About Banking 1

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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

[email protected]

Advertising

PHD Ltd

[email protected]

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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16 ABOUT BANKING

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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18 ABOUT BANKING

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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20 ABOUT BANKING

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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About Banking 1

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