The inquiry will focus on two areas where competition is thought to be weakest: current accounts and loan provision to small firms, writes Siobhán Creaton, Finance Correspondent.

So the Competition Authority has finally taken on the Bankers' Club.

For the first time in its history it will inquire into a couple of crucial areas where consumers, and even the authority itself, suspect the level of competition is far from healthy.

Its chairman, Dr John Fingleton, is not promising that his team's efforts will force financial institutions to pay interest on money held in personal current accounts or that small and medium-sized businesses can look forward to cheaper loans to fund their businesses. But its investigation should provide sufficient evidence to trigger shifts in Government policy and a fairer deal for consumers in these two areas.

The bankers are a closely scrutinised group. Much to their chagrin, the Revenue Commissioners has trawled through accounts and customers' details to track down owners of bogus non-resident accounts. It has now expanded its inquiries to examine offshore bank accounts that may have facilitated tax evasion.

The Director of Consumer Affairs, Ms Carmel Foley, keeps a close eye on them and they must apply to her office to increase bank charges. This week, in her submission to the Competition Authority, she complained that certain institutions had imposed higher fees than they had signalled but that she did not have the power to impose sanctions for such breaches.

The Irish Financial Services Regulatory Authority (IFSRA) is looking at mortgage lending policies based on concerns about excessive lending. It is also preparing to analyse the extent and pace at which financial institutions pass on changes in European Central Bank rates.

Of course, the Central Bank is the prudential regulator and constantly monitors the sector's financial health.

Now the Competition Authority is sending its officers into the banks to mount a limited inquiry. Dr Fingleton is under no illusions about the strength of resistance it may encounter from this very powerful group.

But he is optimistic his lieutenants will gain entry to the banking halls and will be able to gather sufficient evidence to either bolster or reject the widescale perception that customers are being ripped off.

An Irish banking cartel was formed in 1913 and pretty much operated unhindered until the mid-1980s, according to a study by Mr Padraig McGowan, which was published by the Institute of Public Administration in 1990. He wrote: "The Irish banking industry was dominated by the clearing banks, which accounted for some 70 per cent of the total market. These banks operated a cartel and entry into retail banking was inhibited other than by way of a takeover."

The arrangement suited the Central Bank, which at that time controlled monetary policy, setting interest rates, and made regulation much easier. By the mid-1980s Ireland was viewed as having one of the most heavily regulated banking systems of any developed economy. Mounting pressure from the European Union forced an "official" ending of the banking cartel at that point but having operated so successfully for more than 60 years, its legacy is a banking sector where competition is seriously distorted.

Almost 20 years on, the banks are still unable to shrug off the cosy cartel allegations and many of the structural flaws that have impeded competition have never been tackled.

The Competition Authority has a narrow focus and has selected the two areas where it believes that competition among Irish financial services companies is weakest, namely current accounts and in the provision of loans to small businesses.

In February, Davy Stockbrokers suggested that Ireland's two biggest banks, AIB and Bank of Ireland, which together control 80 per cent of all current accounts, were earning more than €150 million a year from these products. This was the first time that anyone had put a figure on how much financial institutions could earn by not paying interest on funds held in credit in a current account, and was all the most shocking because the banks have always claimed that operating this type of account was a loss-making activity.

Current accounts, where customers can access their money by writing cheques or make withdrawals from cash machines, are effectively the "gateway" product through which banks win new customers and begin to sell other products, such as mortgages and investments. Most people have a current account and eight out of 10 are with either AIB or Bank of Ireland.

To offer this type of account, a financial institution has to be part of the Money Transmission System, which facilitates the movement of funds, debiting and crediting accounts. AIB, Bank of Ireland, Ulster Bank, National Irish Bank and Permanent TSB are all members, while BNP Paribas acts both as a clearing bank on its own behalf and provides this service for smaller institutions.

This arrangement is probably the key support mechanism ensuring that the big banks have the lion's share of current accounts. Competition Authority economist, Mr John Evans, says it plans to visit Britain, to study the very different clearing arrangements that operate there, with a view to recommending their adoption here.

A regulator was appointed to monitor the UK money transmission following a review of the banking sector by Mr Don Cruickshank. In her submission to the Competition Authority, the Director of Consumer Affairs has called for a similar structure here.

Some small financial institutions have complained about a lack of transparency about the qualifications and costs involved in entering the Irish clearing system, although the Irish Payment Services Organisation, which operates it, vigorously denied those claims yesterday.

Mr Evans signalled that much of the technology was now quite old and that there may be scope to restructure and introduce a fairer arrangement as a means to ensuring that Irish consumers are given a far wider choice of options when they want to open a current account.

The small and medium-sized business sector has long been recognised by competition authorities all over the world as one of the more vulnerable sectors when it comes to seeking loans.

The Cruickshank review in the UK drew attention to the needs of this sector and helped to assess just how much profits the banks make from small and medium-sized businesses. Their choice of lenders tends to be quite restricted, as such the rate of interest they are charged can be very expensive.

"We are not saying that we are not going to look at other areas," the Competition Authority chairman Mr Fingleton said yesterday.

"If we were to look at every aspect of banking it would take several years. We are picking the areas where competition is weakest, which is best in terms of getting a bang for our buck," he added.

Consumers can only hope that his efforts will eventually also make their money go further.