Retail Banking Sector

The Irish retail banking sector continued to trend towards consolidating the sector into fewer providers in 2022. The industry is also experiencing increasing challenges from new entrants from outside the traditional banking sector.

Departing banks
Two of the five high street banks in the State – Ulster Bank and KBC Bank – are progressing their plans to shut down their Irish operations.

Ulster Bank announced that it was exiting the Irish market in February 2021, leaving behind a 160-year legacy as one of the State's bestknown high street banks. Shortly thereafter, KBC Bank announced it was leaving Ireland after 49 years in the market. Both banks are overseasparented, with NatWest owning Ulster Bank, and KBC Bank being part of the Belgian KBC Group.

Each bank is in the advanced stages of planning its exit, but slow progress has been made on migrating existing Ulster Bank and KBC customers to alternative banking partners.

The Banking & Payments Federation Ireland found that although more than 600,000 new bank accounts were opened in Ireland's remaining retail banks in 2022, few of those customers leaving Ulster Bank or KBC Bank have updated their direct debit originator with these new account details. Figures published at the end of September 2022 show that around 854,000 accounts remain open in Ulster Bank and KBC Bank, amounting to around three quarters of the total number of accounts that were open at the start of the year.

This will be cause for nervousness within the departing banks and indeed within the Central Bank of Ireland (the "Central Bank"), which has been closely monitoring their withdrawal. Migrating existing customer accounts and direct debits to alternative banking providers before the banks fully withdraw remains a Herculean task.

Reduced State ownership
The government has signalled its intention to reduce the stake it acquired in the remaining Irish retail banks as a result of the 2009–2011 bank bailout. Bank of Ireland became the first Irish lender to return to full private ownership when, in September 2022, the government confirmed it had sold the remainder of the 13.9% shareholding it had acquired in the bailout.

The other two high street banks – AIB and Permanent TSB – remain largely State-owned; a legacy of the 2008 financial crisis. In September 2022, the Minister of Finance, Paschal Donohoe, confirmed that the State had reduced its shareholding in AIB from 71.2% to 63.5%, and in Permanent TSB from 75% to 62.4%. Minister Donohoe confirmed to the Parliamentary Finance Committee that the State will continue to gradually release AIB shares back into the private market.

Branch closures
Following the announcement of the closure of 88 Bank of Ireland and 15 AIB branches in late 2021, 2022 saw the continued decline of local branch banking across the country as banks increasingly restructured in favour of online banking services. In July 2022, AIB reversed its decision to make 70 of its 170 branches cashless after the intervention of Minister Donohoe following a political furore.

The reduction in in-person services among the retail banks has pushed customers towards alternative providers, notably An Post and credit unions, which both have extensive branch networks nationwide. An Post has partnered with Bank of Ireland (in March 2021) and AIB (in July 2022) to launch the Everyday Banking service, whereby customers in each of these banks are able to carry out their normal banking services at An Post offices. In this way, An Post looks to be stepping into the space vacated by a retail banking sector as it seeks to reduce its physical branch network.

New entrants
Retail banks are experiencing increasing challenges to their market dominance from non-traditional providers. Digital-only payment institutions and e-money institutions such as Revolut are disrupting the sector, providing app-based services without the costs associated with operating a branch infrastructure.

Likewise, non-bank lenders have continued to increase their market share. As of March 2022, non-bank lenders held 13% of all principal dwelling house mortgages, and close to 30% of new lending in the buy-to-let and refinancing markets. Non-bank lenders have also increasingly participated in the SME lending market, accounting for around 37% of all new SME loans.

Mortgage income rules to ease
In October 2022, the Central Bank announced a relaxation of its long-standing Loan-to-Income limit, to allow households to borrow up to four times their income for a mortgage. This is the first such change to the limits since 2015, when the Central Bank restricted lenders to offering loans of only up to 3.5% of the household income.

The Central Bank had previously indicated in May 2022 that it was to carry out a major midyear review of its macro-prudential mortgage rules, as an additional measure to their annual assessment.

Tracker Mortgage Fines

On 29 September 2022, the Central Bank reprimanded and fined the Governor and Company of Bank of Ireland EUR100.5 million for regulatory breaches affecting its tracker mortgage customers. Bank of Ireland was the last of six retail banks to be fined by the Central Bank for their involvement in the tracker mortgage scandal. The Central Bank fined the banks a combined EUR278.8 million under their Administrative Sanctions Procedure (the ASP), as prescribed by the Central Bank Act 1942.

The interest rate of tracker mortgages should track the interest rate set by the European Central Bank (the ECB). After the 2008/09 financial crisis, the ECB reduced interest rates dramatically, meaning that tracker mortgages became unprofitable for lenders. Many banks sought to move their existing tracker mortgage customers to more expensive variable rate mortgages. The Central Bank determined that this resulted in customers being overcharged for their monthly mortgage repayments and led to the loss of homes and property. Just over 40,000 customers were affected.

In December 2015, the Central Bank commenced an industry-wide review of tracker mortgage accounts, called the Tracker Mortgage Examination (the TME). The TME required all lenders to examine the extent to which they were meeting their contractual obligations to their customers, and to provide redress and compensation where applicable.

According to the most recent figures published by the Central Bank, the total amount paid to affected customers under the compensation and redress scheme was around EUR638 million as of May 2019.

In addition to the TME, the Central Bank also conducted statutory investigations into the lenders. The most common regulatory breaches found across the enforcement actions in relation to the TME included providing unclear contractual information to customers, failure to warn customers about the consequences of decisions relating to their mortgage, failure to handle customer complaints in a fair and consistent manner, and failure to properly implement the TME's Stop the Harm principles. Larger fines correlated to the number of regulatory breaches, the number of customers affected and the loss of properties (with emphasis on the loss of family homes).

The largest fine from the TME was issued to Bank of Ireland (EUR143.6 million) for a series of significant and long-running failings in respect of almost 16,000 tracker mortgage customers, resulting in the loss of 50 properties, 25 of which were family homes. This is the largest fine ever imposed by the Central Bank. Bank of Ireland admitted to 81 separate regulatory breaches and had its fine reduced by 30% to EUR100.5 million under the Central Bank's settlement discount scheme.

The second largest fine was issued to Allied Irish Banks (AIB), which was reprimanded and fined EUR83.3 million. AIB had just over 10,000 affected customer accounts, resulting in the loss of 53 properties, 13 of which were family homes. AIB had admitted to 57 separate regulatory breaches; its four previous Central Bank enforcement actions were an aggravating factor in this circumstance.

Many other Irish mortgage providers have faced fines as a result of the TME, albeit not to the same quantum as AIB and Bank of Ireland. In March 2021, Ulster Bank was fined EUR37.8 million, and KBC Bank was fined EUR18.3 million in September 2021. Permanent TSB was fine EUR21 million in 2019, in addition to the earlier EUR4.5 million fine against its subsidiary, Springboard Mortgage, in 2016.

Whilst the Central Bank has confirmed the conclusion of its statutory investigation into the lenders, Derville Rowland (Deputy Governor (Consumer and Investor Protection) of the Central Bank) has provided that it will continue to look at "individual accountability" in relation to its investigation. The Central Bank currently possesses statutory power to hold inquiries into the conduct of persons involved in the management of a regulated financial service provider. This reinforces the Irish legislature's trend of extending the Central Bank's ASP powers and serves to further embed compliance culture and individual accountability in the financial services sector.

Senior Executive Accountability Regime

Following the 2008/09 financial crisis, the Central Bank sought additional powers from the government in order to regulate key individuals within regulated entities, rather than merely the entity itself. The first generation of these new powers was the Fitness & Probity Regime, whereby appointments to key positions would be conditional on Central Bank approval.

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