Committee Reports > List of Committees > Joint > 1999 > Committee on European Affairs > Interim Report - EMU Changeover Procedures

Appendix 4

Documents submitted by the Irish Bankers' Federation and the Director of Consumer Affairs

The Euro and Financial Services

IBF/IMSA Presentation to the Joint Committee on European Affairs Tuesday, 16^th February 1999

Summary of the Key Points

1.The cost to consumers of exchanging currencies in the euro zone has been significantly reduced both in the exchange of currency notes and in the making of cross-border payments.

2.Recent press notices from banks. building societies and other bureaux, that are providing currency exchange services, have illustrated the following:

(a)the extent of the various price reductions:

(b)the transparency of the new pricing structure; and

(c)the intensity of competition between the various service providers.

3.To correctly compare the price of foreign exchange services between euro currencies after 1^st January with the price before the introduction of the euro, today’s single commission must be compared with the sum of the ‘spread’ (the difference between the rate at which a currency is bought and sold) and the commission that previously applied.

4.The recent press notices from various institutions show that the prices of exchanging currency notes of the euro zone have been reduced significantly since the 1^st January, with reductions averaging between 20% and 30%. For the vast majority of such transactions the Irish consumer now gets more foreign currency for his/her IR£. [See Appendix 1 for copies of press notices.]

5.Exchange rate risk is just one of the cost factors arising in the provision of foreign currency exchange services: other cost factors include staff, premises, insurance, transport and security. The European Monetary Institute [the forerunner to the European Central Bank] independently made the following estimate: that the elimination of the exchange rate risk between euro-zone currencies would account for no more than 20% of the total costs involved in the provision of foreign exchange services between these currencies prior to 1^st January 1999. The exchange rate risk was the only cost factor to be eliminated with the introduction of the single currency on 1^st January last.

6.In developing a new pricing structure for cross-border payment services between euro-zone countries, each bank and building society has had to separately notify and obtain clearance from the Director of Consumer Affairs. The process required each institution to separately and confidentially propose a new set of charges which would pass on to consumers the savings resulting from the elimination of exchange risk and which would be fully transparent. In practice, these savings have been augmented as a result of the additional competitive forces that have been brought into play in the marketplace.

The Euro and Financial Services

Presentation to the Joint Committee on European Affairs by the Irish Bankers’ Federation (IBF) and Irish Mortgage and Savings Association (IMSA) Tuesday, 16^th February 1999

IBF/IMSA Delegation

James Bardon, IBF Director General

Frank Sexton, IBF Deputy Director General and Member of the EMU Steering Committee for banks (IBF) and building societies (IMSA)

Eimer O’Rourke, Irish Mortgage and Savings Association (IMSA)

Pat Ryan, Chairman of the IBF/IMSA EMU Steering Committee and Group Treasurer, AIB

Michael Watson, Member of the IBF/IMSA EMU Steering Committee and Head of EMU Planning and Development, Bank of Ireland

Pat McArdle, Member of the IBF/IMSA EMU Steering Committee and Head of EMU Planning, Ulster Bank

Felix O’Regan, Manager of the Irish Banks’ Information Service and Co-ordinator of the Irish Banks and Building Societies Euro Information Campaign

The Euro and Financial Services

IBF/IMSA Presentation to the Joint Committee on European Affairs Tuesday, 16^th February 1999

Summary of the Key Points

1.The cost to consumers of exchanging currencies in the euro zone has been significantly reduced both in the exchange of currency notes and in the making of cross-border payments.

2.Recent press notices from banks, building societies and other bureaux, that are providing currency exchange services, have illustrated the following:

(a)the extent of the various price reductions;

(b)the transparency of the new pricing structure; and

(c)the intensity of competition between the various service providers.

3.To correctly compare the price of foreign exchange services between euro currencies after 1^st January with the price before the introduction of the euro, today’s single commission must be compared with the sum of the ‘spread’ (the difference between the rate at which a currency is bought and sold) and the commission that previously applied.

4.The recent press notices from various institutions show that the prices of exchanging currency notes of the euro zone have been reduced significantly since the 1^st January, with reductions averaging between 20% and 30%. For the vast majority of such transactions the Irish consumer now gets more foreign currency for his/her IR£.

5.Exchange rate risk is just one of the cost factors arising in the provision of foreign currency exchange services; other cost factors include staff, premises, insurance, transport and security. The European Monetary Institute [the forerunner to the European Central Bank] independently made the following estimate: that the elimination of the exchange rate risk between euro-zone currencies would account for no more than 20% of the total costs involved in the provision of foreign exchange services between these currencies prior to 1^st January 1999. The exchange rate risk was the only cost factor to be eliminated with the introduction of the single currency on 1^st January last.

6.In developing a new pricing structure for cross-border payment services between euro-zone countries, each bank and building society has had to separately notify and obtain clearance from the Director of Consumer Affairs. The process required each institution to separately and confidentially propose a new set of charges which would pass on to consumers the savings resulting from the elimination of exchange risk and which would be fully transparent. In practice, these savings have been augmented as a result of the additional competitive forces that have been brought into play in the marketplace.

Mr. Chairman, Deputies and Senators,

We very much welcome the opportunity to discuss with you the issues in relation to the pricing of certain financial services following the introduction of the euro on 1^st January last. I would like to commence by introducing the members of our delegation as follows:......

All of us are here today as representatives of our respective bank and building society sectors, rather than of any individual member institutions. After our short formal presentation, we will address any questions you may have. However, if there are issues that you wish to raise in relation to individual institutions, we will be happy to refer them to those institutions so that they can deal with them directly.

Savings and Transparencv for Consumers

When speaking to you last June, we made the commitment to pass on to consumers all savings which accrue as a result of the fixing of exchange rates under EMU and to provide, in a transparent manner, full details of any handling charges that arise. These commitments have been honoured in full.

Price Reductions

♦The new price structures for currency exchange under the euro have resulted in significant price reductions for consumers in Ireland.

♦Initial reductions on 1^st January last averaged between 20% and 30%.

♦Price reductions here have actually exceeded the 5%-20% range that was anticipated in a study by the European Central Bank [1].

Competitive Dvnamic

♦The transparency and comparability stimulated by the notification and publication procedures followed in Ireland have introduced an additional competitive dynamic into the market for cross-border euro payments. This has resulted in further savings for Irish consumers over and above the initial 20%-30%.

♦One clear example of these further savings for consumers is the price reductions announced by various institutions in the period since 1^st January. Another example is the suspension by banks of the commission charge where credit cards are used to pay for purchases in the euro zone.

MEETING OF THE JOINT OIREACHTAS COMMITTEE ON EUROPEAN AFFAIRS ON 16 FEBRUARY 1999

1. INTRODUCTION

1.1Surveys have consistently shown the Irish people to be among the most committed of Europeans. It is hardly surprising, therefore, that political will and sustained effort on many fronts in this country have been put behind that most ambitious of projects undertaken by the European Union - the Single Currency. With Ireland now one of the 11 participating Member States in the Single Currency since the beginning of this year, I am proud to count myself among those who are determined to do their utmost to bring the benefits of the euro to the people. Indeed, I listed the euro as one of the priorities for my term of office in the very first interview I gave in November, 1998 on taking up appointment as Director of Consumer Affairs.

1.2I welcome the opportunity to share in some detail, with this distinguished political forum on European Affairs, the first euro-specific action I have taken. This relates to the exercise of my statutory responsibility for regulating charges by financial institutions, in the first instance during the transitional period, 01 January 1999 to 31 December 2001, when the euro may be used for cashless transactions only.

1.3I propose to outline for the Committee:

•the statutory framework, at both national and EU level, within which I regulate charges by financial institutions;

•the charges themselves, and the difference pre and post the euro era;

•the regulatory process and enforcement;

•the main benefits for consumers;

•the next steps.

2. THE STATUTORY FRAMEWORK

2.1As Director of Consumer Affairs, I am operating within a statutory framework at two levels: The provisions of the Consumer Credit Act, 1995 - in particular, section 149 - apply in general at national level to any new or increased charges proposed for services (including foreign exchange facilities) by financial institutions. In the case of the euro, there is an additional dimension at EU level, where the act of most immediate relevance is the European Commission Recommendation of 23 April, 1998 concerning banking charges for conversion to the euro.

2.2The Consumer Credit Act, 1995

Under the Act, banks, building societies, finance houses and bureaux de change are obliged to notify the Director of Consumer Affairs of any proposal to increase a charge which has previously been notified, or to impose a charge in respect of a service which was not previously notified. Every notification must include:

(a)a statement of commercial justification for the proposal, including a detailed statement of cost;

(b)details of the estimated amount of additional income accruing from the proposal;

(c)where appropriate, a notification fee such as the Director may decide, but not being more than £25,000.

The directions issued by the Director of Consumer Affairs in response to each notification must have regard to:

(a)the statement of commercial justification which was submitted;

(b)the promotion of fair competition;

(c)the passing on of any costs incurred to customers;

(d)the effect on customers of any proposal to impose, or to change, any charge in relation to the provision of a service.

Directions must be issued within a specific timeframe - within four months in the case of a proposed increase to any existing charge, and within three weeks in the case of a proposed charge for a new service. The directions may block the increased charges or the new charges from being imposed. The directions may also require the amended charges to be published in a manner specified by the Director.

2.3The 1998 Commission Recommendation

Under the Recommendation, the Commission considers that institutions providing foreign exchange facilities should implement a Standard of Good Practice on conversion without charge, by 01 January 1999 at the latest. This should include the legal requirement to convert without charge:

(a)incoming payments from the national currency to the euro and vice versa during the transitional period;

(b)accounts from the national currency to the euro at the end of the transitional period;

as well as the requirement to:

(c)charge for services denominated in euro at fees no different from those for identical services denominated in the national currency.

In addition, inclusion of the following practices is recommended by the Commission:

(a)conversion without charge of outgoing payments from the national currency to the euro and vice versa during the transitional period;

(b)conversion without charge of accounts from the national currency to the euro during the transitional period;

(c)exchange without charge to customers (i.e., account holders) of household amounts of the national banknotes and coins for euro banknotes and coins during the dual circulation period.

While the Recommendation clearly does not imply in any way that the exchange of eurozone banknotes during the transitional period should be free of charge, it does require that full transparency and public information are provided for these exchanges. The transparency requirements mean that customers should be provided with information concerning conversion charges or exchange charges, separately identified from the conversion rate and from any other charges of any kind whatever which are applied. Public information measures include informing customers about whether or to what extent the institution concerned will implement the Standard of Good Practice; and inclusion of its provisions in a National Changeover Plan.

3. CHARGES PRE AND POST INTRODUCTION OF THE EURO

Pre euro

3.1Charges for foreign exchange facilities were not transparent prior to introduction of the euro. As this fact has probably been the greatest source of misunderstanding by the public to date, I consider it vital to take every opportunity I can to clarify the situation.

3.2Prior to 01 January, 1999, customers engaging in a foreign exchange transaction saw, from their receipt, that they had been charged a commission or handling fee. That was clear. That they understood, and accepted as what they had to pay for the service. From information now supplied by the banks, and what people generally did not realise, however, is that they were also being charged another fee, known as a “spread”, which was not separately identified in their receipt. Rather, it was built in to the calculation of the exchange rate which was applied to their transaction. The spread was therefore a second, hidden fee.

3.3The costs for institutions covered by the spread were real: The exchange rate risk, of course, between the price of buying and selling the currency in question. But that was the smallest element. The spread covered, too, other and greater costs such as transport, storage, security, insurance, fraud risk and agency costs, representing in fact by far the greater part of the total cost of providing a foreign exchange service, and on which institutions were highly dependent in terms of their overall income from crossborder transactions. To put it in proportionate terms, the spread represented in excess of 80% of the total income for such transactions, whereas the commission accounted for less than 20%.

Post Euro

3.4As from 01 January, 1999, the exchange rates between the euro and their respective national currencies have been irrevocably fixed for the 11 participating Member States, including Ireland. When converting their national currencies, only the fixed rates can be used - buying and selling rates can no longer be quoted. As crossborder transactions in respect of the eurozone currencies therefore no longer involve an exchange rate risk, that part of the spread is no longer justified. The other, and bigger, costs incorporated in the spread, which I have mentioned, do however remain - and are likely to remain until the changeover to the euro is complete. In other words, until national notes and coins will cease to be legal tender within the eurozone, by 01 July 2002 at the latest, and probably a good deal earlier than that date. Logically, the same situation obtains in relation to the commission or handling fee. The report of 23 April, 1997 from the European Monetary Institute supports the case that the elimination of exchange rate risks for transacting in eurozone currencies would account for only 10% to 20% of the total cost of providing a foreign exchange service for these currencies.

I shall be returning to crossborder transactions, when outlining the NEXT STEPS.

3.5Operating within the two-fold statutory framework, I set out to require institutions providing foreign exchange facilities to move from an opaque to a transparent charging structure for currency transactions within the eurozone. I believe that I have achieved my objective: There is now one clearly identifiable charge only, representing the previous commission or handling fee and the non-exchange risk part of the previous, hidden spread. Without knowing that, in reality (although not shown on the receipt), there was “dual” charging in the past, this single charge from now on could, on the face of it, appear to customers to be an increased charge due to introduction of the euro. In fact, the opposite is the case. The single charge represents overall price reductions for customers, averaging between 20% and 30% (and in some cases even higher), in the cost of transacting in eurozone currencies. To illustrate this concrete benefit of the introduction of the euro, I have attached as Annex I a comparison between the pre and post euro cost of three transactions - £50, £100 and £500 - in eurozone currencies.

3.6To further underpin the benefits of transparency and reduced charges for customers arising from the euro, I sought and received assurances from the institutions concerned that they would not pass on to customers their own costs associated with introduction of the euro. They will therefore be bearing themselves the not insignificant costs of systems / IT reconfiguration, branch equipment, staff training, marketing and promotion, etc.

4. REGULATION AND ENFORCEMENT

4.1The regulatory process in which I engaged as Director of Consumer Affairs respected the statutory framework at national and at EU level. In view of the euro-specific nature of the process, it is perhaps to be expected that the EU dimension came first in chronological terms.

4.2Following consultations with my Office, the Irish Banking Federation (IBF) and the Irish Mortgage and Savings Association (IMSA) drew up in November 1998 a Standard of Good Practice designed to facilitate the smooth changeover to the euro. All the members of these two representative bodies subscribed to the Standard of Good Practice, which committed them to observing the provisions of the European Commission Recommendation concerning banking charges for conversion to the euro, as well as to those of the European Commission Recommendation concerning dual display of prices and other monetary amounts. The Standard of Good Practice was included in the third edition of the National Changeover Plan, as published by the Euro Changeover Board of Ireland.

4.3A total of 17 institutions, comprising banks, building societies and bureaux de change, submitted euro-specific notifications under the Consumer Credit Act, 1995 in the latter part of 1998. I issued directions in relation to 16 of them before 01 January, 1999; and the remaining one - which I received on 23 December last year - is still under consideration. There were significant variations among the institutions in relation to the charges / pricing structures proposed. The notifications were the subject of in-depth examination, including detailed enquiries and extensive consultations. My staff and I had the assistance of an external expert in all of this work.

4.4For the information of the Committee, I have attached as Annex II details of the maximum charges which, in accordance with my directions, the 16 institutions are entitled to apply in respect of transactions in eurozone currencies for the various products or services they provide. While they may not exceed these charges, they may of course charge a lesser amount.

4.5My directions to the institutions contained two requirements relating to the provision of information for customers, as follows:

(a)publication in the three daily national newspapers of the cost of converting three cash amounts - £50, £100 and £500 - into eurozone currencies, making a clear comparison between the conversion cost of each of these amounts pre and post introduction of the euro, and indicating the reduction or increase arising in respect of each amount. In order to ensure that the advertisements were sufficiently large to attract the attention of as many consumers as possible, I stipulated that they be at least 5” × 5” (or centimetre equivalent) in size;

(b)preparation of information leaflets, to be available in all branches of the institutions concerned as from Monday 04 January, 1999, which would give details of the new charging structures. The leaflets therefore had to incorporate the £50, £100 and £500 pre and post euro examples of cash transactions that featured in the advertisements, and they had to contain this comparative example in respect of the other products specified in the notifications, such as drafts and travellers cheques.

4.6Starting on Monday 04 January, 1999, my staff carried out initial spot checks on institutions in relation to their compliance with my directions. These spot checks did show up deficiencies, notably as regards information gaps for customers. I wrote to those institutions which had been found wanting, to ask them to take the necessary corrective measures. I have received formal assurances from the institutions concerned that the deficiencies have been remedied. I will not cease to be vigilant, however. Further, and more extensive spot checks are already underway. In ensuring that my directions are enforced, I am assisted not only by my own staff, but also by customers who, thanks to the public information requirements I imposed, have been in a position of knowledge to bring to my attention instances of perceived infringements.

5. MAIN BENEFITS FOR CONSUMERS

5.1At this point, I would like to summarise for the Committee the main benefits of introduction of the euro for consumers in Ireland, which have arisen as a result of the exercise of my regulatory functions, as follows:

•pricing transparency: a single transaction charge, to assist consumers in making informed choices as to which institution they should do business with. Choice empowers consumers;

•overall cost reduction: the single transaction charge now applied represents a real overall cost reduction of at least 20%, and up to 50% in some cases. In addition, institutions have committed themselves not to pass on to customers their own internal costs associated with introduction of the euro. The euro means significant cost savings for consumers;

•greater competition among institutions, thanks to public information: my public information requirements have enabled consumers to shop around for value in relation to foreign exchange products in the same way as they can shop around in relation to other products and services. The competitive forces being brought to bear on institutions as a result have meant that, even at this very early stage, four of the 16 institutions concerned have brought down their charges below the maximum which I approved. Information empowers consumers.

5.2My advice to consumers is to shop around. In general, they will pay more for the convenience of buying and selling foreign exchange outside banking hours at transit locations and bureaux de change. Invariably, the cost for consumers of obtaining cash or making foreign purchases using plastic (i.e., credit card or ATM card) is cheaper than bringing foreign currency with them or using travellers cheques.

5.3The Committee may be aware, from media reports, that the Commissioner responsible for Financial Services and the Single Market, Mario Monti, asked the European Banking Federation (EBF) last month to provide him with information on the situation regarding charges in the 11 participating Member States following introduction of the euro. I also wrote to Commissioner Monti at the end of last month, to share with him the key aspects of my approach as Director of Consumer Affairs, which is grounded in ensuring that Irish consumers reap the benefits of the euro.

6. NEXT STEPS

From the information available to me, I understand that:

6.1The European Commission is encouraging institutions to develop efficient crossborder links between national retail payment systems as soon as possible. This would reduce costs for users, and so contribute to developing the widespread use of the euro. In this connection, the Commission has recently welcomed the initiative taken by the Euro Banking Association to examine the possibility of extending its clearing system to crossborder retail payments.

6.2The European Commission intends to issue a Communication later in the Spring of this year on the future of payment systems in the Single Market, which will set out a framework for achieving the goal of a single payments area. The aim is to examine and reduce existing barriers in crossborder payments in the Single Market in order to make them as efficient as domestic payments - in other words, with the same level of speed and security as national operations, and at a comparable cost.

6.3The personal representatives of Ecofin Ministers, at the first meeting of the Financial Services Policy Group (which is chaired by Commissioner Monti) on 29 January 1999, supported the urgency for action to develop a European electronic wallet, i.e., an electronic card which stores value and can be used to make low value retail purchases. The European Commission has indicated that it would welcome the rapid development of such a wallet.

As the Irish Director of Consumer Affairs, I should like to be associated with the welcome extended by the European Commission to these next steps.

7. CONCLUDING REMARKS

7.1I should be more than pleased to discuss with the Committee matters arising out of my statement.

7.2I have confined myself in my statement to the subject of charges, since that is what is on the agenda for this meeting. However, should it be of interest to the Committee. I would welcome the opportunity to raise other euro-specific actions, such as the proposed National Code of Practice on the Dual Display of Prices which Minister Kitt has initiated; and the 1999 European Young Consumer Competition, with the euro as its project topic, which is being run by my Office in conjunction with the Consumers Association of Ireland. I am confident that initiatives such as these, taken together with the efforts of the Euro Changeover Board of which I am a member, the work of other bodies such as Forfas, as well as the various codes of practice either agreed or in the pipeline at national and sectoral levels, will serve to enhance both the concept and the reality of the euro for Irish consumers.

ANNEX I

Advertisements By Financial Institutions of Their Foreign Exchange Charges For Euroland Currencies

BANK OF IRELAND

TSB

ACC BANK

EBS BUILDING SOCIETY

AIB Bank

IRISH PERMANENT

FIRST ACTIVE PLC

AMERICAN EXPRESS

AIB CURRENCY BUREAU LTD

THOMAS COOK OVERSEAS LTD

First Rate Enterprises LTD

ULSTER BANK

NATIONAL IRISH BANK

GUINNESS AND MAHON

FEXCO

Annex II

Sheet1

Sheet2

Sheet3

Sheet4

Sheet5

Sheet6

Sheet7

Sheet8