Minority report by Senator Nick Xenophon

1.1        The Consumer Credit Protection Amendment (Fees) Bill 2011 was introduced in response to the Government's decision to ban all exit fees.

1.2        While the removal of exit fees by the Government was on the surface a good one, the blanket ban approach means that non-bank lenders have in fact been the most significantly affected, and this has the serious potential to impact competition in the banking sector in the long term.

1.3        Non-bank lenders have higher costs associated with raising funds and, while for the Big Four banks administrative costs can be absorbed through other parts of their business, smaller lenders are unable to do the same.

1.4        Indeed, banking analysts Canstar Cannex has said that:

The impact of the ban on deferred establishment fees, or early exit fees, will be keenly felt by non-bank lenders. In a cruel irony for customers, this move touted by the Government as increasing home loan competition is likely to result in the exact opposite. Non-bank lenders will have no option but to raise interest rates or, in extreme cases, exit the home lending market altogether.

1.5        Put simply, banning exit fees will have the effect of reducing mortgage competition by destroying the non-bank lending sector, meaning that interest margins on mortgages will rise over time.

1.6        Non-bank lenders are vital to competition. They have historically offered lower interest rates, which they have been able to do in some part through the application of exit fees, and in this way they offer an alternative banking option to Australian consumers.

1.7        Unfortunately the Government's blanket ban may result in non-bank lenders being forced out of the mortgage market, reducing competition and ultimately consumer choice.

1.8        Under the provisions of this Bill, any fees imposed by any financial lender must be reasonable against the material cost to the lender. This is to require that there is a basic test that can be applied against all lenders to ensure there inappropriate fees are not imposed on consumers.

1.9        The Bill subsequently provides that that those institutions with a market share of greater than 10 percent not be allowed to charge exit or early termination fees for any loan agreement or mortgage contract.

1.10      This prohibition will also apply to any subsidiary company or organisation which is owned 51 percent or more by a bank with more than ten percent market share. That is, a financial subsidiary which is effectively an extension of one of the major banks will also be prohibited from charging exit or early termination fees.

1.11      This will ensure that only small, independent financial organisations will be able to apply reasonable fees to enable them to effectively compete against the major banks.

1.12      Ultimately these provisions are intended to support smaller lenders who are vitally needed to ensure competition in the banking sector.

1.13      There is no question that there are concerns about exit fees. This Bill addresses those concerns by requiring any fee to be reasonable, but doesn't penalise smaller lenders who need to be able to apply reasonable fees in order to remain in the mortgage market.

Recommendation 1

1.14      That the Bill be passed with appropriate technical amendments.

 

Senator Nick Xenophon

Independent Senator for South Australia

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