Irish banks and other lending institutions, still dragging their heels about passing on the full benefit of the European Central Bank's interest rate cut to their mortgage customers, may soon be investigated by the Competition Authority. Since the rate cut, borrowers across the euro zone have been able to get mortgages at between 3 and 4 per cent, except in the Republic, where the institutions have absorbed most of the extra cash.
This week, the Director of Consumer Affairs, Ms Carmel Foley, expressed regret that she was prevented by law from investigating the rates banks charge their customers. Under the structure established by the Government, Ms Foley is permitted to investigate bank charges, but not interest rates.
"I have had several calls in the past week asking me to take on this issue," she said. "But I can't. People have also asked me to look at the rates of interest banks charge on their credit card debt, and again, I am precluded from doing so."
But a spokesman for the Competition Authority stressed that it was entitled to investigate any sector for uncompetitive practices, and if necessary give direct, legally-binding instructions to remove these. As well as responding to specific complaints from the public or from industry, the Competition Authority can act on its own initiative where it suspects certain business practices may be uncompetitive, he added.
The spokesman said he could not confirm or deny that the Competition Authority had received complaints against the Republic's lending institutions, because it was the body's strict policy not to comment on individual cases.
If the Competition Authority is investigating the banks and building societies, its main task will be to determine whether their actions in not passing on the benefit of successive rate cuts to customers represent a collective decision, or rely on an unspoken consensus between the lenders.
When it comes to margins, Irish lending institutions are now the greediest in the EU. They buy money at the same price as other banks and building societies in the euro zone - at the new ECB rate of 2.5 per cent. But while other borrowers across the EU typically pay an additional 1.5 percentage points for their mortgages, Irish customers are often forced to pay 3 per cent more.
This translates as a variable rate in the Republic of 5 or even 6 per cent, compared to one of 4 or 4.5 per cent everywhere else. Over the course of a year, Irish banks wind up taking quite a lot of extra money from mortgage holders. At 4.25 per cent, for example, a mortgage of £75,000 over 20 years will see payments of £464 a month, or £5,568 a year. At 6 per cent the same mortgage holder will pay £537 a month - £6,444 a year.
The reason given by the lending institutions for not passing on the full benefit of the rate cuts to borrowers is that they want to maintain at a higher level the interest rates they pay to deposit account savers. But such an argument appears to ignore the fact that the position of Irish banks is not at all unique - all banks in the euro zone have deposit holders.
Irish mortgage holders will now have to wait as three possible scenarios play out.
Firstly, the Competition Authority could investigate the lending institutions and decide that their acting in unison on the issue, whether by coincidence or not, represents an unhealthy lack of competition on price. The authority could then order the banks and building societies to compete more, or risk heavy fines.
Second, a continental bank - or an Irish institution without a significant base of depositors, such as Irish Life Homeloans - could begin offering Irish customers the same rates as in the rest of the euro zone. This would immediately force the others to drop their prices.
Third, the banks and building societies might just get away with it, and go on charging their customers higher margins than any others in the EU.
Because there has traditionally been little price competition in the Irish mortgage market, many borrowers are not sure whether they would be allowed to switch from one bank to another. Others do not know whether they have the right to switch from a variable rate to a fixed rate, if they think fixed rates have dropped to the lowest level they are likely to hit.
Spokespeople for several lending institutions this week said customers on variable rates usually do not have to pay any penalty, either for switching to a fixed rate or for moving their business to another bank.
But those on fixed rates can at times face heavy penalties if they try to break out of their contract.
