Senate Committee says banks should abolish exit fees on variable loans

A Coalition-dominated Senate Committee inquiry into small business access to finance says banks should abolish exit fees on variable small business loans to encourage greater competition in the sector.

The Committee says the banks should move to eliminate the exit fees voluntarily. If the banks do not do so by the end of 2010, the Government should put in place guidelines, or if necessary legislation, to force the bank’s hands.

“Exit fees are not the only factor reducing switching between banks, but this is no justification for maintaining this impediment to competition,” the Committee’s report says.

“While there are valid arguments for some exit fees on fixed-rate loans, no convincing justification has been put forward for exit fees on variable-rate loans. It is not a sufficient response to say that excessive exit fees may be challenged in the courts. This is too expensive and risky an option for a small business.”

However, Australian Bankers Association chief SteveMünchenberg has disputed the recommendation.

“Price controls on fees create market distortions and usually have the effect of disadvantaging the very customers the lawmakers are intending to help. A competitive market works so that downward pressure on fees remains but regulation can result in adverse consequences for customers.”

“Early exit fees on loans 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.”

The Committee found that lending to small businesses had fallen in the wake of the GFC, partly as a result of lower demand for credit and tighter lending criteria from banks and other financiers.

As well as recommending the abolishment of exit fees on variable loans, the committee also recommended other measures aimed at protecting competition in the banking sector, including the continuation of the Government’s “four pillar” policy and annual reporting into the state of competition in the market, to be conducted by the ACCC and APRA.

Another recommendation picked up an a suggestion from CPA Australia, which put forward a proposal to develop and code of conduct for banks that would govern their dealings with small business.

Under the CPA Australia suggestion, developed from similar codes overseas, banks would need to provide SMEs applying for credit with directions on how to do this, and explanation of the security and documentation required in a loan application and an estimate of the time it will take to process.

CPA Australia head of policy Paul Drum said it was encouraging to see the Committee had endorsed its suggestion and said his organisation would seek to talk to the Australian Bankers’ Association about the development of a Code.

SteveMünchenberg says the current Code of Banking Practice does cover small businesses but says the organisation is “currently completing some analysis to understand whether the Code does or does not cover the lending issues discussed in the report.”

As the Committee inquiry was sponsored by the Coalition, the Government is unlikely to pick up on any of the suggestions.