Test banks on fairness, ACCC asks Frydenberg

Watchdog seeksapproval from Josh Frydenberg to conduct another inquiry into banks.

The competition watchdog is seeking approval from Josh Frydenberg to conduct another ­inquiry into banks after persistent complaints that consumers are not being treated fairly.

It is understood the Australian Competition & Consumer Commission wants a formal ­directive from the Treasurer to examine the industry’s competitiveness — a move that would ­unlock powers, including the right to request documents, that were used in the ­recent digital platforms inquiry.

Mr Frydenberg will have to ­seriously consider issuing the ­directive, given the strong anti-bank community sentiment fanned by last year’s ­financial services royal commission, as well as the political ­embarrassment suffered by the government before establishing the royal commission in late 2017.

A new inquiry could examine what consumer group Choice calls banks’ “catch and keep” tactics, which deter customers from switching, as well as exploitation of loyal customers with high fees and interest rates, and multiple banks offering similar products.

One source speculated that ­approval for the inquiry may come in the next few weeks, although the government will have to carefully weigh whether another probe may result in a further tightening of credit supply from banks. A spokesman said Mr Frydenberg had yet to ­receive the ACCC’s request.

House of Representatives economics committee chairman and Liberal MP Tim Wilson, who ­interrogates the chief executives of the big four banks, said the ­importance of competitive banks had been highlighted in recent evidence given by Graeme Samuel, the predecessor of incumbent ACCC chairman Rod Sims.

“Mr Samuel highlighted the risks of not putting appropriate focus on competition in decisions around financial stability, and how that could harm consumer choices,” Mr Wilson said. “Off the back of the royal commission, a clear risk is the potentially burdensome impact of regulation designed for the big four but hitting small-bank competitiveness.”

A formal competition inquiry would deepen the banks’ long-running regulatory battles.

The industry is already under extreme pressure to implement the 76 recommendations from the Hayne financial services royal commission, which has led to a spike in compliance expenditure that is weighing heavily on profits.

Interest rates at or near zero are also taking their toll on profit margins, along with slowing domestic and global economies and anaemic credit growth.

Choice strongly backed the ACCC’s proposal for an inquiry. Its director of campaigns, Erin Turner, said the consumer group had “an ongoing problem” with the lack of banking competition.

“We believe there’s a deep problem on the demand side, ­because it’s incredibly difficult for consumers to make an informed choice about what products will be right for them,” Ms Turner said.

“The issue of customer stickiness should also be investigated — people often remain a customer of the first bank that they got an account with. Banks have tactics to catch and keep customers, and the way in which products are sold through intermediaries that don’t act in the best interests of customers can result in them making choices that are not in their best interests.”

While the proposed scope of the ACCC inquiry is unclear, the agency hinted about its thinking in an April 2018 submission to the Productivity Commission’s interim report on competition in the financial system. The commission flagged its intention to gain a deeper understanding of the impact of regulatory measures that affected the capacity of smaller banks to compete against the big four lenders: Westpac, Commonwealth, ANZ and National Australia Bank.

Barriers to entry in financial services markets would also be examined, as well as the constraints on consumer switching.

“The work program will also be informed significantly by the Productivity Commission’s final report into competition in the Australian financial system,” the ACCC submission said. The Productivity Commission was scathing of the banks in its final report in August last year for flooding the market with similar products and overcharging loyal customers. It said the industry’s approach led to “a blizzard of ­barely differentiated products” that created “an illusion of choice”.

The report highlighted that customers were penalised by remaining loyal to the tune of 0.3 to 0.4 percentage points, or up to $87 a month, on the average home loan balance. The report said that up to half the cost of an average mortgage was profit for the major banks — double the margin earned by their smaller rivals.

The high levels of customer satisfaction enjoyed by the industry was also a cause for concern. “It indicates a substantial failure in ­financial product information and advice,” the report said.