On 11 November 2018, the Australian Competition and Consumer Commission (“ACCC”) released its final report into the Residential Mortgage Price Inquiry (“Report”) which revealed that major banks have engaged in accommodative pricing behaviour to raise interest rates under the guise of a requirement to comply with regulatory measures imposed by the Australian Prudential Regulation Authority (“APRA”).
On 9 May 2017, the Federal Government announced the imposition of a Major Bank Levy on all ADIs whose total liabilities exceed the levy threshold of $100 billion in any quarter. Following this, the Federal Government directed the ACCC to undertake a Residential Mortgage Price Inquiry (“Inquiry”) to monitor potential price changes by banks to ensure that banks would not attempt to recover costs of the levy from their residential mortgage borrowers.
The banks targeted in the Inquiry were ANZ, Commonwealth Bank, Macquarie Bank, NAB, and Westpac (“Inquiry Banks”). The Inquiry was engaged between the period from 9 May 2017 to 30 June 2018. The Report was the culmination of this Inquiry.
While the ACCC did not find any evidence that the Inquiry Banks had changed their prices to specifically recover the costs of the levy within the period, it revealed that they had used the cover of APRA’s regulatory intervention to increase headline variable interest rates for interest-only residential mortgages in an “accommodative and synchronised” behaviour. The ACCC estimated that the $1.1 billion revenue gains of the big four banks were primarily a result of these interest rate increases.
The following provides an overview of the ACCC’s key findings in the Report in relation to this pricing behaviour:
Opaque discretionary pricing causes inefficiency and stifles price competition
Even before discussing the regulatory measures which influenced the rate increases, the ACCC noted and criticised longstanding features of the Inquiry Banks’ pricing scheme for residential mortgages acting to suppress borrowers’ incentives to shop around for better deals on their loans.
In particular, the ACCC found that the headline interest rates advertised by Inquiry Banks were poor indicators of the interest rates borrowers actually pay. A majority of borrowers pay substantially less than the relevant headline interest rates.
Headline interest rates are indicator rates residential mortgage lenders set and use to publically advertise to borrowers. They are subject to two forms of “discounts”:
- Advertised discounts, which are usually published on a lender’s website and easy for borrowers to discover; and
- Discretionary discounts, which are offered by each lender based on criteria and are not published to borrowers. Such discounts are only obtainable once prospective borrowers have lodged a residential mortgage application, provided supporting documentation and allowed time for the lender to assess the application.
The ACCC strongly criticised the latter discount. Such lack of transparency made it unnecessarily difficult and costly for borrowers to obtain multiple quotes and discover best price offers. Costs are further increased when prospective borrowers are required to provide evidence of another lender’s offer before Inquiry Banks are willing to match or better that offer. The banks end up profiting on its borrowers’ loyalty.
New borrowers paid lower interest rates than existing borrowers
On average, new borrowers were paying lower interest rates than existing borrowers. Meanwhile, borrowers with existing residential mortgages but were not actively engaged in the market were identified to be most adversely impacted by opaque discretionary pricing. It was estimated that existing borrowers could have saved up to $850 a year in interest if they negotiated to pay the same rates as an average new borrower from 30 June 2018.
Even though the Report’s findings were limited to the Inquiry Banks, the ACCC indicated that such opaque pricing strategies were a market-wide practice.
APRA’s interest-only benchmark as the focal point for rate increases
In March 2017, APRA announced that ADIs should cap interest-only lending to 30% of new residential mortgage lending (“interest-only benchmark”) in response to emerging risks in the housing sector.
The ACCC using its compulsory information gathering powers obtained internal documents from the Inquiry Banks to identify how this interest-only benchmark became the focal point for headline variable interest rate increases.
ANZ was identified as the first initiator of these rate rises. On 9 June 2017, ANZ announced its decision to increase its headline variable interest rates on variable rate residential mortgages, citing that the change was needed to offset regulatory costs incurred in order to comply with APRA’s interest-only benchmark.
Internal documents revealed that ANZ believed its price strategy would be successful and that it was confident its competitors would follow its lead to increase their interest-only rates. This prediction was ultimately fulfilled as other Inquiry Banks responded with similar rate increases.
In particular, the ACCC noted that the big four banks had engaged in accommodative and synchronised pricing behaviour, motivated by the ability to publically attribute their rate changes to government regulation despite evidence showing that the banks were already on target to comply with the interest-only benchmark without further rate increases.
A borrower’s willingness to negotiate with their lender is an important factor in pricing their residential mortgages. The Report found that residential mortgage borrowers could potentially make significant savings by regularly reviewing the rates they are paying, asking for better rates, changing to cheaper products from the same lender or switching residential mortgage providers to take up best available offers.
The Report also noted that the upcoming Consumer Data Right, which will affect residential mortgages with the big four banks from 1 February 2020, will be an additional tool to assist borrowers to become more engaged and informed with their current loan positions and ultimately improve their access to more competitive offerings.