David Murray raps ASIC, APRA conflict over tracker mortgages

Financial system inquiry chief David Murray has slammed ASIC’s intervention in the tracker mortgage debate.

Kudelka’s view

Financial System inquiry chief David Murray has slammed ASIC boss Greg Medcraft’s intervention in the tracker mortgage debate, saying it has created a conflict of interest for both ASIC and APRA.

Murray told The Weekend Australian that “it’s not right for a regulator to predict how a product may perform, it compromises the regulation”.

The real issue in the debate is that suggesting products and how they would operate creates a potential conflict of interest, he added.

“What would happen if something went wrong with the product — where would ASIC or APRA be then?” Murray asked.

Medcraft rebuffed the attack, telling The Weekend Australian: “I am not suggesting the product be mandated. I have responsibility for financial consumers and for fair and efficient markets. That’s the context in which I have raised the tracker mortgages.”

Medcraft was fighting a lone hand on the issue yesterday even though he had a supporter in parliamentary committee boss David Coleman, who consistently raised the issue in last week’s hearings with the bank chiefs.

All rejected the concept except for ANZ’s Shayne Elliott who undertook to examine the concept, which he is doing. This is not to say he will actually introduce a tracker mortgage any time soon. His team is working through the mechanics and testing the demand for the product.

APRA boss Wayne Byers raised the risks involved in his appearance before the committee yesterday. He made the obvious comment that if it was an attractive product the banks would already be offering it.

Medcraft would respond: “Attractive to whom — the banks or consumers?”

He rightly argues the present system works for the big bank oligopoly but, given some of the smaller banks are also not fans, questions the competitive impact of any changes.

Around 16 per cent of mortgages are fixed. The argument in favour of a tracker mortgage over a fixed rate is flexibility and the option to pay down the mortgage faster.

The advantage is customers can see the index movement so they know which way rates will move whereas now the discretion is all behind closed bank doors.

This is another reason why banks need to be more open and transparent in explaining themselves.

This in turn will allow them to continue with present products that are clearly very profitable.

Medcraft makes clear he is not advocating a mandated product. This is a relief because the concept of the government telling any company what products to introduce is clearly nonsense.

Byers’s comments effectively endorsed a statement by his predecessor John Laker, who told a Senate economics committee hearing in 2011: “In APRA’s view there is a substantial implicit interest rate risk in such a product, when bank funding costs increase more than the reference rate. The problem was notable, among other examples, with United Kingdom ‘tracker’ loans during the global financial crisis. If home loan rates were to be tied to the cash rate or other rates not controlled by the lending institution, the bank may be required to hold additional capital against the extra risks.”

The point is this debate, while welcome, is not exactly new and indeed Greg Medcraft is on the record over many years supporting tracker mortgages so even his intervention this week is not exactly news. The repetitive debate is another reason why a banking royal commission is not necessary. The former derivatives salesman has long seen the advantage of tracker mortgages, which he thinks give consumers more transparency.

Westpac chief Brian Hartzer, who used to run Royal Bank of Scotland’s retail division, saw first-hand the carnage that can be caused when rates move against the tracker mortgages.

Malcolm Turnbull stopped well short of backing the product in another outburst yesterday attacking the banks for their failure to explain themselves.

The Prime Minister’s reticence was noteworthy given the fact that last week many of committee chair Coleman’s questions were clearly leads to coming changes like the proposed banking tribunal which Turnbull pre-emptively endorsed last week.

This said, Medcraft has a point when he says there is no reason why a bank can’t sell a home loan off the back of the bank bill swap rate when it can sell a corporate loan off the same index.

Granted the corporate loan is normally for a shorter duration and can be hedged, but there is no denying that with home loans banks earn three times the returns they earn for the entire bank, which tells you the way the product is sold now works for them. This is because they want to control earnings on their back book when rates move.

For their part, banks argue the product protects borrowers from increases in funding costs, which is on the surface a good idea until you realise banks will hedge against the risk of increases in the yield curve against the benchmark and the risks of credit spreads increasing.

ABA boss Stephen Munchenberg said: “Mortgages with interest rates tied to movements in the cash rate do not offer the best outcomes for customers, the banking industry or the Australian economy.” Medcraft has succeeded in getting the debate raised but right now his support base is small and shrinking.

Procrastinate? Too late

Productivity Commission boss Peter Harris has taken the unusual but welcome step of using his annual report to attack the government for delaying its response to his reports.

Harris figures that the rejection of a report is a much more preferable outcome than no reaction.

But sadly, politicians often use the PC as a way to delay making a decision; to take Central Petroleum’s Richard Cottee’s line: “It’s never too late to procrastinate.”

The idea of the Productivity Commission is to provide independent research-based policy advice to government free of political and sectoral interference.

Just what the government then does with its reports is its business but, as Harris implies, if the government simply ignores the report then you have to wonder what the point of having a PC is in the first place.

His lament is, of course, also related to the lack of long-term decision making evident in this government, which has proved good at talking about economic reform but not so adept at implementing it.

“In recent years, government responses to our reports have been provided in some cases only after substantial delay,” Harris said in the forward to his report.

“While it takes time for commission reports to be absorbed, and it is not always the case that matters are given to the commission with the expectation of immediate action, it would be preferable for public policy development to take place in a relatively timely fashion,” he added.

Harris also noted that “it should not become the practice that an inquiry, having been commissioned, is allowed to languish for many years”.

A notable example was the PC’s report into access to justice, which is a matter of some public import, but it took some 30 months for the government to react to what was, admittedly, a task referred to the commission by its predecessor.

The report recommended legal assistance for poor people to improve access and other changes that would have created a more efficient court process.

The Harris plea comes ahead of a busy period for the PC, which over the next few weeks will issue its draft report on access to data, its final report on farm regulation, a draft on the Harper Commission recommendations on human services and one of a series of reports on superannuation.

All four reports fall neatly within the government’s stated economic agenda which should mean some timely responses.

It is unusual for public servants to criticise governments but Harris is someone who sees policy development as basic good governance.