Bank Charges: Presentations.

I welcome Ms Mary O'Dea, consumer-director of the Irish Financial Services Regulatory Authority, a function which until earlier this year came under the remit of the Office of the Director of Consumer Affairs in the Department of Enterprise, Trade and Employment. I understand Ms O'Dea is accompanied by Mr. Cathal O'Gorman, Mr. Martin Moloney, Mr. John Pyne and Mr. Neil Whoriskey. They are all very welcome.

Ms O'Dea is present to brief the committee on her remit in protecting consumers on such issues as the passing on of interest rate cuts and bank charges. I suggest we invite Ms O'Dea to make a presentation to the committee to be followed by a question and answer session.

Before doing so, I remind the visitors that, while the comments of members are protected by parliamentary privilege, theirs are not. Members are also reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise, or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable. I invite Ms O'Dea to make her presentation to the committee.

Before that begins, may I ask is it our intention in this session to involve the other institutions in order that cross-questioning can occur at a later stage?

The process is in the timetable we agreed. We will deal with the groups in sequential order. After the IFSRA, we will move on to AIB for the timescale allocated.

Is it not of benefit to have the next two contributors present in case issues arise from Ms O'Dea's presentation?

I understand they are in the public gallery.

Can the Chairman invite them to take their places?

No, because the vacant seats, I understand, are reserved for committee members or officials of the House. The delegations are present in the room.

I have been present at other committee meetings, such as those of the Committee of Public Accounts, where the succeeding delegations are also on display, so to speak. It would seem to me to be good practice that those coming immediately after the IFSRA should be available if clarification is necessary on anything said by the authority or if they wished to contradict or compliment it.

I want to proceed on the basis agreed. Those who have chosen to be present are in the public gallery. It should be borne in mind that some of the banks are not due to be present later in the day. It is their choice and they may or may not all be present at this stage. It is a matter for them.

We should stick to the agenda.

We will stick to the agenda and the proceedings are available on the House television system. I apologise for the late start but we wanted to clear some routine committee business before we entered into the substantive discussions with the witnesses. I invite Ms O'Dea to make her presentation to the committee.

I thank the committee for the opportunity to address it this afternoon, especially on the matters of bank charges and interest rate pass through. I will begin with a brief description of the regulator's role and my role as consumer-director within that.

The overall function of the financial regulator is to assist consumers in making informed decisions in a market which is both safe and fair. This involves monitoring the solvency of financial firms, strengthening consumer protection rules and considerably enhancing and developing consumer information. We are interested in transparency, competition and choice for the consumer. This has led to our two-pronged approach to consumer protection. On one hand we are establishing strong, enforceable rules for sales practices and how firms deal with customers, and on the other hand we are informing consumers of their choices and on their behaviour and how they can encourage competition to impact on the price they pay for financial services.

As consumer director my task is to protect consumer interests, to increase awareness of financial services and awareness of their costs, risks and benefits, to set out and enforce rules on how businesses deal with their clients and to monitor competition.

Our statutory powers regarding bank charges and interest rates pass-through are different in each area. I will deal first with bank charges. The role previously carried out by the Director of Consumer Affairs under section 149 of the Consumer Credit Act has, from 1 May, passed to the financial regulator. This legislation obliges credit institutions - banks, building societies, finance houses and bureaux de change - to notify all proposed non-interest changes. Having considered notification, the Act allows me to issue various directions to these credit institutions, including a directive to refrain from imposing or changing a particular charge. These notifications generally relate to account maintenance charges, transaction fees, loan arrangement fees and the like. The new legislation setting up the regulator has amended the Consumer Credit Act so that penalties and surcharges for mortgages and other arrears are also notifiable. The bulk of fees and commission income which emanates from matters like bank assurance, investment in stockbroking, etc., are not subject to section 149 of the Act and are not regulated. The Act sets out specific criteria for the assessment of notifications under the Act, which set out matters such as the commercial justification for charges, fair competition and impact on and cost to consumers. The policy the Financial Regulator has adopted on notification has been broadly to facilitate those who facilitate competition and innovation through the introduction of new products and services and to advance transparency in relation to charges. This policy has been previously adopted by the Office of the Director of Consumer Affairs.

The issue of bank charges arises frequently and it is ironic that this is probably because these charges are the most transparent. In a pre-launch survey of 1,000 people we found that 28% had switched their main bank account, with 12% of them doing so because of the charges. It is interesting that a much higher percentage, 44%, did so because of the service they were getting. Bank charges vary from consumer to consumer but the average customer pays €50 to €60 in non-interest bank charges every year. By contrast, a customer could lose that in one month if an institution does not pass on a 0.5% cut in rates to a mortgage holder; he or she could pay twice that much in a year on an overdraft of €1,000 at12%. The reality is that when it comes to interest charges people find it hard to compare charges as they do not have a real benchmark and, unlike bank charges, they believe that interest rates are set by someone other than the financial institution. Furthermore, it is not easy to access information on interest rate margins in a way which shows consumers who is providing good value. Even when this information is available it is difficult to interpret and consumers can be easily confused.

In our role as Financial Regulator we will provide information on interest rate products in a way which makes it easy to compare prices and which will encourage competition between institutions. We have already begun work on setting up comparative tables to help people shop around for the best value and we will continue to work on these in the coming months. Furthermore, we will ensure through our statutory codes institutions do not create any barriers which will make it difficult for customers to switch from one institution to another.

Our role in relation to interest rate matters derives from the obligation to monitor competition and to promote the interests of consumers. Following a series of reductions by the ECB, concerns have been expressed that institutions here have been slow to pass on rate reductions and to pass them on in full in some cases. We share those concerns and for that reason we commented publicly when the base rate was reduced by 0.5% on 5 June. We also encourage consumers to ask financial institutions about their policies on interest rate pass-through. We remain strongly of the view that where financial institutions stand to benefit from an interest rate cut by the ECB it is incumbent on them to pass that on to their customers. The extent of an institution's gain will be proportionate to the amount of funding which comes from the wholesale money market. Funding is also provided by retail depositors who may already be receiving low rates of interest on their savings. Nevertheless, a cut in ECB rates clearly provides a competitive opportunity for financial institutions and in a properly functioning competitive market one would expect that whatever benefit is gained by the financial institutions would be passed on to its customers without delay. As those customers include both depositors and borrowers, one might also expect institutions to make commercial decisions as to how the gains from the cuts are to be distributed among their customers. It is important to remember that interest rate cuts have negative effects for small depositors and savers and we also need to handle how this is handled by financial institutions. For example, some institutions choose to leave the deposit rate paid unchanged, therefore passing on that saving to depositors in some way.

One final point in this regard is that when a bank customer opens an account with a variable rate of interest, they expect these rates to rise and fall with some connection to the wholesale market rate. Similarly, those taking out a variable rate mortgage expect interest rates to rise and fall broadly in line with market rates. If for some reason in a very low interest rate environment this is not likely to be the case for any particular financial institution, then it is the responsibility of that institution to inform the customer when he or she takes up the product or at such a time when an interest rates cycle has arrived. In other words, if an institution is offering a variable rate mortgage, which in today's interest rate environment means variable in an upward direction only, then the financial institution should be letting its customers know.

There is a strong view among bank customers that interest rate cuts are not being passed on and that even when they are there is a delay in doing so. It is now incumbent on financial institutions to clearly demonstrate to the consumer what their policies are and how they are being implemented. From the financial regulator's point of view, we need to ensure we pay equal attention to depositors and borrowers and to focus our resources on the areas that are likely to be of most benefit to consumers. Furthermore, we are interested in lasting solutions to any problem that is identified, and to do this we need to have a very clear focus on the facts. I have included a table in the paper I circulated which shows the spread over the ECB rate for various types of business. In studying these trends in interest rate changes and the time taken to pass them on to Irish consumers, the table I have circulated shows the spread over the ECB base rate has been increasing in interest rate years. While mortgage rate spreads have increased somewhat, the rates on overdrafts, personal and business, and credit cards, appear to have increased substantially. Of course one would expect that in areas where the credit risk is higher then the rate would be higher but it is worrying that where official interest rates are falling, the interest rate spreads are widening. Furthermore, research on interest rate pass-through suggests that within a month, borrowers have received only one quarter of any interest rate decrease. We are now commencing a more detailed study into how credit institutions have handled interest rate changes from a number of different perspectives.

Broadly speaking, the study will seek to identify the impact of increases and decreases in interest rates on an institution's cost of funding and to examine how and when that impact was distributed across depositors and borrowers according to individual institutions. Since our role in relation to monitoring competition is complementary to that of the Competition Authority, we have commenced discussions with that body, which is already conducting a major investigation into the banking sector. We are extremely interested in seeing that report when it is complete and in acting on any recommendations arising from it which require our involvement. The Competition Authority is aware of our proposed study on interest rates pass-through and we are prepared to share our resources with the Competition Authority.

The new consumer mandate provides an excellent mandate for those credit institutions which are customer-driven. The new regime will effectively promote good value providers and encourage others to do likewise through our comparative tables and consumer information. An institution which listens to its customers, develops products which are of value to them and prices accordingly will prosper accordingly in the long run. It has nothing to fear from competition and the introduction of high standards of consumer protection.

I understand the committee also has an interest in our role in relation to PRSAs. The introduction of PRSAs is a notable development in the pensions market and will undoubtedly help many consumers in putting appropriate pension provisions in place. The financial regulator is responsible for the financial institutions and intermediaries through whom these products are sold. These firms are subject to specific rules relating to the treatment of their customers. On PRSAs, we want to ensure these products are sold responsibly and that consumers are given an opportunity to fully understand the costs, risks and benefits associated with the different types of PRSA product. We do not want consumers encouraged to purchase a non-standard PRSA when it is not required, simply to generate additional revenue for the financial institutions. We are putting a requirement on all firms selling these products to ensure their customers are given sufficient information on the implications of any decision they might make.

Our consumer information leaflet on PRSAs highlights the various costs and charges to consumers for these products and points out clearly the risks and benefits of the two product types. In addition, we have instructed all sellers of PRSAs to ensure that a declaration is signed by both the customer and the seller before a non-standard PRSA is sold.

At the outset, I set out the overall function of the financial regulator as one which helps consumers to make informed decisions in a safe and fair market. Our role is to support informed decision-making. This can be achieved by increasing the general awareness of consumers and thereby expecting the industry to set out its stall to its customers in a clear and unambiguous way. It can also be achieved by making it easier for consumers to choose to switch to another service provider if they wish. We will help facilitate this through our codes of conduct, information campaigns and highlighting publicly significant issues as they arise.

Our view of the interest rate pass-through is informed by that perspective. We need to understand the scale of the problem, whether it runs across all banks and all product lines or whether certain institutions or certain product lines have particular issues in this area. Wealso need to understand how the problemcan be dealt with in a way that recognisesthe conflicting needs of borrowers and depositors. Finally, we will work closely with other regulatory bodies, such as the Competition Authority, to provide consumers with full information that helps them to make informed decisions and to act in a way that promotes competition.

I thank Ms O'Dea for her presentation. As agreed, representatives of the political parties will now make a statement or ask questions. Members will have three minutes.

I welcome Ms O'Dea and her colleagues to the committee. Irrespective of the statement made by IFSRA today - I appreciate Ms O'Dea made the statement in her new role, which we welcome - it is generally the view of the public, those who do business with the banks and the financial institutions, that, rightly or wrongly, they are fleeced by interest rates at particular times. They clearly identify a number of areas where this is the case. In particular, they are of the opinion that overdraft and credit card interest rates are far too high. In discussions I have had with them, they fail to understand why overdraft interest rates are four times and credit card rates are six times the rate of mortgages. This aspect is never explained by either the banks or financial institutions. Perhaps Ms O'Dea will explain how banks and financial institutions can justify interest rates of 12% on overdrafts and 20% on credit cards. This is at the heart of public debate on financial transactions between the public, banks and the financial institutions.

There is an opinion out there that it was not Ms O'Dea's office or anyone in Government but the media who hounded the financial institutions following the recent ECB interest rate reductions. It was the media's persistent inquiries as to when the financial institutions would pass on the reduction which was responsible for some of the positive and not so positive responses. Can it be made obligatory that reductions of, say, 0.5% are passed on to customers? The public in general wonder why this cannot be done. In the past there was the excuse that the Central Bank had just a prudential role to play in its dealings and it had no interest in customers. Obviously, this is no longer the case because under the new structures there is supposed to be protection for the public.

What is the position in relation to credit unions? Has IFSRA control over credit unions and, if not, is this fair?

The Deputy spoke about the level of interest rates on credit cards and overdrafts. I am not here to justify these interest rates but one would expect that unsecured borrowing would have a higher rate of interest associated with it. This is the case internationally. When lenders give out money which is not secured against something they will charge a higher rate of interest. What will be of much more interest to consumers is that as interest rates fall the level of money on credit cards and overdrafts is widening. Much of the debate following the interest rate cut centred around mortgages. I believe the debate should have involved credit cards and overdrafts, which are the areas we intend to highlight. We can add value for consumers in this regard - within the averages I have given there are very large ranges - because we can tell people who is providing the lowest rates on particular products. People seem to think that they should remain with one financial institution for their credit card, mortgage and so on. In the league tables we are producing we will be saying to people that they should not do this; they should go to whatever institution will provide them with the best value product.

On the public statement, on the Friday of the interest rate cut my institution publicly called on all institutions to pass on the savings they made to their customers. We are strongly of the view that institutions should pass on these cuts.

The Deputy asked should there be an obligation on banks and institutions to pass on these interest rate cuts. This would mean going down the road of price controls. IFSRA will be very interested to see what the Competition Authority's study brings out for the banking market. It is worried enough about the market to say that it needs to get some hard facts and it needs to focus on where the real problems are, for example, on overdrafts and credit cards and business overdrafts in particular. I do not mean the big businesses who have lots of negotiating power but the ones who might not have such strong negotiating power with the banks. Those are the rates which it would like to focus on in particular.

IFSRA has only been in operation for ten weeks. Part of its mandate is to make public comment on these issues and that has begun and will continue. There is a very good example of competition working properly in the arrival of new players into the mortgage market and the deposit market. Competition plays a much more powerful role than any obligation to pass on benefits. Competition will match up the obligations of those providing the service with those who are receiving the service. The people who give the service will have very good commercial reasons for offering good value and good prices. IFSRA can add value by pointing out to people where good value is. The institutions will then have an incentive to say that they want to be the best on the league tables. They want to be able to say this in their marketing literature and to say exactly where they fit in relation to different products. IFSRA will be able to add much more value for consumers in that way.

The Deputy mentioned the role of the Central Bank from a prudential point of view and that is correct. There is now a new mandate which relates to consumer protection. IFSRA's action is taken with a focus on consumer protection issues, making sure that the consumer has good value and that consumers can switch products and institutions and not be locked in by penalties.

I accept the point as regards being unsecured. I do not think a level of four times an overdraft rate and six times a credit card rate is a necessary hike in interest rates on account of the unsecured. Most people in that situation have other transactions with the bank and particularly the business community which can find itself in a very difficult situation. I asked about the credit unions and the speaker did not respond.

The credit unions are regulated by the new authority and that body is presently recruiting a registrar for the credit unions. In the meantime, the chief executive is the acting registrar. They are covered by the remit of the authority.

I congratulate the director on her new appointment and wish her success. I look forward to the success of her office because there is much to be done.

On the issue of the banks failing to pass on savings, the tabular information provided to the committee is very interesting. It shows that between December and June, when the half point cut came, only 0.06% of that half point was passed on in the case of personal overdrafts and 0.05% in the case of business overdrafts. The banks did not pass on 95% of the reduction in the case of their personal and business overdraft customers. In the case of credit cards, not only did they not pass on the half point but they added another quarter point of their own.

IFSRA has many tools at its disposal other than the production of a league table which I welcome. It has powers such as requiring compulsory deposits to be lodged. It has highlighted this as an issue. What steps will IFSRA take? The league table will start to change the environment over the longer term and help people to shop around. This seems to be a direct rip-off of business and personal borrowers. I know that €95 billion is the amount of non-mortgage business. If 1% was added to all of it over the three years, that would mean €950 million extra being taken because the interest rate cuts are not being passed on.

With regard to the charges which have been sanctioned by IFSRA, I know that the telecom regulators are looking to telecom companies to cut their charges by a certain percentage every year in view of the impact of technology. It seems to me that technology has the same impact on the banking sector. Is IFSRA applying similar rules and looking for annual cuts in the charges? It sounds like it is just waiting for something to be notified and then sanction for an increase can be refused. Does IFSRA foresee a reduction in these charges with the spread of technology?

The CSO has reported that in the past 12 months, the cost of financial services within the consumer price index has increased by 23%. Is that entirely due to the extra stamp duty imposed by Government or has IFSRA sanctioned additional charges?

IFSRA has the information and it is very concerned. I have supplied the committee with average figures across different institutions. In order to tackle the problems, IFSRA needs to find out an institution-specific level, how the savings that a customer gets from the half a percent lending rate are spread across depositors, mortgage holders and how the institutions are dispersing the savings. We do not wish to be baffled by figures at the end of the day. The facts of the matter must be ascertained in each case. It is a simple matter of saying what the savings were and how much of a specific institution's funding is at or near money market rates. IFSRA does not have that information in a readily accessible form. It can be collated from different sources but we need to know the increases and decreases. In terms of the timing of passing on these changes and who gains or loses, we need to examine when interest rates went up and when interest rates went down, at an institution-specific level.

Figures show that the problems are everywhere. These are averages, they are going up massively and 95% of savings are not passed on. It does not require a lot of extra investigation to see what is happening. What tools will IFSRA use to change that? We are always one more study away from action.

For this study, IFSRA spoke to the Competition Authority about its role. It believes that in its reporting of competition, it is very important for it to know how institutions behave in terms of passing on interest rate cuts. It would be also helpful to its function. It would allow IFSRA to deal with institutions at an individual level. IFSRA can ask institutions to pass on cuts in a particular way but it cannot see exactly what are the savings from a half percent. The full half percent is not the saving that each institution makes unless they all cut depositors' rates further. It must be remembered that there are depositors in this equation. They are given a windfall gain in terms of their wholesale funding and that is different for different institutions. They do not all get the same windfall gain. IFSRA needs to be able to say with clarity which of them are passing on the interest rates cut and which are not. It needs to be able to say who is providing the cheapest and best value service and this will encourage competition within the market.

IFSRA has no penalties it can impose on those it believes are not playing ball?

IFSRA has no powers regarding the regulation of interest rates.

IFSRA has many powers, such as compulsory deposits, within its armoury.

The question of using compulsory deposit brings with it the question of the Maastricht Treaty. The terms of the treaty would not allow IFSRA to require compulsory deposits for those reasons. If one examines other markets where price competition works well, one finds it is much better to have institutions that compete with each other and do not use an artificial regulation. Institutions tend to move to the lowest standard if there is such a regulation, meaning that a high level of competition does not exist. Competition has worked well since other players entered the market. We need to highlight the issues and to allow competition to work really well.

Like other speakers, I welcome Ms O'Dea and the other members of the IFSRA delegation to this meeting. I wish to follow on from Deputy Richard Bruton's questions, in the context of the replies that Ms O'Dea gave to the Deputy and to Deputy Finneran. Can she tell me why I should not assume that a cartel is operating, in effect, among most Irish banks and financial institutions? Such organisations tend to price their products in the same way, by and large. Their products are delivered in the same way and their policies seem to be pretty close to each other. Although one or two institutions immediately passed on the recent interest rate cut, it seemed that when the others finally bowed to pressure, they all acted together.

Is it Ms O'Dea's view that that is a cartel operating, in effect, or does she believe that certain restrictive practices are to be found? She suggests that individual consumers should consider transferring their bank accounts, but it is not easy to do so if one has taken out a loan with the bank in question. One may have offered a mortgage, for example, as a guarantee. It may be extremely costly to switch such items. There are technical barriers to the kind of competitive structure Ms O'Dea is talking about in an ideal situation. I would like her to comment on what she thinks the technical barriers are.

The phenomenon of services being bundled by banks is part of this problem. It is quite understandable from a business point of view, but it means that if one is in for a penny, one is in for a pound. If one takes out a mortgage with a particular bank, one will often buy associated services such as house insurance from the same bank. It is becoming extremely difficult, from a competition point of view, for consumers such as businesses and individuals to follow the general advice Ms O'Dea is giving in these areas. She suggests that people should go elsewhere if prices are cheaper. I would like her to comment on this matter.

I would like to speak about small businesses, particularly start-up businesses. The indigenous Irish business sector is very important. I am continually depressed by the high extra risk premium charged by the banks to small and start-up businesses. The banks require personal guarantees from directors and others in most cases. I do not know whether Ms O'Dea's competition remit will help us to discover mechanisms that will provide greater transparency. More products should be offered to small and start-up businesses to provide them with a better deal from the banks.

I would like to refer to table 4 of the IFSRA presentation. Are comparative figures available for other EU countries? Such figures would give us a genuine sense of the value of our rates in terms of competition. I understand that mortgages in Finland can be 1.5% lower than mortgages here. There may be reasons why a country with a similar population - approximately five million - can seem to be cheaper than Ireland. Perhaps I do not have the correct version of events, but it is what I have heard.

I am conscious that the banks have benefited from this country's much more favourable corporate tax regime in recent years. I would like to recall a famous comment at the Moriarty tribunal that related to the former Taoiseach, Mr. Charles Haughey. A representative of one of the banks said that it forgave a significant amount of money - about £400,000 - that he owed to it because he was a key business influencer. Other people have been forgiven their debts from time to time for a similar reason, but it indicates to me that there is discrimination between one category of bank customer and another. The policy of the bank in relation to such customers seems to be based on something other than risk. I would have thought that it was a pretty tricky propositionin light of the level of debt in question. Mr.Haughey's debt was forgiven, whereas many small traders and small businesses have often received a tough time from banks. Is Ms O'Dea concerned, from a competition point of view, that banks discriminate between various types or classes of customer? This discrimination can extend to people in different postal areas. Those living in Dublin 1 or Dublin 7 may be treated differently to those living in Dublin 4 or Dublin 6.

The allegation that a cartel exists in the Irish banking industry is a very serious issue and one about which the IFSRA is concerned. Prices may change at the same time because competition is working very well or because of collusion in the market. The Competition Authority is undertaking a study of the banking sector to identify anti-competitive practices in it. The IFSRA is working with the authority in that regard and it will certainly play its part in the process. The Competition Authority's area of expertise involves identifying these specific matters.

The IFSRA's code of conduct will deal with the question of switching certain financial products, which is very much in its bailiwick. Banks in the United Kingdom have a code about switching, but there is no such code here.

Does Ms O'Dea believe that there are serious structural impediments to people easily switching accounts, in order to avail of lower prices, in the banking industry in Ireland?

Yes. I do not doubt that it could be easier for people to make switches in a number of areas, some of which the IFSRA can deal with. Certain issues, such as those relating to mortgages, also relate to the legal profession. We would like to discuss ways of making it easier to switch mortgages. The IFSRA would like, in its study, to examine the passing of interest rate changes to existing mortgage holders, who one already has, in a sense, as well as to new mortgage holders, who one is trying to get in. We would like to draw a distinction in that regard, to see if financial institutions are taking advantage of the fact that it may be more difficult for existing mortgage holders to switch. The IFSRA has a similar approach to bank charges. We do not favour any charge that will have the effect of bundling products when people apply for a new product.

Another issue that needs to be discussed is the perception, which has developed from the way in which banking has developed internationally, that if one has a mortgage with a certain financial institution, one must have one's current account, car loan, etc., with the same institution. It is not true at all. There is also a perception that if one takes out a car loan or personal loan for five years, one is stuck with the same rate for the five years. This is often not true at all. If one has taken out a variable rate loan, there is a high chance that there is no penalty for switching. If a cheaper rate is available elsewhere, one should take advantage of it by paying off one's personal loan and by using the new rate. Many of these problems result from these erroneous perceptions, which is why the IFSRA's information remit is so important. We need to tell people actively to shop around. We will prevent barriers to switching through our codes, which will be legally enforceable. Impediments to switching in the banking industry will be near the top of the IFSRA's agenda when it is drawing up codes.

Deputy Burton also mentioned the fact that there can be an extra risk premium for start-up businesses. This issue overlaps to an extent with the point she made in relation to discrimination between customers. Banks must price in credit risk, so if there is a higher risk to providing credit it is not fair to all the rest of the customers if they provide that at a cheaper cost than is the commercial reality. Having said that, there are some areas where one can see niche players saying: "We are going to be best in class in this or in another area", so there are opportunities for the banking industry within that.

The league tables can be very powerful because the reason many people do not switch or are left with higher costs is because it would be a big hassle to find out what anybody is charging and to wade one's way through the extras, including penalties. That is where we should make it much easier for people to make comparisons. We strongly believe that in the interests of transparency for all consumers, credit risk should be priced appropriately.

Comparisons with other EU countries were mentioned and there are a number of figures in the public domain in that regard. They are not directly comparable because, in some sense, one is comparing apples with oranges, so it is hard to draw conclusions. From September this year, the ECB will be publishing standard comparisons across these rates, so it will be much easier to compare in an informed way and to be able to say where we are in the league table. Work is well under way on that project and the ECB has been working with various countries to ensure the information it gets is standardised. We intend to make that information widely available.

As other members have done, I wish to state at the outset that I am a former employee of one of the banking institutions presenting here today. I have no accounting arrangements with any of the institutions attending today's session of the committee. Having originally proposed——

The Northern Bank?

Is the Deputy taking a 32-county approach?

I am sure the Deputies will get their turn. Indeed, before this evening's conclusion, I will be proposing that we should extend the opportunity to appear before the committee to the other banking institutions and building societies that are not present. As the person who proposed that we should meet with the institutions today, and indeed with IFSRA, I want to join in welcoming Ms O'Dea and her colleagues. I wish them well in their difficult task. I also want to commend you, a Chathaoirligh, and the committee secretariat for all the work that has been done in a short period to prepare for today's engagement.

I suggest that a full transcript of today's proceedings should be sent to the Competition Authority to assist its current banking study. I think the exchanges would be of value in that regard.

Some disappointment was expressed, not only at this committee but also in other fora, when the Government announced its proposal for the establishment of IFSRA. The concerns centred around IFSRA and its focus on consumer interests. There is a general view abroad that the Central Bank had clearly failed in that regard and the concerns extended to whether or not the IFSRA would have the necessary wherewithal to carry out the required function in relation to accountability and ensuring that the situation was balanced towards consumer interests.

I note that the interim board of IFSRA called for a strong statutory financial services ombudsman. I would look forward to the establishment of such an office but is this the current view of IFSRA? If so, is Ms O'Dea pressing for the establishment of this office?

We can hardly disguise the reality of public opinion on the gross exploitation, as many people would see it, by the banks and other financial institutions of individual consumers and, indeed, many within the business sector also. There is a view that AIB and the Bank of Ireland, who are both represented here today, operate a virtual duopoly. They, and the other main financial institutions, are clearly recording substantial profits in their dealings with customers through charges and a range of products they promote. Their dominance in the market is of great concern. Ms O'Dea referred earlier to allegations of a cartel or collusion in the market. There is a general view that AIB and the Bank of Ireland represent the tweedledum and tweedledee of the financial sector here - a bit like Fianna Fáil and Fine Gael in the political sector.

That is an inconvenience.

I assure Deputy Lenihan that it is a temporary inconvenience.

Or like Sinn Féin and the IRA.

Deputy O'Keeffe is from the rebel county, of course, and we would expect nothing else from him.

Is there not a significant body of evidence supporting the view that there is - to use Ms O'Dea's own term, rather than the cartel assertion - collusion in the market? This committee has received a submission from Cork County Council, although I do not know whether Ms O'Dea is aware of its details. Subsequent to the council's efforts to create a tendering process, the Bank of Ireland withdrew in the earliest stages, as did Permanent TSB, despite the fact that they had made the most favourable presentation. That left only AIB, not in a tendering sense but in a dictatorial sense, leaving Cork County Council as a significant customer and a prized account. Is there not significant evidence there? What does Ms O'Dea believe IFSRA will be able to do to address this serious alleged abuse within the financial services sector?

The Consumers Association has stated that the immediate acid test for IFSRA will be how swiftly it addresses, or redresses, the balance of power between retail banks and consumers. Does Ms O'Dea agree with that view as expressed by the Consumers Association? How does she believe that IFSRA's work so far has moved towards the achievement of that goal?

What powers does IFSRA have concerning some financial products, which are engineered to contain unbalanced and unfair terms for consumers? The Irish Nationwide Building Society's home loan mortgage product allows it to vary interest charges, as well as to attach surcharges in excess of 20% per annum in the event of late payments. Recognising the unfair nature of such banking practices, is IFSRA vetting individual products from each of the banking, building society and other financial institutions for imbalance and unfair terms? Does IFSRA do the same for the advertising and marketing of these products? Does IFSRA have power to request the removal of these products from the market place when they clearly fail to meet what would be regarded as fair and balanced criteria?

In her presentation here today Ms O'Dea referred to interest rates and the passing on of interest rate cuts. The subheading is titled, "Assessing the Problem". Not all borrowers are mortgage customers. Many people want to know why there are not similar decreases in regard to personal borrowing. When rates are cut and are being applied to mortgage interest rates, why is there not also a corresponding reduction in all of the other elements of borrowing from personal borrowing to small business borrowing, the mainstay of many banks? What efforts will be employed to ensure that these rates apply right across the board?

On the ombudsman issue, we made a submission when the second Bill was published in draft form, calling for a strong statutory ombudsman. We continue to be of the view that a strong statutory ombudsman is an important feature of the new legislation. The relationship between the financial regulator and the ombudsman is critical. We need to be able to work closely with the ombudsman, to have a one stop shop. For example, where the ombudsman might be able to sort out a complaint for an individual, it may raise issues of whether there is an industry-wide problem or if there is a problem with a specific institution, where we may need to carry out an on-site inspection, to take further action or to use our enforcement powers. The answer to the Deputy's question is, yes, we continue to be of that view. I understand that will be dealt with in the second piece of legislation giving the financial regulator further powers. On the question of dominance in the market and various competition issues within it, this is precisely why there is a study by the Competition Authority. It is a criminal offence to act in such a way. The Competition Authority will be looking carefully and scientifically at whether or not there is that behaviour. We will be passing on any evidence we have which may be helpful to that study to the Competition Authority. We have already been in contact with it in regard to these issues.

In regard to unfair terms and conditions, and without referring to any specific institutions, surcharges are now notifiable in terms of the Consumer Credit Act since 1 May. There is also a question of our examining terms and conditions generally to see if they are fair. If there are terms and conditions which are unfair, we want to know about them and we have powers to do something about them.

On personal borrowing, that is precisely where my concerns and the concerns of the regulator lie. The reason we are showing the table today is to say that, while there is some increase in the spread on the mortgage side, there seems to be a much greater increase, looking at the averages, on credit cards, personal and business borrowing. This is all the more surprising when official interest rates are falling yet the spreads are widening. We have a particular concern in that regard which is why we want to get underneath the problem and see if it is the case that some customers are subsidising others or is the money going to shareholders? How is the money being distributed? How is the windfall gain from a cut in ECB rates being distributed among the various parties? We need more information on all of this.

Does the IFSRA believe it has the wherewithal to make a difference, specifically in the area of credit cards, to take the most extreme example? Does Ms O'Dea believe the authority can make a difference when each of the individual practitioners are holding to high interest rates and eliminating the potential for competition?

Credit cards are a good example in which to note that when competitors come into the market, at the moment they arrive, rates become very competitive because consumers are focused on them. Customers see that it is not difficult to transfer balances and credit card companies are re-enforcing this with special offers. The figures support the fact that, at that time, the spread is narrow. However, people forget about it over time and the spread starts to widen again. To have active competition is the market. There is a fundamental role for the regulator to make statements in regard to these spreads, to state which companies are providing best value and help people to switch to them and then, through our codes, to take away any inhibitions to switching. There should be no question of a customer having to stay with an institution for a particular product for some sort of loyalty reasons. They should be able to switch quickly.

There is a representative of the Competition Authority in the Visitors' Gallery and I am sure that person will seek a copy of the transcript in due course.

We have heard from Ms O'Dea's presentation that the spread of rates over the ECB rate for credit cards has been increasing over the years. My point relates to the issue of credit card fraud. The view must be accepted by everyone that deals with credit cards that there is effectively little or no security. When one presents a credit card, one may or may not be asked to sign one's signature in any commercial establishment anywhere in the world. More often than not the signature is not checked, the cards go out of people's sight and they can be forged. What are the financial institutions doing to ensure that there are improved security measures on credit cards in the interests of customers? The money that is lost to fraud is passed on to other paying customers. It does not cost the banks a penny. It costs the customers. There is no financial incentive to eliminate this problem because the banks pass it on and customers swallow it as part of the increased costs of using a card.

The idea of smart cards with an identification number is far more secure than a signature because anyone can scribble anyone's signature on almost anything. Have the financial institutions taken any initiatives on that issue and does the IFSRA have any powers to enforce it? Does the IFSRA see itself issuing league tables for credit card interest rates and publishing them on a regular basis, more than once a year? That is how the public will see which companies are the most expensive on an ongoing basis.

On credit cards, we have recently come out publicly to remind people that with modern technology, people should be vigilant in regard to their credit cards, particularly when they are abroad, because they tend to be more relaxed in the use of their cards abroad. The real answer to this is the chip technology which would allow the PIN number to be used with the magnetic strip. I understand that the technology for developing that is well under way and will be available to card holders over the next two years.

We propose to have league tables for credit cards on an ongoing basis. We will develop them on our website, which is where they will be honed. However, only a limited number of people will be able to access the website. Therefore, we will have a campaign to regularly make that information available but it will also be available on our website. People will need to bear with us since it takes some time to develop the league tables. The UK regulator - the FSA - has done a good job of this and we hope to be able to borrow from what they have done in some cases and learn from mistakes they may have made along the way. We will begin with current accounts and motor insurance, which require urgent attention. We have a programme for developing league tables but it will take some time. We will not be all-singing, all-dancing within six months.

Ms O'Dea said that the authority made public comment asking the banks to pass on the recent interest rate reduction, and there was subsequent comment from bodies involved in the financial sector criticising the authority's right to do so. Does Ms O'Dea see the authority's role to make this public commentary on calls to the financial institutions to reduce their rates when a reduction is made at ECB level? I am curious to see how Ms O'Dea views the commentary that suggested she was acting beyond her remit in that regard, although I do not want to confer those comments with legitimacy.

It is curious that Ms O'Dea needs a study to see whether people who are not running personal overdrafts are subsidising those who are. It is fairly clear as things stand that the banks are not charging the full economic cost to the holder of an overdraft relative to a person who has an account without an overdraft. Is it her view that the banks should exact a full economic cost through its charges to customers who run overdrafts? In effect, in the current system those who do not have overdrafts are subsidising those who do. Does she think the consumer would be better off without that element of cross-subsidisation, which happens naturally in the banks' activities at present?

Ms O'Dea stated that only about a quarter of the recent interest rate decrease was passed on within a one-month period. Does she have an average figure for how long it takes for the banks or financial institutions to pass on the full effects of a rate reduction when they agree to pass it on? Is there a stalling of payment in that regard through which the consumer loses out? Does Ms O'Dea have any recommendations for the introduction of a tighter time frame within which the banks should be obliged to pass on the rate decreases once they make a positive decision to do so? Should this time frame be obligatory?

Ms O'Dea mentioned the spread of interest; in other words, the disparity between the interest rate charges and overdrafts against a background of decreasing interest rates generally. Does she have any anecdotal evidence from her own career as a banker about why this could be happening at present? Is this spread unique to the Irish market? Are these spreads, which are widening in the case of overdrafts, personal bills and credit cards, happening in other European countries?

In my constituency I have heard from business people and account holders generally about the issue of early repayment of loans. Quite arbitrary figures are produced by banks in relation to early repayment and there does not seem to be any incentive to somebody who chooses to repay a loan early. I have never experienced this personally, but I was amazed when I heard about it. Years ago one was encouraged to be thrifty and pay one's loans and credit card bills early, but it appears that if one does this now there are significant punishment fees. I understand there are reasons for that, which relate to the overall profile of the loan repayment over a certain period, but I thought there would have been some role for Ms O'Dea's office to ensure that the best value is given to the customer in terms of early repayment. There should not be punitive or arbitrary charges when someone volunteers to pay back a loan earlier than originally agreed.

Does the body have any role in the simplification of documentation? People complained about the complexity of documentation in the USA and the regulatory authorities there have gone some way towards reducing the number of documents with which customers are presented when they apply for loans. The number of documents, small print and jargon should be dealt with. Is there room for simplification? The USA was over-regulated in this regard; there were too many requirements for spelling out details and information. Does Ms O'Dea have any views on this?

I was very surprised by the statement of Financial Services Ireland because I thought that anyone who had read the legislation in detail would have seen our role in promoting consumers' interests - there was not a consumer in the country who was not interested in this topic - and monitoring competition. I strongly believe, as does the board, that we do have a role in this area and I was surprised that the industry thought we might not.

The size of an overdraft will vary from one type of overdraft to another. Some overdraft rates are negotiated and some are also monitored closely by the individuals concerned, but what we should really be considering is the fact that the spreads have actually been widening. Where interest rates are falling one would expect the spreads at least to stay the same, but in fact they are widening. This is what I find most disturbing. The Deputy asked how long it took in general to pass on changes in interest rates.

Is the issue of spreads unique to the Irish market? That is the key point.

I cannot say for certain whether it is unique to the Irish market, but it is certainly not good for consumers. I do not know the specific answer to the question.

Does Ms O'Dea have any anecdotal evidence from her contact with the ECB?

No, but we should have that from September, because that is when these rates will be published in a comparable form.

What about what is happening with deposit rates? Obviously, the banks will say that they cannot cut deposit rates. Perhaps Ms O'Dea will comment on that before we hear what the banks have to say.

We have tried to focus on the actual spread. We fundamentally believe that we must protect depositors as much as borrowers, but if there is an issue with deposit rates one would still expect the spreads to stay the same. This is why we expect to identify from the study exactly how much an institution gains - a windfall gain, effectively - from the cut in the ECB rate.

What about the aggregate figures for what is happening to deposit rates? The institutions can say they are not passing on the half percentage point cut in rates because they did not take anything off the deposit rates. Ms O'Dea must know that.

We do know that, and some institutions did precisely that, according to the figures.

Which institutions did not do that?

To be fair to the financial institutions we should try to obtain the full picture by finding out about volumes. Some institutions have a much higher percentage, for instance, if they are mortgage lenders to individual house owners as opposed to the property sector. Surely to make sense of all of this we need to see volumes of the different types of transactions. The very big general banks have a mix of credit card customers, industrial customers, business customers and, in more recent years, home owners, so it is not terribly meaningful unless we have a further breakdown to indicate how value for money can be given.

I will call Senator Ross, who has not had an opportunity to speak.

I still want a reply to my questions - I was the original questioner here.

In a moment I will have to bring this section of the meeting to a conclusion.

I know, but the Chairman allowed other people to ask questions before Ms O'Dea had a chance to answer mine.

I will only allow a moment or two or we will be here for the night. I want to move business along in the interests of the members. I will allow a few quick comments or questions and I ask Ms O'Dea to take note of a few questions and give one comprehensive reply at the end.

I welcome the delegation and congratulate them on their forthright approach so far, although I know it is still early days. I read the transcript but I am concerned about the powers of the regulatory authority. I note that its roll is to monitor, help, encourage and inform, and that is fine. What can it do, however, if the financial institutions, the banks in particular, ignore or flout its directives and rules? Mr. O'Gorman would be familiar with the situation where it was discovered that at least one bank was in blatant breach of rules at Dublin Airport. I was astonished to find that although the bank admitted to a breach of the IFSRA's predecessor's rules, there was nothing that he could do about it in terms of prosecution. The bank paid €20,000 to a charity in the end but could not be punished in any way. If we cannot force them to do anything under these rules, there is not much point because they will continue to flout them until they are caught.

I note the emphasis on mortgages, which is almost inevitable because they are so high profile, but there are other financial instruments and charges which are highly sensitive and which we have not mentioned, such as tracker bonds. Day in and day out, we hear in the media advertisements for tracker bonds and millions of euro are flowing into these instruments on a weekly basis. These are explained in a way which is absolutely impossible for the punter to understand. I have gone into them in detail and eventually understood them after a great deal of work but they are a web of deception. They hide the downside and give the upside. There is no way an ordinary punter who is putting in small amounts can possibly understand the implications of these bonds. The authority could carry out its role by warning that these bonds are very dangerous and it could enforce much stricter regulations.

Foreign exchange charges are an area of massive exploitation by all the banks and the evidence of a cartel in these charges is as clear as anywhere else. There is a similarity in what they charge and huge profits result from those charges. The case I mentioned was not discovered by the financial regulator but by a member of the public. It is not just tourists who are being fleeced in foreign exchange charges but ordinary Irish people who also do not understand what they should be charged.

Could we hear something about depositors, the real victims of what is going on?

I welcome the Irish Financial Services Regulatory Authority to the committee. I am disappointed, however, with the delay in including the credit unions in its remit. We read in the papers now of court cases involving credit unions with huge deposits. Some have gone into invested equity to get rid of surplus funding and that is dangerous because the credit unions are mutually based.

It is fine for politicians to stand up and demand X, Y or Z when the ECB cuts interests rates but what criteria will the regulatory authority put in place to monitor bank interest rate reductions after a cut? No two banks have the same rates and before interest is reduced by American and European agencies, rates tend to fall and some banks push it down to gain more customers.

Where else would I get the value for money I get for the €50 I pay for my personal account? I pay water rates and refuse charges and I wish they were that cheap. The banks are privately owned and, in fairness to them, they provide a good service for €50. Young couples go to banks for loans and the point was made that things must be more flexible in future. We will finish up in the same mess as we have with car insurance if trust does not exist between them and the bank. Young people who need loans and mortgages will be suspected by the banking institutions of taking advantage of mobility. There must be some trust.

Banking is a delicate business and we recall that many banks went bust in Japan. If banks do not have a margin they will not have a proper equity base. We are in a delicate area. Banks are quoted in the public market and many of our pension funds are dependent on the return from banks and their margins. We must have a level playing field or we will wreck the system.

I do not want to be seen as too pro-bank but it is easy to bash them. In fairness to them, the service is good. Credit cards were mentioned. If I buy on 1 July, I have credit available to me for 45 days so I pay on 15 August. Why is the authority advising people not to avail of long-term credit? The banks have bought the money and are making a margin on it. The regulatory authority has a role to play in giving advice to the consumers that if they pay their debts they will not face those exorbitant rates. The role of a regulator is regulation and he must be fair to all sides.

Picking up on what Deputies Ned O'Keeffe and Burton said, there is a huge level of customer loyalty to particular banks which can withstand 0.5% differences in interest rates. It would be useful if the regulator could get solid, statistical information to everyone's benefit about established customers. I suspect that floating customers make up a very small percentage of the market but it would be valuable to the public debate to know what it is. The proportion of people with a propensity to switch if conditions are more competitive could be found out by undertaking consumer surveys.

Is there information available about the cost of retail credit available through large department stores and shops which are often tied in with customer loyalty cards? I deal every year with people who have got into horrendous debt of up to €10,000 through being offered large credit limits by some of the big department stores within a stones throw of this building. I, like many other politicians, end up referring those people to various money advise services. My perception is that the interest rates on those are very high and people are not sufficiently warned.

I do not even know what the relationship is with the people in the Visitors' Gallery today because some of them represent overseas credit institutions. For many working class people who cannot otherwise access credit, they can be a very mixed blessing. I wonder if Ms O'Dea has any information on those because it is important that customers have the information available when they are shopping as to what the hidden charges will be.

My second question relates to other recent products offered by the banks. One promoted by the Bank of Ireland is the life loan for older people and the other is from the Irish Permanent on shared home investment plans, under which an older couple may get credit advances from a bank in return for a share of equity in their home. In those products I can find no evidence of what the interest and transaction costs are. I presume they are commercial and may be very high. Again, because older people are involved, would Ms. O'Dea, as the consumer director, have that information? When these products are widely advertised on radio and TV, can people make inquiries of her about the costs so that they can make a rational decision?

I ask Ms. O'Dea to respond as best she can, and I am not facilitating any further supplementary questions at this stage because we must move on.

Briefly, on our powers, we will have further powers in new legislation which is due to be published, I understand, towards the end of 2003. That will hopefully give us fining powers and powers to name and shame in terms of our codes of conduct. There is, however, a much greater job to be done on all of the legislation because part of what brought IFSRA into being was sticking together lot of other bits of legislation, and a bigger job has started of reviewing all of that to ensure that our powers are comprehensive and that there is a level playing field.

There are some specific rules for tracker bonds in some segments of the market but they are not uniform. Part of our job is to ensure that codes of transparency - what has to be disclosed and what claims one can make on these products - are fair and apply across all markets regardless of who is producing the product. On other areas we will have an inspection programme which will cover matters like foreign exchange issues and so on.

On the issue of customers - and young couples in particular - taking out loans, we are working very much on this with our Prudential colleagues. They have just finished field work on loans being advanced and we want to ensure from the consumer's point of view that the loans are being given to people who will be able to re-pay over the long-term and that a proper calculation of that ability to pay is carried out. There is very much a delicate balance in terms of banks and making sure that they are, after all, commercial operations.

Our remit is to look at the solvency of the institution, which is the fundamental part of consumer protection. If the institution is not there next week it does not really matter as the customers' money is gone one way or the other. Fundamentally, we need to look at the solvency of the institutions and also at what value they are providing to consumers.

Our role is in giving information to consumers. We are not in a position to give people advise on their specific circumstances but we can equip them with all the information they need to help them make their own decisions. We will be using surveys as part of our programme and will be regularly listening to consumers. We already have our helpline set up and about 1,300 to 1,400 calls have been received so far. It will be part of our brief to ensure that the rules that we have on switching actually apply.

On credit unions, the chief executive officer is personally acting as registrar at present and is very actively involved in the various issues with the credit unions, and there are a number of big ones. It is a challenging time for credit unions and the chief executive officer is working very closely with them.

On retail codes, part of that must arise through our role on transparency. Again, there are segments of the market where the codes requiring transparency do not apply, and we have developed what we call interim codes. We have very quickly put those codes of transparency into place so people know exactly how much credit is costing them. We will then move on to do a full review of all the codes to ensure that there is a level playing pitch and that there is a minimum level of protection for everybody to comply with on consumer protection issues.

Chairman——

No, I am not allowing any further supplementary questions. The Deputy may have the opportunity to raise issues with the relevant financial institutions during the course of the afternoon and the evening. On behalf of the committee——

On a point of order——

——I thank Ms. O'Dea, Mr.O'Gorman, Mr. Moloney and Mr. Pyne for attending today's meeting and for a very informative presentation and question and answer session. It is clear that there are further questions to be asked, and I expect at some future date that we will be inviting the delegates back because it is a matter of interest to this committee. I am now suspending the sitting briefly to allow our guests to withdraw and representatives of AIB to take their seats.

On a point of order——

I have suspended the sitting.

Questions were asked which were specific to this particular witness, of whom I would require answers. I presume the questions will be answered by letter to the committee. Other members who had three minute slots were invited to ask further questions so I feel somewhat disadvantaged.

That has been noted and will be done.

What about time? Are we getting time tomorrow morning?

No, I am trying to move things on.

We are behind time now.

We completed our supplementary business at the beginning so that we have none to do at the end.

Sitting suspended at 4.06 p.m.and resumed at 4.10 p.m.

I welcome Mr. John Hickey, general manager of retail banking; Mr. David Kelly, general manager of finance and operations and Ms Catherine Moroney, head of personal and business strategy from AIB.

I am obliged to remind the delegation that while the comments of members are protected by parliamentary privilege, those of visitors are not so.

Mr. John Hickey

AIB's principal business in Ireland is retail and commercial banking. Ireland is a highly competitive market with a wide range of banks and financial service providers, including two large non-bank organisations, An Post and the credit union movement.

AIB employs almost 13,000 staff in Ireland and handles more than 30% of all national banking transactions including domestic and foreign payments. We provide a fully comprehensive range of products and services to all segments and sectors. Over the past four years AIB has created 3,000 additional permanent jobs in Ireland as part of our ongoing commitment to expanding our business and continuously improving and updating the services we provide. None of those 3,000 jobs were grant-aided and are therefore a significant contribution to the State economy.

Our business strategy is founded on our commitment to increase the amount of business we do with our customers by anticipating and identifying their needs. We seek to meet those needs by efficiently providing the best value products and services available and giving our customers a wide range of choices in the way they do their banking business. We believe this strategy will meet and exceed the expectations of our key stakeholders - that is customers, staff and investors. Our charging policy reflects and is aligned with our business strategy.

We offer our customers choice and convenience through a range of delivery channels: 284 branches, 1000 post offices, ATMs, telephone and Internet banking. We offer a range of accounts from full service current accounts to electronic transaction based accounts. We offer a number of payment systems such as cheques, cards, Internet and telephone payments. We provide immediate value for cash and cheques drawn on AIB. We were the first Irish bank to do so and are one of the few banks in Europe to provide this same day value service.

Pricing for transaction and payments services is regulated, Ireland being the only country in Europe to have such regulation. This price regulation inevitably causes inefficiencies and brings about cross subsidisation which would not occur in an unregulated environment. At AIB we encourage customers to use more efficient payment methods and this is supported by a significant discount in the price of electronic self service transactions relative to those done over the counter or by paper. This is in line with the Government's national payments strategy. However, the recent increase in a range of stamp duties has undermined the progress made in this area.

We provide detailed breakdowns of fees and charges to our customers. We were the first to introduce pre-notification of fees and charges in 1994. We also regularly inform our customers of the range of options available to them so that they can choose which are most suitable and cost effective. Customers over 60 years of age and students are eligible for free banking. AIB has also given a commitment to its customers that it will not consider any increase in fees and charges until at least 2005. This amounts to a 13 year price freeze unique among public and private sector organisations. In the same period we have introduced no new charges for existing services. We have also dropped some charges and reduced others. In a typical basket of products for either personal or business customers AIB compares favourably with both domestic and international peers.

It is extremely important that we provide our customers with the most efficient and reliable service possible to ensure that they receive good value for the charges they pay, which currently average €1 per week for those personal customers who pay charges. To maximise effectiveness and efficiency we continuously look to improve our support functions and infrastructure. Over the past five years AIB has invested almost €500 million in enhancing and upgrading the way in which we deliver our services. In summary, our charging policy reflects our responsibility to deliver transparent, reliable, accessible services that offer our customers choice, convenience and value for money.

AIB's interest rate policy centres on providing our customers with the best value to meet their needs across our deposit and lending product range. The interest rates we pay and charge our customers are communicated transparently within the guidelines clearly laid down by the relevant regulators. In banking terms, the gross profit from deposit taking and lending activities is known as net interest. This is before incurring any overhead or risk costs as a result of loan loss and default. Competition, change in product mix and the low interest rate environment have all contributed to reducing our profit margins. Our net interest margin in Ireland has fallen by 22% to 2.73% in the five years to 2002 and is expected to fall again this year.

Our regulators and investors are increasingly focusing on our ability to generate sustainable rather than short-term profits. To establish sustainable profit, evaluation of individual product margin must seek to incorporate risk and cost of delivery. For example, personal loans and overdrafts which are generally unsecured and more costly to deliver, incur higher interest rates than secured business lending. Home mortgages, due to the current low bad debt experience, typically attract a lower interest rate. Our variable mortgage rate of 3.3% is the most competitive in this country and has been so for the past three years. All mortgage customers with a variable rate mortgage have consistently benefited with no discriminatory bias to customers at different stages of house ownership. In effect, we do not discount to attract new customers while penalising existing loyal customers. When we alter interest rates as a consequence of ECB changes we seek to balance the impact on depositors as well as on borrowers. We aim to maintain and increase our profits by doing more business with both our depositors and borrowers rather than by benefiting from interest rate movements.

In conclusion, in formulating our charges and interest rate policy we are acutely aware that the only arbiter of value is the customer. The customer has many options and our strategy is to provide service and value that makes AIB their preferred choice.

I thank Mr. Hickey for the presentation. As agreed earlier, we will call committee members in rotation. In the interests of ensuring that we conclude our business on time, committee members will adhere to questions rather than making extended speeches. We will get more from the meeting if we follow this procedure.

I welcome the delegation. It is in the best interests of this country that we have a strong and healthy banking and financial sector. It is good to see that the banks are competitive and profitable. However, after the 5 June base rate reduction, AIB did not pass on this full 0.5% rate reduction. It got much media attention and the public were not satisfied with the answers given by AIB for not passing it on. Can Mr. Hickey explain how competitive AIB are in the mortgage market? There has been public comment and rumours have been circulating to the effect that AIB and others in the banking sector are fearful of competition in the market. For example, when Bank of Scotland entered the market recently, AIB used its veto to prevent it gaining access to the clearing systems. This resulted in Bank of Scotland not having the same competitive advantages as AIB and others.

Mr. Hickey

My first comment concerns passing on rate changes. I was interested to hear Ms O'Dea make the point about balancing the interests of all customers - depositors as well as mortgage customers. That is what we seek to do. We also seek to neutralise, as far as we can, the impact of interest rate changes, whether they go up or down. As interest rates reach their present level, the lowest for 60 or 70 years, it gets more difficult to do that.

From the last interest rate change, we will have lost money. It is important to register that point. In passing on what we felt an appropriate set of changes to our depositors and current accounts, we were conscious that we were already offering the lowest variable-rate mortgage in the Irish market. As I said, we had been doing that consistently for three years. We passed on a further 0.8% when the interest rate changed by 0.5%. That still left us the cheapest. We provided the lowest variable-rate mortgage in the Irish market. If we expressed that in customer terms, a typical first-time buyer who has had an AIB mortgage for the past three years would be of the order of €350 to €400 better off with an AIB mortgage than with the market average. We had to take those matters into account when we were looking at trying to meet the needs of all our customers. Depositors have to be protected as far as we can if we are to retain our competitiveness. In some instances, something not highlighted as much, we passed on more than the full 0.5%. With business loans, which are very important in assisting the economy to benefit from interest rate changes, we passed on 0.8%. With personal loans, we passed on 0.6%. In any rate change, we must examine the totality of the changes made.

Perhaps I am paraphrasing the Deputy's words incorrectly, but I think he made a point about prohibition. There is no barrier or impediment by the banking system to the Bank of Scotland or any other financial institution joining the clearing system. The Irish clearing system is open to any financial institution which is licensed by the Central Bank to operate as a clearer. Interestingly, the Bank of Scotland in Britain is very familiar with the rules of the clearing system. Its parent is a key member in it, and it is virtually the same as the clearing system here. There is no barrier, and if the Bank of Scotland wished to apply to be part of the clearing system, it would be extremely welcome.

AIB would not block that?

Mr. Hickey

Certainly not; we would welcome them. There are certain things that any institution needs to do to protect the quality of the clearing system. The Irish and UK clearing systems are the finest in Europe in their reliability and speed clearing a cheque from Letterkenny to Dungarvan to Dublin. The Irish and British clearing systems set the standard, and it would not be unreasonable - no one would wish it otherwise - for anyone joining the clearing system to invest in the front-end and central technology to maintain the standard there at the moment. That is in everyone's interest. There is no veto or barrier, and we would not exercise any.

I welcome AIB to the meeting. I would like to raise the issue of passing on rate changes. The evidence offered is in direct contradiction of what we have just heard from the consumer director, who provided us with a tabular statement showing that there was no passing on of the cut to business or personal overdrafts. The witness is saying that AIB passed on more than the cut to business customers. The evidence that we have here is to the contrary. It seems to me that the figures of the Central Bank, which produces monthly quotations for average business rates, including lending rates of up to one year and over three to five years, confirm those with which the consumer director has provided us. Is Mr. Hickey telling us that, despite being a major player, AIB is the only bank which is taking an entirely different direction to the rest of the market? In that case, Bank of Ireland and the others must be the real sinners, judging by the evidence put before us by the consumer director. Is Mr.Hickey picking particular rates that suit his case and the consumer director others that suit her? What is going on here? We are getting conflicting evidence, and we need to see the two compared side by side.

I would like to take up the issue of the net interest margin. We have seen evidence from the National Competitiveness Council, for example, that shows that Ireland is one of the top in that regard. It shows us far ahead - 35% higher than the EU average and far ahead of some countries. The spread is more than twice that of the Netherlands. In his presentation Mr. Hickey quoted the net interest margin of 2.73%. Davy has produced an EU average of 2.2%, meaning that Mr. Hickey is taking a full 0.5% more than the average EU bank to do AIB business. That says to me that AIB is taking a much bigger mark-up out of the business than our European competitors based on a comparison of AIB figures with those in a recent report by Davy.

Davy also concluded - and perhaps Mr. Hickey might comment on this - that AIB had a return on equity for each year 10% in excess of what would be standard. It seemed to be confirming a picture that excess profits are being made in the Irish banking sector. That bears out what the National Competitiveness Council seems to be presenting to us. It seems that AIB's performance in such areas as stock market value has far exceeded that in other European banking markets. The combination of all of these sources of evidence saying that mark-ups are excessive in the banking sector makes me very worried that there is a problem with its competitiveness in Ireland.

I return to Deputy Nolan's point. The Bank of Scotland is saying that Ireland is extremely difficult to set up in, and Mr. Hickey is saying the opposite. I would like to clarify the charge that Mr. Hickey has set up for it to pay. Who vets the fairness of that entry charge? Can AIB and its colleagues in the system set an entry charge that is too high and unfair, trying to recover costs that they may have sunk into this system years ago? Is there an independent agency that will say to us what a fair entry charge is and offer that to the Bank of Scotland or any other player? Why should a group of bankers in a club set that charge? That system does not seem equitable.

Mr. Hickey

I will take some of your questions before passing to my colleague, Mr. Kelly. On the passing on of rate changes, the figures that I quoted of 0.8% and 0.6% on business and personal loans respectively are a matter of record.

Diametrically different figures were presented, and Mr. Hickey was here when that happened.

Mr. Hickey

I was pleased to hear Ms O'Dea talk about looking at individual institutions, and that is welcome. Seventy-five per cent of all business lending is related to market rather than to the headline figures, which must be taken because they are the only public ones available. Seventy-five per cent of loans are negotiated against market rates. Most interest rates are negotiated anyway. Customers will have the strength of their proposition, and we will work between us at that to arrive at a fair rate. In the mix, for example, we offer a business credit loan at 4.6%. We offer a premium business loan at 6.2%.

That is discounting the standard rate. Is Mr. Hickey saying that the consumer director is looking at AIB's quoted price, but AIB is discounting to its customers?

Mr. Hickey

The publicly available figure certainly does not represent the total of what is charged to customers. Our average charge to business customers, currently, is 4.5%. If I could perhaps expand on that point, a report from EUROSTAT was released yesterday in the press which drew some comparisons - and perhaps highlights part of the difficulty. The author, Mr. Marini says: "Currently available statistics cannot be used to compare the level of interest rates in different countries." In comparing one country to another, the range of services and products available is inevitably ignored.

Is Mr. Hickey saying the bank has passed on 0.5% and more to personal and business customers? The consumer director in IFSRA, the Irish Financial Services Regulatory Authority, Ms O'Dea, is saying that less than 1/20th of the cut was passed on to personal and business customers. These are two diametrically different statements. The committee will need to see the AIB case set out in a detailed table and IFSRA's case set out in detail so that we can find out what the truth is. I cannot get my head around what is happening.

Mr. Hickey

I find it difficult to comment on any other institution.

Mr. Hickey

I am familiar with our figures and what changes we make and why we make them.

It would be very useful if Mr. Hickey could comment on other institutions. That would be the whole point.

Mr. Hickey

I would not have the knowledge of their business to comment. I can comment on AIB, and we reduced personal and business loans by 0.6% and 0.8%, respectively.

You know, Chairman, if I could just finish, one of the notable things about this debate is the reluctance of these institutions to comment on each other. There is always a silence - some sort of conspiracy of silence over being critical of each others' rates. It would be very helpful if Mr. Hickey could do exactly that, and tell us what he thinks of the Bank of Ireland's charging and the other charges as well - and if they could do the same about AIB.

Mr. Hickey

It would not be helpful, because I would not have the intimacy of knowledge to be able to comment on another institution. The point, I think that Deputy Bruton was making emphasises that. There is such a range of services which are all caught up in the whole side of our lending and the whole side of our deposit-taking. Ms O'Dea was talking about the spread. The spread is the difference to what we pay for deposits on average and what we charge for lendings, on average. That is currently 2.3%. Our margins have come down by 22% over the past five years. Again, that is a matter of public record. Our charges have been frozen since 1992. That is a matter of public record.

It is also a matter of public record, provided to us by the National Competitiveness Council and indeed by the Davy report, that AIB's net interest margin is dramatically higher than in the rest of Europe. That seems to be a matter of public record and perhaps Mr. Hickey could comment on why that is the case.

Mr. Hickey

That probably ties in with the Deputy's query about the return on assets and Mr. David Kelly will deal with that.

To make a valid comparison one really has to look at the nature of the institutions under review. Retail and commercial banks, like ourselves, the Bank of Ireland and the four big clearing banks in the UK, actually require and do generate a higher net interest margin than others banks in a different type of business. Also, banking practices vary from country to country. There are different definitions in the way net interest margins are calculated. As my colleague, Mr. Hickey, has just said, in relation to the EUROSTAT report we saw, it is actually admitted there that the definitions used to calculate some of the figures in the report cannot really be compared from country to country. We calculate our net interest margin in the same way as the Bank of Ireland and the UK clearing banks. The method will differ from countryto country across Europe. It is not the samefigure.

Davy, presumably, is aware of the complexity of these comparisons, and yet it has offered us information. The National Competitiveness Council is aware of the complexity, but yet it has advised the Irish Government that we are paying higher margins. How come AIB has not taken this up with the National Competitiveness Council and said: "You are not giving a fair comparison"? This information has been in the public domain for many years and I have not heard the banking sector say: "Hang on a minute, National Competitiveness Council, you are not giving us a fair crack of the whip, here".

As I have just explained, net interest margins vary between different types of organisation. It is hard to take just one, like a 2.2%, which is an average - with averages you get ones that are much lower and ones that are much higher - and compare it with ours, which is a good net interest margin. It needs to be a good net interest margin to sustain the kind of business we actually do. Retail and commercial banks typically have higher net interest margins. Ours, at 2.73% for 2002, is not exceptional in any shape or form.

Maybe I could continue on the same theme. In the context of this discussion, I suppose I should start by congratulating AIB and its shareholders. I read that you had a profit of €1.3 billion last year and my general understanding was that was one of the biggest bank profits in Europe. By any normal comparators, the bank is clearly doing very well. I believe what Deputy R. Bruton and others are saying is that because of the bewildering range of bank products and differentiation between types of customers - and whether customers are new to the bank as in 'younger people', or new as in 'changing accounts' - the products on offer can vary enormously. What we, and bank customers, argue is that the lack of transparency in relation to the overall impact of bank charges as well as those associated with the services banks provide - because of the 'bundling up' of various financial products involving a number of institutions - makes it difficult to determine how competitive a service is.

I accept AIB's assertion that it is offering an excellent service in relation to certain products at a highly competitive rate. I have no doubt, however, that its costs are relatively high in relation to other services. The delegation spoke - rightly - about the bank's contribution to the Irish economy in terms of jobs, but in the context of AIB profits of €1.3 billion last year, bear in mind that the State lowered the bank's corporate tax take very significantly, as part of the general move to lower corporate tax rates. Also, the Minister for Finance confirmed, in a reply to me a couple of months ago, that the banks' benefited - I presume AIB and Bank of Ireland are the biggest beneficiaries - to the tune of €316 million last year from capital allowances transferred from businesses through leasing arrangements to the banks. There is a quid pro quo here in terms of the lower tax rates that the State is offering, and certain types of tax arrangements and incentives that are available to the banks.

To come back to the net point, it is difficult to have a clear picture. When can we go into an AIB bank and see in large letters on the wall the comparative costs over the lifetime of a product or a loan, so that customers can make an intelligent decision about the overall cost? That is the net point of what we are asking today. We know that in some ways the changes in net margins have to do with the overall shifts in interest rates as well. Nonetheless, most financial commentators, stock brokers and so on, would say that AIB has done exceptionally well. When can we expect to see transparency from Allied Irish Banks on a range of bank charges for typical customers? That would be credit card customers, small and medium sized business and, particularly, home loan borrowers, because the market has become so competitive and home loans carry a high level of guarantee in terms of a mortgage so the risk factor is exceptionally small. On a range of other business, from car loans to small and medium sized enterprises, credit cards and so on, when can we expect to see average figures on what typical groups of customers pay for services? It is the view, not just in relation to AIB - and the Director of Consumer Affairs has to some extent reiterated that view - that Irish bank charges are relatively high in terms of the overall cost to a business or to an individual customer who uses a credit card or who takes out a business, personal or car loan.

Mr. Hickey

I will endeavour to deal with those points. Regarding overall profit, more than half of our profit is made outside of Ireland. Interestingly, the lowest spending margins we achieve are in Ireland. That says something about the relative competitiveness of the Irish market compared to the other international markets in which we operate. Our profits are achieved against the price freeze of 13 years and against margins down by 22%. That is a general comment about our profitability.

On transparency, we do everything in our power to make clear to customers what services cost, and there is a very wide range of services available. The Consumer Credit Act goes a long way towards setting out a comparator between one product or loan and another, bringing it down, for example, to monthly payments over a given term, which brings a greater level of transparency.

It gets more difficult with other products, for example, credit cards, which Ms O'Dea commented upon. We segment our credit card base. We offer lower rates to customers with a better risk record. We offer credit cards at rates as low as 12.9%. We offer credit cards at 14.25%. We endeavour to make that segmentation based on the record of the customer, principally their risk record with us. Overall, the margin we are earning on credit cards has come down faster than the reduction in ECB rates. It has come down by 1.25% over the past five years.

It is still a profitable area of banking here.

Mr. Hickey

It is a profitable area, and it needs to be. Otherwise the service could not be maintained. It is an area that gives great flexibility to customers to operate at home and abroad. As a consequence of that flexibility we have a higher bad debt, more than ten times the average of all bad debts in our lending.

Would Mr. Hickey say that is partly because of the type of advertising and the way in which all the banks encourage credit card debt? That has to be rather worrying in many ways. Obviously, from a business point of view the banks must be worried by the high level of bad debt, but it is also worrying from the point of view of social responsibility. I spoke earlier about the cases that come to me as a Dáil Deputy of people getting in way over their heads because of the advertising of cheap easily available credit, and the responsiveness of banks to such individuals and families varies from bank to bank. Have you a sense of social responsibility in relation to that?

Mr. Hickey

Very much so, and our advertising reflects that. We certainly do not push credit aggressively. We do not encourage customers to borrow on credit cards. Credit cards should not be used for medium or long-term borrowing, and the vast majority of customers do not use them in that way. The vast majority of customers clear off their account each month and benefit from the interest-free period and the lack of any transaction costs. In other words, they pay nothing for the service.

In regard to responsible credit, we are with our customers for the long haul. We have been in this market a long time and will be for a long time to come. It is not in our interests to have customers getting in over their heads in borrowing and defaulting and getting into trouble as a consequence. We place a very high premium on responsibility with lending. Nevertheless, fraud and bad debt are a feature of the flexibility that a credit cards gives the customer base. This year alone we will have costs of close to €18 million in bad debt and fraud in the use of credit cards. That is related to the fact that they give customers flexibility and freedom.

How much of the €18 million would be fraud and how much would be bad debt?

Mr. Hickey

With your permission, I would prefer not break that down because, from a security point of view, that could have undesired impacts.

I gather from what you said earlier that a significant portion of your decisions, perhaps the majority of decisions in relation to interest rate cuts, for example, are based on market conditions rather than specifically on a cut in the ECB rate? That being the case, is it possible that the public, and particularly mortgage holders who are only a fraction of the total market, are placing too much emphasis on the ECB rate which is one small aspect of the overall banking interest situation and perhaps missing the bigger picture, given that decisions are based on a variety of other factors?

Mr. Hickey

That is certainly part of the answer. ECB changes do bring a different dynamic into the market. The point I was trying to emphasise is that we need to look after the interests of all our customers at a time of change, not just our mortgage or borrowing customers. We try to balance that. I emphasise again that our objective in balancing or seeking to balance is that the impact overall will be neutral. In a low interest rate environment that generally is not possible. The competitiveness of the market clearly also has an impact. Mortgages have been touched on a few times at this meeting. We determined some years back that we would be the price leaders in this market, that we would provide the best value variable rate mortgages in this market and we are determined to keep on doing so, so we have to react to market conditions, like any other business.

I welcome the AIB delegation. I have a number of questions. I want to take up the issue of social responsibility mentioned by Deputy Burton. AIB recorded profits of €1.375 billion in 2002, the highest ever recorded by an Irish company. How in this context can you justify the stated opposition of the Irish Bankers' Federation, to which AIB is affiliated, to the Government's banking levy of just €300 million shared across all the banks over a three-year period, given that in the same year they benefited significantly from the reduction in corporation tax from 16% to 12.5%, which must be a further fillip to the Bank's profitability? How can you justify opposing a meagre contribution of €300 million between all the banking institutions over a three-year period?

On social responsibility, all of the main banks, including AIB, have been involved in the systematic closure of bank branches, including daily sub-offices and occasional sub-office presence in rural areas. What type of consultation did AIB, for instance, undertake with local communities on its decisions to leave different rural settings? Does Mr. Hickey accept that the closure of these bank premises has a significant damaging effect and downside in terms of rural communities, their current needs and their future aspirations?

Mr. Hickey commented that the credit card service needs to be profitable as otherwise it could not be maintained. I believe consumers are being ripped off in relation to credit cards in terms of the exorbitant interest rates charged. It is estimated that Irish banks' rates for credit cards are 7% above the EU average. Those are the recently published figures from the Irish Small and Medium Enterprises Association. Why is there such a massive divergence between ordinary interest rates and credit card rates, and how can AIB possibly justify such a rake-off? We are all victims of it, and I am anxious to know the position on that.

As a former member of the Irish Bank Officials' Association, I would like to know the position of Allied Irish Banks on worker-directors on its board, as has been called for by the IBOA. Surely that is a a reasonable proposition. Will the representatives remind the committee of their stance in that regard, recognising, as I do, that such a move would benefit everybody?

On the comparisons of interest rates on a European scale, I noted in the recently published EUROSTAT report on an overview of interest rates that Irish bank rates for loans to businesses, at an average of 8.87% for short-term loans, are the highest in the EU and at 8.07% for loans of over a year are also the highest in the EU. These figures are clearly documented in a comparison with the greater number - ten, I understand - of the member states in the eurozone. Do the representatives not agree that these prohibitive rates compare very badly with those offered to business, both in terms of the short-term and the in excess of 12 months lending? I regard that as an impediment to the future competitiveness of the Irish business sector. AIB has created an interest rate penalty on business, and that is having a significant adverse effect on the potential of Irish business to reach its natural potential and to create new employment opportunities because those rates are punitive by comparison with rates that apply in a number of other countries in the eurozone.

In April I noted that AIB's head of retail banking, Mr. Donal Forde, refused to disclose how many of its more than 500,000 current account customers would end up paying higher bank charges as a result of changes in AIB's products. The bank has said it will pay 0.5% of a percentage point in interest to customers who access their current accounts by phone or use the Internet, once they maintain €1,000 in credit but customers who traditionally qualified for free banking, once they held a level of credit of €500 or more in their current accounts, will now be forced to pay bank charges. Is that not grossly unfair and yet another example of the bank's sole focus on profit and the benefit of shareholders, and not looking after the interests of customers who are the critical mass of the bank's success?

I almost winced when I heard Mr. Hickey's reply to a Deputy's question earlier. He had made the point about negotiation and said that customers, on the strength of the proposition, will be able to negotiate but the average high street customer will view that comment with incredulity because it is at such a remove from the reality of the experience of the greater mass of ordinary people using AIB's banking services, and those of the other banks. It merely highlights that the banks apply higher interest rates and surcharges to those who can least afford to pay them and offer preferential rates to others, and subject the overall mass of us to weighted interest charges. That is the reality and any spin offered to us here today will not change the public sense of that.

In his presentation Mr. Hickey stated that price regulation inevitably causes inefficiencies. Why should that be the case? He also made the case that Ireland is the only country in Europe to have such regulation on transaction and payment services. Why should price regulation inevitably cause inefficiencies and bring about cross-subsidisation? He also made the point, and I made reference to it, about electronic and self-service transactions but he stated that a recent increase in a range of stamp duties has undermined the progress made in this area. That is overstating the case somewhat.

Mr. Hickey also stated that competition, change and product mix, and the low interest rate environment have all contributed to reducing profit margins. He said that the bank's net interest margin in Ireland has fallen by 22% to 2.73% in the five years to 2002, and is expected to fall again this year. He will have to forgive me for saying that my heart does anything but bleed for AIB and that cry from Mr. Hickey in his presentation. With €1.375 million in profits and rising, AIB is doing extremely well in a situation they would like to present as anything but favourable.

I will call Senator Mansergh, Deputy O'Keeffe and Senator Ross. I intend adjourning the meeting at 5.05 p.m. at the very latest and I ask for brief questions at this stage. I will then ask Mr. Hickey to conclude as best he can.

While I welcome the delegation, I greeted with some scepticism the notion that a highly successful bank like AIB would not follow closely what its competitors are up to, but I understand it does not wish to make blanket, people-friendly generalisations.

Four or five years ago the mortgage rate was 7.75%, the rate for small businesses and small farmers was around 10%, for overdrafts it was 11% or 12% and a point or two above that rate for general finance, with credit cards being at the top rate. The mortgage rate has come down. Everybody focuses on that and there is a sharp, competitive mortgage rate but over a four or five year period, has there been anything like the reduction in those other interest rates? Mr. Hickey cited a recent specific instance but over a longer period my impression is that those rates have stayed fairly stagnant where the mortgage rate has come down.

I wish to ask two more brief questions. Reduction of profit margins is not always the same as reduction in profits, or is it? We belong to the eurozone. A few years ago, one was able to do such transactions with other countries, which had their own currencies, using a eurocheque. It is utterly absurd that now that we are members of the eurozone, one cannot write a cheque to a company in France, Belgium, Spain or wherever. What is the rationale for that because it is a tedious, time-consuming exercise to have to go in to the bank and write out a bank draft? Irrespective of the answer to the question, would Mr. Hickey and his colleagues, both in Ireland and in Europe, look to providing a facility which would be a major convenience to the consumer?

I will be very brief. Mr. Hickey, your presentation differed greatly from the presentation by the previous group on the variation in interest rates. Would you be prepared to defend your statement, to present to the committee a written defence of your stance, a commentary on what has been said by the previous group and an outline of the rates you charge and perhaps a critical commentary of what others charge?

I am still staggered that Mr. Hickey will not comment on AIB's rivals. The banks are prepared to cut each others' throats for tuppence, yet Mr. Hickey tells the committee it would be impolite for him to mention the activities of AIB's rivals. It makes me suspicious about the relationships between banks in Ireland if they are not even prepared to comment on each others' practices. The banks are meant to be in competition with each other, yet Mr. Hickey's comment belies that.

When the ECB cuts its rates there is always a remarkable coincidence - apart from on the last occasion when the AIB rate was lower than others - in both the timing and amount by which the banks normally cut their rates. The similarities are staggering. Is there any contact of which Mr. Hickey is aware between the banks at the time that the ECB cuts rates or are the similarities in cuts, or the delay or lack of it, another coincidence between the activities of the banks?

It would appear that the charges to pension funds AIB manages, which affects us all, are not based upon performance. Perhaps Mr. Hickey would comment on the pension funds managed by AIB in recent times, which have been less than glorious, not only in relative terms but in absolute terms, where they have been abominable. How can Mr. Hickey justify the multiples of millions of euro AIB takes from pensioners in managing pension funds when the performance has been so deplorable? I understand AIB was bottom of the league last week.

I welcome the delegation from AIB, which is a very successful bank. AIB is the envy of other banks in the international arena. While many would wish to turn banks into another Department of Social and Family Affairs, we on this side of the House hold a different view of banking.

What has been the success of the post office joint venture with the State? I commend AIB for coming to the rescue of rural Ireland. AIB is very much a rural bank and we are proud of its successes domestically and internationally. I applaud AIB's joint venture with An Post. Post offices are very important to rural communities, towns and villages. What further plans has AIB to develop the system?

I call on Mr. Hickey to respond to the questions raised.

Mr. Hickey

With the agreement of the committee I will ask my colleagues to deal with some of the questions. Ms Moroney will deal with the number of current accounts affected by the withdrawal of the concession of free banking while Mr. Kelly will deal with the EUROSTAT report and the performance of our pension funds. I will try to deal with the other questions.

We have been very pleased with our post office partnership. It provides our services in 1,000 post offices around the country and, most tangibly, it takes them to every town and village of any size around the country by giving customers five - in most cases five and a half - days to do their banking. It is growing in success. People's habits take time to change from attending a bank to a post office. The programme is well up to our expectations. We will develop it further and will be in discussion with An Post to see if we can offer more services to our customers.

On branch closures, at the launch of our partnership with An Post in 2001, we gave a commitment that we would not withdraw service or branches from any town or village where we currently had one. That commitment was given for a minimum five year period, which brings us to the end of 2006. We are proud of that and I do not believe any other institution, State or private, has made such a commitment. We have 284 branches and approximately 500 ATMs throughout the country. We have been investing heavily in rural Ireland, which comprises a big part of our customer base and we support our commitment to Ireland through such ventures as the GAA and rugby clubs of the year, club championships and so on. Our roots are very deep in the markets in which we serve and that commitment is on record.

Comment was made on the inefficiencies raised in my submission. Electronic transactions are by far the cheapest way for us to provide a service, therefore, we price them far cheaper for our customers. For our personal customers an electronic transaction is two thirds the charge of a paper transaction. We would wish customers to do a lot more transactions electronically for their safety, in that it reduces the cash in the system and, therefore, the fraud and theft risks.

The average charge for our current account customers is just over €50 per annum, while the charge in Government taxes for the same typical customer is €60 per annum. Following the recent increases, they pay 20% more in card taxes than they do for the range of services they take from AIB. It acts as a prohibition in terms of customers using services and competition. If somebody has a credit card with one institution and moves to another they pay the Government tax twice. If they move from a high cost to a low cost credit card, they pay the fee twice. It acts as a barrier on competition.

What about eurocheques?

Mr. Hickey

We would love to see a European wide clearing system. The example of a clearing system is the one operating in the United Kingdom and Ireland. They pretty well mirror each other. There is no equivalent individually within countries in the rest of Europe and they differ to varying degrees of efficiency. The willingness to establish such a clearing system would be there from an Irish and, I am sure, a British perspective. However, it requires all the institutions in all the countries to decide to proceed on that basis, which is quite an undertaking. It is not one to which we could commit or exert a major influence over, given our size within the overall European context.

The Irish Bankers Federation objected to the Government levy, which amounts to €100 million over three years and is a drop in the ocean in terms of your profits.

Mr. Hickey

A comparison of our profit with other industries would be interesting. There has been much publicity about the profit margins of other sectors, including in today's newspapers. Mention was made of the difference between interest margins and profit. Our margins are significantly below those of other businesses, as well publicised, not only today but frequently. Interest margins and profit are not the same thing. We have grown our profits very satisfactorily by doing more business with our customers in a benign economic climate while controlling our costs. We can make more profit by being efficient at what we do and doing more business with our customers.

However, Mr. Hickey has no objection to making a contribution to the public purse.

Mr. Hickey

We object to a selective levy being placed on one industrial sector while not being applied universally. It is also only one of several levies. The levy on cards which retards the evolution of electronic payments we all wish to see is another part of that.

We must differ on that.

Mr. Hickey never answered my question about whether there was any contact between banks at the time of the European Central Bank cuts.

Mr. Hickey

I emphatically refute that there was any contact. It would be illegal and immoral. I guarantee Senator Ross that we would have had no contact.

Does that mean telephones never get rung?

Mr. Hickey

Pardon me?

They do not ring each other informally.

Mr. Hickey

Be it informally, formally or any other way, there is certainly no contact between us and any other financial institution.

Ms Catherine Moroney

On the concession of free banking, the key issue is the customer. All our customers were contacted or written to and we had a help line and dealt with every one of the queries individually. The number of our customers affected was extremely small, less than 10% of our customer base. To put it in context, our customers pay on average €1 a week.

It is important that I address a comment by Senator Ross because it deserves an answer. We know every one of our competitors rates and if he inquires about any one of them, I can quote the rate off the top of my head. What my colleague was saying is that we cannot comment on the net interest margin. Obviously, we do not know the mechanics of how their business works internally but we are aware of their rates. As far as we are concerned, our key is that we do not lose our customers. We are very transparent about our rates. They are in all our letters and on all our statements. Our customers know what we charge them and we know what our competitors offer. It is important that I say that, if I may.

Why would a witness have refused to give the information earlier this year?

Mr. Hickey

The mix of one's internal business is generally competitively sensitive. I would not expect another financial institution to disclose that.

Mr. Hickey indicated earlier that some customers receive more preferential rates. He indicated significantly lower credit card charges. Will he indicate the proportion of customers who benefit from these lower rates and what proportion carry the ordinary rates?

Mr. Hickey

Our gold card was introduced about two years ago, so the number of customers who hold one is increasing. Customers who had the higher rate card and who have the necessary credit record to qualify for the lower rate card are switching to it. It reflects the relative risk of one customer versus another. There is continued growth in the number who hold the lower rate card.

Did Mr. Kelly wish to come in? This will be the conclusion.

On the net interest margin we have discussed and the comparison that was made in the EUROSTAT report, our average lending margin to our customers is less than 2.5%, and that can be verified in our 20-F, which is a statutory return we make for SEC purposes.

The EUROSTAT report is gaining some currency, but it is stated clearly in it that the available statistics cannot be used to compare rates because the rates are not harmonised and definitions are not the same for each country. It might be asked why there is such a divergence between what is shown as Ireland's one year rate versus those of other countries. We have looked closely at this and what we see is that Irish rates are more transparent because the Central Bank has all the AA rates. What is used for Ireland in that comparison is the AA rate, which is the highest rate we offer to business customers.

The highest rate in each country is not being used in the report. I will take two other countries for comparison purposes because we examined them closely. For example, in Spain, 4.45% was quoted against the 8.87% rate referred to for Ireland. In Finland, 4.36% was quoted. Both those rates are the prime lending rates in those countries, that is, the lowest rate of which business borrowers can avail in those countries. The table in question compares the highest rate available to business people in Ireland versus the lowest available to those in the other two countries. If one were seeking a valid comparison, it would be against the United Kingdom clearers. The rates we have and the margins we earn relative to the UK clearers are very competitive. Irish banking rates are lower.

It states in the EUROSTAT report that these are the annual averages and the source is the European Central Bank. This is exactly how it is presented. The figures Mr. Kelly quoted for Spain for short-term borrowing up to one year and Finland for borrowing greater than one year are presented in the EUROSTAT report as the annual averages applying in those respective economies.

That is not inconsistent with what I said. They are the annual averages for the prime rates of the banks in those countries. The prime rate is the lowest lending rate one can achieve. In Ireland for the same period, which is December 2002, the prime rate was 3.5%. That is lower than both figures I quoted for Spain and Finland. That was our comparable prime rate at the end of December which was significantly below the comparable rate for Spain.

We are comparing apples with oranges. A paper has been issued by the Irish Bankers Federation to try to correct this. It is neither correct nor fair to make such a comparison when some figures are calculated on a different basis. All I have to do is reiterate what the author said on page six of the report, which is that it does not compare like with like.

The figures from Britain and other countries are not included.

I will conclude this section of the meeting at this stage. On behalf of the joint committee, I wish——

Will the witnesses reply to the committee in writing regarding the rates and margins quoted in a statement made by the previous group and comment on why they are so far below them compared with other groups?

Mr. Hickey

I would have to pick up on something Ms O'Dea said which was that she will be interacting individually with the institutions and seeking full co-operation in that context. We will certainly give that.

Will Mr. Hickey give that to this committee?

Mr. Hickey

I would have to reflect on that because the regulator the State has put in place, which we welcomed, has indicated that she will deal with the institutions to ensure that she understands the comparison of one institution with another and the institutions here with those in other countries. To go beyond her demand of us is something that should be considered carefully. She has the right to and will receive absolute co-operation with whatever she looks for from us.

The rates we seek are on the tip of your tongue. This is not acceptable.

Mr. Hickey

The point I have tried to make is that the committee has taken one high headline figure. We have given the committee the average, which Deputy Burton sought, between what we pay and charge for money, which is 2.3%. Cases move up from that average depending on the risk and the size of the deal and the flexibility when one moves to credit cards or overdrafts, for example. There is a cost for those features. The average still comes back to 2.3%. The gross margin we earn between what we buy deposits and sell loans for is 2.3%.

Surely cases also decrease from the average. Mr. Hickey said that they increase, but surely they also decrease. Theseare the facts and information we would like tosee.

Mr. Hickey

I did not present it as benignly as I should.

At this stage I will conclude.

There is a conflict of interest between the two sets of evidence and the committee ought to obtain written statements from the two sets of witnesses.

I propose that we put that point on hold until the conclusion of the meeting because there may be a few issues we will want to address with Ms O'Dea perhaps by way of correspondence. Two or three other issues may arise between now and the conclusion of the meeting. Rather than delaying the meeting now, we as a committee may decide at the conclusion of our business what action we will take or what line of approach we will adopt. I do not want to delay the meeting at this point. If needs be we will contact Mr. Hickey subsequently.

Mr. Hickey

We will, as we always do, co-operate officially with an agency of the State. If we are asked to do so by an agency of the State we will do so.

On a point of clarification——

There is no clarification. We will discuss this point at the conclusion of our business this evening. That is the clarification. We will come back to this later. I thank Mr. Hickey, Mr. Kelly and Mr. Moroney for their presentation, which was very informative and beneficial.

Sitting suspended at 5.21 p.m. and resumed at 5.41 p.m.

I welcome Mr. Mark Duffy, Chief Executive; Ms Clare Connellan, Associate Director Legal Services; Ms Rosaleen Kelly, Marketing Director; and Mr. Jim Rourke, Associate Director Corporate Development. I wish to remind visitors that while the comments of members are protected by parliamentary privilege, those of visitors are not so protected.

Mr. Mark Duffy

We thank members for the opportunity to appear before the committee this evening. As we do not receive telephone calls from our competitors - neither do we make them - we want to take this opportunity to get across our views. On the oral and written presentation I am about to go through, I am sure it will come as a relief that my colleagues believe I can give the oral presentation in five minutes. I will try to keep to that promise. We tried to keep the written presentation brief and to the point. We were led to believe that one of the objectives in coming here was to discuss in summary pricing and policy. I took heart in Ms O'Dea's comments earlier because the Bank of Scotland group believes there is a definite link between competition and developing a truly competitive banking market in Ireland, generating more competitors and lower pricing for consumers. We would say that one must first get the competitor landscape before one can determine a policy to attract more banks and drive pricing down. If members can indulge in me and in the paper I have put in front of them they will understand the approach I am taking.

The Bank of Scotland Group, is a wholly owned subsidiary of HBOS plc, which is an amalgamation of Halifax and Bank of Scotland Group UK. I would like to refer to what we currently see wrong in the Irish marketplace from a banker's perspective. It is unusual that a banker would see anything wrong in the sector but we have quite a few things to say. There are no problems without solutions in the Bank of Scotland. We have a number of solutions we would like to put to members. I am pleased some of our competitors have remained here this evening because we have a challenge to put to some of them which we believe could cut through some of the work of the committee and perhaps the Competition Authority's work.

Bank of Scotland Group is one of the oldest banking groups in the world. It is a company of €550 billion assets. In Ireland we employ more than 3,500 people. Therefore, we have a substantial commitment and are in a unique position as one of the few foreign entrants to the Irish marketplace in the area of competition. What that gives us is a view as to whether there is a problem with the competitor landscape in Ireland. We believe there are serious problems in this marketplace and we are alone as a bank in stating that the marketplace badly needs reform, not just for consumers but for the banking industry also. We have made our views very clear in advance since our entry to the Irish marketplace a number of years ago.

There are many problems which mainly boil down to three issues, including the Irish transmission system, switching, which I suppose is a fancy term for people being able to move their business from one bank to another and, lastly, transparency of pricing, which was referred to earlier. Put simply, that is the battleground. Those are the three areas we believe need change to attract other entrants to the marketplace and to drive down pricing.

On the Irish money transmission system, while I am pleased at the AIB's open invitation to Bank of Scotland to join the system, it is a little more difficult than one would suspect. One might pose a number of questions as to why Bank of Scotland are not in the system as a full member, as one of the largest banking groups in the world. While we have been welcomed to the system on many occasions - many other people have been welcomed to the system - I would like to know who has applied, who has been rejected and what happens when one is rejected. I would pose two questions which would probably indicate what is wrong with the system. First, it is a private company and is that in the national interest? Not having genuine access to the clearing system and the transmission system answers the question as to why there are very few foreign competitors. If one cannot get in the front door there will be no competition. It does not matter what the committee does or what the Competition Authority might recommend - if one cannot get in, there will be no increase in competition, and people will be left to the will and way of the existing players in the marketplace.

Second, the system is controlled by the very banks that every dog in the street says there is an issue with. The committee has reflected on this aspect. Is that in the public interest? In effect, it is tantamount to the jailers handing the keys to the prisoners. It does not make sense to us in the Bank of Scotland. I take exception to the AIB's earlier comment because it is not the same as the system in the UK, which is why there is a radically different market in competition between the two islands. In effect, it is a major barrier to competition. Members must not believe what they are being told. The Central Bank, which is a shareholder in the system and one of the key regulators, has said that it wants an investigation by the committee. The Department of Finance wants an investigation by the committee. Members heard what the Director of Consumer Affairs, Carmel Foley, said a number of years ago and they have heard the inferences from Ms O'Dea earlier. We cannot all be wrong. Why does everyone, including one of the guardians of the system, want to have a look at the very system in which it is a shareholder? The system needs examination and reform because it is a major barrier to the entry of foreign banks into the Irish banking system.

If one assumes that the system can be reformed, it could be reformed in a far less complex way than people probably assume. There are the two issues which are highlighted in the written report, switching and transparency of pricing. One cannot discuss one without the other. They must be taken together. If one introduces one without the other, as was found in the UK, one will cause a fundamental problem. My submission highlights how difficult switching is. It is not a matter of inertia. Some people are loyal to their bank, as a Senator said earlier. However, at the end of the day, banking is a commodity and if there was a free market, people would switch and chop and change to the best value provider.

Asking any commercial animal, let alone a banker, to aid one of its customers to move to another customer will not happen. As I said in my submission, it is like asking turkeys to vote for Christmas. It will not happen without a change in the code of practice by which bankers operate. Switching is a fundamental system that bankers deliberately use to frustrate customers moving. It is a rational response given the current code of practice. It is wrong and needs changing. Our experience in the UK is that when it was changed, it dramatically changed the competitive landscape. It led to a dramatic increase in the fortunes of people such as HBOS and Bank of Scotland Halifax Group, who are very much into selling money and changing the money market in the UK. If the system of switching in Ireland is changed the same will happen.

On transparency of pricing, every dog and devil in the street will say there is no transparency of pricing as earlier commentators tried to maintain. It is far from clear, it is a black art and it is very difficult. There are more than 200 products in the mortgage market. Every bank claims to be the cheapest. The conflicts and statistics identified by some members of the committee instances that the market needs transparency. It needs a code of practice that enables switching. The barriers of entry in a transmission system need to be removed. They are the three main problems and there are many more. My submission identifies the solutions in as brief a manner as possible. The bank will make a submission to the Competition Authority on the completion of its own detailed analysis. I sympathise with some of the views of the members.

Deputy Bruton made the point that we are always one study away from a solution. I wonder why that is so because these are very simple issues. The transmission system is within the gift of the Central Bank to change. It is within the gift of these welcoming banks to change. Why do they not change it? It is not in their interests to change it. Equally, they can deliver a code of practice that can reform and deliver switching and deliver transparency of pricing. I advocate that the country needs to take a risk, as does the industry. The solution is self-cure. It does not require the Competition Authority to complete a study. We have confidence in the outcome of the study but it will take some time as it is a very complex task. I argue that it is deliberately being made very complex to provide what is known as chaff or distraction. These three issues will result in a dramatic change in the competitive landscape. If the banks are so willing and welcoming, why can they not adopt voluntarily the self-cure of a self-imposed code of practice that delivers these three issues? From a legislative point of view, it does not stop the investigations of the committees. It is a simple risk, it cannot do any more harm than the existing system and it will invite more competition. It will reduce their profits and reduce pricing and that is in the interests of the national good. It does not stop the Competition Authority investigating further. The Competition Authority could be the expert to decide whether an industry-driven, self-policing code of practice that improves on the areas I have mentioned is good for the nation or not.

The issues are quite simple and are not complex. They do not require a succession of studies by consumer groups and by the Competition Authority. The banks have it within their own gift to voluntarily sign up to a code of conduct. I doubt if we can be worse off as a result. It would transfer the balance of power from the provider, as is the case at present, to the consumer, where it should be.

Thank you, Mr. Duffy. I ask members to confine their question time to three minutes.

Deputy Bruton

I will comply with the Chair's wishes. I wish to ask a question about the clearing system. The other banks have indicated that if Bank of Scotland paid a reasonable entrance fee, they would allow it in. Their presentation seems to suggest that Bank of Scotland is unwilling to pay the entrance fee. Does Bank of Scotland regard the entrance fee as unreasonable?

The Bank of Scotland argues that the clearing system should be regulated and should not be private. Is it not the case that it is a private company in the United Kingdom and the Bank of Scotland is involved in that system? The bank is a participant in a similar club in another jurisdiction but which it regards as unfair in this jurisdiction.

The bank has successfully entered the mortgage market and at a time when the Irish banks were seeking to take excess margins, it forced them back to at least a lower excess than they originally intended. It is very clear that the margins have widened in personal and business lending. The ECB cuts are not being passed on and the margins in those areas are rising. Why is the Bank of Scotland not taking on those opportunities in business and personal borrowings which look to be ripe for the taking by a new, ambitious entrant?

Will the bank provide the committee with the pro-switching regulations that have been introduced in the UK? Does the bank concur with the view of the National Competitiveness Council that the mark-ups and spreads are very high, indicate excessive profits in the system and give a bad deal to consumers and business?

Mr. Duffy

I agree that the spreads are horrendous. I will give an example. The bank's recent entry to the business current account market shows that there is an enormous difference in our favour between the banks. AIB mentioned earlier that its overall average spread is approximately 2%. The Bank of Scotland would love that. Our business does not need that to survive because we pass the benefit on to the customer. The customer is being ripped off and this was highlighted by our entry into the domestic mortgage market and we make no bones about saying that.

Switching is a very technical topic and is one that the Bank of Scotland has majored in. I am running a business for a shareholder. He wants a return, perhaps a lower return than some of our competitors because we see that as making good business sense. The bank was in the vanguard of the introduction of switching in the UK. It is good for business and good for the consumer.

I will deal with the topics of interest margins and the commercial opportunities for entry into the mortgage market. The bank is never slow to follow a commercial opportunity. It knows what it is like to be a small bank. As our advertisement suggests, we are business people. There are many opportunities and the bank is seizing those opportunities. The unlevel playing field has denied the bank access into many areas where it would wish to go, such as the credit card market. It is a very lucrative business but there are a number of steps which the bank must perfect through the transmission system, switching and transparency of pricing, before it can do so. It is not prepared to subsidise the consumer until the Competition Authority or the committee can deliver a reasonable playing field. It is inaccurate to say that the situation in Ireland is the same as in the UK.

The bank has exploited the home loan market. Each bank argues that it is the cheapest. Eleven banks all say they are the cheapest. The Bank of Scotland has exploited its home loans as a business opportunity to everyone's advantage and this is well recognised. The bank is short of capturing one in five small to medium businesses in Ireland, which represent the bulk of Irish business. The bank has had the courage of its convictions to stick it out on a very difficult and unlevel playing field and provide the third current account. When the bank signalled the launch of the current account ^ surprise - the two banks which never act in unison, supplied two competitive offerings, just as happened when Bank of Scotland introduced the private dwelling mortgage a number of years ago. The current account revolutionised the market and gave the bank extra fuel to obtain its strategic ambition of becoming Ireland's number one business bank. That is an ambition which the bank will carry through.

I could spend a long time telling the committee about the clearing system. It is not the same system as in the UK. A business analyst from Davy Stockbrokers approached the bank and asked what the sunk costs of the Irish clearing system were. We asked him why he asked us that question as he worked for a subsidiary of Bank of Ireland. He answered that nobody could give him the answer. My bank is being asked to join what is a strange system. It made the decision that it was not right to join unless the system was reformed. As one of the biggest banks in the world, my bank is asked to display its financial credentials because it might be considered a threat to the Irish payments system. I have no problem with that. However, the bank is an upstanding member of the banking community. It is then asked to give a guarantee that it will do 1% of their annual turnover.

Second, why are new members asked for an entry fee? I am told that it is part of the sunk cost, but I do not want to buy anything - I want to rent something. I want to use it like a public utility. It is no different from Eircom or Esat wanting to use somebody else's telephone line. When I asked what the sunk cost was, I was told that they would get back to me. Nobody will tell me what the sunk cost is. Why am I asked to pay for something that I do not know the sunk cost of? I cannot validate it, as I do not know what I am buying. I am being asked to buy the proverbial pig in a poke. I am not asked to do that in other markets in which HBOS is involved as an international group. I am also asked to make a payment to each existing member for their costs involved in accommodating a new member. This is a very strange club. It is a private company. I have asked many times whether there is a right of appeal, but there is no such right, to my knowledge. There is no ombudsman in this sector. While it is gratifying that our competitors welcome us into the system, it is a very difficult club to join.

I can give Deputy Richard Bruton chapter and verse in response to his question. I have been told at every turn that Bank of Scotland (Ireland) is welcome to join this very strange organisation but, having gone through this process, I do not know whether I would like to do so. I would welcome, and the bank would be happy to join a reformed system, but the current system is rotten. The members know that it needs to be reformed, but they are not prepared to admit it.

Mr. Duffy has said that the net interest margin of 2.5% is too high, but Davy Stockbrokers included the Royal Bank of Scotland in its cross-comparison. The Royal Bank of Scotland's margin in the UK is higher - 3.2% according to its figures. Is Mr. Duffy promising to do something in the Irish market that his bank is not doing in its home market?

Mr. Duffy

Without making fun of the Deputy, I should point out that the Royal Bank of Scotland, which is my bank's major competitor, is a rotten bank too. I wish to make clear that there is a difference between that bank and the Bank of Scotland.

Mr. Duffy

The Royal Bank of Scotland is almost as bad as AIB.

I thank the Bank of Scotland (Ireland) delegation for attending this meeting. I would like to ask about the money transmissions system. It is stated at the bottom of page 10 of the report that the bank strongly believes that the Legislature should resist the temptation to regulate pricing, as such a move would only serve to distort and stifle competition. Mr. Duffy stated earlier that the Irish banking market is riddled with anti-competitive practices. Does he suggest that the transmission system should be reformed by some kind of central clearing house system? Does he argue that it should be run by the State? Should its structure be set by a regulator, such as a financial services authority with greater powers, or by the Central Bank? I understand that there is a central clearing house system in other countries. The report on the Irish banking system that was published in 2000 contained a number of references to such a system. Does Mr. Duffy see a way in which the transmission system could be reformed and entry to the Irish system could be made easier for banks across Europe as a consequence? Is that the net point of what Mr. Duffy is saying?

Mr. Duffy

The net point is that the system needs reform. Bank of Scotland (Ireland), as an institution, believes that the benefits to the consumer of reduced pricing and increased competition can be achieved much quicker if legislators have a light hand. There is nothing wrong with the clearing system per se. I share the belief expressed earlier by AIB in relation to the efficiency of the system in the UK and Ireland, but there is room for improvement and reform of the terms of entry. I would prefer if the State did not get involved, as I do not believe that it has a role in this matter. The banks are capable of reforming the system, but I am more interested in the rules of entry and how it is governed. It is better for consumers and my bank if the solution is found by the banks. The study being undertaken by the Competition Authority at present will equip it to decide whether this is the correct way of reforming the system. If the committee comes up with an improved system along those lines, banks like Bank of Scotland (Ireland) will be attracted into the marketplace. This has to be in the interest of the public and the business community alike.

This is not a complex issue, as I said earlier, it does not stop a dual process. The banks can do this - they can give it a lash, to use a colloquial expression. Adopting the three things I have mentioned will not have a downside in terms of the public interest. If the banks are serious and genuine about opening up competition, they will do so. The public investigation into the banking industry and the Competition Authority's study can proceed in tandem. If the Competition Authority believes that real change is being generated, it can adapt the recommendations of the study, which will advocate change rather than insist on it. If this part of the process takes another year or a year and a half, I suspect that the Legislature will take a similar period to put legislation in place. Will the public be grateful for reforms that will take three or four years to take effect, or for "one more study", to use Deputy RichardBruton's words? I do not think it will. There is a quicker way of doing this without removing the current powers or stopping the current studies.

Bank of Scotland (Ireland) Limited condemns what it describes as predatory pricing in its submission to this committee. The bank's submission suggests that cheap introductory offers are rather misleading to customers. Is it saying that such offers mislead consumers? Does it believe that they contribute to the lack of transparency in the system? People are only aware of current advertising about costs. In the context of competition, does Mr. Duffy envisage that this issue will be addressed by the banks, individually and collectively, in the form of a code of practice? Such a code might say that while predatory pricing offers a good deal to new entrants to the market, it is not sustainable in the long-term and is, perhaps, unfair to existing customers.

Mr. Duffy has clearly reiterated his belief in the self-regulation of the banks. Does he agree with me that there should be a role for a fairly tough regulator to work in the interests of consumers? Such a regulator should have more powers than those indicated by Ms O'Dea today. He or she could force price transparency and could inform the general range of bank customers about the implications of predatory pricing.

Very favourable prices for business loans are indicated on page 17 of the bank's submission. A rate of 6.35% is indicated for AA customers. It seems to me that such a rate is significantly cheaper than that offered by other banks. Many start-up businesses and new ventures are offered higher rates. Can Mr. Duffy comment on how the banks can balance their responsibilities to their shareholders and the need to make a reasonable level of profit with the need to develop the indigenous SME sector?

Mr. Duffy

The Deputy has asked a number of questions. Predatory pricing is a reality, but it is bad for the industry. It is certainly bad for customers as it involves cheating. Customers are offered a cheap product, in effect, provided they take other products. They do not receive any definite guarantee that it will remain in place in the years after those covered by the normal introductory offer. This practice can even be seen in domestic mortgages. It is wrong. As a customer, I am irritated by the fact that a new customer of a building society, for instance, can receive a cut-price rate while an existing loyal customer does not. There is something wrong and rotten about such a practice. It distorts the marketplace.

Self-regulation of the banking industry is the correct approach. Banks know what the problems are - they know about bundling, predatory pricing and switching. They are familiar with every trick in the book. They know they can deliver reform in this area. Without meaning to show disrespect to those in this room, the banks know that committees meet over a period of time. The longer and more complex the discussions and the more intelligent the people sent to meetings such as this one, the more the process will be delayed. It is in their favour. One is playing into longer pricing and into a situation of deferring new entrants to the market and, in the meantime, they are making very nice profits, such as the €1.3 billion that we would love to be making. If one adopts a dual approach of a self-cure - and the banks draw that up as the people who know what is wrong - and it is judged by an expert such as the Competition Authority, which is equipped to do this, one ends up getting a dual solution. The Competition Authority can decide whether that is acceptable and it can still complete the report. One ends up with a solution that is light on legislation and high on self-cure. That is in the industry's best interest. As a PR position, the industry is best served by doing this.

The third question was whether regulation of the process stifles competition. I come from the school which thinks that a light hand on this is better. If the industry can come up with solutions to the current anti-competitive practice, the State's role is that of a watchdog. I welcome Ms Mary O'Dea's appointment. I believe IFSRA has real teeth and has shown that this afternoon. What is wrong at present is that there is an imbalance. We have a system whose roots date from 20 or 30 years ago; it is not a modern system. It serves the banks at present but does not serve new entrants, such as the Bank of Scotland, and neither does it serve the public. If that system can be reformed through self-cure, the advocacy of the Competition Authority, or a combination of both, it will serve people well. The establishment of the new authority, over which Ms O'Dea is presiding, is timely. It will watch over and keep manners on the industry. Did I answer everything?

My last question was about Bank of Scotland's AA business rate and how that compares to other banks.

Mr. Duffy

We believe we are cheaper but, given my earlier statement, every bank is probably going to say that to the committee this afternoon. Having purchased ICC, which, I need not remind members, was the State bank for many years - since 1933 - our pedigree of supporting start-up business has a long tradition. My case rests on that. We are no longer a development bank but it is good business sense. It is much easier to get new customers than to prise customers away from existing banks - that is simple common sense. Our pedigree is there to be seen through ICC and that culture has continued within the merged Bank of Scotland group over the past two or three years.

As regards our rates, we are putting our money where our mouth is; we have undercut the other banks substantially on that. We are doing a substantial level of business with customers switching but we will not make a profit out of that product until customers can get over the twin problems of switching and transparency. Apart from being able to explain our position in a public forum such as this one today, we need to do this because we cannot continue to expand our business unless we can get delivery of that. If the committee is an instrument to achieve that, I am a very happy banker.

I wish to welcome Mr. Duffy and his colleagues. The arrival of the Bank of Scotland in Ireland has been beneficial in terms of competition, and I welcome that. Mr. Duffy made a couple of comments to which I wish to respond and I also have a few questions. He asked whether Ms O'Dea and her IFSRA team have real teeth - and I do not think that is a question for their dentists - but we want to see them having real powers. I have to say I disagree, however, because I do not think they have sufficient powers to regulate the existing, long-term, indigenous players or the Bank of Scotland (Ireland) Limited.

Mr. Duffy described the clearing system as "a private company". I empathise with the description and I understand it. It is an important point to make. That poses a problem for members of the committee, however, because there is quite a significant discrepancy between the information being provided by different people who have appeared before the committee this afternoon. How much of what we have been told can we believe? There are probably more questions that the committee would now wish to put than we had at the outset of our deliberations with the various people who have come before us, and we are far from finished. I wish to record that fact.

Welcoming a bank from outside the traditional system is not a knee-jerk reaction, it is just a fact of life. The so-called indigenous banks will only have themselves to blame when switching becomes an open opportunity for all, as inevitably it will in my opinion. Those banks will only have themselves to blame when more and more customers move to new players in our economy. We have heard nothing to the contrary.

The evidence we presented in support of positions today has been discounted by clever responses. The truth of the matter, however, is that the public has heard nothing to discount the view that they have been screwed by the indigenous banks in particular for a long number of years. They will reap their just reward. Unless they are listening now and will act accordingly, they are sowing the seeds of a major exodus in the years to come.

Mr. Duffy's document outlines his bank's strategy and he has reiterated it in his oral commentary. He stated: "We are ambitious to grow our market share and to become Ireland's number one business bank by 2005". All businesses are not always borrowers - some are occasionally depositors and many are both depositors and borrowers. Concern has been expressed that the Bank of Scotland (Ireland) Ltd. is concentrating on the upper end of the market. Let me give one example. I understand that the Bank of Scotland's business current account, which was introduced this year, unquestionably pays a competitive interest rate of 2.25% on credit balances, but the bank requires an opening cash balance of €50,000. This puts that option out of the reach of many small businesses in the Irish business sector and, as a result, it renders the bank inaccessible to so many. As Mr. Duffy wants to provide choice, particularly in the business sector, and as he is hoping to become Ireland's number one business bank by 2005, would he not consider lowering his thresholds to more achievable levels for people within the business sector? Would he accept that these limits for opening credit balances are unattainable for many, and that they require review?

The Bank of Scotland and the ICC refused to participate in the Irish Bankers' Federation submission to the Competition Authority's banking study. I have a good idea what the answer will be but I wish to offer Mr. Duffy an opportunity to tell us why that was.

I ask Mr. Duffy to respond briefly. I am concluding this session at 6.30 p.m. because we have two other groups to meet and we wish to conclude our business. I will be calling Deputy O'Keeffe in a moment.

Mr. Duffy

Why did we not join the IBF? We have no dispute with the IBF. We are a fully paid-up member and we are of use to each other but I anticipated what the response would be. I am my own man and we had our own view. As I said at the opening, we have a singular view and I felt it was going to be different from the IBF's view. I also felt that it was hypocritical, with a different view, to join in with the IBF and we wrote to them - there was complete openness and honesty on this. Perhaps there is an element of the Scot in me; I am a Scot stripped of his generosity and I did not fancy paying for something that was going to come up with a conclusion that I was going to disagree with. I hope that answers the question.

Will the Bank of Scotland be co-operating with the Competition Authority's banking review?

Mr. Duffy

We are and, in fact, I was with the chairman yesterday. Our interests are very clear; we want change.

Let us call a spade a shovel. I am being accused of cherry-picking here. However, I have to cherry pick at present because when we introduced our home loan, our experience - maybe an element of naiveté for a new entrant to the marketplace - was that a lot of customers took the Bank of Scotland offer, which entailed a cost, and marched into their banks because of the difficulties with switching and loyalty and so on and asked their bank manager to match the cost and those other banks would simply undercut. That cost us a fortune but we saw it as the price of entry to the marketplace. In setting a minimum level, there was an element of trying to avoid being used again because that cost could put us out of business and kill the golden goose from our perspective.

The main reason we set the deposit at €50,000 is that we are a business bank and without the type of entry and cost base in a transmission system that we would be used to in other overseas markets. We have a cost base. We are a no-frills provider or a Ryanair or whatever people want to call us and we can only provide a product if it is within that cost base. As present, because of the unlevel playing field, that highlights the fact that I cannot compete unless I get a proper playing field because the other banks have it to themselves. Can we come up with a solution to the three problems? I was interested to note that the committee does not have a bank account and we would be delighted to take one on for it.

They have not had the chance.

Mr. Duffy

We would like to follow the lead of our business parent in the UK where the minimum deposit is £1 sterling. A deposit of £1 will get the Deputies in and we will be delighted with your business.

I welcome Mr. Duffy and the Bank of Scotland delegation to the committee. Mr. Duffy has made some important noises.

Bank of Scotland will only take customers with balances of at least €50,000. The bank does not give mortgages to first-time buyers. I read in theSunday Business Post some time ago that the bank was happy to leave the dross to the other banks. Are people with less than €50,000 to invest and first-time house buyers the dross? Will Mr. Duffy elaborate on that because it is an insult to the Irish customer coming from a reputable banking organisation like the bank about which Mr. Duffy was boastful about?

Mr. Duffy

We were not quoted properly. We did use the word "dross".

It was Mr. Duffy's quotation.

Mr. Duffy

If I could answer the question, I will fall on my sword. The quotation was not accurate. We used the word "dross" and regretted doing so. We have all been guilty. Politicians and bankers are open to criticism on these matters. Sometimes we say things we should not and we apologise for that afterwards. We are man enough to admit it when we say things that are wrong. Nonetheless, comments like that are not good for business and we were not proud of making the statement. It was my problem.

We do not go for first-time buyers because that is not our business as we are currently structured. If we decided to get into the retail market, we would get into the first-time buyers market. That business is run directly.

It is cherry-picking at its worst.

Mr. Duffy

If I can answer the question in total, the Deputy will understand the position because in isolation I would probably say the same thing as the Deputy. The business is run directly from Scotland. It is a pan-European business in that there is a central call centre and we deal with many European countries because it is the cheapest way of doing business and it allows us to pass on those savings to the consumer. There is not a man, dog or devil in this room or outside it who would criticise Bank of Scotland for doing that. We do not finance first-time buyers because that is not the current business focus and it is the same in every European market.

If we decided to get into the retail market, which we would like to and hope to do, the Deputy would not be asking me that question.

The other banks have to pick up the pieces of the first-time buyers. It is cherry-picking at its worst and the Competition Authority should be challenging that. I asked if the Bank of Scotland is only taking customers with €50,000 deposits in their current accounts. It has just five offices servicing in the Republic of Ireland, which is selective. The bank came to Ireland on the eve of the Celtic tiger being born, when the economy was growing at a rate we had never seen before. The growth rates were then 11% and they have now fallen to 3% or 4% or even zero growth. What is Mr. Duffy's attitude in the event of a crisis with people getting into difficulty, as we have seen happen in Germany and the US? In such a case, will Mr. Duffy pick up the bits and pieces and the baggage and leave our island?

Mr. Duffy

No.

What guarantee do I have?

Mr. Duffy

There are two guarantees. In my opening statement, I said that we are one of the oldest banking groups in the world and our pedigree shows that we stick with markets and we will not be quitting this market. We also employ 3,500 people on this island which is a hell of an investment. There are few companies in Ireland with that many employees.

There are other groups employing close to 20,000.

Mr. Duffy

With respect, there are very few groups employing 3,500 people. We have attracted almost one in five businesses in Ireland. We are not running away from that since it is a very profitable business. We are not here for quitting and our record in the UK shows that.

We did something in regard to home loans that few other people have done in that we gave customers a lifetime guarantee. That is not a guarantee for two or three years; we are not fair-weather friends and it is not the Scottish way. Our pedigree in the UK over 300 years shows that. We are not for quitting and in the context of the fear that we might buckle in a crisis, that is not Bank of Scotland.

Mr. Duffy made a point about switching which I would like to challenge. Switching can be legally fought. As a Deputy for 21 years, I have experienced that when there is a crisis with the economy people want to switch banks and building societies. Three or four weeks ago, a constituent came into me before I left for Dublin and said he wanted to change his endowment mortgage. I called the building society in Dublin who first said they did not have permission to speak to me. I told them that the constituent was with me and he spoke to the office. Within two days of that phone call, and without any further documentation, that client received a letter stating there was no problem switching if he repaid his loan. I do not accept the nonsense presented by Mr. Duffy about switching because by and large all the banks will allow customers to switch if the documentation is in order and they are paid back. I have experience of it. I am sure that if a member of staff of the Bank of Scotland was asked to switch an account without being paid back, there would be a problem.

Mr. Duffy

I do not agree with the Deputy and neither does Ms O'Dea.

Fair enough. We will differ then. Has Bank of Scotland applied for membership of the clearing house to the Central Bank?

Mr. Duffy

No.

Why is the bank critical when it has not gone through the proper channels? The Central Bank has been the regulatory authority up to now.

Mr. Duffy

I have read out a list of some of the things we believe are prohibitive.

Did the Bank of Scotland make an application to the Central Bank?

Mr. Duffy

I am more than willing to explain, having been invited to answer the question. I gave the Deputy the courtesy of listening to him. Perhaps he would reciprocate.

We did not apply to the Central Bank because, having assessed as a business the costs and barriers to entry, we found it ridiculous. It is a rational decision and one which any consumer would make. I would not waste my time applying to a club which I could not afford to join or whose conditions were ridiculous. That is our prerogative. The question I asked which no one has been able to answer is: who else, apart from Bank of Scotland, has been in this position? Who has been rejected and what happens when one is rejected? Those are the reasons, which I believe are rational business reasons. The Deputy has a view of Bank of Scotland and I doubt I am going to get his account, although perhaps I have one account this evening. However, there are many people who do not agree with him. One in five businesses do not agree and if he saw the press coverage of the Bank of Scotland home loan entry, he would see that many people would put him in a minority.

The Central Bank is an independant authority, an arm of Government, and I am shocked that Mr. Duffy has suspicions in this regard when he will not even make application to the club of which he talks. Many small banks here have had to work through the clearing system since we got our freedom in the 1920s and have been amalgamating since. I do not know what Mr. Duffy's problem is.

Mr. Duffy

May I answer that?

I have one more thing to say. Mr. Duffy was unfairly critical of one of this country's banking organisations. That bank has a retail arm in the UK which has been awarded a high honour, if I have read the business papers correctly. Mr. Duffy's organisation is competing with this bank in the UK and it was not on the roll of honour.

Mr. Duffy

Although I would prefer not to be here all night, I am not going anywhere. I will not answer the Deputy's second question. I felt my comments about AIB were fair and if offence was taken, none was meant.

The Deputy heard the director speaking earlier and he heard my comment. If everything was rosy in the garden of the transmission system and the Central Bank is, by the Deputy's own admission, a shareholder, why would it ask for an investigation? Would the Deputy ask for an investigation of a company in which he was a shareholder and he thought everything was all right? I very much doubt it. All is not well in the garden. I saw the Deputy at the committee meeting two years ago at which he heard the evidence from the Director of Consumer Affairs that the Central Bank wanted to look at the system. The Central Bank is the guardian of the system. Why would it have to investigate it? Why has there been no report? Why have the Department of Finance and Ms Foley asked these questions, if the Deputy is so right?

I am prepared to take up Mr. Duffy's case. If he writes to me I will pursue the case for him.

I thank Deputy O'Keeffe and Mr. Duffy for anticipating some of my questions. It is important that we invite the chief executive and key personnel involved in the clearing houses who operate this private company to speak before the committee, because some very serious allegations have been made. Essentially, Mr. Duffy has described the organisation as rotten. If I am right - although I am subject to clarification on this - he describes it as the apex of a cartel that operates in the Irish banking industry. If that is the case it needs to be investigated properly. Is Mr. Duffy saying there is a clear conflict of interest between the Central Bank as a shareholder in this very profitable clearing house and its role as regulator? If there is, it is a huge issue that needs to be investigated. If the Central Bank is asking for an investigation of something in which it is a shareholder, it may not be a powerful shareholder within the company in terms of exercising its influence. We will need to investigate this by asking questions of the chief executive of this company.

I do not entirely agree with Mr. Duffy on his point about switching. He stated that banking was a commodity. He compares his company to Ryanair - that case has more or less been proven in the airline industry by Michael O'Leary, who has done a fantastic job.

The Deputy's aunt does not think so.

I am quite different from my aunt. Michael O'Leary is doing a great job for his shareholders and for the country. We need to investigate this issue. Ms O'Dea's survey prior to launch showed that 44% of customers switched from the existing banks because of service, not because of charges, and 28% switched because of charges. Is he correct in his definition of banking as a commodity? I suspect that at present it is not a commodity, but he wishes to move it towards being one, so that customers will move on the basis of prices rather than service. The reality appears to be, however, that people move because of service benefits conferred by one bank over another. What is Mr. Duffy's view on this? Does he believe that banking can be made a commodity?

I know banks are not much interested in making permanent loans, but would Mr. Duffy consider making a permanent loan of the fine portrait of Daniel O'Connell that was lent to the National Gallery? It is a real addition to the collection.

Ten years ago a need was identified for a third banking force by two parties in this committee. There is still a vacancy there but obviously a full range of services would have to be provided. Finally, I am interested in Mr. Duffy's proposal for An Post to be a core of financial services in villages. Unfortunately, previous evidence has shown that 800 out of 1,800 post offices are not automated and therefore cannot provide that service.

Some years ago the value of shares in Bank of Ireland and AIB increased significantly because of rumours that they were takeover targets of European banks. One of the concerns publicly voiced at that stage, both at Government level and in the business sector, was that policy decisions would move out of Baggot Street and the Bank Centre. Perhaps Mr. Duffy could comment on the fact that all the major policy decisions of his organisation are being taken in Edinburgh. How does this affect the Irish market?

Mr. Duffy spoke about switching and the need for banks to co-operate to organise a system under which switching could take place. I recently had the experience of trying to switch and despite what my good friend Deputy O'Keeffe said, there were legal difficulties involved - it would have cost about €1,000. Is it not the case that legal people will have to be brought into the circle if the system of switching is to work easily?

There will be no more supplementary questions as we have to move on to the next delegation.

Mr. Duffy

I shall go back and answer each of the questions one by one. Deputy McGrath's point about legal people is a fair one. The chairman of the Competition Authority had an idea that interested my legal colleague - to introduce a passport to allow people with domestic mortgages to go from bank to bank, escaping the need for legal costs. One of our big features on coming into the Irish marketplace was to subsidise the legal costs because we recognised that as a block to switching. When the Competition Authority comes forward with this, or if the banks respond to the challenge of getting their own houses in order, that will be of merit. If my friend will excuse me for saying this, we are dealing here with another vested interest, the legal profession, but that is another day's work. As a suggestion from the industry, however, this proposal would be of use.

The Bank of Scotland is a foreign-owned bank but we have a local licence and a local board. We also have a very proud history, particularly from the perspective of the ICC, which goes back to the foundations of the State. There has been no change in our policy, which is driven by the local market. The Deputy is absolutely right - if Edinburgh wants something to happen it will - but the Bank of Scotland has operated under a federal system for hundreds of years and what works in Ireland may not work in Scotland. The independence of the local board is recognised.

Does Mr. Duffy confirm that decisions are made in Edinburgh?

Mr. Duffy

Decisions are taken by the local board in Ireland, but as in any foreign-owned company, the shareholder has an influence. There is a local board which is its own authority, a local chairman and a local licence. Ultimately, however, 100% of the shares are owned by a foreign shareholder. I was not aware of the picture mentioned by Senator Mansergh, so I will have to ask one of my colleagues and report back to the Senator.

We do not see ourselves as a third force, but we certainly see ourselves as a new competitor which would like to go upstream and into the retail market. I accept the Senator's point about An Post. It is an idea we took from one of our subsidiaries in Australia whose market is in western Australia in particular. The issues there are exactly the same as they are here and we also have the problem of the banks wanting to close down branch structures. It struck me that any rural town does not need three banks and two building societies. If the banks are being centralised in terms of power and decision-making and the post office is under threat, surely the obvious thing to do is to amalgamate the administration under An Post, allow the banks to get their cost structures in order and pass that benefit on. Maybe that is too idealistic, but they were able to do it in Australia, where it served everybody's purpose. We would be delighted to write to the committee and outline our experience in this regard.

Is that the policy of the Bank of Scotland?

Mr. Duffy

In reply to Deputy Conor Lenihan's question on whether banking will become a commodity, retail products are a commodity but business products are not because they deal with people in a relationship market and that is different but the market is definitely going in that direction.

My understanding of the statistics is that 44% of those who switched were dissatisfied with the service, not 44% of the 1,000 people questioned. That is a considerably lower proportion but perception of service is a huge element in people switching - we do not deny that.

I do not believe that the transmission system is rotten per se. It is run by good bankers who operate an efficient system and I agree with Mr. Hickey about that. The terms of entry, however, are rotten. As an analogy, I would like to join the club, it is a lovely club, but I do not like the terms, conditions and price and I feel it is restrictive practice and a barrier to entry.

The Central Bank is the regulator of the system. It is strange that the regulator would want to investigate and that the Department of Finance and the Director of Consumer Affairs made a formal request of this committee. That must beg a question.

I thank the delegation for attending today's meeting. It was an informative and lively discussion and we appreciated it.

Our next submission will be made by representatives of Permanent TSB. The delegation is made up of Mr. Niall O'Grady, marketing manager; Mr. Diarmuid Bradley, deputy chief executive; and Mr. David McCarthy, the group financial controller. I welcome them before the committee.

I am obliged to remind visitors that while the comments of members are protected by parliamentary privilege, those of visitors are not so protected.

Mr. Niall O’Grady

The initial presentations to the committee seemed to be about which institution has the lowest mortgage rate in the market place. The latest entrants to the market assume they are third or fourth so there is some competition for placings.

This presentation gives a perspective on who we are, how we came about and what our business focus is as we move forward. Permanent TSB is the newest bank in Ireland, formed only 15 months ago as a result of the acquisition of TSB Bank by Irish Life and Permanent and the subsequent merger with Irish Permanent. Our core focus is on personal customers with strengths in mortgages and savings products, a link to the histories of both former organisations. We have an exclusive focus on the market in the Republic of Ireland so, unlike some of our competitors, we make our bread and butter here.

The TSB Bank was formed through a series of mergers of regional savings banks that historically focused on the deposit savings market, which is logical because it was a trustee savings bank. It then attempted to move and broaden the provision of all personal financial services products. It saw customer service as a key to competitive advantage. The conversations about commoditisation versus customer service that preceded this presentation were interesting but TSB saw itself as having a distinct competitive advantage in customer service. Before the merger it had 80 branches so it was a relatively small provider, number five or six competitively in most product areas.

By contrast, Irish Permanent has strong roots in mutuality. It was a building society until 1992 with a key focus on mortgages. It had a 22% market share at the time of merger. It was also strong in car finance through Irish Permanent Finance and had a relatively small presence in other retail product areas. It had 72 branches at merger - again a relatively small player in the scheme of things. Our major competitors would have upwards of 250 branches.

A key rationale for the merger was that we were a big mortgage provider and a small relationship bank. The logic behind the merger was to put the two together and become a competitor in all retail product areas while remaining true to the original values of both former organisations of being Irish and mass market driven as opposed to cherry picking. Our objective was to provide a real challenge to the status quo.

We provide full-service retail banking designed to challenge the two main banks in the personal banking sector. We have 2,750 employees and national coverage with 166 outlets, comprising branches, a small number of sub-offices and 55 agencies across the State. We now have full ATM access, something previous speakers would take for granted but, from our perspective, it was a key to enabling us to a strong competitor in the market place and with any current account offering we have the direct channels available to customers.

If we look at how the customers of the retail banks that merged benefited, Irish Permanent customers got access to a clearing system, got a proper current account with Internet and telephone banking, and longer opening hours. The TSB customers got access to the market leading mortgage product, a full range of life and pension products from our parent company Irish Life and access to the leading car finance product, and both got significantly increased national coverage. In addition, our key focus at the time was not to lose any existing customers by maintaining the level of customer service that had kept them loyal to the organisation and, in addition, to provide a real and significant challenge and alternative to the two leading competitors.

We are unique in the market in that all our fees and charges were submitted and approved by the Director of Consumer Affairs as far back as 2002, a prolonged activity that took significant discussion, justification and rationale. Our customer service gives us a competitive advantage and we had a significant investment in proportion to our scale. As those who are familiar with the retail banking system will be aware, the IT system is the bane of many of our lives and we spent €25 million merging the two IT systems from the two former organisations. That spend is the two ongoing because the process is not yet complete.

We also focused to a huge extent on product innovation. Our objective was not just to say we are new, because no one would come to us if we said that, but to bring new initiatives to the market place. I have included some examples of that in our presentation - the One Plan equity release product, a four-in-one card with ATM, Laser, cheque card, Internet or direct channel registration, and a series of free banking initiatives.

The presentation quantifies the level of customer service and the importance we place on it. On an annual basis we examine the level of satisfaction with our existing customer base and compare it with that of our competitors. We are reassured that four or five months into the launch, 92% of customers were either very or fairly satisfied, which compared well with our competitors, which we also track. Our core strength, particularly coming from the former Irish Permanent and its roots in mutuality, is in the mortgage market. We are currently the leading mortgage provider. There are many people claiming to be but we actually are, with a 25% share of the market. We focus very explicitly on the mass market. We do not cherry-pick and price accordingly. As an example of that, we have the highest share of first-time buyers. Almost half of our business is with first-time buyers. We give loans of up to 92% and so on and do not advantage higher net worth customers. Similarly, we do not disadvantage lower net worth customers.

We have a strong commitment to our existing customers as well as remaining as competitive as possible to get new business. Obviously it is in our interests to keep our existing customers as satisfied as possible. One of the initiatives we launched in order to reward them was One Plan, an equity release product launched at the end of 2002. From our perspective it revolutionises the lending market. It made lower-priced loans more accessible to mortgage customers, so instead of going out and getting oneself a term loan of between 8% and 10%, one is now entitled to get pre-approval for mortgage rates for any further loans one needs to access. It is aimed at existing mortgage customers. It revolutionised the market because of the results we have had with the product so far and because of the number of competitors which have lined up to follow us as a direct result of that launch.

Just to finish up on mortgages and on the strategies specifically going forward, we have a strong history of product development and innovation. For example, we were the first provider to introduce fixed rates to give customers security and the first to introduce discounted rates to make it easier for first-time buyers in particular to get onto the property ladder. We introduced a best-of-both-worlds product that offered customers the ability to fix their mortgage rate but, if the variable rate went below that, to switch without any breakage cost. We were the first provider to introduce that. I have said already that we introduced One Plan equity release to replace high term lending rates. We have an ongoing commitment to mortgage pricing and customer service is to our competitive advantage in the marketplace.

Some committee members may have seen some of the advertisements for One Plan over recent months. To finish off on our mortgage strategy, we have a history of competitive pricing, and in addition to competitive rates we have abolished the application fee that was around for a long time on mortgages. More recently we have absorbed - as now have some of the competition - the cost of the indemnity bond charge that used to be passed on as a hidden charge to customers.

In terms of customer service we go out regularly and talk to our mortgage customers and customers who have not taken out a mortgage and ask what exactly they need in the marketplace in addition to competitive rates. They say things like speed - they want to know immediately if they are entitled to a loan or not, whether they will get it and how much it will cost - so we offer instant approval in principle. One does not have to wait, as we will tell people there and then. We will not drag people around.

We have to ensure that existing customers are loyal and therefore satisfied because it is only through satisfaction that we will get loyalty. Finally, another initiative we introduced two years ago was a series of flexible product features to match needs. One Deputy earlier made a reference to coming into lump sums and potentially clearing mortgages. We offer those facilities if customers do have such luck. That completes the section within the presentation on mortgages.

Just briefly on savings and investments, both former organisations have strong roots on the deposit market, with the Irish Life side strong on mutuality and the Trustee Savings Bank, true to its name, very strong on the deposit savings market. That subsequently was complimented by our mother company, Irish Life's expertise on the life products. We now offer anybody a structured financial review. This is basically to ensure that the transition to needs-based selling is consistent and controlled throughout the organisation on the savings and investment front. In other words, rather than us recommending products based on what we perceive to be customers' needs we sit down and actually ask them all the questions to ensure that they are sold the appropriate product.

However, we recognise that it is a challenging interest rate environment, and as a result, particularly on the deposit savings and in general with the volatility in the stock markets, we recognise the importance of product innovation. We can talk about that later. I do not plan to take the committee through that in any great detail but we can talk about it later through questions if appropriate.

What has all this resulted in over recent years? We have taken a nine-year picture on our net interest margin, which is the difference between the rate we lend at and the rate we offer to our customers. We used to make a 3.4% net interest margin in 1993 but now make 1.78%. That is a reflection of how competitively priced we are and of our ongoing commitment to customers. It is also a concern to us because it has reduced in nine years by almost 50%, and having listened to some of the questions that preceded this presentation in terms of our competitors, the levels of margins that they are making, as well as the European benchmark quoted at 2.2%, causes us a very significant concern.

In addition, we are in a historically low interest rate environment so I do not see much potential to increase on that 1.7% in the short-term. We have six times more depositors than we have mortgages. As a result, the levels of returns on interest rates that are given to depositors are of ongoing concern to us.

I have put only a brief slide or two together on the current accounts because we are a relatively small player here, with 8% to 9% of the market. In order for us to close the gap on the incumbent current account providers essentially we need to innovate. I have just outlined some of the initiatives that we have focused on recently. We have launched a loyalty current account which essentially offers customers the potential to reduce their current account charges based on product holding. In addition we have set ourselves a clear objective of challenging the status quo when it comes to current accounts.

When one of our competitors eliminated free banking recently for credit balances over a certain amount we reacted by changing the current terms and conditions for existing current account customers by introducing free banking based on credit balance. That was a direct attack on our competitor and customers have voted with their feet as we have had a very positive reaction to it. While we introduced that approximately six weeks ago, just two weeks ago we introduced a new long-term promotion of free banking for all mortgage customers going forward. Our objective is to ensure that customers get the best value possible when it comes to current accounts.

Consistent with one of the previous speaker's comments, although I think he was speaking more about the mortgage product, our perspective and drive would be to ease the account switching process. We have as much documentation within our branches as possible to ease that. However, it is a long and cumbersome process and we are aware of what has happened in the UK and are watching very closely to see whether the introduction of regulation there has freed up the ability of customers to switch their current account. We would welcome any move on that side. Some of the committee may have seen one of our advertisements recently to support one of those promotions.

On the future, there is nothing that will shock or is inconsistent with the rest of our presentation. We have continuing investment in new processes, a strong commitment to growing aggressively through product innovation - including the examples I have taken the committee through - and competitive ongoing pricing both for new business and our existing customers. We see our differentiating factor as being customer service. At the end of the day that essentially means making sure customers know that they have the best service available. It is only through doing that and offering them competitive pricing that we will retain the loyalty of our existing customer base.

I thank the delegation for making the presentation to the committee. Rather than going back over the ground we have covered already I would like to ask a number of additional questions. First, the TSB in particular was a very valued part of the banking sector, particularly traditionally for people on low incomes and in towns. It was quite a trauma for many customers when it was effectively privatised and then merged with the Irish Permanent.

In terms of the merger between the two organisations, Mr. O'Grady says that there are now 2,750, I think, employees. Roughly how many jobs were shed, or were many jobs shed? From the time that the merger took place perhaps there have been areas where jobs have since grown. I would be interested to know because I am aware there was a great deal of social concern at the time when all the changes were going through.

On services such as call services - I presume Mr. O'Grady's bank, like all others, uses call services - does he see those being retained in Ireland? We heard earlier from the Bank of Scotland that their call services are located in Scotland. Through my experience as an accountant and public representative, I have always been shocked at the level of variability with which customers have been dealt with by various banks and business institutions. There is the old saying that to owe the bank a hundred, they have their foot on one's throat but to owe the bank a million, they will sit up and treat one with extraordinary respect. In that context, I am concerned at the practice of some lending institutions on penalties and surcharges when people do not conform to the conditions on their accounts. Deputy ÓCaoláin referred to one of the organisations that is now more well known for that practice. I can understand why in certain circumstances they might apply. However, those that apply in some sectors are excessive. In terms of the social responsibility of the banks, applying galloping surcharges can lead to people being way over their heads in debt.

Fingal County Council has the biggest affordable housing programme in the State. I welcome the Government's announcement last week on introducing a number of other additional affordable housing programmes. Does the PTSB lend to that sector? Does the PTSB have any suggestions as to how we can speed up the process of providing affordable housing for people on lower incomes?

Earlier I asked about products for older people and I referred to the shared home investment plan. I wish to make a correction, as I understand that this product is not associated with the PTSB. It was a former chief executive of Irish Permanent, Mr. Kane, who set it up.

As the PTSB is so involved in the mortgage business, does it have concerns about some of the products that are currently on offer to elderly people that releases equity in their homes. Does the PTSB have figures for how many parents co-sponsor or subsidise their children to obtain mortgages by releasing equity in their homes? How does the PTSB view some of these products that allow elderly people to spend some of the equity from their homes? Is there enough customer protection on these products? I am concerned about the lack of transparency in some of those products.

The committee received material from the senior executive officer of Cork County Council regarding a tendering process. The council inserted a notice of tender in the EU Journal seeking bank services because the AIB, its previous bank, increased its charges by a phenomenal percentage. Initially, three banks - the AIB, Bank of Ireland and the PTSB - submitted a tender. In the heel of the hunt, Bank of Ireland at an early stage and the PTSB, later, withdrew. In the context of the earlier questions about competition, I am concerned that the bank charges that the AIB was offering went up from €30,000 to €200,000. Why was the PTSB not able to sustain interest in what is a lucrative banking contract for the second biggest local authority in the State?

Mr. O’Grady

We will spread the questions around. My colleague Mr. Bradley will take the tough ones to start with.

Mr. Diarmuid Bradley

I will start with the issue of the merger of Irish Permanent and the TSB. A key part of our objective in terms of the merger was that we had complementary strengths in both businesses. The strength of Irish Permanent was on the mortgage side, while on the TSB side there was a strong customer ethos and a savings franchise. We set as a key objective that we would in effect keep the two strengths together. We merged the two businesses in June 2002. Looking at the balance sheet at this stage in terms of our research, customer numbers and market share, we are happy we kept the two franchises. All evidence is that we kept both sets of customers and have even got new customers. In terms of that measure, we are happy. That is the key that Mr. O'Grady referred to as our ability to challenge the major players - to keep those two franchises.

We have a major call centre which services our 24 hour banking arrangement, Open 24. We also operate a major call centre in Dundalk. It is a stated part of our strategy that we are an Irish-based organisation. We make our money from this market and so our commitment is to it. Our call centres will be in the market in Ireland.

On the Deputy's question of surcharges, I will state that the PTSB, as a policy, do not charge penalties or surcharges for any of our mortgage customers who are in arrears. There is a normal interest charge on a mortgage customer's balance. If some extra balances build up, the normal standard mortgage rate as it applies to that account is still charged. We do not have surcharges or penalties. It is a practice among——

Do the PTSB feel surcharging is sharp practice and unethical in that it can be severe?

Mr. Bradley

I hope that Mr. O'Grady's presentation brought out the PTSB commitment as a long-term player in the mortgage market. We want to get first-time buyers. We are proud that we have the biggest market share there and we want to keep the people right through their life cycle. We do not believe we can keep the people if we introduce penalties and surcharges. By definition we do believe it is appropriate for our business. We have had that approach for well over ten years.

Mr. O’Grady

I will take some of the other questions. Regarding affordable housing, we have a certain number of ideas on this. We can pass those ideas on to the committee separately. On the equity release products for older customers, it does not matter what the bank does as it is going to be slated to a certain extent. I would not ever criticise legitimate innovations by any of our competitors. The more of it that happens, the better. On the specific issue of older asset-rich, cashflow-poor customers, we have not launched a particular product in that market because we are holding our fire. Having assessed some of the products already available, we have a concern about some of the features of them. Some of the anecdotal evidence - not research - we have received tends to indicate that customers might not have realised the exact workings of the product. They are quite complex products to explain to customers. Our final point would be——

Does Mr. O'Grady have any idea of the effective rate of interest or charge associated with those products? I have followed several of them. I have a background as an accountant, but I have not been able to work out the rate of interest. If a bank advances me €30,000 or €50,000 on my house and it is repaid over ten or 20 years, it is not cost-free. I find it astonishing that it is not possible to get a clear rate of interest.

Mr. O’Grady

I will not go into detail about it, since our institution does not offer such products, but I can give two top-line pieces of information about which our next presenter might better be able to expand than I. As I understand it, the Bank of Ireland product offers a 15-year fixed rate, which is quite transparent. I am not familiar with fees or charges beyond that.

The second product that you mentioned was based not so much on a rate of interest but on actuarial calculations about the age of the customer at a given time. For example, the value of 20% of the property to a 70-year-old is significantly more than to an 85-year-old. Actuarially they must look at the age and profile of the customer and the value of the property. It is calculated on an actuarial basis instead of a standard mortgage rate of interest. We have the documentation and can send it over to the Deputy. I agree with the Deputy that overall they are very much sold rather than bought products. They are complex, and there are a number of elements to them. I would put that under the umbrella statement that in this mortgage market, the more innovation that is happening, the better. We will hold fire on that part for the moment because of the complexities involved.

To what extent would someof the first-time buyers be assisted by theirparents?

Mr. O’Grady

We never know. We always ask customers. Sometimes they tell us and sometimes, for reasons of pride, they do not. The anecdotal evidence suggests that it has been happening increasingly over the past five to six years. Parents are passing on inheritances and gifting money earlier to get their children onto the property ladder. The statistic that we look to internally, to which we are very sensitive, is the loan-to-value ratio - the proportion of the value of the property taken out in a mortgage. That has remained steady in the mid-70s in our book and reassures us that, from an affordability perspective and the ability of the customer to service the loan, we are still in very conservative, safe territory.

Does Mr. O'Grady have any idea of how many of your first-time buyers are assisted by parents?

Mr. O’Grady

No, we do not have reliable figures on that. It is undoubtedly an increasing minority, but I do not have statistics.

I beg your pardon, was there another response?

Mr. Bradley

There was a question about Cork. We emphasised in our presentation that our big focus is on the personal sector. In the merged bank, that is where our main area of activity is planned. The business side is not as critical, since it is not an important part of our business. We have a franchise and a business in commercial lending, but one of the areas that we explored at the time of the merger and thereafter was expanding our business banking activities. We have been piloting and examining that. Coincidentally, the application to tender came from Cork County Council, and we applied. As our thinking developed on business banking, we became more negative about the broader aspects. We were not happy that we had the competencies or skills to be an effective provider in that market, and our focus will be heavily towards commercial lending. Our discussions with Cork occurred around that time. In retrospect, we should not really have applied. We realised that we did not have the skills base to provide a full service to Cork County Council, and we indicated that to it following an initial discussion and evaluation. That is the background. We are unlikely to be a tenderer for similar proposals in the future.

Perhaps I might comment on the last point first. I hesitated because I was anxious to know what the response on the Cork County Council proposition would be. I am looking at the circularised documentation from Cork County Council dealing with the banking arrangements of 23 of the local authorities. There are more than 26, since Dublin and Tipperary are split. All but one listed is with either the Bank of Ireland or the AIB. The exception is Donegal, which is with Ulster Bank. In his presentation, Mr. O'Grady showed his ambition that Permanent TSB, the newest bank in Ireland, would become the third significant player. I wish the bank well in that pursuit, for it is important. I do not know if Mr. Duffy is still with us, but, having listened to some of his responses on the Bank of Scotland (Ireland) perspective, I felt cold. I will certainly not be taking up the offer of the new account arrangement with them.

I would be very interested to see a third player become a serious contender and offer a real competitive edge to the whole Irish banking sector. I believe, from the commentary that Mr. O'Grady has offered, that, in the first instance, he has fed that in some way by offering the most competitive tender to Cork County Council. By subsequently withdrawing, the bank fed the view that there is a cosy relationship. If not part of the cartel, Permanent TSB was certainly not willing or hungry enough to shake the damn thing. Many will have that view of Permanent TSB regarding its niche in Irish banking. It is niched rather than mainstreamed, and the bank is not, as yet, prepared to take on the major players in critical areas. Although Mr. O'Grady has stated that his focus is on personal banking, I have no doubt that major institutions such as local authorities are a door to a great deal of personal banking through their staff and so on. It is huge and feeds into the major influence that both Bank of Ireland and AIB have over the sector today. I regret that Permanent TSB did not feel up to taking on that challenge, and I hope that at some point in the future it will.

I suppose that it very much reflects the public perception of where the bank is that it is seen first from a mortgage point of view, or at least as being more in that mould. Permanent TSB is the State's largest mortgage lender. It was reported last week that its figures show that mortgage demand and house prices are unlikely to ease in coming months. Only last week, Mr. O' Grady stated that the volume of new mortgage applications to date in 2003 was significantly up on the previous year and that it was driven by low interest rates. There has been much concern expressed, and the Central Bank figures published on Friday, 4 July show that mortgage lending is continuing to grow at an annual rate of 24%. That said, we all recognise that there is a slowdown in growth in the economy. People are anxious about the effect that that will have on jobs. There have already been small indicators. Some predict very problematic figures in the jobs sector before the end of the year, and there is of course a consequential effect on the whole house market.

The Central Bank has expressed concern that lending institutions are more concerned with volume growth than market share. They are driving forward a proposal whereby lending opportunities are being created for people who cannot, or will not be able to, afford what they are taking on. What cushion is Permanent TSB preparing for people who undoubtedly will find themselves in difficulty if the current forecasts come to pass? Will it be as guilty of neglect as all the other players in lending to people who will then have to face the full rigours of its subsequent efforts when clearly they will not be able to cope? Or is Permanent TSB, as a caring and socially conscious body within the Irish banking sector, making provision for the difficulties in which I sincerely believe a significant number of people will find themselves within a few years? I wish Permanent TSB well and I hope it will prove to be the player.

I want to call Deputy Ned O'Keeffe because we are running short of time and Iwant to take a couple of speakers together at thisstage.

I welcome the representatives of Permanent TSB. We have been lonely since the merger because both organisations were very customer friendly, particularly when it came to mortgages. Many years ago, the Trustee Savings Bank came to the rescue of my late great friend and colleague, Mr. George Colley, in opening up the mortgage business when other people had closed down. That is a plus as far as I am concerned. How long did it take before Permanent TSB reduced its interest rates? This is a controversial matter. When the last ECB rate was reduced, how long did it take Permanent TSB to fall into line? Was it pressurised into doing so by politicians and others? We do not have the benchmarking formula to know how Permanent TSB arrived at that, so I have asked the financial regulatory authority to explain how it does so. It would not be fair for us to make suggestions and statements willy-nilly because that is not a businesslike way of doing it, but there must be a formula.

Permanent TSB is now quoted on the Stock Market and I have read in the newspapers that the shares are not performing as they should. The shares went as high as €16 last year but they are now below €10. Will the Permanent TSB representatives tell us when the shares will go back up to €16?

Mr. O’Grady

The sooner the better.

Following Mr. Duffy's presentation, I should say that I know the Permanent TSB and have a home mortgage with them. Were they like Mr. Duffy many years ago - knocking on the door of the clearing system and could not get in? I want to hear about the bank's experience because it has gone through huge organic growth over the years. Was it shut out or did it feel shut out of this clearing system at any stage, given that it is the third force knocking at the doors of the two bigger banks? What kind of club is it, according to Permanent TSB's depiction, and do they find it difficult to gain admission?

Mr. O’Grady

I will take a few questions and then hand over to my colleague, Mr. Bradley. As regards Deputy Ó Caolain's point about house prices and what happens if things go wrong, from our perspective our credit criteria have not changed. The amount of money and the customers to whom we lend do not change either. It is obviously not in our interest to overstretch our customers, and it is not in their interest to be overstretched. In evaluating any application for a mortgage, we make sure the applicant is in full-time employment, has the ability to service mortgage repayments, and conforms to the affordability formula used by the credit department. In addition, in order to give us and the customer a safety net, we ensure that we stress-test every loan. For example, interest rates are very low at present - they are 3.55% for us - and in the event that they rose a full two percentage points to 5.55%, we would ensure that the customer could continue to service the debt.

On specific customers falling on hard times, we have been in this market for a long time. We have a quarter of the market and are well experienced with some of our customers falling on hard times, where employment or the primary income ceases. We deal with customers on a one-to-one basis. We ensure we can come to an arrangement that is mutually acceptable and that will see the loan paid off over a potentially rescheduled period, and we will adjust the payments accordingly. It is only by doing such things that we have retained our competitive position in the market place.

Another question related to the speed of passing on the most recent ECB interest rate reductions. We passed on the full 50 basis points to our mortgage customers. As a matter of interest, we passed significantly less than that on to our deposit customers. We passed it on the 23rd day of the month, while I think the announcement was made at the end of the first week or the beginning of the second week; we did it as quickly as was feasible.

Mr. Bradley

I will take the final questions, including Deputy Lenihan's relating to the clearing system. The former Irish Permanent was not a member of the clearing system. We did think about it and looked at the possibility of going into the system. Our perception would not have been the one that Mr. Duffy gave earlier. It would have required an additional investment by us and additional commitment, on our own side mainly. We would have needed to invest more in our technology and our systems. We did not feel that it made sense in terms of our business focus but, frankly, we did not perceive it as a barrier in that world. We are now a small member through the TSB link, because TSB was a member of the clearing system for quite a long time. My impression from TSB colleagues is that there was not the level of barrier that seems to have been a feature from some of the earlier presentations.

The demands, in terms of the sum cost and requests, were not extortionate?

Mr. Bradley

That was our perception. Deputy Ó Caoláin commented on the Cork County Council tender and the link to "cosy" arrangements. To be clear, we are focused on the personal sector in which we are hungry and competitive. We have built up our business. In 1993, for example, we did not have a presence in car finance. We are now, however, either the largest, or second largest, car finance provider with more than 20% of all cars being financed by Permanent TSB.

Our presentation showed our aggressive approach to personal current accounts and, as Mr. O'Grady said, we are promoting that currently to get new personal accounts. We are hungry to build our business but in areas where we are happy we can provide a service. We have thought about the business sector and the issue for us is that, given our presence and reputation in Ireland, we are not happy to develop our business if we do not have the competence or something real to offer. We are not going to pretend to offer competition in an area that is not core to our business. We will be a real competitive force in personal accounts in Ireland; that is our major corporate commitment.

At this stage I will conclude this section of the meeting.

What about my question concerning the share price?

Mr. Bradley

I will answer it. As Deputies know, we have a very wide shareholding, given the former Irish Permanent's position. In fact, our shareholding is spread throughout the country. Unfortunately, we have been the victim of the international downturn in share prices, which is reflected in the Irish market-place. It is frustrating for us who are involved in the business. Our share price is important in maintaining investment. So the real comfort I can give the Deputy is that we have a very strong business and continue to do so. Ultimately, the market will recognise our value.

I do not want to comment on that but is the operative word "Buy"?

Mr. Bradley

Cheap at the price.

We are getting no indication of the share price directly.

I wish to thank Mr. O'Grady, Mr. Bradley and Mr. Carthy for their presentations, and for the helpful answers they provided to our questions. I will suspend the meeting for a moment to permit the witnesses to withdraw and to allow the representatives of the Bank of Ireland to take their places.

Sitting suspended at 7.30 p.m. and resumed at 7.31 p.m.

I wish to welcome the following representatives of the Bank of Ireland: Mr. Des Crowley, chief executive, retail financial services, Republic of Ireland; Mr. David Holden, head of group communications; and Mr. Finbar Murphy, group legal adviser. I apologise for the late hour. As the delegates can see, this topic has exercised the minds of Deputies. It is appropriate to say that because most people think TDs have been on holidays for the past week. Nonetheless, we are still here at this hour of the evening and we have not finished yet.

I am obliged to remind visitors that while the comments of members of the committee are protected by parliamentary privilege, those of visitors are not so protected.

Mr. Des Crowley

I thank you, Chairman, and members of the committee, for inviting us here today. The principal, stated purpose of this hearing, as we understand it, is to discuss consumer charges and interest rates in the market. I will confine my opening remarks to those two items. The 220-year history of the Bank of Ireland can be read elsewhere at another time. I would add that we are pleased to be here. We had our annual general meeting today so we appreciate being scheduled last in the proceedings.

From our perspective, charges in this context are taken to mean the fees payable by both personal and business customers for a wide range of transaction services linked to the operation of their current accounts. The current average fee paid by Bank of Ireland personal customers is €45.60 per annum and, by business customers, €279 per annum. There have been no increases in the prices of any core current account services for either personal or business customers since 1993.

Let me deal first with personal customers. Fees in this category have been falling steadily in real terms for more than a decade. Transaction volumes increased substantially as more and more people engaged with the banking system and as economic activity increased. Advances in automation have generated some efficiencies. Unfortunately, Ireland still lags behind many European countries in the reliance we place on both cash and paper-based transactions. That situation was not helped by the recent increase in Government duties on plastic cards. However, progress has been made and higher usage of electronic systems, particularly via the Internet and telephone, has been a clear trend. These developments would have helped to contain prices because we became more efficient. Ireland also has the added factor, unique in Europe, of price control, which, we contend, has distorted the market and prevented the emergence of differentiated pricing structures that would accelerate the move to more efficient electronic banking systems. Ironically, in our view, it has also reduced competition by discouraging new entrants to the money transmission system, which is an extremely costly service to provide.

On the previous discussions, we would welcome any review of the clearing system, including the entry rules to the clearing system and clarity surrounding the issues. We would like to see more players in the market place.

At Bank of Ireland, our personal customers may opt for a fixed fee of €11.40 per quarter, which covers all routine banking services with no extras to pay. Alternatively, if they have limited activity on their accounts, they may opt for a fee per item. In either case, their average outlay is less than €50 per annum. This compares with €209 per annum for the rental of a phone line and is a fraction of the service charges applied by many local authorities and other service providers. In return for those fees, customers have access to 700 Bank of Ireland ATMs, 270 branches, 24-hour telephone and Internet banking, cheques, standing orders, direct debits, card transactions - both Laser and ATM - throughout Europe, and monthly statements posted to their homes. It is a modest price for a comprehensive service that bears comparison in quality and sophistication to the best around the world.

Small and medium-sized enterprise customers also have access to those and additional services but typically have much higher levels of activity: an average of 241 paper transactions, 133 automated transactions, 184 cheques lodged, €58,000 in cash lodgements and €6,000 in cash withdrawals. The average cost is 76 cent per day. The service we provide to these customers represents exceptional value for the fees charged.

I will now move on to interest rates. There has been significant focus recently on the speed at which banks responded to change in the ECB rates and the extent to which reductions were passed on to customers. The European Central Bank assumed rate-setting powers at the time of EMU entry in December 1998. Including the first rate change from the existing Central Bank rate, to date, there have been 18 rate changes. Rate increases accounted for seven of these and 11 were reductions. The total net effect of all of those changes was a fall of 3% in the base rate, from 5% to 2%.

The record of Bank of Ireland with respect to the timing and the amount of changes is as follows: we responded to rate increases in an average of 28 days, i.e. rates going up; and when the ECB rate fell, our average response time was 17 days. In other words, and contrary to popular opinion, we reduced rates faster than we increased them.

Against a fall of 3% in the ECB rate since October 1998, our standard variable mortgage rate has fallen by 3.5%, our standard credit card APR by 6.7%, and certain small business and farm loans by up to 4.9%. Other rates, and particularly overdraft rates, have not fallen, or have reduced by smaller amounts. This reflects a realignment where the product was previously under-priced. Many banking markets do not have overdraft products - borrowing is by way of term loan with regular or fixed repayments. Overdrafts generate high administration costs and high bad debts. There is no simple equation between the lowest deposit rate available and the interest rate charged on an overdraft.

Loans to business are keenly priced and the matrix, or published rates, do not paint an accurate picture of the average cost of borrowings by small and medium-sized enterprises. Bank of Ireland currently offers unsecured loans of up to €65,000 to SMEs and farmers at 4.75%. In addition, a significant proportion of business lending is negotiated at market rates plus a margin. Taking account of the varied risk profile of SME borrowers and the wide variety of loan products, including overdrafts, the average interest rate charged by Bank of Ireland is under 6%, which is on a par with the generality of rates to businesses right across Europe. It is significant in this context that, in a sample of more than 1,000 SMEs by the Small Firms Association - carried out earlier this year to determine their current top 12 or "dirty dozen" concerns - banking did not feature at all.

Bank of Ireland offers a wide range of deposit and lending products and the management of our overall margin requires delicate balancing between all of the rates offered and charged. In the current low interest rate environment, it is not possible to apply the same rate cut across every lending product, for the simple reason that we do not have the ability to reduce deposit rates by the same amount. Over the past two years, there have been 30 basis points of contraction on our net interest margin at a cost of €60 million. The key ratio for the health of our business is the group net interest margin, which is the aggregate of all the deposit taking and lending margins across the business. That rate is currently 2.38%.

The twin topics of charges and interest rates are rarely discussed without reference to bank profitability. Bank of Ireland is a diversified and profitable financial services company with pre-tax returns last year of €1.177 billion and commercial success is our primary focus. We would ask the committee to focus on profits earned from our retail business in Ireland, that is, from our personal, SME and agri-banking activities, our credit card company, asset finance and commercial finance activities, the mortgage business, general insurance, the full branch network, and the electronic and telephone banking infrastructure. These businesses employ 7,500 people in the Republic of Ireland and have €20 billion in assets. They generated profits of €375 million in the year to end of March 2003, which is about €50,000 per head. If one compares that with many companies listed in the last week in the top 1,000 companies in Ireland, including Vodafone, Bank of Scotland and Viaggio, it is considerably less than any of those companies per head of staff.

In the same year, Bank of Ireland group had a total payroll cost in Ireland of €684 million. We paid out €160 million in dividends here and paid over corporation taxes and duties of €181 million. I mention this purely to illustrate that the equation is not one-sided and that profitability must be set against the size of the business and the assets we employ. We are striving to be as efficient as possible, to give the best service possible and the best possible value to customers. Success can only be measured in customer numbers and customer retention. We are a competitive organisation and that is why we have continued to grow our business, despite the many new and aggressive competitors who have entered our market. Indeed, we expect many new competitors that we cannot even think of at this point.

Because of time constraints, I would ask members to confine themselves to brief questions where possible.

I will do my best, Chairman.

I think we should make an effort to remain brief. The order is for three minutes each.

I hope the Deputy is using up his time at this point, and not mine. I welcome the representatives of the Bank of Ireland. I worked with the Bank of Ireland for 12 years and I have happy memories of my time working for that organisation. I have many friends still working in it from my own time.

To get down to charges at the outset, is it the case that where a personal customer goes into debit in their current account for a period of days within a particular quarter, the charges will apply for all cheques, manual debits and standing orders, etc., presented for the whole quarter rather than just the days for which the current account was overdrawn? Does that also apply where an overdraft permission applies?

On the bank's much heralded new current account charges - as they are styled on the bank's website - I believe that it remains the case, despite all of the promotion of this product, that account holders in banks in Britain pay significantly less than bank customers here. This has been instanced recently in an article inThe Irish Times in March, and Ireland on Sunday also did an exposé on it 12 months ago. I would welcome advice as to whether or not that position still obtains in the opinion of the Bank of Ireland representatives - that is, where a customer with overdraft permission and an ordinary current account gets charged for every single transaction. There is a quarterly maintenance fee and in terms of the overdraft arrangement an annual renewal fee applies. In the particular instance highlighted, which concerned the HSBC in Britain, none of those charges apply. Why do the Bank of Ireland and Irish banks generally, apply all of these, what I would regard as, recurring charges? The charges would appear to any ordinary man or woman in the street to be repetitious. If one is paying for every single item, why is one also paying quarterly and renewal charges on an overdraft facility, whether or not one uses it? All this feeds into the view that the banks are screwing people. It is to confront that and to elicit a different approach on the part of the Bank of Ireland and AIB in particular, that I have raised those particular questions.

As a former member of the bank's staff, I want to put the same question to the delegation as I did to Allied Irish Banks. What is the Bank of Ireland's position concerning worker directors on the board of the bank? This is something for which the IBOA, of which I was a member for many years, has argued. I did not press it with AIB but I would be anxious to hear the Bank of Ireland's position.

I would also refer to the news that broke this morning about the proposed transfer of Bank of Ireland's IT sector to Hewlett Packard. I understand that the IBOA has announced a one-day strike, or at least notice has been served of the association's intention to do so. The general view in reaction to that is that it is indicative of the bank's lack of commitment to its staff and to its customer base in the wider community. Within the past 12 months there has been quite a significant focus on a marriage of convenience with AIB concerning ATMs and IT. Once again, this is an example of where staff and customers are not the predominant concern because the profit motive is dominating. I would like to know what the bank's position is on that because a one-day strike by the IBOA will have its own consequences. I remember having been a participant in the 1976 bank dispute when the only consolation was the good weather.

I wish to put to the Bank of Ireland representatives a final number of questions that I also posed to AIB. Consumers are strongly of the view that the exorbitant interest rates on credit cards mean that they are being ripped off. It has been established that the rates of Irish banks for credit cards are 7% above the EU average. Why is there such a massive divergence between ordinary interest rates in the first instance and credit rates? Why are Irish banks charging such exorbitant rates in comparison with their EU neighbours?

As regards the closure of branches and sub-offices, AIB gave a response concerning an arrangement with the post office, which is all very well if the post offices survive in some measure. Mr. Duffy of the Bank of Scotland spoke earlier of having no branches at all, which is the ultimate nightmare scenario. Does the Bank of Ireland accept that the closure of branches over the years has had a damaging effect on local communities? What is the bank's position on that, and its current intent? AIB gave a response earlier.

I am coming to a conclusion and wish to pose a question that I did not ask earlier. Last week, the Dáil passed the Official Languages Bill to ensure that people who wish to conduct their business with the State in Irish will have that right recognised in practice. What facilities does the Bank of Ireland have for customers who wish to carry out their business in Irish in any of its branches throughout the country? Does the bank have people with the necessary language skills and are all the bank's forms available in both languages?

The situation vis-à-vis Cork County Council has come up on a number of occasions. While Permanent TSB has given its response, is it not the case that in this particular instance, a cosy arrangement exists between the Bank of Ireland and AIB on their share of the various local authority accounts throughout the country? How can Bank of Ireland explain why it did not compete for such a lucrative account as that of Cork County Council? Whatever their response may be, do the bank's representatives not agree that the bank's failure to compete - leaving Cork County Council having to accept the dictated terms of AIB - has left a bad taste in the mouths of many people? It has fed into the view that the two banks operate a cartel together.

Mr. Crowley

I will start with the Cork County Council issue, which was unique. When we saw the advertisement for the tender we absolutely wanted to compete for the business. When we examined the tender document there were three service features that we could not meet. In addition, at that time we were involved in an extensive branch merger programme in Cork. Our management team took the view that they could not meet the service requirements and that, therefore, they would not set winning that business as a priority. I can tell the committee today that we are tendering aggressively for Limerick and Leitrim County Councils against whoever else is in the race. It is our intention to compete for county council business. In the case of Cork, there was an individual circumstance - both because of the service requests in that tender and our circumstances in that market - as to why we did not tender for that particular piece of business.

As regards branch closures, we have rationalised our branch network since 2000, primarily in urban areas. The classic situation was like that in Ennis, where there were two branches 20 yards apart, while in Dublin's O'Connell street we had three branches. We rationalised in the large urban areas of Athlone, Dundalk and so on. We can assert that there has been no damage to our business nor to the customer service we deliver in those markets with the exception of some inconvenience in the transition process, which is accepted. Overall our service delivery has improved in those markets. We have no further plans on rural closures, nor have we had any major rural closure programme in the past ten years.

We have innovated around new retailer ATMs.

How many branches have closed in the past two or three years?

Mr. Crowley

In the past two or three years we have focused on urban branches and we have closed 37 branches.

Rural branches have been closed, in Castlepollard, for example.

Mr. Crowley

We have closed sub-offices. We are addressing that through the provision of retailer ATMs, which is a new programme that we launched with one of the Ministers recently to get local cash access to all small towns in Ireland.

Castlepollard was not a sub-office. It was a full office.

Mr. Crowley

In my time it was a sub-office.

I worked in it. I looked after Deputy Cassidy's accounts.

Mr. Crowley

Perhaps many years ago it was not.

I have to say it was a full office. There are others. I welcome Deputy McGrath's intervention.

Mr. Crowley

Let me conclude on the branch closure issue. We have a number of branch rationalisations going on but they are in large urban areas, Clonmel and Kilkenny being the two remaining at this time. At this stage we have finished that stage of the programme. I would never say "never again" in that we have to look at the way systems are changing. People migrate from branches, footfall is very low, but we have made a significant investment. There are 270 branches which are fully staffed and are providing a very good service. If we do not have branches in towns we intend to install retailer ATMs near Spar centres and similar outlets. We believe that is a very good innovation and we are conscious of the needs of rural communities.

Will you note our appeal?

Mr. Crowley

I will note the Deputy's position.

I call on Senator Mansergh.

This is not quite finished.

We have spent 11 minutes onthis.

I have asked a number questions. I would like a response to the detailed questions I have put. I went to the trouble of preparing the questions and we have only reached the second answer.

I will allow Mr. Crowley to continue and I will then call Senator Mansergh.

Mr. Crowley

On the personal current account side, it is our policy that unless a customer is in the student or golden years category we charge either €11.40 a quarter or 29c per transaction. That is a very good deal for customers. Customers have other alternatives in the market. Our policy is to charge for the service, which is a very good service, and we will continue to do so. There are players in Britain who, for their own reasons, have free banking on credit balances. That is their strategic position. That is quite acceptable to us, but we will not be doing it here.

On the credit card side, most countries in Europe do not have stamp duty on cards. They charge their customers a fee. Stamp duty on cards is €40 here. Looking at the comparative charges for credit cards across Europe, we tend to look at APR, including fees. However, we do not have fees because of the stamp duties, and that is one anomaly in the market. A recent IBF survey comparing credit card charges at a sectoral level indicated that we are about average in Europe so far as credit cards are concerned. Credit card APRs and interest rates in Britain are higher than they are in Ireland. We have a card at present, an advantage card for the Special Olympics, at 14.3%, which is one of the best on the market. These change over time and different products have different prices.

I will ask Finbarr or David to comment on the language equality Bill and the matter of worker directors.

Mr. David Holden

I will refer first to Hewlett Packard. The industrial dispute was mentioned. We were very surprised to receive strike notice from the IBOA because discussions are still ongoing on this issue. The IBOA has made it very clear in public that it has no difficulty with the principle of outsourcing. It is not about the principle but about the terms and conditions under which people move from Bank of Ireland to the new company. There are still discussions going on in relation to that. We are pretty confident that those discussions will reach a successful conclusion for all parties. It was very puzzling to us that strike action should have been proposed.

On the language issue; we are not perfect but we have received much praise from Irish language organisations in recent years. We have innovated quite a bit in this area, especially in ATMs. All of our ATMs are now bilingual.

Mr. Crowley

Are bilingual cheque books available?

Mr. Holden

Yes. Bilingual cheque books are available. We do not have bi-lingual signage in every branch, but we have it in quite a number of branches, especially in those parts of the country where Irish is more used than in others. There is still some distance to travel. We are in fairly constant contact with Irish language organisations about this.

The other point raised was on worker directors. We have no plans to appoint worker directors in the bank. I cannot elaborate beyond that.

I am a customer of 35 years' standing at a provincial branch of the bank where a very good service is provided in modern headquarters. Let me come now to the complaints. Some of them fall into the "lead us not into temptation" category. I remember being urged 25 years ago to open an account not at the bank but in the Isle of Man or in Northern Ireland, and the banks in general have not taken sufficient responsibility. I do not believe it was just individuals looking to plant their money offshore but that it was actively promoted from within the banks, and I am not sure that has been sufficiently acknowledged.

As far as credit cards are concerned, I have had the experience twice in recent times where I have temporarily gone close to my credit limit and with some difficulty paid it off only to get a letter by the next post raising my credit limit by a couple of thousand euro. This is definitely leading us into temptation and I am not sure that is a particularly desirable practice. Similarly, having paid off a mortgage, again with some difficulty after 20 years, a letter in the next post invited me to remortgage my property. That leaves a bad taste. Most people are relieved to have it off their back. The last thing they want is to be approached or urged to start all over again.

One of the points I raised with AIB has been dealt with, but I want to make this comment. Mr. Crowley said other rates, particularly overdraft rates have not fallen. The overdraft interest rate has remained at or near 11% whereas the mortgage rate has come down. However, you say that overdrafts generate high administration costs and high bad debts. There is a sector of business, however, where overdrafts are virtually inevitable in the absence of a lot of working capital, and that is the farming business. It is of a seasonal nature in many cases, particularly in areas like the cattle business where income tends to be concentrated in a particular part of the year but expenditure is spread over the whole year. The overdraft rate for farming is far too high. My brother, being single without dependants, has taken over from the Bank of Ireland as far as I am concerned.

The final point I wish to make relates to community facilities. Very often communities get to build badly needed or wanted facilities, for example, in the areas of welfare, sport or arts, for which they often have a loan from the banks. I urge the Bank of Ireland and other banks to be as understanding as possible. Very often organisations get overstretched in those situations and it would be very helpful if, rather than adopting a peremptory attitude that might involve fairly drastic measures and fairly drastic results for the community, the banks allowed maximum latitude and flexibility. To be fair I wrote to the Bank of Ireland in Waterford about a particular incident in Tipperary and whether it was as a result of my letter or otherwise it moderated its position. The matter is important.

Mr. Crowley

I will respond on the farming side. We would much prefer to see people taking seasonal facilities, the lending rate for which at present is 4.75%, rather than an overdraft facility. It is important that we give the right product for the customer's need. I fully accept the input but the customer has to come and speak to us about their particular needs.

Will the delegation clarify exactly what Bank of Ireland did with the latest half point cut in respect of the different categories as this is not contained in its statement. We heard from the AIB that it cut its business rates by 0.6% and 0.8%. What exactly has the Bank of Ireland done across the range of its products? Does the delegation recall what happened to mortgage margins during the 1990s? I am looking at a report on the banking sector which shows a very interesting table. In 1995 the margin on mortgages was one percentage point. In 1999 the banks had pushed it up to 2.6%. The Bank of Scotland entered the market and the rate is now down to 0.5%. That experience does not give me the impression of a highly competitive, vigorous sector, trying to squeeze value everywhere it can. It appears that when competition took the banks on, the established banks responded and cut down. In response to the point that people with overdrafts are difficult to deal with, the Bank of Ireland has not passed the 0.3% cut on to its overdraft. Would the Bank of Scotland and others have a point when they say this is where access to the clearing system gives the Bank of Ireland a particular edge and, therefore, it has been sheltered, as it was for a while in the mortgage industry from passing on these reductions? The Bank of Ireland is choosing the areas where to pass on the reductions and where there is sheltered and market segmentation that can protect its margins, it is not about trying to do the right thing for business.

Perhaps the delegation can clarify the position about access to the clearing system? What exactly is the cost being sought and what is the cost which the Bank of Scotland and others are being asked to shoulder? Let us get those costs into the open. What exactly is the Bank of Ireland looking for in order that we can draw a conclusion?

I wish to make two final points. This interesting report by Davy has analysed the returns and has arrived at a view that for the years since 1993 the Bank of Ireland had an excess return of 12% on equity. This was a flavour of extra profit being driven out of the Irish system compared to the other banking systems in our European competitors. Does the delegation fundamentally disagree with the report's analysis or does it accept that part of its business has been its capacity to take excess returns in the Irish market? What are the implications of that?

To refer to a matter raised by Deputy ÓCaoláin, and the director, when she was here she showed us the margins and that the Bank of Ireland is pushing up its margin continually on overdrafts and credit cards. This report again shows the credit card rate here is 19% while the EU average rate is 12%. It shows that the Bank of Ireland's charges on a transfer of €100 is €25 while the EU average is €17. There appears to be a consistent picture that where the segmentation is possible and the competition is not vigorous the banks will push out the margin. Is not that the problem, that we have not got into a vigorous competitive model and that we have a cosy arrangement within the sector?

Mr. Crowley

Having listened to the two previous presenters I certainly feel I am in a very competitive environment. We have some people cherry picking and some coming with mass-market products. There are approximately 80 domestic players in this market at present. Yes, I do think it will get more competitive and there will be more competition and prices will be driven down. Our personal current account prices have been driven down in real terms over ten years. During the ten years before Bank of Scotland entered the mortgage market, our average margin was about 130 base points, but it is now about 120. Certainly, there was a blip around the time of the ECB entry. For many years there has been a fairly consistent level of pricing in this market despite some new entrants.

On access to the clearing system, I strongly encourage an inquiry. There are only two terms and conditions of entry to the clearing system: share the fixed cost of running the system and convince us you will not bring the system down, in terms of automation. It is simple, and I would encourage strongly——

What are the fixed costs? What are the numbers? What is the Bank of Ireland looking for?

Mr. Crowley

I do not know but we can get it for the joint committee. I do not have access to those data as it is not an issue that concerns me from day to day.

Bank of Scotland maintains that it could not find out what those costs are.

Mr. Holden

As we understand it, Bank of Scotland never made a formal application to join the clearing system. I presume, until such time as it did, it would not get a number. We would be perfectly happy with the kind of inquiry suggested earlier by Deputy Lenihan into the clearing system. That is the way to deal with it.

I would like to see the numbers presented to the joint committee. We heard earlier that AIB was unwilling to present certain numbers to the joint committee. I hope Bank of Ireland will not say it will not do so.

Mr. Holden

We are not in a position to present numbers on the clearing system. The clearing system is run by an organisation with its own executive. They are the people who are in a position to speak about costs; we would not be qualified to give those numbers, nor is the board.

Bank of Ireland is one of the five players on the board of this outfit. It owns it and sets those charges. Therefore, we have to take that with a grain of salt.

Mr. Holden

We would encourage the joint committee to——

What is the role of——

Mr. Holden

The Central Bank is a member of the clearing system as well. Because Mr. Duffy made a big deal earlier about the clearing system and the impact of the clearing system on his ability to do business, the best way to resolve this issue is to test it. This theory should be tested and this would be a good place to do it.

Deputy Lenihan made the suggestion earlier that we invite in representatives of the clearing system.

I made that proposal and also that we include the Central Bank. There is no point in having it separate. It is part of the board and it is also regulating.

We will invite in that organisation before concluding our hearings in September and the joint committee will draw its own conclusions at that point. We will definitely act on that suggestion.

There have been only two applications to join the clearing system in my experience. The first was in 1988 from a building society. It was rejected for the simple reason that in 1988 building societies were not empowered to take part in money transmission services. The second application, which was from the TSB was accepted.

Has the delegation completed its answers?

I have not had a response to the question on overdrafts.

Mr. Crowley

On the overdraft position - our provision of personal current accounts is a serious loss-making service for us. The overdraft facility is a very difficult product to manage both in terms of administration costs, bad debts and other features. We are trying to ensure the product is run properly and is priced properly. There is plenty of competition in the market for overdrafts as indicated by the previous speakers. That is our position on that. On lending rates, we would strongly suggest to customers that, if they want to take facilities, that they look at the competitive lending offers we have in all segments of the marketplace and come and speak to us rather than running overdraft facilities.

On the issue of credit cards, more than half of those who have credit cards do not take credit on them. They do not extend credit. They take the free credit period and use it as a payment card for convenience both here and abroad. They do not take lending on the credit card. It is an expensive product for us to run as there are many costs involved in it. I would suggest that the overall returns on cards is not exorbitant.

On the Davy report and the years since 1993, the Deputy talked about in excess of a 12% return on capital employed. As an overall group objective, we have stated in the market that our target return on capital employed is 20%, and we run our business in that way. We are in products and we compete in markets where we believe we can get those returns. That is the reason we price our current account service at €11.40 per quarter. We do not provide that free of charge because we cannot run a business providing many costly services without recouping charges from customers. The key aspect is that we are clear with the customers, and then they have a choice. There are other providers in the market who take a different position.

It would seem that all the providers in the Irish market take a position similar to that of the Bank of Ireland, that of high profitability, whereas the players in the markets in other European countries do not demand this 20% and therefore are more competitive for the consumer.

Mr. Crowley

If we consider the UK financial services market or the better players across Europe such as Banco Popular or the Belgian, Spanish and Italian banks, they are all targeting those returns. At the end of the day, we compete with those banks for investors because they are looking to Europe for the best run bank. Essentially, we are a commercial enterprise in that regard, but it is very competitive.

We have not yet heard of any poor banks in Ireland but we have certainly heard a bit of the béal bocht today from a number of the banks in relation to the extraordinary services they render. I am still not satisfied that there is transparency in terms of the cost structures. That is an issue the committee will not get a final answer to but perhaps it will in conjunction with the Competition Authority. Perhaps we will be more wise when we return to this issue in the autumn.

I congratulate the banks on the €1.1 billion profit. I realise a bank has to be a hard-headed business outfit but do the representatives not agree they get an exceptionally good deal from the Government in terms of the extension of the lower rate of corporation tax to them and the other banks? The comparative figures for most banking organisations across Europe on the take in corporate taxes is far higher, and they also have the benefit of the use of capital allowances through leasing arrangements. I do not know to what extent Bank of Ireland benefits but in a recent reply to me the Minister for Finance stated that the cost to the Exchequer of taxes foregone last year, by virtue of capital allowances being used by the banks through leasing arrangements from customers, was €316 million in total, which is a fair amount forgone by the taxpayer. For that reason, I would be concerned about the level of competitiveness offered by Bank of Ireland and AIB as the biggest players in the market, particularly to small and medium sized businesses, and to what might be called the indigenous sector, which we need to grow. I read the statement about the bank's contribution but, in turn, the Exchequer is quite generous to the banks and financial institutions here in that they have the benefit of the lower tax rates that apply to the corporate sector in general for various reasons.

In that context, the bank is on record in a number of newspapers recently in respect of the 400 customers it wrote to in connection with the Bank of Ireland offshoot in Jersey. I do not know whether that has settled down to about 280 accounts; it is not clear. I understand the Revenue Commissioners, in their recent report, mentioned 281 accounts. If people choose to take their banking business to Jersey, I assume they must have at least €100,000, or probably €250,000, to make it worth their while because I am sure Bank of Ireland services in Jersey do not come cheap. We are talking about a lot of money, perhaps €40 million or €50 million. The DIRT inquiry - do not want to rehash that - and other inquiries have shown significant levels of non-compliance by certain categories of account holders who in turn have then been assisted in relation to ease of transfer of deposits, etc. offshore. Many of those subsequently turned out to be non-tax compliant. The Bank of Ireland says it gives a good deal to the taxpayer in terms of returns and so on but the bank gets a good deal from the Exchequer in terms of the lower rates of corporation tax. If the Bank of Ireland alone has 400 account holders in Jersey, what percentage of that Irish offshore business has the bank, as one of the major players? What is the story in respect of being tax compliant by the bank's customers in a context where we have lower rates of corporation tax, and it behoves everybody to pay that? There is much play in the statements about compliance and so on and I would like to know about that aspect because it is a fundamental question in terms of the business environment. If small and medium businesses which are tax compliant are competing against somebody who is not, is that facilitated in some way by our banking system? A level playing pitch operates in various ways but this is one area of competition about which I would be concerned.

Mr. Holden

I would like to address that question, Chairman. The fact that this is in the public domain is because Bank of Ireland took an initiative, and we are a compliant organisation. It is important to say that since the abolition of exchange controls, any Irish citizen is entitled to put money offshore. There is nothing illegal about the product or putting a trust, for example, offshore. There are many good reasons people would put a trust offshore rather than onshore because there is a difference in the tax treatment of legitimate trusts in Ireland, the Isle of Man and Jersey. If customers put these funds offshore through Bank of Ireland, there is no reason to suggest that was not an entirely legitimate transaction from a bank, and indeed from a customer, point of view.

A little over a year ago, in our normal internal audit process, we found a reporting requirement to the UK Revenue - not to the Irish Revenue - on UK-domiciled individuals who had trusts in Jersey. If we have an issue with any tax authority, our normal practice is that we always inform our primary tax authority, which is the Irish Revenue, which we did. We were told subsequently that the Irish Revenue Commissioners were about to undertake an investigation into offshore accounts, though not necessarily ours; I believe they are looking at the whole spectrum of offshore accounts. We sought and were given their permission to write to our customers to tell them this would happen and that if they had an issue around any funds they had placed offshore with us, they should make a voluntary declaration and if they did so, they would get the same deal available to any citizen who makes a voluntary declaration. That is the genesis of this issue. I am not aware of any suggestion that the bank was involved directly in tax evasion in this matter. The bank's position is that it is compliant in every jurisdiction in which it operates. It obeys the rules and laws, whatever they may be, and that is the reason the issue is now in the public domain.

Would Mr. Holden agree that now that we have some of the lowest tax rates in Europe, it behoves the banking industry to encourage people to be tax compliant? There are crises in our health and education services and in the context of the infrastructure needed to sustain the economy. Although I do not want to go into the history of the DIRT inquiry, we know the consequences and we know that significant amounts of money have been repaid to the Exchequer. It seems to me that this is another area which, along with the competition questions, concerns the banks. The banks say the situation is global but they will have to face up to encouraging customers to be tax compliant. I have seen the bank's mission statement; they want to be good corporate citizens but how do we sustain the economy if large amounts of money can be shifted offshore and people cannot make a contribution in the way that bank employees do as workers paying tax and social welfare contributions? It is important for the banks to address this matter.

Mr. Holden

I agree entirely with the Deputy's point of view. As an organisation and as individuals working in a bank in Ireland on PAYE, we are the most transparent taxpayers around. We have no interest whatever in people evading tax. I agree entirely.

Mr. Crowley

Can I make one additional comment concerning the Competition Authority, transparency and pricing? We welcome the Competition Authority's review. We think there are many myths being perpetuated in this market place which we believe will be blown away by the Competition Authority. There may well be issues to be addressed and I am sure there will be. We will be in a constructive mood as regards what needs to be addressed but at this point wewelcome the review and will co-operate fully with it.

On mortgages and commercial mortgages, a special deal is available to new Bank of Ireland customers that is considerably below the normal borrowing rate. How does the bank justify this to existing long-standing customers, that it can, in effect, subsidise more people to join the Bank of Ireland out of their costs and interests rates? What is the bank's rationale? Perhaps it is linked to the business of switching, which we talked about earlier. Once the bank has people on board it will cost them money to switch; they are captured and cannot move. What does the bank say about switching? Is it in favour of making it easier to switch mortgages from one group to another? Is the bank prepared to pilot such a scheme? The Bank of Scotland said earlier that it was prepared to do so. What is the view of the Bank of Ireland on that?

The Bank of Ireland representatives spoke earlier about branch closures around the country. They may want to change the record of what they said because there has been rationalisation of branches in rural areas. They may want to write back to the committee to clarify this issue, rather than having the record stand, because branches have closed.

The Bank of Ireland's profits were announced at its AGM today but what proportion of those profits are generated overseas?

I commend the Bank of Ireland on a wonderful performance in making over €1 billion in dividends, and paying wages and salaries also. They have done everything very well. There is no point in knocking everything around the table today. The bank has been around for 220 years, since 1783. The Bank of Ireland had the concession or privilege of being the Government's bankers for many years. Is that still the case? Some time ago, there was a proposal to amalgamate the clearing banks into one organisation but I understand that it was scuttled by the Competition Authority or an equivalent body. I would like answers as to why that proposal, which involved both major banks, was scuttled. Someone mentioned that the Bank of Ireland has a 12% return on equity but is the bank satisfied with that?

Some time ago, the banking system in New Zealand was deregulated. Does the Bank of Ireland see a threat to the Irish banking system arising from the deregulation that is occurring across Europe? The consequences for Ireland will be very serious. We talk about the two big banks being major players but they are small fry in a big market. Journalists and economists write about the threat of a big German bank arriving here; how would that affect the Irish banking system? If that happened, there may be no alternative but for the Government to allow Bank of Ireland and AIB to merge into one organisation in order to save the Irish banking system.

Given that everything here has been organised to bash the banks, I suppose I should congratulate Bank of Ireland for their generous and successful sponsorship of the Special Olympics, which were a huge success and reflected well both on the bank and on the country. The bank, along with the other bank witnesses who appeared before the committee, would want to remember the words of Ms O'Dea of IFSRA concerning the widening interest rate spread against a background of the headline European interest rate levels coming down. We are seeing a widening spread of overdrafts, credit cards and other personal banking facilities. This is a huge issue, from the political viewpoint, having been the subject of complaints and lobbying that the banking levy is unjust. I can see no end to that levy in the medium term if this practice is not changed and unless there is transparency with regard to overdraft charges for customers. Competition and inflation are impacting seriously on our general economic performance. I throw that down as a warning to the banks that hope the levy will end in three years. We hope so, also, but if there is not going to be competition in this area, I can see a future Minister for Finance prolonging that levy well into the future. I accept the logic that it is a direct charge, a Robin Hood exercise, on the banking industry but we cannot be blamed for that when one sees the level of complaints and the widening gap in interest rates.

I thank the bank's representatives for coming here to make their points before the committee. More transparency is needed. Mr. Duffy may be right on this - it would be better if the banks moved voluntarily, as they did in relation to the Isle of Man. If they had moved in a similar manner in the past - and AIB in particular, in relation to the DIRT inquiry, in which I was involved - as they did concerning the Isle of Man customers, we might not have been in the situation of having levies, extra charges and investigations into the banking sector. It is in the banks' interests to move voluntarily in this regard. Mr. Duffy has thrown down a serious challenge to them. They might be better off moving voluntarily rather than having us coming after them for more money.

I forgot to ask what part of the bank's activities concern agriculture and agri-business. It used to be substantial once upon a time but I have heard that in recent times the Bank of Ireland is not as enthusiastic about the farming world as it was in the past, because of the downturn and what is happening in Europe.

I concur with Deputy Conor Lenihan's comments about the bank's sponsorship of the Special Olympics and its great work on behalf of the GAA, which is a rural organisation. The bank has been a wonderful sponsor in that area and should be commended for that. Not everything the banks do is wrong - they do much good also.

I will invite Mr. Crowley to comment. I say this in jest, but I am sure that from Mr. Crowley's point of view, he hopes that Deputy Conor Lenihan is not the Minister for Finance when it comes to dealing with the levy in a few years' time.

Mr. Crowley

I would like to accept the offer from Deputy Paul McGrath. We will provide a full list of branch closures we have done over a reasonable period - five years or so.

Mr. Holden

Yes.

Mr. Crowley

On the switching of mortgages——

Will that information be furnished to the committee?

Mr. Crowley

Absolutely. We have noticed a couple of facts about switching mortgages. If a customer wants to switch a mortgage of €300,000 from our bank to Mr. Duffy's bank, it will cost about €1,100, of which approximately €500 goes to the State in stamp duty, €400 to the legal profession for its work, and €100 to us as an administration fee.

We would dearly like to pilot the issue of a passport for mortgages, but the questions around the taxation on switching and the re-stamping of documents in the legal profession need to be addressed.

So you have no objection to switching?

Mr. Crowley

No. Deputy Conor Lenihan referred to the widening of margins. Our net interest margin in the past two years has shrunk by 30 basis points. Everybody is forgetting that we have a lot of depositors who are beginning to get very poor returns on their money. In fact, they are getting no real return because the inflation rate is higher than the interest rate. We did not pass any major interest rate reductions to our demand depositors over the last two rate changes. We could not. The rates we are paying are very low, but we have nowhere else to go. We will continue to focus on the issue around balancing the interests of depositors and borrowers.

Approximately 12% of our loan book would be connected with agri-business. The business, banking and personal books are growing rapidly. In absolute terms, agri-business is approximately the same, but it is not growing, which reflects the state of the industry.

There is not, to any great extent, local management of the New Zealand banks. Policy is set abroad, either in Australia or the United Kingdom. Therefore, there tends to be a lack of funding or access to funding for businesses, which in turn has a big impact on development capacity. The biggest issue for New Zealand is that it has been the slowest growing economy in the OECD for the past ten years. Some of that is attributable to the banking system. The key issue for Bank of Ireland, AIB and other large companies is that if we are taken over, there will be no headquarters such as those on Baggot Street and, in our view, there will be no investment in some of the local sponsorships. In particular, there will be very little professional expertise kept here, that is, accountants, solicitors and IT. Those facilities - call centres - will not be here if the bank is taken over. That is a serious situation for Ireland Inc., the Government and the people of the country.

Part of our defence is to run the bank as best we can, to run it very commercially and to compete and make sure somebody looking at Bank or Ireland would not form the view they could run it better and perhaps charge higher prices. It is our intention to improve the efficiency of the bank in whatever way we can and to give better service and better value for money if we can.

On behalf of the committee I thank Mr. Crowley, Mr. Holden and Mr. Murphy for attending this evening's meeting, making the presentation and participating in a lively questions and answer session. We are grateful and thank them for bearing with us so late in the evening. As there is no other business I now declare the meeting adjourned until Thursday, 4 September. I thank the committee members for their hard work and co-operation. I hope these sessions have been of interest and I look forward to seeing members after the recess.

The joint committee adjourned at 8.35 p.m. until 11 a.m. on Thursday, 4 September 2003.