Customer protection or a hindrance to competition in the banking sector - the debate over the Consumer Credit Act continues, writes Caroline Madden

The Irish banking sector has become increasingly competitive over the last decade, with a steady stream of new entrants to the market, increased ease of switching between providers, and the advent of "free" banking.

Rewind to the early 1990s and the banking landscape was very different, with only a handful of major players and little incentive to compete on prices.

In an effort to provide some protection to consumers, legislation was introduced - specifically Section 149 of the Consumer Credit Act 1995 - to regulate the non-interest charges which banks could impose on transactions, such as direct debits, standing orders and general current account activity.

The Irish Bankers Federation (IBF) contends that this artificial method of controlling prices, although necessary at the time, has outlived its purpose. Pat Farrell, chief executive of the IBF, says that the time is now right to abolish S149.

"Our central thesis is that it's actually competition that is driving down prices, not price control," he says, "and, notwithstanding the approval under S149, fees and charges have come down over the years.

"There are several examples where transaction charges have been applied at a level lower than the approval level. And credit card annual fees have also been dropped even though they were approved. In other words, competition is actually setting a higher benchmark and a higher bar than regulation."

Under current regulation, banks must apply to the Irish Financial Services Regulatory Authority for approval if they wish to introduce new products or increase their charges. A fee of €37,150 applies to each application and, while the official processing time is four months, it can take considerably longer.

Mr Farrell says the process reduces the ability of banks to respond quickly to new products from their competitors.

"If you take the mortgage market, there are constantly people pitching new offers into the market. The providers can come to the market at will with new offers.

"If you contrast that with the current account market, somebody will bring out a proposition and maybe six months go by before a response comes," he says. "The whole competitive dynamic is slowed down."

Mr Farrell says the IBF Switching Code, which was introduced in February 2005, has stimulated and driven competition. In its first year of operation, 20,000 people switched to a different bank using the code. The IBF is launching a similar code for business customers this summer.

Patricia Callan, director of the Small Firms Association has some reservations in relation to ending the regulation of bank charges. "From our perspective, we would like to wait and see what happens with the business switching code."

She points out that switching a business account is considerably more complex than doing so with a personal account.

Ms Callan does agree that the process of applying to the financial regulator for approval of bank charges is "quite bureaucratic" and "discourages innovation".

However Mark Duffy, chief executive of Bank of Scotland Ireland, says that, as a new entrant to the marketplace, it did not find the application process for approval of their products off-putting and were in fact "very happy with the regulator".

He is adamant, however, that the current legislation is "daft", describing it as "a clog on competition, reducing not improving competition."

The IBF is also looking further down the track to the impending introduction of a SEPA (Single European Payments Area) in 2008, which, Mr Farrell says, will enable banks across Europe to sell their products directly into the Irish market.

"I would argue that now, with the creation of a pan-European payments market, that having one geographic piece of that market - Ireland - subject to price control, where the rest of Europe is not subject to that price control, is actually anti-competitive," he says. "The clock is ticking on this. S149 should be abolished sooner rather than later, otherwise Irish institutions are going to be placed at a competitive disadvantage vis-à-vis their European competitors.

"The other important development which we believe is critical in understanding why the timing is right to get rid of S149, is that the regulator is about to implement the new consumer protection code," he continues.

This new code will apply to personal consumers and businesses with a turnover of less than €3 million, and covers all aspects of bank/customer interaction. The IBF feels that it will provide protection for consumers.

John Cradden, financial researcher with the Consumers Association, says that the IBF "has a valid point to make" but he is more circumspect about the effects of removing current regulation.

"Abolishing price control is a little bit of a double-edged sword as far as consumers are concerned. I would prefer to see some reform of price control reform than abolition. It's there for a reason - to protect the consumer."

He suggests that the application process should be speeded up. "Attack the system instead of abolishing it altogether. Price control is a very simple mechanism. If taken away I would imagine that the banks would increase their charges."

He adds that banks have to do more to win the trust of the consumer, as overcharging scandals are still fresh in their minds.

Mark Fielding, chief executive of ISME echoes these concerns.

"The bottom line is that we don't trust [ banks] to give fair play to the customer." He predicts that if banks charges were unregulated, excess charges and management fees would creep in overnight.

The financial regulator issued a statement this week saying that "before the abolition of Section 149 could be contemplated, a number of other conditions would need to be met".

These conditions include the need for a more transparent bank charge pricing structure, as well as "a range of information sources available to consumers . . . that assist consumers in assessing the costs, risks and benefits associated with non-investment banking products and services."

In addition the regulator stated that "full consideration should be given to the development of a standardised low-cost basic bank account, and any issues relating to entry/access to the clearing system should be resolved", and said that they would require evidence that the switching code is "fully operational and effective."

However, the financial regulator did acknowledge that the banking industry has made progress towards addressing these issues, most notably in the area of the switching code.