The Department of Finance today publishes its review of the regulation of bank charges in Ireland. Section 149 of the Consumer Credit Act 1995 (as amended) requires financial institutions to seek approval for any increases in fees and charges and for the introduction of new charges.
This review fulfils one of the commitments given to the Troika. The review was sent to the Troika last month.
The Department of Finance undertook the desk based assessment and review. Consultations were held with stakeholders during the review including the Central Bank of Ireland, AIB, Bank of Ireland, Irish Banking Federation, the National Consumer Agency, the Competition Authority and the Irish Small and Medium Enterprises Association.
The Review examined the existing regulatory framework for bank fees and charges. It used data from SNL financials to examine fees and commission income of Irish banks relative to their peers as agreed with the Troika. It also examined competition in the Irish banking sector and proposals of the various stakeholders.
The main conclusion of the review is 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. However this conclusion should be revisited when competition in the banking sector has improved.
The review also recommended that the process used by the Central Bank of Ireland for assessing applications under the Section 149 process should be examined further to take account of Government policy, changing customer behaviour and product developments.
In addition, the review recommended that 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.
The findings of the review can be found in the report attached..
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.