What has happened?

The government has asked the Australian Competition and Consumer Commission to investigate mortgage rates, in particular the failure of the big four banks to pass on the full benefit of the Reserve Bank’s three interest rate cuts of 0.25% each, which took the cash rate to the historic low of 0.75%. The treasurer, Josh Frydenberg, said on Monday that “we need information about the cost of the funds of the banks and ... why they’re not passing on these rate cuts in full”.

What have the banks done that’s annoyed everyone so much?

The banks have only passed on three-quarters of the benefit, making many mortgage holders wonder why their rate still starts with the number three, or more likely four. Research by the money saving website mozo.com shows that the average variable rate available from the big four banks is 4.13%, as opposed to 3.6% from online lenders such as loans.com.au. It has led to accusations of gouging, especially when set against continued impressive profits of the big four which made total profits of nearly $30bn last year. In addition, the public still distrusts the banks in the wake of the Hayne royal commission and the sector has become a political target for Frydenberg as he tries to show he is not in the pocket of the big end of town.

So why haven’t banks passed on in full?

Low interest rates are very bad news for the banks. If the cash rate is 0.75% there is virtually no fat in the system and the banks can’t make as much profit as before. This is important because the big four are the mainstay of the country’s stock market, currently making up all but two of the top six most valuable companies on the ASX200. They consistently provide the bulk of dividends to shareholders and, crucially, the superannuation accounts of millions of Australians. With increased competition from online lenders and brokers such as CurrencyFair, the banks need to maintain profit margins in order to deliver to shareholders who, ultimately, do indirectly include most Australians.

Competition watchdog to examine banks' failure to pass on full interest rate cuts Read more

What is the ACCC going to do about it?

The chairman of the ACCC, Rod Sims, wants to make consumers more aware of the issues around mortgage pricing and therefore help them get a better deal. He has promised “to shed light on why banks make the decisions they make, how they make these decisions and that would only be a good thing for the economy”. In particular, he wants to hold banks more accountable for often catch-all statements about how they can’t lower rates because of higher funding costs. He also wants to empower consumers to switch banks if they think they’re being ripped off.

What can consumers do?

Exposing the way the industry works is a key component in Sims’ strategy and he clearly hopes people will start being proactive with banks, encouraging them to demand cheaper mortgages. The corporate watchdog, Asic, even has its own switching calculator. Personal finance experts are also keen to remind mortgage holders that it is easier to switch than ever before. “There is an idea that refinancing is complex and time-consuming,” says Kirsty Lamont of mozo.com.au. “But these days that is not the case. You can fill in an application in 10 minutes from the comfort of your home. The only face-to-face interaction would be a home valuation. The majority of people … are the perfect candidates to take advantage of lower online rates.” She estimates many people could save thousands of dollars by switching to online providers.

Haven’t we heard this before?

The ACCC has investigated mortgage pricing as recently as last year, reporting in December that the pricing system was opaque and discouraged people from shopping around. Sims spoke at the time about the need for people to demand a better rate, so in that sense it’s the same old story. But this new inquiry comes with the power to require the banks to produce documents such as emails and letters, and the ACCC can also subpoena witnesses under oath. The watchdog believes these legal powers will make it easier for it to get to the bottom of issues such as whether banks’ funding costs make it more difficult for them to pass on the full rate cuts.

OK, but do they have the power to force the banks to do something?

No, it can only make recommendations to the government. Hayne gave the banks a kicking and related compensation claims and disputes will continue to be a huge drag on the sector. But the oligopoly remains broadly intact and the banks have seen off any suggestions that they might be too big to fail and should be broken up. The Hayne commission was humiliating but not fatal for the big four and, in many ways, it’s back to business as usual. Frydenberg needs the banks to keep lending money in order to keep the moribund economy ticking along. He could force them to cut rates but he would surely stop short of legislating price controls. That would be a step too far for a Liberal treasurer.

So what will happen?

Tommy Do, a senior industry analyst at the market research firm Ibis World, said the banks were “unlikely” to pass on future rate cuts and the prospect of government intervention was remote. “The inquiry is more likely to introduce more competition for the banks and more transparency across the industry. It’s a challenging situation for the banks with such a low-rate environment because profits face a further squeeze.” He highlighted the other side of the banking equation – rates for savers – which banks were keen to maintain as high as possible, meaning there was extra incentive not to pass on rate cuts. “It’s difficult for banks to cut deposit rates. Banks rely on domestic deposits for 60% of their capital and if banks cut their deposit rates investors are going to take their money elsewhere such as overseas. That’s bad for the economy – like an export of capital.”