Competition Commission rejects investigation of mortgage rates

Brendan Burgess

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Michael McGrath got the attached reply from the Cometition and Consumer Protection Commission

Extract
The concerns you raise regarding the current state of the banking sector in Ireland and the nature of competition between banks are well known to the Commission. However, I believe that a further study would not be useful at the present time as it would not resolve the issues inherent in the sector. Furthermore, I believe that the Commission's resources would be more appropriately utilised in other areas where our work could achieve meaningful change. I would point out however that the Commission continues to be active in the sector.



Original letter from Michael McGrath:


Ms Isolde Goggin, Chair of Competition and Consumer Protection Commission
Re: Banking sector in Ireland.
Dear Isolde,
In the first instance I would like to congratulate you and your colleagues on the establishment of the Competition and Consumer Protection Commission and wish you well in the important work you are undertaking. I am writing to you to raise my concerns regarding the state of the banking sector in Ireland and the nature of competition between banks.
I note from your mission statement that the Competition and Consumer Protection Commission is charged with “Investigating and challenging practices that are damaging to consumers and/or the wider economy,” and “Bringing anti-competitive behaviour and practices that are harmful to consumers to an end, where necessary via court actions.” In this context I believe there is a significant role for the Commission in addressing widespread concerns which currently exist regarding competition in the Irish banking sector.
In the UK the Competition and Markets Authority (CMA) has recently concluded that banks in that country have failed to meet the needs of retail and SME customers such as making it easier to switch banks or providing clear information on fees. As a consequence the CMA is launching a full scale investigation in to the banking sector in the UK. I believe that competition issues are even more acute in respect of the Irish banking sector.
As we are all aware there has been a significant reduction in the number of banks operating in the country As a result of the loss of competition, the two pillar banks now command approximately 70% of the current account market. Lack of competition can lead to unhealthy behaviour, most obviously in terms of pricing.
An example of the lack of competition in the market place can been in respect of home loans. The standard variable rate charged by mortgage lenders has converged at around 4.5%, well above the cost of funds incurred by the banks. The interest rate charged to new customers in Ireland is almost 2% above the average rate across European countries. In addition the market for switching mortgage is almost non-existent. New products are extremely rate within the market for home loans and innovations such as allowing people to retain their tracker mortgage when they move home have had very limited take up due to the highly restrictive conditions which apply.
As well as the difficulties encountered by personal customer, SMEs have also raised concerns about how they are treated by banks. In particular the view has been expressed to me that there is a lack of transparency around how credit decisions are taken and the manner in which fees are set. While the Credit Review Office plays an important role it is not in itself a substitute for tackling fundamental difficulties which exist in the sector.
Now that the ECB stress tests have been completed there is an opportunity for the banking sector in Ireland to enter a new phase. It is my belief that there is a need for a full examination of how the sector operates with clear recommendations for remedial action where needed. The Competition Authority report “Competition in the (non-investment) banking sector in Ireland” published in September 2005 was a very important piece of work and indeed noted that “that competition between banks for core banking services was actually limited and largely superficial.” While we operate in a much changed banking environment since then it is clear that competition has diminished further.
I would therefore request that the Commission invoke its powers under the Competition and Consumer Protection Act 2014 and initiate an investigation in to the banking sector in Ireland. I believe this has the potential to be of significant benefit to individual customers and also benefit the wider economy. I trust you will give consideration to my suggestion in this regard.
 

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This is very annoying and suggests that, in common with most commentators, she has little understanding of the bigger picture of financial services.

She focuses on competition for current accounts. So what if it's easy for me to switch from AIB to BoI? I might save €20 a year in charges.

It's completely irrelevant in the context of people paying around €5,000 a year more in interest every year than they should.
 
Why do you think they are paying more than they should.

I'd be interested in getting info on what the length of repossession is on average in the EU versus the pretty much indefinite stay here. I don't know the answer so if they are similar fair enough you have a point.

The experience of recent years has changed things forever - irish mortgage lending is in some grey area between secured and unsecured lending and the interest rates should be set appropriately
 
Yes it is a good piece, in my banking life, Ireland has been a cartel of mainly two, BofI and AIB, both of which I will never bank with. Nothing has changed in relation to this cartel in my lifetime. There is effectively no competition in the area of banking.

Like you said BB, who gives a damn about saving 20 Euro's a year in bank charges. The real savings are to be made in loans/mortgages. The rates for personal loans, car loans and mortgages are shocking to anyone living elsewhere in Europe. I moved myself to KBC, abroad, and was given a great deal to switch, mortgage reduction from 4% to 2.5%, I can get a car loan for less than 3% etc. Not sure what the rate on my credit card is, but it's sure to be lower than Irish banks.

Another toothless quango has been born.
 
Why do you think they are paying more than they should.

I'd be interested in getting info on what the length of repossession is on average in the EU versus the pretty much indefinite stay here. I don't know the answer so if they are similar fair enough you have a point.

The experience of recent years has changed things forever - irish mortgage lending is in some grey area between secured and unsecured lending and the interest rates should be set appropriately

This canard is raised time and again on this forum, as if there is a finger-wagging bot installed to quell the quite proper questioning of the SVR regime.

I have yet to see any support for the argument that is based on actual or estimated costs to our heavily subsidised banks. To what extent does it explain massively higher Irish mortgage rates, if at all? 5%, 10%, 50%... all? Show us the figures.
 
I'm certainly not trying to quell anything hence the questions? I do think that saying the rates are too high just because they are higher than the rest of the EU seems a bit simplistic but maybe I'm thinking about things too much

Why aren't people making the same complaint about the cost of our government borrowing versus Germany etc?
 
Ps. I find it incredible that a foreign lender hasn't come into the Irish market to gobble up all the blue-chip borrowers stuck on SVR mortgages. There must be 1000s of them. Just take the low hanging fruit and ignore the rest. Set lending terms as strict as you like. There will still be many that qualify. Money for old rope. Why hasn't it been done?!

There's a relatively simple reason for it: As you can see, it is pretty much impossible to repossess a house if the mortgage has gone into arrears. So simply put, it is not worth the hassle for any foreign lender as the risk associated would be too high for the rates.
Imagine the headlines in this country: "Nasty Foreign lender throws family out on street although they have not paid a red cent for only 2 years"

Also, property prices in Ireland seem to be well - "la la land" covers it best I guess, without breaking the "no property price discussion" rule. Which means, even higher risk.

Property market in Ireland is toxic, that's why it hasn't been done.
 
newirishman,

Thanks. What you say makes sense. But, still a pity. Without going into details, my wife and I would be bluest of blue-chip, so anything rather than subsidising AIB would be a bonus.

Would still like to know how Bronte swung it. :)

D.

Same here in terms of "bluest of blue-chip". I have my mortgage with KBC, on the SVR of 4.5%. Wouldn't mind paying 3.5% or 2.5%!
On the other hand, I've budgeted with an average of 6% over the life time of the mortgage and stress tested to 10% so 4.5% is already good in that sense :p

Looking at switching in the next 2 years or so (TRS finishes in 2017 I think) but there's isn't a proper switcher marker out there.
Was hoping that this campaign might improve the situation, but - not unexpected - nobody is interested in creating a proper "free market" :mad:
 
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