Should banks automatically adjust repayments?

On Friday afternoon (15 November), in a small room in Canberra, a big conversation was taking place.

The House of Representatives’ standing committee on economics was holding its ongoing review of Australia’s four major banks and other financial institutions – zeroing in on what the big banks are doing in the light of the current interest rate environment and following the banking royal commission.

On Friday, it was the turn of ANZ CEO Shayne Elliott and NAB’s Phil Chronican (marking his first day as NAB chairman) to front the public hearing.

What resulted was an interesting debate on how parental the banks should be when it comes to assessing what’s in the customer’s best interest.

On one side of the fence was the deputy chair of the standing committee on economics, Andrew Leigh, who suggested that ANZ was profiting off home loan customers’ “inertia”.

He noted that, despite the official cash rate having dropped three times this year, the flow-on effects are not yet being felt in the economy. He suggested that the bank’s default position to hold repayments at the same level until otherwise advised by the customer was potentially not in society’s best interest.

Dr Andrew Leigh MP, member for Fenner ACT, asked: “If we wanted to improve the transmission of monetary policy, presumably changing the [repayment] default – so that by default, borrowers did see a reduction in their repayment – [that] would be optimal from a societal point of view, wouldn’t it?”

To this question, Mr Elliott disagreed, saying he believed that having a default mechanism that holds a borrower’s repayments at the same level regardless of interest rate movements actually protects customers.

This position is particularly noteworthy given that it is actually a cost to the bank.

Mr Elliott said: “I think what you’d be asking me to do is to potentially put my customers into harm’s way for the national good. I don’t buy that argument. So, I think that’s for our customers to decide. 

“I think what our obligation to do is make that choice easy and obvious for them and... maybe we can be better at communicating there. But we contact every single customer every single time there is a rate cut and offer them that they have a chance to review their interest rate and lower their payments. So, you know, we do that.”

“I have to act in my customer’s best interest,” he continued.
“And we have taken a view that the default [not to change repayments] is in their best interest in the long term, to repay their debt. And that is a considered view. I find it hard to imagine that I could ever push an argument that it is in my customer’s interest to have it for longer.”

The argument boils down to this: where is the line between interference and responsibility?

Mr Elliott argued: “I don’t think it’s reasonable to say that our default position should be to just keep putting money into customers pockets.... We have an obligation with our customers.

“We just had a royal commission into when banks don’t do the right thing by their customers. I feel really strongly about this one; it is absolutely our obligation to do this. Now, we should give the choice to people and make sure that people act on that choice. And I could see there may be some problems of people being a bit latent and not paying attention, and all of those things. But you know, I don’t think I should assume that our customers are lazy or silly. They’ve made a decision and I respect that.”

It’s an interesting point. Should banks automatically adjust customer repayments to reflect rate cuts in order to put more money into a customer’s back pocket, which in turn should see more money flow into the economy?

As NAB’s Phil Chronican told the committee, previously, when banks have automatically reduced payments, they’ve been criticised for doing so because it was only in order to keep their loan balances up. Now, it seems, they are being criticised for allowing their books to go into decline as they enable customers to pay off their loans more quickly. 

Should lenders empower borrowers to make their own decisions? Or should they take action for the benefit of the economy overall? Moreover, exactly how pervasive is borrower “inertia”? 

According to the ANZ CEO, just 7 per cent of home loan borrowers have reduced their repayments off the back of the rate changes. That’s a tiny proportion. But consider that many borrowers have carefully thought out financial plans. They know what their repayments are and have budgeted for that.

What happens if banks are given control to automatically adjust repayments when rates drop? And conversely, would you allow banks to automatically increase repayments if rates rise?

Providing lenders with the power to adjust repayments without borrower consent provides the banks with an unsavoury amount of control.

I agree with Mr Elliott: “It’s the responsible thing to do, as a bank, that people pay down the debt.”

Given that Australia has one of the highest rates of personal debt per capita in the world, trying to take the decision out of consumer’s hands for the sake of a (potential) boost to the economy via spending is short-termist at best and irresponsible at worst.

The right for a consumer to choose what is in their best interest, and be accountable for that decision, is paramount.

In a capitalist society, having the free will to make your own financial decisions is a fundamental lynchpin. 

It seems that so much focus this year has been on a customer’s best interest - whether it be banking, broking or financial planning. But the key thing that seems to be missing in all these conversations is this: the customer’s own thoughts on what is actually in their best interest.

I’d like to hang on to my right to make up my own mind, thank you very much. 

[Related: ANZ still grappling with ‘nuanced’ lending environment]