In a pulling-no-punches speech at the Australian Financial Review (AFR) Banking and Wealth Summit, Australian Competition and Consumer Commission (ACCC) chairman Rod Sims called out the nation’s big banks for allegedly using home loan interest rate discounts to maintain market stability rather than to provide their customers with healthy competition.
Based on the interim report from the Financial Services Unit (FSU), to investigate competition in Australia’s banking and financial system, Mr Sims refuted claims from the nation’s leading banks that the mortgage discounts they offer are indicative of healthy competition, instead describing these discounts as “a measure of a gap between the actual rate charged by the bank and a reference or headline rate that the bank decided for itself and that almost nobody ever pays.”
“Internal documents reviewed by the ACCC reveal a lack of vigorous price competition between the five Inquiry Banks (ANZ, Commonwealth, NAB, Westpac and Macquarie), and the big four banks in particular. In fact, their behaviour more resembles synchronised swimming than it does vigorous competition.”
“What we found is that the pricing behaviour of the Inquiry Banks appears more consistent with ‘accommodating’ a shared interest in avoiding the disruption of mutually beneficial pricing outcomes, rather than vying for market share by offering the lowest interest rates.”
It was also alleged that the big four banks (which represent approximately 80% of all outstanding residential mortgages held by banks in Australia) determine their headline interest rates based largely on the actions of one another, and pay little attention to the more than 100 other residential mortgage lenders in the Australian marketplace.
The lion’s share of home loan discounts from the big four banks were found to be being offered to new customers rather than existing customers, with data from 2015 to 2017 showing that existing borrowers on standard variable interest rate residential mortgages were paying interest rates up to 32 basis points higher (on average) than new borrowers – a saving of approximately $1200 in interest over the first year of a $375,000 mortgage.
But while Australians may be able to get a better deal by switching lenders, according to Mr Sims, the sometimes obtuse nature of home loan pricing and discounting makes it difficult for many Australians to easily compare different mortgage offers and make an informed decision of which loans would be best suited to their personal finances.
“At worst, the ‘hassle factor’ of comparing and switching should be a bug in the system; it shouldn’t be a feature which benefits an industry lacking in vigorous competition.”
Mr Sims voiced his support of proposed open banking initiatives, which could help to make these processes more transparent and simpler for everyday bank customers to navigate.
Mr Sims concluded his speech by reiterating the importance of healthy competition in the banking sector, arguing that the recent failures and scandals in the industry were not caused by excessive competition, but often by “inappropriate behaviour and endemic short termism, possibly driven by a desire for huge bonuses.”
“If we continue to insulate our major banks from the consequences of their poor decisions, we risk stifling the cultural change many say is needed within our major banks to put the needs of their customers first.”
The ACCC’s final report into residential mortgages is due to be released 30 June 2018.