The federal government has recently announced some substantial
changes to banking regulation. The government anticipates greater
protection for borrowers and greater competition for lenders. Two
of the most significant changes are the banning of mortgage exit
fees and the end of the prohibition on Australian
deposit-taking institutions (ADIs)
issuing covered bonds.
Banning mortgage exit fees
The National Consumer Credit Protection Amendment Regulations
2011 became law on 23 March 2011. These regulations amended the
National Consumer Credit Protection Regulations 2010 by banning
lenders from imposing 'back-end' charges payable on termination of
home loans entered into after 1 July 2011, such as deferred
establishment fees or early termination fees. The banning of exit
fees further extends previous federal amendments in 2009 requiring
lenders to advertise comparison rates.
This is not a blanket ban and it only applies to loans secured
by residential property. The ban is limited to credit fees or
charges and does not cover break fees for early repayment of
fixed-rate loans or discharge fees that cover reasonable
administrative costs of terminations. Crucially, it only applies to
loans entered into after 1 July 2011.
The federal government has high hopes that these amendments will
increase competition in the home loan market and enhance
transparency by allowing borrowers to discern from the outset what
the best deal is. The government anticipates that this increase in
competition will drive down interest rates as lenders attempt to
attract borrowers. Accordingly, borrowers could stand to benefit in
a 'big picture' way and it already seems to have generated
competition, with major banks launching massive advertising
campaigns in an attempt to woo consumers. Unfortunately, it is
difficult to know what practical effect this will have because many
ADIs have already applied to ASIC for exemptions.
These reforms will affect different lenders in different
ways.
If you are a lender who does not rely on mortgage exit fees,
these amendments will provide an excellent marketing opportunity.
You will not need to raise other fees or interest rates to recoup
lost revenue. Your institution will appear stable and attractive
when compared to lenders that will have hiked up their fees in
response to the amendments, inspiring consumer confidence.
However, these amendments may strike a blow to the reputation of
lenders relying heavily on home loan exit fees. They will have to
raise other fees, charges and interest rates to remain profitable,
which may make them appear unstable and mean-spirited. It will seem
particularly distasteful because borrowers entering into home loans
before 1 July 2011 will be stuck with the higher rates and charges
and still be liable for exit fees.
Thus, lenders that are competitive without having to rely on
back-end charges stand to prosper under the new regime. Conversely,
lenders who rely heavily on revenue from mortgage fees look set to
receive bad press when they have to raise other fees.
Covered bonds
Under the federal government's draft Banking Amendment (Covered
Bonds) Bill, published on 24 March 2011, Australian banks, credit
unions and building societies will soon be able to issue covered
bonds. Covered bonds are subject to the asset coverage test; the
asset pool relating to the bond must at all times be equal to the
amount outstanding of the bonds. The draft regulations require ADIs
to appoint a cover pool monitor, whose job is to ensure the asset
pool is at all times larger than the debt. Covered bonds are common
in Europe, but have so far been prohibited in Australia. The
Australian Prudential Regulation Authority (APRA)
had previously prohibited issuing such bonds because it would
contravene the Banking Act by conflicting with depositor protection
standards; depositors must be placed above all other creditors in
claims for assets.
This is a significant change for the banking sector, but the
ability to issue covered bonds will be limited. ADIs cannot issue
more than the equivalent of 8 per cent of the issuer's total assets
in covered bonds. Further, in certain situations, APRA can order
ADIs not to issue such bonds. APRA can also impose additional
requirements or limitations on issuance.
Authored by Georgia Hunt, Cornwall Stodart