Experts warn banks will come under pressure to scrap exit fees, but ASIC enforcement still required

Experts say major banks will be under pressure to scrap their exit fees now, following ANZ’s decision to remove its own penalty charges, combined with the release of guidance for mortgage lenders by the Australian Securities and Investments Commission.

The developments come as the entire banking industry is under fire, with politicians and industry representatives slamming lenders for exit fees, along with shots fired at ANZ for raising its variable mortgage rate by 39 basis points.

The decision comes a week after the Commonwealth Bank raised its own lending rate by 45 basis points. NAB and Westpac are yet to make a decision on their own rates.

Melbourne University legal professor Ian Ramsay, who released research earlier this year showing some exit fees charged by lenders may actually be illegal, says ANZ’s decision is a step forward for competition and banks will now be under more pressure to scrap their own.

However, he also warns these fees may reappear and ASIC must remain vigilant.

“I think this is a positive step forward for consumers. Our research showed earlier this year that exit fees could be anticompetitive, especially because these fees range in size and are not transparent in a number of cases,” he says.

“I do believe that banks will be under pressure to remove their own fees now that ANZ has removed theirs. I also think ASIC’s decision to release guidance is also a great decision.”

ANZ announced the move yesterday, with chief executive Philip Chronican challenging other banks to make similar announcements.

“If they don’t, we’re prepared to provide some recompense to other banks’ customers to come to us,” he told AAP yesterday.

ANZ will provide $1,000 to new customers wanting to switch to a three-year fixed rate. Its $700 deferred establishment fee will be scrapped. Loan approval fees for three-year fixed rate mortgages will be scrapped as well, the company said.

But the announcement came as ASIC released a document yesterday outlining guidance for mortgage lenders on exit fees, promising to crack down on unruly lenders justifying high exit fees above and beyond the actual amount needed to recoup losses.

In the documents, ASIC reminds lenders that as of July 1, 2010, the new consumer credit laws allow ASIC to take actions against lenders if they charge an early termination fee that is “unconscionable” or unfair.

ASIC says an exit fee may be unfair if it causes a significant imbalance in the parties’ rights, and warns that banks should not take more funds than necessary to recoup a loss.

“A fee or charge payable on early termination, or for pre-payment of an amount under a loan, is unconscionable if a court determines the fee or charge exceeds a reasonable estimate of the lender’s loss arising from the early termination or pre-payment (including their average reasonable administrative costs for such a termination or pre-payment).”

The documentation comes after treasurer Wayne Swan has indicated that the Government will look to scrap exit fees as part of a banking reform package.

ASIC also warns that it is more likely to take action against fees if they include components for a recovery of loss of profits that would have been gained if the loan had been completed, marketing costs and other costs associated with new features.

The documentation also makes a number of recommendations regarding proper disclosure of early termination fees, saying that “lenders should explain early termination fees as transparently as possible”.

Ramsay says his earlier study found this to be a problem, as many lenders would hide these fees away and in some cases would not disclose the actual amount, which in some cases ran above $10,000.

“This is a great announcement, it provides guidance on the sorts of things that are important, like the estimate of a reasonable loss. Many of these feeds are hidden, and are not transparent, and these banks need to be up front.”

The Australian Bankers’ Association has also said it expects large lenders to come under pressure and will need to review their existing mortgage fee structures as a result of ASIC’s release.

However, chief executive Steven Münchenberg says ASIC is defining costs too narrowly, arguing that certain components such as marketing costs and product development are perfectly valid.

“Also, ASIC is limiting the ability of lenders to recover any increased costs that occur after the loan has been taken out,” he said in a statement.

But Ramsay warns ASIC needs to be watching out for the swapping of fees, as banks may choose to introduce new charges to replace old exit fees.

“They need to be on the lookout for that, with the banks perhaps choosing to charge fees elsewhere. I also think there is an issue around how you can define a reasonable loss, and there are still some unknowns around that. I would hope ASIC addresses that.”

Ramsay warns that ANZ will still come under pressure in the upcoming banking inquiry despite its latest decision, along with the other lenders which are yet to scrap their fees.

“I should say that our research found that ANZ was far from the top in terms of fees, but the banks have come under significant pressure over the years because of these fees, and it’s come to a head now.”

“The law for some years has said that consumers should only be charged for an exit fee what is a reasonable estimate of the loss, but there hasn’t been acceptable enforcement of that. Now that is beginning to change.”

But while politicians welcomed ANZ’s decision, both Prime Minister Julia Gillard and treasurer Wayne Swan blasted the lender for raising rates by 39 basis points to a variable rate of 7.8%.

“I believe Australians are angry enough that they will be looking again at the conduct of their own bank and judging what they should do next based on that conduct,” Gillard said from the G20 summit in South Korea.

Opposition treasury spokesman Joe Hockey told ABC the bank’s decision to raise rates is an indication the Government does not have the economy under sufficient control.