Craig Thomson (Dobell, Australian Labor Party) Share this | Link to this | Hansard source

On behalf of the Standing Committee on Economics, I present the committee’s report entitled Competition in the banking and non-banking sectors, together with the minutes of the proceedings.

Ordered that the report be made a parliamentary paper.

by leave—Competition within the mortgage market has grown considerably since financial deregulation in the 1980s. In particular, the entry into the market of non-bank lenders and overseas financial institutions has resulted in greater competition, lower interest rates and margins, and an increase in mortgage products.

In August 2007, the collapse of the US subprime mortgage market disrupted wholesale funding markets around the globe, making it extremely difficult for lenders to access funding as well as undermining consumer confidence. During September 2008, the upheaval in financial markets escalated with large falls in equity prices and severe volatility across financial markets. As a consequence, a number of governments implemented financial stability packages in an attempt to stabilise their financial systems.

During the past year there has been a noticeable increase in interest rates which can be attributed to increases in the official cash rate and the cost of funding. Between January and September, Australia’s four largest banks increased their interest rates by an average of 100 basis points, of which 50 to 60 points were raised independently of the Reserve Bank of Australia’s official cash rate. There has also been a reduction in the number of institutions offering home loan products.

Early in the year the rise in interest rates, combined with increasing petrol and grocery prices, put Australian households under financial pressure. Fortunately between September and November, the Reserve Bank of Australia reduced the official cash rate by 200 basis points to 5.25 per cent and the world price of oil is currently falling. The banks have passed on most of this rate cut but not all. For commercial rates to fall further the cost of funding needs to decrease and competitive pressures within the marketplace need to be more effective.

The non-banking sector, which has primarily used securitisation as the main source of funding, has found it particularly difficult to remain competitive in the current financial conditions. This has resulted in a decrease in competitive pressure within the banking and non-banking sectors.

The government is currently taking positive steps to increase liquidity both for the banking and non-banking sectors. There is still some uncertainty as to how long the recent downturn in the global financial market will last and the government should therefore continue to monitor market developments.

The committee has also recommended that the government examine a range of other proposals that could provide additional liquidity, including expanding the RBA’s repurchase agreements by extending their term to maturity even further and allowing authorised deposit-taking institutions to issue covered bonds.

In addressing matters relating to the state of competition, the committee received evidence on a range of other issues. I would like to highlight two of these issues for you now.

Some concerns were raised with the committee regarding whether the current mechanisms were adequate to monitor the state of competition within the banking and non-banking sectors. The committee therefore recommended that government review the current adequacy of the Trade Practices Act to provide the Australian Competition and Consumer Commission the powers to investigate and address issues of concern in markets and regulated sectors.

Making it easier for a customer to switch between providers is an obvious way to improve competition. The switching rate in Australia’s transaction account market is approximately three percent. This represents about half that of the United Kingdom and is well below that of the European Union average. The committee acknowledges and supports the work undertaken by the government and industry to arrive at a switching package. The committee has recommended that the government review the account-switching package in 12 months time and that consideration be given to including card schemes in the package.

To promote a more efficient sector and enhanced consumer protection for borrowers, the report contains several additional recommendations including that:

• the government implement the findings of the Australian Law Reform Commission’s report recommendations on reforming Australia’s credit reporting system;
• the government consider mechanisms for making entry and exit fees more transparent and for addressing unfair entry and exit fees;
• the government consider the feasibility of regulating unsolicited credit card limit increases;
• the Australian Securities and Investments Commission includes a glossary of standardised financial terms and Treasury develop a standardised key facts document for mortgage products to help consumers to compare financial products; and
• the government make it compulsory for all credit providers to be a member of an external dispute resolution scheme approved by ASIC.

On behalf of the committee, I would like to thank all of the organisations and individuals who participated in this inquiry. I would also like to place on record my thanks to the secretary of the committee, Mr Boyd, and his staff for the work that they undertook during this inquiry. I commend the report to the House.

Kevin Andrews (Menzies, Liberal Party) Share this | Link to this | Hansard source

by leave—I join with the Chair of the House of Representatives Standing Committee on Economics, the member for Dobell, in commending the recommendations of this report to the House. This inquiry and the report which flows from it, Competition in the banking and non-banking sectors, which has been tabled today, is both timely and important given the developments in the financial markets and in financial regulation over the past few months, both here in Australia and overseas.

The reality is that the global financial crisis has affected Australia. In the first instance there was a dramatic loss of liquidity in the market for residential mortgage backed securities—securitisation products. This was because these products were tarred with the same brush throughout the world irrespective of the quality of the securities. The subprime issue originated in the United States, where more than 15 per cent of loans were subprime. People who could not afford to borrow were overextended. Securitisation products in the US packaged a number of loans, both good and bad, but the market collapsed because of the loss of confidence following dramatic falls in home prices in the United States, which unfortunately left many defaulting loans. As an example, during the boom, people were being assessed for creditworthiness on their ability to pay a honeymoon rate of 0.5 per cent rather than the normal rate of around 5.5 per cent.

Part of this problem flows back to what undoubtedly was a noble intention some years ago to try and increase the homeownership rate, particularly of poorer people in the United States. But one of the unintended consequences of that was that, when these problems arose, the reality was that many people were unable to repay loans and simply returned to the keys to the lenders, as they can do in the United States. Fortunately, in Australia our subprime level is well below one per cent. Yet liquidity in the residential mortgage backed securities dried up—hence the providers of such products either fell over or were bought out. This has led to a contraction in the number of providers of home and other loans, and hence there has been a reduction in competition.

The reality is that Australia’s financial sector is well regulated and relatively strong on any global or international comparison. However, there are a series of recommendations which the committee has made in order to further strengthen that system of regulation in Australia—for example: that the government review the current adequacy of the Trade Practices Act to extend the Australian Competition and Consumer Commission’s powers, that the government implement the findings of the Australian Law Reform Commission report recommendations on reforming Australia’s credit reporting system, that the government review the account-switching package in 12 months time and that consideration be given to including card schemes in the package, and also that the government consider mechanisms for making entry and exit fees more transparent and address unfair entry and exit fees, giving consideration to the feasibility of regulating unsolicited credit card limits. There are also a series of other recommendations.

One thing that the committee did not recommend was the adoption of an Aussie Mac model in Australia, along the lines of the two mortgage instruments in the US. I think one of the reasons for that is not just what has happen-ed with them in recent years but that, otherwise, Australia has a well-regulated market.

The ultimate guarantee, of course, in terms of people being able to repay their loans is for them to have a job. If people have a job, if there is full employment in the count-ry, then generally people are able to con-tinue to meet their obligations to pay off their home mortgages. They become stressed when they lose their jobs, and that is where the threat of default is most acute. In this context, the government guarantee is important at present, while we are still in the midst of this financial crisis, but it should not be on-going. It must be terminated in due course, when we are over the current difficulties so far as Australia is concerned. In conclusion, I join with the chairman of the committee, as the new deputy chair of the committee, in com-mending the report to the House and the recommendations contained in it to the government.

Bruce Scott (Maranoa, National Party) Share this | Link to this | Hansard source

Does the Member for Dobell wish to move a motion in connection with the report to enable it to be debated on a future occasion?

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

I move:

That the House take note of the report.

In accordance with standing order 39(c), the debate is adjourned. The resumption of the debate will be made an order of the day for the next sitting.