ASIC to crack down on excessive exit fees under new laws

The Australian Securities and Investments Commission will now have the power to chase banks charging excessive mortgage exit fees, the Government announced yesterday.

The announcement comes just days after two Melbourne University legal experts published a paper in which they claim the current use of exit fees may actually be illegal, and massive reform is needed to bring them down.

Deputy prime minister Wayne Swan and financial services minister Chris Bowen announced the changes yesterday, saying borrowers will now find it easier to switch to a rival bank offering a cheaper rate.

“From July 1, 2010, ASIC will have the power to take action against any bank if they charge an early exit fee which is considered unfair or unconscionable to a consumer. Consumers will also be able to challenge early exit fees that are unfair or unconscionable.”

The provisions for ASIC’s new powers are contained in two new consumer protection laws. The laws also include the possibility for ASIC to chase banks relabelling their exit fees as entry charges.

“If any bank seeks to simply re-badge their current mortgage exit fees as upfront entry fees, ASIC will have the power to pursue the bank if it appears that the fee is ‘unconscionable’ under the National Credit Code.”

“ASIC is most likely to take action against banks which try to profit from exit fees or establishment fees – rather than fees which merely recover a fair level of costs.”

Any mortgage exit fee found to be unfair by a court will then be declared completely void, Swan said. ASIC will then be able to chase refunds on behalf of customers if that fee has already been paid.

However, the laws only apply to new mortgages after July 1. Customers paying fees on existing mortgages taken out before that date will still need to pay.

The Australian Bankers’ Association isn’t happy with the new laws. Chief executive Steven Munchenberg said in a statement that Australia has low entry fees for mortgages, compared to the US and Britain, meaning it is actually cheaper to get a mortgage here than overseas.

“Early mortgage exit fees can include the bank’s unrecouped costs associated with the establishment of the loan. Exit fees may also include the credit provider’s average administrative costs and any loss to the credit provider arising from the early termination.”

“For example, a credit provider may agree not to charge the full loan establishment costs at the start of the loan on the basis that it may recoup those costs if the loan runs beyond a certain term.”

But NAB chief executive Cameron Clyde said the new laws provided scope for greater competition, and puts power in the hands of consumers to switch mortgages if they feel there is a better deal available.

“If these new laws banning unfair mortgage exit fees encourage greater competition and give Australians more power to walk down the road and find a better deal for their mortgage then that’s a great thing for all Australians.”

“It will be good for competition, good for bank customers and good for those lenders, like NAB, who have been willing to offer the most competitive interest rates.”