SUBJECTS: Economic stimulus, CBA/Westpac fixed interest rates, Australian Business Investment Partnership, national unfair contract terms provision
CHRIS SMITH:
There's no shortage of bad news on the economic front; the Prime Minister has conceded for the first time that it is inevitable that Australia will be dragged into recession, the 'R' word is no longer blasphemous; we've got a survey from the NSW Business Chamber finding that 25 per cent of small to medium sized businesses plan to sack staff within three months; and then we've got the good old Commonwealth Bank. First they refuse to pass on the full amount of the last official interest rate cut and now they have started whacking up interest rates on many of their fixed rate loans, with by the way, 12 hours notice. The bank is blaming the increases on something called 'wholesale market swap rates'. Give us a break. And it's not just Commonwealth, Westpac has done the same thing, and just like the Commonwealth, they will only cut rates by 0.1 of a per cent as well.
Well it's in the context of all of this that we are speaking this morning with Chris Bowen; he's the Federal Assistant Treasurer and the Minister for Competition Policy and Consumer Affairs. Now he has also been making some encouraging noises lately, about banning exit fees to make it easier for borrowers to switch lenders. Finally, a real plan that does create real competition. Chris Bowen is on the line right now. Minister, good morning.
CHRIS BOWEN:
Good morning Chris, good to be with you.
SMITH:
Thank you for your time. To the banks in just a moment. To the PM and his concession about a recession; he says the challenge for the government is to cushion the impact of the recession on business on jobs. How do we do that?
BOWEN:
Well what we do Chris is continuing to do what we have done, which is to put more money into the economy through our stimulus packages; to deal with particular problems as they arise, like foreign banks leaving Australia – if they go back to their home markets – through the Australian Business Investment Partnership, and continue to respond to circumstances as they arise.
What the Prime Minister is talking about Chris is this. We are used to downturns. There are downturns around the world from time to time. This is not only the worst downturn in over 70 years, but it is the most synchronised. Normally when you have the United State turn down, their economy slow, you find Europe might be doing okay, or Asia can take up the slack, or there is somewhere in the world that is doing alright. At the moment everywhere in the world is slowing…
SMITH:
Hang on a second. The Government in Britain, and also their economic analysts, reported on Sky from London this morning saying 'hang on, the worst of it we have hit, we are now bouncing back'. How does that fit with what the Prime Minister said yesterday? I know I'm being a cynic here; is he painting the bleakest of pictures here, so down the track he can claim some kind of victory?
BOWEN:
No, no, there's a long way to go on this Chris. I think Ben Bernanke, the Chairman of the US Federal Reserve, put it the best way when he said there are 'green shoots'. You chop down a tree and you see little green shoots starting to come back. But there is a long way to go; we are not at the end; we are not even at the beginning at the end of this yet, there's a long way to go, and yes, there are some encouraging signs, but this has a long way to wash through.
SMITH:
Okay. Let me just pick up on one point you raised. You said as part of your stimulus strategy, you've got these handouts going on. I think there has been some warranted criticism of that kind of strategy. Last week, and I point to a survey by the St George Bank, it found that only 42 per cent of people who received the latest cash bonus payments plan to spend it, stimulate the economy, 44 per cent said they plan to pay down debt. That doesn't work.
BOWEN:
Chris, we always said that people should do with the money what is in their best interests. Now if you are a family who uses the stimulus payment to ay off their credit card, I say 'great', because what does that mean? It means a couple of things: it means they feel more confident about spending into the future – we [inaudible] rush out and spend it on the day necessarily - if they pay off their credit card or their debt, then they feel more comfortable, more confident, about spending in coming months. If their washing machine goes bung or they feel like a weekend away, they will feel much more comfortable…
SMITH:
Oh, the link is rather tenuous though Minister?
BOWEN:
Well Chris if you look at a family in my electorate, in Western Sydney, who might have a substantial debt or credit card debt, they are going to be very, very reluctant to spend, but if they have paid that down, paid that off, then they feel comfortable going forward. So some people will spend it immediately, some people will spend it on things that have been planning to for some time but haven't had the money…
SMITH:
It's hardly guaranteed though.
BOWEN:
Look Chris, what you need to do is boost confidence in the economy. As the Prime Minister said, times are tough, but we are best placed in the world to get through this. Everybody, pretty much, agrees with that.
SMITH:
Okay, let me just raise the dirty banks: Commonwealth and Westpac. Whacking up their fixed rates. We know how this works, when they whack it up, they give you 12 hours notice, when they drop them, they tell you that it will happen in about 60 days so you can take advantage of the interest rate. What are your thoughts on what they've done and have they jumped the done?
BOWEN:
A couple of points here before we get onto the general issue of unfair contracts, which covers some of these topics, but look, on the issue of interest rates we have made it clear that we weren't happy with the banks passing on the last official reduction. What we are seeing today is a little different, in that say, when you are dealing with fixed term interest rates, you are talking about people entering the market now. So someone who already has a loan won't be affected by this, it's people choosing to enter the market now…
SMITH:
Is it 'enter the market'? If I wanted to change my variable rate, pay the exit fees – and we will get onto that shortly – and move over to a fixed rate with the Commonwealth…
BOWEN:
That's right.
SMITH:
That still applies right?
BOWEN:
That's right, but entering the market with that bank, so entering a new loan with that bank. Now what fixed interest rates are is often an indication of where banks think interest rates will be going over the longer term. So if the banks think that maybe interest rates are starting to get a bit low and over a longer period they might start to edge up a bit, then that would increase their fixed term interest rates, and also take into account their funding costs, et cetera.
So I think we have two separate issues; we got the decision not to pass on the official interest rate increase in full, which was disappointing, but then you've got the separate issue of their long-term fixed rates - which I think you've got to look at through a different prism.
SMITH:
Okay. The National Australia Bank is warning that the big four lenders who last year made more than $16 billion mind you in profits, will be unable to refinance $190 billion in commercial property debt - they want the establishment of the 'Ruddbank'. Now considering the fact that taxpayers have guaranteed their deposits, are you really considering this?
BOWEN:
Well, look what they are talking about there is the Australian Business Investment Partnership, which I talked about before, which is very important Chris because around the world what you are seeing is banks - foreign banks - returning to their home market for a couple of reasons.
Firstly, a lot of them have been nationalised, a lot of them have been taken over by their home governments - United States, United Kingdom, Belgium etc - and their governments have bought them. And the new governments, the new owners, the governments are saying 'well you know, we don't need you lending at the other end of the world, we need you lending here', so they are being encouraged to return home.
Also some governments have changed what's called there prudential regulation to encourage banks to lend in their home market; and the final thing is that it is nothing personal against Australia, they are returning home from everywhere because they are going home to the markets they know best and understand best.
SMITH:
So you will be supporting the proposed 'Rudd Bank' by the sound of it?
BOWEN:
Yes, we think the Australian Business Investment Partnership is very important because what it means; the Treasurer, the Finance Minister and I spent a lot of time talking to business and business tell us their big worry, their big worry, is not being able to roll over their debt. Particularly in the commercial property industry.
You can have people lining up at the door to by your products or you property; if you can't roll over your debt then you have a serious problem. That's why we think the partnership, which is the partnership between the banks and the government to take up that slack when foreign banks leave or other banks scale back their operations, is important.
SMITH:
You see what I'm saying though – the public has had a gutful of banks crying poor?
BOWEN:
I understand the cynicism Chris, and I have got a lot of sympathy for the arguments, but you've got to respond to the circumstances, and the government has to step in where possible.
SMITH:
Congratulations on foreshadowing of banning of exit fees; gee it has taken you a while though?
BOWEN:
Chris this is a law that we have been working on for some time which I will introduce it into the Parliament in the middle of the year. It is not just about banks of course, it applies across the economy, and what it does is even the ledger between consumers and suppliers.
It deals with standard-form contracts, so this isn't a contract when you sit down and negotiate. Chris Smith goes in and talks to Chris Bowen and says let's do a deal, and we sort out a contract, this isn't covered. This is where you go in to buy a product or a service and you are get a contract plonked in front of you on the counter and you're told sign here.
You might not have time to read it, or if you do read it, it might not all be clear but it is a standard form contracts which everybody gets given and nobody gets a chance to negotiate. Sometimes there are on their elements to those contracts…
SMITH:
Sometimes? [Laughs] Almost every time…
BOWEN:
Well…. what is an unfair element? Well something that puts all the risk on the consumer, much more than is necessary for the legitimate business interest of the supplier.
SMITH:
In summary we should be able to walk out of say the Commonwealth Bank into Westpac Bank and get ourselves a better deal. Is this a hollow promise though Minister, have you actually done a draft of the legislation yet?
BOWEN:
We're working on a draft of the legislation now, and there is some detail that we are working through. So as I must emphasise Chris, it applies across the economy I'm not just talking about banks, people often complain about mobile phone companies or gym memberships or where all the risk is put on the consumer.
If your circumstances change, you might need to move town, you might not like the product any more…
SMITH:
it is a great sign, as long as it happens…
BOWEN:
…and what we are doing is working through how we actually word the bill. Now we have a couple of options we can just say that all the contract terms shall be fair and then leave it up to the regulators and the courts to determine what is fair and unfair.
We can have a list of things which say: the following things will always be unfair. Or the middle path is to say the following things will usually be unfair but the court should take into account all of the circumstances.
Now Chris, there will always be some sort of cost for changing your mind and changing your contract. There will always be some sort of penalty involved, but the matter is, is it fair. Is it way over and above what the retailer, whether it is a bank or some other supplier, needs to ensure their legitimate business interests?
SMITH:
Well consumers need to be protected a lot more than they are at the moment. I must run, but thank you very much for your time this morning.
BOWEN:
Great pleasure Chris.