ACCC’s Sims compares big four banks to synchronised swimming
Financial Services April 5, 2018 10:00 pm By Cat Fredenburgh | Melbourne

The head of the Australian Competition and Consumer Commission said Thursday that when it comes to mortgage prices, the behaviour of Australia’s big four banks looks more like synchronised swimming than vigorous competition.

In a speech at the AFR Banking and Wealth Summit laying out the findings of the ACCC’s interim report on competition in the residential mortgage industry, Chairman Rod Sims said the four largest banks benefit from a lack of competition and don’t want to do anything to rock the boat.

“What we found is that the pricing behaviour of the Inquiry Banks appears more consistent with ‘accommodating’ a shared interest in avoiding the disruption of mutually beneficial pricing outcomes, rather than vying for market share by offering the lowest interest rates,” Sims said.

Sims said this manifests in the banks setting their interest and discount rates in relation to one another; not competing on interest rates; and generally moving their interest rates at the same time.

The ACCC’s interim report found Australia’s largest banks, especially the big four, are weak when it comes to offering competitive prices on residential mortgages.

“We do not often see the big four banks vying to offer borrowers the lowest interest rates. Their pricing behaviour seems more accommodating and consistent with maintaining current positions,”  Sims said when the interim report was released.

Opaque discounting practice that vary from bank to bank play a large role in the rates consumers pay, the ACCC said, making it hard for consumers to make informed decisions when choosing a mortgage.

“The discounting by the big banks lacks transparency and it’s almost impossible for customers to obtain accurate interest rate comparisons without investing a great deal of time and effort. But the potential savings from these discounts are immense,” Sims said.

The average discount on variable interest rate loans for the banks whose practices the ACCC reviewed – Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Bank Limited, National Australia Bank Limited, and Westpac Banking Corporation – was 78-139 basis points off the relevant headline interest rate, the report said.

The interim report also found existing mortgage borrowers pay higher interest rates than new borrowers at the big four banks, up to 32 basis points higher on average than new borrowers for standard variable interest rate residential mortgages.

Average interest rates for basic or ‘no frills’ loans are often higher than those for standard loans offered at the same bank, the inquiry found.

“We think many customers who opted for ‘basic’ or ‘no frills’ loans thinking they are saving money would be surprised to learn they might actually be paying more,” Sims said.

Treasurer Scott Morrison, MP, directed the ACCC to look into residential mortgage pricing by the banks affected by the Major Bank Levy, announced May 9.

The five banks together held about 84 percent of all outstanding residential mortgages in Australia – about $1.3 trillion – as of December 2017.

None of the banks had decided to adjust their residential mortgage prices in response to the Major Bank Levy as of November 2017, the report said.

In a recent report to the Productivity Commission, the ACCC touted the role of its newly formed Financial Services Unit in policing competition in the financial services sector.

Other inquiries for the newly formed Financial Services Unit of the ACCC, which is leading the residential mortgage inquiry, could include “assessing the impact of regulatory measures which affect the ability of smaller banks to compete against the majors, barriers to entry in financial services markets and consumer switching,” the ACCC told the Commission.

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Cat Fredenburgh

Cat Fredenburgh has been covering legal news for 12 years. She was previously Editor-in-Chief at US legal news publication Law360. She is the Co-Founder of Lawyerly.