Seanad Éireann - Volume 155 - 14 May, 1998

Banking System: Statements.

Minister of State at the Department of Finance (Mr. Cullen): I am glad to be here today to debate this important issue. I welcome the opportunity to speak on the recent developments and future challenges in the banking system.

At the time of independence in 1922 there already existed a well developed banking system carrying out business throughout the island. At that time there was also a general agreement on the need for a distinctive currency and for some authority to issue it and be responsible for its integrity. It was also accepted, however, that the new currency would have to command no less confidence than sterling which had been the currency of Ireland since 1826.

Given the upheavals of the time, the Government of the day was cautious about any innovations [792] that might run the risk of undermining the country's trade and business stability. Accordingly, it was not until 1926 that the first moves in this direction occurred with the enactment of the Coinage Act, which authorised the Minister for Finance to issue coins of limited legal tender, and the establishment of a Commission of Inquiry into Banking and the Issue of Notes.

The commission, in its final report in January 1927, recommended the adoption of fixed parity with sterling for the new Irish currency with the issue of legal tender notes managed and controlled by a currency commission. The maintenance of the connection with sterling was based mainly on practical considerations, the principal of which was the dominant role the UK played in the new State's external trade, receiving 95 per cent of our exports and providing 80 per cent of our imports. This link was maintained for almost 50 years until March 1979 when we finally went our separate ways. The commission also considered whether a central bank should be established but concluded that this course was not recommended as an immediate expedient. The Currency Act, 1927, gave legislative effect to these proposals and in September of that year the Currency Commission was established.

In November 1934 the Minister for Finance appointed a Commission of Inquiry into Banking, Currency and Credit. Four years later that commission recommended that the Currency Commission be replaced by a central bank with enhanced powers and functions. The Government accepted this recommendation and set about preparing a Central Bank Bill which was eventually enacted in 1942.

It was not until 1971 that the Central Bank was given responsibilities for the licensing and supervision of banks. However, in the late 1980s the pace of development of the banking industry in Ireland increased sharply and the State was obliged not only to react to these developments but to provide the environment within which an efficient and effective banking industry could develop and to encourage and foster its growth. The Central Bank Act, 1989, subsequently provided for the extension of the bank's licensing and supervisory powers in respect of banking business, the introduction of a deposit protection scheme and the supervision by the Central Bank of certain institutions in the IFSC, futures and options and exchanges and moneybrokers.

Subsequent years saw considerable changes in the regulatory environment both in Europe generally and in Ireland. The remit of the Central Bank's supervisory functions was further extended to building societies, the TSB, unit trusts, ACC and ICC banks, investment intermediaries, stock exchanges, bureaux de change and payment systems.

Arising from our membership of the European Union, much of our legislation in the field of financial services derives from European Law, and reflects, inter alia, the goal of completing a single, competitive, financial services market within the [793] Union. As a consequence, significant changes have been made to Irish law in recent years which have had the effect of liberalising the whole area of financial services at both the wholesale and retail ends of the market. These new laws reflected the changes and developments that were progressively taking place in the range and complexity of the financial products that the banks and indeed other financial institutions were offering to the public.

We have come from a situation not so long ago where the regulatory environment in the area of financial services was, at best, light to a situation where our system of financial regulation is as comprehensive and efficient as anywhere in the world.

Many of the provisions that brought about this change were introduced by way of primary legislation, which provided the opportunity for Members of both Houses of the Oireachtas to debate and discuss the issues to which all of these gave rise.

In passing, Senators may wish to note that many of the more recent EU initiatives in the area of financial services received significant impetus during the Irish Presidency of the Union in 1996, and it is to the credit of all those involved that such considerable progress was made. The Cross Border Credit Transfers Directive, which provides for the issue and settlement of cross-border credit transfers from one credit institution to another and includes a number of consumer protection measures, and the Investor Compensation Directive, which provides for investor compensation in respect of investment firms authorised under the Investment Services Directive, were both adopted following conciliation with the European Parliament at which Senator Avril Doyle presided. Significant progress was achieved on several other dossiers in the financial services field.

The base directives in relation to EU banking law are the First and Second Banking Directives. The 1992 European Communities (Licensing and Supervision of Credit Institutions) Regulations, the purpose of which was to give effect to the provisions of the Second Banking Directive, heralded the introduction of the ‘EU passport’ in banking, whereby a credit institution established and licensed in any one member state may supply its services in any other part of the Union without barrier. This single development has resulted in a degree of competition and liberalisation in banking which would not otherwise have been the case. However, in Ireland, we have regarded such challenges as being accompanied by opportunities which we have done our best to exploit. I am glad to say that rather than crumble under the weight of new competition, the Irish financial services sector has reacted in a most positive manner and indeed flourished in the new environment.

The l990s have seen remarkable changes in the financial sector in Ireland, not least in the area of banking. While these banks have been around for what appears to be an age, if we look at the manner [794] in which they have grown and expanded in the last ten years, we can see how much has changed in such a short space of time. At the end of December 1988 there were 37 holders of bank licences in Ireland with total assets of some £25 billion. At the end of 1997 there were 44 licence holders with total assets of some £125 billion. The banking sector is one of Ireland's leading employers. In 1996 total employment in the sector was 23,700 in the Republic, which represented a 20 per cent increase over 1990. In the same year, banks between them spent more than £1.3 billion in the Irish economy. Some £715 million of this went in the form of wages and related payments. Banks paid in excess of £530 million to the Exchequer over the same period through PAYE, PRSI, VAT, Corporation Profits Tax, the bank levy, and other taxes. The combined contribution of banks to the Irish economy accounted for 4 per cent of the country's GNP of £36.98 billion in 1996. Nowadays it has become commonplace to have Irish credit institutions involved in mergers and take-overs in other jurisdictions, something which would have been unthinkable not so very long ago.

So much for the past, what of the future? We are on the threshold of unprecedented change in the financial world, with the recent decision on EMU and the introduction of the euro. Where do the banks stand in this brave new world? We have seen over recent years how policies designed for EMU qualification have helped secure our exceptional economic performance.

The challenge presented to us from 1 January 1999 is to ensure the best return for the economy and for employment from our membership of the euro zone and to deliver on the Government's commitment in its Action Programme for the Millennium to share the benefits of Ireland's EMU participation among all sectors of the work force.

It will be evident that costs associated with the changeover to the euro, and their timing, will vary from company to company according to various factors, including the nature of the company's business. The situation in the case of banks will be no different, although because of the nature of their business the effects will be more immediately and directly felt. It should be borne in mind in this context that EMU should bring significant benefits to the Irish business sector as a whole. Furthermore, such benefits will be ongoing, while of their nature changeover costs will be once off.

In the case of financial institutions, there will be an ongoing loss of revenues arising from the elimination of currency transaction costs and exchange rate differentials between EMU participants. However, this ongoing loss to the financial institutions will be an ongoing gain to business as well as consumers. This should help boost business performance and in turn be of long-term benefit to financial institutions. For that matter, it is a truism to say that in business every threat is an opportunity. EMU will also bring new opportunities for the financial sector and a larger [795] marketplace in which institutions can do business. The introduction of the euro represents a step forward in terms of new products, customers and potential and should not be viewed as merely a threat to be overcome.

Another issue facing the banking sector is the future position of the State banks. As Senators might be aware, the Government has authorised the Minister for Finance to enter into consultations with the boards, management and staff of the State banks with a view to developing detailed proposals on the future structure and ownership of the banks in a way which would recognise the interests of all stakeholders, including the taxpayer. The Minister is currently engaged in discussions with the various other stakeholders in this regard. However, at this time no final decision has been made regarding a disposal of the State's interest in the banks.

Another important issue facing all of industry, including banks, is the so-called millennium bug. I can advise Senators that a recent survey of 11 countries, including Ireland, found that while most believe that their banks will be year 2000 compliant, Ireland is among a small number of countries that actually has a year 2000 working group and that the Irish financial sector is relatively well advanced in its preparations for the new millennium. I think it is fair to say that we now have in Ireland a mature and sophisticated financial services industry, providing an ever-increasing range of services in both the retail and wholesale markets. This has been driven, above all, by the often dizzying pace of financial innovation internationally and facilitated by the contribution of the International Financial Services Centre to our financial infrastructure.

It is perhaps to state the obvious to say that retail financial services are central to the national economy in the widest sense. Their role manifests itself in two ways — in a direct way as firms which are employers of Irish people and purchasers of Irish goods and services, and in their indirect role as the major providers of capital to the business and households, and also as investors in the Irish economy.

It is in the provision of capital for small businesses and consumers that retail financial services hold a unique position and can make a visible contribution to the betterment of our people and of the economy as a whole.

In the last ten years there has been an increasing focus on the area of consumer protection, both at EU and at national level. While it is my colleague, the Tánaiste and Minister for Enterprise, Trade and Employment, who has ministerial responsibility in this area, I am sure she will have no objection to my referring to the Consumer Credit Act, 1995, which was the most obvious manifestation of this interest in Ireland. Specifically, the Act confers powers and duties on the Director for Consumer Affairs in the area of credit agreements with, among others, banks. Senators will be aware that one of the provisions [796] of the Act was the transfer of responsibility for bank charges from the Central Bank to the Director of Consumer Affairs. Section 28 of the 1989 Central Bank Act provided a role for the Central Bank in the control of bank charges other than interest. This section was repealed by the Consumer Credit Act, 1995, which introduced, in section 149, an analogous provision giving the Director of Consumer Affairs this responsibility. Also, section 149 introduced for the first time a fee to be paid by banks when applying for an increase in existing charges or for the imposition of any new charges. The Central Bank still has a vital role to play, however, from the perspective of its functions as prudential regulator of credit institutions in relation to the protection of depositors' money.

As Senators will be aware, recent months have seen the emergence of a number of serious issues concerning the retail banking sector which have been a cause of serious concern, not only to the Government and Members of the Oireachtas but to the public at large. These include reports of a sizable number of bogus non-resident accounts in certain banks in the late 1980s and early 1990s. As far as these are concerned, Senators will appreciate that the pursuit of particular tax cases is a matter for the Revenue Commissioners, who must deal with them on a confidential basis. I can say, however, that on various occasions in the past Revenue has discovered individual cases where false non-residence declarations had been made for the purpose of evading tax on deposit interest. In all these cases, Revenue took action as regards the taxpayers involved by recovering any underpaid tax and imposing interest and penalties as appropriate. I understand that Revenue also raised the matter generally with certain institutions concerned in the early 1990s and was given assurances that steps had been taken to ensure compliance with the legislative requirements.

Before recent media reports of historic non-compliance in this area, Revenue had already commenced a review of the position generally. Its work includes an examination of ongoing controls, procedures and liabilities and, where considered necessary, involves an examination of liabilities in past years. The review covers all financial institutions and will take some time to complete.

Another instance was allegations concerning the role of a bank in facilitating certain offshore investments. In that case the Minister for Finance wrote to the Governor of the Central Bank drawing his attention to the possibility that these developments could have exchange control implications. This is being investigated by the Central Bank. In his letter the Minister also requested the Governor to make a separate report on the implications, if any, for all aspects of banking supervision. In this regard, the Governor subsequently confirmed the Central Bank's inspection, which was conducted in its capacity of supervisor, had [797] concluded, but that he was precluded by law from revealing the findings.

The Governor also reiterated comments made in a previous letter concerning the supervisory issues arising from the McCracken tribunal whereby he advised that the Board of the Central Bank was satisfied with its legal powers which are generally adequate to enable the bank to discharge satisfactorily its statutory functions. The board keeps supervisory procedures under review and tries to ensure that these are in line with best international practice. Nothing in the Central Bank's inquiries into this latter matter had led the Governor to change any of the conclusions he reported last November.

More recently, there have been worrying allegations concerning the alleged application of charges on certain accounts over and above the standard charges which these accounts should have attracted. The Central Bank is undertaking its own investigation into these new allegations. The Minister has asked the Governor whether, following the result of the Central Bank's current investigations, he would wish to revise any of his opinions regarding the adequacy of the legal framework for supervision set out in his earlier letters on the subject. The Governor has indicated that when the Central Bank's current investigations are completed, he will write again.

Despite the fact that they predate the enactment of the Consumer Credit Act, 1995, all these allegations have resulted in an understandable public concern about certain of the activities of particular banks and about the banking industry generally. It is with this concern in mind that the Minister decided to establish a working group of representatives from the Department of Finance, the Department of the Taoiseach, the Department of Enterprise, Trade and Employment, the Central Bank, the Office of the Director of Consumer Affairs and the Office of the Attorney General, the task of which is to investigate the law and practice governing the provision of financial services in Ireland and the impact this has on consumers. In this regard, the group is undertaking an assessment of the laws relating both to the role of the Director of Consumer Affairs and to the role of the Central Bank, including the procedures used to give effect to these roles, with a view to identifying the impact of these on consumers and, in particular, to identify if there are gaps in consumer protection which need to be filled. The group has also been asked to consider what steps may be required to increase the public understanding of the regulatory systems, including the manner of their implementation. I understand the group hopes to complete its deliberations and draw up its report in the next few weeks.

I should also add, on a more general basis, that the terms of reference of the Moriarty tribunal include a remit to make whatever broad recommendations the tribunal considers necessary or expedient for enhancing the role and performance of the Central Bank as regulator of the [798] banks and of the financial services sector generally.

Irish banking has come a long way since the early days of the State, and especially in the last decade. The State has always shown itself ready to respond to developments as they occur and to take the lead in circumstances where the need arises. I can assure Senators that this continues to be the case now and will continue to be the case in the future. I look forward to hearing the comments and views of the Senators.

Mr. Caffrey: I welcome the Minister to the House for this important debate on banking. I suppose it would be impossible to conclude any debate about banking in Ireland at present without a reference to the recent allegations about the activities of one or two banks and the consequent public outcry. Customers were being systematically overcharged and effectively duped by the bank in relation to their accounts. We are awaiting the report of an investigation into these matter and any further comment at this stage would serve no purpose.

The credibility and image of banking in Ireland has suffered as a result of these allegations. There is now an onus on people who believe in the integrity of the banking system and the banking industry to make a contribution. It is in all our interests and in the interests of the further economic and social development of this country that there is a healthy, progressive and competitive financial sector which is free from any suspicion of shady practices. The fact that there has been one or two delinquents in the family is not sufficient reason to denigrate the entire branch of the family tree.

We, as a nation, have a capacity to generalise about everything. Let us face it, there are many people with a deep seated antipathy to the banks and many with genuine grievances. I suppose this is inevitable given the size of the banking sector in Ireland. At present, seven out of ten Irish adults have a bank account of one type or another. There are 2.1 million current account holders and 4.4 million deposit accounts are held with the banks in this country. With such a huge customer base, there will always be an element of disgruntled people and some bad decisions will be made and I am sure many mistakes were made.

However, in the context of our overall economic development we must recognise the contribution which the banking industry has made to the totality of the commercial life of this nation. The growth in the economy equates fairly evenly with the growth in the banking sector. If we go back to 1990, we see that the five clearing banks made £174 million after tax on an asset base of £39.1 billion. In 1996-97 they made £669 million with total assets of £57.3 billion. Today the media reported that Bank of Ireland's profit has increased to almost £500 billion. I am open to correction on this figure because I did not here the complete report but I do know that Bank of

[799] Ireland's profits have increased dramatically over the past year.

Some people say these are exorbitant profits. If that is so, then is the growth in our GNP also exorbitant? High economic growth rates and unprofitable banking industry are mutually incompatible. If the five clearing banks continued to make profits of only £174 million on assets of £39.1 billion representing a return of 0.5 per cent in 1990 then we would have no Celtic tiger today.

There is also the question of shareholders who also need and expect a return on their investments. We should remind ourselves that for each additional £10 added from profits to a bank's capital base it enables it to lend another £100 to customers. As the Minister has said, this solvency ration is regulated strictly by the Central Bank. At present the Celtic tiger is sustained mainly by the banking industry. The Celtic tiger has a voracious appetite for cash and, thankfully, there is a lot of it about right now. The most recent Central Bank figures for Ireland for legal tender notes in circulation placed the amount at £2,100 million. When one deducts a percentage from this for cash held in bank vaults, there is still over £500 for every man, woman and child on the island. Unfortunately, every man, woman and child has not got £500 but this issue can be debated on another occasion. The Government has borrowed in total £3.4 billion. Lending to farmers, business and personal consumers up to mid-June last year stood at a high of £29.6 billion, an increase of 124 per cent over 1990 figures. So no matter how much we dislike the idea of banks making huge profits they are an inevitable consequence of an expanding economy. We should stop worrying about bank profits and concentrate more on the protection of customer interests and how the level of protection can be increased.

Like every commercial sector there is consumer protection legislation concerning every aspect of lending and consumer credit. The Consumer Credit Act, 1995, is major legislation and EU measures are also in force since 1995. An EU directive on deposit guarantee schemes also gives protection to depositors. While we may never have protection or legislation to deal with every eventuality that may arise due to an individual's decision to flout the law, there is a legal framework in place that demands compliance by financial institutions. It covers the contents of agreements and the advertising of many types of consumer credit. It also includes provision for the control of bank charges. The Central Bank role is a different role and in view of the debacle at NIB many people believe that its powers are inadequate. Voluntary codes of practice also exist to supplement the legal framework. The following are examples: the banks' charter for personal customers and the banks' charter for small business customers spell out standards of good practice and service to which bank customers are entitled; the code of conduct for competition practices broadly requires banks to act fairly and [800] properly, to maintain high standards of integrity and professional practice and to be truthful and transparent. The code of practice on transparency requires banks to have brochures detailing the principal bank charges available in all branches, to have posters containing this information on display and to issue press notices advising of tariff changes. There is also the European code of best practice on card-based payment systems which limits the liability of a credit or ATM cardholder to a maximum of ECU 150 or approximately £120 punts in the event of loss or theft. These are real provisions to protect the consumer.

We must also be aware that there are consumer complaints procedures. The public, like myself, until I began investigating this issue, were unaware that the consumer complaints procedures are quite extensive. The banking sector is no different to any other business sector in terms of the errors which are sometimes inadvertently made in dealings with customers. It is scarcely surprising that mistakes can happen within a system which processes millions of cash and non-cash transactions each year on behalf of its customers, but mistakes are bound to occur. The overriding considerations are that such mistakes are kept to a minimum and that there are proper procedures in place to redress them as they arise. In reality the frequency of error in relation to the amount of business conducted is very small and all the banks have their internal complaints procedures in place. If a person is dissatisfied with a bank's service or suspects a banking error has occurred then one should contact the relevant branch management in writing giving an exact and factual account of what happened. If the response is unacceptable the matter should then be referred to the branch again with a statement to the effect that in the absence of a resolution the matter may be forwarded to the bank's regional or head office. If there is no satisfactory outcome after communication with the branch a written complaint should be referred, including copies of the previous correspondence, to the customer relations department at the bank's head office. Each bank has such a complaints department though its title may vary.

Most complaints are resolved by a bank's internal complaints procedures. Those which are not can be forwarded free of charge for independent investigation to the Ombudsman for the credit institutions. His decision is binding on all the 37 or more banks belonging to the scheme, as well as the eight building societies and the other financial institutions.

Provided a customer has first tried to resolve a problem with the local branch, the regional branch and head office, the Ombudsman for Credit Institutions can investigate that problem if it relates to a dispute arising on or after 1 October 1990 when the scheme commenced or, in the case of a limited company, after 1 October 1994, if it contains a claim for less than £30,000, if it concerns the provision or non-provision of services in the Republic of Ireland, if it comes from an [801] individual consumer or sole trader, a partnership or an unlimited company or if it comes from a limited company with an annual turnover of no more than £250,000. Members of the public are not always aware that the Ombudsman offers services of that nature.

I am particularly concerned about the net interest margin claimed by the banks. This represents the difference between the average lending interest rate and the rate which banks pay on deposits and it affects personal borrowers with an A rate. Competition for customer deposits is so intense and the variation in rates is so great that the effort by the banks to maintain a net margin of between 4 and 5 per cent means that small borrowers are being screwed. A personal borrower with an overdraft is obliged to pay 12 per cent interest. It is particularly difficult for young couples who have taken out a large mortgage to try to manage an overdraft at the same time. Families with big mortgages should be on the prime rate or the special charity rate for overdraft accommodation. At present, the A rate is 6 per cent higher than the one month interbank rate. When we consider that at the end of August 1997 total personal borrowings from credit institutions amounted to £16.3 billion we can see that these borrowings account for a major proportion of the overall figure.

It is obvious that Ireland's future lies within EMU. We have negotiated the first two stages and the third stage — the euro — comes into effect on 1 January 1999. The euro will replace our national currency and those of the other EU states which will participate in EMU. For better or worse, our future lies in Europe.

Mr. Finneran: I requested a debate on the banking system a number of weeks ago and I am glad the Leader provided time for it today. I agree with the Minister of State that the banking system has served us well since the foundation of the State. That system developed out of the Coinage Act, 1926, and its latest challenge will be our joining the euro with ten other countries. It could be stated that the banking system is a success story and we must compliment the individuals and successive Governments responsible for this.

We have arrived at the stage where we can stand alone. It is extraordinary that we have decided to remove ourselves, in European terms, from sterling, the currency with which we began trading in 1926, which will stand alone outside the euro. We have decided to move forward without sterling which is a sign of the strength of the financial institutions, the Government and the various components that comprise financial services in Ireland.

Members of the public are concerned about a number of important matters. Since January, consumer confidence in the banking system has been breached. It was with horror that people discovered — I compliment the RTÉ journalists who broke the story — that breaches of trust and illegal acts had occurred in the banking system [802] and that money had been stolen from customers. Had it not been for the efforts of the RTÉ journalists, these matters would not have come to light.

I questioned the Governor of the Central Bank about this matter at a meeting of the Joint Committee on Finance and the Public Service and I was not impressed with the level of information he made available to the committee. In fact, he attempted to provide the least possible amount of information and frequently stated he was precluded by law from providing such information. The Central Bank and its Governor are the authorities responsible for licensing the commercial banks. They have a responsibility to ensure that those to whom licences are given act within the terms of those licences. When I asked the Governor of the Central Bank to state the circumstances in which someone would have their licence revoked in the event of a breach of the regulations, he failed to do so. If I obtain a driving licence and I breach the law, I will lose that licence. Likewise, if I obtain a licence from a local authority to haul certain material and I breach its terms, the licence will be revoked.

As a public representative, I have been unable to ascertain the exact circumstances in which the Central Bank or its Governor have the power to revoke a commercial banking licence. There is not enough transparency in that area. If the Governor of the Central Bank is precluded by law from providing information, that law should be changed. The Houses of the Oireachtas should be in a position to delve deeply into matters of this nature. We must be confident that the activities of financial institutions are transparent and that the interests of the public will be protected. As public representatives, we have a duty to ordinary citizens to ensure that their interests are protected.

I cannot understand how the banks can state that they protected the interests of the public in the past, particularly in light of the evidence which has emerged in respect of breaches of trust. Thousands of bogus offshore accounts were put in place by the banks to avoid paying tax to the Government. If a member of the public set up accounts of that kind they would be brought to court and sanctioned. I have not seen anyone brought to court or any criminal proceedings brought concerning the matters uncovered by RTÉ journalists. The public is of the opinion that white collar crime is rife and no one is being prosecuted. Who could blame them for thinking that, given the banks' activities over the years and the events brought into the public domain since last January? One bank hyped up interest rates on accounts to increase profits in certain branches. Surely this was stealing. If one steals money from one's neighbour one is likely to be brought to court, prosecuted, convicted and perhaps sent to jail. I have not heard of anyone being prosecuted or brought to court concerning events in the banking system.

[803] Not all the activities of banks falls into this category. I agree with Senator Caffrey that banks have served the country well in many instances. However, I disagree with him on one issue, namely, profits. It is immoral for a bank to make £500 million profit in one year. It should not happen. There is no need for a bank to make such profits. Who is the cause of that profit and who is contributing to it? Personal borrowers and consumers are paying massive interest rates, charges, referral fees and surcharges all of which contribute to the massive profits made by banks. I am not satisfied that ordinary consumers are getting the deal to which they are entitled. Banks are giving preferential treatment to certain people. There are different ratings favouring those who pose a lesser risk. Banks are in business to make money and they will opt for customers who pose less risk. However, should the majority of people — consumers with mortgages, overdrafts and term loans — be carrying the can for everyone else and making massive profits for the banks? That is what is happening.

I appreciate that legislation has been enacted over the years to protect customers, particularly the Consumer Credit Act, 1995. That was welcome legislation which offers opportunities for the public to obtain some redress. I listened with interest to the Director of Consumer Affairs when he came before the Committee on Finance and the Public Service. He seemed to have a genuine interest in protecting customers vis-a-vis the banks. However, I could not say the same for the Governor of the Central Bank. He totally ignored the plight of customers and stated that they were not his responsibility. Surely the Central Bank has some responsibility in this area and I am not happy with the level of secrecy attached to the bank.

During March and April a decision was taken concerning an inspector. Would the Minister indicate the current position as regards that inspector? There were calls in both Houses for the appointment of an inspector and the Minister indicated that she might do so in the case of at least one bank.

I also find it disturbing that the Central Bank has taken so long to complete its investigation and to report. A few days or a week should be sufficient for such a matter. It should not take months as has happened. Is there an intention that if the matter is delayed long enough the public and this House will forget about it and the matter will go away when some other issue hits the headlines so we never get to the bottom of this issue? I do not want to see that happen. I want to see this matter teased out to the last. If blame is to be laid then so be it. Let us name those who took decisions or ignored practices so that they can answer for the wrongs which have been done. The public wants to know who did what, who took the decisions and who ignored the practices before its confidence in the banking system is restored. People are not prepared to see [804] the matter glossed over to the extent that seems to be taking place given the attitude of the Governor of the Central Bank and the Minister of State. In his statement the Minister of State said that he will write again when the investigation is concluded. This is the second week of May. These matters took place in the spring and it is past the time that we had answers. The Government should state that we are going to get the answers now and the matter will not be put on the long finger.

Ireland's entry into the single currency presents immense opportunities and challenges for the financial institutions. We have a sound financial structure and Irish banks will compete successfully with other financial institutions in Europe. Hopefully, the euro will become a hard currency and compete favourably with the yen and the dollar.

Mr. Quinn: I welcome the Minister of State, Deputy Cullen, and I am glad to have this opportunity to speak in this debate. The Minister of State has given us an interesting history of the banking system which reminds us of how much good has come from that system in the 70 years since independence.

Senator Caffrey spoke eloquently about the public's concern at some of the events and business methods in the banking world. Senator Finneran reminded us of some of the challenges facing the banks. I want to look at some of the challenges facing the banking system and view current events from that perspective.

From the beginning of next year Irish banks will not be acting in isolation. They will be part of the euro zone referred to by the Minister of State. They will share a currency and the same interest rates with ten other countries. This means that they will be open to competition for deposits and loans from insitutions from most of Europe. This represents a major challenge because up to now Ireland has been under-banked. That is not a normal word but it fits well. The European area has been over-banked. By under-banked I mean that banks may not have had much competition. As a result they have been used to operating on the highest margins available to any banks in the developed world.

I am a great believer in competition. I had the opportunity to nominate a topic for debate on Private Members' Time last year and I chose competition. One of the benefits we will have in the future is more and more competition in every sphere of activity, not just in banking and State companies but in all sectors of the economy. We will be more successful as a result of more competition and the public and consumers will benefit. The high margins banks enjoyed were inflated and are now fast becoming a thing of the past. In that lies the clue to the recent behaviour of many Irish banks, some of which has just come to light.

Irish banks were able to get their money extremely cheaply because most of their customers [805] were lazy. The money they deposited with banks earned either tiny amounts of interest or none at all. Banks lent that cheap money at the highest rate possible. It is normal business practice to make as much profit as possible. The difference between the rates at which they received and lent money was such that the lending margin of Irish banks was the envy of their colleagues worldwide.

That changed in the past decade. Companies became more sophisticated in how they handled their balances. More importantly, the mass of ordinary account holders and depositors began to realise the value of the money in the run up to the devaluation of the punt in 1992. Interest rates at the time increased to 14 per cent and people started to put their money to work, in many cases for the first time. The high interest rates did not last long but the mindset of the public had been changed. People no longer automatically left money in the bank, not thinking to make it work for them. From then on, the days of cheap money for the banks were numbered. The future held out a constantly dwindling lending margin as Ireland slowly came into line with countries with which we had been out of line previously. We are about to witness the last phase of this next year with the arrival of the euro.

The banks' problem has been an opportunity for customers. Loans have become cheaper and the gap between deposit and lending rates has narrowed, although overall deposit rates have decreased. However, this reduction in the lending margin has not been completely good news for the customers because it has triggered a massive effort by banks to make money out of their customers by other means. Banks have created a wide variety of what are called new financial products, all of which have one thing in common — they are very expensive. Bank staff are intensively trained in the art of what is called cross selling, which is pushing additional products at existing customers. Staff are rewarded and promoted on their ability to do this effectively. This is one of the reasons people's trust in banks has been undermined over the past ten years and even before the recent revelations of overcharging of customers. Banks are a little like politicians — no one likes them very much. In their pursuit of profit to replace the wide lending margins they have lost, banks have undermined their customers' trust by hard sell techniques.

I first came across this in 1971 when I went to the bank seeking a loan for a new business venture. I was told by the manager that circumstances had changed and that I had to go to a merchant bank. When I applied to it for a loan, it indulged in hard sell and although it eventually agreed to lend me the money, it would not agree to lend it in overdraft form but rather in three different tranches, one of which would be in return for shares in my company. I said they did not understand and that I did not want to sell shares in the company, but they said that was the deal. I was fortunate that there was competition [806] at the time and that I was able to apply to another bank. This is an example of cross selling, of managing to sell a number of different products to existing customers.

Fewer customers believe banks are acting in their best interests. They are slowly becoming aware that banks' priority is to make money out of them. Customers are becoming increasingly sceptical of the notion that a bank acts in the customer's interest when it gives financial advice. That is a dramatic change from when we implicitly trusted banks. This trend is disastrous in terms of banks' future. Nothing can be more costly, foolhardy and dangerous to a business than to throw away customers' trust. However, this is what the sophisticated marketing techniques of banks have been doing. They are destroying trust and loyalty and creating huge doubts in customers' minds. That is dangerous for any business. However, I welcome this trend in the national interest, not just because customers will get a better deal, important as that is, but because it creates an increasing and welcome scepticism about banks. This may result in fewer customers being encouraged to borrow recklessly. Banks cannot be relied upon to restrain themselves in this regard and this is a universal phenomenon of banking.

All banking problems which have occurred around the world in the past 20 years can be traced to reckless lending, which is linked to reckless borrowing. International banks poured money into South America in the 1970s which created a massive bubble because the lenders had so little interest in the quality of investment they were funding. The bubble inevitably burst. The same occurred more than once in Mexico and it also happened in America in the 1980s when savings and loans associations made billions of dollars of reckless loans safe in the knowledge the United States Government would bail them out if things went wrong, which it inevitably did. This happened more recently in Asia when international banks and other investors were prepared to pour money into situations which any school boy could see were dodgy but which the lenders could not see because they were mesmerised by the myth of what was called the Asian tiger. History repeatedly tells us that banks will lend as long as there are people to take the money from them. The ability of the lender to repay or of the investment to become viable are secondary issues when credit is plentiful and competition among banks is intense.

If one speaks to people about banks, the complaint one often hears is that they will not lend the customer the money they want. The real danger which the problems I have outlined should teach is that banks lend when they should not. The message for individuals and the national economy is caveat emptor — let the buyer beware. Banks will lend irresponsibly if they get a chance to lend. They are certainly doing so as regards property and no one can doubt that. It must be remembered that up to a few years ago [807] banks were not in the house lending business. However, they became involved and are now engaged in a savage war for market share with the building societies. In this war the customers' interests come last, although most people are happy for the moment with the cheaper and more generous mortgages they can obtain. However, how many banks are reminding their customers that interest rates can increase as well as decrease and that they should enter into 30 year commitments only on the most careful terms and with their eyes open and their homework done? However, not many banks remind their customers of that because they are afraid of losing the business to a competitor.

I am an enthusiast for competition and I welcome it, but we must realise that in this case it creates a more dangerous situation for customers who have to look out for themselves. If it does nothing else, this debate may encourage customers to put manners on the banks by shopping around for financial services and, from next year, by shopping around in a wider and easier way than we have done in the past.

Customers may stop regarding banks as impartial advisers and instead begin to regard them as hustlers who are out to make as much as they can. Banks should not be shy about saying that is the business they have been in for many years. For the first time, however, customers are beginning to realise that banks are not impartial advisers, but people who are out to make money. That is what they are there for, of course, and let us not decry that. Let us recognise it, however, and let us encourage those bank customers to see if they can get a better deal somewhere else. That is in the interests of the nation as a whole.

The future will present challenges to the Irish banks and it is by no means certain that all of them can survive in their present form or ownership. The real challenges of the future, however, are for bank customers who will need to be more sophisticated, careful and wary than in the past.

To the extent that recent events may encourage customers in that direction we may regard them as a favourable development. We are entering a new world and the banking system will find it difficult to see the final score. In America they have a saying to remind themselves the game isn't over. Allow me to quote some more Latin “Obesa non iam cantava” — “The fat lady hasn't sung yet”

Mr. Ross: It is sexist anyway, and disgraceful.

Mr. Quinn: It is indeed, but it is a fine term that comes from American ball games. It represents the fact that the game is not over and the final score has not been reached. The banks have a long way to go and I think they will find a very interesting end to this game.

Ms Ormonde: This is a controversial issue at the moment and, given the fact that our confidence [808] has been undermined in the wider domain, it is entirely worthy of a debate to allay the fears in the public arena. The Minister has outlined the history of the banking system which, I agree, has served the country well. The regulations in force were acknowledged by the financial institutions over the years but we crossed the threshold of change in the early 1990s. We are now about to join the EMU and will have a single European currency. That has led to an increase in the number of banking institutions operating here.

We are debating this controversial subject because of allegations in the public domain, yet nothing has been proven. Nevertheless, they will undermine the confidence of consumers, people like us who are dealing with the banking system. Of late, we have heard of huge profits the banks are making at the expense of consumers through interest charges.

We have also heard about big investors who because they have expertise and knowledge behind them can find ways of avoiding taxes and interest rate charges. However, PAYE workers have no hope and are dependent on the trust and confidence that did exist in our banking system. I hope it will exist again when the air has been cleared.

We are in a transition stage, moving into a common European way of thinking. There is such pace out there that PAYE consumers cannot go to a bank to discuss a small deposit account or overdraft as a previous generation might have done. Nowadays there are such variations in people's overdrafts, mortgages, investments and deposits that it is mindboggling when one seeks information from a bank.

When one received one's statement one always trusted that the balance belonged to the customer. That trust meant one did not have to fine-comb the details. In examining bank statements now, however, customers do not always know what to look for. It never came out in the open that customers should watch out for bank charges because they did not know what the charges were for and they were never really explained. People trusted their bank managers and the service the banks provided but suddenly we have become ill at ease with our money. We have to because we work hard for our money. We want to get the best return for it so we call on the banks to reassure that confidence, to be transparent and to have standards of procedure so that consumers can understand what bank managers tell us. Bank officials should use consumer-friendly language and not banking jargon.

I am able to question that sort of jargon but how many others can? They may say “Yes, sir” because they do not have the confidence to talk to a bank manager or his officials. Bankers and their staff should give clear material instructions or directions to their customers in ordinary simple English. If I invest £100 I want to know how much I will receive in return.

Recently a bank official was explaining a particular unit of investment to me and I told him I [809] did not understand what he was talking about. I asked him to explain by example but he could not do so and was ill at ease despite having the technical knowledge. He did not make me feel at ease in his office and I was unable to think of questions that might be important to me. If I felt uneasy, how many others would feel ill at ease in dealing with banks about interest charges, reading their statements and how to obtain advice?

The banks have gone through a bad time recently but only one or two banks are giving them all a bad name. Most banks I know of, and their staff, are excellent. However, it is the old story; one bad apple has brought about this debate to highlight the matter and to demonstrate that we are concerned about consumers. We are asking the banks and other financial institutions to reassure their customers concerning investment charges. If one has money on deposit the banks will suggest how one should invest it but they never talk about the charges for setting up the account. They do not come clean.

This is about transparency, standards of service, understanding the system of charges, reassurance and getting the banks to rebuild the confidence this country had in their services for many decades. The Government is doing its job. It has directed the Director of Consumer Affairs and the tribunal to investigate the allegations. This debate is a welcome opportunity to reassure the public that we are on their side and that we will ensure that the country has a banking system that is second to none, as was the case.

It is most important that the PAYE worker is not caught and that banks should not make big profits at their expense while large investors are unaffected. I support the PAYE sector in this regard, the person who wishes to borrow and to have a safe deposit rate and who does not seek to have large scale investments. They are the people I stand for and they are the people I hope to reassure and whose confidence in the banks I wish to rebuild. The Government is behind me in this regard and it will see to it that the confidence we always had in our banking system will return.

Mr. Ross: I congratulate Senator Ormonde on her speech which was an impassioned and clear plea on behalf of the consumer. I have rarely heard such a plea put so well or so clearly in such a short time.

I do not wish to allay the fears of the public about the banks as Senator Ormonde sought to do. She also intended to allay the fears that the Government is doing nothing about the problem. I prefer to exacerbate the public's fears by pouring a little fuel on the flames. What has been happening in Irish banks is not, as Senator Ormonde maintained, a case of one bad apple. One will probably find that all banks have been using these practices.

The Senator was probably referring to National Irish Bank but Allied Irish Banks and Bank of [810] Ireland have also been exposed as having facilitated tax evasion. A spokesman from one of those banks was quoted as saying that it was one of the worst kept secrets in Ireland at the time. That is tantamount to saying: “we did it, but everybody was at it so it was all right”. The Government has been silent in the face of this provocation, the brazen admission that the law was being broken. I cannot understand why the major banks, which have admitted to these actions, are not being prosecuted. Why has action not been taken in that regard? Of course, action should have been taken against National Irish Bank. It has, and the bank has made a dog's dinner of its defence by not publishing its report.

However, the other banks deserve equal investigation. What we are dealing with is, in the words of Lord Denning, “an appalling vista”. Every bank in the State's retail banking sector appears, on the evidence available, to have been corrupt to some extent. That might be unfair to some of the smaller banks. I withdraw the remark because there is no evidence for it. I apologise. However, the larger banks have been carrying out these practices and it is likely that smaller banks are doing it as well.

Can we, as consumers, trust our banks any longer? No. Senator Ormonde virtually said as much. We should realise that every pound we put in the bank is a prisoner of the bank. The bank regards it as its money to do what it can with it to make money for its shareholders. There is nothing wrong with that. The banks do not, and never have pretended to, act on behalf of their consumers. Consumers, or customers as they call them, are the people they exploit on behalf of their shareholders. There is nothing wrong with that, it is the pursuit of profit.

The problem is that the banks have demonstrated they are unfit to carry the trust of their consumers. They have exploited it to an extent which is unacceptable and we do not have enough safeguards, regulations or regulators on the banks in this sphere. One need only look at deposit interest rates as against overdraft rates. If a person goes to the bank with £200 or £300, he or she will get about 0.75 per cent interest per annum. It is laughable. However, the bank will lend that amount of money at 11 per cent interest.

Today the Bank of Ireland announced record profits of £530 million for last year. That is the result of having the highest margins in Europe and they have those margins because we allow it. I am a free marketeer and believe in private enterprise, profit and shareholder interest. However, there are times when those who exploit their consumers, the small depositors, to such a degree that they must and should be regulated properly. It is criminal that people with small amounts of money should be so blatantly exploited. If one has a few thousand pounds the interest rate goes up but the small depositor [811] inevitably suffers at the hands of the banks. That is the reality.

There is an especially bad situation in Ireland. Our two major banks are far too powerful. I was disturbed to read on Aertel that the chief executive of the Bank of Ireland said that Bank of Ireland wishes to buy the ICC from the Government when it is put up for sale. Is the Government willing to sell the ICC to the Bank of Ireland or AIB? These banks are already too big and powerful.

Bank of Ireland bought New Ireland Assurance, the second largest insurance company in the country. It has its own Lifetime Insurance division and it owns the biggest stockbroking company in Ireland. It also runs the biggest asset management company in Ireland, it has the biggest number of retail branches, the biggest number of corporate accounts and the biggest corporate finance department. AIB matches Bank of Ireland in many ways by having the same type of powerful and large divisions. What chance has the ordinary person against such a bank if it is behaving in a disgraceful manner, as we have seen in both cases? He or she has no chance.

Will the Minister consider ensuring that neither of the major banks buys the ICC thereby giving them even further dominance in the market? That is what will happen. The ICC is a rather meaningless bank in so far as it does not matter much. However, it has a niche market and if the Bank of Ireland is allowed to buy it, it will then capture that niche market. One can be certain that, as it becomes more powerful, the people in that niche market will be abused by the Bank of Ireland as it has abused other customers in the past. That is the real danger we face.

I wish to dwell a little on some of the issues Senator Quinn raised. There is a case for the Government carrying out a thorough examination of all lending institutions. How much of the money loaned by the lending institutions has directly led to the rise in property prices? I do not know the answer to that and the Bacon report did not come up with an answer to it either. I suspect that banks are considering the value of properties rather than the incomes of individuals and are lending x per cent of a property's value regardless of the income level involved. In that way, the bank is protected by the asset but the individual is exploited by having an inadequate income.

The probable effects of a recession in the property and other markets are obvious; the banks will be protected but individuals will not because the banks will not have loaned too little, as business people sometimes complain they do, but far too much. Individuals will not be able to pay their mortgages as they will be out of work or interest rates will have increased and the banks will be forced to sell the assets. The banks will not care as long as they are protected.

[812] I am a champion of shareholders' involvement in companies but Irish banks have betrayed the trust of the Irish people and the Government. They have been exposed in recent times as being unfit to regulate their own affairs. I do not believe it is adequate for the Minister to send in an investigator in the case of individual banks such as the NIB when we have evidence that worse offences have occurred in the major banks. The Government should set up an open public inquiry into what is occurring in the banking system. Irish banks have proved themselves to be dishonest and untrustworthy.

Mr. Dardis: I welcome the opportunity to contribute to this debate. Legislation requires us to declare our interests on occasions such as these; I am a shareholder in the Bank of Ireland.

Mr. Ross: The Senator did very well today then.

Mr. Dardis: The manner in which banking has been conducted in the recent past has not been satisfactory. However, it would be wrong to assume that this is something new. There is a certain nostalgia for what tend to be regarded as the superior banking practices of the past when one went into one's local friendly bank manager to look for money and the manager had a great deal of discretion as to the amount of money he could allocate. Although a close relationship between manager and client may be desirable, it would be naive to say that banks did not operate in an equally commercial manner then to that in which they operate nowadays.

There appears to be a presumption abroad that banks are philanthropic institutions; they are not and should not be seen to be such. Banks are hard nosed commercial institutions, a fact which has been responsible for their success and much of the recent success of our economy. I recall tales being told of farmers' widows with young children approaching banks to seek extra facilities to tide them over after their husbands' deaths and being reduced to tears. In some instances, nostalgia for the past is badly misplaced.

The banks should be conscious of the fact that they are major beneficiaries of the changes occurring in regard to corporation tax which is due to decrease from 32 per cent to 12.5 per cent over the next five years. Banks should behave as good corporate citizens and it is up to the regulators to ensure they do so. The regulatory mechanisms which exist, or the determination to enforce a particular degree of regulation, are suspect. Those of us who are Members of the Committee on Finance and the Public Service would be confirmed in that view as a result of our discussions with the Governor of the Central Bank, the Director of Consumer Affairs, the Bankers' Federation and the Revenue Commissioners. It seems to be very much a case of passing the parcel, although the Director of Consumer probably [813] plays the greatest role in terms of protecting consumers in regard to the activities of banks.

I want to comment on the issue of competition and the degree to which it exists within the sector. Unquestionably, until the recent past and prior to the Single Market, little competition existed between the banks. I had the experience of banking in England at one stage with, I should hasten to add, the consent of the Central Bank under the exchange control regulations. If one walked down the high street of any English town one could go into each of five or six different banks, present the same proposal to each of them and receive a different deal in each case. That struck me forcibly. At that time, such a facility did not exist here other than for customers with large amounts on deposit who could dictate their own terms.

In regard to the success of farming in the 1960s and 1970s, banks loaned money on an asset basis rather than on the basis of profitability projections. Banks and farmers alike got into serious trouble at a certain stage when they recognised it was not quite so easy to realise assets in a Domesday situation. One of the great achievements of that period was the setting up of the ACC which provided funds to farmers at a time when it was difficult to secure them from the mainstream banking section.

The issue of the NIB revelations and their effect on the stability of the sector has been raised and the utmost necessity for confidence in the sector has been outlined. However, it could be inferred that the degree of rigour involved in the pursuit of impropriety should be played down as it could otherwise have a detrimental effect on stability in the sector. That is totally erroneous; it is akin to saying that the olive oil sector should not be investigated because the Mafia is involved in it and the whole sector could be destabilised. Such an argument is simply not tenable.

EMU will commence in seven months' time, exchange rates will be locked and Ireland will become a participant in the European system of central banks. The Governor of the Central Bank will become a director of the European Central Bank. These events will result in the release of resources in our own Central Bank which will serve to increase and improve the regulatory procedures conducted by it in order that auditing can be more thorough and more resources can be devoted to it. Our representative on the European Central Bank must have the very best economic, financial and other information available to him, not just in respect of the Irish economy but also the global economy. The quality of the information available to that individual will determine whether we can make an effective input into the European Central Bank.

The question of the future of State banks, such as ACC, ICC and TSB, was raised. I agree with Senator Ross that it would be wrong for one of the major banking groups to acquire them. I am sure the Competition Authority would look very [814] closely at such a proposal and I hope it would not accept it. However, disposing of the State banks could release in the order of £800 million which could go towards funding Luas or some other large capital projects in the State. If money were raised from those quarters it would be used for capital purposes rather than day to day spending. The pressure to use it for day to day spending is not as great as it would have been a few years ago.

The Tánaiste is to be commended on the way in which she has investigated several banks using her powers under the Companies Act. However, it would probably be preferable if those powers rested with the Central Bank, for example. In other words, it should not be left just to the Tánaiste to intervene under the Companies Act to appoint inspectors and so on. There might be other ways in which these matters could be initiated and pursued. At present, she has more than six inquiries in train within the sector. The question of offshore accounts and the Ansbacher accounts are a matter for the tribunal.

It is utterly wrong that the banks would connive with clients, not to avoid tax but to evade it. That is a serious matter which is unacceptable. Compliant taxpayers are picking up the bill for wealthy individuals who would be liable to significant levels of tax if they were not shielded by some of these devices. People with large sums of money will employ the very best technical accountancy and legal information and will use the law to their advantage. However, it is an entirely different matter to do this illegally, which appears to have been done with the help of certain banks, or at least certain bank officials. In general, the inquiries would not be needed if the regulator was doing his job properly. One also looks to the Revenue Commissioners in this area.

When the Bankers Federation appeared before the Committee on Finance and Public Services it seemed it did not see it as its role to blow the whistle. This returns to the question of quis custodiet ipsos custodes — who polices the policemen. It appears the Bankers Federation does not see its role as one of a whistle blower within the sector. In those circumstances the State must be vigilant and ensure the proper procedures are in place to deal with these issues. That is probably best done through proper powers for the Central Bank.

The Central Bank made the point that the confidentiality aspect was very important, the inference being that if it found tax irregularities it could not refer them to the Revenue Commissioners, which is wrong. Any irregularities should be reported. The rules of confidentiality can only go so far because if one pursues that argument to its logical conclusion one finally arrives at the point where the Nazi gold in Swiss banks becomes a routine administrative matter and not one of a broader moral question.

[815] I hope the banking sector will make its proper contribution to the welfare of our citizens and to the country's economy and to do so within the law.

Mr. Costello: I wish to share my time with Senator Ryan.

An Leas-Chathaoirleach: Is that agreed? Agreed.

Mr. Costello: This is a very serious matter. The unthinkable has happened in our financial services sector with the appalling vista of the banks robbing their customers. On one hand they are defrauding the public of money handed into their trust and, on the other hand, assisting big time investors to evade and avoid tax. The banks have been breaking the law for years. Although the finger has been pointed at one or two banks in particular, we hear this is happening on a wide scale. This is a disgraceful scandal which no one ever thought could happen.

People were told over the years they should not keep their money under their mattresses. When some crimes took place in rural areas there was a huge campaign to ensure elderly people deposited their money in safe and trustworthy places such as banks and building societies. Little did we think that money was at as much risk in the banks as it was under the mattress. They also did not earn much interest from the banks.

We are all shocked this could happen and that banks would put profit before their small investors. Many NIB managers who colluded with the levying of dishonest charges were given bonuses for the extra money they brought into the bank's coffers. This raises questions about restoring the public's trust in banks in the future.

The State has in many ways put money back into the hands of the banks by reducing corporation tax, while they have been illegally taking money from many citizens through exorbitant, unjust and illegal charges. I firmly believe we should have a full scale, broad ranging inquiry into the banks, building societies, credit institutions and financial service providers. The range of malpractice happening across the board seems to be far wider than we first thought. The imposition of illegal fees, the banks' collusion in offshore investment and the processing of non resident accounts through our financial services institutions demands that we, as elected representatives and legislators, take whatever action is necessary to ensure trust is restored to the banking and financial services. We must put structures in place to ensure adequate regulation and supervision.

I have not been happy with the response of the Governor of the Central Bank to the McCracken report. He does not see a need for extra legal regulatory or licensing requirements. How can he say that when we can see that the Central Bank was not providing adequate regulation and supervision? [816] Because the banking institutions cover a wide range of important functions we must have equally trustworthy regulatory and supervisory mechanisms. We can no longer have confidence in our banks.

Thank God, we have not sold the State banks, ACC, ICC and the TSB. If ownership of these banks is transferred to private banks we will do the people no service. Such an action would merely strengthen an existing monopoly. Our first requirement must be to protect the customer and the taxpayer. We must ensure adequate competition. NIB looked seriously at the possibility of buying a State bank. Thankfully, that did not happen. We need the State banks as an alternative, competitive element in banking because, unlike the private banking sector, there has been no scandal there.

Whatever the future holds, there will be difficulties ahead. The banks no doubt made large profits from currency exchange. We have all heard that if one travels throughout Europe with £100 in one's pocket and changes currency in each country one will be left with only £50 at the end of the journey. That will soon end. I hope the new European Central Bank will exercise wider regulatory powers both in the member states and globally. That positive result will, I hope, come fro the introduction of the single currency.

We need to regain trust in the banking system. That system is built on trust and confidence and it has been undermined. We must also regain trust in the supervisory and regulatory system because that equally has been undermined and we need to look again at the question of licensing financial institutions. What bodies should be entitled to hold licences? There are people who should now be in prison because of some banking practices.

Mr. Ryan: Hear hear.

Mr. Costello: In such circumstances how can it be said that the corporate bodies which supported those practices should still be licensed to operate? Such questions must be raised and the way to raise and answer them is by summoning a full inquiry into the financial services.

Mr. Ryan: I thank Senator Costello for sharing time with me. The Labour Party Members have little enough time and I appreciate his sharing what little time he has.

Ordinary people are astonished at the blasé responses of the various State institutions to the appalling behaviour of the banks. They have been forced by public outrage to begin to take action now, but our banks have suffered from a malaise for a long time.

They are among the most appalling employers in the State. At the height of the recession in the 1980s they introduced a new grade of low paid worker in an endeavour to reduce costs. They thereby created a group of people who were poorly trained, poorly motivated, poorly paid and [817] with understandably poor loyalty to the institution that employed them. They have put enormous pressures on their middle ranking management. Anyone I know who works in the banking system is looking forward to retiring at the youngest possible age. These pressures are not the result of an increasingly competitive market but rather of the extraordinary expectations of senior management as to their bank's appropriate level of profitability.

It requires very little skill to make a lot of money from a monopoly which can write its own costs. Not to make enormous amounts of money in a non-competitive monopoly would represent an extraordinary level of incompetence. Banks have never competed on the basis of price and they never will until they are forced to do so. A classic, although not very significant, example of this non-competitiveness is the interest rate charged on credit card balances. In real terms this rate is approximately 21 per cent. A back street money lender would be arrested if he tried to charge such a rate of interest.

These people award themselves scandalous salaries. A director of any of our major banks regards himself or herself as worthy of an income twice or three times that of the Taoiseach. Do they hold responsibilities or take risks which justify that level of reward? We must remember how these salaries are fixed. They are agreed by the shareholders at annual general meetings. Any shareholder who objects will be outvoted by the big institutional votes. This is because the institutional shareholders will be other financial institutions who want to make sure that they, in turn, are entitled to pay themselves the telephone number salaries they believe are consistent with their offices. These are people who take no risk, do not invest their own personal resources and yet will make enormous sums out of the irresponsible decision of the Minister for Finance to reduce capital gains tax. This will enable holders of share options, which they do not buy in a competitive market and which involve no risk to themselves, to make enormous further profit.

All of this is regulated by the Central Bank which lectures everyone else about restraint and responsibility but which sat back and ignored the greed of the banking sector. This whole rotten quasi-monopoly must be investigated from top to bottom with real market economics and competition introduced. This is what they are afraid of and avoid, something the Central Bank has allowed them do.

Mr. Bonner: The most recent development in banking has been the loss of confidence in the system due to the hammering it has taken over the past four months in relation to the activities of one bank in particular. It would be very easy to speak about the events relating to this bank and indulge in prejudices. We must concentrate, however, on establishing the facts and await the outcome of the investigations being carried out [818] by the inspector appointed by the High Court, the Fraud Squad, the Director of Consumer Affairs, the Central Bank and the internal NIB report which I understand is available since yesterday and which hopefully will be made available to the public.

Banks have relied entirely on trust between them and their customers. We have built up fantastic confidence in our banking system over the years, and this is reflected in the IFSC. It is vital, therefore, that we know the results of the ongoing investigations as soon as possible so that public confidence in our clearing banks can be restored.

I compliment the staff of the NIB branches who have been embarrassed and ashamed by what has happened. From speaking with them I know they have been subjected to jibes from staff of other banks. Time will tell whether those people will have egg on their faces.

The misdemeanours in our clearing banks have, in the main, been due to a small number of management employees striving to maximise profits and meet targets set by their superiors. This type of pressure leads to short cuts and involvement in sharp practices. The credibility of our banking system has been put at risk by the current requirement of individual banks to maximise profits, with or without instructions from head office. Initially banks operate on the margin between interest on loans and deposit interest paid to customers. Today's difficulties have arisen due to the introduction of various types of charges under the guise of charging for employees' time. As Senator Ross said, we have the highest bank charges in Europe, being 25 per cent greater than those prevailing in Britain.

Will we eventually see retailers of consumer goods, such as Senator Quinn, charging for their time on top of accepted trade margins to enable them increase profits? Bank charges were first introduced for lodgments, cheques and other transactions. They were then extended to referral fees, loan commitment and arrangement fees and surcharges on interest for various reasons. In recent years there has been an increase in interest and charges to customers.

While the structure of charges in general is legal, their operation can lead to abuse and overcharging. The general public does not have the capacity to check interest, which is calculated on a daily basis, or charges. Referral charges in particular are implemented by computer. I cannot understand why banks cannot check this system, at least on a weekly basis, and call on erring customers. Many of these unnecessary charges could be eliminated by small increases in bank overdraft limits. The large variety of bank and interest charges give room for overcharging.

Banks make no effort whatsoever to trace the beneficiaries of dormant accounts. The non-return of cancelled cheques is also to the detriment of banks which are no longer consumer [819] friendly. In recent years banks have issued statements on a quarterly basis showing the breakdown of charges. I cannot understand why a statement cannot be supplied showing the rate of interest and how it has been calculated on a daily basis.

Managers are under pressure from the stream of statistics in relation to fees and costs they must return to head office. We do not know if NIB is an isolated case, but over the past number of months all banks have had situations arising. For example, in recent days we learned of a manager instructing staff to overcharge on interest in one of the larger banks in Galway. Another subsidiary of one of the main banks based on Northern Ireland has not been allowing a sterling surcharge to customers when the punt was stronger than sterling. However, it implemented a full charge when sterling was stronger. As many others have stated, we have the problem with bogus accounts in the other two main banks in addition to that of offshore accounts in the NIB.

There are a number of key areas in which managers are in a position to raise the rate of return at branch level. They give poor rates on foreign exchange, load interest on certain customers and charge a penalty rate of 6 per cent on overdrafts when customers forget to renew arrangements; I could mention many other areas. I have even seen cases where banks hold money for customers in current accounts and make no effort to advise them that a rate of deposit interest is available.

I hope this debate can be extended on another occasion to include all financial services. The greatest legal blackmail in the State is the operation and charges on credit cards. Another issue concerns building societies and penalty charges for customers who default on mortgage repayments. Insurance companies, especially towards the end of the tax year, have been involved in a big sales push to put funding into pensions without any knowledge or information being given on how the pensions will operate.

Finally, I wish to address the challenges facing banking in the years ahead. There must be greater transparency and openness to stop the lack of confidence which has begun to develop. The two main banks may be taken over by global multinational banks while some institutions, such as Anglo Irish Bank, will remain special niche banks. We will be part of EMU and there will be job losses and greater competition for banks. Banks see EMU as a threat rather than an opportunity while customers view it differently. Retail banks and life assurance companies will be under pressure to make the same level of profits as we have heard today in relation to the Bank of Ireland. We must introduce electronic banking and smart cards. The euro is likely to increase the [820] level of electronic banking and our banks are not prepared for such activities.

The biggest issue facing our banks is the unprecedented challenge to restore public confidence which has been lost through negative media coverage of the events of the past number of weeks.

Mr. Walsh: I agree with the sentiments expressed by Senator Bonner. The banks have made a tremendous contribution to economic development, representing a contribution of 4 per cent of GNP or £1.3 billion. This is an indication of the importance of the banking sector which has grown enormously. People like Dermot Desmond have done much to bring in winds of change, open the system and provide a breath of fresh air to the financial services industry. The banks are a very important component of the Celtic tiger. They have a responsibility and duty to their shareholders to generate profits, but any well run business — the banks are no different — also has a responsibility to its customers and staff. Regarding customers, it appears there has been some neglect and failing.

The recent disclosures highlight the role of the Director of Consumer Affairs with regard to policing various regulations and I suggest that staff and other resources should be provided not only to go after banks where there have been specific disclosures, but to police and ensure that best practices are applied by our banks in general. In this context the Minister should consider an appropriate bank levy to underwrite the cost of introducing that policing service. The banks cannot be critical of it in view of the circumstances which have given rise to it. The Minister might also look at punitive damages which are often applied when people abuse others, which they should not do.

It is important that the commercial sector is a beneficiary of EMU and that the banks are not allowed to compensate for the loss of earnings from currency transactions by introducing other charges or increasing existing ones. There is a need to generate more competition. The two main banks should not be allowed to acquire any of the State banks. The State should hold an equity share on the stock market and form an alliance with a suitable overseas partner which would facilitate the development of the banking sector as a strong commercial entity in its own right.

The lending philosophy of banks is geared towards property. Banks must have the skills and staff necessary at local level to ensure that commercial projects are given the same sympathy as property transactions. That is an underlying failure of the banking sector. Personal guarantees should be given by the banks. The winds of competition will provide the best safeguard in the long run for our customers.