Fee review fails fairness test

A new ASIC review does little to promote competition amongst lenders

By Charis Palmer

Non-bank lenders have suffered another blow to their competitiveness with the release of ASIC’s review of mortgage entry and exit fees. The report reveals non-ADI lenders are slugging customers an average $3,267 in fees for loans terminated within three years, compared to $2,255 for their large bank counterparts, and $1,388 for credit unions and building societies.

Australian Bankers’ Association chief David Bell says the findings are no surprise since “it was non-banks that pioneered the use of deferred fees”.

The Government is pressing ahead with initiatives to make account switching easier and Treasurer Wayne Swan says the ASIC report will help shine light on high exit fees and boost competition in the banking sector. “We want the banking system to offer families a real choice of financial products, including on the important issue of the level of fees and services provided” says Swan.

But industry analysts say it will take more than a spotlight on exit fees to foster competition in the Australian banking sector.

Martin North, managing consulting director of Fujitsu Australia & New Zealand says “What it (the review) is doing is highlighting the fact that we have an oligopoly in the financial services market in Australia. 80 per cent of the business is in the hands of a very small number of players.”

North agrees competitive pressure has actually weakened in recent months with specialist and non-bank lenders finding it difficult to fund loans competitively as a result of the credit crunch.

And while the major banks point the finger at non-bank lenders for pioneering deferred establishment fees, ASIC’s review reveals of the 16 home loan products on offer by the major banks, 15 have early termination fees.
North says the Government should mandate a standard way of talking about the total cost of a loan so that people can make better comparisons. “Rather than go on interest rate they should say ‘Over a standard three year period for a loan of $250,000, this is the total cost of the loan.’ It would be a bit like mobile phone plans where you actually know the full amount you’re up for.”

Others argue the comparison rate must be revisited to help consumers better compare loans. Infochoice general manager Denis Orrock says the comparison rate was actually a contributor to deferred establishment fees. “If you went back to the day before the comparison rate was launched it wasn’t a fee that was common in prime lending. It was a fee that was common in the sub-prime mortgage market, but now we’ve seen it explode so that everybody has one.”

Orrock argues: “If these fees aren’t being captured in the comparison rate then what’s the use of it? Isn’t the whole point that it gives you the true cost of borrowing?”

North agrees: “Because there are no deferred establishment fees included in the comparison rate you can look like you’ve got a cheap loan when you haven’t.”

But Resi head of consumer advocacy Lisa Montgomery says the comparison rate has always been confusing for customers and probably isn’t the best place to start in addressing the issue. “It is important for people to understand the true cost of a loan…but I don’t think the comparison rate is necessarily the best place for that because it’s convoluted anyway.”

Montgomery says all fees are outlined in the terms and conditions of the loan contract, adding “I would really like to see people read it”.

She also supports more prudent and appropriate lending practices. “Sometimes people can be convinced that paying a high exit fee and moving to a new lender is a good thing and they will end up thousands of dollars better off. That may not be the case and in most cases it’s not.”

The Council of Australian Governments is developing a national regulatory framework for mortgage lending, which has gained strong support from the industry.

North says in addition to harmonised national regulation, greater consumer education is required. “I actually don’t think that a lot of consumers know what they’re getting into and they’re being bamboozled by the pseudo-scientific language around a lot of this stuff. It’s very simple once you know, but my belief is an education program is required.”

Montgomery argues it’s not the fees but the perceived difficulty of switching that puts most consumers off, particularly given the large number of consumers now tied to a package of products with their bank. Recent research from Datamonitor revealed half of all new Australian mortgages are part of a package deal that combines a mortgage with a transaction account and credit card. Montgomery says “Consumers need to have the ability to switch quickly and efficiently rather than having it all tied up in a package that’s difficult to break. I think that’s the issue rather than the issue of the fee – people think it’s all too hard.”