Ross Greenwood speaks to Former ACCC Chairman Professor Allan Fels as the competition watchdog has set its sights on a gap between mortgage rates offered to new borrowers and higher rates charged to existing customers.
Ross Greenwood: What is the price of loyalty? Now, if you’re loyal to anybody, anything, I know your dog. Maybe your dog likes it. Your kids. They like loyalty, your partner, definitely, but when it comes to your bank, no. In actual fact they really like your loyalty but they, if you’re like the synonym between loyalty in a banker’s mind, is the word lazy? In other words, you can’t be bothered you’re too busy to actually get out and cut a deal.
In other words, I actually would prefer you to be a disloyal customer especially if you want to get a better deal. What always beggared belief to me, is it banks and other financial institutions spend so much money attracting new customers to try and get you with the latest, hottest deal to come in and see them and do a deal with them. That if they actually spend a fraction of that money looking after their existing customers, they wouldn’t need to attract all the new ones, who these days are encouraged to go and look elsewhere and not be loyal to them.
That’s the way it is right now. The ACCC has indicated that it’s prepared to look at this issue of loyalty and also the penalty for that loyalty to either an electricity company, a big institutional utility or a bank. One person who knows about this is the author of a book called Tough Customer: Chasing a Better Deal for Battlers is Professor Allan Fels, the former Chairman of the ACCC, who joins me now. Allan, many thanks for your time.
Interview with: Alan Fels, Former Chairman, ACCC
Allan Fels: Thank you Ross.
Ross Greenwood: All right. Now you’ve been instrumental in all of this, because you in the past, have looked at the whole insurance industry and you have really focused on this premium that loyal customers pay simply because they don’t get out there and shop for a better deal. Is the ACCC onto something here?
Allan Fels: Yes, it is. Most customers just don’t know. Typically, if we started with insurance, the difference between what you pay year 1 and year 2 is about 30%. Unless you know, you won’t know because you’re not told what you paid last year. They’ve just been required to tell you but it’s the same problem with banks. The difference is about 0.3 even 0.4 of an interest rate. That would be for the average loan about $850 a year. Over the life of a product you would be up in the tens of thousands of dollars.
Ross Greenwood: Why is it then that consumers don’t call this out? Why is it that people, we know the banks still even today, have more than 80% share when it comes to deposits and 80% share when it comes to home lines. This is the four big banks. Why is it the people just don’t understand this as better and push themselves out the smaller institutions. If I’m lending money, I am the risk not the lender. Why wouldn’t we actually go out there and have somebody else take a risk on us?
Allan Fels: Well, it’s not easy to switch. It’s not easy to find out in general, what alternative rates there are because it tends to be done on a one-by-one basis. Even if the 20% of people or so, who do that shopping around, most of them only go to one other place because you only find out what you’ll get if you inquire. If you follow the headline rate, you don’t look any better off. You have to apply for a loan and be given a quote. That’s a lot of trouble, a lot of nuisance.
Ross Greenwood: Also, one of the problems these days Allan, I would have thought post the Royal Commission and giving the more stringent lending standards of many of these lenders, a lot of people might be a little resistant to try and change lenders only because they might find more onerous conditions or indeed that the potential new lender simply won’t accept their risk and won’t accept their business.
Allan Fels: Yes, I think that’s a very, very valid point. Anyway the result is that if you’re the bank, you don’t have to compete. You don’t have to go around making special offers to establish customers.
Ross Greenwood: That case, where is the role of the mortgage broker in all this, because mortgage brokers now have getting close to 60% market share when it comes to writing new loans. Given the fact that the big banks still have 80% of all of the mortgages, that gives me a hint, at least anyway that the mortgage brokers are in the majority, writing loans with the big banks. Where is their role as the honest broker to try and make certain that the very best deal is done for the individual.
Allan Fels: Well you’re right on to a point there. They’re not on the side of the customer. They tend to be on the side of the bank. They’re not doing the job that they should and that we expect of them.
Ross Greenwood: That being the case, one other thing that strikes me here, is this is to a certain extent getting into the realm of ASIC and/or APRA’s prevail, do you believe that maybe the ACCC may be a more effective regulator when it comes to trying to police the banks and their behavior in as much as taking them to court, doing things given the criticism of, in particular, ASIC but also APRA in the Royal Commission for not having been vigorous enough in pursuing the major financial institutions?
Allan Fels: There’s no question there ACCC would do it better. In 1998, the Wallis Inquiry actually recommended that the ACCC should at least have the same powers, concurrent powers with financial institutions as does ASIC because it was a far more effective regulator. That was fought off by really heavy lobbying by the financial institutions.
Ross Greenwood: You think that might be time to change again. Maybe this is one small hint that Rod Sims, the chairman of the ACCC is just showing that he does have a, a few muscles and he’s prepared to use them.
Allan Fels: Yes, I think they’re better, he’s right and not only they have got more willpower to do these things but I think they’re better at litigation. They’ve been involved in tough cases much longer. They tend to have a fairly good record in the courts.
Ross Greenwood: There you go. Allan Fels is the former Chairman of the ACCC and the author of the book Tough Customer: Chasing a Better Deal for Battlers. Of course, also was the man who called out the whole issue about increases in insurance fees. That was going back earlier this year. Allan, always great to have you in the program. Appreciate your time.
Allan Fels: Thank you Ross. Good.
Ross Greenwood: Allan Fels there. We’ll take your calls in this, 131873 is really important about trying to cut a better deal, what you have to go through, whether it’s worthwhile. On top of that also, I just think that it’s a situation whereby tougher action is needed.
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