Two weeks ago the Bank of Scotland announced that it was looking to compete for business in the Irish home loans market. The announcement that the Scots are offering a standard variable interest rate of 3.99 per cent caused excitement among potential borrowers and consternation in the Irish banks. Since then both AIB and Bank of Ireland have slashed their standard variable mortgage rate by more than 1.25 per cent.

The events of the past month are proof positive that many of us have been systematically ripped off by the Irish banks for a long time and never more so than in the last year.

In the last quarter of 1998 the Central Bank reduced Irish base interest rates by more than half, from over 6 per cent to 3 per cent. The main banks passed on less than half of this reduction to mortgage-holders.

In April of this year the European Central Bank reduced the base rate by a further half of 1 per cent. Again the consumer got only about half of the benefit. Put another way, the average mortgage-holder is paying about £100 more per month than if the full reduction had been passed on. Why?

At the time we were told that the banks had to look after their deposit-holders. The argument seemed weak at the time. With the benefit of hindsight, it seems wholly implausible.

Banks in other euro zone countries face exactly the same constraints. Yet Irish mortgage rates are a good deal higher than most.

The truth is that the Irish banks have been motivated largely, if not exclusively, by one thing: profit.

Don't get me wrong. Profit is a good thing. There are good healthy profits to be made in the banking sector, and in the final analysis it is in the interests of the economy and of consumers that this should be so.

But the profits made in the Irish banking sector are not normal. They are extraordinary.

AIB posted profits of £1 billion last year. Bank of Ireland reported about half that. The financial services sector accounts for over 10 per cent of our GNP.

This level of profit-taking may well keep the shareholders happy, but it is happening on the backs of mortgage-holders and some other bank customers such as small business. It also suggests in a very stark way that parts of banking business are not as competitive as they should be.

How can this be allowed to happen? The truth is that nobody has particular responsibility to stop it happening.

I admit I almost felt sorry for Maurice O'Connell, governor of the Central Bank, when he appeared recently before the DIRT inquiry to try to explain the bank's role in the matter. This is the umpteenth time this year that the governor has been called to account on matters of this kind, and it seems the pressure of saying the same thing for the umpteenth time to an increasingly hostile audience is beginning to tell.

The Central Bank, says the governor, does not look after consumers. It is responsible for the prudential supervision of the banking sector and it cannot disclose to anyone else information which it comes across during the course of its inquiries. I could quibble about the detail but it seems clear that the governor is correct in his reading of the law.

It might reasonably be thought that the Director of Consumer Affairs should be looking after the interests of consumers.

Unfortunately, it is not so. The director is specifically prohibited by law from investigating matters to do with the interest rates charged by banks. In fairness, the current director, Ms Carmel Foley, has said as recently as last April that she would very much like to have a look at the interest rates charged but, by law, she cannot do so.

The role of the Competition Authority is less clear. The authority has power to investigate specific complaints. It will not discuss such complaints in public so it is difficult to assess how useful its role has been. In any event, we clearly need to go one important step further. We need a root-and-branch assessment of alleged anti-competitive practices in parts of the banking sector, not least home loans. The Tanaiste has power to request such an inquiry and she should do so now.

It is all the more important that this is done now as the sector is already going through a period of radical change, not just in Ireland but throughout Europe. The trend towards amalgamation and takeover in European banking appears irreversible. This last year has seen several huge mergers in Germany and France.

In Ireland, too, the number of domestic players in the market is beginning to fall. Irish Permanent and Irish Life have merged. ACC and TSB will most likely merge before the end of next year. ICC will be sold off. The future of some smaller banks appears less than certain. NIB is a case in point. Looming is the possibility, many would say the likelihood, that one of the big two (AIB and Bank of Ireland) will be taken over by a foreign bank.

It is important that these changes should benefit the banks' customers and not just their shareholders. To ensure that this happens we need to do everything possible to eliminate anti-competitive practices. This should be a stated aim of public policy backed up by active intervention of the Competition Authority.

For years the banks have denied that they are a cartel. The events of the last year make this denial difficult to believe. We need to find out the truth.

OF COURSE, it is not just in the area of interest rates that the banks have questions to answer. National Irish Bank has been found guilty of deliberately overcharging in some of its branches.

Virtually every deposit-holding financial institution in the State maintained untold numbers of bogus non-resident accounts. All of this discloses a major lacuna in the way we regulate the financial services sector.

Last year the Government decided to set up a single regulator to oversee the whole sector. This was, and is, a good decision. But the decision has not been implemented because the Government is hopelessly divided as to how the regulator should be set up.

However it is done, it is critical that the regulator should have a strong consumer focus.

For too long bank profits have taken precedence over bank customers in the eyes of many managers. It is high time this changed. Our best chance of encouraging this change is some real competition in the market. In that sense Bank of Scotland has done us all a big favour.

Derek McDowell is finance spokesman for the Labour Party