Better mortgage transparency

When Scott Morrison stiffed the banks with a new levy in the 2017 budget, he added a gratuitous insult to financial injury. “Nobody likes you anyway,” the then treasurer said. Last week, the Prime Minister declared the big banks were “profiteering” after declining to pass on to home borrowers the full value of the Reserve Bank’s 25-basis-point cash-rate drop. After three cuts in official interest rates since June, worth a cumulative 75 basis points, the banks have on average reduced the heat on borrowers by 57 basis points. According to the Morrison government’s talking points, inadvertently released into the wild on Monday, “the major banks have decided to put their profits before their customers, and that’s not a good outcome for their customers or the economy”. Because of this behaviour, Josh Frydenberg has directed the Australian Competition & Consumer Commission to investigate the pricing of residential mortgages.

The banks can defend themselves, of course, but this is a populist political hit on an unloved group of companies that have behaved appallingly in recent years. They are also in PR overdrive to improve their image and win back trust from customers. Naturally, the banks and their lobbyists made the right noises after a big-bang announcement. Australian Bankers Association chief Anna Bligh said the industry stood “ready to assist” the competition watchdog with its inquiries, which sounded like a police-beat euphemism. The truth is there have been 57 separate government-initiated inquiries into the banks since the global financial crisis. As a group, the banks should be match fit for the regulatory blowtorch.

Westpac chief executive Brian Hartzer was upfront and assertive, arguing that competition in the market is “intense” and that banks have to make decent returns lest they lose their AA credit rating — otherwise borrowers would have to be charged higher rates of interest. The big four — ANZ, Commonwealth, National Australia Bank and Westpac — hold 75 per cent of residential mortgage debt. They have seen new and smaller players, including fintech outfits, chip away at their market share. Yet home lending remains a very lucrative part of their operations, and banks are still among the most profitable entities in corporate Australia. The bonuses and salaries paid to bank executives are often eye-wateringly excessive; but that is a matter for boards and shareholders.

The banks are not, as ALP president Wayne Swan alleges, running a cartel. It’s true they should be treating their customers with greater respect, especially in the wake of the findings of the Hayne royal commission; billions in refunds to customers are now hitting their bottom lines. Thankfully, there are better mechanisms in place for switching between institutions. But there is an issue around clarity for customers; comparing products is often extremely difficult. Perhaps the ACCC probe will lead to more transparency, although breaking open the black boxes around how banks price their products may not necessarily produce the light (and lower costs) that mum and dad borrowers are crying out for. It would have been possible for the Treasurer to act on improving transparency without a new inquiry; last year, the Productivity Commission provided clues about how to move on this. Price obfuscation does not help banks win customer trust, especially those most loyal borrowers (and savers) who, after years of inertia, wake up to discover a new world of banking possibilities.