Following this short presentation, I will be happy to take questions. The Irish Bankers Federation is the representative body for the banking and financial services sector in Ireland. We represent 63 member banks. Thirteen of these are in the retail business and the rest are in the international financial services business, located principally in the centre on the north Dublin docks and also across the country. The Irish Bankers Federation is affiliated to two federations: the Federation of International Banks which is the umbrella body for the international banks and the Mortgage Council which represents the mortgage lenders, which would include building societies and banks.
The following gives a flavour of the economic contribution of the financial services and banking industry. There are over 55,000 employed directly in financial services, principally in banking. The vast majority of those are in retail financial services. There are 19,000 working in the international financial services sector, which is one of the fastest growing employment sectors in the economy. The financial services sector spends approximately €4.5 billion on wages, services and projects and pays over €1.5 billion in taxes, including PAYE and PRSI. The sector accounted for 6% of GNP in 2004.
Ireland has been hugely successful in development of international financial services. We are now the fourth largest exporter in the services sector. In fact, in 2004 the IFSC exported a total of €14.6 billion, which was over one third of the entire services exports by value.
Some may have the impression, as they look down onto the north docks and, indeed, increasingly onto the south docks, that employment in international financial services is confined to that particular area but in fact it has a country-wide base. A slide in the presentation shows that almost all of the country is covered. The members will be familiar with some of the entities. In Kildare, for example, State Street has recently established a facility. There are also branch banks. In south Leitrim and Roscommon approximately 1,400 are employed through MBNA and branch banks. In Limerick, over 1,000 are employed through organisations like GE Capital, Halifax and branch banks. In Cork, over 3,000 are employed in financial institutions. In Westmeath, Deputy Paul McGrath's constituency, there is branch banking, GMAC with which he would be familiar and also a number of other entities. In Dublin, Bank of Ireland has a large operation centre in the Cabinteely-Dún Laoghaire area. In Carlow-Kilkenny, almost 1,000 are employed between State Street, a Bank of Ireland operation centre and branch banking. Financial services are very much spread across the country, and this is becoming increasingly the case. I am originally from the Carrick-on-Shannon area and the entire north Shannon region has received a significant boast from MBNA being located in that area and drawing a workforce from a wide hinterland.
The market has been transformed over the past number of years. Over a period the number of credit card providers has increased from eight to 12, one of those being MBNA. The number of personal loan providers has also increased quite significantly and the number of mortgage providers has increased significantly as well. The number of current account providers have increased, but there has also been consolidation which evened the effect, for example, TSB and Irish Permanent merged to create one provider as such, Permanent TSB.
The 8,000 providers across the EU mentioned in the presentation refers to the advent of the single European payments area project, which is being rolled out by the banking sector and will result in a standardised payments process from 2008. Although it will obviously take time for the market to develop, theoretically it will allow all banking providers to offer directly payment services across the EU to all citizens. That is part of the evolution of the Single Market. Commissioner McCreevy is very involved in that in his role as Commissioner for Internal Market and Services.
The next slide visualises developments since 1998, when MBNA entered the credit card market. Since then, there has been a considerable number of new entrants, mainly foreign players, into the market. As recently as this year, as the committee will be aware, Fortis Banque was successful in partnering An Post in a potential banking alliance which, according to the chief executive of An Post, will launch a suite of personal banking products into the market in 2007. An Post has an extensive network across the country and already provides services in an alliance with one of the other main banks. All of those providers who have come into the market are involved, not in one area only but in credit cards, business banking, personal loans, mortgages, etc.
Even the newspaper headlines tell their own story. Over the period there has been much increased competition, particularly in the current account market. There has obviously been increased competition in the mortgage market. That is manifested in the headlines included in the slide presentation.
In overview, there are 14 mortgage lenders. They are Irish, UK, Danish, Dutch and Belgian owned lenders operating in the Irish mortgage market. The number of foreign players shows the international aspect of the business.
There is significant innovation in the market. The choice of products includes different interest rate types — fixed, variable and, more recently, tracker products which track the ECB base rate — and a considerable range of features — discounts, payment breaks, current account mortgages and cheque book mortgages. This innovation is a response to Ireland's dynamic mortgage market which has been driven by the considerable increases in the provision of housing over the past number of years and by the growing population.
There is a diverse customer base. While one hears a great deal about the first-time buyers who obviously form an important segment and are the ones fighting hardest to get onto the property ladder, the customer base is not comprised solely of first-time buyers. There are also movers who are trading up and sometimes trading down, investors purchasing property for rental, those switching mortgage provider and those who top-up their mortgages to finance a variety of purposes such as holidays or car purchase.
The total value of residential property stock in Ireland is €600 billion, according to the Central Bank. One hears a great deal about the amount of residential mortgage debt outstanding but the total amount of residential mortgage debt outstanding is €98 billion. While there is quite a large mortgage book which has grown considerably over the years with the growth in the economy and the demographics, it represents approximately 20% of the value of the residential property.
A slide in the presentation shows residential mortgage debt measured as a percentage of GDP in the form of a map of Europe supplied by our colleagues in the European Mortgage Federation. Ireland, which is in the range 50%-70% of mortgage debt to GDP, is not by any manner of means on the upper quartile of the scale in terms of the level of mortgage debt to GDP and is more in the middle. We have moved significantly forward over the past number of years, given that the housing stock has required substantial improvement and demographics resulted in a significant pent-up demand for housing.
The mortgage market competitiveness is referenced, not just by the statistics in the presentation but, indeed, by regulators and others. We are very competitive. In order that there is no confusion, the slide in the presentation shows clearly the current ECB base rate. The other rates shown are those as referenced in December 2005. It is useful to show the current ECB base rate, which is 2.75%. The committee will see that Ireland is quite competitive on the costs of providing a housing loan, and is marginally ahead of Spain and Finland in that regard.
Owner occupation rates may be of interest to committee members who have probably heard over the years that Ireland has one of the highest, if not the highest, home ownership rates in Europe. We have lost that mantle now. The slide shows we have been displaced by the former eastern European countries that are now part of the larger European Union. Most of the housing stock there would, previously, have been owned by the state, but as these countries have moved into the market economy, the properties have transferred into mainly private ownership. Those countries now have higher levels of home ownership than we have, but we are still well above the EU average.
With regard to what drives the mortgage market, on the demographic side we still have significant inward migration. Some people would have predicted the recent CSO figures which show a huge increase in population — a young population which wants to acquire homes. We also have more people per house than the European average. There is still quite a significant unfulfilled demand for housing and it is unlikely the demand will level off soon. There is a strong supply of housing to match the demand, but the demand is stronger than supply, particularly in Dublin. There has been some disruption in supply on the south side of Dublin over recent years on the planning side, which means it will take some time for supply there to catch up with demand. In other parts of the country there may be an excess, but in the round we are close to reaching equilibrium.
On the number of housing completions per 1,000 population, as can be seen from the slide, Ireland leads the pack. Spain is just behind Ireland in this regard and some people have said that Ireland has something to do with the Spanish rate also as many Irish people have bought homes in Spain. I am not sure whether anyone can verify this.
In terms of future development of the mortgage market, as part of the single market Commissioner McCreevy is promoting measures to try to promote integration measures within mortgage markets across Europe. This process is under way. By 2010 therefore, we could have a scenario where, through branches, brokers and the web, many companies will provide mortgage finance in Ireland. Some of these company names will be recognisable but some will be part of a mixture of European providers that are not currently in this market.
We estimate that approximately 10% of new lending relates to mortgages switched from other lenders. The lifespan of a mortgage is approximately six years. In other words, about every six years people revisit their mortgage and may remortgage or switch provider. This is what I mean when I say the lifespan of a mortgage is six years. Every six years people have occasion to think again about their mortgage and they either go to a new lender or renegotiate their mortgage for a higher amount. They may also decide to switch from a fixed rate to a variable rate or move to a tracker mortgage. Evolution in the market follows the trend that when first-time buyers become established, they move on and take a product that finances more of their lending requirements. Later still, they may move to a tracker mortgage. Many competitive initiatives by individual lenders encourage switching, for example, the offer to pay the legal costs of switching. I am sure members are familiar with the offers available in the market.
The current legislative structure does not allow one lender to transfer security to another and I will return to this issue with another slide.
I will describe briefly the mortgage switching process which is quite complex. Before members rush to any conclusions, it is not complex because the lending institutions make it so. A number of players are involved in the process, including the Government and the legal profession because of the matters of title and stamp duty. Typically what happens is that if people decide to switch mortgages, they apply to a new lender and get an offer. They then get a solicitor to redeem their mortgage and create a new one. The solicitor must contact the lender to request the title deeds which are security for the property and examine them to ensure they are good and marketable and have them stamped for the new mortgage. Then the solicitor goes to the new lender and requests a redemption figure — the amount of money required to redeem the old mortgage. Providing all conditions are met, this is drawn down and the solicitor redeems the loan with the old lender who vacates the mortgage and sends it to the solicitor to be charged and registered at the Land Registry where it is completed. It is quite a long process and I will explain how it might change in a few minutes.
It is difficult to give the exact cost of switching a mortgage because it can vary and depends on who people go to for the service. Let us take an example of a mortgage in the €250,000 to €300,000 range. The cost of switching could be approximately €1,300. The State takes approximately 50% of that for the stampings and duties associated with the deeds, the legal people take a slice for their part in the legal transaction, the valuer takes €100 to €200 for doing the valuation on the property being mortgaged and the lender takes from €50 to €100, in some cases not even that, as a vacate fee or administrative fee for conducting the transaction. The majority of the cost of switching the mortgage is, therefore, attributable to legal or stamp duties. Most lenders, in order to get people to switch, now offer to pay most of those costs as part of the switching process.
With regard to how we can improve this process, we could take a number of approaches that would facilitate easier switching than we have currently. First, we could change the legislative structure, but that is probably not the best route to take because, as members well know, legislative time is hugely constrained. Also, changing the legislative structure would be complex and raise all kinds of issues of ownership rights and would be difficult to deliver in the medium to longer term. I do not intend to dwell on this approach, but would be happy to elaborate if anybody wants me to later.
The easier and more straightforward way to create efficiency in the process is to do something which could be done in the medium term and which would have tangible benefits. There is a road map for this prepared by the Law Reform Commission. It published a report in April this year that laid out a clear road map for what we call e-conveyancing, as shown on the next slide. This involves transferring all the manual, paper-based system — explained on the chart I just showed which mentioned solicitors, values, Government, etc. — to an electronic platform which connects all the players so that the whole process can be transacted and executed electronically. This would cut down on time and costs and streamline the process significantly.
This is not a theoretical concept as it has been achieved in other jurisdictions. I refer members to the Law Reform Commission report which gives the example of the State of Ontario. It set up a quasi-commercial semi-state agency to run the operation and it charges a modest fee to the players to conduct the process on their behalf. This has speeded up the conveyancing process significantly and could be done here also. The Law Reform Commission retained a consultancy firm, BearingPoint, to map the process of migrating from the current manually based unwieldy system to a more streamlined electronic system.
We can play a part in one particular element of this process, namely the standardisation of mortgage deeds. Currently, each lender has its own mortgage deed. In order to make the electronic process work, all lenders would have to agree to have a standardised deed that could be moved easily from one lender to another. We are already working on that and have retained a legal firm to help us deliver it. We plan to have it delivered by the end of the year and that all lender members of the federation, which covers 100% of the market, will have a standardised mortgage deal. This will leave us set up to plug our piece into the e-conveyancing product when it happens.
I will refer briefly to current accounts which are part of the switching process. The cost of current accounts in the mortgage market is very competitive by international standards. This is referenced by CapGemini which did a world report on this issue in 2005. On the typical products in a current account — the regulator made reference to this recently — the cost is €59 and we are only superseded by China and the Netherlands. In relative GDP terms, China is in fact more costly than Ireland while the Netherlands has a very electronically enabled system of current accounts which allows it to deliver even further efficiencies. This is the reason they would be more competitive in that space.
On the matter of personal account switching we developed a code in the past year with all the stakeholders. We consulted with the Consumers Association of Ireland and with our own members and the regulator held a watching brief. I am happy to say that in the first year since the code has been introduced, 24,000 customers have switched under the code. A survey undertaken with TNS-MRBI showed that 5% of current account holders have switched in the past year. This is a reflection of the growing competition in the market place.
The trend has ebbed and flowed during the year. My explanation for the peaks and troughs is that new players have brought new offers into the market — I will not name individual members — such as those who have introduced free banking offers into the market at various times during the year. The visual presentation shows where the level of activity has increased at the time the marketing activities for those products were launched into the market. The code and the availability of free banking is a development that allows and makes it easier for people to switch between banks.
We have a similar initiative for business accounts which was launched in April and is in place since the beginning of June. This covers all current accounts and demand deposit accounts held by business customers and has been fully operational since the end of June. We engaged the stakeholders regarding this development, including the SFA and ISME.
Our vision is to create a dynamic and stable financial services industry in Ireland that will contribute both to the economic and social well-being of the country. We are very committed to this vision and to working constructively with all the stakeholders. We have introduced a switching code for personal business customers and we are committed to enhancing and improving it. We are developing a standardised mortgage deed which is referenced to the home mortgage switching process. We are strongly supportive of the promotion of e-conveyancing. I emphasise again that the financial services sector and banking in particular is a significant contributor to Ireland Inc. The international financial services side as I have mentioned, is a major contributor to the Exchequer and to job creation. I hope I have demonstrated the increasing choice and competition in the domestic banking sector.
