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

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

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 y 1 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 2 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 3 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 4 TABLE OF CONTENTS Executive Summary Introduction 5 Part 1 – Analysis of the existing regime 7 Part 2 – Significance of fees and charges for Irish banks 12 Part 3 – Efficiency, competition and price regulation 19 Part 4 – Proposals from Stakeholders 24 Part 5 - Recommendations 28 Appendices 30

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 y 5 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 fee- free 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 6 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 7 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 8 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 9 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 on- going 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 10 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 11 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 12 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 0% 20% 40% 60% 80% 100% 2008 2009 2010 2011 2012 ROI Net Interest Income BOI AIB

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 y 13 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 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 0% 20% 40% 2008 2009 2010 2011 2012 ROI Other Income BOI AIB

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 y 14 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 FTE Employees 2012Y (actual) Crédit Agricole SA France 81,886 RBS United Kingdom 123,000 DNB ASA Norway 13,291 Alpha Bank Greece 13,650 SEB Sweden 16,357 Crédit Industriel France 20,446 Banco Popolare Italy 18,799 Eurobank Ergasias Greece 17,427 Banco Popular Español SA Spain 16,501 UBI Italy 19,088 Banca Monte dei Paschi Siena Italy 30,265 Swedbank Sweden 14,861 National Bank of Greece Greece 35,078 Banca popolare dell'Emilia Italy 11,834 Banca Popolare di Milano Italy 8,312 Lloyds Banking Group United Kingdom 92,788 OTP Bank Hungary 36,431 Danske Bank Denmark 20,308 Nordea Sweden 29,491 Handelsbanken Sweden 11,156 Deutsche Postbank Germany 18,600 BPI Portugal 8,680 CaixaBank Spain 32,625 Bankia SA Spain 20,005

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 y 15 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 Net Fee Income/ Average Assets 2012Y (%) Alpha Bank 0.47 Banca Monte dei Paschi Siena 0.71 Banca popolare dell'Emilia 1.16 Banca Popolare di Milano 0.94 Banco Popolare 1.02 Banco Popular Español SA 0.53 Bank of Ireland 0.20 Bankia SA 0.34 BPI 0.81 CaixaBank 0.55 Crédit Industriel 0.70 Danske Bank 0.23 Deutsche Postbank 0.58 DNB ASA 0.29 Eurobank Ergasias 0.28 Handelsbanken 0.30 Lloyds Banking Group 0.34 National Bank of Greece 0.48 Nordea 0.35 OTP 1.55 RBS 0.34 SEB 0.57 Allied Irish Banks 0.28 Swedbank 0.51 UBI 0.89 Ulster Bank Ireland Ltd. 0.25 Ulster Bank Ltd. 0.31 Average 0.57

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 y 16 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 % of total income (%) Net interest income as % 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 17 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 Net Interest Income/ Avg Assets 2012Y (%) Alpha Bank 2.43 Banca Monte dei Paschi Siena 1.22 Banca popolare dell'Emilia 2.15 Banca Popolare di Milano 1.63 Banco Popolare 1.31 Banco Popular Español SA 1.80 Bank of Ireland 0.95 Bankia SA 1.06 BPI 1.24 CaixaBank 1.26 Crédit Industriel 0.78 Danske Bank 1.00 Deutsche Postbank 1.37 DNB ASA 1.15 Eurobank Ergasias 2.02 Handelsbanken 1.05 Lloyds Banking Group 0.81 National Bank of Greece 3.23 Nordea 0.79 OTP 6.47 RBS 0.80 SEB 0.73 Allied Irish Banks 0.84

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 y 18 Swedbank 1.09 UBI 1.46 Ulster Bank Ireland Ltd. 1.48 Ulster Bank Ltd. 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 19 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 20 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 21 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 22 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 23 (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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 24 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 25 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 26 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 27 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 28 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 29 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 30 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-banks- idINL5N0IX0ZM20131112

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 y 31 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- (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. (2) 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.

(3) 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. (4) 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.

(5) 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 32 (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. (6) 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) 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.

(8) 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. (9) 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 33 (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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 34 (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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 35 (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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 36 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 37 • 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 • • • Department of Finance ‐ Report of the Review of Regulation of Bank Charges in Ireland y 38 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 9 11 Partial Approval 7 4 Rejections 0 1 Exemptions 4 2 Total 20 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 Number of charges approved Percentage 1996 411 9% 1997-30 April 2003 90 2% May 2003 – date 4072 89% Total 4573 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.

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