ESRI research on Behavioural Elements of Switching Financial … –

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Good afternoon everyone. I would like to begin by welcoming you all to the Department of Finance. We are here today in the T.K. Whitaker Conference room.
As many of you know well, T.K. Whitaker was a Secretary General of the Department of Finance; he was a Governor of the Central Bank of Ireland; and he was a member of Seanad Éireann.
Whitaker was also a Chancellor of the National University of Ireland, and a well-respected economist in his own right. The ESRI office itself is located on Whitaker Square in Grand Canal Dock, named in his honour.
The reason I mention the many facets of Whitaker’s career is by way of explaining the linkages which we have, and must always continue to strengthen, between politics, governance, supervision and academia. And I also wish to make an important addition to this network to include industry.
It takes more than any one state agency or private company to make changes and improve life for our citizens or customers. We all have a collective duty to serve and protect consumers, and the more coordinated we are, the more consumers will benefit from the work done on all sides.
In that vein, we are here today to launch the research papers which were commissioned by the Department of Finance, and carried out by the ESRI, on the important topic of switching financial products.
The financial system is changing. And the pace of this change keeps increasing. Established players are leaving markets, new players are joining markets, new financial products are being developed, and the very way we access financial products and services is changing, with the advancement of digitalisation.
In order to deal with the rapid and continuous change in the financial system, it is of key importance that all stakeholders involved work together and address these changes in a coordinated way. The system is not a stand-alone entity, it is a sum of the people involved.
Not only is the financial system changing, we now also find ourselves in a changing interest rate environment. For the last decade or so, we found ourselves in what was a strange at first situation of a low interest rate environment. Industry and consumers adjusted accordingly to that situation, but within the last year ECB rates have gone from zero to three and a half per cent. This is a very sudden and steep increase in a very short space of time.
The sudden increase in interest rates comes at a time when consumers are also dealing with cost of living challenges and highly elevated rates of inflation. Whilst the ECB strategy of increasing interest rates is intended to combat inflation, and is a well understood macro-economic tool, in the meantime consumers are facing higher costs for products and services and also for borrowing.
The issue of affordability has serious impacts for many consumers. For mortgages, in particular, a household may have seen an increase of many hundreds of euros per month on their repayments over the last year.
There are ways in which each of us can address affordability and encourage competition. This was explored in depth in the Retail Banking Review which concluded late last year.
Last year Government also introduced legislation to cap the amount of interest charged by ‘High Cost Credit Providers’, and addressed the price-walking issues within the insurance industry. These are positive steps in protecting consumers and helping keep the costs of the financial services they require down.
We need to do what we can to get better value all round for consumers, and one way they can get better value is by switching financial products or providers.
The ability and willingness of consumers to switch products and services is central to well-functioning markets. But, relatively ‘low’ rates of switching in the retail financial services and products sector has long been of concern to policy makers like ourselves.
Although there is no optimal rate of switching, many consumers could benefit financially. However, there can be costs, and other barriers, which discourage consumers from engaging. The ESRI work is very important in developing tools to encourage consumers to take action.
Let me dive for a minute into some economics.
‘Homo Economicus’ or ‘the Rational Man’ refers to a person who behaves in exact accordance with their rational self-interest. This would imply consumers always seek to get the best value for money.
However, it has long been proven that consumers are not necessarily perfectly rational. So the science of behavioural economics has emerged, and the experts from the ESRI have been using their knowledge and experience in this field to help us understand and address the low level of switching in financial services.
The research carried out by the ESRI, which Professor Pete Lunn will explain in more detail shortly, looks into the reasons why Irish consumers do or do not switch financial products.
The research looks retrospectively in its surveying of consumer habits, but the ultimate goal is forward-looking – to develop digital tools to aid in the decision-making process, and ultimately to encourage consumers to engage in the switching process.
The development of these tools is important. If the tools are of good quality, consumers will use them.
A good example of useful tools is the ‘Money Tools’ available through the Competition and Consumer Protection Commission website. The tools were used over 675,000 times in 2022. The most popular pages were the ‘Mortgage Calculator Money Tool’ and the ‘Mortgage Comparison Money Tool’.
I look forward to the next phase where the ESRI research is put into practice.
We will continue to work together across the system to promote switching.
And as I mentioned earlier, industry has an important role to play to encourage switching. There is a lot more that can be done to eliminate friction for consumers who wish to switch financial products and I expect industry to play its part.
It is important that consumers are aware that their financial services provider is there to support them, and indeed has an obligation to support them. Financial services providers need to make the case that they are “open for business”.
The Central Bank is currently reviewing its Consumer Protection Code. One of the themes of this review is ‘Availability and Choice – Effective Market Functioning’. This is based on its findings that:
“When markets function well, consumers have access to a broad range of products and services, placing downward pressure on prices and promoting higher quality products and services through innovation, as firms seek to attract and retain customers.”
I know there are representatives from the Central Bank and from industry here today. I will continue to encourage action to ultimately aid consumers to get the best value they can.
Both the Central Bank, in its review of the Consumer Protection Code, and the officials here in the Department of Finance, are implementing the OECD High Level Principles on Financial Consumer Protection.
The OECD Principles highlight the importance of choice for consumers and the role of competition in providing choice, enhancing innovation and maintaining high service quality. They also focus on disclosure and transparency.
Another important part of the work in implementing the OECD principles is addressing Financial Literacy and Awareness. A lot of work is being carried out at the moment.
For instance, the National Adult Literacy Agency recently published their report “Financial Literacy in Ireland”, which looks at the challenges and possible solutions which aim to contribute to the development of more literacy-friendly financial services for adults with financial literacy, numeracy and digital literacy needs.
Bank of Ireland recently commissioned a Red-C poll which demonstrates how much more work we have to do in this area.
The Department of Finance, in accordance with the Retail Banking Review recommendation, will engage and participate fully in the financial literacy stream of the Adult Literacy for Life Strategy led by the Department of Further and Higher Education.
My department will also work with all stakeholders to develop a National Strategy for Financial Literacy in line with best international practice.
The better consumers can understand and interact with financial services, products and their delivery systems, the more ability and confidence they will have when it comes to shopping around and switching. This is a priority for me and my department, and I thank the ESRI and everyone here today involved in this research which will inform our next steps.
Thank you, I will now hand you over to Professor Pete Lunn from the ESRI to give some more insight into the research.
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