about banking 1
TRANSCRIPT
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2 ABOUT BANKING
The Competitiveness
of the Irish Financial
Services Market
The Price of a
Single Europe
The Role of Consumer
Protection Codes in
Financial Services
Creating EuropesInternal Marketin Financial Services
MAY 2005EDITION 1
NEW STORIES
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CONTENTS
ABOUT BANKING
ISSN 1649-6671
About Banking is a publication of
the Irish Bankers Federation (IBF).
Opinions expressed in the
magazine are not necessarily those
of IBF. Reproduction in whole or in
part without written permission is
strictly prohibited.
The Irish Bankers Federation is the
leading representative body for
the banking and financial services
sector in Ireland. Membership
of over 60 institutions includes
licensed domestic and foreign
banks and financial services
institutions operating here.
The Federation of International
Banks in Ireland (FIBI) and the
Irish Mortgage Council (IMC)
are affiliates.
President: Diarmuid Bradley
Chief Executive: Pat Farrell
Irish Bankers Federation,
Nassau House,
Nassau Street,
Dublin 2
Tel: +353 (0)1 6715311
Email: [email protected]
www.ibf.ie
Editor
Felix [email protected]
Production
Patrick Hughes
Advertising
PHD Ltd
Design
Dcoy Design
www.dcoy.ie
Printing
Hudson Killeen
11-13 The Competitiveness of the
Irish Financial Services MarketJim Power
6-9 Creating Europes Internal Market
in Financial Services
Charlie McCreevy
2-4 Newsdesk
The latest news from the
Irish financial services sector
15-17 The Price of a Single Europe
Guido Ravoet
18-20 The Role of Consumer Protection
Codes in Financial Services
Mary ODea
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2 ABOUT BANKING
NEWSDESK
IBF Welcomes McCreevyCommitment to Address BanksRegulatory Burden
Speaking at the inaugural Federation of InternationalBanks in Ireland (FIBI) lunch in March 2005, Pat Farrell,
Chief Executive, Irish Bankers Federation, welcomed the
recognition by EU Commissioner for Internal Market and
Services, Charlie McCreevy, of the need to address the
regulatory burden faced by financial institutions.
This signal of a new approach at EU level is welcome,
added Mr Farrell.
FIBI President Mike Ryan attributed the success of the
international banking community in Ireland to a number
of factors, including the strong partnership between theindustry, the government and the public sector, which Mr.
McCreevy exemplified while Minister of Finance.
Justice Minister Michael McDowell TD at the IBF/Institute of Bankers Money
Laundering and Terrorist Financing Conference in April
IBF Chief Executive Pat Farrell, EU Internal Market Commissioner Charlie
McCreevy and FIBI Chairman Mike Ryan enjoy the annual FIBI Lunch
Justice Minister Calls forContinued Cooperation againstMoney Laundering
The Minister for Justice, Equality and Law Reform, MrMichael McDowell, TD, commended the contribution of
the financial services industry in his keynote address to
the recent Conference on Money Laundering and
Terrorist Financing organised by the Irish Bankers
Federation and The Institute of Bankers in Ireland.
Minister McDowell welcomed the very timely and
appropriate conference, which was attended by over
100 delegates at The Institute of Bankers Conference
and Learning Centre in Dublin on April 18th, as an
opportunity for financial institutions to work with law
enforcers and law-makers to combat criminal abuse ofthe financial system.
If together we can continue to adopt and implement
measures which disrupt the realisation of criminal proceeds,
we will be playing a major part in the States overall
strategy for tackling crime, said Minister McDowell.
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The IBFs Aoife McDonnell kits out for worthy cause
ABOUT BANKING 3
Education Minister Mary Hanafin TD, BSTAI President Norah Martyn and
IBF President Diarmuid Bradley with award recipient Sinead Grennan
IBF and BSTAI HonourTop Business Students
Minister for Education Mary Hanafin TD paid tribute to
the work of the Irish Bankers Federation and the Business
Studies Teachers Association of Ireland (BSTAI) aimed at
making business and economics attractive and
interesting to young people.
Minister Hanafin was speaking at the annual BSTAI awards,
which honoured top business students at post-primary level.
Pictured at the launch of FIBIs International Banking in Ireland
marketing pack are: (L-R) Pat Farrell, Chief Executive, Irish Bankers
Federation, Enda Twomey, Irish Bankers Federation, The Taoiseach Bertie
Ahern TD and Mike Ryan, Chairman, FIBI.
IBF Supporting
the CommunityAoife McDonnell, a member of the Irish Bankers
Federations PR and Communications team, takes off for
Brazil on June 2nd, 2005 for an 11-day trek in aid of
Barretstown Gang Camp in Wicklow. With the help of IBF
member banks, Aoife aims to raise 10,000 for the
charity. Barretstown provides a unique programme of
therapeutic recreation that enables seriously ill children
from Ireland, Britain and throughout Europe to rediscover
their own inner strength, confidence and self-esteem.
Each ten-day session offers children aged between 7 and17 opportunities, in a safe and supportive environment,
to make real changes in their lives. At Barretstown,
they meet and develop friendships with other children
from all across Europe who know how it feels to battle
against illness.
The Taoiseach forecastsboom and bloomin international
financial services
The Government of Ireland is determined that our
financial services industry will continue to boom and
bloom in the years ahead, said The Taoiseach, Mr Bertie
Ahern, TD, launching a new marketing pack produced
by the Federation of International Banks in Ireland (FIBI),
which is affiliated to the Irish Bankers Federation.
All the required educational and communications
infrastructure is already in place and, together with the
Federation of International Banks in Ireland, other
financial services associations and IDA Ireland, we aredetermined that Ireland will remain at the heart of the
international banking industry, said Mr Ahern.
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4 ABOUT BANKING
ECB figures confirmcompetitiveness of personallending market
Irish mortgage and consumer loan costs are below average
for the euro zone, according to figures for February 2005
released by the European Central Bank. The annual average
percentage rate of charge (APR), which reflects the total
cost of the loan, was just 3.36% for new housing loans in
Ireland compared with a euro-zone average of 3.98%.
The total cost of new consumer loans was 6.67% here
compared with an average of 7.77% in the euro zone.
Switching Code tocover SMEs
In February we introduced a Code of Practice on Account
Switching, which is designed to make the process of
switching personal accounts between banks more
streamlined and efficient. In the coming months IBF will be
developing a similar code for SMEs with the aim of having
this in place as soon as practicable.
We need a wake up callon regulation andcompliance costs
In this first edition ofAbout Banking, Commissioner
McCreevy acknowledges the challenges posed for our
sector in absorbing the increasing costs of regulation and
compliance generated by a growing army of standard
setters at national, EU and global levels. This year alone,
the sector is striving to cope with a series of significant
consultations from IFSRA, application of new International
Accounting Standards, preparations for Basel II and the
imminent introduction of the new compliance regime.
This list is far from exhaustive, with these and many more
requiring major project management and significant
mobilisation and allocation of finite resources for Irish
business. It is worth remembering that this relentless
increase in the burden of regulation, and associatedknock-on costs for the financial services sector and for
business generally, is ultimately paid for by our customers.
Financial institutions need regulation. It is as much in our
own interests as in the interests of our customers, our
shareholders and other stakeholders. Striking the right
balance, however, between the need for high standards of
corporate governance, compliance and regulation on the
one hand and maintaining a pro-enterprise competitive
environment is never easy. Inevitably, when there are
corporate governance failures, society and the political
system demands a response. History teaches us,however, that such responses - fashioned in the
white heat of controversy and driven by the
issue of the time - quite often end up neither
measured nor proportionate in their
impact. To be beneficial, regulation needs to be balanced,
proportionate and co-ordinated; and it should be framed
so as to complement the very obvious benefits that can
accrue from measures of a self-regulatory or voluntary
nature. We welcome the Commissioners stated intention
to subject future EU Directives to full regulatory impact
assessment and his acknowledgement of the regulatory
fatigue that currently besets our sector.
Here at home, there is now a real danger of sleepwalking
our way into a regulatory and compliance regime that will
further erode our competitive position. Furthermore, this is
happening at a time when we have more than enough
challenges in the form of rising input costs and a
hardening stance at EU level towards Irelands state aid
policy - as reflected in the recent negative decision in
relation to Intel. In January 2004 the Government
published a White Paper which sought to lay down good
general principles to support its Better Regulation
initiative. The principles bear restating here: Necessity,Effectiveness, Proportionality, Transparency, Accountability
and Consistency. We urgently need to see these principles
consistently applied to the growing body of regulation and
legislation that impacts on our sector. We are fast
approaching a point where our emerging regulatory and
compliance regime is becoming more demanding than
other competing jurisdictions, with compliance provisions
going beyond those introduced under the Sarbanes Oxley
Act in the US; yet, even there, voices of reason are again
starting to prevail with moves now afoot to remedy some
of the more damaging aspects of the provisions. The
potential blow to our competitiveness
posed by current regulatory developments
are not immediately apparent but will be
all too clearly seen in three or four years.
It is time for reason to prevail.
Pat Farrell,
IBF Chief Executive
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6 ABOUT BANKING
Creating Europes Internal Marketin Financial Services
Charlie McCreevy, EU Commissioner for Internal Market and Services
A more open Internal Market in Europe - andthe banking industrys role within it - is vital toeconomic success and to sustaining Europessocial model, explains EU Commissioner forInternal Market and Services, Charlie McCreevy.
Europe is facing some significant
economic challenges. It would be
an understatement to say that theeconomic performance of many
Member States has been
disappointing over the past five
years and the immediate term
outlook at least is not promising.
The consequences of this for jobs
and for Europes ability to sustain its
current social model are serious. I
sometimes become impatient with
politicians and interest groups who
refuse to face up to the realities of
economic life: in particular with
those who remain blind to the
reality that a prerequisite of social
progress and social inclusion is
economic progress. You can certainly
have economic success without social
inclusion. But you cannot have social
inclusion without economic success.
This is a reality that has to be faced up
to across Europe - not least in those
Member States where unemployment is
highest. Certain of the required actions
need to be undertaken at Member Statelevel. Politically it is not going to be easy.
It requires restructuring, more labour
market flexibility, AND more open
markets. Unfortunately, as we saw in
Ireland many years ago, the pain oftencomes before the gain.
But protracted adversity usually forces
action. I believe that the tide is now
slowly turning towards reform across
Europe and that we will see meaningful
progress during the term of the present
Commission. There is a growing
recognition that soft options will no
longer do.
At EU level, a more open Internal
Market has a huge role to play -
especially in respect of services of all
kinds. After all, services represent the
vast majority of national output in
advanced economies, including financial
services. So progress in improving the
scale and efficiency of the financial
services markets should help drive
growth, employment and living
standards in all Member States.
Many of the market-opening initiatives
that are needed to deliver on thispotential fall within my domain as
Commissioner for Internal Market and
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ABOUT BANKING 7
As we continue to open up the financial markets in Europe, thebanks will have more new opportunities overseas. The flip side is thatoverseas players will have more opportunities in Ireland too. Businessand personal customers in Ireland will benefit from that.
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8 ABOUT BANKING
Creating Europes Internal Market in Financial Services
Services. In some areas there is much
controversy and progress may not be as
fast as in others. Examples include morecompetition in public procurement, in
services and in the professions.
Competition in Financial Services
I am glad to say that in financial services
we have already made great strides.
The full benefits of what has been done
will become more evident with time.
However, more work remains to be
done. My hope is that rather than tie up
financial services businesses in more red
tape - I hope we are close to the end of
that - this work will help financial
services companies (banks, insurance
companies, stockbrokers and others) to
extract benefits from access to a bigger,
more integrated and more competitive
market. Banks will benefit from that.
But consumers, and other businesses,
will also benefit.
More integrated and efficient capital
markets assist small companies to tap
more innovative and less costly riskcapital to fuel their growth. They help
the public sector to raise capital and
fund its borrowings at lower cost. They
also help consumers to benefit from
higher returns on investment and lifeproducts or reduced mortgage costs
and, perhaps most critically, efficient
pan-European markets for long-term
savings products can help to finance and
overcome what may be the most serious
long-term structural challenge Europe
and its Member States face: the
pensions deficit.
Progress in further opening up EU
financial services markets has required
and will continue to require regulation
at EU level. Some of the framework
rules have been agreed at this stage and
are now being put in place.
I know that talk of more open, more
competitive markets does not make all
Irish business people rub their hands
with glee. Some people have a natural
tendency to consider the threats, instead
of focusing on the opportunities.
The banking industry is an important
example. It has faced a markedintensification in competition over the
past five years. But the increased
competition and more open markets
have not been a zero sum game
between them and their customers.Indeed, the facts show quite the
contrary. Both parties have happily
shared in the gains. In less than a
decade, mortgage margins have halved,
and the price of many consumer loans
has also fallen. I know banks do not get,
or expect to get, pats on the back for
that. Nor do they expect any sympathy
for some of the other pressures that
have arisen from a much more
competitive domestic corporate banking
market, from the fact that European
foreign exchange earnings have been
wiped out with the advent of the euro,
or from the fact that deposit margins
and profits from free current account
balances have tumbled because of low
interest rates.
Yet at the same time that these largely
market-driven attacks on the banks
earnings streams have happened, the
banking industrys profits have
continued to grow.
That is because competition and bigger,
more open markets have forced the
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ABOUT BANKING 9
pace: on restructuring; rationalisation;
productivity; costs; innovation; and
diversification. That is exactly why all
parties have shared in the gains. The
customers may not show gratitude for
the better deal, but at least their buying
power has increased as a result of it.
That in turn has generated more
demand, more jobs, higher living
standards, and therefore more
customers for the banks. Customers
who are looking for second or better
cars paid for by bigger bank car loans.
Perhaps second or third holidays are
bought using more innovatively
designed credit cards. Second homes are
financed by more competitively priced
second mortgages. More savings
products and bigger savings are
captured by more innovative and more
fleet-of-foot wealth managers.
Wealthier customers: wealthier banks.
People sometimes forget, and may need
more frequent reminding, that the
banks biggest shareholders are the
pension funds and institutional investors
who invest pension money on behalf of
clients. Those clients typically include
bank customers. The result of more
prosperous banks is larger pension
funds, with, in the longer term,
improved pensions for clients.
The virtuous circle that is Irelands
economy today has not only been
created by low taxes. We have seen how
the forces of competition, be it in
banking, the airline industry or
anywhere else, invariably drive down
costs, stimulate innovation, raise
productivity, and generate bigger overall
sales volumes. In turn, that generates
more growth, more employment, and
more innovation. In the case of banking,
it helps to create new financial
instruments, different product designs,
more cost efficient distribution channels
and better services. For the banks, what
were once considered strategic options
(e.g. restructuring, innovation and
diversification) have now become
strategic imperatives. As we continue to
open up the financial markets in Europe,
the banks will have more newopportunities overseas. The flip side is
that overseas players will have more
opportunities in Ireland too. Business
and personal customers in Ireland will
benefit from that.
A Pan-European Mortgage Market
From a regulatory perspective I have at
this stage no fixed views on how best
to open up a pan-European mortgage
market. I am currently actively looking at
this area and at various different options.
However, provided that I am satisfied
that the banking industry will respond,
I do want to move forward with
proposals to bring down barriers in this
area to ensure, as quickly as possible,
a properly functioning Internal Market.
I am looking forward to talking and
listening to industry players about their
ideas. Indeed, I am looking forward to
finding out if opening up the mortgage
markets in the ways that have been
talked about to date is of any interest
to the industry at all. Certainly, a moreopen market should benefit customers
and should present as many
opportunities as threats for the banks.
At the same time, I realise that
exploiting retail financial market
opportunities across Europe will be
a much more complex task than
exploiting wholesale ones.
That is simply because of the different
product characteristics, distribution
systems, differences in consumption
culture and other economic and
structural factors in different Member
States. Some banks will throw up their
hands at the idea of building their brand
or their distribution channels in new
territories because they will be unable to
find a business model that enhances
their earnings within a reasonable
timeframe. Those fleet-of-foot playerswho can build alliances and business
models that enable them to focus on
those parts of the value chain where
they can enjoy competitive advantage
(be it in technology, underwriting,
distribution, marketing, sales, or
servicing opportunities) will, I hope,
present themselves.
A deep, liquid, dynamic pan-European
financial services market will benefit
banks and customers alike and lay the
foundation for higher growth and
more jobs.
In my role as Commissioner for Internal
Market and Services, I hope to get these
messages about the benefits of
competition, openness, and scale across
to the citizens of Europe. However, to
truly realise the full potential that this
offers, Member States will themselves
have to play their part in the drive to
secure more flexible, dynamic labour
and capital markets. Without them
Europe simply will not have the resourcesto sustain its social market economy or
to support its rapidly ageing population.
And in all of that, the banks have a
major role to play.
A deep, liquid, dynamic pan-European financial services market willbenefit banks and customers alike and lay the foundation for highergrowth and more jobs.
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ABOUT BANKING 11
The Competitiveness of theIrish Financial Services Market
Jim Power, Chief Economist, Friends First
Competition in theIrish financial servicesmarket has changedbeyond recognitionin the recent past,and will become
increasingly intenseover coming years,argues economist,Jim Power.
In the past decade, deregulation and the
introduction of competition into many
areas of the Irish economy have become
topics of intense debate. It is generally
accepted that more competition is good,
since it forces the vendors of goods andservices to become more efficient, with
ultimately the consumer benefiting from
better service provision and lower prices.
Unsurprisingly, there are some players
who seek to resist the introduction of
increased competition in the
marketplace. Regardless of ones stance,
the reality is that the move towards
greater competition has been gathering
momentum in the Irish economy and
this trend is set to continue in the
years ahead.
Objective observers of the Irish economy
would find it difficult to argue that
competition and deregulation have not
delivered benefits over the past decade.
Arguably, the three clearest examples
are the airline industry, the telecoms
industry and some aspects of public
transport. Air fares have fallen
dramatically over the past decade due
almost exclusively to the advent of
Ryanair, telecom costs have fallen quite
significantly, and the various privatesector bus services on offer have
improved the welfare of many
Irish commuters.
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12 ABOUT BANKING
The Competitiveness of the Irish Financial Services Market
The Role of the Competition
Authority Study into Banking
The Competition Authority has been a
driving force in introducing more
competition into many areas of the Irish
economy, though clearly its agenda is
long and its work is still in its infancy.Late last year, the Authority released
initial findings on the extent of
competition in the Irish banking sector
(non-investment). Broadly, the findings
were that competitive forces are not as
strong as they should be and the
Competition Authority has now opened
up a consultation process to determine
what can be done to rectify this
situation. It remains to be seen what
actions (if any) will be taken, but before
anything happens it is important to
objectively assess the real situation.
In reality, competition in the Irish
financial services sector has changed
completely in the past ten years. At the
top end of the corporate market,
international and domestic institutions
are vying to win business on all fronts,
but particularly lending and foreign
exchange related business. International
fund managers are increasingly winning
fund management mandates and the
domestic players can no longer takeanything for granted. At the personal
level, the mortgage market has been
opened up to intense competition, with
a vast increase in the number of
participants seeking to gain market
share. The arrival of Bank of Scotland
(Ireland) into that particular segment in
the late 1990s was a serious catalyst for
change, and the imminent arrival of
Danske Bank should make another
significant difference. The level of
innovation in the mortgage market interms of product offering, the
divergence in interest rates on offer on
the various products, and the lengths to
which the institutions have gone to win
market share provide clear evidence of
a market that is characterised by
intense competition.
SME Banking
The Competition Authority report
identified the SME sector as being an
area of particular concern, claiming that
the failure to pass on ECB interest rate
reductions cost that sector 85 million.
This is misleading on two fronts. Firstly,
financial institutions that lend to the
SME sector do not derive all of their
funding from the ECB REPO rate facility.
The real source of funding derives from
a combination of the REPO rate,
deposits and market rates. Thecombination used varies from institution
to institution and from period to period.
However, the net result is that the cost
of funding is typically higher than the
ECBs REPO rate. Secondly, while the
report shows that not all ECB cuts were
passed on to the SME sector, it also
shows that not all increases were passed
on either, particularly between early
2000 and late 2001. This is because the
REPO rate may not be the main source
of funding and hence rates charged
are not sensitive to the ECBs REPO
rate changes.
In relation to bank charges, a study
undertaken by Amarach Consulting
in April 2004 compared the cost of
transaction banking for the SME
sector in Great Britain versus Ireland.
The analysis considered 20 different
transaction costs under the categories of
Cheques, Cash, Money In, Money Out
and Other Services.
The study found thatin 17 out of the 20charges, the averagetransaction cost inIreland is lower than inGreat Britain. Thestudy concluded that
average SMEtransaction bankingcharges in Irelandare very competitiverelative to GreatBritain and thatthe difference incost is very significantin several transactioncategories.
There are no significant barriers to entry
for institutions serving the SME sector.
If it is as profitable as some
commentators claim, why are institutions
not falling over each other to get
involved? The reason may simply be that
the SME sector has much biggerproblems than banking relationships.
Margins are being squeezed in the sector,
international competition has become
very intense, and many small firms lack
the expertise to engage in high-level
marketing and product innovation. These
are issues with which the SME sector
needs help. With their resolution,
perhaps financial institutions might start
competing more aggressively to gain a
bigger lump of what is at present a high-
risk market.
The Open Market:
Measuring competition
The barriers to entry into the Irish
banking market have been steadily
dismantled over the past decade and
there are now over 80 credit institutions
in the State offering various banking
services. The completion of the Single
European Market and the emergence of
technology as a medium for delivery of
banking services have combined tobreak the barriers to entry and increase
competitive forces in the market.
Gaining access to the clearing system is
frequently cited as one of the barriers to
entry into the Irish banking market. In
reality, new entrants to the market have
clear ways to access the system. Under
the Central Bank Act, 1997, the
member banks of the Irish Clearing
System formed two companies for the
collective governance of the system andits related rules and procedures. The two
companies are the Irish Paper Clearing
Company Limited (IPCC) and the Irish
Retail Electronic Payments Clearing
Company Limited (IRECC). The Central
Bank and Financial Services Authority of
Ireland (CBFSAI) regulate both of these
companies. Banks can participate in the
clearing system through direct (ordinary)
membership, or indirect (associate)
membership. Membership in either
manner is guided by a set of criteria,
which are intended to ensure that
participating banks maintain the
integrity of the system. Indirect
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ABOUT BANKING 13
membership is obtained by means of an
agency arrangement with any of the
direct members. The payments system is
expensive to run, with the running costs
currently estimated at more than 500
million per annum. Members of the
system have to pay for the running ofthe system and new members must
contribute to past non-recurring (or
sunk) costs incurred by the other banks
and pay any costs incurred by the other
banks from their entry into the system.
Customer inertia has been an
undoubted feature of the Irish banking
market. This may be due to factors
such as customer loyalty, relationship
banking, or the inconvenience and cost
involved in switching banks. The first
two factors are positive sources of
inertia and suggest good customerservice, but the issue of switching may
have been less positive.
In response to this problem, a code of
practice on switching was introduced by
the Irish Bankers Federation earlier this
year, which applies to current, deposit
and savings accounts held by personal
customers. The institutions involved have
committed themselves to new step-by-
step procedures to facilitate a quick,
efficient and transparent switching ofaccounts. This code was developed in
conjunction with IFSRA and will
undoubtedly remove a perceived block
to competition in that segment of the
banking market. It seems inevitable and
indeed very desirable that eventually,
such a code will be applied to other
areas of the banking market.
Profitability is a key measure of the level
of competition in the banking market.In a perfectly competitive market, prices
will be driven down towards costs. The
net interest margin has been steadily
falling for Irish banks in recent years,
and this is a noteworthy feature of most
analyses of Irish banks. Irish banks are
in the top half of the worlds leading
economies in terms of profitability.
However, it is a fact that there is a
strong correlation between cost/income
ratios and profitability. Irish banks have
a relatively low cost/income ratio,
suggesting a high level of efficiency.
The sector has been quite successful inrecent years in controlling costs, through
a combination of staff management and
reaping the technology dividend. It must
also be borne in mind when discussing
the profitability of Irish banks that they
have been exposed to the strongest
growing economy in the industrialised
world over the past decade and this
has resulted in massive growth in
business volumes.
The Future
Over the past decade the evolution and
development of the Single European
Market has broken down many barriers
to entry across the Irish economy, and as
a result, all sectors have been opened
up to unprecedented levels of
competition. Nowhere has this been
more apparent than in the financial
services sector, where all EU providers
are being given the regulatorywherewithal to sell most products across
borders within the EU. The established
domestic players have responded to this
competition through price and product
innovation. The Irish financial services
industry is now more dynamic and
competitive than ever before. However,
this is a dynamic rather than a static
process and it is clear that due to a
combination of EU deregulation and
cross border mergers, alliances and
takeovers, the environment is set to
become even more competitive in the
years ahead. All players in the marketwill have no choice other than to
respond positively to these increased
competitive pressures, which will
ultimately benefit all consumers and the
economy in general.
The more competitive environment and
increased regulatory transparency will
undoubtedly exert margin compression
across all product categories and so the
industry will have to respond through
increased efficiency, technologicalinnovation and more customer-focused
practices and products, in order to
maximise shareholder value.
The established domestic players have responded to this competitionthrough price and product innovation. The Irish financial servicesindustry is now more dynamic and competitive than ever before.
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ABOUT BANKING 15
Over the past 20 years, you have represented banks at
both the national level in Belgium and at the European
level. How has the banking sector changed in that time?
Risk management has become far more complex during these
years. The capital market has been liberalised and the
relationship between banks and government and with social
stakeholders has changed. Today, banks are far more conscious
of their social function. This gives rise to questions around
whether banking services should be regarded as universal
services that should be provided with or without charge.
Consumers today are handling their finances altogether quite
differently. They shop around much more. The savings account
may be with a different bank than the current account and
investments could be arranged through yet another bank. This
means that banks can no longer pursue a strategy under which
payments services are offered below cost price because they can
earn the money back through other products.
How have you seen the ideas on Europe and the
European payment systems, in particular, develop over
the years?
I would sum it up as coming from a wait-and-see attitude to
being intensely involved. For a long time, bankers adopted the
wait-and-see perspective. In a number of countries, bankers
would say: Well wait and see whether therell be any rules.
We must not take any initiatives ourselves, because there is no
business case.
Regulation did come about in the form of the EU Regulation
2560 on cross-border payments, although this has had a
perverse effect. The countries that operated the most efficient
payments system and charged the lowest rates (for domestic
transfers) were obliged to use the same rate for cross-border
transfers. The banks in countries where it was usual to charge
a few euros for each domestic transfer were thus rewarded for
this high rate and the existing inefficiencies.
How do the banks express their closer involvement
with Europe?
Many major banks and even several national banking
associations - those from Germany, Italy and France - have
since opened their own representative offices in Brussels. They
have done so to keep in touch with political developments and
to be involved in policy discussions from an early stage. Of
course, this is hardly surprising given the fact that over 80% of
the regulations are ultimately created at the European level by
either the European Commission, or the European collaborative
alliances of supervising bodies. Regulators have a differentattitude. It has now become standard practice to hold
consultations about those themes that are the subject
of policy research. We welcome this development.
The New Legal Framework for Payments in the Internal
Market, after several consultations, has seen its fifth
draft. What do you think of the Commissions
latest draft?
At the start of the discussion, the intention was to remove the
legal barriers to a Single Euro Payments Area. The New Legal
Framework (NLF) specified in greater detail the rules whichapply to non-banking players in the payments system, adding a
strong measure of consumer protection. This protection now
also covers small and medium-sized enterprises, as well as
The Price of a Single Europe
Guido Ravoet, Secretary General, Fedration Bancaire Europen (FBE)
Guido Ravoet, recently appointed Secretary General of FBE, talks about the
challenges facing the banking sector as Europe moves ever closer to a Single Market
for financial services.
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The Price of a Single Market
transactions to and from non-European countries. The
consequence of the current proposal for very great and strict
liability on the part of banks versus very limited liability on the
part of the customers is that banks will have to incur very high
costs in order to cover the increased liability through
special insurance.
What started out as the removal of legal barriers to a common
payments market has degenerated into a draft proposal that,
in its current form, will prompt a considerable increase in
banking costs and prices.
Is the Commission sensitive to the banks arguments
about this?
Thus far, we as FBE have not been able to convince the
Commission. Yet we continue to think that the proposal
requires a fundamental revision. We are hoping, therefore,
that the new European Commission, in particular
Commissioner McCreevy, will lend a sympathetic ear to our
plea to fundamentally rewrite the proposal, with the original
purpose at the back of their minds: the removal of barriers so
that payments in the Single Euro Payments Area can be
governed by uniform rules.
How do you envisage the Single Euro Payments
Area (SEPA)?
First of all, the various banking associations and some forty
major banks have joined forces to establish the European
Payments Council (EPC), laying down a plan to have pan-
European payment instruments available from 2008 onwards.
The bulk of the work to be carried out for this is still at thelocal level. The banking associations and the banks in the
various Member States will have to realise quite a few
adjustments in their own countries to make pan-European
payments possible.
How will this impact on banking costs?
In the medium and long term, the work of the EPC means that
banks will have to incur additional costs to develop the pan-
European products alongside the existing products. But
eventually, several pan-European clearing houses will be able to
service standardised payments transactions. If the domestic
payments systems gradually switch to these standards, the
long-term outcome will be that costs will go down as a result
of economies of scale.
How will bank customers benefit?
I think that corporate treasurers will quickly take advantage of
the possibility to carry out all their European payments with a
single file. Personal customers will find that they will be able to
withdraw money with their (bank) PIN card in more locations
and will also be able to make cross-border payments more
easily. What I also hope is that the government, as a wholesalecorporate customer, will set a good example and use the new
pan-European instruments.
What more needs to be done to open up national retail
banking markets and enhance cross-border integration
and competition?
The measures of the Financial Services Action Plan (FSAP),
launched by the European Commission, have now been
finalised and are being implemented. These measures will
allow the opening up of markets, but mostly on the wholesale
side of the business. Progress must now be made in the field
of retail banking, and we feel that this is possible by means of
more targeted legislation.
Achieving a European retail banking market implies that
elements essential to boost cross-border competition are fully
harmonised. We have already made concrete recommendations
on ways to open up national banking markets in a report the
FBE published last September, as a follow-up to the
Commission consultation on post-FSAP.
At the same time, the opening of markets, accompanied by a
high level of consumer protection as foreseen, would foster
competition among banks. Such competition is generally to theadvantage of customers, who end up with a broader choice
and lower prices.
On another level, we think that the goals of competition policy
and financial markets should be linked. We would like the
Commission to make full use of its competition competence to
ensure that the broad FSAP objectives of furthering integration
are not hindered by anti-competitive behaviour.
If European law makers do not take the necessary measures,
the EU as a whole would be deprived from reaping the
benefits of retail banking integration. Our estimates show thatfurther integration would lead to a growth estimated at a
minimum 0.5% of EU GDP per annum. Such an opportunity
cannot be missed!
Are there obstacles to cross-border mergers and
acquisitions in European banking which are hampering
achievement of the Single Market in retail services?
Banks have employed various strategies for meeting customer
needs at a European level: alliances and joint ventures with
local partners; direct cross-border selling the establishment of
branches and subsidiaries, and; mergers and acquisitions
(M & A). We believe it is beneficial for the Single Market and
bank customers if banks are able to compete in this way
across EU borders.
Personal customers will find thatthey will be able to withdrawmoney with their (bank) PIN card
in more locations and will also beable to make cross-borderpayments more easily.
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ABOUT BANKING 17
Banks report various difficulties in expanding through M & A.
These difficulties include the differences between the laws and
regulations of EU Member States, for example in areas such as
consumer protection and company law. These may come in
addition to the cost of operating cross-border. Some features
of the tax rules around the EU may also make it more difficult
to generate added value from a business after consolidation.
The FBE is studying this issue at present. We intend to assess
the importance of the different obstacles and consider the
ways in which policy-makers could or should react. A report
should be issued by the middle of 2005.
Note: This article draws on an interview originally given by
Guido Ravoet to the Netherlands Bankers Association and
since supplemented by information furnished to the IBF.
The European Banking Federation (FBE)
The European Banking Federation is the voice of the European
banks. Its members are the national banking associations from
26 European countries, comprising 23 EU Member States
(including Ireland), Norway, Switzerland and Iceland. Itrepresents the interest of over 4,500 banks employing over
2.3 million people.
SEPA and the EPC
The European Payments Council (EPC) was formed in June
2002 by major banks and banking associations in Europe to
realise their vision for a Single Euro Payments Area (SEPA). The
goal is to make it possible for everybody to make payments
anywhere in the euro area as easily and inexpensively as in
their hometown.
The EPCs vision for the SEPA has been supported by the
Eurosystem, comprising the European Central Bank and national
central banks in the euro area.
Profile: Guido Ravoet
Education:
Doctorate in law at Louvain University, followed by a special
licentiate in business economics
Work Experience:
1970-1974: Head of Research Department, CERA Bank
(now KBC)
1974-1983: Regional Director, CERA Bank (now KBC)
1983-1996: Secretary General, European Association of
Cooperative Banks
1996-2004: Director General, Belgian Bankers Association
2003-2004: CEO, Belgian Finance Federation (Febelfin)
2005-date: Secretary General, Fedration Bancaire
Europen (FBE)
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The Role of Consumer Protection Codesin Financial Services
Mary ODea, Consumer Director, Financial Regulator (IFSRA)
The overall purpose of consumer
protection codes in financial
regulation is to ensure that
regulated entities treat their
customers fairly and act in the
clients best interests when
conducting their business. The
advent of a new unified consumer
protection code is a landmark in the
development of financial services
regulation and will serve to ensure
that financial services firms put
consumer interests first in their
dealings with clients. Our draft
unified code was published in
February of this year and we are
currently consulting with consumers
and industry on the provisions
contained in it. When finalised, theunified consumer protection code
will apply to all regulated financial
services providers and will contain
provisions on the sale of credit,
savings, insurance and
investment products.
The draft consumer protection code
and existing codes do not contain any
prudential rules relating to issues such
as the authorisation, solvency or
reporting requirements of financialservices providers. These rules will be set
out separately. The draft code also does
not restate provisions provided for in
consumer protection legislation, except
where we feel that a statutory
requirement that applies to one sector
can be usefully extended to another
sector in the interests of creating a level
playing field and further protections
for consumers.
As we are a principles-based regulator,
the code is drafted to reflect that
position. We believe that rules alone will
not help consumers in their dealings
with financial services providers. By
setting out principles we are stating our
broad expectations as to how financial
services providers should interact with
their customers. These principles should
be reflected in all aspects of the financial
services providers business dealings
with customers.
The draft code requires all regulated
entities to have adequate systems and
controls in place to ensure compliance
with it and with other applicable
consumer protection legislation.
Responsibility for compliance rests with
the board and management of a
regulated entity.
Initial Consultation Process
In an initial consultation with consumers
and the industry last year some industry
respondents felt that, with the
development of the administrative
sanctions programme, it was important
that the code be drafted in such a way
to enable them to develop compliance
systems that would withstand regulatory
scrutiny. The draft code comprises
general principles and more detailed
rules designed to enhanceunderstanding of and compliance with
those general principles. Each rule is
then linked to one or more of the
general principles in order to facilitate a
principles-driven form of compliance.
In all circumstances the overriding
obligation of regulated entities is to
adhere to the letter and spirit of the
general principles. In creating the draft
code, we have tried to take account of
the different legal frameworks, both
European and domestic, under which
various regulated entities operate and
the evolving nature of those legal
frameworks. In addition, we need to
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ABOUT BANKING 19
ensure that the code fosters competition
by creating a level playing field and does
not discourage new players from
entering the different markets.
Most respondents to our initial
consultation favoured a code structured
under various product types rather thanby regulated entity type. The key
arguments in favour of this approach
were as follows: there has been a
blurring of the distinction between
providers of financial services; there is
a need to ensure the same level of
protection for customers regardless of
the type of financial services provider
they choose; and customers are
interested in the service provided rather
than the legal classification of the
provider or seller.
In the draft code for consultation there
is a chapter of common rules that apply
to all regulated entities followed by a
series of chapters which cover products
and services under broad headings such
as banking, lending, insurance and
investments. Where a specific rule
applies, it does so to all providers of that
product or service irrespective of the
legislative basis under which that
regulated entity operates.
The Draft Guiding Principles
A regulated entity must ensure that,
in all of its regulated business activities, it
adheres to the following twelve principles:
1 acts honestly, fairly and
professionally in the best interests of
its customers and the integrity of
the market;
2 acts with due skill, care and diligence
in the best interests of its customers;
3 does not recklessly, negligently ordeliberately mislead a customer as to
the real or perceived advantages or
disadvantages of any product or
service provided;
4 has and employs effectively the
resources and procedures, systems
and control checks that are
necessary for compliance with this
Code and other applicable consumer
protection legislation;
5 seeks from its customers information
relevant to the service requested;
6 makes full disclosure in a way that
seeks to inform the customer of all
relevant material information,
including all fees, charges and
commissions, before acting on
behalf of a customer;
7 seeks to avoid conflicts of interest
and, when they cannot be avoided,
fully discloses the potential conflict
and ensures that customers aretreated fairly;
8 corrects errors and handles
complaints speedily and efficiently;
9 does not exert undue pressure or
undue influence on a customer;
10 retains full responsibility for any
outsourced activity and ensures that
the providers of such outsourcing are
able to perform these functions
reliably, professionally and in the
best interests of its customers;
11 does not, through its policies,
procedures, or working practices,
create a barrier of access to
financial services;
12 complies with the letter and spirit of
all regulatory requirements
applicable to the conduct of its
business activities.
Key Issues for Financial Services
The draft code contains a number of
new proposals that will impact directly
on the financial services sector. Theseinclude the following:
the prohibition of unsolicited pre-
approved credit;
a requirement for all regulated firms
to explain product recommendations
in writing to the customer;
a standardised complaints procedure
for all types of regulated entities to
keep customers informed of the
status and progress of a complaint;
a requirement that payment
protection insurance must be quotedseparately from a loan;
the inclusion in consolidated/
refinancing loans of details of
the total cost of credit of the
consolidated loan together with
total cost of continuing to service
existing loans;
the extension of the 15-day renewal
notices currently required for motor
insurance to other forms of
non-life insurance;
the inclusion of warning notices on
advertisements to ensure that the
customer is aware of risks and all
fees and charges;
provisions to help improve access
to financial services.
Other Provisions for
Financial Services
Other key provisions in the creditinstitutions chapter of the draft code
include the following:
A credit institution must issue
statements of transactions on all
accounts held with it at least on an
annual basis, unless otherwise
agreed, in writing, with the customer.
Where a credit institution plans to
close or move a branch, or to
withdraw or curtail a service, it must
inform affected customers in writing
at least three months in advance.
Any such decision must be advised
to the Financial Regulator
immediately. The wider local
community should also be informed,
in advance, through notification in
the local press.
A credit institution shall ensure that,
when it announces a reduction in
interest rates, the reduction is be
implemented within one week of the
rate change being first announced
by the credit institution.
Where a credit institution changesthe interest rate on accounts, it
will update the information on
information services, including
telephone helplines and website
as soon as the changes come
into effect.
A credit institution must, at least
annually, undertake the following:
advise customers periodically of
methods by which charges can
be mitigated; warn customers, before opening a
joint account, of the consequences
of operating a joint account
including full access and use of
funds in the account by both
named parties;
establish from the principal donor,
where relevant, the purpose for
which the funds in a joint account
are intended to be used and
whether the other named person is
to be the beneficiary of the funds;
advise existing deposit holding
customers of the different interest
rates that are being applied to its
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deposit accounts, together with
details of the rates applied to their
savings account during the
previous year;
where a customer has a variable rate
savings account and the credit
institution has reduced interest rates,
contact the customer within areasonable period of time to:
- advise the customer of the
change in the interest rate
- inform the customer about other
savings accounts operated by the
credit institution, offering to help
the customer switch to one of
these accounts, if the customer
so requires
- inform the customer that he/she
can withdraw all the money in
their account; ensure that it notifies customers,
who hold an investment deposit
account with a minimum duration
term of one year, at least ten days
before the scheduled maturity
term of the account, of its
impending maturity.
Certain provisions in the draft code
relate specifically to deposit agents.
A deposit agent must ensure that
once it has processed a transaction,
that transaction is immediately
credited to the account of
the customer.
A deposit agent shall not retain in its
possession the account passbook(s)
of any of its customers.
A deposit agent may not operate
from the same premises as a
deposit broker.
A deposit agent shall ensure that
each customer is given a copy of the
relevant credit institutions terms of
business not later than the time of
accepting the first deposit from that
customer. Such terms of business
shall set out the nature of the
relationship between the productproducer and the deposit agent and
the basis on which the deposit
agents services are provided.
Current Account Switching
The consultation paper also raises the
question as to whether or not the
voluntary switching code that facilitates
consumers to switch bank accounts
should be incorporated into the
statutory consumer protection code.The Financial Regulator welcomed the
launch by members of the Irish Bankers
Federation (IBF) of a voluntary switching
code that became operational
in January. We believe that this
promotes healthy competition and
represents a significant consumer
protection measure. We are monitoring
the operation of the switching code and
participating, in an observer capacity,
at the meetings of the IBF sub-
committee on switching.
In the context of the statutory draft
code, the Financial Regulator believes
that the issue of effective enforcement
would be facilitated by making failure to
comply with the switching code subject
to the administrative sanctions regime.
This may be best accomplished by
incorporating into the code the IBF
switching code as it now exists. This
consultation process invites views on
whether it is preferable that the issue
of switching should be incorporated in
this way.
The FutureFollowing the consultation process,
it is planned to issue the consumer
protection code on a statutory basis
before the end of the year. Recognising
that the code is a significant document,
we have extended the consultation
period to May 13th, 2005 and are
seeking feedback from consumers and
the financial services industry. Going
forward, it will be important to ensure
that the code remains relevant and
effective and adaptable to issues arising.We will monitor the impact of the code
on an ongoing basis to ensure that we
can react to developments in financial
markets and consumer protection
mechanisms. We will continue to consult
with consumers and the financial services
industry on possible changes to the code
as it evolves and we would encourage
input into the process now so as to
ensure that the code implemented later
this year is appropriate, proportionate
and achievable both for consumers and
the industry.
Note: copies of the consultation paper
are available on www.ifsra.ie.
All responses will be made publicly
available on this website.
The Role of Consumer Protection Codes in Financial Services
The Financial Regulator welcomed the launch by members of theIrish Bankers Federation (IBF) of a voluntary switching code thatbecame operational in January. We believe that this promotes
healthy competition and represents a significant consumerprotection measure.
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