The Housing Boom Is “Officially” Over – The Property Imperative 07 Apr 2018

Welcome to the Property Imperative Weekly to 07 April 2018.

Watch the video, or read the transcript.

In this week’s digest of finance and property news, we start with Paul Keating’s (he of the recession we had to have fame), comment that the housing boom is really over at the recent AFR conference.

He said that the banks were facing tighter controls as a result of the Basel rules on capital adequacy, while financial regulators had had a “gutful” of them. This was likely to lead to changes that would restrict the banks’ ability to lend. He cited APRA’s recent interventions in interest only loans as one example, as they restrict their growth. Keating also said the royal commission into misconduct in the banking and financial services sector would also “make life harder” for the banks and pointed out that banks did not really want to lend to business these days and would “rather just do housing loans”. Finally, he spoke of the “misincentives” within the big banks to grow their business by writing new mortgages, including having a high proportion of interest-only lending.

Anna Bligh speaking at the AFR event, marked last Tuesday her first year as CEO of the Australian Banking Association (ABA) – but said she feels “like 500 years” have already passed. Commenting on the Royal Commission she warned that credit could become tighter ahead. The was she said an opportunity for a major reset, not only in how we do banking but how we think about it, its place in our lives, its role in our economy and, most of all, it’s trustworthiness”.

At the same conference, Rod Simms the Chair of the ACCC speech “Synchronised swimming versus competition in banking” He discussed the results of their recent investigation into mortgage pricing, and also discussed the broader issues of competition versus financial stability in banking. He warned that the industry should be aware of, and respond to, the fact that the drive for consumers to get a better deal out of banking is shared by many beyond the ACCC. Every household in Australia is watching.  You can watch our video blog on this for more details.

He specifically called out a lack of vigorous mortgage price competition between the five big Banks, hence “synchronised swimming”. Indeed, he says discounting is not synonymous with vigorous price competition. They saw evidence of communications “referring to the need to avoid disrupting mutually beneficial pricing outcomes”.

He also said residential mortgages and personal banking more generally make one of the strongest cases for data portability and data access by customers to overcome the inertia of changing lenders.

Finally, on competition. he says if we continue to insulate our major banks from the consequences of their poor decisions, we risk stifling the cultural change many say is needed within our major banks to put the needs of their customers first. Vigorous competition is a powerful mechanism for driving improved efficiency, and also for driving improved price and service offerings to customers. It can in fact lead to better stability outcomes.

This puts the ACCC at odds with APRA who recent again stated their preference for financial stability over competition – yet in fact these two elements are not necessarily polar opposites!

Then there was the report from the good people at UBS has published further analysis of the mortgage market, arguing that the Royal Commission outcomes are likely to drive a further material tightening in mortgage underwriting. As a result, they think households “borrowing power” could drop by ~35%, mainly thanks to changes to analysis of expenses, as the HEM benchmark, so much critised in the Inquiry, is revised. Their starting point assumes a family of four has living expenses equal to the HEM ‘Basic’ benchmark of $32,400 p.a. (ie less than the Old Age Pension). This is broadly consistent with the Major banks’ lending practices through 2017. As a result, the borrowing limits provided by the banks’ home loan calculators fell by ~35% (Loan-to-Income ratio fell from ~5-6x to ~3-4x). This leads to a reduction in housing credit and a further potential fall in home prices.

Our latest mortgage stress data, which was picked by Channel Nine and 2GB, thanks to Ross Greenwood, Across Australia, more than 956,000 households are estimated to be now in mortgage stress (last month 924,500). This equates to 30.0% of households. In addition, more than 21,000 of these are in severe stress, no change from last month. We estimate that more than 55,000 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA are higher at 4.9 basis points.  Flat wages growth, rising living costs and higher real mortgage rates are all adding to the burden. This is not sustainable and we are expecting lending growth to continue to moderate in the months ahead as underwriting standards are tightened and home prices fall further”. The latest household debt to income ratio is now at a record 188.6. You can watch our separate video blog on this important topic.

ABS data this week showed The number of dwellings approved in Australia fell for the fifth straight month in February 2018 in trend terms with a 0.1 per cent decline. Approvals for private sector houses have remained stable at around 10,000 for a number of months. But unit approvals have fallen for five months. Overall, building activity continues to slow from its record high in 2016. And the sizeable fall in the number of apartments and high density dwellings being approved comes at a time when a near record volume are currently under construction. If you assume 18-24 months between approval and completion, then we still have 150,000 or more units, mainly in the eastern urban centres to come on stream. More downward pressure on home prices. This helps to explain the rise in 100% loans on offer via some developers plus additional incentives to try to shift already built, or under construction property.

CoreLogic reported  last week’s Easter period slowdown saw 670 homes taken to auction across the combined capital cities, down significantly on the week prior when a record number of auctions were held (3,990). The lower volumes last week returned a higher final clearance rate, with 64.8 per cent of homes selling, increasing on the 62.7 per cent the previous week.  Both clearance rate and auctions volumes fell across Melbourne last week, with only 152 held and 65.5 per cent clearing, down on the week prior when 2,071 auctions were held across the city returning a slightly higher 65.8 per cent success rate.

Sydney had the highest volume of auctions of all the capital city auction markets last week, with 394 held and a clearance rate of 67.9 per cent, increasing on the previous week’s 61.1 per cent across a higher 1,383 auctions.

Across the smaller capital cities, clearance rates improved week-on-week in Canberra, Perth and Tasmania; however, volumes were significantly lower across each market last week compared to the week prior.

Across the non-capital city auction markets, the Geelong region recorded the strongest clearance rate last week with 100 per cent of the 20 auction results reporting as successful.

The number of homes scheduled to go to auction this week will increase across the combined capital cities with 1,679 currently being tracked by CoreLogic, up from last week when only 670 auctions were held over the Easter period slowdown.

Melbourne is expected to see the most significant increase in volumes this, with 669 properties scheduled for auction, up from 152 auctions held last week. In Sydney, 725 homes are set to go to auction this week, increasing on the 394 held last week.

Outside of Sydney and Melbourne, each of the remaining capital cities will see a higher number of auctions this week compared to last week.

Overall auction activity is set to be lower than one year ago, when 3,517 were held over what was the pre-Easter week last year.

Finally, with local news all looking quite negative, let’s look across to the USA as the most powerful banker in the world, JPMorgan Chase CEO Jamie Dimon, just released his annual letter to shareholders.  Given his bank’s massive size (it earned $24.4 billion on $103.6 billion in revenue last year) and reach (it’s a giant in consumer/commercial banking, investment banking and wealth management), Dimon has his figure on the financial pulse.

He says that’s while the US economy seems healthy today and he’s bullish for the “next year or so” he admits that the US is facing some serious economic headwinds.

For one, he’s concerned the unwinding of quantitative easing (QE) could have unintended consequences. Remember- QE is just a fancy name for the trillions of dollars that the Federal Reserve conjured out of thin air.

He said – Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal.

We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets.

And of course the DOW finished the week on a down trend, down 2.34%, and wiping out all the value gained this year, and volatility is way up. Here is a plot of the DOW.

This extreme volatility does suggest the bull market is nearing its end… if it hasn’t ended already. Dimon seems pretty sure we’re in for more volatility and higher interest rates. One scenario that would require higher rates from the Fed is higher inflation:

If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect.

As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment.

Now– here’s the important part. For the past ten years, the largest buyer of US government debt was the Federal Reserve. But now that QE has ended, the US government just lost its biggest lender.

Dimon thinks other major buyers, including foreign central banks, the Chinese, etc. could also reduce their purchases of US government debt. That, coupled with the US government’s ongoing trade deficits (which will be funded by issuing debt), could also lead to higher rates…

So we could be going into a situation where the Fed will have to raise rates faster and/ or sell more securities, which certainly could lead to more uncertainty and market volatility. Whether this would lead to a recession or not, we don’t know.

We’ll leave you with one final point from Jamie Dimon. He acknowledges markets have a mind of their own, regardless of what the fundamentals say. And he sees a real risk “that volatile and declining markets can lead to a market panic.”

Financial markets have a life of their own and are sometimes barely connected to the real economy (most people don’t pay much attention to the financial markets nor do the markets affect them very much). Volatile markets and/or declining markets generally have been a reaction to the economic environment. Most of the major downturns in the market since the Great Depression reflect negative future expectations due to a potential or real recession. In almost all of these cases, stock markets fell, credit losses increased and credit spreads rose, among other disruptions. The biggest negative effect of volatile markets is that it can create market panic, which could start to slow the growth of the real economy. Because the experience of 2009 is so recent, there is always a chance that people may overreact.

Dimon cautioned investors that interest rates could rise much sooner than they expect. If inflation suddenly comes roaring back. Indeed, it’s entirely possible the 10-year could break above 4% in the near future as inflation returns to 2% and the Fed shrinks its balance sheet.

Dimon also cast a wary eye toward exchange-traded funds, which have seen their popularity multiply since the financial crisis. There are now many ETF products that are considerably more liquid than their underlying assets. In fact far more money than before (about $9 trillion of assets, which represents about 30% of total mutual fund long-term assets) is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation.

And Finally America’s net debt currently stands at 77% of GDP (this is already historically high but not unprecedented). The chart below also shows the Congressional Budget Office’s estimate of the total U.S. debt to GDP, assuming a 2% real GDP growth rate. Hopefully, with the right policies they can grow faster than 2%. But more debt does seem on the cards.

And to add to that perspective, we spoke about the recent Brookings report which highlighted the rise in non conforming housing debt in the USA. debt as lending standards are once again being loosened, and risks to mortgage services are rising.

The authors quote former Ginnie Mae president Ted Tozer concerning the stress between Ginnie Mae and their nonbank counterparties.

… Today almost two thirds of Ginnie Mae guaranteed securities are issued by independent mortgage banks. And independent mortgage bankers are using some of the most sophisticated financial engineering that this industry has ever seen. We are also seeing greater dependence on credit lines, securitization involving multiple players, and more frequent trading of servicing rights and all of these things have created a new and challenging environment for Ginnie Mae. . . . In other words, the risk is a lot higher and business models of our issuers are a lot more complex. Add in sharply higher annual volumes, and these risks are amplified many times over. . . . Also, we have depended on sheer luck. Luck that the economy does not fall into recession and increase mortgage delinquencies. Luck that our independent mortgage bankers remain able to access their lines of credit. And luck that nothing critical falls through the cracks…

They say that goldfish have the shortest memory in the Animal Kingdom… something like 3-seconds. But not even a decade after these loans nearly brought down the entire global economy, SUBPRIME IS BACK. In fact it’s one of the fastest growing investments among banks in the United States. Over the last twelve months the subprime volume among US banks doubled, and it’s already on pace to double again this year.

What could possibly go wrong?

ACCC Focuses On Banking Reform

Rod Sims, Chairman ACCC spoke at the AFR Banking and Wealth Summit Synchronised swimming versus competition in banking”. His excellent speech is worth reading in full. Net, net, the tempo for reform just got stronger still….

He discussed the results of their recent investigation into mortgage pricing, and also discussed the broader issues of competition versus financial stability in banking. He warns that the industry should be aware of, and respond to, the fact that the drive for consumers to get a better deal out of banking is shared by many beyond the ACCC. Every household in Australia is watching.

He specifically called out a lack of vigorous mortgage price competition between the five big Banks, hence “synchronised swimming”. Indeed, he says discounting is not synonymous with vigorous price competition. They saw evidence of communications “referring to the need to avoid disrupting mutually beneficial pricing outcomes”.

He also said residential mortgages and personal banking more generally make one of the strongest cases for data portability and data access by customers to overcome the inertia of changing lenders.

Finally, on competition. he says if we continue to insulate our major banks from the consequences of their poor decisions, we risk stifling the cultural change many say is needed within our major banks to put the needs of their customers first. Vigorous competition is a powerful mechanism for driving improved efficiency, and also for driving improved price and service offerings to customers. It can in fact lead to better stability outcomes.

This puts the ACCC at odds with APRA who recent again stated their preference for financial stability over competition – yet in fact these two elements are not necessarily polar opposites!

As the economy-wide competition and consumer regulator, the ACCC has always had a role in the banking sector. It is fair to say, however, that our role has been reactive to date, focusing on pursuing breaches of the Competition and Consumer Act 2010.

For example, following an ACCC investigation the Federal Court, 16 months ago, imposed a penalty of $9 million against ANZ and $6 million against Macquarie for attempted cartel conduct.

We’ve also always had a role in considering mergers in the banking sector.

But following the Treasurer’s 2017/18 Budget announcement, the ACCC now has a proactive role in the financial services sector. We have established a permanent team within the ACCC, the Financial Services Unit (FSU), to investigate competition in our banking and financial system.

The FSU was originally a recommendation of the Coleman Committee Review of the Four Major Banks in November 20161, which said:

… the Australian Competition and Consumer Commission… [should] establish a small team to make recommendations to the Treasurer every six months to improve competition in the banking sector.

If the relevant body does not have any recommendations in a given period, it should explain why it believes that no changes to current policy settings are required.

The FSU will undertake regular inquiries into specific financial service competition issues, and so facilitate greater competition in the sector.

The first task of the FSU is the current Residential Mortgage Price Inquiry; the interim report was released on 15 March.

In addition, the Government has recently announced that the ACCC will be the lead regulator for the consumer data right, with banking being the first sector covered.

Clearly our role in the financial sector will be more active than it has been in the past.

Today I will cover three topics.

  • The findings from the interim report from our Residential Mortgage Price Inquiry
  • Data as a competition driver, and
  • Stability and competition; the topic we avoid but must talk about.

1. Residential mortgage price inquiry findings

Our interim report indicates quite clearly, based on evidence we have collected, that not only does competition in the banking sector need to improve, but that where there appears to be competition it may often be illusory.

A number of issues were raised in the interim report; today I will concentrate on three:

  • The transparency of interest rates
  • The treatment of loyal customers compared to new customers
  • Why discounts do not indicate vigorous competition.

The transparency of rates: apples and oranges

It is the nature of competition that similar goods can be compared; you need to be able to compare apples with apples.

It is the nature of residential mortgage products, however, that no two apples are alike (See chart 1).

Chart 1: Total variable residential mortgage book by size of discounts – 30 June 2017

Total variable residential mortgage book by size of discounts 30 June 2017

The headline price is a starting price which may then vary by as much as 78–139 basis points below the applicable headline interest rate.

Over the life of an average loan, and this is crucial, we are talking about discounts which amount to life-changing amounts of money for average income earners.

These discretionary discounts do give borrowers a better price, but easy comparison is almost impossible.

Lenders determine discretionary discounts against a range of criteria, some of which are opaque to the borrower.

Since the decision criteria for discretionary discounts vary across lenders, borrowers can find it difficult to determine in advance what, if any, discount they may be eligible for.

Further, discretionary discounts may only be applied and known deep in the application process, and borrowers may even be required to lodge a loan application to confirm the discretionary discount available to them.

And to compare one product with another, the whole process needs to be repeated each time.

Borrowers essentially need to go through the time-consuming process of lodging an application with multiple lenders in order to make an informed decision.

These requirements increase the time and effort associated with obtaining accurate interest rate offers, making it difficult for borrowers to determine the range of effective interest rates available to them (see chart 2).

Chart 2: Headline and average interest rates7 paid for standard8 variable interest rate residential mortgages —owner-occupier with principal and interest repayments9

Offers for new customers versus rates available to existing customers

When it comes to residential mortgages, it pays to be a new customer as discounts are a key tool used by residential mortgage lenders to secure new borrowers.

Due to the difficulty of changing your existing loan, existing customers are assumed to be ‘locked in’. For good reason. In most cases, they are.

In recent years, residential mortgage lenders have been increasing the discounts offered to their new borrowers compared to the discounts offered to new borrowers in the past (see chart 3).

This practice has resulted in new residential mortgage borrowers often paying a lower interest rate than existing borrowers.

Based on data supplied by the big four banks for 30 June 2015, 30 June 2016 and 30 June 2017, existing borrowers on standard variable interest rate residential mortgages were paying interest rates up to 32 basis points higher (on average) than new borrowers.

Chart 3: Average interest rates paid on standard10 variable interest rate residential mortgages by new and existing borrowers—owner-occupier with principal and interest repayments

On a $375,000 mortgage, 32 basis points would save approximately $1200 in interest over the first year of a loan alone.

Banks are clearly saying to their customers: “if you want a lower interest rate you will need to keep switching lenders.”

Why discounts do not indicate vigorous competition

In response to the above, the banks and their representatives have said that, in effect, “discounts indicate vigorous competition”.

Discounting is not, however, synonymous with vigorous price competition.

For example, and at its most basic, if a monopolist or oligopolist offers a 10% discount on a price already inflated by market power, we wouldn’t say this is evidence of vigorous price competition.

In residential mortgage lending, “discounts” are a measure of a gap between the actual rate charged by the bank and a reference or headline rate that the bank decided for itself and that almost nobody ever pays.

This tells us very little about the vigour of price competition, particularly if the headline rate provides for a profit margin that is inflated well above what is needed to cover any notion of the risk-adjusted return on capital.

Moreover, the ability of the banks we investigated to selectively offer higher discounts to some types of customer, and maintain lower discounts to others, indicates an ability to refrain from vigorous price competition at least with respect to some types of customers.

Our observation that loyal customers pay higher mortgage interest rates, on average, than new borrowers indicates clearly that loyal customers are not seeing the benefits that vigorous price competition would be expected to provide.

The finding about a lack of vigorous price competition was the focus of most attention when we released our report last month.

Little wonder.

It goes to the heart of the problem in banking and confirms long-held consumer suspicions.

Internal documents reviewed by the ACCC reveal a lack of vigorous price competition between the five Inquiry Banks (ANZ, Commonwealth, NAB, Westpac and Macquarie), and the big four banks in particular. In fact, their behaviour more resembles synchronised swimming than it does vigorous competition.

What we found is that the pricing behaviour of the Inquiry Banks appears more consistent with ‘accommodating’ a shared interest in avoiding the disruption of mutually beneficial pricing outcomes, rather than vying for market share by offering the lowest interest rates.

This manifests in at least four ways:

  1. The big four banks largely focus on each other when they determine headline interest rates and discounts on variable rate residential mortgages. This means the actions and reactions of over 100 other residential mortgage lenders do not appear to have much bearing on interest rate decisions for the big four banks’ main brands. This is important as the big four represent approximately 80 per cent of all outstanding residential mortgages held by banks in Australia.
  2. The Inquiry Banks generally have not often sought to compete by offering the lowest headline variable interest rate to borrowers.
  3. The banks usually move their interest rates at the same time, and in response to RBA changes in the overnight cash rate.
  4. During late 2016 and early 2017, two of the big four banks (independently of each other) decided to take action to reduce discounting in the market. They each reduced their own discounts and sought to trigger reduced discounting by rivals, even though this was likely to be costly for them if other banks did not follow their lead. We observed that by early 2017 the two banks considered they had been successful in leading competitors to reduce discounts for a time.

These are the observed behaviours.

Then there are the internal communications.

In 2015, for example, we saw references to the need to avoid disrupting mutually beneficial pricing outcomes.

There were also references to “encouraging rational market conduct”, “maintaining orderly market conduct” and maintaining “industry conduct”.

There were also references to a desire to have interest rates that are “mid-ranking”, and to the need not to “lead the market down”.

Comments like these are at odds with banks’ assurances and the reasonable community expectations that competition in the sector is vigorous and effective.

2. Data as competition driver

From a competition perspective, it could be argued that ‘customer stickiness’ is an issue for the customer to resolve.

Fair point. Up to a point.

A study by one Inquiry Bank into customer refinancing requests found that where an existing borrower requests a discount, the Inquiry Bank only needs to come close to the discount requested in order to retain the borrower.

That Inquiry Bank observed in a presentation to its executives in the residential mortgage lending division in June 2015 that “where we allowed repricing to occur, customers are price inelastic when the discount offered is close to their requested discount”.

For this reason, residential mortgages and personal banking more generally make one of the strongest cases I have seen for data portability and data access by customers to overcome the inertia of changing lenders.

As an organisation, the ACCC is more than pleased with Treasury’s Report of the Review into Open Banking and its recommendations as it outlines a framework for a consumer data right.

As the Treasurer noted:

Granting third-party access to a customer’s data will allow rival providers to offer competitive deals, products that are tailored to individual needs, and enhanced services that simplify the choices customers face when accessing banking services.

It should simplify the process of switching between banks and help to overcome the ‘hassle factor’ that sees customers stay with their current bank even in the presence of more competitive deals elsewhere.12

At worst, the ‘hassle factor’ of comparing and switching should be a bug in the system; it shouldn’t be a feature which benefits an industry lacking in vigorous competition.

The Government has announced that the ACCC will be the lead regulator for the consumer data right, with strong support from the Office of the Australian Information Commissioner.

The consumer data right was, of course, the brain child of the Productivity Commission in a report to the Government last year.

The ACCC’s proposed roles include making rules to implement the specifics of the data right, and taking enforcement action to ensure that participants in the new framework meet their obligations.

We are undertaking preparatory work in anticipation of this new role, recognising that formal commencement will be determined once the government has finalised its response to the Open Banking report.

3. Stability versus competition

This is a topic we avoid, but it is one we must talk about.

In recent public statements, particularly in response to the recent Productivity Commission draft report on Competition in the Australian Financial System, senior bank representatives have suggested that prudential regulation and other supportive measures are vital to keep them strong.

They also argue, however, that they are commercial enterprises and as such, must be allowed to pursue an objective of maximising shareholder value.

I believe there is a tension in these two positions that needs to be examined further.

But beyond this tension, we must recognise that the poor performance and failures of banks worldwide, that have often prompted enhanced stability measures, were not caused by excessive competition. Quite the contrary.

Often they appear to have been caused by inappropriate behaviour and endemic short termism, possibly driven by a desire for huge bonuses.

The current Banking Royal Commission is also revealing further failures that cannot be blamed on strong competition.

On the contrary, if we continue to insulate our major banks from the consequences of their poor decisions, we risk stifling the cultural change many say is needed within our major banks to put the needs of their customers first.

There is a, perhaps old fashioned view, that facing strong competition forces firms to increase their focus on customer outcomes.

I think this holds for all sectors of economy, including the banking sector.

Vigorous competition is a powerful mechanism for driving improved efficiency, and also for driving improved price and service offerings to customers.

Culture change to deliver better outcomes for consumers will not occur because the community, regulators or perhaps even some bankers wish it to happen.

Competition is not, repeat not, welcomed by businesses. This is because it delivers better outcomes for consumers. This is exactly what seems to be needed in our banking system.

The ACCC is deeply involved in helping consumers find and achieve lower prices in areas of essential purchases, from electricity to petrol. But most consumers spend significantly more on various financial products, particularly servicing their home mortgage.

Financial stability will be helped by more competition. More importantly, so will consumers.

Conclusion

Ladies and gentlemen, the ACCC’s mandate is to promote competition and fair trading.

It is clear from our interim report into residential mortgage pricing that there are significant issues in the banking sector which raise concerns about competition in the sector as well as fair trading.

Soon after June 30 this year, the ACCC will be releasing its final report into residential mortgages. Our focus will then turn to how best to promote competition in the industry more generally and we will proactively identify issues to examine, particularly leveraging off the work of the Productivity Commission.

Cardtronics to amend unfair ATM contracts

The ACCC says ATM provider Cardtronics has admitted that its subsidiary, DC Payments, offered contract terms with small business that may be unfair under the Australian Consumer Law.

Cardtronics has given a court-enforceable undertaking to the ACCC to change terms that may be unfair for businesses under existing contracts.

“Business contracts need to balance the rights of each party to ensure they aren’t unfair, as smaller firms may not always be in a strong negotiating position,” ACCC Deputy Chair Dr Michael Schaper said.

“We considered Cardtronics’ contract had several unfair terms, including automatic renewal for six years, unilateral increase of fees, and first right of refusal should businesses seek to change providers at the contract’s conclusion.”

Cardtronic has co-operated with the ACCC’s investigation, and undertaken not to enforce unfair terms for all existing merchants, some of whom entered contracts six years ago.

“This undertaking is a great outcome for Cardtronics’ customers, as the unfair contracts protections for small business only became effective in November 2016,” Dr Schaper said.

While Cardtronics contracts will continue to be automatically renewed, the minimum notice to cancel will be reduced from six months to three months and Cardtronics will provide written notice to customers five months before the end of the contract.

Previously, merchants had to keep track of automatic rollover dates more than five years after entering contracts.

Cardtronics must also provide written notice of any fee increase to customers and allow them to terminate the contract without penalty under a new contract term.

The undertaking is available at Cardtronics Australasia Pty Ltd

Background

This outcome is part of a wider ACCC review of small business contracts in a range of industries. As part of this review, the ACCC has been engaging with a range of businesses to encourage compliance with the new unfair contract term provisions.

For more information, see Businesses remove unfair contract terms before new law.

The Australian Consumer Law allows a court to determine that a term of a standard form contract is unfair and therefore void, meaning that the contract is treated as if the term never existed.

If the term is declared void, the remainder of the contract continues to bind the parties to the extent that it can operate without the unfair term.

From 12 November 2016 the unfair contract terms provisions of the Australian Consumer Law were extended to cover standard form contracts involving small businesses.

The Mortgage Industry Omnishambles – The Property Imperative 17 March 2018

Today we examine the Mortgage Industry Omnishambles. And it’s more than just a flesh wound!

Welcome to the Property Imperative Weekly to 17th March 2018. Watch the video, or read the transcript.

In this week’s review of property and finance news we start with the latest January data from the ABS which shows lending for secured housing rose 0.14% or 28.8 million to $21.1 billion. Secured alterations fell 1%, down $3.9 million to $391 million.  Fixed personal loans fell 0.1%, down $1.2 million to $4.0 billion, while revolving loans fell 0.06%, down $1.3 million to $2.2 billion.

Investment lending for construction of dwellings for rent rose 0.86% or $10 million to $1.2 billion. Investment lending for purchase by individuals fell 1.34%, down $127.7 million to $9.4 billion, while investment lending by others rose 7.7% up $87.2 million to $1.2 billion.

Fixed commercial lending, other than for property investment rose 1.25% of $260.5 million to $21.1 billion, while revolving commercial lending rose 2.5% or $250 million to $10.2 billion.

The proportion of lending for commercial purposes, other than for investment housing was 45% of all commercial lending, up from 44.5% last month.

The proportion of lending for property investment purposes of all lending fell 0.1% to 16.6%.

So, we are seeing a rotation, if a small one, towards commercial lending for more productive purposes. However, lending for property and for investment purposes remains quite strong. No reason to reduce lending underwriting standards at this stage or weaken other controls.

But this also explains the deep rate cuts the banks are now offering – even to investors – ANZ Bank and the National Australia Bank were the last of the big four to announce cuts to their fixed rates, following similar announcements from the Commonwealth Bank and Westpac. NAB has dropped its five-year fixed rate for owner-occupied, principal and interest home loans by 50 basis points, from 4.59 per cent to 4.09 per cent. The bank has also reduced its fixed rates on investor loans by up to 35 basis points, with rates starting from 4.09 per cent. And last week ANZ also dropped fixed rates on its “interest in advance”, interest-only home loans by up to 40 basis points, with rates starting from 4.11 per cent. Further, fixed rates on its owner-occupied, principal and interest home loans have fallen by 10 basis points, with rates now starting from 3.99 per cent.  This fixed rate war shows our big banks are not pricing in a rate hike anytime soon.

But we think these offers will likely encourage churn among existing borrowers, rather than bring new buyers to the market.  For example, the ABS housing finance data showed that in original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 18.0% in January 2018 from 17.9% in December 2017 – and this got the headline from the real estate sector, but the absolute number of first time buyers fell, thanks mainly to falls of 22.3% in NSW and of 13.3% in VIC. More broadly, there were small rises in refinancing and investment loans for entities other than individuals.

The latest data from CoreLogic shows home prices fell again this week, with Sydney down for the 27th consecutive week, and their index registering another 0.09% drop, whilst auction volumes were down on last week. They say that last week, the combined capital city final auction clearance rate fell to 63.3 per cent across a lower volume of auctions with 1,764 held, down from the 3,026 auctions over the week prior when a slightly higher 63.6 per cent cleared.  The weighted average clearance rate has continued to track lower than results from last year; when over the corresponding week 75.1 per cent of the 1,473 auctions sold.

But the strategic issues this week relate to the findings from the Royal Commission and from the ACCC on mortgage pricing. I did a separate video on the key findings, but overall it was clear that there are significant procedural, ethical and even legal issue being raised by the Commission, despite their relatively narrow terms of reference. They cannot comment on bank regulation, or macroprudential, but the Inquiries approach is to examine a series of case studies, from the various submissions they have received, and then apply forensic analysis to dig into the root causes examining misconduct. The question of course is, do the specific examples speak to wider structural questions as we move from the specific instances. We discussed this on ABC Radio this week.

From NAB we heard about referrer’s providing leads to the Bank, outside normal lending practices and processes, and some receiving large commissions, despite not being in the ambit of the responsible lending code. From CBA we heard that the bank was aware of the conflict brokers have especially when recommending an interest only loan, because the trail commission will be higher as the principal amount is not repaid. And from Aussie, we heard about their reliance on lenders to trap fraud, as their own processes were not adequate. And we also heard of examples of individual borrowers receiving loans thanks to poor conduct, or even fraud. We also heard about how income and expenses are sometimes misrepresented. So, the question is, do these various practices show up more widely, and what does this say about liar loans, and mortgage systemic risk?

We always struggled to match the data from our independent household surveys with regards to loan to income, and loan to value, compare with loan portfolios we looked at from the banks. Now we know why. In some cases, income is over stated, expenses are understated, and so loan serviceability is a potentially more significant issue than the banks believe – especially if interest rates rise. In fact, we saw very similar behaviours to the finance industry in the USA before the GFC, suggesting again we may see the same outcomes here. One other point, every lender is now on notice that they need to look at their current processes and back book, to test affordability, serviceability and risk. This is a big deal.

I will also be interested to see if the Commission turns to look at foreclosure activity, because this is the other sleeper. Mortgage delinquency in Australia appears very low, but we suspect this is associated with heavy handed forced sales. Something again which was apparent around the GFC.

More specifically, as we said in a recent blog, the role and remuneration models for brokers are set for a significant shakedown.

Turning to the ACCC report on mortgage pricing, this was also damming. Back in June 2017, the banks indicated that rate increases were primarily due to APRA’s regulatory requirements, but now under further scrutiny they admitted that other factors contributed to the decision, including profitability. Last December, the ACCC was called on by the House of Representatives Standing Committee on Economics to examine the banks’ decisions to increase rates for existing customers despite APRA’s speed limit only targeting new borrowers. The investigation falls under the ACCC’s present enquiry into residential mortgage products, which was established to monitor price decisions following the introduction of the bank levy. Here are the main points.

  1. Banks raised rates to reach internal performance targets: concern about a shortfall relative to performance targets was a key factor in the rate hikes which were applied across the board. Even small increases can have a significant impact on revenue, the report found. And the majority of existing borrowers would likely not be aware of small changes in rates and would therefore be unlikely to switch.
  2. A shared interest in avoiding disruption: Instead of trying to increase market share by offering the lowest interest rates, the big four banks were mainly preoccupied and concerned with each other when making pricing decisions. It shows a failure in competition (my words).
  3. Reputation is everything: The banks it seems were very conscious of how they should explain changes. As it happens, blaming the regulators provides a nice alibi/
  4. For Profit: Internal memos also spoke of the margin enhancement equating to millions of dollars which flowed from lifting investment loans.
  5. New Loans are cheaper, legacy rates are not. Banks of course are offering deep discounts to attract new customers, funded by the back book repricing. The same, by the way, is true for deposits too.

The Australian Bankers Association “silver lining” statement on the report said they welcomed the interim report into residential mortgages, which clearly shows very high levels of discounting in the Australian home loan market. It’s clear that competition is delivering better deals for customers, shopping around works and Australians should continue to do so to get the best discounts on the advertised rate. But they are really missing the point!

We will see if the final report changes, but if not these are damming, but not surprising, and again shows the pricing power the major lenders have.

So to the question of future rate rises. The FED meets this week, and the expectation is they will lift rates again, especially as the TRUMP tax cuts are inflationary, at a time when the US economy is already firing. In a recent report Fitch Ratings said that Central banks are becoming less cautious about normalising monetary policy in the face of strong growth and diminishing spare capacity. They expect the Fed to raise rates no less than seven times before the end of next year. And while still sounding tentative, the European Central Bank is clearly laying firm groundwork for phasing out QE completely later this year. They now also expect the Bank of England to raise rates by 25bp this year.

Guy Debelle, RBA Deputy Governor spoke on “Risk and Return in a Low Rate Environment“.  He explored the consequences of low rates, on asset prices, and asks what happens when rates rise. He suggested that we need to be alert for the effect the rise in the interest rate structure has on financial market functioning, and that investors were potentially too complacent.  There are large institutional positions that are predicated on a continuation of the low volatility regime remaining in place. He had expected that volatility would move higher structurally in the past and this has turned out to be wrong. But He thinks there is a higher probability of being proven correct this time. In other words, rising rates will reduce asset prices, and the question is – have investors and other holders of assets – including property – been lulled into a false sense of security?

All the indicators are that rates will rise – you can watch our blog on this. Rising rates of course are bad news for households with large mortgages, exacerbated by the possibility of weaker ability to service loans thanks to fraud, and poor lending practice. We discussed this, especially in the context of interest only loans, and the problems of loan resets on the ABC’s 7:30 programme on Monday.  We expect mortgage stress to continue to rise.

There was more discussion this week on Housing Affordability. The Conversation ran a piece showed that zoning is not the cause of poor affordability, and neither is supply of property. Indeed planning reform they say is not a housing affordability strategy.  Australia needs a more realistic assessment of the housing problem. We can clearly generate significant dwelling approvals and dwellings in the right economic circumstances. Yet there is little evidence this new supply improves affordability for lower-income households. Three years after the peak of the WA housing boom, these households are no better off in terms of affordability. In part, this may reflect that fact that significant numbers of new homes appear not to house anyone at all. A recent CBA report estimated that 17% of dwellings built in the four years to 2016 remained unoccupied. If we are serious about delivering greater affordability for lower-income Australians, then policy needs to deliver housing supply directly to such households. This will include more affordable supply in the private rental sector, ideally through investment driven by large institutions such as super funds. And for those who cannot afford to rent in this sector, investment in the community housing sector is needed. In capital city markets, new housing built for sale to either home buyers or landlords is simply not going to deliver affordable housing options unless a portion is reserved for those on low or moderate incomes.

But they did not discuss the elephant in the room – booming credit. We discussed the relative strength of different drivers associated with home price rises in a separate, and well visited blog post, Popping The Housing Affordability Myth. But in summary, the truth is banks have pretty unlimited capacity to create more loans from thin air – FIAT – let it be. It is not linked to deposits, as claimed in classic economic theory.  The only limit on the amount of credit is people’s ability to service the loans – eventually. With that in mind, we built a scenario model, based on our core market model, which allows us to test the relationship between home prices, and a series of drivers, including population, migration, planning restrictions, the cash rate, income, tax incentives and credit.

We found the greatest of these is credit policy, which has for years allowed banks to magic money from thin air, to lend to borrowers, to drive up home prices, to inflate the banks’ balance sheet, to lend more to drive prices higher – repeat ad nauseam! Totally unproductive, and in fact it sucks the air out of the real economy and money directly out of punters wages, but make bankers and their shareholders richer. One final point, the GDP calculation we use in Australia is flattered by housing growth (triggered by credit growth). The second driver of GDP growth is population growth.  But in real terms neither of these are really creating true economic growth. To solve the property equation, and the economic future of the country, we have to address credit. But then again, I refer to the fact that most economists still think credit is unimportant in macroeconomic terms! The alternative is to continue to let credit grow well above wages, and lift the already heavy debt burden even higher. Current settings are doing just that, as more households have come to believe the only way is to borrow ever more. But, that is, ultimately unsustainable, and this why there will be an economic correction in Australia, and quite soon. At that point the poor mortgage underwriting chickens will come home to roost. And next time we will discuss in more detail how these scenarios are likely to play out. But already we know enough to show it will not end well.

ABA’s Positive Spin On ACCC Report

Every cloud, even the ACCC report, they say has a silver lining. The ABA found theirs…. but it sort of missed the point….

The Australian Banking Association welcomes today’s ACCC interim report into residential mortgages, which clearly shows very high levels of discounting in the Australian home loan market. It’s clear that competition is delivering better deals for customers, shopping around works and Australians should continue to do so to get the best discounts on the advertised rate.

The report itself states that “an overwhelming majority of borrowers with variable rate residential mortgages at the Inquiry Banks were paying interest rates significantly lower than the relevant headline rate” (the advertised rate). Discounts on home loans ranged between .78% and 1.39% below the relevant headline interest rate.

The advertised variable discount rate for home buyers today is 4.5%, close to the lowest ever recorded.

Data from APRA(1) and Canstar further illustrates there is strong competition in the home loan market, with over 140 providers, offering over 4,000 home loan products. Truly a vast and competitive market for Australians to choose a home loan.

Other evidence shows that Australians are taking advantage of this competitive market and are shopping around. Research by Galaxy shows that:

  • 3 million people had switched banks over the last three years.
  • Of those who had switched banks over the last three years, two-thirds (68 per cent) found that switching was an easy process.

What The Banks’ Memos Say

An excellent summary of the ACCC’s report, which we discussed yesterday, from MPA’s Otiena Ellwand.  It confirms the banks were well aware of the opportunity to capture substantial economic benefit of hundreds of millions of dollars in additional revenue, and a quest to meet financial targets.

The ACCC’s interim report into residential mortgage pricing reveals the “lack of transparency” around how the ‘inquiry banks’ – ANZ, CBA, Macquarie, NAB and Westpac— make these decisions.

The regulator found a “lack of vigorous price competition” between the big four banks in particular, with negative public reaction being a major concern.

The ACCC examined thousands of internal documents for this report. This is what they reveal:

1. Banks raised rates to reach internal performance targets:

The ACCC found that achieving profit and/or revenue-related performance targets affected the banks’ decisions on interest rates.

For example, concern about a shortfall relative to target was a key factor in two inquiry banks increasing headline variable interest rates in March 2017.

Tweaking the headline variable interest rates may be in the banks’ favour because it affects both new and existing borrowers, so even small increases can have a significant impact on revenue, the report found. And the majority of existing borrowers would likely not be aware of small changes in rates and would therefore be unlikely to switch.

2. A shared interest in avoiding disruption:

The banks’ pricing behaviour “appears consistent with ‘accommodating’ a shared interest in avoiding disruption of mutually beneficial pricing outcomes”, the ACCC found.

Instead of trying to increase market share by offering the lowest interest rates, the big four banks were mainly preoccupied and concerned with each other when making pricing decisions.

In fact, in late 2016 and early 2017, two of the big four banks each adopted pricing strategies aimed at reducing discounting in the market even though this was potentially costly for them if the other majors didn’t follow suit.

3. Reputation is everything:

The banks are particularly attentive to when and how they explain interest rate decisions to the public, and strong public reaction can even put pricing decisions on hold.

One inquiry bank decided to defer a rate rise due to the reputational impact.

Another bank’s internal document noted that changing the headline variable interest rate without an easily understood reason or trigger event could have the “potential to attract a lot more attention and focus” from the public.

In an email discussion among a group of bank executives, one leader noted that it had not made the case for repricing its back book.

“I am also very conscious that we suspect that many first home buyers, unable to afford owner occupier homes, have instead have [sic] bought [an] investment property to take advantage of the low interest rates, tax break and keep a foot on the housing market. I don’t think that this would play well from a customer or community stand point,” the executive wrote.

4. Not just about APRA:

In July 2015, all of the big four banks attributed interest rate increases to APRA’s limits on investor lending.

However, one inquiry bank said in an internal memo that the “substantial economic benefit” of hundreds of millions of dollars in additional revenue was a consideration in its decision.

Where does this ACCC report come from?

Back in June 2017, the banks indicated that rate increases were primarily due to APRA’s regulatory requirements, but once under further scrutiny they admitted that other factors contributed to the decision, including profitability.

In December, the ACCC was called on by the House of Representatives Standing Committee on Economics to examine the banks’ decisions to increase rates for existing customers despite APRA’s speed limit only targeting new borrowers.

The investigation falls under the ACCC’s present enquiry into residential mortgage products, which was established to monitor price decisions following the introduction of the bank levy.

ACCC takes action against Equifax, formerly Veda

The ACCC has instituted proceedings in the Federal Court against credit reporting body, Equifax Pty Ltd (formerly Veda Advantage Pty Ltd), alleging breaches of the Australian Consumer Law (ACL).

The ACCC alleges that from June 2013 to March 2017, Equifax made a range of false or misleading representations to consumers, including that its paid credit reports were more comprehensive than the free reports, when they were not.

Equifax also allegedly represented that consumers had to buy credit reporting packages for it to correct information held about them, or to do so quicker. In fact, Equifax was required by law to take reasonable steps to correct the information in response to a consumer’s request for free.

In addition, the ACCC alleges that Equifax represented that there was a one-off fee for its credit reporting services, when its agreement provided that customer’s subscriptions to the services automatically renewed annually unless the consumer opted out in advance. We allege this renewal term is an unfair contract term, which is void under the ACL.

In all the circumstances, it is alleged that Equifax acted unconscionably in its dealings with vulnerable consumers including by making false or misleading representations, and using unfair tactics and undue pressure when dealing with people in financial hardship.

“We allege that Equifax acted unconscionably in selling its fee-based credit reporting services to vulnerable consumers, who were often in difficult financial circumstances,” ACCC Commissioner Sarah Court said.

“We allege that Equifax told people they needed to buy credit reporting services from them in situations when they did not. It is important for consumers to know they have the legal right to obtain their credit report and to correct any wrong information for free.”

By law, consumers are entitled to access their credit reporting information for free once a year, or if they have applied for, and been refused, credit within the past 90 days, or where the request for access relates to a decision by a credit reporting body or a credit provider to correct information included in the credit report.

To find out how to access your free credit report, visit the Office of the Australian Information Commissioner’s webpage

Mortgage pricing not strongly competitive

The opaque pricing of discounts offered on residential mortgage rates makes it difficult for customers to make informed choices and disadvantages borrowers who do not regularly review their choice of lender, a report by the ACCC has found.

The ACCC’s Residential Mortgage Price Inquiry is monitoring the prices charged by the five banks affected by the Government’s Major Bank Levy: Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), Macquarie Bank Limited, National Australia Bank Limited (NAB), and Westpac Banking Corporation.

The Inquiry’s interim report, out today, reveals signs of less-than-vigorous price competition, especially between the big four banks.

“We do not often see the big four banks vying to offer borrowers the lowest interest rates. Their pricing behaviour seems more accommodating and consistent with maintaining current positions,” ACCC Chairman Rod Sims said.

“We have seen various references to not wanting to ‘lead the market down’, to have rates that are ‘mid-ranked’ and to ‘maintain orderly market conduct’.”

The ACCC has found that discounts are a major factor in the interest rates customers are paying. Banks offer varying levels of discounts, both advertised and discretionary, but the latter are not always transparent to consumers.

The criteria used by different banks for determining the total discount offered to borrowers includes many factors, such as the individual borrower’s characteristics, their value or potential value to the bank, and their ability to negotiate.

During the two years to June 2017, the average discount across the five banks under review on variable interest rate loans was 78-139 basis points off the relevant headline interest rate.

“The discounting by the big banks lacks transparency and it’s almost impossible for customers to obtain accurate interest rate comparisons without investing a great deal of time and effort. But the potential savings from these discounts are immense,” Mr Sims said.

The report also found the average interest rates paid for basic or ‘no frills’ loans are often higher than for standard loans at the same bank.

“We think many customers who opted for ‘basic’ or ‘no frills’ loans thinking they are saving money would be surprised to learn they might actually be paying more.”

The report’s other key findings include:

  • existing residential mortgage borrowers paid significantly higher interest rates than new borrowers at the same bank. Between 30 June 2015 and 30 June 2017, existing borrowers on standard variable interest rate residential mortgages at the big four banks were paying up to 32 basis points more (on average) than new borrowers,
  • the large majority of borrowers are paying lower interest rates than the relevant headline interest rate, and
  • the bank with the lowest headline rate is not always the bank with the lowest average rate paid by borrowers.

“These findings suggest that many bank customers would likely benefit from either switching mortgage providers, or approaching their bank for a better rate and indicating they are prepared to switch to get one,” Mr Sims said.

“It seems existing customers are not being rewarded for their loyalty; in fact they are worse off. For example on a $375,000 residential mortgage, a new borrower paying an interest rate that was 32 basis points lower would save approximately $1200 in interest over the first year of a loan.”

“This is a significant saving,” Mr Sims said.

In addition to examining the way banks make their mortgage pricing decisions, the ACCC’s Residential Mortgage Pricing Inquiry final report will detail if the banks have adjusted their pricing in response to the Government’s Major Bank Levy.

As at November 2017, the five banks stated no specific decisions had been made to adjust residential mortgage prices in response to the Major Bank Levy.

Indeed, one bank considered whether the costs could be passed on to customers and suppliers at a range of different time periods, including after the end of the ACCC inquiry.

The ACCC’s final report will examine these issues further.

Background

On 9 May 2017 the Treasurer, the Hon. Scott Morrison MP, issued a direction to the ACCC to inquire into prices charged or proposed to be charged by Authorised Deposit-taking Institutions (ADIs) affected by the Major Bank Levy in relation to the provision of residential mortgage products in the banking industry in Australia. The Major Bank Levy came into effect from 1 July 2017, and the Inquiry will consider residential mortgage prices for the period 9 May 2017 until 30 June 2018.

The ACCC’s interim report examines the motivations, influences, and processes behind the residential mortgage pricing decisions of the five banks during the period 1 July 2015 to 30 June 2017.

The ACCC is reporting on this period in order to have a baseline against which to compare pricing decisions for the review period set by the Treasurer.

The ACCC will continue to examine the banks’ mortgage pricing decisions and how they have dealt with the Major Bank Levy through to 30 June 2018.

The ACCC has used its compulsory information gathering powers to obtain documents and data from the five banks on their pricing of residential mortgage products. The ACCC has supplemented its analysis of the documents and data supplied by the five banks with data from the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and the Australian Bureau of Statistics (ABS).

This inquiry is the first task of the ACCC’s Financial Services Unit (FSU), which was formed as a permanent unit during 2017 following a commitment of continuing funding by the Australian Government in the 2017-18 Budget. Alongside the ACCC’s role in promoting competition in financial services through its enforcement, infrastructure regulation, open banking, and mergers and adjudication work, the FSU will monitor and promote competition in Australia’s financial services sector by assessing competition issues, undertaking market studies, and reporting regularly on emerging issues and trends in the sector.

ACCC Seek Views on News and Digital Platforms Inquiry

The ACCC says is looking forward to hearing the views of consumers, media organisations, digital platforms, advertising agencies and advertisers after today outlining the key issues it will be considering in its digital platforms inquiry.

The ACCC is seeking submissions in response to its issues paper by 3 April 2018 and will issue a preliminary report into its findings in December 2018.

As part of its public inquiry into the impact of digital platforms on media and advertising markets in Australia, the ACCC is seeking feedback on:

  • Whether digital platforms have bargaining power in their dealings with media content creators, advertisers or consumers and the implications of that bargaining power.
  • Whether digital platforms have impacted media organisations’ ability to fund and produce quality news and journalistic content for Australians
  • How technological change and digital platforms have changed the media and advertising services markets, and the way consumers access news
  • The extent to which consumers understand what data is being collected about them by digital platforms, and how this information is used
  • How the use of algorithms affects the presentation of news for digital platform users.

“Digital platforms like Google and Facebook are part of the sweeping technological and cultural changes overhauling the media landscape in Australia and globally,” ACCC Chairman Rod Sims said.

“While these technological changes have brought many benefits for consumers, this inquiry will have a particular focus on examining whether the changes affect the quality and range of news supplied to Australian consumers.”

“Considering the longer term impacts of digital platforms and the ability of traditional media to remain financially viable will also be key to understanding the media and advertising markets,” Mr Sims said.

“Our aim is also to understand better the digital platforms’ business models and how they operate behind the scenes, and the evolving nature of the way consumers search for and receive news in Australia. We are particularly interested in the extent to which digital platforms curate news and journalistic content.”

The ACCC is seeking submissions in response to its issues paper by 3 April 2018 and will issue a preliminary report into its findings in December 2018.

Consumers may alternatively provide feedback to the inquiry more informally via the ACCC consultation hub.

As part of this inquiry, the ACCC will use its compulsory information gathering powers to obtain information from digital platforms and media organisations that is not publicly available.

Background

In December 2017 the Australian Government directed the ACCC to undertake a public inquiry into the impact of digital platforms on competition in media and advertising services markets, in particular in relation to the supply of news and journalistic content.

The ACCC must provide a preliminary report to the Treasurer by 3 December 2018 and a final report by 3 June 2019.

ACCC focusses on energy, broadband, net economy and financial services in 2018

Chairman Rod Sims has today announced the ACCC’s compliance and enforcement priorities for 2018 at a CEDA event in Sydney.

He signalled that the ACCC will shortly release its interim report into residential mortgage pricing and a key focus will be on transparency, particularly how the major banks balance the interests of consumers and shareholders in making their interest rate decisions.

This year, the regulator will focus on consumer issues in broadband services and energy, competition in the financial services and commercial construction sectors, systemic consumer guarantee issues, and conduct that may contravene the new misuse of market power and concerted practices provisions.

“As I have repeatedly said, Australia faces an energy affordability crisis. This has upended one of Australia’s core sources of competitive advantages, and caused significant consumer harm. The ACCC’s retail electricity pricing inquiry report and the ACCC’s wholesale gas inquiry have given us, and the wider community, a far stronger understanding of the issues and pressures around rising energy prices,” said Mr Sims.

“Armed with the clear findings on the causes of the problem, the ACCC will now focus on making recommendations that will improve electricity affordability across the National Electricity Market and provide recommendations for reform in our final report at the end of June 2018.”

“Consumer issues in the provision of broadband services, including addressing misleading speed claims and statements made during the transition to the NBN, have become one of the ACCC’s most prominent issues in the past two years and highlights the importance of both our consumer and competition focus.”

“The first report of the ACCC’s Measuring Broadband Australia program will be released shortly, and our commitment to truth in advertising related to broadband speeds is making it easier for Australians to choose a service provider. You have seen a number of ACCC enforcement actions in 2017 and can expect further interventions this year.”

The ACCC is also well placed to play a role in consumer and competition issues relating to access to data, as recognised by the government.

“This is a hugely important pro-competition and pro-consumer innovation. At the heart of the proposals is giving consumers access to data that is held about them by business, including the ability to direct that such data be copied and provided to a third party.”

The ACCC’s Financial Services Unit is now well established and will, post 1 July, proactively identify and investigate competition issues in the sector.

“Importantly, the ACCC is due to release its interim report into residential mortgage pricing shortly. As directed by the Treasurer, a key focus will be on transparency, particularly how the major banks balance the interests of consumers and shareholders in making their interest rate decisions.

Mr Sims highlighted 2018 as the first full year the ACCC will have powers covering misuse of market power and concerted practices.

“In response to the Harper Reform legislation, the ACCC has established the Substantial Lessening of Competition (SLC) Unit to focus on investigations that could give rise to cases under the new laws. The SLC Unit also has a broader mandate to enhance our investigation of competition cases and look afresh at the way we handle such investigations. The ACCC fought hard for these provisions and we will be using them,” Mr Sims said.

Mr Sims also stressed the importance of higher penalties under both consumer and competition law. In relation to the Australian Consumer Law (ACL), legislation was introduced last week to raise penalties from $1.1 million for companies to the greater of $10 million, three times the value of the benefit received, or where the benefit cannot be calculated, 10 per cent of annual turnover in the preceding 12 months.

“Currently, the maximum penalties for breaches of the ACL are, for corporations, approximately one-tenth of the lowest maximum penalty for breaches of the Competition Law. There is no good reason for this difference as we have seen cases where consumer law breaches have led to very substantial harm to many consumers.”

In relation to competition penalties, the ACCC is also anticipating the launch of an OECD report at the end of March will shine a light on Australia’s approach to antitrust sanctions in comparison with other developed competition law jurisdictions.

“Put simply, we believe large businesses should bear penalties which are commensurate to their size, in order to achieve specific and general deterrence. Making this happen is a huge priority and challenge for the ACCC in 2018.”

Most keenly anticipated, perhaps, is the ACCC’s inquiry into digital platforms.

“Concerns about the influence of digital platforms have become prominent in recent years, on many fronts, and this inquiry will be the first of its kind to explore broadly the competition and consumer implications,” Mr Sims said.

“A key question will be how much consumers know about the amount and use of the data about them that is collected and sold by the digital platforms in the form of advertising.”