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The Government’s Retail Banking Review

The Chancellor of the Exchequer Jeremy Hunt MP has made no secret, with his Edinburgh Reforms, of his desire to introduce greater proportionality to UK financial services regulation and to foster economic growth and competition. Ireland seems however to be in a cycle of imposing ever increasing regulatory burdens on our financial industry, while at the same time bemoaning the lack of available choice, innovation, and customer service. Is it time perhaps for Irish policymakers to take seriously the notion that these matters could be connected?

Lack of competition?

In the Government’s Retail Banking Review, published in November 2022, press attention focused on proposals for reform of the bonus and pay caps at Irish banks, a legacy of the global financial crisis. The trigger for the Review was the announcements by Ulster Bank (NatWest) and KBC that they would withdraw from the Irish market, resulting in public concern that the market would be underserved. The Review Report, somewhat surprisingly, asserts that the Irish retail banking sector will not suffer from any lack of sufficient competition in the short to medium term – although with only three significant retail banks, it is already highly concentrated by any measure.

The Report suggests that the credit union movement, digital banks and An Post will step into the gaps left by Ulster Bank and KBC. This seems quite aspirational and there is little meaningful discussion in the Report of the possibility that fundamental regulatory reform could instead make the Irish market more attractive to foreign bank entrants or to new cross-border investment.

Is regulation a barrier to new market entrants?

The Report asserts, without any detailed analysis, that Irish regulatory standards are fully consistent with international best practices. Therefore, it asserts, regulation cannot be considered a barrier to new market entrants in Ireland. However, Irish financial regulatory lawyers can easily identify instances where this is not necessarily so. For example, Ireland is one of very few states globally (another is Kenya) to require banks to obtain regulatory pre-approval of all customer charges, under section 149 of the Consumer Credit Act. The Government agreed in 2014, under IMF pressure, to relax the pre-approval requirement for new entrants to the market for a two-year period. However, it refused at that time to abolish it outright, claiming that this would allow the incumbent banks to abuse their dominant position.

Arguably, maintaining the section 149 pre-approval requirement favours the incumbent banks against insurgents, since only the incumbents have established processes and know-how for managing notifications. In addition, the notification process can take months, so a foreign bank looking at the Irish market must factor this procedural and pricing inefficiency into its decision whether to invest in our small market or to deploy capital elsewhere. Multiplied across products and processes, we know that local regulations like this, coupled with the perception that the CBI’s supervision model is overly intrusive, are at least a part of what makes new entrants to the Irish financial services market slow and wary.

New regulatory barriers

In addition to its failure to suggest any simplification and reduction of the current regulatory burdens on business, the Review Report recommends the introduction of new barriers. Currently firms that provide credit to consumers, i.e., retail credit firms, are subject to a CBI authorisation requirement, but those that provide credit to corporates, including to SMEs, are not. Banks, being licensed deposit-takers, are in a different category: their licensing necessarily covers all their activities, including their SME lending.

The Review Report recommends that all providers of SME credit in Ireland should in future be required to be authorised by the Central Bank, to ensure a “level playing field”. It justifies this recommendation by stating that, since borrowers are only entitled to avail of conduct protections from CBI-regulated lenders, and since all SME borrowers should be equally protected, all SME lenders must therefore become CBI-regulated. This seems like a disproportionate regulatory response which could have adverse and unintended consequences.

Lack of availability of credit for SMEs

No-one could object to all SME borrowers receiving equal protections, where this protection is needed. However, the Report also acknowledges that stakeholders were generally dissatisfied with the availability of credit for SMEs in Ireland. Despite this, the Report gives no consideration to the possible adverse consequences and impact of subjecting a group of currently unregulated SME lenders to authorisation. Central Bank authorisation is an onerous process, requiring firms to hold prescribed levels of capital, to employ certain numbers of staff to demonstrate substance, and to subject their outsourcing arrangements to substantial oversight, among other matters. Imposing these requirements on SME lenders could make some existing lenders unviable, will certainly not encourage new lenders to enter the market and is likely to drive up the cost of credit. Our policymakers should pause before recommending the introduction of another local authorisation regime that is not required by European law. If the desired policy objective is to protect borrowers, could legal means not be found to require SME lenders to observe prescribed standards of behaviour without subjecting every aspect of their operations to full Central Bank oversight?


Regulatory policy is explicitly designed to alter economic behaviour by firms towards their customers. Against that background, it is naïve to imagine that regulatory policy does not also alter the decisions of capital providers on when, where and how to deploy capital. Those capital deployment decisions necessarily then impact on the levels of choice and competition available in the market.

These self-evident economic truths need to inform Irish policymaking in financial regulation, just as it is informed by the truth that markets, left to themselves, can generate undesirable social costs. Irish policymakers must adopt a balanced approach to regulatory policy-making that recognises both sides of this complex equation. Reconsidering the recommendation to subject all non-bank SME lenders to full CBI authorisation would be a very good start.

For more information, contact a member of our Financial Regulation team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

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