Euro should drive down foreign exchange charges

Foreign exchange charges should fall significantly in the next few months the Director of Consumer Affairs, Ms Carmel Foley has said.

She said her directive which forced banks and building societies to publish their charges would result in "new competition and means consumers can finally compare the institutions' rates".

In yesterday's newspapers financial institutions published their charges, with significant differences in some of the rates. The institutions had no advance knowledge of the rates other institutions would be quoting and some curious staff purchased early copies of the newspapers to see how far their competitors would go.

At present, financial institutions' foreign exchange charges are made up of commission and a foreign exchange margin. The latter is the difference between the rate at which banks bought foreign currencies and the rate at which it sold them.

After January 1st 1999 the conversion rate will be fixed between all 11 states participating in the euro. This means no foreign exchange margin will arise from transactions in these currencies.

With the foreign exchange margin to be eliminated, this means that consumers will only pay a commission charge from January 4th on. However, the advertisements of the financial institutions show that they have increased their commission charges to go some way to compensate for the loss of earnings from the elimination of the foreign exchange margin.

For example, Bank of Ireland currently charges a commission of £1 and a foreign exchange margin of £2.50 (total charge £3.50) when exchanging £100. It now proposes to charge £2.25 commission when exchanging £100. AIB is proposing a similar move. When exchanging £500 at present, the bank charges a commission of £5 and a foreign exchange margin of £17.13, which means a total charge of £22.13. The new proposed commission charge is £15.

Both banks said yesterday that a commission-only charging system would not be a reflection of the real costs of "importing, storing and transporting currency".

Other banks said a commission-only system would mean all profit was removed from the foreign exchange business.

Ms Foley said that financial institutions had made the case to her that the commission charged up to this was not a true reflection of the cost of exchanging currencies. She said whatever the merits of this argument the fact that financial institutions now have to publish their charges will mean significant falls in rates, as competition takes place.

Other banking sources agreed and said some of the figures published yesterday were the "opening positions of the banks".

An examination of the charges shows wide variations. Using examples quoted by the financial institutions, ACC Bank is the only bank where if you are changing either £50 or £100 the charges under the euro increase, compared to current charge levels The charge to change £50 at ACC Bank at present is £2.25, it will now rise to £3.50. If a customer is changing £100 the charge now rises 50p to £5.

Mr Denis Fahy, from the ACC said the bank "has to show some profit" from its foreign exchange business. He pointed out that the charge for changing large amounts, like £1,000 is dropping from £45 to £32.

In terms of changing £500 and £100 the lowest charge is with National Irish Bank at £10 and £2 respectively. In terms of changing £50 the lowest charge available is Bank of Ireland with £1.13.

All the banks have to publish the rates again on January 4th and while they can reduce them before that, they are not permitted to increase them, said Ms Foley. She said inspectors from her office will also be checking to see that leaflets detailing the charges are provided in branches of each financial institution.