Institutional inertia will impede adoption of recommendations

The reaction of the small business lobby to the latest phase of the Competition Authority investigation into banking is telling. It is overwhelmingly negative with ISME and the Small Firms Association expressing little confidence the issues raised will be rectified.

Their pessimism is well-founded, not least because of the welcome extended to the report by the Irish Bankers Federation and various individual banks. Of the 40 recommendations made in the LECG around half of them will have to be implemented directly by the banks or by their proxies - the Irish Bankers' Federation and the various companies that control the clearing system that underpins the current account system.

Given that most of these reforms will actually cost the existing players either money or market share, the Competition Authority has left itself open to a charge of wishful thinking.

The Small Firms Association warns that the most likely fate of the report will be to "gather dust like so many before it". Their counterparts at ISME make comparisons with similar studies in the UK which looked at coordinated behaviour by the large banks. By comparison, yesterday's report lacked a cutting edge and was a lost opportunity, argued ISME.

However, the Irish Bankers' Federation is of the view that "effective progress can be and is being made with regard to the Authority's recommendations".

Along with most of the banks, it welcomed recommendations such as the abolition of price controls and soft measures such as improved current account switching codes. There was much less comment from the industry on the issue of reforming the clearing system, which the Authority's consultants identify as the key to unlocking competition in both the current account market and the small business market.

The report argues that despite some reforms in this area "barriers to competition still persist in the payments clearing system". These include lack of clear procedures for new banks to join the system and the complex structure of the system. It also questions the corporate governance structure of some of the companies within the structure.

These restrictions make it difficult for new entrants to become full members of the system and thus avail of lower charges and faster clearing cycles. This affects their ability to compete in the personal and business current account markets. This in turn denies the new entrants a "gateway" through which they can offer other services in competition to the existing players.

Dr John Fingleton, the chairman of the authority is happy that the banks will pay ball with all the recommendations, including the reform of the clearing system. He argues the main banks would like to see more competition in the market as it would help drive internal reform. Longer term thinkers in the industry accept they will become vulnerable to takeover if they are not operating in a efficient market, says Dr Fingleton.

In reality, the authority has little choice but to hope that the banks cooperate out of some sense of enlightened self-interest. The current study was undertaken by the authority wearing its advocacy rather than enforcement hat. As a result, it has no powers to enforce the recommendations unless the practices they relate to are in breach of competition law. Dr Fingleton acknowledged yesterday that the issues covered by the report did not fall into this territory.