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In the final report following its Residential Mortgage Price Inquiry, the Australian Competition and Consumer Commission (ACCC) has accused ANZ, the Commonwealth Bank of Australia (CBA), NAB, Westpac and Macquarie of “synchronised”, opportunistic behaviour in response to the Australian Prudential Regulation Authority’s (APRA’s) macro-prudential cap on interest-only lending in March 2017.
The ACCC claimed that in June 2017, ANZ repriced its interest-only loan book, despite already being on track to comply with APRA’s 30 per cent cap, in order to offset regulatory costs incurred as a result of its failure to meet the prudential regulator’s capital requirements, as evidenced by the bank’s decision to reprice its back book as well as new business.
The competition watchdog said that ANZ used APRA’s interest-only cap to justify its 30 basis point rate increase, knowing that its pricing decision would have “spill-over consequences” for its competitors’ ability to comply with the benchmark.
The ACCC added that ANZ’s decision succeeded in prompting its competitors to follow suit with similar pricing changes, despite also being on track to comply with the cap in the 2018 financial year (FY18).
“We consider that the interest-only benchmark served as a convenient focal point for the inquiry banks, in particular the big four banks, to engage in accommodative and synchronised pricing behaviour, consistent with their history of such behaviour,” the ACCC said.
The ACCC added that if it weren’t for the APRA benchmark, it would have been likely that the big four banks would not have “moved so swiftly” to increase headline variable rates on interest-only mortgages and would not have increased rates for interest-only mortgages “to the same extent, or at all”.
The competition champion claimed that the APRA cap “created a common understanding” between the inquiry banks regarding compliance with the interest-only benchmark.
The ACCC continued: “We consider that without this common understanding and knowledge, it is likely that ANZ would have been less certain that its competitors would follow its lead to implement significant interest rate increases for interest-only residential mortgages and may not have acted as it did.
“Some inquiry banks may have been reluctant to follow ANZ’s lead and announce significant interest rate increases during the price monitoring period without an ability to publicly attribute those changes to government regulation.”
Further, the ACCC said that APRA’s intention to improve stability in the banking sector came at the expense of market competition.
“The interest-only benchmark may have fulfilled the objective of contributing to financial system stability, but we find it lessened price competition for interest-only lending,” the ACCC added.
The ACCC observed that as a result of the pricing changes implemented by the inquiry banks in 2017, the headline standard variable rates offered by the lenders for interest-only loans increased by an average of 32 basis points for much of the price monitoring period.
The watchdog estimated that the rate hikes would have added $1,300 in interest charged to the average-sized owner-occupier interest-only standard variable loan and $1,200 in interest for equivalent investors for the first year.
The ACCC stated that estimated revenue gains between the big four banks of over $1.1 billion in FY18 were “primarily as a result of their mid-2017 rate changes”.
The competition watchdog concluded that the behaviour of the inquiry banks was an opportunistic attempt to generate additional revenue.
“We therefore observe that the net effect of the inquiry banks’ mid-2017 interest rate changes was an additional revenue benefit to the inquiry banks, which they were able to attribute to the interest-only benchmark, despite the fact that for most of the inquiry banks, the evidence indicates that, absent price changes by competitors, they were on track to comply with the interest-only benchmark without headline variable interest rate changes.”
Mortgage Business reached out to the inquiry banks for a response to the ACCC’s findings.
A CBA spokesperson told Mortgage Business that the bank has welcomed the report and is considering the findings.
“We have worked closely with the ACCC throughout their inquiry, and we will now review the report and closely consider the findings,” the spokesperson said.
“At the Commonwealth Bank, we constantly review and monitor our loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs. We are committed to providing Australians with a strong, competitive mortgage market.
“We will continue to compete to enable more customers to achieve their home buying goals.”
Westpac Group also issued a statement to Mortgage Business, with a spokesperson noting: “Westpac Group takes its regulatory responsibilities seriously and is committed to doing the right thing by our customers.”
Westpac stated that it won’t be providing further comment until it has reviewed the ACCC’s findings in more detail.
In a statement to the media, NAB executive general manager of consumer lending Angus Gilfillan added: “We encourage all Australians, whether or not they are with NAB, to get in touch with us. We’re here to help.
“We believe the residential mortgage market remains highly competitive, and customers have a lot of choice in this low-interest rate environment.”
Mr Gilfillan concluded: “We’re committed to rewarding our existing customers and rebuilding trust with the community.
“NAB has a number of options available to existing customers to help them understand what the most competitive offer is available for them, which may include switching to a principal and interest loan or a fixed rate loan at no cost.
“We proactively contact our home loan customers to discuss their needs to ensure their product remains the right one for them.”
ANZ and Macquarie declined the invitation to comment.
[Related: Mortgage pricing too opaque and discounting to time consuming: ACCC]
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