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

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