SUBJECTS: National Consumer Credit Law, unfair mortgage exit fees, Mining Resources Rent Tax
GLENN RIDGE:
Thanks for joining us on a Sunday afternoon on MTR.
CHRIS BOWEN:
Pleasure. Good afternoon, gentlemen.
RIDGE:
So Paul, what did we decide? Where is it at the moment?
PAUL GARDINER:
Minister, it's Paul Gardner.
BOWEN:
Hi Paul.
GARDINER:
I guess when we start talking about this, it was a little bit lost – it was announced last week – it was lost in the other events in Canberra, I guess understandably, but it's obviously very important. You and I chatted about briefly last week. Why do you think we need reform in this area, in the credit laws?
BOWEN:
Well, simply because, I think, very high exit fees for a mortgage are anti-competitive. People shop around for a better interest rate on their mortgage. They find one; they think, 'You beauty, I can save a bit here. Competition is working.' They ring up their financial services provider, whether it's a bank or somebody else, and say, 'Okay, I want to drop my mortgage with you. I found a better interest rate elsewhere,' and they say, 'Fine, but it will cost you x thousand dollars,' and when you do your sums again you find it's not worth it. So I think it is anti-competitive to have those very high fees. It's also not fair. It provides too much profit on what should be a pretty basic transaction to change your mortgage.
GARDINER:
And I see that the Australian Bankers' Association have come out and said the reason they are high is they have low entry fees. Is that right or is that just a furphy?
BOWEN:
Well, I think that ignores the anti-competitive impact. It might be true to say that we have low entry fees then elsewhere. But entry fees are up front; exit fees are often not up front and you don't realise the exit fees hidden away. And, as I say, it's anti-competitive. It locks you into a rate that you don't necessarily want to be on because you've found a better one. So this action that we've taken, giving ASIC the power to knock out unfair exit fees, I think is a good step forward for competition.
RIDGE:
Chris, one would ask the question, how much can you really protect the consumer? Because it's pretty well in black and white nowadays that when you go into a loan you really do need to read the small print, you need to be aware of what these sorts of exit fees are, whether it's a fixed rate or whether it's a flexible rate or whatever. It must be a concern for the Government to know where that degree of protection stops.
BOWEN:
Yeah, look, there is always a balance to be struck there. And you're right; everybody needs to be vigilant when they're entering into these contracts, no doubt about it. But with these unfair contract laws, it doesn't just apply – we're talking about bank exit fees – but it also applies across the economy, with standard form contracts. So this is contracts which are basically a 'take it or leave it' offer; you sign here, you don't sit down and negotiate it. And the test for being found to be unfair is reasonably high, and so it should be, that you need to have suffered detriment and it needs to put all the, essentially a lot of the power on one side of the bargain, and the other person, who is the signatory to the contract, has very little power. So I think that's an appropriate test.
Yes, it will continue to be the case, that in an economy like ours you have to be aware of your rights and responsibilities when you enter into a contract. But in those cases where something is blatantly unfair and the regulators, ASIC in this case, should have the power to do something about it.
GARDINER:
Minister, I note that about 30 per cent of mortgages are refinanced each year. I mean, how many more would that be under these new rules? Would you expect it to jump to 40?
BOWEN:
Well, we don't have a target. We haven't done that analysis, but we just want people who feel that they want to change to be able to change. And if it jumps up from 40, well, that's fine. If it stays where it currently is, at least we know that people have that option.
And I should probably just explain for your listeners just what we've done. We've given ASIC the power to challenge an exit fee because it's unfair and ASIC have said, 'We'll have a look at the costs to the bank or the financial services institution.' So clearly if somebody wants to change their mortgage and the bank incurs costs, then the bank has the right to get those back, no question about that, and there should be a fee for that, and that should be appropriate. But where you find fees much in excess of the legitimate costs of the bank or the financial institution, that's where ASIC is likely to say, 'Hang on a second, this isn't just getting a cost back, this is just trying to lock people into your contract. This is unfair and we're going to take you on about it.'
ALAN HOWELL:
Chris, its Alan Howl here –
BOWEN:
Hi Al.
HOWELL:
Terry McCrann has been writing for years, not withstanding the fact that the banks are unpopular and extremely profitable. We now know that they have been one of the most profitable banking businesses on the planet. Their business and much of that extreme profitably was built on fees just like this. To what degree that saved us during the global finance crisis that our banking system was absolutely rock solid because it's so profitable.
BOWEN:
Oh no doubt about it, it was very important. And we want a profitable banking sector. I do as Financial Services Minister and promoting Australia's financial services export, for example is a key part of my job. Making the industry more robust and really getting it as competitive as it can be.
We don't want those profits based on unfair fees and that's in nobody's best interest and can I say that banks sometimes have lower exit fees in their defence than other mortgage providers. So it's not just about big banks it's across the board. Credit unions and building societies tend to have very low exit fees. You have the banks and then you have some non-bank providers who sometimes have very high exit fees. So it's not just about the banks, but bank profitably, to answer your question is very important. We want that, we support that. We've taken measures to help them with that through some of our budget announcements on withholding tax for example. But it's going to be based on a fair [inaudible} –
RIDGE:
Chris, I've got to ask when does a bank profit become obscene and need to be looked at and one could argue that's what happening with the mining tax as well.
BOWEN:
Well the mining tax in fairness is different because we make the point that mining companies have always paid royalties. You always had to pay for the minerals under the ground. We don't think that they've been paying enough. And the mining companies are quite a separate question to banks. Banks are a business not taking resources out of the ground that belongs to all Australians –
RIDGE:
Can I argue that they're using our money though?
BOWEN:
Well sure but I'm just making the point that there is not a case for an extra tax on banks as there is on mining. As I say because mining companies have always paid an extra tax we just think it should be higher in their case. But look sure, as I say in my point of view banks deserve to make a good profit, a solid profit. If they're very profitable, sound and well regulated, then the whole nation benefits but it's just got to be based on fair business practices and some of these exit fees are simply unfair.
HOWELL:
Chris, when the global financial crisis was at its peak and the government stepped in lead by Kevin Rudd to sort of guarantee deposits as it were. The banks paid a fee for that didn't they?
BOWEN:
Yes for their wholesale deposits guarantee. Yes they did –
HOWELL:
How much was raised during that time?
BOWEN:
Look, I don't have that figure with me –
GARDINER:
It was a fair bit though, wasn't it?
BOWEN:
It was a substantial amount. They had to pay a fee which was a small percentage of the amount they borrowed from offshore, but nevertheless they borrowed huge amounts of money so there was a reasonable return on that. That's correct.
RIDGE:
Chris, really appreciate your time. Thank you very much to join us on for a Sunday afternoon on MTR.
BOWEN:
Always nice to talk to you guys at MTR.