On behalf of the Minister for Finance, Deputy McCreevy, I wish to speak about the changes in interest rates in the last week. The Minister and the Minister of State, Deputy Parlon, are abroad on business.
The level of inter-bank interest rates is a matter for the European Central Bank, which is entirely independent of any Government in relation to its monetary policy activities, and the individual financial institutions operating in the market. It is important for me to stress that neither the Government nor any Minister has a function in respect of the setting of interest rates, either on mortgages or more generally. This is a function of the competitive forces within the market.
However, I welcome this opportunity to discuss in the Seanad the economic and financial implications of the recent reduction in ECB interest rates. The recent 50 basis points cut in these rates – which is ECB terminology for a 0.5% cut – will have a positive effect on economic trends in Ireland. First, to the extent that the cut is passed on to borrowers, it will directly stimulate the Irish economy by increasing disposable income and domestic demand. In addition, it will boost activity in the economies of many of our trading partners, thereby stimulating demand for Irish exports. Our position as a small open economy, which is highly integrated into the euro area economy, means that an increase in European demand should have positive knock-on effects here.
The key factor in determining the extent to which rate cuts are passed on to borrowers is the level of market competition. In that regard, Senators will be aware that the Competition Authority is engaged in a study of the banking market. I understand that its study will deal with competition in the provision of banking services generally in the State. The study covers the markets in which the clearing banks operate, including other participants in those markets such as the credit unions and An Post. The study will seek to identify both the degree of rivalry between existing participants and whether there are any barriers to the entry of new participants.
The authority has undertaken to advise the Government if existing legislation or administrative practice has a disproportionate effect on competition and it will make recommendations for change if this is found to be the case. It also intends to identify issues relating to consumer inertia and plans to make recommendations to ensure that consumers can exercise their full rights to their advantage using the competitive process. It will, of course, consider appropriate action if any practice or arrangement appears to be in breach of the Competition Act 2002. The study is still in progress and it is planned to be completed this year.
Senators will also be aware of the recent establishment, after passage through this House of the relevant legislation – the Central Bank and Financial Services Authority of Ireland Act – of the Irish Financial Services Regulatory Authority. This authority carries a more advanced remit than any previous body in respect of its focus on the needs and requirements of consumers. The legislation has, for the first time, placed the statutory position of Consumer Director at the heart of the Irish financial regulatory system.
Neither the IFSRA nor the Consumer Director have a role in respect of price fixing for interest rate products. However, the Consumer Director has a number of crucial functions in regard to furthering the interests of consumers. These include: monitoring the provision of financial services to consumers; monitoring the extent to which competition exists among providers of financial services, in so far as it affects consumers of those services; increasing public awareness of the availability, costs, risks and benefits of financial services; issuing and enforcing codes of conduct, regulations, directions, etc., to financial services providers with regard to the conditions under which they provide services to customers; control and monitoring of customer charges, other than interest rates imposed by credit institutions and bureaux de change; and promoting, in general, the best interests of users of financial services.
In her annual report, the Consumer Director must specify, inter alia, how far she has promoted the interests of consumers of relevant financial services during the financial year concerned and “the extent to which competition exists among providers of those services in so far as it affects consumers of those services”. In summary, the role of the Consumer Director in regard to this issue is to monitor competition and to promote the interest of consumers.
The cut in interest rates by the ECB clearly provided a competitive opportunity for financial institutions here and a consequential cut in retail rates would have been expected. I am aware that the IFSRA made public its views on this matter.
Those taking out variable rate mortgages or other borrowings expect rates to fall as well as rise and, generally, the level of change in rates is a matter for the institution concerned. However, the Consumer Director has a role in monitoring the extent to which competition exists in financial markets and would, therefore, be concerned if the institutions were overly one-sided in the operation of their discretion in this regard. I understand that on this occasion the Consumer Director has advised consumers to ask their lenders about their policies in respect of the pass-through of interest rate changes. I am informed that the financial regulator intends to carry out a survey of interest rate pass-through on various lending and borrowing rates and to pass any relevant information in this regard to the Competition Authority in the context of its study of the banking industry.
Further consumer protection legislation, which will, among other things, establish industry and consumer advisory panels to advise the IFSRA and establish a statutory financial services ombudsman scheme, is currently being drafted. These will be substantial steps in ensuring the appropriate protection of Irish consumers.
There are, from time to time, things which Government can do to improve the general access to funds of credit institutions and other entities, with a view to assisting the efficient operation of the market, and the availability of choices for consumers. A recent example was the development and passage of legislation allowing for the issue under Irish law of asset covered securities. This legislation has not yet been availed of by Irish domestic mortgage lenders, but one international bank has pioneered the first issues of such securities and proved the concept as a viable one, which is available to credit institutions, among other funding options.
I thank the House for the opportunity to discuss these issues here today.