The bank fee party is officially over: Kohler

The Treasurer Wayne Swan first started talking about mortgage exit fees in 2008. Eighteen months ago he promised to bring in legislation against them.

Then he did, eventually, sort of. From July 1 this year, the Australian Securities and Investments Commission has had the power, under the new Australian Consumer Law, to take action against “unconscionable” bank fees, including exit fees.

State regulators had been able to do the same thing since November 1, 1996, when the Uniform Consumer Credit Code was introduced, aligning all state laws.

Nothing happened – in 1996 or this year. Mortgage exit fees remain the key blockage to banking competition because it’s too hard to use the consumer credit laws against them. They are the reason Commonwealth Bank was able to unilaterally raise its lending rate by 45 basis points last week without fear of losing market share.

In response to the noisy controversy over that, and to a Joe Hockey speech two weeks ago in which exit fees were not mentioned, Wayne Swan has foreshadowed a new “wave” of measures to improve bank competition by controlling exit fees.

Yesterday Prime Minister Julia Gillard said that this very week “we will see the operationalising (sic) of the measure to crack down on unfair mortgage exit fees…”

It could have been “operationalised” long ago – it’s not as if the problem had not been identified. It was not only identified, but also legislated against, in 1996, but the laws were ineffective because to get a declaration that a fee is unconscionable, the consumer has had to prove that it is significantly greater than the cost to the bank of processing the loan, a near impossibility.

That said, in some cases it was easy. In 2008 the Consumer Action Law Centre took RHG Mortgage Corporation (formerly RAMS) to court over a $12,000 “early termination fee” and the case was settled out of court.

Yes, the worst exit fees were usually charged by the banks’ nemeses – the non-bank lenders like RAMS.

Indeed it’s a rich irony that the deferred entry fees that were used by the non-bank lenders as a tool for competing with the big banks ten years ago became the tool by which the big banks entrench the lack of competition – the law of unintended consequences at work.

Banking competition was destroyed by the impact of the global financial crisis on the mortgage securities market. It removed access to funding for all but the largest banks.

Suddenly, without non-bank competition, deferred establishment fees turned into exit fees, or early termination fees.

The major banks generally kept their exit fees under the $1,000 mark – just enough to deter customers from shopping around to get a 0.5% reduction in interest rate – about $70 a month. It simply isn’t worth it.

Presumably Wayne Swan’s “operationalising” this week of the laws against unconscionable mortgage exit fees will involve either a cap on them or making it easier for ASIC or consumers to sue a bank for a declaration from the court that a particular fee is unconscionable.

It may be better all round to simply ban them.

It’s true that early termination fees exist in most countries, although they are invariably much less than in Australia. But any exit fee is anti-competitive and deceptive, even the $400 or so that applies to mortgages in the UK.

The other irony about all this is that exit fees will be regulated this week as a result of a political controversy about interest rates that is entirely of the banks’ making.

The banks are probably justified in putting up their lending rates more than the Reserve Bank, although we can’t be sure since they are not fully transparent about their funding costs. Their wholesale funds are going up as pre-GFC credit lines are rolled over at interest rates that are up to 150 basis points higher than they were before.

But for some strange reason the banks all continue to announce their rate increases at the same time as the RBA, while insisting that there is more to their funding costs than RBA rate increases.

What is the matter with them? Can’t they see that this is the cause of the calumny that is heaped upon them, and that if they tied their lending rate announcements to actual changes in funding costs they might begin to turn around public opinion? Especially since their margins have actually been coming down.

But I guess that would mean they couldn’t now surreptitiously widen their margins again, which, thanks to exit fees, has little downside.

This article first appeared on Business Spectator.