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Treasurer Josh Frydenberg has announced that the Australian Competition and Consumer Commission (ACCC) has been commissioned by the Morrison government to conduct a review into mortgage pricing.
The inquiry will review pricing behaviour from 1 January 2019 to examine:
- the differences between advertised rates and the prices actually charged or paid;
- the differences between rates paid by existing customers and those paid by new customers (front and back-book pricing behaviour);
- pricing decisions in response to changes to the official cash rate; and
- factors preventing customers from switching to cheaper home loans.
In exploring these matters, the ACCC will consider consumer decision-making and biases, information used by consumers and the extent to which lenders may contribute to consumers paying more than they need to for home loans.
The ACCC noted that it can use compulsory information-gathering powers under Part VIIA of the Competition and Consumer Act (2010) to gather information from financial institutions, including their decision-making documents.
Following the announcement, ACCC chair Rod Sims commented: “Having consumers and the community understand how pricing decisions are made, why, and with what consequences is important for a well-functioning market.
“We are looking forward to examining how banks make these crucial decisions. It will be important to understand and examine the different factors that financial institutions take into account when setting their prices.”
According to the competition watchdog, the new inquiry will build on its Residential Mortgage Inquiry, in which it accused the major banks of ‘synchronised’ pricing behaviour.
“We will aim to provide answers to the questions that banking customers have long asked,” Mr Sims added.
“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.”
He concluded: “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.”
The ACCC added that it would consult closely with financial regulators including the Reserve Bank of Australia (RBA), the Australian Prudential Regulatory Authority (APRA), and the Australian Securities and Investments Commission (ASIC) throughout the inquiry.
The competition watchdog is expected to hand down a preliminary report by 30 March 2020, with a final report due by 30 September 2020.
This comes amid criticism of the banks from Mr Frydenberg for their failure to pass on the RBA's full 25 basis-point cuts to the cash rate.
“The banks have a lot of explaining to do,” Mr Frydenberg said.
“This is very disappointing by the banks, and customers should vote with their feet.”
The Treasurer encouraged borrowers to consider switching to alternative lenders with lower mortgage rates.
“Now, some of the smaller lenders have actually passed on this rate cut in [full],” he said.
“People should shop around, get the best deal, but also make their displeasure known to their banks because the rate cuts should be passed on in full, and that would be a good thing for consumers.”
Banking industry stakeholders have welcomed the ACCC’s new inquiry.
ANZ CEO Shayne Elliott said: “The inquiry is a good opportunity to provide facts in what is a complex space and we hope it will provide the public with renewed confidence in the way their home loans are priced.
“Despite intense competition, there is cynicism in the broader community about interest rates for home loans.
“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.”
NAB chief customer officer, consumer banking, Mike Baird added: “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 Group CEO Brian Hartzer said the inquiry would present the major bank with an opportunity to shed light on current pricing practices in the mortgage industry.
“The inquiry is an important opportunity to put the facts on the table around mortgage pricing. Westpac will actively participate in this inquiry and believe the Australian community will benefit from increased transparency,” he said.
“Competition in Australian banking is intense. Australian and foreign banks – big and small – are competing fiercely for customers. Australian borrowers are benefiting from the lowest mortgage rates in 50 years.”
Mr Hartzer added that the bank has sought to balance its own financial interests with the interests of customers and shareholders when determining its pricing decisions.
“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 take into account the interest of borrowers, depositors and shareholders who provide the equity that enables us to operate,” he said.
“Banks also need to make a reasonable level of return. This not only supports shareholder investment it also underpins prudential stability, and our debt rating. The level of profit also needs to be considered in relation to the size of our balance sheet which is $850 billion. In fact our profitability in terms of ROE has more than halved over the last 15 years.”
The Westpac CEO concluded: “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.”
A Commonwealth Bank spokesperson added: “The ACCC Inquiry invites the opportunity to gain a deeper understanding of how Australian banks are operating in a historically low interest rate environment. Achieving the right balance for borrowers and depositors is a constant challenge and the inquiry provides an opportunity to bring transparency to these.”
The Australian Banking Association (ABA) also noted in a statement: "Australia’s banks stand ready to assist the ACCC in this inquiry. 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.
"The first priority of Australia’s banks is the implementation of the royal commission. Banks are also working night and day to prepare for the Consumer Data Right to empower customers to more easily shop around for the financial service that best meets their needs."
[Related: ACCC backs new probe into banking competition]
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