Comment: The Competition Authority's report on banking in Ireland shows that banks do not compete aggressively for customers. As an example of how customer "lock-in" and failure to attract new banks into the Irish market can affect the bottom line, small businesses in Ireland lost out on interest rate reductions worth approximately € 255 million between January 2001 and January 2004. This situation will continue unless there is more competition.
The authority's report seeks to make financial institutions more responsive to the needs of Irish customers. Rather than creating scapegoats, the report identifies specific problems in the sectors that it has examined, and then recommends detailed courses of action to mitigate these problems and make banking markets more competitive.
While the report does not represent a multi-organ transplant for the Irish banking industry, neither is it a superficial, cosmetic exercise. Instead, the authority's scalpel has made its incisions selectively.
The authority focuses on two areas, personal current accounts and lending to small and medium enterprises, as well as examining the crucial role of the payments clearing system.
We concentrated on these areas for a number of reasons. Firstly, these areas are very important. Almost everyone has a current account, and the small business market is a vital part of the Irish economy.
Secondly, this focus allowed us to complete our report in a timely manner. Neither consumers nor the small business community would have benefited if the project came to resemble a tribunal of inquiry. Accordingly, if implemented, our recommendations should make a significant impact, and should allow for the possibility of pro-competitive knock-on effects in other areas of banking.
The authority is under no illusion as to the extent of the challenge and we understand that a single report on its own will not change the world of Irish banking.
Although the authority has no enforcement powers in this area, we are confident that the report can serve as a catalyst for significant change. In the recent past, we have witnessed a gathering momentum for reform of the Irish banking sector, and it is important that we grasp the opportunities that this momentum affords us.
The authority has delivered a total of 40 recommendations, addressed to the financial regulator, the clearing companies, government and the banks.
Without their co-operation, the shelf life of the report will be short. While the authority cannot force competition to happen (absent a breach in competition law, which was not found here), it has identified those areas where competition is not allowed to develop freely and unencumbered, and make recommendations accordingly.
Since the commencement of the study, numerous changes have already taken place. Some of which have, in fact, anticipated our recommendations. During 2004, the IBF, IPSO and the Department of Finance announced their intentions to remove some of the more troublesome restrictions on competition in banking.
The Minister has endorsed the removal of the double-taxation stamp duties on customers who switch banks. Entry barriers to the Payments Clearing System, which inhibit entry into the Irish banking market, have been substantially reduced by the clearing organisations.
The Bankers' Federation has promulgated a switching code that will facilitate bank rivalry and make switching banks easier for Irish consumers. Clearly, there is still a great deal to be done.
Small business lobby groups have levelled a number of criticisms at the report. It is claimed that the report does not go far enough in its recommendations on small business lending, and that implementation of the report's recommendations cannot be guaranteed.
While the report does address every major issue raised in submissions to us from both small business lobbies, on occasions we simply did not agree. One of the submissions stated that "the loan market is very competitive". This is simply not the case. The report found significant problems in small business loans for working capital. In addition, claims of illegal collusion among the banks have not been supported by any evidence.
Perhaps more importantly, the report does validate the frustrations of the small business lobby and shows the extent of the problems which small businesses face in seeking access to reasonably priced finance.
Our recommendations address these problems, and we believe that they will provide valuable lessons which can be applied to other SME areas.
In order for real change to be effected for the benefit of personal and business customers, we need all stakeholders to look at what can be achieved if the authority's recommendations are implemented in a timely fashion.
While it may be easier to play the hurler on the ditch, change will not take place without action. We invite all stakeholders to submit comments on whether there are better practical solutions, whether our proposed remedies have hidden unintended consequences, and whether we have directed them to the right entities, and - most importantly - to join with us in seeking reform in this important area.
Terry Calvani is a member of the Competition Authority and director of the Authority's Study into the Banking Industry
