The arrival of Bank of Scotland and Northern Rock marks just the beginning of a major shakeup in the Republic's financial services sector, according to an industry survey. The report suggests that "reactive" strategies to deal with such competition will prove unsustainable.

The survey, of more than 50 chief executives or managing directors in large financial services companies, reports an overwhelming majority - 94 per cent - believing that reduced margins will continue as a result of deregulation.

The report argues that financial institutions should adopt radical and speedy responses to the changes happening in the marketplace. Piecemeal, reactive changes, such as the reduction in mortgage rates as a result of the entry of Bank of Scotland, are not sustainable, Prospectus says.

"The comfort zone for Irish financial institutions is over," said Mr Owen Purcell, head of financial services practice at Prospectus. "Institutions will no longer be able to rely on short term defence strategies or tweaks to existing strategies."

The most immediate threat to Irish companies is expected to come from further British providers targeting the Republic's market to increase their volume of low-margin products, through low-cost channels, the survey suggests.

A suitable distribution strategy was seen by respondents as the most important key to success, with several financial institutions appearing to develop a multichannel approach.

Irish financial institutions seem reluctant to set up separate companies to exploit new channel opportunities. The survey concludes that they appear to fear cannibalising their own existing customer base, despite the success of operators such as Egg, which was launched in Britain without damaging Prudential's customer base.

The survey also suggests that many companies devoted a significant portion of their IT budgets to dealing with the Year 2000 computer problem, rather than focusing on electronic commerce.