Moving between banks
The costs and other impediments to moving between banks are important
factors with the potential to weaken competition significantly:
...consumer switching costs (whether real or perceived) are
widespread and our analysis suggests that the resulting welfare losses may be
substantial: switching costs generally raise prices and create deadweight
losses...in a closed oligopoly...public policy should discourage activities that
increase consumer switching costs (such as airlines' frequent-flyer programmes)
and encourage activities that reduce them (such as standardisation that enhances
compatibility and reduces costs of switching, and quality regulation and
information sources that reduce consumer uncertainty about untested brands).
Changing banks is too hard and unduly complicated.
National Australia Bank's CEO concedes this:
The two key drivers of competition are search cost, so how
long does it take in terms of time and what is the cost to find a deal—this
applies to any industry—and, secondly, what is a switching in time and cost?
They are the key drivers.
A survey of Queensland businesses found that those banking with regional
banks are more satisfied than those banking with the majors.
The failure of this to translate into increased market share for the regional
banks suggests some barriers to customers moving between banks.
The same survey found that of businesses that had not switched banks,
only about a third said this was because they were satisfied with their bank. A
third said they thought all banks were the same and a third said it was too
difficult and expensive to change banks. Almost half the businesses that
switched banks found the process difficult or extremely difficult, and that it
cost over $5,000.
There are not just explicit costs to moving between financial
intermediaries. There is also an inherent inertia. One submitter wrote of the
'fear of the unknown' as a deterrent:
If you’ve been with your lender for a period of time...You’re
familiar with their internet and phone banking. You know where the branches and
ATMs are located...What if you move to a new lender and find out that it’s a lot
more difficult to get things done or the products don’t work like you would
expect? Sometimes it’s better to deal with the devil you know.
Mrs Amanda Watson put the blame more on the consumer:
It is my belief that many Australians are somewhat apathetic
in regards to their banking choices and while I note that there is a fair level
of ‘bank bashing’ most people appear to choose not to switch in order to find a
better product for their needs.
This chapter discusses the factors which may deter customers from moving
between banks, including mortgage exit fees, financial illiteracy and mortgage
insurance, and considers possible improvements in this area.
Mortgage exit fees
Banks charge a variety of fees if customers repay a loan early. In the
case of fixed rate loans a large exit fee may be quite reasonable. A
prudent bank offering a fixed rate loan will fund it through fixed rate
borrowing. If interest rates fall, and customers are free to repay loans early
and take out new loans at a lower rate, the bank will be caught still paying a
high interest rate but earning a low rate. The rest of this section is
concerned with the case of variable rate loans, where there is not this
Some exit fees are modest administrative fees, or mortgage discharge
fees, as would be paid at the maturity of a loan. But some lenders charge large
'early repayment' fees or have 'deferred establishment' fees which may be
waived if a loan is maintained until maturity. Both of these may not be clearly
disclosed at the time the loan is taken out and both can act to impede
competition by locking customers into their current bank even when a rival offers
a lower interest rate.
Some examples of exit fees are given in Tables 7.1 and 7.2. The fees are
generally high for non‑conventional lenders and low for building
societies and credit unions.
Table 7.1: Exit
fees after three years on $300,000 owner-occupied home loan ($)
ANZ simplicity Plus
NAB base variable rate
Westpac flexi first
option home loan
St George basic home
variable home loan
Bank of Queensland
Mortgage House basic
Homestar No Fee
AIMS gold standard variable
Community CPS Credit
Union basic variable
Mecu Credit Union basic
Society great rate
Society standard variable
Source: Infochoice website (www.infochoice.com.au)
as at 23 March 2011.
Source: Reserve Bank of Australia, Submission 41,
Westpac do not charge an exit fee if the customer remains for more than
Presumably the argument is that the interest charged has covered the upfront
costs by then. This seems inconsistent, however, with the argument that the fee
is necessary to recover the costs of establishing the loan. These costs would
be fixed rather than varying with the size of the loan, and so if recouped from
interest would be recovered more quickly for larger loans. Nor do interest
rates drop for ongoing borrowers after four years.
Exit fees for mortgages in Australia are higher than in most comparable
countries (Charts 7.1 and 7.2).
Chart 7.1: Mortgage
Source: Westpac, Submission 72, p 36.
Comparison of selected bank fees
Source: ASIC, 'Review of
mortgage entry and exit fees', Report no. 125, April 2008, p 11.
The case against excessive exit
There is considerable support for action to limit exit fees,
particularly but not exclusively in relation to home mortgages:
Consumers of mortgage products dissatisfied with the product
or service they receive from their bank or mortgage provider feel trapped by
the exit fee, which discourages them from switching.
Lenders should only be allowed to charge loan exit fees on a
cost recovery basis...
...excessive and unjustified early exit fees represent a
serious barrier to switching in the mortgage market, inhibiting
competition...Across the market more broadly, this reduces the pressure on lenders
to provide better and more competitive products.
Exit fees differ from other bank charges in that there is no incentive
for an individual bank manager to waive or lower these charges in an attempt to
retain a valued customer, as they are only relevant to a customer who has
decided to move their custom elsewhere. It was suggested that if establishment
fees are being deferred due to the borrower's cash flow constraints, it would
be more transparent just to add the fee to the loan amount.
When comparing potential lenders, a borrower is unlikely to pay much attention
to differences in exit fees as they are likely to be focused on the purchase of
their current home, not thinking about when they will sell it to buy their
One example of the anti-competitive impact of excessive exit fees was
...our client chose a variable rate home loan based on
representations that the product‘s interest rate would remain competitive, but
after several rate rises over approximately an 18 month period, her home loan
rate was considerably higher than other rates in the market, but she felt
unable to switch because she faced an early exit fee of over $12,000.
The case for exit fees
The main opposition to restrictions on exit fees comes from some
non-bank lenders. They are unable to raise funds as cheaply as the major banks,
so may rely on fees to offer competitive interest rates:
The offer that they [some non-bank lenders] make to consumers
is: ‘We can offer you an interest rate which is at the moment around 0.7 per
cent less than the banks, but to come on board with us we want some assurance
that you are going to stay with us for a reasonable amount of time. Also, to
make it attractive, we won’t change you any upfront fees, any establishment
fees. But if you leave us within three years—or five years, depending on who
the non-bank lender is—we will then ask you to pay those establishment fees;
thus the term ‘deferred establishment fees’...I know that there has been a focus
on non-bank lenders charging $7,000 as a deferred establishment fee, and I
suppose people always tend to look at the worse possible example to prove their
point. Yes, that could happen, but it would only happen if someone had a pretty
high loan—about $700,000—and they switched within the first 12 months of the
There is a real tangible cost to ‘writing a loan’ which has a
commercial impact, as does the manufacturing production and sale of any
product. This commercial cost cannot be ignored, and should not be hidden
elsewhere. Removing the same will have an impact which most likely will not be
to the benefit of the consumer borrower as it has the potential to
significantly increase the cost up front to obtain a loan.
Exit fees per se (apart from questions of scale) are a
The proposed removal of exit fees is not a measure we believe
will enhance competition. It is the smaller, non-bank lenders that will be hurt
most by this. For the majority of banks, the deferred establishment fee was put
in place as a competitive response to reduce the upfront albeit legitimate
costs of taking on a new mortgage.
The Australian Bankers' Association commented:
...exit fees do reflect genuine costs incurred by banks and
others. To the extent that they are genuine costs, removing the ability to
recover those costs is likely to hit smaller lenders disproportionately
compared to larger lenders.
Asked about any prudential concerns, APRA responded:
...it is important that ADIs are able to cover and/or recoup
their legitimate costs in originating, managing and closing out a mortgage.
The Committee heard claims that banning exit fees would lead to a
corresponding increase in establishment fees or interest rates, which would be
paid by all borrowers:
If you ban exit fees you will push costs to up-front...
Furthermore, as exit fees are only charged to those customers repaying
early, this provides an advantage for those customers who stay with the lender.
Aussie noted that:
Regulation or banning of exit fees would result in cross
subsidisation by the stable customers of those customers who routinely move
ASIC action on unfair exit fees
As described in Chapter 10, some provisions of the National Credit Code
under the National Consumer Credit Protection Act 2009 relate to exit
fees. These provisions came into effect in July 2010 and from this date borrowers
have been able to challenge the validity of early termination fees they think
are 'unconscionable' or 'unfair'. Borrowers may also complain to ASIC or to an
external dispute resolution scheme; the borrower or ASIC can seek review of
fees by a court.
ASIC have explained their stance as:
Mortgage exit fees are acceptable provided they reflect—and
are limited to—the lender’s losses which can be directly connected to the
borrower exiting the loan early.
This statement has been interpreted as implying:
Under the Australian Consumer law, an unfair contract term
that includes payment of early exit fees can be declared void.
The Consumer Action Law Centre advocated a narrow or literal reading of
this which would make the permissible fees quite small:
...if you section out exit costs that apply whenever the exit
occurs and simply focus down on the costs attaching to early exit, we think
that the numerical value of that cost would be very small.
The Government's December 2010 package
The Government announced in its package that from July 2011 exit fees
would be banned on new variable rate mortgage loans.
The measures which came into force in July 2010 relating to unconscionable
exit fees would continue to apply to existing mortgages. The reason the new
measures do not apply to existing loans is constitutional:
...that would be an acquisition of property. The property is
the property of the financial institution. We took legal advice on that.
Treasury clarified that the ban refers to a fee 'triggered by the
consumer’s action to pay out the mortgage early, which would not ordinarily
Perhaps trying to make a virtue of necessity,
two of the major banks have abolished exit fees ahead of the ban.
On 23 March 2011, the Government amended the National Consumer Credit
Protection Regulations 2010 to prohibit exit fees.
The Committee regards the Government's decision to ban exit fees as a
kneejerk reaction. The new consumer protection provisions which would restrict
exit fees to reasonable amounts only came into effect a few months ago and are
not well known. They should be given a chance to work. Exit fees should be
limited to underlying costs and a reasonable profit margin, rather than banned.
The Committee notes the importance of fees in underpinning the business
models of non-bank lenders which bring competitive pressures to the market.
The Committee believes that banning exit fees will lead to higher
upfront fees, including for borrowers who never incur exit fees. It is notable
that the only financial intermediaries that accepted the abolition of exit fees
were the major banks.
It is important, however, that borrowers are made aware of the extent of
exit fees at the time they take out their loans.
The Committee recommends that the Government reconsider its
decision to ban exit fees, before the amended regulations come into effect,
with a view to allowing enough time for the effectiveness of the existing ban
on unfair and unconscionable exit fees (as implemented through ASIC Regulatory
Guide 220) to be assessed. If it proceeds with the ban, it should only apply to
authorised deposit-taking institutions.
The Committee recommends that lenders be required to inform borrowers
when they take out a loan of the provisions of the National Consumer Credit
Protection Act 2009 which relate to unconscionable charges.
The Committee recommends that borrowers be required to sign off on a
form clearly disclosing any exit fees applicable to their home or small
business loan before making any commitment.
The Committee recommends that lenders charging exit fees be required to
explain on their website how the exit fee relates to relevant costs.
Other factors influencing inhibiting customers moving between mortgage
In addition to costs and related impediments, a number of other issues affecting
decisions to move between banks were raised during the inquiry.
Lenders mortgage insurance
Lenders mortgage insurance (LMI) is a product intended to protect
lenders by covering any shortfall if a property has to be sold as a result of
the borrower defaulting on their loan and realises less than the outstanding
balance of the loan.
It became evident during this inquiry that LMI can represent a significant cost
But the biggest inhibitor of switching—in over half the cases
we see, probably 70 per cent—is not the exit fee; it is the duplicating cost of
mortgage insurance. If you borrow over 80 per cent of the value of your
property, you have got to obtain mortgage insurance. That can cost you
anything. It can cost you $10,000 or $7,000...That is something that the
Treasurer said he was going to have a look at, and I think that is a great
thing. To have a look and do something about it would be fantastic.
The real deterrent in the LMI premium, as the policy is not
portable from one bank to another. As a result a customer wishing to move a
mortgage from one bank to another will need to pay LMI twice...LMI policies
should be made portable...
...that is a problem for consumers in terms of the initial
insurance premium being a sunk cost and if they switch they have to pay another
one...the premium for a lender’s mortgage insurance policy is in the thousands of
...if the loan is discharged early there is regularly no
premium rebate to the borrower albeit in some cases it is ‘partially’ available
for the first 2 or 3 years of the loan only (and note the premium is paid based
on the total loan term not just 2 or 3 years) this rebate is not on a pro-rata
or proportional basis given the total period covered in some cases if you don’t
ask for a rebate/refund on the premium you won’t get it as only some LMI
Providers have an automatic system to do this – others do not. Colloquially if
you don’t know you don’t get, and you can’t ask for something you don’t know
Mortgage insurance is typically required for loans which are
80% or more of the property value (i.e. loan-to-valuation ratio of at least
80%). It is not portable. The cost of mortgage insurance varies with loan size
and, like legal fees and State government taxes and charges, can run into the
thousands of dollars.
LMI is usually paid by the borrower but the benefit accrues to the
lender. If the borrower repays early, they will only sometimes get any refund
for the premium paid for the remainder of the loan:
Generally speaking, there is somewhere between a 12- to 24-month
window. If you discharge your mortgage in that period of time, you are possibly
eligible for a rebate of up to about only 40 per cent of that premium only,
remembering the premium covers the lender for right of recourse for 20 to 30
years. But the consumer is the one who has paid for it and the consumer is the
one who only gets a rebate if they ask for it.
Lenders’ mortgage insurance is one thing that, when it is
raised, is an impediment to people moving forward to seek to switch their
accounts. We are working on that at the moment and looking at a process whereby
lenders’ mortgage insurance could be portable—could go with the mortgage. We
have not finalised it yet but it is the clear intention of the government to
introduce such a system.
The Insurance Council of Australia defended the current arrangements:
While the cost of LMI protecting the lender is typically
borne by the borrower, the borrower obtains significant benefit from the use of
LMI by the lender. LMI provides greater access to home ownership, particularly
for low income, low equity or higher risk borrowers who would otherwise have
difficulty obtaining a home loan. These borrowers are able to obtain a loan
that would otherwise not be available, or to obtain a loan much earlier than
they would be able to if they had to save for a full (20%) deposit.
The Insurance Council also observed:
Importantly, with LMI, lenders do not have to charge a higher
interest rate to cover the increased risk a low deposit borrower presents. The
cost of the once only up front LMI premium borne by a borrower is significantly
less than higher risk based interest pricing that would apply to a higher risk
borrower over the life of the mortgage loan.
Genworth Financial, a provider of LMI insurance, claims that LMI is not
an impediment to borrowers switching:
...LMI is typically only required on HLTV [high
loan-to-value] loans (above 80%). If a consumer does take out a high LTV loan
and looks to switch to another lender, our analysis shows that the consumer is
unlikely to be asked to pay LMI again if they switch after two to three years,
given the LTV for the new loan is likely to be below 80% given long run home
price appreciation assumptions.
The Government has indicated its intention to make LMI transferable
between lenders, perhaps through a clearing house, or refundable, and
consultations are underway with key insurers.
If the market for LMI is competitive, these additional requirements will
push up its cost. As with exit fees, this would mean that those borrowers who
stick with their lender will be paying more to assist borrowers who switch
There were doubts raised, however, about whether the LMI market is very
competitive, with some submitters arguing it was opaque and concentrated:
If you go back in history, there was a government mortgage
loss insurer and there were four or five at one stage. We are down to two...it is
important that we keep competition in that market...because that is an input into
making sure that the securitisation market operates effectively and
efficiently, which means players like us can provide that competition to make
sure that mortgage spreads do not increase.
Currently lenders mortgage insurance is a duopoly market...The
Federal Government agency, the Housing Loans Insurance Corporation (HLIC),
operated from the early 1960s before being sold to GE Capital in 1999. The sell
off of HLIC has greatly reduced competition and exacerbated the competitive
disadvantage suffered by securitisers relative to banks funding on balance
There is also a lack of disclosure of commissions (if any)
paid to banks/lender for the sale of LMI...
The borrower will generally be required to pay an LMI provider nominated
by the lender, often an entity owned by that lender, and cannot shop around for
a cheaper LMI provider. As the premium is paid in a lump sum at the time the
loan is taken out, it is equivalent to an additional 'establishment fee' but is
often excluded from comparisons of interest rates and fees charged by different
lenders. There are also concerns that there is no product disclosure statement
on lenders mortgage insurance.
The Committee recommends that lenders mortgage insurance always be
made either pro-rata refundable or transferable and that this be made clear to
As an alternative, lenders mortgage insurance should be payable
by instalments (eg. monthly, quarterly or annually) rather than as an upfront
lump sum payment (as occurs in other jurisdictions).
Interest rate disclosure
There have been calls for a standardised annual percentage interest rate
to be prominently displayed, to avoid confusion over compounding.
Ideally the single standardised interest rate would also include fees:
I would like to see all fees (excluding fixed rate break
costs) converted into the interest rate, including any deferred establishment
or exit fees, so that the true cost of the facility at any point in time is
known and borrowers are not hoodwinked about how much they are really paying...
...banks should be required to...publish comparison rates for
Suggestion: A regulated
central comparison website across all financial products, by type &
features with full disclosure of fees & charges.
The Financial Ombudsman Service commends the one-page disclosure
statement required in the United States (see following page).
The Consumer Action Law Centre advised that better disclosure would
We would certainly support disclosure that occurs
pre-contractually that enables consumers to visit a number of institutions,
obtain a range of information and make a carefully considered decision rather
than quickly being provided with disclosure at the point of contract. We would
say it needs to be of standard form and key terminology.
A lacuna is a site where financial products can be readily compared:
A consumer would be better informed by a transparent price
mechanism. A better informed customer can then make a decision to switch if the
price differential is found attractive. Currently, there is no official
website/data resource where such information could be available at one place.
Competition would be enhanced by increasing the information
available to the public so that they could more easily compare different
banking products from different institutions.
One bank had found that simplifying charges benefited the bank as well
One of the positive learnings from the last 18 months is that
the abolition of a number fees and changes in process around this has removed a
number of complexities in our business. This simplification of our offers means
that we are able to better explain our products and services to our staff and
customers, and do so at a reduced cost.
Better information to assist moving between banks
The movement of customers between banks is facilitated if information
about different offers is easy to compare. The Consumer Action Law Centre warned:
It is also in the interests of industry participants to do
the opposite, making it harder to compare deals by producing more complex
products and information about those products, and attempting to differentiate
products on a basis other than price, even where products are essentially
commoditised or homogenous goods. In Australia, the telecommunications market
provides an excellent example of this phenomenon in action – we believe it is
currently impossible for consumers to undertake an effective comparison of
mobile phone plans and choose the best deal for their usage pattern.
The Reserve Bank and the Australian Prudential Regulation Authority
already receive a lot of information from ADIs about their products. For
example, the Reserve Bank is able to calculate a measure of the cost of
mortgages, including both interest and (establishment, service and exit) fees.
The Reserve Bank provided an example of this in a chart in their submission (reproduced
as Chart 5.8) but did not identify the individual lenders. Providing such
information, with the names of the credit providers, would be very useful to
Another impediment to consumers comparing across accounts is confusing
differences in product names:
A valuable way of rectifying the information asymmetry that
fosters the current anticompetitive environment in respect of exception fees is
to require all financial institutions to adopt equivalent nomenclature and
terminology when describing exception fees, in order to enable consumers to
genuinely compare banking products with ease.
...banks should be required to standardise banking terminology,
to help business customers make easier product comparisons...We believe some
simple changes would be helpful, such as requiring standardised terminology to
be used and cutting out some of the more confusing lingo.
Another submitter refers to:
...extensive product suites with complex pros and cons. The
resulting consumer confusion allows the banks to harvest greater revenues
through inefficient selection.
A small business representative referred to a major bank which gave them
a document about terms and conditions which ran to 75 pages.
The Commonwealth Bank itself cast doubt on the usefulness of advertised
interest rates for comparing between banks (see further discussion in Chapter
The vast majority of the Group's mortgage customers do not
pay the headline standard variable rate...
Behavioural economics warns of 'decision paralysis'; an increasing number
of options may not lead to a better choice being made, it may lead to a
reversion to a default option.
One component of the Government's December 2010 package is a uniform
mandatory key fact sheet for new home loan customers, which will show consumers
how much they will pay every month and over the life of their loan (see next
Treasury's Jim Murphy is particularly enthusiastic about it:
If you wish to go and shop around, this will enable you in
terms of what deal you can get. This is a simple document which would give you
the terms and conditions for that loan. To me that is a huge advance.
ASIC released an online mortgage-switching calculator in 2010, which
allows consumers to work out how long it would take them to gain in interest savings
what it costs to switch mortgage providers. It is part of the new personal
finance website (www.moneysmart.gov.au), which replaced ASIC's previous FIDO
Choice expounded their initiative to provide customers with better
One of the reasons Choice launched its Compare, Ditch and
Switch website—and we have had tens of thousands of Australians using that tool
since we launched it a few days ago—is to make it easier for people to compare
products in the market and easier for people to use our data comparison to
match one product against another. But, for lots and lots of consumers, the
complexity of the information about products, the speed with which the market
sometimes changes and the speed with which you need to be able to transfer, for
example, your direct debits and direct credits to a different transaction
account is just too much, and we have to recognise that.
The Brotherhood of St Laurence shared with the Committee results from
...over 70 per cent of low-income clients surveyed were not
aware of basic bank accounts and had not taken them up, leaving many paying
bank fees unnecessarily. The analysis also shows that banks are not promoting
these products and that information about them is difficult to find or unnecessarily
Choice argued that even when impediments to moving between banks are
removed, there may be a need for education before consumers make the most of
the opportunities. They spoke of the need:
...to encourage people to change their behaviour and move
accounts, move mortgages and so on, because we have had centuries, if you like,
of consumer inertia, and it does not just change overnight. So there is a
period of time where it will take efforts on all of our parts, really, to
encourage the market to work better than it has worked before, even with those
The Committee recommends that the Reserve Bank and the Australian
Prudential Regulation Authority draw on their data collections to publish
regular information about the total cost of home loans (based on standardised
assumptions on the average size and term) for the twenty largest ADI home
The Committee recommends that a working group be set up including
Treasury, the Australian Prudential Regulation Authority, the Australian
Securities and Investments Commission, the Australian Competition and Consumer
Commission, the Reserve Bank, the Financial Ombudsman Service, the Australian
Bankers' Association, Abacus, consumer representatives and relevant academics
to develop standardised words for financial products and their characteristics
to allow consumers to more readily compare offers from different financial
Psychological or privacy barriers
There is a natural reluctance of borrowers about revealing to bank
officers personal details about their income, their regular expenses, and the
value of their home and other assets. Having to repeat this process when moving
between lenders inhibits customers moving.
A possible means of overcoming this problem would be personal credit
ratings. An agency could make an assessment of a customer's creditworthiness
and give them a certificate they could give to a lender. Part of the assessment
process could involve positive credit reporting. If the customer wishes to
change to a new lender they could show the same certificate to the new lender
rather than having to repeat the disclosure process.
The Committee recommends that the Government ask Treasury to investigate
the feasibility of personal credit ratings to facilitate borrowers moving
There were a number of calls from witnesses and submitters for improved
There does not seem to be a large amount of switching between
transaction account providers in the general population. I guess that those
with lower financial literacy might have greater reticence.
...for any banking reform to be successful it needs to include
better consumer education...
The Governor of the Reserve Bank remarked:
It is a hard balance to strike, isn’t it? As you say, you do
not want to say to people in some overly nanny state sort of way, ‘You can’t
have this loan.’ You certainly do not want them to be in a position where they
have taken on a commitment without fully realising what is actually involved.
That is the balance to strike.
The banks indicated their contribution to improving financial literacy:
...the banking industry is committed to a long-term strategic
priority of helping improve Australians’ financial literacy. Australia’s banks
have a strong tradition of free education in financial skills and have in place
a wide range of financial literacy, financial inclusion and capacity and
enterprise building programs. In the year to June 2010, it is estimated these
programs also received over $36 million of direct support from the main retail
banks. Program contributions include building understanding in the areas of
managing money, finance and banking, developing budgets, managing debt,
building basic investment, insurance and superannuation knowledge, planning for
life stages, including home ownership and retirement. These programs target
efforts to assist the most vulnerable parts of the community.
The Federal Government should enhance levels of financial
literacy of all Australians by developing and publishing a “National Strategy
on Financial Literacy” ...[and] provide additional funding to ASIC so that
dedicated efforts on financial literacy can be implemented...
The CEO of ANZ Bank also emphasised the role of financial literacy in
his opening remarks:
Turning to customer empowerment: active, well informed
customers help lift competition...The idea of the proposed mortgage fact sheet is
to provide a simple statement which will help consumers compare the costs and
features of mortgages. Financial institutions can also assist here by providing
simple, transparent products. In the longer term, more financially literate and
informed customers will grow competition in the market. ANZ has made a
significant investment in understanding the issues related to low levels of
financial literacy, and which groups in the community are most affected, and in
developing programs aimed at building the skills of the more vulnerable in the
community. Our programs are delivered in partnership with the government and
community organisations such as the Brotherhood of St Lawrence.
Yellow Brick Road believes:
...additional investment in financial education must be made,
and that the Australian consumer should be encouraged to seek financial advice
by making these services tax deductible.
If we are looking at competitive and sustainable banking, a
major thrust is to better inform consumers as to the nature of the banking
system and how they should invest their money—to empower them to increase their
It was suggested the improvement in financial literacy needed to start
Improve Australia’s educational system to facilitate informed
discussion about topics such as inter-bank competition.
Regrettably, in 2008 the Government significantly cut funding from the financial
literacy programme introduced by the Howard Government.
The Government recently announced some initiatives:
The Government will also launch a new, interactive consumer
website with ASIC to help people boost their understanding of money matters
through access to high-quality and independent online, personalised financial
guidance that is free and readily accessible.
From 2011, the national school curriculum for Maths will
contain a strong focus on the practical financial skills that students need...
The National Financial Literacy Strategy was released by the Government
on 15 March 2011. The Strategy includes four key elements:
using educational pathways to build financial literacy for all
providing Australians with trusted and independent information,
tools and ongoing support;
recognising the limits of education and information, and
developing additional innovative solutions to drive improved financial
wellbeing and behavioural change; and
working in partnership and promoting best practice.
Partly due to a lack of financial literacy many customers rely on
advisers to select banking products. This raises the issue of 'Quis custodiet ipsos
custodes?' Is it any easier to choose a good adviser than a good product? This
is particularly problematic when advisers receive much of their income from
commissions from the product providers rather than just being paid by the
After the Committee had completed its hearings, the Government released
information on its 'Future of Financial Advice' reforms. These represent the
Government's response to the Joint Committee on Corporations and Financial
Services' report into financial products and services, which was set up in the
wake of collapses such as Storm Financial and Opes Prime. The Minister
characterised the reforms as designed to:
...focus on improving the quality of financial advice and
expanding the availability of more affordable forms of advice...The key reforms
include a ban on conflicted remuneration structures, including commissions and
volume payments, a requirement for advisers to obtain client agreement to
ongoing advice fees every two years and the expansion of limited advice.
It remains to be seen whether the aims of these reforms can be
implemented successfully without undermining access to relevant financial
advice by Australians, particularly those on lower incomes. Finance brokers
and other financial advisers do play a useful role is helping households find
the best deal on a home loan. They thereby contribute to improving competition
in this market. A poorly thought out or implemented FOFA could limit the reach
of that role. It is important to balance ensuring that advisers are not
conflicted by commission arrangements with not preventing the impartial
advisers being able to do their work effectively and in an accessible manner. The
CEO of the Mortgage and Finance Association of Australia noted:
...there are conditions imposed on brokers, such as clawback
provisions. If the customer decides to switch, the broker gets penalised by
having their commission taken off them within a certain period of time. Some
lenders have volume hurdles that say, ‘We won’t let you deal with us unless you
produce so much business to us.’ Those sorts of things make the broker’s role
more difficult. At the edge of the market, brokers who cannot comply with those
conditions find it difficult to continue. As I have said, brokers are part of
the competitive force in the market because they provide the retail face to the
competition. A lot of the stuff we have been talking about is behind the
scenes, the funding, but brokers provide the retail face.
The Committee supports the renewed attention being paid to financial
literacy. This is an important component of a more competitive financial
system. The Committee is concerned, however, that the Government's approach may
be too simplistic and prevent some customers gaining the benefit of informed
and impartial advice.
There are odd spikes in the rates banks offer retail customers on term
deposits; ‘specials’ as the banks term them. For example, they may offer 6 per
cent for a seven month maturity but only around 3 per cent for six months or eight
months. This disadvantages customers who just allow term deposits to roll over
automatically on maturity.
Westpac were rather vague about the motivations:
...all banks have specials at various points...it could be for
seven months or 12 months and it fits in with your maturity profile—and there
is also a little bit of a marketing element to it and a tracked and
incentivised business element as well.
Westpac also downplayed the extent to which less sophisticated investors
ending up being rolled over into low interest terms:
...customers do pay a lot of attention to the rates that they
receive and, indeed, that was even intensified further through the global
financial crisis with this intensity of preciousness of retail deposits.
Customers do pay attention to that. We personally write to every customer, or
communicate directly with every customer, when that term deposit is maturing
and have a conversation with that customer about the options. We are not
rolling over very attractive rates to much lower rates. That is simply not part
of our philosophy or our style...
Asked about this the Reserve Bank observed that the large majority of
customers who initially invest in a term deposit at a ‘special’ rate roll over
their deposit into a new ‘special’ (possibly for a different term).
In 2009, ASIC conducted a review of the marketing and disclosure of term
deposits by ADIs. ASIC noted that seven of the eight ADIs reviewed had dual
pricing (i.e. they offer both high and low interest rates based on the term of
investment, with significant differences between these rates), but none of the
ADIs reviewed 'disclose the existence of dual pricing or the risk of rollover
at a lower interest rate'.
The report recommended improvements to advertising practices and the disclosure
of dual pricing, interest rates and grace periods.
The Committee recommends that banks should be required to contact
customers before the expiry of term deposits advising them of the rate that
will apply if they are automatically renewed and the current 'special' rates
Some bank customers are critical of the delays in banks effecting
transfers of mortgages:
Banks are able to settle properties for purchase readily in
normal commercial time, but when they are receiving the settlement from
outgoing customer this becomes in the main a painful exercise for the customer.
It should be regulated that a bank is required to settle the transfer of a
mortgage from one bank to another, within a maximum of 21 days of the date
notified by the customer that they are transferring to another bank. There is
no system impediment to this occurring. Mostly titles for properties exist both
electronically and on paper and the exiting customer bank holding the title
should be readily able to produce the physical title document, match it with
the transfer signed by the customer, and transfer the title to the new lender
within this period. If the bank cannot produce the title within 21 days and
affect the transfer for the customer a penalty of perhaps one month's interest
expense for each day's delay by the bank be paid to the customer as
Abacus member ADIs have pointed to two factors that could be
improved for borrowers wanting to switch lenders...long delays in discharge and
settlement by the current lender.
Brokers were also critical of delays:
The actual processes employed by the banks internal
departments which handle Discharge Documents and Payout Figures etc, use
erroneously long delaying tactics which hinder and frustrates consumers and
industry participants when trying to refinance a mortgage and or discharge the
State stamp duties on mortgages will remain a barrier to shifting
Discharge fees of a
mortgage—and that is where you get stamp duty—would still be applicable. That
is a matter of state government regulation.
For those borrowers who live in jurisdictions where stamp
duty is payable on mortgages, there is a significant barrier in switching as
previously paid mortgage stamp duties are not transferable...
In some States and in some situations mortgage stamp duty can
be charged on refinanced loans. This can be quite substantial. Also, the titles
office charges mortgage registration and deregistration fees (which range from
$180 to $260).
Under the Intergovernmental Agreement on Federal Financial Relations,
stamp duties on mortgages are scheduled to be abolished before 1 July 2013.
The Government is examining the possible introduction of a central
repository to hold all mortgages so as to avoid mortgage discharge and
The Committee recommends that the abolition of stamp duties on
refinancing of mortgages be placed on the agenda for the forthcoming tax forum
and that the agreement on their abolition be implemented.
The Government has observed that impediments to deposit account
portability (discussed below) may also inhibit movements of mortgages:
Many bank customers hold their savings in a deposit account
with the same bank as they have their home loan, so the inconvenience of moving
their deposit account also acts as a significant barrier to moving their
The Bendigo and Adelaide Bank told the Committee:
...there is currently a project about electronic or e-conveyancing.
If the industry could get together and for the 80 per cent of people who just
need a standard, everyday mortgage agree to the terms of what an industry
mortgage might look like, we can put that into an e-conveyancing project. So if
you wanted to swap from Westpac to us it would simply be a matter of it
happening in a central electronic register. This reduces an enormous amount of
the cost in the industry...
The Australian Bankers' Association added:
The National Electronic Conveyancing Development Ltd (NECDL)
was established in January 2010 by the New South Wales, Queensland and
Victorian Governments, following a Council of Australian Government’s decision
to develop the national electronic conveyancing system. We support this as an
important initiative for national micro-economic reform and as being key to
greater efficiency and convenience in conveyancing for consumers, practitioners
and financiers... A national system will provide greater certainty of
settlement date, delays associated with making appointments for settlement will
be significantly reduced and the electronic settlement of transactions will
obviate the need for bank cheques on settlement.
Deposit account number portability
Many consumers and small businesses find the process of moving between
banks cumbersome as it involves telling large numbers of organisations or customers
about a new account number. This is more burdensome for consumers now that many
bills are paid using direct debits from accounts.
A recent survey commissioned by CHOICE showed that the most common
reasons for not switching between ADIs were beliefs there was too much
paperwork (50 per cent), not having enough time to research the best deal (48
per cent) and not believing they would be better off (44 per cent).
The rate of transaction account switching appears lower in Australia
than in the UK.
And the UK is considering measures to facilitate account switching there:
...it may be possible to introduce greatly improved means of
switching at reasonable cost, in which case the industry should be required to
do this within a short timescale...
As well as being a hassle for individuals, it is burdensome for small
...at the moment in business if I need to change my account I have
to go and tell all my customers my new account numbers. It happens to me,
because I have suppliers. I will get an email, a letter, a phone call or
whatever saying: ‘Here’s the new BSB and account number. Please change it.’... Most
small businesses do not do it because it is difficult. It is not so much that
they do not want to do it; it takes a lot of time and effort... you have your
bank details on your stationery.
Some bankers acknowledge the problem:
When people switch banks, what they generally struggle with
administratively is changing all of their direct debits and various other
things, and that is obviously a barrier to people taking advantage of
... direct debits and credits serve the purpose of tentacles
for banks to hold onto customers by restricting them from moving to another
provider. Unfortunately, for the Account Switching package to work effectively,
changes are required under the Bulk Electronic Clearing System ("BECS')
rules. Currently consumers do not find the package convenient or user friendly
and are reluctant to initiate switching to other banks even when they are not
happy with the service provided to them by their current bank. Since the
customer has to open a new account number and then take the responsibility to
actually transfer the credits and debits over, there is reluctance on the part
of consumers to initiate a change.
Other banks and the Australian Payments Clearing Association regard the
problem as overstated:
Based on local data on account “churn” and overseas
comparisons as well as RBA analysis of deposit account competition, there is
substantial and effective competition in transactional banking services. If the
challenges of switching transaction accounts are a barrier to competition, they
are not a strong one – millions of Australians change provider every year.
The [Commonwealth Bank] Group opens and closes over 1 million
personal transaction accounts a year, in the context of having over 5 million
personal transaction accounts...These account opening and closure numbers show
many customers change their personal bank accounts each year, contrary to
Improving portability is welcomed by a number of witnesses and
Bank account portability is very important...it should be
...portable account numbers would take the hassle out of moving
from one FSP [financial service provider] to another, by eliminating the need
to advise multiple parties of new account details...
The Australian Bankers' Association is sceptical about the idea:
...account portability, as frequently proposed, where a bank
account number can be moved from financial institution to financial
institution, would require significant investment, especially for smaller
providers as well as other businesses and government departments. Furthermore,
the benefits of account portability have not been demonstrated.
Some submitters called for action to mandate improving account
...the Federal Government needs to make switching banks as easy
and as seamless as possible. Within this context, the best outcome for bank
customers would be to have an ability to simply go the new bank, sign an
authority to allow the new bank to move the customer’s dealings over to the new
bank and have the new bank do all the work with the old bank.
The other method used by banks to limit competition between
themselves is the archaic bank state branch identifying numbering system, which
together with the account number, supposedly drives the payment system. This
antique framework was originally designed for the cheque clearance system
specifically for Micra Ink readable cheques. It is readily easily replaced by
each customer having a bank account number that becomes the universal number
for that person. In other words each Australian citizen can have a number of
bank accounts, each with a separate and unique identifying number solely for
that person. The payments system for interbank clearances is readily adaptable
to this identifier which would fully replace the bank state branch system of
numbering, and thus make it very simple for a client to move banks whilst
retaining their account numbers. Of course the banks will oppose this and
provide significant reasons why this can't be done, but it can simply be
legislated for with 12 months notice of compliance.
The banks in general, however, expressed caution about the idea, whether
through dislike for improved competition or genuine concern about technical
We are dealing with very complex and ageing infrastructure in
the banking environment, so we would have to look into the time taken.
...this account portability and the fact that this is going to
go out for further consultation is quite an important thing. The actual
logistics and difficulties of doing this and the cost of it would be so huge.
Some other parties were also wary:
Bank account number portability may have limited benefits for
small business lending, and may impose significant costs upon the banking
Account number portability is an idea that should be examined,
but the legal and compliance hurdles, along with their associated costs, are
likely to be considerable, particularly for smaller mutual institutions.
An attempt to force an artificial addressing constraint to
support account switching would tend to dampen this competitive evolution.
...we would have to replace the BSB number system with a
different arrangement if we were to move to account number portability.
A banking analyst was also wary on technical and cost grounds:
... the proposal to have account number portability will be
very difficult. When we look at this, a lot of banks have the BSB number and
the account number; the various banks have different numbers. Remember that
some of the IT technology and the core banking processes go back to the 1960s
and that there are more than 100 ADIs in Australia. Every bank has to try to
redo their IT systems. Some of the banks that we have spoken to over the last
couple of days and previously have suggested that it will cost the major banks
several hundred million dollars each to implement this account number
He also raised a prudential concern:
Northern Rock is a classic example. When there was a run on a
financial institution, the IT system spontaneously crashed. That was convenient
but it meant that not as many people could go online and transfer their savings
across. The queues went out the door and there were not that many tellers
there. That slowed the run on the bank, and it eventually failed anyway. If you
have account number portability, in the event that rumours go around that there
could be a financial institution under stress, it will lead to instability... If
you think about the Basel committee’s reforms on liquidity, we want sticky
deposits and we want term funding. With account number portability, it is
diametrically opposed to sticky deposits because, by definition, deposits will
become less sticky.
This concern was not thought likely to be a problem by a major bank:
...if a customer had issues with a particular institution then
they might just withdraw their money and then put it in somewhere else much
more quickly rather than try to switch accounts like that.
The Committee asked APRA about this and APRA responded that:
From a prudential perspective, portability would expose ADIs
to greater liquidity management pressures and would be likely to require them
to hold higher levels of liquid assets to compensate for increased customer
The September 2008 package
The Government announced a package of measures in September 2008 aimed
at facilitating movement between financial intermediaries. A key part of the
package was the requirement for ADIs to provide their customers, if they wanted
to switch, with a list of direct debit and credit payments going back 13
It appears to have had a limited impact so far:
Usage of the switching package has been low...In the year to
September 2010, 2541 lists of regular payment arrangements were issued to
consumers at their request.
...consumer awareness of this is relatively low and CUA’s
experience has been that very few consumers have taken advantage of the
A recent internal ASIC survey reportedly showed ‘40% of 1,207
respondents couldn't be bothered switching banks because of the hassle, 10%
said there was no point changing because all banks are the same and 10% found
switching too hard a process’.
ASIC conducted a review of the initiative and its report was later
released under Freedom of Information. ASIC summarised the results for the
...implementation had happened consistent with the
requirements. But there was a relatively low level of usage at that point—this
is probably going back two years—though consumers who had used the new
procedures generally reported a better experience switching than those who had
not. We identified that one of the problems in the situation is making sure
consumers are aware of this possibility of the service. It is very difficult to
compel an institution to advertise to its customers that it will give them help
to leave, and that is probably too much to expect from institutions... there was
a relatively low level of understanding or knowledge of this facility by
The Government attributes the limited take-up so far to the GFC:
During the turbulence of the global financial crisis it is
understandable that many savers would have had a preference for the stability
of their existing institution...more consumers will utilise the account switching
service as competition returns to the banking sector and the benefits of the
package become more widely known.
The Committee received evidence on possible alternative approaches to
full deposit account number portability:
You might be in a situation where you could have a user
interface that allowed you, if you had multiple bank accounts, for example, to
redirect a direct debit from one banking institution to another. That would
require you to have accounts in other banks, but if you had an account with bank
A and you decided you preferred the deal with bank B then you could redirect
direct debits from A to B. There are things that can be explored that may not
be as complex or timely as total account portability.
I am not sure that we need an expensive, high-tech solution.
We see in some other countries that there is a process where you tell the new
bank that you want to leave the old banking institution and they have a
positive obligation to provide standard information in a set time frame and a
way of verifying that it is the right person.
There are solutions that have been tried in Europe. There is
a solution short of portable bank account numbers which we have supported,
which is to require the new bank to take the hassle out of switching for you as
a customer by authorising them to deal with your old bank within a clear time
frame and transfer your direct debits and direct credits across.
...there are a number of other mechanisms significantly beyond
what we currently have in Australia in other jurisdictions such as New Zealand,
Europe and the Netherlands which stop short of actual account number
portability but still enable a significantly more effective switching by
consumers than we currently have in Australia.
The European Union has recently introduced measures, falling short of
full account portability, but which sound like they would facilitate account
switching. They provide that:
banks must provide consumers with a switching guide explaining
what steps need to be taken in the switching process, by whom and within which
if the consumer chooses, their new bank must act as a complete
intermediary between the consumer and their old bank as well as third parties,
by which we mean that the new bank (not the consumer) performs all the relevant
steps, including obtaining the necessary information about the consumer‘s
recurrent payments from their old bank, reinstalling these payments on the new
account, asking the old bank to cancel these payments on the old account, and
informing third parties about the consumer‘s new account details;
the new bank must assist the consumer to request that their old
bank close their old account and transfer the remaining balance;
there are clear timeframes that must be followed, including that
the old bank must provide the information about recurrent payments within seven
banking days of receiving the request to do so and the new bank must set up the
recurrent payments on the new account within seven days of receiving this
the information provided by the consumer's old bank and the
closure of their old bank account should generally be free of charge.
The Netherlands system works as follows:
Once a consumer (or a small business) applies to use the
switching service, for 13 months their new bank ensures that their old bank
reroutes direct credits to the new account and as direct debits hit the old
account, they are also rerouted and the creditor is informed of the new account
and to change their details for future debits. (The consumer must inform their
employer and other parties that direct credit their account about their change
in account sometime within the 13 months – they receive a notification of the
impending end of their switching service one month before it ends.) Rerouted
transactions are separately noted on the consumer‘s bank account statements.
A European entrant to the Australian market believes the Netherlands
approach is a successful model:
We understand the Dutch system has resulted in around 100,000
customers shifting each year as a result of that. It really did shift the dial.
ING Bank refers to a new scheme in New Zealand:
...a new company called 'Payments NZ' owned by ANZ, Westpac,
ASB, BNZ, Kiwibank, HSBC TSB and Citibank, has been established. Our
understanding is that Payments NZ, will be taking over the New Zealand Bankers'
Association's Electronic Credit System Code and the Direct Debit Systems Code,
which documents the operational agreements and arrangements among member banks
for clearing electronic credits and direct debits. Under this proposed model,
the customers will fill out a form authorising the incoming bank to get all the
customer's information relating to direct debits and credits linked to their
existing account from the outgoing bank and the incoming bank will organise the
entire switching process and have the direct debits and credits linked to the
new account number with the incoming bank.
The Consumer Action Law Centre contrasts the EU and Netherlands schemes
with that developed in Australia. Among the deficiencies of the Australian
scheme they highlight are that it only requires the old bank to produce a paper
list of payments and the customer must then sort through these and notify the
parties involved, it excludes credit card accounts and there is no restriction
on customers being charged a fee by the old bank.
The Centre concludes:
...the Australian listing and switching service compares poorly
with overseas practice and strongly recommend that it be improved.
Choice referred to research suggesting 80 per cent of bank customers
have not considered moving. Responding to a suggestion that this may be an
indication of their satisfaction with their current bank, Choice had the
Our annual consumer satisfaction survey across the board for
ADIs shows that the banks with the largest market share consistently have the
lowest customer satisfaction ratings...You would think that, if they were
competing genuinely on price and quality, that would not be the case... there
were very clear reasons given by those who considered switching but did not
switch in the last two years: the paperwork, the hassle of researching the
market and the belief, rightly or wrongly, in the case of individual products
that there is not a better alternative out there in the marketplace.
The Government has announced a feasibility study of introducing full
account number portability to report by June 2011. The study will be conducted by
former Treasury secretary and Reserve Bank governor Bernie Fraser, and assess
the current technology, privacy issues, the potential need for a central
account registry and the costs, benefits and risks of introducing account
portability on various timelines.
The Committee recommends that a scheme based on those in Europe be introduced
requiring a bank, upon being advised that a customer has left for a new bank,
to reroute all direct debits and credits for 13 months and provide the new bank
with details of those direct debits and credits.
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