Finance News: 23 Jul 2010
Big banks like to deflect criticism from those who question their massive profits and fee-gouging ways by playing the ''bank bashing'' card...
. They deny they have been charging excessive amounts on ''exception'' fees.
Their assertion that they have only been recovering costs is about to be tested in the courts by a class action on behalf of thousands of bank customers who were charged $25 to $60 for being overdrawn on their accounts or credit cards by a few dollars.
The suspicion is these charges are not based on cost recovery but, rather, plucked out of the air. That is also likely to be the case with many of the exit fees that apply to variable mortgages.
Reasonable fees that reflect the lenders' costs are probably in the range of $300 to $600 but some lenders charge several thousand dollars. Laws that came into effect on July 1 give new powers to the Australian Security and Investments Commission (ASIC) to strike out ''unfair'' or ''unconscionable'' exit fees on mortgages that exceed cost recovery. That only applies to new mortgages; those who have a mortgage contract with big exit fees are stuck with them.
The banks argue their increase in fee revenue is mostly driven by customers, households and businesses completing more transactions and buying more products and services. But that is only partly true; the level of fees, overall, has been rising.
While the fees rightly raise the hackles of consumers, banks make most of their money out of mortgages. Australian borrowers pay big interest margins - the gap between what it costs the banks to raise funds and the interest rates they charge on their loans. The banks that have increased their mortgage- and business-loan interest rates above the rise in the cash rate continue to assert they had no alternative because their cost of funding had risen.
But the Reserve Bank put paid to that argument in its March bulletin when it said that for the major banks, the increases in lending rates had more than fully offset their higher funding costs, with their net interest margins in late 2009 about 20 basis points to 25 basis points above pre-crisis levels.
What we have seen since the onset of the GFC is a massive transfer of wealth from consumers to the banks. Why has this happened? The answer is simple. The banks make record profits and charge their customers over the odds simply because they can.
The lack of competition has been the main driver for the banks' behaviour. The Australian Competition and Consumer Commission got it wrong when it approved a series of takeovers that saw the big banks gobble up many of their competitors during the GFC, severely diminishing competition.
Unfortunately, there are few signs that the cosy oligopoly enjoyed by the big banks is going to end soon.
This absence of competition makes it all the more important that ASIC uses the new powers it has been given. And it makes it more important that consumers who are not locked into their mortgages by hefty exit fees take up any better deals on offer from the big banks' rivals.
SOURCE: John Collett - Sydney Morning Herald
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