Governments to reign in bank fees, but is it a good idea? Boyd

In a move that has infuriated the banking industry, the states and territories have handed the Rudd Government the power to rein in banks’ right to keep cranking up fees to replace lost net interest margins.

In a move that has infuriated the banking industry, the states and territories have handed the Rudd Government the power to rein in banks’ right to keep cranking up fees to replace lost net interest margins.

The banks have been told by the Ministerial Council on Consumer Affairs that it will proceed with amendments to the Consumer Credit Code to enable all fees and charges to be the subject of review on the basis of “fairness”.

Banks have warned that the inclusion of a fairness test in bank fee contracts would result in higher interest rates. They claim that fees have helped cross-subsidise services and those who will suffer the most will be lower income earners.

The latest development in the long running battle between the banks and consumer groups over fees has greater significance than would normally be the case because the Credit Code is about to come under the control of the Federal Government.

The Council of Australian Governments meeting in July agreed to put the policing of consumer credit and mortgage brokers under federal control. An implementation plan for the new federal law is due in October.

The Victorian Government succeeded some time ago in having a fairness test included in contracts in Victoria. It was a driving force behind taking it national, backed by the major consumer groups.

The latest development was announced to the industry last week by the Victorian Minister for Consumer Affairs Tony Robinson, who said that all credit fees and charges will be reviewable under revisions to division three of part four of the Consumer Credit Code.

“The touchstone will be fairness, which in relation to establishment, early termination, prepayment and default fees, will be linked to cost or loss,” Robinson said. “Default fees will include the sorts of fees labelled as ‘exception fees’ by the Australian Bankers’ Association. All other fees will be reviewable for unfairness, which will not carry an express definition.”

Bank fees and charges rose 160% between 1997 and 2007, from $3.9 billion to $10.5 billion, an increase of $6.6 billion, Treasury said in a submission to a Parliamentary inquiry into bank and non-bank competition.

Treasury said in its paper that “penalty” or “exception” fees had been growing in recent years at a rate faster than assets, deposits and transactions. It also said that the benefits of competition in banking had not flowed across all products and services and the benefits had not been distributed evenly across all banking customers.
The RBA says that increased bank fees have been offset by declines in interest margins.

But several submissions to the Parliamentary inquiry into competition have noted the recent return to a concentration of competitive power in the home mortgage market to the banks. They warned that banks would use their renewed market power to jack up fees even though interest margins had recently widened.

Banks have increased home loan interest rates outside of the RBA cash rate increases by 60 basis points. ANZ said this week that its net interest margin had increased by four basis points in the three months to June from 1.99% to 2.03%.

Penalty fees are unfair because they have significantly exceeded underlying cost, according to consumer group Choice. It says this shows that part of the market for banking and credit products has not been competitive.

Choice has been conducting a campaign against penalty fees. These include inward cheque dishonour fees, credit card over-limit fees, late payment and payment failure fees on credit card accounts and honour or dishonour fees on transaction accounts. It says these fees can be as high as $50 and have been steadily increasing since 2002. The typical credit card over-limit fee is now $30 and can be as high as $35.

The move to include a fairness test may force banks to change contract terms that allow fees to be changed at any time, provided there is an advertisement in a newspaper.

The decision by the ministerial council to include a fairness test in credit contracts was pushed very hard by Victoria. Under its existing unfair contract terms law, the regulator negotiates with companies to change contracts rather than litigate.

According to Choice, the Victorian experience has shown that many, if not most, businesses are willing to work with the regulator to ensure their contract terms and conditions are fair.

The Victorian model draws heavily on the British Unfair Terms in Consumer Contract Regulations, which provide that “a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer”.

The banks will make a last ditch effort to stop the amendments going ahead and becoming part the new national consumer credit law. But their prospects of victory look slim. The rhetoric on interest rates could be tested sooner rather than later.

This article first appeared on Business Spectator