After three years of intensive research the Competition Authority is closing in on a solution to the myriad problems that beset the banking sector, writes Siobhán Creaton

The Competition Authority has reiterated its view that Irish banking is not competitive. The lack of competition between Ireland's financial institutions has resulted in customers being "locked in" to their banks' unattractive terms and conditions. While the banks' refusal to fully pass on interest rate reductions to small Irish businesses is costing them millions in profits, it says.

This will continue unless the financial institutions themselves, the Irish Payment Systems Organisation (IPSO), the financial regulator and the Minister for Finance tackle it once and for all.

After three years of intensive research the Competition Authority has designed a road map it believes can create a competitive banking market in Ireland. It has set targets for each of the players and if they are met, it seems bank customers will end up with a better deal.

Significantly, the authority has provided an incentive to the banks this time around to get their house in order. Having previously advocated the abolition of the regulation of bank fees and charges, it has now changed tack and says this should only happen when competition is seen to have improved.

Put simply, if everyone does what the authority is recommending, Irish consumers should get their first real taste of a competitive banking market towards the end of 2007, according to the report.

Its chairman, John Fingleton, says the authority will continue to monitor progress in the sector and hold the various parties to account to meet its deadlines.

"Competition should make financial institutions more responsive to the needs of Irish customers" he says. "Consumers have not reaped the benefits of better services, prices, products and innovation. We have identified a number of areas where competition is not allowed to develop freely and unencumbered. Our recommendations will have a significant impact, and will have knock-on effects in other areas of banking."

The authority's key objectives are to make it easier for personal and business customers to move their bank accounts to institutions that offer them a better deal; to make it cheaper for small businesses to access working capital, and to make it easier for new banks to offer services to Irish consumers.

While this study has been underway the banks have tried to pre-empt some of the likely recommendations and have introduced initiatives such as a code to facilitate retail customers to switch bank accounts. Fingleton acknowledges some positive developments have occurred but says they are a drop in the ocean.

"There have been some very positive developments but not much has happened to core banking in Ireland over the past 20 years. For 30 years before that there was a cartel," he says.

The report concludes that banks in Ireland do not compete for existing customers but fight aggressively for the first time customers such as students.

The key measure of the lack of competition among financial institutions offering current accounts is that over 70 per cent of the market is held by Ireland's two biggest banks, AIB and Bank of Ireland.

These accounts are vital for most people. They provide the means to pay bills, access cash and get short-term credit from an overdraft. They are also vital for the financial institutions, giving them an insight into how much each customer earns and how they spend their money.

Armed with these details the banks will try to sell them other products, such as mortgages, savings and investment deals. And customers often prefer to buy from the institution they have already built a relationship with.

The lack of competition in this segment of the market has meant that few customers ever switched their account to a rival institution. And even if they did, the process was cumbersome, particularly when it came to reorganising direct debit payments.

In February the Irish Bankers Federation, which represents most of Ireland's financial institutions, adopted a code designed to make it easy for consumers to shop around. It was a welcome nod towards improving competition and this week it announced that 10,000 account holders have indeed switched their accounts.

Fingleton says that while it is good to see this trend emerging, these figures could be substantially higher. "The magnitude of switching is still well below one per cent of Ireland's 1.9 million current account holders. In the UK, some 3 per cent of account-holders switch banks so we are still well below that level," he says. His message is that the banks have to make it even easier for customers to move.

The Authority is recommending the development of a transferable direct debit that would take the pain out of having to contact the likes of the ESB or Eircom to set up a fresh arrangement from a different account.

Another key recommendation is to create a similar structure for business customers, whose accounts are more cumbersome to move. Apart from the dismantling of possibly hundreds of payments a bigger problem for businesses, when it comes to moving their accounts, is maintaining their credit history.

A bank that is about to lose a customer will not be too co-operative in terms of helping them to secure the best terms with a rival. Therefore, the authority is recommending that banks provide a three-year account history to business customers, free of charge, so they can extract the maximum benefits from new financial institutions.

Fingleton says that regardless of whether business customers decide to change their accounts or not, the fact that they can gives them sufficient bargaining power to squeeze a better deal from their existing bank.

An overhaul of the payments system, the vehicle used by the Irish banks to transfer payments, is another priority, according to the report. The authority wants to see wider representation on IPSO's board and to ensure that new banks can easily enter these arrangements.

Fingleton says the recommendations for the sector are sensible and pragmatic. "When implemented, they will provide a greater selection of . . . innovative banking services at competitive prices." Customers can only hope this will be the outcome.

Stamp duty: The Minister for Finance should prepare an analysis of the costs in terms of distorting competition due to the imposition of a stamp duty levy on electronic cards, charge cards and credit cards. This should be done by April 2006.

On personal current accounts: The Minister for Finance should bring legislation to end the regulation of the level of bank fees and charges once all of the recommendations designed to improve competition have been implemented by the banks and are proven to be working.

Switching: The Irish Bankers Federation switching code should be reviewed by the Irish Financial Services

Further recommendations...

Personal current accounts

• If the financial regulator is not satisfied that a voluntary switching code is sufficient to encourage customers to switch banks it should implement a statutory code that it would monitor.

• By January 2006 customers should have free access to account records for the past year. By March 2006 banks should be required to provide interest rate and interest rate margin information to customers with current accounts.

Payments system

• The board of directors of the Irish Payment Services Organisation should be expanded to include other stakeholders, particularly big users of the money transmission system such as utility companies and consumer representatives. This should happen by January 2006.

• IPSO should clarify by January 2006 that credit unions and An Post are eligible for ordinary and associate membership.

• IPSO should publish its articles of association, rules for membership and any other documents regarding membership by October 2006.

• IPSO should, under the supervision of the regulator, investigate the establishment of an automated clearing house by February 2006.

Small to medium-size business customers

• By 2006 the Irish Bankers Federation should expand its switching code to include small and medium-sized enterprise customers and allow all financial institutions to participate in the switching code regardless of whether they are its members.

• The effectiveness of the switching code as it would apply to small and medium-sized business customers should be reviewed by the regulator and its findings should be published by June 2007.

• By January 2006 business customers should have free access to their own business loan, deposit or current account records held by their bank for at least 36 months.

• The Irish Bankers Federation should develop and promote the use of a standard form of mortgage document by December 2006 which could be provided for in legislation by June 2007.

• By January 2007 the Minister for Finance should bring forward legislation to allow the transfer of a mortgage to a new loan provider without any change in the loan's validity or its priority over other mortgages