Chapter 3

Overview of early termination fees and Schedule 2

Background

3.1 The terminology used within the mortgage industry, and in the consumer credit sector more generally, to describe the fees and charges linked to exiting a loan is not consistent. In general, 'early exit fees' or 'early termination fees' may apply if a customer either transfers, refinances or repays their loan before the end of the term. It is argued these fees respond to costs which arise from the early repayment of the loan, such as administrative costs (including costs which may have been deferred) and other losses arising from the early repayment.

3.2 In the context of residential home loans, the Australian Securities and Investments Commission (ASIC) considers an early termination fee is:

... any fee payable because of the early repayment of a residential loan that is additional to standard discharge fees ...[1]

3.3 For variable rate home loans, an early termination fee is likely to include a 'deferred establishment fee':

This type of fee is said by lenders to reflect establishment costs not charged at the start of the loan. Typically, it is charged if the consumer repays the loan in the first three to five years (although, in some cases, it can be longer).[2]

3.4 An exit fee may also include 'break fees':

This type of fee is said by lenders to be charged to recover the economic cost to the lender of a customer terminating a fixed rate loan before the end of the fixed rate term. It is not charged for variable rate loans.[3]

3.5 As noted in chapter 2, new laws relating to unconscionable fees and charges and unfair contract terms came into effect on 1 July 2010. In November 2010, ASIC released Regulatory Guide 220 which outlined its approach to enforcing those provisions with respect to early termination fees for residential loans.

3.6 In December 2010, the Government announced as part of its Competitive and Sustainable Banking System that it would ban exit fees outright for new variable home loans from 1 July 2011. Amendments to the National Consumer Credit Protection Regulations 2010 (NCCP Regulations) were made on 23 March 2011 to put the ban into effect.[4] The amendments were subjected to a disallowance motion in the Senate, which was negatived on 22 June 2011.

3.7 Early termination fees were considered by the Senate Economics References Committee as part of its May 2011 report of its inquiry into competition in the Australian banking sector. During that inquiry, some organisations were critical of the decision to ban exit fees outright.

3.8 In his Second Reading Speech on the Bill, Senator Xenophon noted the arguments put forward in evidence received by the banking competition inquiry. The Senator stated that the aim of Schedule 2 of this Bill is to:

... ensure that only small, independent financial organisations will be able to apply reasonable fees to recoup some of their costs.[5]

Debate surrounding early termination fees

Arguments against early termination fees

3.9 During the recent banking inquiry, the Chief Executive Officer of the National Australia Bank (NAB) outlined the general impediments to switching between credit providers, and their effect on competition:

The two key drivers of competition are search cost, so how long does it take in terms of time and what is the cost to find a deal—this applies to any industry—and, secondly, what is a switching in time and cost? They are the key drivers.[6]

3.10 Following this, the main argument against early exit fees for residential loans is usually that:

Consumers of mortgage products dissatisfied with the product or service they receive from their bank or mortgage provider feel trapped by the exit fee, which discourages them from switching.[7]

3.11 During the banking inquiry, Treasury outlined the basis of the Government's policy to ban exit fees. Treasury suggested that exit fees, as well as other fees and impediments, represent:

... hurdles and obstacles to enabling consumers to exercise their preferences or their choice. The government is seeking not to turn the world upside down but to try to remove those impediments and empower consumers to provide a competitive stimulus to the system.[8]

3.12 One example of the anti-competitive impact of excessive exit fees uncovered during the banking inquiry was the following:

... our client chose a variable rate home loan based on representations that the product's interest rate would remain competitive, but after several rate rises over approximately an 18 month period, her home loan rate was considerably higher than other rates in the market, but she felt unable to switch because she faced an early exit fee of over $12,000.[9]

3.13 The Deputy Prime Minister and Treasurer, the Hon. Wayne Swan MP, recently argued against changes to the Government's ban aimed at allowing smaller lenders to impose exit fees:

TREASURER: ... some of the smaller lenders are the worst offenders. You see, some of the smaller lenders are running very high mortgage exit fees. If they've got a business model that relies on that fee structure, then it's not a business model which delivers fair value.

SPEERS: So if this does hit them very hard, what's that going to do to competition in the industry?

TREASURER: Well, you can't have competition if there are large unfair mortgage exit fees stopping people from moving down the road to get a better deal because they're locked into uncompetitive arrangements which cost them a lot of money.[10]

Table 3.1: Examples of exit fees after three years on $300,000 owner-occupied home loan (March 2011—prior to ban)

Product	Upfront fees ($)	Exit fees ($)
ANZ simplicity Plus	600	160
NAB base variable rate home loan	600	150
Westpac flexi first option home loan	600	950
Commonwealth Bank economiser	600	1050
St George basic home loan	100	1500
Bendigo residential variable home loan	730	250
Bank of Queensland standard variable	595	1450
Aussie Classic	600	1215
Mortgage House basic home loan	569	5250
Homestar No Fee	0	3600
AIMS gold standard variable home loan	660	4230
Community CPS Credit Union basic variable	595	0
Mecu Credit Union basic home loan	595	100
Greater Building Society great rate	0	0
Heritage Building Society standard variable	600	0

Source: Senate Economics References Committee, Inquiry into competition in the Australian banking sector, May 2011, p. 111; originally sourced from Infochoice website (www.infochoice.com.au) on 23 March 2011.

Arguments supporting smaller lenders being able to charge reasonable early termination fees

3.14 During the recent banking inquiry, the main opposition to restrictions on exit fees came from players other than the big four banks. It was put forward that smaller lenders were unable to raise funds as cheaply as the major banks, so may rely on fees to offer competitive interest rates.

3.15 The Australian Bankers' Association commented:

... exit fees do reflect genuine costs incurred by banks and others. To the extent that they are genuine costs, removing the ability to recover those costs is likely to hit smaller lenders disproportionately compared to larger lenders.[11]

3.16 When asked whether the removal of exit fees would raise prudential concerns, the Australian Prudential Regulatory Authority (APRA) responded that it did not 'in itself', although:

... it is important that ADIs are able to cover and/or recoup their legitimate costs in originating, managing and closing out a mortgage.[12]

3.17 The debate, however, appears to have centred on the possible impact that the ban may have on competition because of its effect on non-bank financial institutions, rather than smaller banks. The Australian Finance Group submitted to Treasury:

The introduction of non bank lenders into the Australian market in 1996 created a whole new level of competition. Not backed by a massive level of savings deposits, the securitized lenders were able to introduce smart, customer focused lending products. Deferred Establishment Fees were considered a vital mechanism in allowing these non banks to compete with the banks, whose primary lending capability was being underwritten by its deposit base. Removing the ability for lenders to charge an exit fee will in turn limit the non bank lenders ability to compete with the Banks. Without the protection of a DEF, a non bank lender, who has a higher cost of funds in the first place, will have to charge a higher interest rate on the loan so as to remain viable. This is self defeating and may remove the opportunity for non bank lenders to re-enter or enter the market as the impact of the GFC lessens.[13]

3.18 These sentiments were repeated in the Mortgage and Finance Association of Australia's (MFAA) submission to this inquiry. The MFAA provided the following information (Table 3.2) to indicate the competitive impact the growth on non-bank lenders have had on interest rates.

Table 3.2: Non-bank market share and difference between cash rate and average standard variable rates

Table 3.2: Non-bank market share and difference between cash rate and average standard variable rates

Source: Mortgage and Finance Association of Australia, Submission 1, p. 6; data from Australian Bureau of Statistics, Housing Finance, Australia, cat. 5609.0, and the Reserve Bank of Australia.

3.19 The MFAA also questioned whether the outcome of the early termination fees ban has been beneficial for consumers:

Following 1 July 2011, some lenders, mainly small or non-bank lenders have increased up front establishment fees applicable to all borrowers to compensate for the loss of their ability to charge deferred establishment fees to the far smaller percentage of borrowers who may wish to switch lenders in the early years of their loans.[14]

3.20 However, the MFAA noted that, in their view, there are more pertinent concerns regarding the ability of smaller lenders to compete with the large banks than the ability to charge early termination fees:

The issue, at least for non-bank lenders represented by MFAA, is access to funds to be able to make an impact with their competitive pricing offer. Although since the demise of securitisation mortgage managers are able to access wholesale funding from banks probably giving the non-bank/mortgage manager sector around a 5% share of the total mortgage market, (included in the banks market share) if only funds originated by nonbank lenders is taken into account the market share is only 1.2%.[15]

Schedule 2 to the Bill

Overview

3.21 Under section 9 of the Banking Act 1959, APRA is responsible for granting authorisation for a body corporate to carry on banking business in Australia (i.e. for them to become an authorised deposit-taking institution). APRA may set the criteria for the granting of an authority, revoke the authority and, at any time, (a) impose conditions, or additional conditions, on an authority or (b) vary or revoke conditions imposed on an authority; provided the conditions relate to prudential matters.[16] Item 1 of Schedule 2 amends the restriction that conditions must relate to prudential matters to allow for the conditions envisaged by Item 2 of Schedule 2.

3.22 The remaining amendments to the Banking Act proposed by Schedule 2 would require APRA to impose conditions on banks with a market share of more than 10 per cent to prohibit them from imposing an early termination fee for any loan agreement or mortgage contract. If a bank with more than 10 per cent market share has a 51 percent or more interest in a subsidiary, the prohibition would also apply to that subsidiary.

3.23 A key difference between the proposals in Schedule 1 and Schedule 2 is the scope of agreements they cover. Schedule 1 refers to all credit fees or charges payable relating to credit contracts whereas the provisions in Schedule 2 are limited to early termination fees in respect of any loan agreements or mortgages.

Products covered by Schedule 2

Fixed and variable rate loans

3.24 The current prohibition on early termination fees for home loans introduced by the Government through amendments to the NCCP Regulations does not apply to 'break fees'—fees associated with the credit provider's loss as a result of differences in interest rates due to the early repayment of a fixed rate home loan.

3.25 The Bill, however, does not discriminate between variable and fixed rate home loans; instead it refers to 'any' loan agreement or mortgage contract. The definitions in proposed subsection 9AF(4) also do not separate the two types of mortgages. For instance, the following definition of early termination fee is provided:

... any additional charge imposed on a borrower or mortgagor in any situation in which the borrower or mortgagor chooses to pay out the loan agreement or mortgage contract, as the case may be, ahead of the time specified in the relevant loan or mortgage contract.[17]

3.26 The CEO of the NAB has previously argued that a different rationale applies for exit fees being imposed on fixed rate mortgages compared to variable loans:

We think that exit fees are economically legitimate on fixed mortgages. You enter into a fixed mortgage contract and the bank incurs costs to set up and hedge against the profile of that fixed rate mortgage, so that is a different story. But it is different for variable rates.[18]

3.27 The recent report of the Senate Economics References Committee's inquiry into competition in the Australian banking sector also observed:

A prudent bank offering a fixed rate loan will fund it through fixed rate borrowing. If interest rates fall, and customers are free to repay loans early and take out new loans at a lower rate, the bank will be caught still paying a high interest rate but earning a low rate.[19]

3.28 In its submission to this inquiry, the Australian Bankers' Association queried the impact Schedule 2 would have on the future availability of fixed rate loans:

Because the Bill does not exclude break fees, a bank would be unable to charge an early repayment adjustment and administrative fee on fixed rate loans that were repaid within the fixed rate term. Consequently, banks would bear the risk of borrowers choosing to repay their fixed rate loans early if interest rates dropped, banks would be forced to either increase the interest rates charged on fixed rate loans or cease offering fixed rate loans. The Bill would therefore have extensive detrimental effects, particularly on the availability of fixed rate loans to Australian consumers.[20]

Meaning of 'any loan agreement or mortgage contract'

3.29 The Bill would prohibit an early termination fee from being imposed in respect of 'any loan agreement or mortgage contract entered into by the bank' (emphasis added). The terms 'loan agreement', 'mortgage' or 'mortgage contract' are not defined by the Bill or in the Banking Act. As the Banking Act covers the broad concept of 'banking business', and in the absence of guidance of specific definitions in the Bill for the purposes of the Schedule, it is likely that products and services outside the consumer credit sphere would be captured. It is not clear if this is in line with the intent of the Bill.

3.30 The Australian Bankers' Association strongly argued against the broad scope of the Bill, noting that one outcome would be that a bank would not be able to charge a listed company an exit fee on a corporate loan:

... because the Bill would amend the Banking Act 1959, the Bill would apply to all credit contracts (secured or unsecured), not simply to consumer credit contracts. The Bill would therefore result in a large lender being prohibited from charging an exit fee under any credit contract—commercial, corporate or consumer. It is the ABA's understanding that such an intervention into freedom of contract would be unprecedented.[21]

Market share and entities covered by the Schedule

3.31 The provisions of Schedule 2 apply to banks with a market share of more than 10 per cent. Further, if a bank with more than 10 per cent market share has a 51 per cent or more interest in a subsidiary, the prohibition on imposing early termination fees would also apply to that subsidiary.

Meaning of 'bank'

3.32 The term 'bank' is not defined in the Banking Act. Under section 66, only APRA may approve the use of certain terms and expressions such as bank. Although APRA's guidelines are currently under review, at present the main requirement APRA requires is that an organisation have a $50 million minimum capital size.[22]

3.33 For the purposes of the provisions the Bill seeks to introduce, the Bill defines bank as meaning an Australian ADI that is permitted under section 66 of the Banking Act to assume or use the word bank, banker or banking, or any other word (whether or not in English) that is of like import.

3.34 It is not clear why the term 'Australian' was included in the definition. While the big four banks will be captured, a question may arise as to whether foreign subsidiary banks and/or branches of foreign banks operating in Australia will fall in the definition of bank as defined by the Bill.

3.35 Nonetheless, if the provisions were applicable to ADIs that had a market share of 10 per cent, rather than Australian ADIs that are permitted to use the term bank in their name, the definition would be clearer and, at the present time, the same large banks would be covered.

Market share

3.36 The provisions of Schedule 2 would apply to banks that have a market share in excess of 10 per cent. The Bill requires market share to be determined by APRA 'on the basis of proportion of total deposits'.[23]

3.37 There is currently no definition of 'deposit' in the Banking Act. However, the Bill provides for APRA to determine market share, and in doing so it will necessarily choose an appropriate definition. A similar situation arose during the development of the Financial Claims Scheme; an official of APRA has noted that for the purposes of that programme they decided to use a definition:

... based on the 'banker/customer' relationship ... (i.e. there must be an account). Traded market instruments will not be included.[24]

3.38 Given the proposed amendments deal with loan agreements and mortgage contracts, a question arises as to why APRA's calculation of market share is to be determined on the basis of the proportion of total deposits instead of its share of loan agreements or mortgages.

3.39 Professor Sathye argued that market share should be based on consumer credit rather than total deposits:

The proposal seeks to prohibit the bank with a market share of more than 10 per cent from imposing an early termination fee for any loan agreement. Market share has been defined as that determined by APRA on the basis of proportion of total deposits. I am of the view that the relevant criteria should really be on the basis of proportion of share in consumer credit.[25]

3.40 Other approaches are also available. Austrade based its calculations of the major banks' market share on resident assets in one of its recent publications.[26]

3.41 More generally, when assessing mergers and acquisitions the Australian Competition and Consumer Commission (ACCC) typically calculates market shares 'according to sales, volume and capacity'.[27] In the United States, the competition authorities:

... measure each firm’s market share based on its actual or projected revenues in the relevant market. Revenues in the relevant market tend to be the best measure of attractiveness to customers, since they reflect the real-world ability of firms to surmount all of the obstacles necessary to offer products on terms and conditions that are attractive to customers.[28]

3.42 The following tables provide an indication of the various measurements of market share held by a selection of banks, based on operations and transactions booked or recorded inside Australia and conducted with Australian residents. On this interpretation of market share, only the 'Big Four' banks—ANZ, Commonwealth, NAB and Westpac—would fit this definition. As a wholly owned subsidiary of the Commonwealth Bank, Bankwest would also be covered.[29]

Table 3.3: Share of deposits of selected individual banks (on domestic books)

Bank	Household deposits		Total deposits³
Bank	($ million)	% of total	($ million)	% of total
ANZ	71,034	14.30	224,203	16.27
Bank of Queensland	15,895	3.20	28,993	2.10
Bankwest1	14,572	2.93	41,277	2.99
Bendigo and Adelaide Bank	17,545	3.53	35,712	2.59
Commonwealth Bank	136,004	27.38	305,196	22.14
HSBC Bank Australia	4,737	0.95	13,731	1.00
ING Bank	17,800	3.58	28,779	2.09
National Australia Bank	70,139	14.12	224,640	16.30
Suncorp-Metway	14,447	2.91	34,173	2.48
Westpac2	113,128	22.77	281,052	20.39
Total (all banks)	496,785	-	1,378,419	-

Table 3.4: Share of total resident assets of selected individual banks (on domestic books)

Bank	Total resident assets⁴
Bank	($ million)	% of total
ANZ	368,370	14.75
Bank of Queensland	36,836	1.47
Bankwest¹	71,734	2.87
Bendigo and Adelaide Bank	42,882	1.72
Commonwealth Bank	524,960	21.02
HSBC Bank Australia	19,206	0.77
ING Bank	47,459	1.90
National Australia Bank	428,817	17.17
Suncorp-Metway	57,979	2.32
Westpac²	547,314	21.91
Total (all banks)	2,497,811	-

Table 3.5: Share of loans and advances of selected individual banks (on domestic books)

Bank	Housing (owner-occupied and investment)		Total gross loans and advances
Bank	($ million)	% of total	($ million)	% of total
ANZ	155,426	15.04	261,902	15.92
Bank of Queensland	20,990	2.03	26,720	1.62
Bankwest¹	41,521	4.02	65,326	3.97
Bendigo and Adelaide Bank	20,619	2.00	31,904	1.94
Commonwealth Bank	255,611	24.73	356,135	21.65
HSBC Bank Australia	6,996	0.68	11,904	0.72
ING Bank	36,716	3.55	39,989	2.43
National Australia Bank	166,071	16.07	300,899	18.29
Suncorp-Metway	28,922	2.80	45,345	2.76
Westpac²	279,161	27.01	379,917	23.09
Total (all banks)	1,033,458	-	1,645,204	-

Source: Australian Prudential Regulatory Authority, Monthly Banking Statistics, May 2011 www.apra.gov.au/Statistics/Monthly-Banking-Statistics.cfm (accessed 13 July 2011).

Notes:

1) Bankwest is a wholly owned subsidiary of the Commonwealth Bank of Australia.

2) Westpac includes all Westpac brands, such as St George Bank.

3) This figure includes the following categories of deposits as classified by APRA: non-financial corporations, financial corporations, general government, households, community service organisations and non-profit institutions, other deposit accounts and certificates of deposit. It may not correspond with the definition APRA employs for the purpose of Schedule 2 of the Bill if the Bill is passed.

4) Total resident assets refers to all assets on the banks' domestic books that are due from residents.

3.43 As shown by tables above, there is little variation between the market shares held in deposits compared to other activities. The tables also demonstrate that only the big four banks have a market share of over 10 per cent (of domestic transactions with residents), and that if two banks outside the big four were to merge, the consolidated entity would still have a market share below 10 per cent.

3.44 The Australian Bankers' Association, however, suggest that the Bill's definition of market share, being based on the proportion of total deposits, would capture foreign banks because the 10 per cent market threshold is not limited to Australian deposit liabilities. They state that it 'is not clear whether the capture of foreign banks was intentional'.[30]

Overstepping the 10 per cent threshold

3.45 Proposed subsection 9AF(2) would require that the section 9 authority for a bank which has a market share of more than 10 per cent must prohibit the bank from imposing an early termination fee in relation to certain products. Any subsidiaries that are 51 per cent or more owned by that bank would also have this condition imposed in its section 9 authority.

3.46 The phrasing of that subsection, and the use of terms in proposed subsection 9AF(1) such as 'relevant existing section 9 authorities' and 'any new section 9 authority granted ... to which this section applies' (emphasis added) appears to indicate that APRA is only required to amend the section 9 authorities of banks that currently have a market share of over 10 per cent, and impose conditions to give effect to proposed section 9AF if a new authority is issued to a bank that has a market share of more than 10 per cent.

3.47 If a bank which, at present, does not have a market share of above 10 per cent managed to pass that threshold without requiring a new section 9 authority, that bank may fall outside these provisions.

Extending the prohibition to subsidiaries

3.48 One submitter objected to the prohibition applying to subsidiaries that are majority-owned by the major banks:

The proposal in section 9 AF (3) states that where a bank which holds more than 10 per cent of market share has majority interest (51 per cent or more) in a subsidiary which is an ADI, then the ADI should also be prohibited from imposing an early termination fee. In my opinion this clause is going rather too far. The whole idea is to prevent banks from using market power. The subsidiaries may be operating in particular geographical areas and posing competition to providers in that area. It may put such a subsidiary at a disadvantage and will not create a level playing field in the geographical area. I wouldn't support this particular clause for that reason.[31]

Impact on non-ADIs

3.49 As the Schedule amends the Banking Act (which relates to ADIs—banks, building societies and credit unions), it does not directly relate to other providers of consumer credit.

3.50 Having a law which affects the products offered by some participants in a market, but not others, raises some fundamental issues. Allowing smaller ADIs and non-bank lenders to impose exit fees could damage their standing in the eyes of consumers:

Senator WILLIAMS—Would you have a problem if the exit fees on ADIs were removed but if that removal were not made compulsory for those ASIC companies, those non-ADIs, those smaller businesses? Would you have a problem if it were optional for the smaller businesses to keep those exit fees? Those smaller businesses have had a hard time. They did not get their deposits underwritten up to a million dollars and they had a lot of money withdrawn from their businesses as a direct result of the government underwriting the ADI companies. Would you have a problem if those smaller businesses had an option to leave their exit fees in place?

Mr Murphy—Even if you did that—and I do not think that is a good idea for a number of reasons—given the publicity and the issues about exit fees, people now, when they borrowed money, would be thinking that there would be no exit fees, I think. The government has given an indication that exit fees would be prohibited. If you tried to differentiate the market, I think you would find that consumers would discriminate against nonbank lenders if they had exit fees. So I think you have to have one rule for everyone.[32]

3.51 It is also not clear how much practical assistance the Schedule would provide to smaller lenders in helping them compete with larger banks:

I do not think you can have a hybrid half and half. If I [FirstMac] have suddenly got exit fees and the banks do not, that is all the banks are just going to advertise all day long. They have very deep pockets to advertise. We saw this when the crisis hit. There were a couple of large nonbanks that got into trouble when the crisis hit, and the banks came out straightaway and said, 'Oh, we’re not affected by the crisis. Nonbanks aren’t safe. Come and move your business to us'.[33]

3.52 The Australian Bankers' Association questioned whether allowing smaller lenders to charge exit fees, but not others, would actually support competition:

If ... all lenders with a market share of deposits less than 10% are permitted to charge mortgage exit fees, consumers are more likely to choose a lender that does not charge mortgage exit fees (large ADIs) than one that does. This may result in a further concentration of the mortgage market.[34]

3.53 The MFAA argued that the Schedule would:

... leave non ADIs subject to the regulation banning exit fees. Such a result would be unhelpful to non ADIs, the very lenders who were most negatively impacted on by the exit fee ban.[35]

3.54 Accordingly, the MFAA does not support Schedule as it is currently drafted:

A result which exempted the <10% ADIs and non-bank lenders would make more sense given the arguments around the impact of exit fees on competitive forces in the mortgage market.[36]

3.55 The MFAA also argue that, instead of prohibiting some lenders from being able to impose exit fees, and allowing others:

A better and cleaner position is that taken by ASIC’s RG 220 which allows such fees provided they are reasonable.[37]

3.56 This issue is examined further in chapter 4, which discusses the interaction between the Bill and the current ban on early termination fees imposed by the NCCP Regulations.

Need to amend the authorities of ADIs

3.57 As noted earlier, APRA is responsible for granting authorities to a body corporate for carrying on banking business. One of the reasons APRA may revoke a section 9 authority is if the bank fails to comply with a condition of its authority. An ADI is also guilty of an offence if it does or fails to do an act that results in a contravention of the ADI's authority (noting that at present, the conditions set by APRA must relate to prudential matters).

3.58 Section 31 of the National Credit Code deals with prohibited fees and charges. Currently, it simply states that the regulations may specify credit fees or charges or classes of credit fees or charges that are prohibited for the purposes of the Code. It is not clear why the matters targeted by this Bill could not be framed through an amendment either to section 31 of the National Credit Code, or another section of the Code, rather than the Banking Act. This would avoid making changes to Australia's prudential framework (a system that focuses on the stability of Australia's financial system, rather than consumer protection). Such an amendment could also have some other advantages such as making it clearer to consumers and businesses alike what entities and products are covered, as well as limiting the number of laws which are involved in exit fees specifically, and consumer credit matters in general.

3.59 However, none of the submissions to this inquiry queried this approach.[38]

3.60 A further issue may be whether the requirement for APRA to vary the conditions of relevant section 9 authorities within 30 days of the Bill receiving the Royal Assent is a sufficient period of time, particularly given the wide range of loans and services that will be captured. The Australian Bankers' Association point out:

... no transitional period is provided for the introduction of the reforms. It is not practical to expect credit provider's to immediately comply with the reforms and for APRA to vary all section 9 authorities under the Banking Act 1959.[39]

Administration and enforcement

3.61 APRA is responsible for the enforcement of matters associated with section 9 authorities issued under the Banking Act. However, as noted above, at present these authorities relate to prudential matters. Changing the nature of these authorities so they no longer exclusively deal with prudential matters would likely pose difficulties for APRA in terms of its usual responsibilities, and may conflict with APRA's purpose under the Australian Prudential Regulation Authority Act 1998 (APRA Act). Section 8 of that Act states:

(1) APRA exists for the following purposes:

(a) regulating bodies in the financial sector in accordance with other laws of the Commonwealth that provide for prudential regulation or for retirement income standards;

(b) administering the financial claims schemes provided for in the Banking Act 1959 and the Insurance Act 1973;

(c) developing the administrative practices and procedures to be applied in performing that regulatory role and administration.

(2) In performing and exercising its functions and powers, APRA is to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, is to promote financial system stability in Australia.

3.62 ASIC, on the other hand, has a broader purpose—it will 'administer such laws of the Commonwealth, a State or a Territory as confer functions and powers under those laws on ASIC'.[40]

3.63 As perhaps recognised by Schedule 1 to the Bill, it is ASIC that is responsible for the enforcement of consumer credit matters. APRA may not be well placed to monitor whether large banks had been charging early termination fees and were therefore breaching their section 9 authority. It is worth noting, however, that under section 15 of the APRA Act, any of APRA's functions can be delegated to ASIC if ASIC accepts.

Drafting issues

3.64 At first glance, the Bill appears to insert some inconsistent numbering into the Banking Act. Item 2 of Schedule 2 seeks to insert section 9AF after section 9. However, the numbering sequence currently is:

Section 9	Authority to carry on banking business
Section 9A	Revocation of authority
Section 9B	Bodies that cease to exist or change their names
Section 9C	Publication of list of ADIs
Section 10	APRA to be supplied with certain documents

3.65 The explanation can be found in the number of private members' and senators' bills currently before the Parliament which also propose to amend section 9 of the Banking Act by inserting new provisions.[41] However, if any of these bills were negatived or otherwise determined not to proceed prior to the consideration of this Bill, it may be desirable to amend this Bill to ensure the most appropriate section number is used.

3.66 Any change to the section number for the proposed section 9AF would also require a consequential change to the text in item 1 of Schedule 2 (because it refers to section 9AF).

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