Lobby group the Banking Reform Coalition wants the FMA to use its powers under the new Conduct of Financial Institutions (CoFI) regime to get tough on banks not passing on OCR cuts in mortgage rates immediately.
The financial markets regulator has new responsibilities as a bank conduct watchdog in getting to the nub of why banks are not passing on OCR cuts quickly. It has taken over from the Commerce Commission
The FMA told Parliament’s Finance and Expenditure Select Committee’ inquiry into banking competition that this is one of its top priorities.
CoFI came into effect on 31 March allowing the FMA to investigate claims the behaviour of financial institutions, such as banks, are not fair.
The Banking Reform Coalition says banks’ excuses for not passing on the OCR cuts immediately are not fair. Internationally, banks don’t seem to have any problems, but banks here offer up two shallow excuses, Kent Duston, coalition head says.
It is taking up to two weeks for some banks to pass on OCR cuts. Their reasons for this include archaic and out-of-date IT systems and the time it takes to notify customers.
Oddly enough, the coalition agrees with the banks’ claim their IT systems are archaic.
During its market study into personal banking last year the Commerce Commission seemed shocked that core ANZ systems were so old they had been depreciated down to zero value.
“In both accounting and operational terms, some of the core systems used by banks are, in fact, worthless,” Duston says.
He says that is no real excuse because the big four banks are exceptionally profitable – some of the most profitable in the world.
Using the ANZ, the country’s biggest mortgage lender, as an example, its return on equity was 14.1% in the December quarter, compared to the OECD benchmark of 5.5%. The New Zealand bank is even more vastly profitable than its Australian parent, Duston says.
“So, it has plenty of money. If it has decided not to reinvest in its systems that is its problem.
“There is no reason by New Zealand borrowers should be punished because it has creaky old systems and prioritised paying dividends to its shareholders rather than reinvesting in its core IT systems.”
Duston says the other pathetic excuse is the banks must give notice to borrowers they are going to change rates.
“All up the banks made about $6.5 million they are not entitled to. They didn’t earn it. They didn’t make it because they have amazing customer service or incredible innovation. They just did it because they can,”
It is fictional, he says, in the sense the notice period is defined by their own contracts. “If the banks wanted to change that and asked borrowers if they were okay with a text on the day the OCR drops to notify them of a rate change, most people would be fine with that.
“There's no need to employ flocks of carrier pigeons or whatever it is banks do that justifies weeks long delays before they pass through a rate drop.”
The Commerce Commission commissioned a piece of work from Auckland University’s Business School as part of its bank market study last year and asked it to look at this issue and its analysis was ‘rockets up, feathers down’, Duston says.
When looking at the long run analysis over four months, and allowing for fixed rate changes, banks had passed on 90% of the OCR increases but only 57% of the decreases.
“What this does is inflates profits for banks,” he says.
The coalition’s own calculations using publicly available data show by delaying the 50 basis points OCR drop six weeks ago, the banks made an extra $5 million. Using the same calculations and considering the shorter delays and less of a rate drop, the banks still made $1.6 million from the most recent OCR decision.
“All up the banks made about $6.5 million they are not entitled to. They didn’t earn it. They didn’t make it because they have amazing customer service or incredible innovation. They just did it because they can,” Duston says.
Immediate no regrets action that could be done by the FMA is policing the banks for better behaviour.
Labour’s finance spokeswoman Barbara Edmonds has already flagged to Parliament’s banking inquiry that banks don’t pay interest on transaction accounts. She pointed out that $58 billion was held by households and businesses in zero interest bank deposits, according to 2023 figures collated by the Commerce Commission.
The commission concluded that having such a large sum of deposits the big four Australia-owned banks don’t pay interest on gave them a 50- to 60-basis point funding cost advantage over the smaller banks.
The coalition is hoping the regulator can do something about the big four banks getting that funding free. Duston says if it can’t then obviously the next call is for Parliament to say if there is money sitting in accounts then the banks pay for it the same as any other source of funding.
Westpac chief executive Catherine McGrath, however, told the banking inquiry Westpac was comfortable not paying interest on all deposits, explaining those cost savings enabled it to invest elsewhere in the business.
She noted Westpac had an automated system that alerts customers when their transaction account, or low-interest savings account, balance surpasses $3000. It nudges them to look at the bank’s savings products.
Duston says while Parliament’s banking inquiry has been in progress, the major banks’ behaviour has worsened, which he finds astounding.
“Since the Commerce Commission wrote its personal banking report last August, every one of the four main banks has increased its profit and put up its margins.
“Despite Parliament’s ongoing inquiry, they seem to be giving the middle finger to it.” Duston says it will be interesting to see how long it takes Parliament to respond, ‘no, this degree of looting is unacceptable’.
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