The Director of Consumer Affairs is distorting competition in the banking sector through the way it controls bank charges, according to the Irish Bankers' Federation. The federation claims the current regime has lead to higher interest rates being charged to customers.

Federation president Mr Donal Forde, head of AIB's retail banking operations in the Republic, said the requirement for banks to seek approval to change existing prices or introduce new ones needed to be changed. "It stifles innovation and distorts competition to the disadvantage of the general body of consumers."

Mr Forde said the banking industry will be making this point strongly in its submission to the Competition Authority which is preparing to undertake an examination of the level of competition within the sector. It wants this section of the Consumer Credit Act to be repealed to allow prices to be determined by "market forces".

He said the industry welcomed this development as long as it was broadly based. "We compete with each other fiercely. I am very confident that any study will bear that out. It may find that we are less competitive in some areas but more in others" he said yesterday.

Bank charges remain at 1994 levels which Mr Forde suggested has forced the banks to recover costs through means such as higher margins on mortgage and other interest rates.

The federation, which represents more than 60 Irish and foreign banks based in the Republic, said it also welcomed the establishment of a new financial regulatory body but has many reservations.

"The development of the new Irish Financial Services Regulatory Authority provides the opportunity to introduce the right balance and model of regulation. This development should involve full and open consultation between policy makers and all stakeholders - a process in which the IBF will play a constructive role on behalf of its 60-member institute," he said.