Following the Reserve Bank of Australia’s (RBA) decision to slash the cash rate to 0.75 per cent at the start of the month, the four major banks all dropped their rates to varying degrees between 13 and 30 basis points, however none passed the full decrease to their customers.
Mr Frydenberg called the big four’s reactive decreases disappointing, saying the banks had “lot of explaining to do,” particularly while some of the smaller lenders had passed the full cuts.
The ACCC will be consulting with the RBA, APRA and ASIC to look into pricing practices across the entire market, including the major institutions as well as smaller banks and non-bank lenders.
The Treasury has said it wants a better understanding of how the financial institutions make pricing decisions.
The inquiry will examine differences in the prices paid by new and existing customer, differences between the reference interest rates published by suppliers and the interest rates paid by customers as well as looking at barriers that may prevent consumers from switching lenders.
The ACCC said it will consider matters such as consumer decision-making and biases, information used by consumers and the extent to which suppliers may contribute to consumers paying more than they need to for home loans.
The consumer watchdog added the investigation will build on its residential mortgage price inquiry report that was released last year.
ACCC chair Rod Sims said having consumers understand how pricing decisions are made and the consequences is crucial for a well-functioning market.
“We will aim to provide answers to the questions that banking customers have long asked,” Mr Sims said.
“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.
“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.”
Banks call inquiry ‘opportunity’ to enlighten customers
ANZ chief executive Shayne Elliott said the inquiry would provide the public with facts about a “complex space,” declaring it will give consumers confidence about home loan pricing.
“Despite intense competition, there is cynicism in the broader community about interest rates for home loans,” Mr Elliott said.
“We know we have not done a good job in explaining our position and we will be working hard to ensure this process delivers results.”
Mike Baird, NAB chief customer officer, consumer banking said likewise, commenting: “This is an important opportunity to discuss the challenges of an increasingly low interest rate environment and engage in a broader discussion about how we support all our customers – both depositors and borrowers.”
Westpac chief executive Brian Hartzer added competition in the lending space is intense – with Australian borrowers to benefit from increased transparency.
He insisted banks need to make a reasonable level of return, to support shareholder investment, prudential stability and their debt ratings.
“Pricing decisions require banks to take into account a number of factors, particularly as the cash rate heads towards zero,” Mr Hartzer said.
“In particular we have to manage the net interest margin – that is the difference between deposit and lending rates. As part of this process we have to take into account the interest of borrowers, depositors and shareholders who provide the equity that enables us to operate.”
The level of profit for Westpac needs to be considered in relation to the size of its balance sheet which is $850 billion, Mr Hartzer said.
“In fact, our profitability in terms of ROE has more than halved over the last 15 years,” he commented.
“Westpac must also retain its double AA rating. This rating allows the bank to import funding at more reasonable cost from international investors.
“To lose it would increase the cost of our wholesale funding which would inevitably lead to higher interest rates for our borrowers.”
The big four continue to be hit with issues stemming from the Hayne commission. ANZ in particular added further remediation charges last week, taking a further $559 million hit to its cash profit for the second half.
However Morningstar analyst Nathan Zaia said the bank had larger issues at play, stating “investors should be more focused on the banks’ ability to stop the recent decline in mortgage growth.”
Australian Banking Association chief executive Anna Bligh said the banks are ready to assist the ACCC.
“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,” Ms Bligh said.
“The first priority of Australia’s banks is the implementation of the royal commission.”
The government has provided the ACCC with $13.2 million of dedicated funding to undertake regular inquiries into specific competition issues within financial services.
It has listed the new inquiry among its other reforms aiming to increase competition in the sector: passing the Consumer Data Right legislation to allow for open banking, allowing APRA to streamline the creation of new banks and providing co-operative and mutual banks more flexibility to access capital to make them more competitive against larger banks.
Shadow assistant treasurer Stephen Jones said the Liberal party blocked Labor when it previously called for the consumer watchdog to get involved.
“Little more than a week ago when Labor called for a bigger role for the ACCC in banking competition, the government said that would be a distraction so we know that Scott Morrison and Josh Frydenberg’s hearts are not really in this,” a statement from Mr Jones’ office said.
“The big banks are very profitable by international standards – so they shouldn’t be doing the wrong thing by borrowers.”
The ACCC will deliver a preliminary report by the end of March and a final report by 30 September next year.
