for almost all account features and so the position that Ireland has a feefree banking system is no longer accurate.
The Programme Documents (the Memorandum of Understanding on Specific Economic Policy
Conditionality and the Memorandum of Economic and Financial Policies) agreed following the 10th
Review of the EU-IMF Programme of Financial Support include a commitment to carry out an
assessment of banks’ fee income by end-December 2013 as follows:
The authorities will assess banks’ fee income relative to peers in selected other
jurisdictions. Based on this assessment they will complete an external review of
the regulation of bank fees.
The Department of Finance undertook this assessment and review. The Department conducted a desk
based assessment of fee income relative to banks of a similar scale and business model. A peer group
was created on the basis of geography, excluding mutual banks due to the likely different business
models. Developed Europe was used as the search parameter to exclude emerging countries with
different banking structures with the specific addition of Hungary due to its fee regime.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 5 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • The Department also conducted an examination of the rationale for the existing regulation including a
review of the 2005 report by the Competition Authority on the Banking Sector and the Competition
Authority’s review of Section 149 in 2011.
Consultations were held with stakeholders during the review including AIB, Bank of Ireland, Irish
Banking Federation, the National Consumer Agency, the Competition Authority, the Central Bank of
Ireland and the Irish Small and Medium Enterprises Association and their views were fully taken into
account. The willingness of all stakeholders to contribute to the review is greatly appreciated.
Certain aspects of submissions are commercially sensitive and it has been necessary to be
circumspect in describing certain issues raised.
This report presents an analysis of the existing regime along with the conclusions of the review. The
Department of Finance sets out its recommendations in Part 5.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 6 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Part 1 – Analysis of the Existing Regime
In assessing the Irish regulatory framework for bank fees the Department had always in mind the
objectives of promoting competition and consumer protection and enabling banks to price service costs
efficiently.
We begin by setting out the existing regulatory regime, how it evolved, the legislation behind the regime
and the process involved in regulating bank fees and charges.
Existing regulation regime
Introduction and Evolution
In 1996 Section 149 of the Consumer Credit Act, 1995 was enacted obligating all regulated credit
institutions to notify customer charges to the Consumer Director. All charges being imposed by credit
institutions at that time “stood notified” under the Office of the Director of Consumer Affairs (‘ODCA’).
The Central Bank of Ireland (‘Central Bank’) assumed responsibility for Section 149 in 2003. The role of
the Central Bank under Section 149 of the Consumer Credit Act 1995 (as amended) is to ensure the
right balance is struck between:
• Credit institutions recovering costs of providing services and;
• That charges they are imposing on personal and small business account holders are
reasonable and appropriate.
Scope
Section 149 of the Consumer Credit Act 1995 (see Appendix 2) requires that credit institutions,
prescribed credit institutions and bureaux de change must make a submission to the Central Bank if
they wish to introduce any new customer charges or increase any existing customer charges in respect
of certain services, such as:
• making and receiving payments,
• providing and granting credit, and
• maintaining and administrating transaction accounts
• providing foreign exchange
The Central Bank may direct the institution not to impose the new or increased charge or it may
approve the charge, or approve it at a lower level than requested by the institution. The Central Bank
does not approve interest rates nor does it approve charges such as insurance attached to products or
the passing on of third party charges, if these are passed directly on and not altered in any way. The
Central Bank may exempt a credit institution from the obligation to make a notification for charges that
are legitimately individually negotiated between the institution and the customer. Letters of Exemption
are granted by the Central Bank, where certain requirements are met, which outline the qualifying
conditions.
As part of the conditions under which the Irish banks received state aid, Ireland made various ‘sectoral
commitments’ to the European Commission in order to promote competition in the Irish banking sector.
Among these commitments, Section 1.1 (b) of the approved State Aid for Bank of Ireland states:
“Legislation will be enacted that will provide that Section 149 of the Consumer Credit Act, 1995
regarding price regulation and fees will not be applied to new entrants in their first 3 years of
commencing business in Ireland”.
This 3-year exemption from Section 149 has been given effect in the Central Bank (Supervision and
Enforcement) Act 2013 and applies to new market entrants from 1 August 2013.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 7 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • The Central Bank (Supervision and Enforcement) Act 2013 allows new credit institutions entering the
market after the commencement of this Act a three year exemption from the requirement of Section 149
for credit institutions to notify the Central Bank of fees. During this three year period the relevant credit
institution may impose any fees it sees fit in relation to a service provided. However, following this three
year period should that credit institution wish to increase any existing fees or impose any new fees for a
relevant service, a notification must be made to the Central Bank under Section 149. At the end of the
three year period, the relevant credit institution is required to notify the Central Bank of all decisions to
impose charges during the three year period. This notification is treated as a new notification of a
proposal to increase charges and is subject to the Section 149 process.
Process
Some of the stakeholders that were consulted during the review asserted that the notification process is
‘lengthy and expensive’. Before addressing these concerns we set out below the process involved
when a notification is made to the Central Bank under Section 149.
A bank may choose, for commercial or competitive reasons, not to apply charges for which it already
has approval or which “stood notified” and then subsequently apply such charges at its own
discretion. These concessions are not subject to a Section 149 submission, that is, a bank may choose
to apply waivers or discounts or may impose charges at lower than approved levels and subsequently
increase these charges. The Central Bank has no power to approve or reject such revisions. During the
course of this review the Department of Finance met with the Central Bank and learned that most
banks will inform them of discounts applied to charges that ‘stood notified’ as of 1996 and to approved
charges but are not obligated to do so. It is a courtesy measure.
Where the Central Bank does have the power to approve or reject charges, Section 149 requires that
the commercial justification for the proposal is submitted including details of the estimated amount of
additional income accruing from the proposal. The Central Bank can direct the credit institution to
refrain from imposing the notified charge or reduce the charge by reference to Section 149. The Central
Bank may waive or reduce the fee referred to in subsection (2) if the payment of the fee would, in the
opinion of the Bank, be unfair to the credit institution having regard to(a)
the impact of any increase in or imposition of charges on customers, and
(b)
the number of customers affected by any increase in or imposition of charges, and
(c)
the additional income likely to accrue from any increase in or imposition of charges, and(d) any
other matters that the Bank considers appropriate.
The Central Bank is also required to have regard to:
• the promotion of fair competition between credit institutions,
• the commercial justification of the charge,
• the passing on of costs to the customer and the effect on customers.
Section 149 extends to personal and business customers so the potential impact on groups of
customers, such as SMEs is considered as part of the Central Bank’s process. Whilst the Consumer
Protection Directorate of the Central Bank of Ireland deals with processing the applications under
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 8 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Section 149 it does consult with other sections where necessary and in particular where financial
stability is concerned. The final decision is a decision of the Central Bank.
With regard to the provision under Section 149 enabling institutions to seek exemptions, the Central
Bank confirmed that exemptions were usually sought for ‘niche’ products such as Treasury or trade
finance products and not normal consumer or business customer products.
The Central Bank developed four customer profiles which are analysed as part of the review process
involving personal current account fee notifications. Each profile represents different usage patterns, in
terms of volumes and types of transactions (for example, electronic vs. manual) and differing
occurrences of out of order charges. The profiles currently used are as set out in the 2011 review of
Personal Current Accounts (see Appendix 3). Banks, the Irish Banking Federation (IBF) and the
National Consumer Agency (NCA) were consulted in determining the profiles. The National Payments
Plan (NPP) team in the Central Bank is currently reviewing these profiles to take into account changing
customer behaviour including the increasing use of contactless payments. The Central Bank does not
have a common profile for business customers.
When taking a decision on a charge or proposed amendment to a charge, the Central Bank can
approve, partially approve or reject the notification of the charge. Where approved the Central Bank
issues a Letter of Direction setting out the maximum level of each charge. Appendix 2 contains data on
decisions taken with respect to notifications received by the Central Bank in 2012.
A further amendment was made to Section 149 under the Central Bank (Supervision and Enforcement)
Act 2013 whereby the timeframe for consideration of a notification of an increase by the Central
Bank was reduced from 4 months to 3 months. The timeline for new fees was also set at three months.
The amendment also provides that in calculating the periods of 3 months specified “no account shall
be taken of any day on which any information required by the (Central) Bank to be provided by
the credit institution for the performance of the (Central) Bank’s functions under this section
has not yet been so provided”.
A notification is not a complete notification made to the Central Bank, under section 149 of the Act, until
the Central Bank is satisfied that sufficient information has been received from the credit institution in
order for the Central Bank to consider that notification under the criteria set out in the Act. When all
information has been received then the statutory timelines take effect.
Under subsection 149(2) the Central Bank may impose a fee on a credit institution for the consideration
of a notification made under Section 149 (up to a maximum of €31,750 as set out in subsection 149(3)).
In practice the Central Bank does not currently impose any fee for standard Section 149 notifications.
The Central Bank does impose fees for very large notifications. This practice may change in the future.
In discussions with the Central Bank it emerged that just one institution had been charged a fee in
recent years and this was for a large volume of work in notifying several charges under Section 149.
The process does not involve a formal appeals mechanism against a decision by the Central Bank.
However, the Central Bank confirmed and the submissions from the banks supported that there is ongoing communication between the parties until a Letter of Direction is issued.
Transparency
Section 149 requires that any proposed changes to charges or qualifying criteria must be notified three
months in advance. Where approved those changes must also be published in advance. The Central
Bank does not require credit institutions to publish information on the maximum amounts approved. The
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 9 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Letters of Direction generally state that credit institutions must publish the above charges at the level to
be imposed on notices, leaflets, promotional material etc.
The European Communities (Payment Services) Regulations 2009 (S.I. number 383 of 2009) and the
Consumer Protection Code 2012 contain certain requirements in relation to the information provisions.
Generally the minimum requirement is 60 days’ notice by running an advert in a minimum of two
national newspapers.
The Payment Services Regulations require that payment service providers:
• provide information on all charges payable by the user to the provider and, where such charges
can be broken down into components, a statement of those components.
• agree, between the payment service user and the payment service provider, any charges
imposed. These charges shall be appropriate and in line with the payment service provider’s
actual costs.
• All charges applicable must be provided before a user uses a payment service.
The Consumer Protection Code 2012 contains a number of provisions relating to charges which
regulated entities including credit institutions must comply with, except when providing payment
services and/or issuing electronic money. Under the Code regulated entities must:
• make full disclosure of all relevant material information, including all charges, in a way that
seeks to inform the customer.
• provide consumers with a breakdown of all charges, including third party charges prior to
providing a product or service to the consumer. Where such charges cannot be ascertained in
advance, notify the consumer that such charges will be levied as part of the transaction.
• display a schedule of fees and charges in public offices, in a manner that is easily accessible to
consumers. If the regulated entity has a website, its schedule of fees and charges must also be
made available on the website.
• notify affected consumers of increases in charges, specifying the new charge and the old
charge, or the introduction of any new charge, at least 30 days prior to the change taking effect.
• where charges are accumulated and applied periodically to accounts, and amount to €10 or
more, notify the consumer at least 10 business days in advance of the deduction of the charges
and give each consumer a breakdown of such charges
The list of charges that ‘stood notified’ when the Consumer Credit Act 1995 came into effect in 1996 is
not publicly available. However, following an appearance before the Joint Committee on Finance,
Public Expenditure and Reform on 17 April 2013, the Director of Consumer Protection at the Central
Bank of Ireland wrote to the Chairman of the Committee with further information on the charges that
‘stood notified’ in 1996. The Director wrote:
“The Central Bank of Ireland…maintains a database of all approvals granted under
Section 149 of the Consumer Credit Act, 1995. This database records the maximum
approved levels of charges for each institution but it does not maintain a record of the
actual charge being applied by the institution. It contains more than 4,500 individual
charges covering hundreds of products. Of the charges contained in this database, over
4,000 relate to charges approved by the Office of the Director of Consumer Affairs
(ODCA) or the Central Bank (i.e. post 1996). Less than 10% of all approved charges
‘stood notified’ in 1996. Of those charges, a significant proportion is currently being
imposed at the maximum level, leaving no scope for banks to increase those charges
without notifying the Central Bank”.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 10 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • The Director provided a further breakdown of the charges that ‘stood notified’ and those that have been
approved post-1996 and this is included at Appendix 4. The data from the Central Bank, whilst not
revealing the charges that ‘stood notified’ in 1996 demonstrates that they may no longer have
significance for determining the appropriateness of the existing regime given that:
(a) they no longer constitute a significant proportion of approvals and
(b) the banks are now almost universally charging near the maximum amount approved in
1996.
Challenges for the banks
In reviewing the regulatory regime, the Department of Finance consulted with key stakeholders
including the pillar banks. Both banks referred in their submissions to ‘costs’ with the process involved
in making a notification to the Central Bank under Section 149. In addition to the time and resources
involved in submitting a notification the banks commented that the time taken to await the Central
Bank’s decision represented a significant cost: the banks commented that overall they would have to
allow an additional 3 to 6 months to bring a new product or service to the market due to the requirement
to make a Section 149 notification.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 11 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Part 2 – Significance of fees and charges for Irish banks
Using data from SNL Financial, net interest income and net fee and commission income for year ending
2012 for the Bank of Ireland, AIB and Ulster Bank were examined to assess the relative significance of
both types of income. Unless otherwise stated, the data is at group level and may include earnings
outside Ireland.
In order to avoid possible distortion by once off income gains, “combined income” was taken as the
combined total of both types of income and the table below shows the data for the main Irish banks with
Ulster Bank in Northern Ireland included:
Company Name
Net fee and
commission
income as %
of combined
income
Net
interest
income as % of
combined
income
Bank of Ireland
17.18%
82.82%
Allied Irish Banks
24.92%
75.08%
Ulster Bank Ireland Ltd.
14.21%
85.79%
Ulster Bank Ltd.
17.46%
82.54%
This table shows that the significance of fee and commission income varies between the Irish banks but
is an important element for all the banks.
The graph below shows the development of net interest income as a percentage of combined income
since 2006 for AIB and Bank of Ireland. It peaked in 2009 and declined since then as the banks
introduced and/or increased fees and charges.
Net Interest Income
ROI Net Interest Income
100%
80%
60%
BOI
40%
AIB
20%
0%
2008
2009
2010
2011
2012
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 12 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • The AIB figure for 2011 and 2012 is the same at 75% while the Bank of Ireland figure has increased
from 79% to 83%.
The net fee and commission chart is the reverse below:
Net Fee and Commission Income
ROI Other Income
40%
BOI
20%
AIB
0%
2008
2009
2010
2011
2012
The Bank of Ireland Annual Report for 2012 states “Fee and commission expense of €215 million (year
ended 31 December 2011: €192 million) primarily comprises brokerage fees, sales commissions and
other fees to third parties and reflects higher commission payments following the extension and
strengthening of the financial services relationship with the UK Post Office during 2012.” Higher fee and
commission expenses obviously reduce net fee and commission income contributing to a reduction
from 21% to 17% for Bank of Ireland. The change in the net figure masks an increase in the importance
of fees and commission income for Bank of Ireland and does not mean that the focus is changing back
to interest income.
We can conclude that fee and commission income have become more important to the banks in
recent years and that the banks have been able to increase fee and commission income as a
percentage of total income since 2009 despite the requirements imposed by section 149.
However this does not give any indication of where fee and commission income should be and it is
necessary to examine similar figures for a selection of peer banks to get the relative position of Irish
banks.
Selection of peer banks
The terms of reference for the review committed to assessing fee income of the Irish banks relative to
banks of a similar scale and business models in other jurisdictions. SNL Financial was used as the
main source of the raw data.
A peer group was created using SNL software which selected peers on the basis of geography,
excluding mutual banks due to the likely different business models. Developed Europe was used as the
search parameter to exclude emerging countries with different banking structures with the specific
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 13 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • addition of Hungary due to its fee regime. Banks with full time employee numbers less than 8000 were
excluded to get banks of similar size to the Irish pillar banks. The following banks were excluded early
in the process because they are too different from the pillar banks for business model reasons:
Santander, Natixis, Credit Suisse, BNP Paribas, Soc Gen, Unicredit, HSBC, ESFG,
Barclays, UBS, BBVA, Deutche Bank, Banco Espirito Santo, Commerzbank, Standard
Chartered, Intesa and Komerchni banca a.s.
Discussions took place with the Troika on 30 October 2013 during their twelfth quarterly mission to
ensure their satisfaction with the peer group chosen.
Following these discussions, the 5 banks below were excluded from the list of proposed European
peers following assessment of their business models and emerging market exposure as requested by
the Troika.
KBC, Piraeus Bank, Banco Sabadell SA, BCP, Erste Bank
This leaves 24 banks in the peer group as follows:
Company Name
Country
Crédit Agricole SA
RBS
DNB ASA
Alpha Bank
SEB
Crédit Industriel
Banco Popolare
Eurobank Ergasias
Banco Popular Español SA
UBI
Banca Monte dei Paschi Siena
Swedbank
National Bank of Greece
Banca popolare dell'Emilia
Banca Popolare di Milano
Lloyds Banking Group
OTP Bank
Danske Bank
Nordea
Handelsbanken
Deutsche Postbank
BPI
CaixaBank
Bankia SA
France
United Kingdom
Norway
Greece
Sweden
France
Italy
Greece
Spain
Italy
Italy
Sweden
Greece
Italy
Italy
United Kingdom
Hungary
Denmark
Sweden
Sweden
Germany
Portugal
Spain
Spain
FTE
Employees
2012Y
(actual)
81,886
123,000
13,291
13,650
16,357
20,446
18,799
17,427
16,501
19,088
30,265
14,861
35,078
11,834
8,312
92,788
36,431
20,308
29,491
11,156
18,600
8,680
32,625
20,005
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 14 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • The Troika was then informed of the finalised peer group.
It was originally intended that additional banks in the US would also be included in the peer banks for
comparison purposes but, as will become clear below, the data for the peer European banks made their
inclusion moot.
International Comparisons with peers
During the twelfth Troika mission, the following data items were proposed for the international
comparisons with peers:
•
•
•
Net Interest Income/Average Assets
Net Fee Income/Average Assets
Net Fee Income as ratio of Net interest income
The table below shows the data for the selected peer banks with the Irish Banks highlighted in bold.
Company Name
Alpha Bank
Banca Monte dei Paschi Siena
Banca popolare dell'Emilia
Banca Popolare di Milano
Banco Popolare
Banco Popular Español SA
Bank of Ireland
Bankia SA
BPI
CaixaBank
Crédit Industriel
Danske Bank
Deutsche Postbank
DNB ASA
Eurobank Ergasias
Handelsbanken
Lloyds Banking Group
National Bank of Greece
Nordea
OTP
RBS
SEB
Allied Irish Banks
Swedbank
UBI
Ulster Bank Ireland Ltd.
Ulster Bank Ltd.
Net Fee Income/
2012Y (%)
0.47
0.71
1.16
0.94
1.02
0.53
0.20
0.34
0.81
0.55
0.70
0.23
0.58
0.29
0.28
0.30
0.34
0.48
0.35
1.55
0.34
0.57
0.28
0.51
0.89
0.25
0.31
Average
0.57
Average
Assets
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 15 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • This table shows net fee and commission income divided by average assets in AIB, Bank of
Ireland and in Ulster Bank in both Northern Ireland and the Republic of Ireland as well below the
average which could indicate that the regulation on fees is inhibiting the banks from imposing
an appropriate level of fees and commission.
To further explore whether fee and commission income is underweight in the Irish banks, we then
looked at the breakdown between net fee and commission income and net interest income.
Company Name
Net fee and commission income as Net interest income as %
% of total income (%)
of total income (%)
Alpha Bank
0.16
0.84
Banca Monte dei Paschi Siena 0.37
0.63
Banca popolare dell'Emilia
0.35
0.65
Banca Popolare di Milano
0.37
0.63
Banco Popolare
0.44
0.56
Banco Popular Español SA
0.23
0.77
Bank of Ireland
0.17
0.83
Bankia SA
0.24
0.76
BPI
0.40
0.60
CaixaBank
0.31
0.69
Crédit Industriel
0.48
0.52
Danske Bank
0.19
0.81
Deutsche Postbank
0.30
0.70
DNB ASA
0.20
0.80
Eurobank Ergasias
0.12
0.88
Handelsbanken
0.22
0.78
Lloyds Banking Group
0.29
0.71
National Bank of Greece
0.13
0.87
Nordea
0.31
0.69
OTP
0.19
0.81
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 16 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • RBS
0.30
0.70
SEB
0.44
0.56
Allied Irish Banks
0.25
0.75
Swedbank
0.32
0.68
UBI
0.38
0.62
Ulster Bank Ireland Ltd.
0.14
0.86
Ulster Bank Ltd.
0.17
0.83
Average
0.28
0.72
Again net fee and commission is lower in the Irish banks than in their European peers with net
interest income making up a significantly higher proportion of income in the Irish banks.
Company Name
Alpha Bank
Banca Monte dei Paschi Siena
Banca popolare dell'Emilia
Banca Popolare di Milano
Banco Popolare
Banco Popular Español SA
Bank of Ireland
Bankia SA
BPI
CaixaBank
Crédit Industriel
Danske Bank
Deutsche Postbank
DNB ASA
Eurobank Ergasias
Handelsbanken
Lloyds Banking Group
National Bank of Greece
Nordea
OTP
RBS
SEB
Allied Irish Banks
Net Interest Income/ Avg Assets 2012Y (%)
2.43
1.22
2.15
1.63
1.31
1.80
0.95
1.06
1.24
1.26
0.78
1.00
1.37
1.15
2.02
1.05
0.81
3.23
0.79
6.47
0.80
0.73
0.84
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 17 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Swedbank
UBI
Ulster Bank Ireland Ltd.
Ulster Bank Ltd.
1.09
1.46
1.48
1.48
Average
1.57
This shows net interest income divided by average assets for Ulster Bank in both Northern Ireland and
the Republic of Ireland as very close to the average but both AIB and Bank of Ireland well below that
average.
This lower level of net interest income leads to caution in placing too much reliance on the lower level
of net fee and commission income because it indicates that both forms of income are lower than their
peers.
However the data does provide evidence that the Irish banks have lower levels of income from
fees and commission than their peers.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 18 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Part 3 – Efficiency, competition and price regulation
Market interventions by the State in the form of price regulation are usually justified by market failures
of one kind or another. In the financial markets, these mainly take the form of
•
•
Uneven information/price opacity
Imperfect competition/market power of incumbents
Uneven information operates on both sides of the transaction. On the one hand, the bank does not
usually have full information about the customer and can therefore make sub-optimal decisions. On the
other, the customer may not be fully aware of the price for the service required. The low degree of
current account switching in Ireland may be attributable to a number of different factors including
customer inertia and lack of information but it does appear to indicate that price competition is not a
factor in this market.
Market efficiency at a theoretical level depends on perfect competition.
Competition
In the years up to 2005, there were a number of foreign investments in the Irish banking sector which
substantially increased competition. Bank of Scotland (Ireland) purchased ICC bank and expanded its
branch network in the first decade of the millennium. In 2002, ACC Bank became a wholly owned
subsidiary of Rabobank. Danske Bank took over National Irish Bank in 2005.
However the 2005 Competition Authority report on Competition in the (non-investment) banking sector
in Ireland found that there was insufficient competition in the banking sector to justify the removal of
price regulation through Section 149.
“The Irish banking sector is not yet a competitive market. Consumers are locked in to
their existing bank and it is not easy for customers to switch their accounts or for new
banks to offer services. In these circumstances the current price regulations can protect
consumers from the power of their bank to increase charges”
It made a number of recommendations to improve competition including
• implementing a switching code for current accounts
• developing a transferable direct debit
• standardising acceptable forms of identification
• providing twelve months current accounts records free
• providing current account interest rate information and
• promoting current account interest rate awareness.
The majority of these recommendations have been implemented and competition has improved as a
result. The National Consumer Agency maintains a comparison website, setting out details of fees and
charges. The Central Bank has introduced a Code of Conduct on the Switching of Current Accounts
with Credit Institutions for consumers, which includes the transfer of direct debits, a list of acceptable
forms of identification has been developed and some banks provide twelve months records free.
State Aid Decision July 2010
The EU Commission State Aid decision in relation to the Bank of Ireland restructuring imposed a
number of conditions on the Irish State “in order to restore the competition in the Irish banking market
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 19 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • by facilitating entry and expansion of competitors and enhancing the consumer protection in the
financial sector.”
One of these commitments focusses on Section 149 and requires the Competition Authority to consider
“whether competition in the retail banking market has sufficiently improved and the
interests of consumers are adequately safeguarded to support its recommendation that
existing price regulation of fees and charges under Section 149 of the Consumer Credit
Act 1995 be removed”.
In February 2011, the Competition Authority concluded
“that competition in retail banking has deteriorated over the past five years.
It advised the Department of Finance that
“competition in retail banking has not improved sufficiently relative to 2005 to warrant
the removal of Section 149 for all banks.”
The commitment under the State Aid decision goes on to state
“If the assessment of the Competition Authority is such that the competitive
environment does not support its abolition, Section 149 of the Consumer Credit Act, 1995
will not be applied to new entrants in their first 3 years of commencing business in
Ireland.”
The Central Bank (Supervision and Enforcement) Act 2103 fulfilled this commitment by dis-applying
section 149 with regard to new entrants to the Irish market.
Developments in Competition since 2011
In an Economic Letter published in April 2012 titled “Bank competition through the credit cycle:
implications for SME financing”, McCann and McIndoe-Calder made number of significant findings in
relation to bank competition including that:
“it is apparent that the share of foreign banks in private sector credit stock reached its
peak just as the crisis began, and has been falling since, indicating that in times of crisis
foreign market participants react by more aggressively reducing exposure than domestic
banks.”
The Competition Authority and National Consumer Agency made a joint submission in relation to this
review. They stated that
“Competition in retail banking has deteriorated further since the onset of the financial
crisis. Danske Bank has closed its branch network and Ulster Bank has recently
announced the rationalisation of its retail operations in Ireland. EBS Building Society has
been merged with AIB, and Permanent tsb has also cut back its operations leaving the
two pillar banks as a de facto duopoly.”
Since that submission was made, Danske has announced that it will re-focus on corporate and
institutional clients and stop accepting new business from personal and business customers. Existing
personal customers’ products and services will be withdrawn on a phased basis in the first half of 2014.
Recently ACCBank announced plans to withdraw from providing standard banking products, such as
deposit accounts and current accounts, and to focus solely on debt recovery.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 20 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • On the other hand, KBC opened two new branches in September 2013 and announced plans to open 6
further branches in the 18 months from September 2013.
It has to be accepted that competition in the Irish banking sector has reduced significantly since
the onset of the economic crisis but that this reduction is not related to Section 149.
Section 149 and Credit Unions
In Ireland the credit unions also offer deposit-taking and lending services to its members. Credit unions
conduct business solely with their members and their members are owners of the credit union. They
operate within a common bond, such as where the members live or where they work. Unlike a bank
which provides services to all areas of the population, the operation of the common bond restricts credit
union membership. Currently, credit unions do not offer current accounts, overdrafts, mortgages or
business loans. Credit unions are regulated by the Registrar of Credit Unions at the Central Bank.
Section 149 of the Consumer Credit Act 1995 does not currently apply to credit unions.
However, the proposed introduction of the Tiered Regulatory Approach will see credit unions being
divided into two categories, allowing credit unions with assets of €100 million and more to apply to the
Central Bank to become a category 2 credit union. Category 2 credit unions, approved by the Central
Bank will operate a more sophisticated business model than previously permitted, allowing these credit
unions to provide services such as SME lending and mortgage provision. At some point, such credit
unions may need to be brought within the scope of Section 149, if they are offering products similar to
those being offered by banks. However, this would require a legislative change and the application of
Section 149 to credit unions would place a considerable administrative burden on this sector at a time
when they are already facing enormous challenges and change.
Whilst credit unions could be in a position to compete with banks (to a limited extent and within
the common bond) in the coming years, it remains to be seen how this could impact the market
and how Section 149 would apply to credit unions moving into this space.
Section 149 and competition
It has been argued that the existence of Section 149 regulation decreases competition in the banking
sector because it means that a new entrant to the market or an existing bank providing a new service
cannot be certain about whether or not its proposed fees and charges will be approved.
New entrants
The argument is that a potential new entrant cannot be certain about the level of fees and charges
which will be approved by the Central Bank and that this uncertainty about a revenue stream
discourages new entrants.
As noted in Part 1, a 3-year exemption from Section 149 has been given effect in the Central Bank
(Supervision and Enforcement) Act 2013 and applies to new market entrants from 1 August 2013.
It is also noted that the existence of Section 149 did not stop a number of banks entering Ireland in the
early years of the millennium.
If no new entrant has come into the Irish banking sector after the recovery of the Irish economy despite
the 3 year exemption, then a case could be made that something needs to be done to improve
competition. However it is too early to say whether the recent changes in legislation have been
successful in attracting new entrants to the Irish banking sector.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 21 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Existing banks
Existing banks may have difficulty introducing innovative products because of the section 149
requirement. While the Central Bank authorisation and approval regime may be amenable to
adjustment, as long as Section 149 remains in existence, banks face a degree of price uncertainty
which can reasonably be expected to inhibit innovation. The regime also imposes an additional
workload on the banks which can act as a disincentive.
The banks can point to greater innovation in relation to savings products which are not subject to the
approval process to show that the Section 149 regime reduces innovation in relation to products which
are subject to it.
But “innovation” in relation to savings accounts has resulted in the reduction of interest rates paid to
consumers. Central Bank figures show that retail interest rates paid to households for deposits with a
maturity of up to two years declined from 3.47% in September 2012 to 2.39% in September 2013
(Table B.1.1 Retail Interest Rates - Deposits, Outstanding Amounts Central Bank).
Section 149 does appear to exert a restraining effect on the development of innovative products
by the existing banks in Ireland but this may not be to the detriment of consumers.
Section 149 and merchant service providers
Section 149 applies to credit institutions only. Merchant services providers (businesses who process
payments by credit or debit card) are not subject to the requirements of section 149 if they are not
credit institutions. This means that the provision of the same service by two different organisations is
subject to a different regulatory regime depending on the type of organisation providing the service.
Section 149 and efficiency
Price regulation generally leads to a sub-optimal outcome from a pure price viewpoint because the
market is prevented from finding its level. As noted above, regulation may be justified because of
market failures of one kind or another but regulation increases the risk of the wrong products being
provided at the wrong prices. In the financial sector, this can lead to unintended cross-subsidisation of
products because most financial service providers provide a range of products. (Cross-subsidisation is
often intentional in the financial sector with some products effectively acting as loss leaders to attract
customers who are then sold other products, as happens in other areas of commerce.)
The regulations may also have the effect of preventing banks from pricing different products in ways
that encourage customers to switch to more efficient products. The banks would prefer to have to deal
with less cash transactions and may seek to increase prices for these transactions to encourage
customers away from them. However there is no certainty that the Central Bank will approve such
increases.
Section 149 requires the Central Bank to take account of the following in assessing an application for
an increase in fees or for new charges:
“(a) the promotion of fair competition between—
(i) credit institutions, and
(ii) credit institutions carrying on a particular type of banking or financial business,
(b) the statement of commercial justification referred to in subsection (3) (b),
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 22 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • (c) a credit institution passing any costs on to its customers or a group of its customers in
proposing to impose or change any charge, in relation to the provision of a service to a
customer or a group of its customers, and
(d) the effect on customers or a group of customers of any proposal to impose or change any
charge in relation to the provision of such service.”
Section 149 does not permit the Central Bank to take other considerations into account and therefore
the Central Bank cannot use its price regulation powers to implement other aspects of its policy remit.
Of course, section 149 does not prevent the banks reducing the charges for their preferred types of
transactions in order to encourage customers towards these types of transactions.
Section 149 may lead to inefficiency in pricing of financial products by the banks in Ireland.
Customer Mobility
The benefits to the customer of competition are enhanced if the customer is price sensitive and is in a
position to change service provider in response to changes in price. The benefits of competition are
reduced, if not eliminated, if customers cannot or do not move from one service provider to another.
Research by the National Consumer Agency found that current account switching was very low with an
annual switching rate of approximately 4%. It should be pointed out that some of this switching activity
is likely to have originated in the withdrawal of certain service providers leaving consumers with no
option with their banking requirements. Other consumers may not be able to meet eligibility criteria in
different banks owing to financial difficulties.
The Credit Review Office has pointed out that property related debt overhang continues to be a major
issue for SMEs and farmers. This prevents SMEs and farmers moving from one bank to another.
Mortgage switching is also difficult if not impossible for customers who are in negative equity. Some
banks will provide negative equity mortgages but only for existing customers.
Low customer mobility may mean that banks can increase prices without fearing a loss of
customers.
Looking to the future
The low level of competition in the Irish banking sector is not seen as a permanent state.
It is natural that market shares in traditional banking services become more fluid during the recovery as
the banking landscape continues to adjust to the withdrawal of foreign players, the restructuring of our
incumbent banks and the increasing price transparency within financial services.
It is expected that over time this will present opportunities in the market for the entry of new market
participants who are well positioned to be confident in the future profitability of an Irish branch or
subsidiary. While the current market may not be attractive to a fully diversified bank challenger in the
short term, new financial services providers are expected to enter the market on a more targeted basis
– such as specialised lenders and non-bank finance providers.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 23 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Part 4 – Proposals from stakeholders
Consultations were held with stakeholders during the review including AIB, Bank of Ireland, Irish
Banking Federation, the National Consumer Agency, the Competition Authority, the Central Bank of
Ireland and the Irish Small and Medium Enterprises Association. The purpose of this consultation was
to develop as wide a view of the impact of Section 149 and to allow stakeholders a voice in relation to
possible changes to the regime.
Repeal of Section 149
The fundamental question to be answered in this Review is whether Section 149 should be repealed or
not. There are strong arguments for its removal and there are strong arguments for its retention. This
review brings additional clarity and focus to some of the arguments made.
As has been shown in previous chapters, fee and commission income have become more important to
Irish banks in recent years. Therefore the significance of regulation in this area has been brought into
sharper focus. It contrasts with interest income which is not subject to price regulation. The Central
Bank has previously publicly indicated that it does not seek the power to have regulatory control over
the setting of retail interest rates and doing so would be likely to reduce the availability of credit. This
question of whether interest rates should be regulated is beyond the scope of this review but the
different regulatory regime for the two types of income should not be ignored.
It has also been shown that Irish banks have been able to increase fee and commission income relative
to total income since 2009 despite the restrictions imposed by section 149. This confirms what would
have been expected from anecdotal evidence and media reporting.
It has also been shown that Irish banks have lower levels of income from fees and commission than
their peers. This is important because Irish banks need to rebuild their balance sheets and to increase
income to do this.
Competition in the Irish banking sector has been shown to have reduced significantly since the onset of
the economic crisis. Again this finding is not unexpected as banks withdraw to national borders and
focus on home markets. This reduction is not related to Section 149 because the withdrawal to national
borders is a worldwide phenomenon.
The Government has amended section 149 to encourage new entrants to the Irish market but it is too
early to say whether the recent changes in legislation have been successful in attracting new entrants
to the Irish banking sector. Realistically new entrants can only be expected as the economy
demonstrates that its recovery is sustained and a new entrant can be confident in the future profitability
of an Irish operation.
The review has noted that Irish bank customers are not likely to move to another bank for a variety of
reasons which stem from both the bank and the customer. Low customer mobility may mean that banks
can increase prices without fearing a loss of customers.
Section 149 is a complicated process which introduces additional uncertainty into the revenue
projections of Irish banks. The review has noted that Section 149 appears to exert a restraining effect
on the development of innovative products by the existing banks in Ireland. The Section 149 regime
may lead to inefficiency in pricing of financial products by the banks in Ireland.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 24 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Retain Section 149 but also allow increases in line with Consumer Price Index without approval
A significant disadvantage of the Section 149 regime is that it does not permit increases related to
changes in the CPI to be applied by the banks without approval. It must be noted that banks’ costs can
be different to the CPI but it may seem reasonable that some indexing of charges should be possible
without Central Bank approval.
A number of technical issues would have to be addressed such as how often changes would be
permitted, what index should be used for increases but it would be a relatively straightforward way to
allow the banks recoup higher costs without a complicated approval process. An argument can be
advanced that this should only be done if all stakeholders were satisfied that the approved rates for the
various services are set at the appropriate level.
Linked to this is the question of the circumstances in which it should be possible to seek Section 149
approval for any other increases. It can be argued that indexation should be sufficient for the banks to
address increases in costs but there may be other reasons to permit changes to the pricing structures
such as overall economic efficiency improvements.
Repeal Section 149 with banks voluntarily agreeing not to impose increases above the
Consumer Price Index
This is a combination of the above two options. The Banks could voluntarily agree that they will not
introduce price increases above the CPI for a period after repeal. As with the points made above a
number of technical issues would have to be resolved but it would give comfort to customers for this
period at least. Again this should only be done if all stakeholders were satisfied that the approved rates
for the various services are set at the appropriate level. This option would therefore involve
considerable engagement and negotiation between stakeholders prior to taking effect. There may be
some opposition and doubt from consumers around allowing banks such ‘voluntary agreements’.
Amend Section 149 to Provide Greater Flexibility
A number of stakeholders (both industry, consumer and regulatory) suggested that with some
amendments, Section 149 could offer greater flexibility. Banks would continue to notify the Central
Bank of Ireland of charges under Section 149 but with some changes. The most common suggestions
were as follows:
-
Amend profiles used by the Central Bank in determining impact on consumers of a proposed
charge and introduce ‘forward-looking projections’ for assessing the effect of increases
Allow greater transparency of the process for Section 149 notifications and decisions by the
Central Bank
Give the banks the right to appeal the Central Bank’s decision
In terms of potential amendments to Section 149, we explore these further below:
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 25 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Amend profiles and introduce ‘forward-looking projections’
One of the main tools used by the Central Bank in assessing the impact on customers of changes in
bank charges is the use of ‘profiles’ which set out the usage profile of four categories of consumer of
personal current accounts(See Appendix 3). It has been argued by some stakeholders that this
approach needs to be reviewed with a view to ensuring that the impact on consumers of changes in
bank charges is forward looking, and takes account of likely changes in payment usage.
We understand that the process of reviewing these profiles is currently ongoing.
Furthermore, it was suggested that forward looking projections need to take account of a) the impact of
changing bank charges on the demand for the service itself, b) the impact of new technologies such as
contactless cards and c) other market changes which are likely to significantly alter payment usage
such as the National Payments Plan. In the absence of forward looking projections, the impact on
consumers of an increase in the charge for a service with declining demand (e.g. cheques) could be
over-estimated, while the impact on consumers of an increase in the charge for an emerging service
(e.g. contactless cards) could be significantly under-estimated.
Amend the factors to be considered by the Central Bank
The legislation provides that
“The Bank shall, in exercising the powers conferred by this section, have regard to(a)
the promotion of fair competition between(i) credit institutions, and
(ii) credit institutions carrying on a particular type of banking or financial business,
(b) the statement of commercial justification referred to in subsection (2)(b), and
(c) a credit institution passing any costs on to its customers or a group of its customers in
proposing to impose or change any charge, in relation to the provision of a service to
a customer or a group of its customers, and
(d) the effect on customers or a group of customers of any proposal to impose or change
any charge in relation to the provision of such service.”
A particular argument was advanced that proposes that the application of Section 149 should to take
account of the goals of the National Payments Plan and reflect this in the pricing structures approved.
Greater transparency of approved fees and charges
The process of notifying a fee and/or charge to the Central Bank of Ireland is defined in the Consumer
Credit Act 1995 but remains largely unknown outside the banks and the Central Bank of Ireland. The
list of charges that ‘stood notified’ when the Consumer Credit Act came into effect in 1996 is not
publicly available. It has been suggested that we allow for publication of the maximum limits agreed at
this time. Consumers would then have a better idea of how much further prices can increase whilst
regulation remains in place.
Following an appearance before the Joint Committee on Finance, Public Expenditure and Reform on
17 April 2013, the Director of Consumer Protection at the Central Bank of Ireland wrote to the Chairman
of the Committee with further information on the charges that ‘stood notified’ in 1996. The data from the
Central Bank, whilst not revealing the charges that ‘stood notified’ in 1996 demonstrates that they may
no longer have significance for determining the appropriateness of the existing regime given that (a)
they no longer constitute a significant proportion of approvals and (b) the banks are now almost
universally charging near the maximum amount approved in 1996.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 26 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • However this information is not widely known leading to a perception in certain quarters that banks
have “truckloads” of approvals for price increases which they can implement at will.
Transparency is also lacking in that the Central Bank may approve a rate but the relevant bank may
choose to apply a discount and it is only the discounted rate which must be published. There is a
substantial difference from a consumer viewpoint between taking a product at a particular price from
one bank which is at the limit of its approval and taking the same product at the same price from a
second bank which is applying a discount. The second bank can subsequently increase the price
without Central Bank approval.
A formal appeals mechanism
It is evident from speaking with both the Central Bank and the banks that there is ongoing engagement
during the assessment of a notification, to the extent that it could be considered an ‘informal’ appeals
mechanism. However, banks (and the Troika) argued that the banks should be able to formally appeal
the Central Bank’s decision on a notification under Section 149.
Informal appeals mechanisms have several benefits:
• Efficiency
• Cooperation between the parties
• Lower costs
However they do not provide an opportunity for an aggrieved party to go beyond the initial decision
making party and are subject to power imbalances between the parties.
Some decisions by the Central Bank are already subject to possible appeal to the Irish Financial
Services Appeals Tribunal (IFSAT). This was established by the Central Bank and Financial Services
Authority of Ireland Act 2003. It is an independent tribunal set up to hear and determine appeals from
aggrieved parties against certain decisions of the Central Bank of Ireland. Currently IFSAT can hear
two types of appeals against decisions by the Central Bank of Ireland – appeals against administrative
decisions (sanctions following an inquiry) and appeals against supervisory decisions (licences,
authorisations and their conditions). The Tribunal will either affirm the Central Bank’s decision or refer
back to the Central Bank for review. It may also refer certain matters to the High Court.
The effect of decisions made by the Central Bank in relation to applications for increases in fees and
charges can be as significant as those already subject to possible appeal to IFSAT.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 27 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Part 5 – Recommendations
Issue- Repeal of Section 149
The fundamental question to be answered in this Review is whether Section 149 should be repealed or
not.
As has been noted in the previous chapters,
• fee and commission income have become a more important source of income for Irish banks in
recent years
• Irish banks have been able to increase fee and commission income as a percentage of total
since 2009 despite the requirements imposed by section 149
• Irish banks have lower levels of income from fees and commission than their peers
• competition in the Irish banking sector has reduced significantly since the onset of the economic
crisis and that this reduction is not related to Section 149
• it is too early to say whether the recent changes in legislation have been successful in attracting
new entrants to the Irish banking sector
• Low customer mobility may mean that banks can increase prices without fearing a loss of
customers.
• Section 149 does appear to exert a restraining effect on the development of innovative products
by the existing banks in Ireland
• Section 149 may lead to inefficiency in pricing of financial products by the banks in Ireland.
Recommendation:
On balance, it is not considered appropriate to repeal Section 149 at this point in time.
The lack of competition in the banking sector means that the removal of Section 149
would give unfettered price setting power to the incumbent banks. This issue should be
revisited when competition in the banking sector has improved significantly.
Having reached the conclusion that Section 149 should be retained, the other possible changes to the
regime to improve its functioning were considered.
Issue- Increases in line with Consumer Price Index without approval
Bank customers are faced with increasing costs in many areas and the Government is committed to
reducing the cost of doing business. It would directly conflict with Government policy if a regime were
introduced which would automatically increase one of the costs of business in line with inflation. It is not
clear that indexation applies to fees and charges applied elsewhere that affect consumers and
businesses.
Recommendation:
It is not considered appropriate that automatic indexation of fees and charges should
apply.
Issue - Efficient functioning of the Section 149 process
Changes to how the analysis by the Central Bank of applications is undertaken could improve the
efficacy of the regime. The legislation does not prescribe exactly how the analysis should take place
although it lists the items to which the Bank must have regard.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 28 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Recommendation:
The Central Bank of Ireland should reform the process by which it assesses applications
as part of the Section 149 process, in particular by a) updating consumers profiles on a
regular basis and incorporating forward looking projections in them; and b) issue
Guidance Notes for Section 149 notifications that wish to cite the strategic direction of
Ireland’s National Payments’ Plan as a significant element of the Commercial
Justification for both absolute and differential price changes. It is recommended that the
Central Bank consider these changes with a view to implementation.
Issue- A formal appeals mechanism
There are both advantages and disadvantages to having a formal appeals mechanism available to
banks who are not satisfied with the decision of the Central Bank in relation to an application for an
increase in charges.
Recommendation:
Given the existing level of consultation between the Central Bank and the banks seeking
approvals for increases in fees and charges, it is not recommended that a formal appeals
mechanism be implemented.
Issue- Merchant service providers
The provision of the same service by two different organisations is subject to a different regulatory
regime depending on whether or not the organisation is a credit institution.
Recommendation:
The application of Section 149 to merchant services providers should be the subject of
further consideration with a view to the application of the same regulatory regime to all
providers, whether they are credit institutions or not.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 29 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • APPENDICES
Appendix 1 – Hungary and the Regulation of Bank Charges
In Hungary the government monitors pricing of interest rates, fees and commission in existing
consumer contracts. According to Section 210 of the Act CXII of 1996 on Credit Institutions and
Financial Enterprises, the provisions on the protection of clients state that in loan contracts with
consumers and in financial leasing agreements only the interest rate, fees and commissions may be
changed unilaterally to the disadvantage of the customer. The creditor can only exercise the right of
unilateral modification if the objective reasons giving grounds for modification are fixed in the contract,
and if the creditor has committed its pricing criteria in writing. The adequacy of the pricing criteria and
the means of application are monitored by the Central Bank.
Pricing criteria contain for example:
a) any change in the interest rate, fee and commission may be allowed only on grounds having a
material impact on the interest rate, fee and commission in question;
b) where changes in the same circumstances warrant the reduction of interest rates, fees and
commissions, this shall be enforced as well;
c) specific conditions showing cause and effect relationships with and bearing any relevance as to the
interest rate, fees and commissions shall be taken into consideration in proportion of the actual impact
they may have;
d) fees and commissions may be increased annually by not more than the annual consumer price index
for the previous year.
e) As regards foreign exchange based consumer credit and loan contracts, financial institutions shall be
allowed to charge in a foreign currency only those expenses and fees, which are directly connected to
obtaining the foreign currency required to execute and maintain the given contract.
Any changes applied unilaterally regarding interest rates, fees or commissions, if to the disadvantage of
customers, shall be published by way of posted notice sixty days prior to the operative date of such
changes, by mail, or on another durable medium specified in the contract. The customers affected shall
have the right to withdraw from the contract free of charges before the change takes effect.
A contract may not be modified unilaterally by introducing new fees or commissions. The calculation
methods of certain interest rates, fees and commissions may not be modified unilaterally to the
disadvantage of the customer.
Media reports on 12 November 2013 indicated that Hungary's parliament had passed a motion to stop
banks from charging customers for two withdrawals of cash monthly up to the value of average wages.
The parliament passed the motion in response to a significant increase in the cost of financial services
in the year from October 2012 to 2013. See: http://in.reuters.com/article/2013/11/12/hungary-banksidINL5N0IX0ZM20131112
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 30 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Appendix 2 – Section 149 of the Consumer Credit Act 1995
Number 24 of 1995 / Consumer Credit Act 1995
Part XII Obligation on Credit Institutions to notify Director of all customer charges
149. Customer charges etc. by credit institutions that are subject to regulation by the Bank
149.-(1) A credit institution or, subject to the Competition Act 1991, a
group of any such credit institutions in respect of a service offered
jointly by the group, shall notify the Bank of every proposal-
(2)
(3)
(4)
(5)
(a)
to increase any charge that has been previously notified to
the Bank, or
(b)
to impose any charge in relation to the provision of
a service to a customer or to a group of customers, that
has not been previously notified to the Bank.
Every notification under subsection (1) must be accompanied by(a)
subject to subsection (4), such fee as the Bank may decide
with respect to each notification, being a fee that does not
exceed the prescribed maximum amount, and
(b)
a statement of the commercial justification for the proposal,
including a detailed statement of cost, and
(c)
details of the estimated amount of additional income
accruing from the proposal.
For the purposes of subsection (2)(a), the prescribed maximum
amount is(a)
€31,750, or
(b)
if some other amount is prescribed by regulations made for
the purposes of this subsection – that other amount.
The Bank may waive or reduce the fee referred to in subsection
(2) if the payment of the fee would, in the opinion of the Bank, be
unfair to the credit institution having regard to(a)
the impact of any increase in or imposition of charges on
customers, and
(b)
the number of customers affected by any increase in or
imposition of charges, and
(c)
the additional income likely to accrue from any increase in
or imposition of charges, and(d) any other matters that
the Bank considers appropriate.
Subject to subsection (6), the Bank may, within [3 months] of
receipt of a notification under subsection (1), direct a credit
institution(a)
to refrain from imposing or changing a charge in relation to
the provision of a serviceto a customer or to a group of
customers, without the prior approval of the Bank, and
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 31 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • (b)
(6)
to publish, in such manner as may be specified by
the Bank from time to time, information on any charge in
relation to the provision of a service to a customer or to a
group of customers.
If a notification under subsection (1) is in respect of a proposal to
impose a charge for a new service that was not previously offered
to its customers, or is being offered as a choice to and in a
materially different way to existing services, the Bank may, within
[3 months] of receipt after the date of the notification, direct the
credit institution(a)
to refrain from imposing or changing a charge in relation to
the provision of a serviceto a customer or to a group of
customers, without the prior approval of the Bank, and
(b)
to publish, in such manner as may be specified by
the Bank from time to time, information on any charge in
relation to the provision of a service to a customer or to a
group of customers.
[(6A) In calculating the periods of 3 months specified in subsections (5)
and (6) no account shall be taken of any day on which any
information required by the Bank to be provided by the credit
institution for the performance of the Bank’s functions under this
section has not yet been so provided.]
(7)
(8)
(9)
A direction under this section may be expressed to apply(a)
to every credit institution or to credit institutions carrying on
a specified type of banking or financial business, or
(b)
to all services provided to a customer or to a group of
customers by credit institutions or to specified services or
to services of a specified kind, or
(c)
to a specified time or times or during a specified period or
periods.
The direction must(a)
be communicated to every credit institution concerned, and
(b)
if not communicated in writing, be confirmed in writing to
every such credit institution as soon as possible
afterwards, and
(c)
have effect in accordance with its terms.
The Bank shall, in exercising the powers conferred by this
section, have regard to(a)
the promotion of fair competition between(i)
credit institutions, and
(ii)
credit institutions carrying on a particular type of
banking or financial business,
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 32 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • (b)
the statement of commercial justification referred to in
subsection (2)(b), and
(c)
a credit institution passing any costs on to its customers or
a group of its customers in proposing to impose or change
any charge, in relation to the provision of a serviceto a
customer or a group of its customers, and
(d)
the effect on customers or a group of customers of any
proposal to impose or change any charge in relation to the
provision of such service.
(10) The Bank may amend or revoke a subsisting direction under this
section and may amend or revoke a subsisting direction, which
has been amended.
(11) The Bank may exempt a credit institution from the obligation to
make a notification under subsection (1) in respect of
any charge which has been individually negotiated bona fide with
the credit institution by a customer, or by or on behalf of a group
of customers, of the credit institution.
(12) The Bank shall(a)
keep under general review the terms and conditions
applying to the provision of services to customers by credit
institutions, and
(b)
require a credit institution to discontinue or refrain from the
use of those terms and conditions that are, or are likely to
be regarded as, unfair, and
(c)
if the credit institution fails to comply with a requirement
under paragraph (b), bring proceedings in the High Court
for an order prohibiting the use, or the continued use, of
those terms and conditions.
[(12A) A credit institution shall not impose a charge for providing
a service to a customer or group of customers if(a)
the charge has not been previously notified to the Bank or
to the Director, or
(b)
the charge exceeds the charge notified for the service in
accordance with subsection (1), or
(c)
the charge does not comply with a direction issued by
the Bank under this section.
(12B) The Bank may, by notice given in writing, require a specified
credit institution, or credit institutions of a specified class, to
publish in such publications, and within such timeframes, as are
specified in the notice details of the amounts of charges notified
to the Bank under this section.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 33 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • (12C) A credit institution to which a notice has been given under
subsection (12B) shall comply with the notice within the
timeframe specified in the notice.]
(13) In this section‘service’ means any service provided by a credit institution to a
customer in respect of the following(a)
making and receiving payments;
(b)
providing foreign exchange facilities;
(c)
providing and granting credit;
(d)
maintaining and administrating transaction accounts used
for the services specified by this subsection, including
issuing statements;
(e)
any other service that may be prescribed by regulations for
the purposes of this section;
‘charge’ includes a penalty or surcharge interest by whichever
name called, being an interest charge imposed in respect of
arrears on a credit agreement or a loan, but does not include any
rate of interest or any charge, cost or expense levied by a party
other than a credit institution in connection with the provision of
a service to the credit institution or the customer and that is to be
discharged by the customer.
(14) For the purposes of this section, a notification made to the
Director of Consumer Affairs before the substitution of this
section by item 42 of Part 21 of Schedule 1 to the Central Bank
and Financial Services Authority of Ireland Act 2003, is taken to
have been made to theBank.]
[(15) A direction given under section 28 of the Central Bank Act 1989
and in force immediately before the coming into operation of
section 78(d) of the Central Bank (Supervision and Enforcement)
Act 2013 is to be treated as continuing in effect as if given under
this section and accordingly is a subsisting direction under this
section for the purposes of subsection (10).
(16) The duty imposed by subsection (1) shall not apply to a relevant
new credit institution until the end of the period of 3 years after it
commences business in the State; but at the end of that period,
the credit institution shall notify the Bank of all decisions to
impose charges in relation to the provision of any service to a
customer or to a group of customers during that period and of any
proposal to do so which is not implemented during that period.
(17) A notification under subsection (16) shall be treated as a
notification under subsection (1) for the purposes of this section;
and references in this section to a proposal include a decision to
impose charges notified under subsection (16).
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 34 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • (18) In subsection (16) ‘relevant new credit institution’ means a credit
institution which commences business as a credit institution in the
State after the coming into operation of section 78(d) of
the Central Bank (Supervision and Enforcement) Act 2013 and is
not when it does so a related undertaking (within the meaning of
that Act) of another credit institution carrying on business as a
credit institution in the State.]
COMMENCEMENT:
Brought into force 13 May 1996 by the Consumer Credit Act, 1995
(Commencement) Order, 1996 [S.I. No. 121 of 1996]
AMENDMENTS:
Section 149: substituted by Schedule 1, Part 21 of the Central Bank and
Financial Services Authority of Ireland Act, 2003 with effect from 1 May
2003 [Pre amendment 1]
Section 149(12A) to (12C): inserted by Schedule 3, Part 12 to the Central
Bank and Financial Services Authority of Ireland Act, 2004
Section 149: amended by Section 78 of the Central Bank (Supervision
and Enforcement) Act, 2013 with effect from 1 August 2013 [Pre
amendment 2]
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 35 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Appendix 3 - Customer Profiles used by the Central Bank in Assessing Notifications under
Section 149
The following text was published in the Central Bank of Ireland’s ‘Review of Personal Current Account
Charges’ published in December 2011.
Summary of profiling assumptions
Assumptions made in relation to the Standard Current Account profile
• Cheques Drawn is included above, however government stamp duty, which is currently €0.50
per cheque, has not been included in the cost.
A separate charge is applied for cheque processing and this is included with OTC withdrawals.
• Interest Charged on authorised overdraft is calculated based on a customer going €1500
overdrawn for 30 days in a year.
• Interest Charged on unauthorised overdraft is calculated based on a customer going €500
overdrawn for 10 days in a year.
• It is assumed that standard customers have an authorised overdraft for which there is a set up
cost.
Assumptions made in relation to the Non-standard Current Account profile
• Cheques Drawn is included above, however government stamp duty, which is currently €0.50
per cheque, has not been included in the cost.
A separate charge is applied for cheque processing and this is included with OTC withdrawals.
• Interest Charged on authorised overdraft is calculated based on a customer going €1500
overdrawn for 60 days in a year.
• Interest Charged on unauthorised overdraft is calculated based on a customer going €500
overdrawn for 45 days in a year.
• It is assumed that non-standard customers have an authorised overdraft for which there is a set
up cost.
• It is assumed that a non-standard customer will incur multiple referral and unpaid fees and will
require duplicate bank statements.
Assumptions made in relation to the Sophisticated Current Account profile
• Cheques Drawn is included above, however government stamp duty, which is currently €0.50
per cheque, has not been included in the cost.
A separate charge is applied for cheque processing and this is included with OTC withdrawals.
• Interest Charged on authorised overdraft is calculated based on a customer going €1500
overdrawn for 10 days in a year.
• It is assumed that a sophisticated customer would not fall into an unauthorised overdraft
position
• It is assumed that sophisticated customers have an authorised overdraft for which there is a set
up cost.
• It is assumed that a sophisticated customer would not incur any referral/unpaid fees or require
duplicate bank statements
Assumptions made in relation to the Unsophisticated Current Account profile
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 36 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • •
Cheques Drawn is included above, however government stamp duty, which is currently €0.50
per cheque, has not been included in the cost.
A separate charge is applied for cheque processing and this is included with OTC withdrawals.
• It is assumed that an unsophisticated customer would rely more heavily on manual transactions
• It is assumed that an unsophisticated customer would rely more heavily on cash and would not
have a debit card
• Unsophisticated customers would not incur referral and unpaid fees
• Unsophisticated customers will not have an authorised overdraft so do not incur a set-up fee
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 37 Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland • • • Appendix 4 – Section 149 Notifications to the Central Bank
Section 149 Notifications to the Central Bank in 2012 and 2013*
Notifications
2012
2013
Full Approval
Partial Approval
Rejections
Exemptions
Total
9
7
0
4
20
11
4
1
2
18
* Data correct as of 28 November 2013.
Note: ‘Partial Approval’ figures may include some rejected charges
Section 149 Notifications to the Central Bank – Approvals since 1996*
Year
1996
1997-30 April 2003
May 2003 – date
Total
Number
approved
411
90
4072
4573
of
charges Percentage
9%
2%
89%
100%
*Data supplied by the Central Bank of Ireland to the Joint Committee on Finance, Public Expenditure
and Reform on 8 May 2013. All charges being imposed by credit institutions at that time “stood notified”
under the Office of the Director of Consumer Affairs (‘ODCA’). The Central Bank of Ireland (‘Central
Bank’) assumed responsibility for Section 149 in 2003 hence the reference to 2003 in the above table.
Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 38