Condemnation of Banks' dishonesty by the Federal Court
'Let's hope banks withdraw nasties' Noel Whittaker The Sunday Mail 10/12/17

AT LAST the Government has succumbed to pressure for a royal commission into the banks, and has added some other financial institutions, such as superannuation funds, into the mix for good measure.

Whether a royal commission is needed has been a topic of much debate, and while I have long been on the "No" side, comments by Justice Jayne Jagot in the Federal Court in October must give us cause for serious concern. As a consequence of that case, NAB and ANZ entered into enforceable undertakings with ASIC, after the Federal Court accepted a $50 million settlement with both banks for manipulation of the bank bill swap rate.

Condemnation
The learned judge said the banks' conduct involved "gross departures from basic standards of commercial decency, honesty and fairness".

"It is difficult to convey the seriousness of what the attempts to manipulate the bank swap rate involved," she said. "The public should be shocked, dismayed and, indeed, disgusted that conduct of this kind could have occurred."

Strong words indeed, and given the wide scope of the royal commission's terms of reference, and the relatively short time frame allowed, it may be unrealistic to expect too much of a change in banking culture. But I can think of at least three areas that are crying out for change.

First is the shameful practice of increasing the interest rate on your loan if you start having trouble making the repayments. It is known as "default interest", and the rate is usually shown near the top of your loan statement. The banks argue that they do this because a loan becomes more risky if it gets into arrears. But this ignores the fact that most loans are mortgage-insured, which protects the bank from loss in case of foreclosure .

The average Australian goes into a loan with the intention of paying it back on time, both to save interest and to maintain their credit rating. Yet the banks are happy to give anybody who gets into arrears a kick in the guts by raising the interest rate -a classic example of a charge that exists just to improve the banks' bottom line.

Another area begging for reform is mortgage insurance, which is usually required if the borrower has less than a 20% deposit. It has a once-only premium that varies from bank to bank and can often be negotiated if the bank is keen to get the business.

The premium also varies depending on the purpose and amount of the loan. For first home buyers borrowing $460,000 for a $500,000 house, the premium would be about $16,000, including stamp duty.

The problem with mortgage insurance is that the loan policy is not transferable. Therefore, anybody with less than 20% equity in their home would find it prohibitively expensive to change banks to get a better deal, as they would be required to pay another "once-only" premium. This is despite the fact there are just two institutions offering mortgage insurance, so the hapless borrower could be paying another premium to the same organisation to which they already paid the original one.

Last but not least, interest rates charged on credit cards are outrageous, as is the way the system works.

Despite interest rates being at historic lows, and the cash rate remaining unchanged at 1.5% for the past 16 months, most credit cards are still charging interest of between 18% and 20% on outstanding balances.

To make matters worse, you are charged interest on the entire balance if the debt at the end of the month is not paid off in full. This is a system that favours no-one but the banks.

These are just three examples that have long been in the forefront of my mind. No doubt the inquiry will bring to light many more. Let's hope the outcome is a better banking system for all of us.

Noel Whittaker's advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au