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Creating Europe’s Internal Market in Financial Services
The Competitiveness of the Irish Financial Services Market
2 ABOUT BANKING
The Price of a Single Europe
The Role of Consumer Protection Codes in Financial Services
2-4 Newsdesk The latest news from the Irish financial services sector
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: firstname.lastname@example.org www.ibf.ie Editor Felix O’Regan email@example.com Production Patrick Hughes firstname.lastname@example.org Advertising PHD Ltd email@example.com Design Dcoy Design www.dcoy.ie Printing Hudson Killeen
Creating Europe’s Internal Market in Financial Services Charlie McCreevy
The Competitiveness of the Irish Financial Services Market Jim Power
The Price of a Single Europe Guido Ravoet
The Role of Consumer Protection Codes in Financial Services Mary O’Dea
Justice Minister Calls for Continued Cooperation against Money Laundering
The Minister for Justice, Equality and Law Reform, Mr Michael 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 of the 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 State’s overall strategy for tackling crime,” said Minister McDowell.
IBF Welcomes McCreevy Commitment to Address Banks’ Regulatory Burden
Speaking at the inaugural Federation of International Banks 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 the industry, 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
2 ABOUT BANKING
The Taoiseach forecasts “boom and bloom” in 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 are determined that Ireland will remain at the heart of the international banking industry”, said Mr Ahern.
The IBF’s Aoife McDonnell kits out for worthy cause
IBF Supporting the Community
Aoife McDonnell, a member of the Irish Bankers Federation’s 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 and 17 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.
Pictured at the launch of FIBI’s ‘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 and BSTAI Honour Top 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”.
Education Minister Mary Hanafin TD, BSTAI President Norah Martyn and IBF President Diarmuid Bradley with award recipient Sinead Grennan
Minister Hanafin was speaking at the annual BSTAI awards, which honoured top business students at post-primary level.
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We need a wake up call on regulation and compliance costs
In this first edition of About 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 associated knock-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 Commissioner’s 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 Ireland’s 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
ECB figures confirm competitiveness of personal lending 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 to cover 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.
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Creating Europe’s Internal Market in Financial Services
Charlie McCreevy, EU Commissioner for Internal Market and Services
A more open Internal Market in Europe - and the banking industry’s role within it - is vital to economic success and to sustaining Europe’s social model, explains EU Commissioner for Internal Market and Services, Charlie McCreevy.
Europe is facing some significant economic challenges. It would be an understatement to say that the economic 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 Europe’s 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 State level. 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 often comes 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 this potential fall within my domain as Commissioner for Internal Market and
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“As we continue to open up the financial markets in Europe, the banks will have more new opportunities 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.”
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Creating Europe’s 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 more competition 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 risk capital 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 life products 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 marked intensification 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 bank’s earnings streams have happened, the banking industry’s profits have continued to grow. That is because competition and bigger, more open markets have forced the
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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
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 new opportunities 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
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 players who 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
“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.”
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 Ireland’s 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
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 more open 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
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 resources to 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.
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The Competitiveness of the Irish Financial Services Market
Jim Power, Chief Economist, Friends First
Competition in the Irish financial services market has changed beyond recognition in the recent past, and will become increasingly intense over 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 and services 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 one’s 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 private sector bus services on offer have improved the welfare of many Irish commuters.
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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 take anything 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 in terms 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.
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. The combination 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 ECB’s 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 ECB’s 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.
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 bigger problems 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 highrisk market.
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.
The study found that in 17 out of the 20 charges, the average transaction cost in Ireland is lower than in Great Britain. The study concluded that ‘average SME transaction banking charges in Ireland are very competitive relative to Great Britain’ and that ‘the difference in cost is very significant in several transaction categories’.
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 to break 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 and its 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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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 of the 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 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 world’s leading economies in terms of profitability. However, it is a fact that there is a strong correlation between cost/income
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 regulatory wherewithal 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
“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.”
banking, or the inconvenience and cost involved in switching banks. The first two factors are positive sources of inertia and suggest good customer service, 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-bystep procedures to facilitate a quick, efficient and transparent switching of accounts. This code was developed in conjunction with IFSRA and will undoubtedly remove a perceived block to competition in that segment of the
ratios and profitability. Irish banks have a relatively low cost/income ratio, suggesting a high level of efficiency. The sector has been quite successful in recent 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.
cross border mergers, alliances and takeovers, the environment is set to become even more competitive in the years ahead. All players in the market will 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, technological innovation and more customer-focused practices and products, in order to maximise shareholder value.
The Future Over the past decade the evolution and development of the Single European Market has broken down many barriers
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The Price of a Single Europe
Guido Ravoet, Secretary General, Fedération Bancaire Européen (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.
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.
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 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: ‘We’ll wait and see whether there’ll 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
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 different attitude. 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 Commission’s 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 which apply 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
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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.
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 wholesale corporate customer, will set a good example and use the new pan-European instruments.
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.
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 the advantage 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 that further integration would lead to a growth estimated at a minimum 0.5% of EU GDP per annum. Such an opportunity cannot be missed!
“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.”
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 panEuropean payment instruments available from 2008 onwards. The bulk of the work to be carried out for this is still at the local 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 panEuropean 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.
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.
16 ABOUT BANKING
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.
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, Fedération Bancaire Européen (FBE)
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. It represents 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 EPC’s vision for the SEPA has been supported by the Eurosystem, comprising the European Central Bank and national central banks in the euro area.
ABOUT BANKING 17
The Role of Consumer Protection Codes in Financial Services
Mary O’Dea, 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 client’s 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, the unified 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 financial services 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 provider’s 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 enhance understanding 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
18 ABOUT BANKING
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 than by 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.
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 are treated 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.
provisions to help improve access to financial services.
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 or deliberately 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,
Key Issues for Financial Services The draft code contains a number of new proposals that will impact directly on the financial services sector. These include the following: • the prohibition of unsolicited preapproved 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 quoted separately 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;
Other Provisions for Financial Services Other key provisions in the credit institutions 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 changes the 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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The Role of Consumer Protection Codes in Financial Services
“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.”
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 a reasonable 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. • A deposit agent shall ensure that each customer is given a copy of the relevant credit institution’s 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 product producer and the deposit agent and the basis on which the deposit agent’s services are provided. 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.
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.
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 subcommittee 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
The Future Following 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.
20 ABOUT BANKING