Here are my initial thoughts and first draft. I would welcome any input as I will send it off tomorrow.
Submission to the CCPC on proposed acquisition by Bank of Ireland of certain assets of KBC
The consideration of this transaction should not be done in isolation from the mooted sale of Ulster Bank's mortgage book to permanent tsb which is very similar in nature.
It is very important that the CCPC does not just assess competition based on the number of lenders in the market. The behaviour of the lenders and their treatment of customers are more important factors.
KBC competes for new business on mortgage rate alone and does not use cash-back incentives to maintain high rates for existing customers.
BoI keeps its existing rates high and attracts new customers with cash-back incentives. Without these incentives it would get no new business at the rates they charge. As they have high rates for new customers, they are under no pressure to reduce rates for existing customers.
If the situation were reversed, and KBC were buying Bank of Ireland's mortgage book, I would welcome it as it would be the replacement of an expensive lender with a competitive lender.
It is very alarming that a very expensive lender is buying a competitive lender.
A typical KBC customer who is on a <80% LTV whose fixed rate expires at the moment, could fix again for 3 years at 2.3%. It would cost them a full 0.7% extra if their loan is bought by Bank of Ireland.
However, the CCPC should be very careful about any restrictions it places on KBC’s disposal of its mortgage book.
It is bad news for competition, but we need more mortgage lenders in the Irish market. If we make it difficult for them to exit the market, potential entrants might be reluctant to commit themselves to the Irish market in case they could not reverse their decision if it did not work out. So KBC should be relatively free to dispose of its mortgage book to the highest bidder.
It would be best for consumers if the highest bidder were a European bank wishing to enter the market and compete with the existing lenders, but if they want to do that, they should outbid Bank of Ireland for the mortgage book.
The CCPC should approve the sale but subject to certain conditions
The Central Bank should have stopped the discrimination between new and existing customers as it constitutes unfair treatment of customers which is prohibited by the Consumer Protection Code.
However, the CCPC should now make it a condition of the takeover that for all its business:
- Existing customers must be offered the rates and incentives on offer to new customers
- Cash-backs be discontinued other than refunding the legal costs of switchers
If that is done, the normal competition would return to the mortgage market and the sale to Bank of Ireland should be approved.
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