The Australian Competition and Consumer Commission has called out the big banks for gouging an extra $1.1 billion a year from thousands of interest-only borrowers, but has baulked at recommending action to fix the problem.
The four major banks controversially repriced their interest-only back books by an average of 32 basis points in June 2017 and claimed they were forced to do it by a restrictive lending policy imposed on them by the Australian Prudential Regulation Authority.
However, the justification stumped up by the banks was misleading because APRA’s restrictive benchmark for growth in interest-only mortgages was directed at limiting such lending to new borrowers only.
In its final report on residential mortgage pricing released yesterday, the ACCC found that the banks used the cover of the APRA’s regulatory intervention to slug existing interest-only borrowers with higher rates.
“Together, the big four banks estimated revenue gains of over $1.1 billion for their 2018 financial year primarily as a result of these mid–2017 interest rate increases,” the ACCC observed in its report.
“These estimated revenue gains were largely due to the big four banks’ increased variable rates for existing interest only residential mortgages.
“While APRA’s interest-only benchmark had the objective of contributing to financial system stability, we find it lessened price competition for interest-only lending.
“We consider that the benchmark provided the opportunity for the banks to synchronise their significant increases to interest-only rates during the price monitoring period, at a significant cost to those borrowers.”
The ACCC found that the “synchronised” mortgage repricings were enabled by an oligopoly market structure dominated by the four major banks.
The regulator also found that opaque pricing practices of major lenders meant that most existing borrowers were generally being charged much higher rates for the same mortgage products than new customers.
“The lack of transparency in discretionary discounts makes it unnecessarily difficult and more costly for borrowers to discover the best price offers,” the ACCC found.
“This adversely impacts borrowers’ willingness to shop around, either for a new residential mortgage or when they are contemplating switching their existing residential mortgage to another lender.”
Consumer advocates, including the Consumer Action Law Centre(CALC), swooped on the ACCC’s findings, saying they were latest proof that banks were failing to give full and open disclosure to borrowers about their pricing tactics.
“Clearly the major banks are punishing loyalty rather than rewarding it,” said CALC’s director of policy, Catherine Temple.
“Being a consumer shouldn’t be a full time job.”
Temple said her organisation had serious concerns about banks not being upfront with borrowers when they reprice home loans.
While the ACCC report is another blow to the reputations of Australia’s largest lenders, the regulator cleared the major banks of having used the 2017 mortgage rate hikes to recoup revenue lost through the federal government’s wholesale banking levy.
The ACCC was asked to investigate the possible link between the levy and mortgage rate increases after Prime Minister Scott Morrison raised such concerns last year when he was Treasurer.
“We did not find any evidence of an Inquiry Bank making a pricing decision during the price monitoring period in order to recover all or part of the cost of the Major Bank Levy from residential mortgage borrowers,” the ACCC said in its report.
“We came to this conclusion having reviewed decisions made by the Inquiry Banks in relation to headline variable interest rates, headline fixed interest rates, discounting policies and fees.”