The failure of banks to pass on interest rate cuts in full will be the subject of an immediate inquiry by the ACCC, which will examine various factors that may be impacting the cost of home loans.
Federal Treasurer Josh Frydenberg has asked the competition watchdog to investigate the banks over their continued failure to cut interest rates in step with those of the Reserve Bank.
Three cuts to the official interest rate have been made since June this year, halving the rate from 1.5 per cent to a new record low of 0.75 of a percentage point.
Yet none of the major banks, and few if any of the other banks, have passed on these cuts to home loan rates in full. Following this month’s 25 basis point rate cut, for example, the big four banks passed only 13 to 15 basis points to variable home loan customers.
In a public statement, the ACCC said it will “immediately” begin an inquiry into home loan pricing at the behest of the government, looking at various factors including:
- interest rates paid by new versus existing customers
- how bank funding costs impact rate decisions by the banks
- why RBA cuts aren’t being passed on in full
- barriers for customers to switch to cheaper home loans
- how suppliers may be contributing to higher home loan costs
The conduct of mortgage brokers has been specifically exempt from the terms of the inquiry.
As part of a formal inquiry, the ACCC has compulsory information-gathering powers, including over decision-making documents, which may shed considerable light on the banks’ processes for determining their lending rates.
“Having consumers and the community understand how pricing decisions are made, why and with what consequences is important for a well-functioning market,” ACCC chair Rod Sims said in announcing the inquiry.
“We are looking forward to examining how banks make these crucial decisions. It will be important to understand and examine the different factors that financial institutions take into account when setting their prices.”
Mr Sims said the ACCC will “aim to provide answers to the questions that banking customers have long asked”.
“For example, we know from our first financial services inquiry that there is an unusually large difference between the headline rate and the actual rates many customers are paying, which can be confusing for consumers,” he said.
“It is also very difficult for customers to find out what mortgage rate they could pay with another financial institution, without going through a lengthy and time-consuming application process.
“We have evidence that customers can save considerable money by switching providers, and we want to fully understand what the barriers are that stand in their way, particularly barriers created by the banks.”
As part of the inquiry, the ACCC will liaise with banking regulators the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) as well as the Reserve Bank.
The competition regulator is due to issue a preliminary report by late March 2020, and a final report by 30 September 2020.
Banks ready to assist: ABA
In a brief statement responding to the inquiry, the Australian Banking Association (ABA)’s boss Anna Bligh claimed that “Australia’s banks stand ready to assist the ACCC in this inquiry”.
“Banks are no stranger to public scrutiny and look forward to the opportunity to cast more light on mortgage pricing and the many important factors that influence the setting of interest rates,” she said.
“The first priority of Australia’s banks is the implementation of the Royal Commission. Banks are also working night and day to prepare for the Consumer Data Right to empower customers to more easily shop around for the financial service that best meets their needs.”
Speaking at a subsequent press conference at Parliament House, Ms Bligh said the inquiry should help provide more transparency about how interest rates are determined and what Australians are actually paying on their mortgage.
“I think one of the things that this ACCC inquiry may help shed more light on is a great deal more accuracy of what Australians are actually paying for their mortgages. There is often a difference between a rate that is advertised and a rate that may be negotiated by customers with their bank,” she said.
“It is not the case that every customer is paying the standard rate. In fact, very large numbers of them increasingly are talking to their banks, shopping around and getting a stronger deal.”
Asked if yet another inquiry into the banks, so soon after the banking royal commission, would impact on lending, Ms Bligh replied “I don’t expect it to.”
“Australian banks are no strangers to inquiries, they are well versed in how to manage the requirements of an inquiry, and ensure that get on with the business of putting money into the economy so businesses can thrive and families can get ahead,” she said.
Parliamentary committee to grill smaller banks
Meanwhile, the House of Representatives Standing Committee on Economics revealed on Monday (14 October) that it would scrutinise a number of banks, as well as the Australian Banking Association, with particular attention being paid to whether, and to what extent, they are implementing the recommendations of the banking royal commission.
Individual banks to be scrutinised by the Committee are Macquarie, Bendigo and Adelaide Bank, Bank of Queensland, Suncorp and Citi Australia.
According to committee chair and government MP Tim Wilson, it will be the first time that smaller banks have appeared before the panel, which has in the past focused on the big four banks.
“These hearings are an important mechanism for the Parliament to publicly scrutinise and hold Australia’s banking sector to account,” Mr Wilson said.
“Given widespread misconduct in banking and financial services identified by the Hayne royal commission, it is important that the smaller banks and the Australian Banking Association are held accountable to ensure that they are making the crucial improvements needed to restore trust in the sector.”
The public hearings will be held at Parliament House in Canberra on Friday, 29 November 2019, and will be broadcast live on Parliament’s website.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.