A year-long inquiry into how the major banks price their mortgage products will begin next month following the establishment of the ACCC’s new Financial Sector Competition Unit.
On Tuesday evening, the Hon. Scott Morrison MP, Treasurer of the Commonwealth of Australia released the federal budget for 2017-18, which included — among other measures targeting banks — the establishment of a new unit in the Australian Competition and Consumer Commission (ACCC).
If the measure passes the Senate, the government will provide $13.2 million to the ACCC over the next four years to establish the Financial Sector Competition Unit.
The unit will be tasked with undertaking regular inquiries into specific competition issues across the financial sector, starting with a one-year price inquiry into residential mortgage products, which will run until 30 June 2018.
As part of this inquiry, the ACCC can compel the major banks to explain any changes or proposed changes to fees, charges, or interest rates in relation to residential mortgage products affected.
Speaking of the new inquiry, ACCC chairman Rod Sims told The Adviser: “We have already begun building a specialist banking unit to investigate specific competition issues across the financial sector.
“The direction provided by the government means the ACCC can request specific information from the banks, which it will use as part of its first inquiry, focusing on residential mortgage products.”
He added: “The purpose of this inquiry is to provide customers with greater understanding on how the major banks price their mortgage products and increase transparency around any changes or proposed changes to fees, charges, or interest rates in relation to these products."
Writing in a blog on The Adviser’s sister publication Mortgage Business, Sally Tindall, money editor at RateCity, said: “Asking the big banks to explain their price rises is worth doing. Not only will this put a greater spotlight on pricing, it will hopefully make more Australians aware that there are lower-cost alternatives out there.”
Inquiry could 'constrain' mortgage repricing
Many banks have been increasing the rates on their mortgage products in recent months, particularly for interest-only and investment mortgages, which have been under increasing scrutiny and subject to more regulatory caps recently.
And there have been some concerns that the newly-announced ‘big bank tax’ on the five biggest banks will impact borrowers, with several CEOs warning that this would be the case.
Indeed, speaking yesterday on 3AW Radio, NAB group CEO Andrew Thorburn said: “[Y]ou can't introduce a tax like this of this magnitude at such haste and not have unintended consequences.
“The people who are going to pay for the tax is not the bank: it's customers and shareholders of the banks who are normal people and we have to think about that. Those are the people who pay that and absorb that tax.”
Financial consultancy Morgan Stanley has recently suggested that the major banks will need to increase their standard variable rates by around 20 basis points to offset the impact of the $6-billion levy handed down in the federal budget.
However, several commentators have said that the new mortgage pricing inquiry will make it harder for the banks to do so, with one stating that the new inquiry is “worrying” for the banks.
Morningstar analyst David Ellis said: “The move to have the ACCC police future mortgage-rate repricing is worrying and could make increases to mortgage interest rates more difficult.”
Likewise, Moody’s latest research into the budget argued that the inquiry will “likely constrain the major banks’ traditionally very strong pricing power” and warned that banks could therefore “not be able to pass the additional costs of this levy to bank customers”.
However, the research paper noted that notwithstanding this additional profit pressure, the profitability of the major banks still would be very strong and “remai[n] amongst the most profitable by global standards”.
The research paper stated: “Moody’s expects these initiatives to further constrain Australian banks’ pricing power at a time when low interest rates and strong competition for new loans, particularly in the residential mortgage market have already put their net interest margins on a narrowing trend.
“Banks have been raising the standard variable interest rate applicable to existing mortgages to stem the contraction in margins and improve profitability. However, the pricing inquiry to be conducted by the ACCC will likely constrain the banks’ ability to undertake further rounds of mortgage loan re-pricing, resulting in them having to absorb most of the cost of the bank levy.”
Other measures announced in the budget 2017/18 by the Treasurer included: a new levy on the five biggest banks; a new Banking Executive Accountability Regime that will be able to remove and disqualify senior executives and directors; a requirement for a minimum of 40 per cent of an ADI’s variable remuneration and 60 per cent of a CEO’s remuneration to be deferred for a minimum period of four years; and an open banking regime.
It is hoped that these measures will make the banking industry more accountable and more competitive.