Federal Treasurer Josh Frydenberg is angry. He has been seen venting this fury over the past fortnight, ever since the Reserve Bank of Australia (RBA) reduced the official cash rate to 0.75%. It’s not that he’s upset about the RBA’s move but is frustrated that the banking sector has not passed on the full benefit of that cut to its customers.
The cash rate is typically used by banks to set their interest rates on various products, including home loans and savings accounts. Mr Frydenberg said that if the banks had passed on the entirety of the RBA’s three cash rate reductions since June, a person with a $400,000 mortgage with one of the big four banks would, on average, have saved an extra $500 in interest payments a year. The big four – Commonwealth Bank, ANZ, National Australia Bank and Westpac – have only passed on an average of 57 basis points out of the full cash rate cuts this year of 75 basis points, Treasury figures show.
To find out why, in his words, the banks are “ignoring the RBA”, the treasurer today set the Australian Competition and Consumer Commission (ACCC) into action, to investigate “the pricing of residential mortgage products”. The inquiry will probe how loan rates are set and why different groups of borrowers are charged different rates, such as the gap between prices charged to new and existing customers.
The Aust people are sick of the merry dance where the RBA reduces the cash rate, political leaders & the RBA call on the banks to pass them on in full & that advice is ignored. This ACCC inquiry will give us a better explanation as to why the banks aren’t passing on these cuts. pic.twitter.com/SEZL42RAnW
— Josh Frydenberg (@JoshFrydenberg) October 13, 2019
Canstar finance expert Steve Mickenbecker said while he expected consumers would welcome more transparency in the way that banks set their interest rates, there was likely little the government could do to force the banks to pass on the cash rate cuts in full.
“I don’t think it’s viable to legislate that – for example, I don’t see how they could make it compulsory that existing borrowers must be offered the same rate as new customers,” he said.
“But the more preferable sort of reforms to come out of this could be that the banks are required to make crystal clear – and repeatedly so – what interest rate people are paying, and – to focus borrowers’ attention – total interest payable at that rate assuming the loan goes full term. If every time you look at a statement or open your banking app, you see this detail very clearly, it becomes harder to ignore the offers you see marketed.
“Better informed customers are more able to consider their position, and make decisions in their own best interest. It would encourage people to get the best deal by comparing their rate with other lenders.”
Shadow Treasurer Jim Chalmers said that the government had been “dragged … kicking and screaming” into action over the issue.
“Australians are facing … record household debt and stagnant wages so you can understand why (the Liberal government) get(s) so angry with the banks when they don’t pass through interest rate cuts,” Mr Chalmers said. “As the Reserve Bank has pointed out, our banks are still incredibly profitable by international standards. They’ve got no reason not to do the right thing by their customers. We need to see more banking competition, so if customers want to get a better deal there are better deals available, and it’s as easy as possible for them to seek out and realise those better deals in the market.”
What will the ACCC inquiry into residential mortgage prices investigate?
Even though the banking sector is still reeling from the more broad-ranging Financial Services Royal Commission, which handed its findings to the government in February, this new inquiry will focus directly on the residential mortgage market.
A preliminary report is expected in March next year and the final summation by September. It will run a fine-toothed comb over the entire banking industry – major banks, smaller banks and non-bank lenders –, probing how they work out their residential mortgage interest rates, why different customers are charged different rates and when and how consumers are told about pricing decisions. The aim is to make the sector “more transparent” in its decisions.
News: ACCC commences pricing transparency inquiry for home loans https://t.co/PrdVPx5s3i
— ACCC (@acccgovau) October 13, 2019
A statement by the Treasurer listed these terms of reference:
- Investigating the prices charged for residential mortgages across the entire market, including by major banks, smaller banks, and non-bank lenders.
- Considering how banks make pricing decisions, including passing on movements in the official cash rate.
- Examining differences in the prices paid by new and existing customers.
- Examining differences between the reference interest rates published by suppliers and the interest rates paid by customers.
- Investigating barriers that may prevent consumers from switching lenders.
The ACCC said in a statement that: “The ACCC 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.”
“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.
“We will aim to provide answers to the questions that banking customers have long asked. For example, we know … 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.”