Keep exit fee ban in place, says action group

by AB07 Apr 2014
Consumer advocacy group CHOICE has recommended maintaining a ban on exit fees and that macroprudential tools are examined to keep the market in check.

In its submission to the Financial Services Inquiry, CHOICE “strongly supported” the exit fee ban to increase consumer welfare.

In CHOICE’s recent survey, 21% of mortgage holders cited incurring an exit fee as a reason for not switching their home loan to a different service provider in the past two years, the submission said.

The survey showed that while 13% of respondents with home loans say they changed banks in the last two years, a further 25% say they considered switching but did not actually change. This figure is even higher for customers of the big four banks, at 28%. This indicates there is a sizeable segment of the market that is actively predisposed to switching, but for various reasons do not change, the consumer group said.

“The ban is consistent with an important principle of consumer protection, which is that consumers should not be locked into ongoing contracts for products through exit fees or penalties in circumstances where the supplier or retailer reserves the right to vary the price of the product at any time.

“When consumers are locked into such contracts, the result is a lessening of pressure on providers to continue competing on price and customer service over the duration of the contract. In this way, the removal of exit fees illustrates an important point – that measures to enhance consumer protection can be consistent with increasing competition in the marketplace.”

But mortgage industry pundits don't agree. Gadens Lawyers' Jon Denovan recently told Australian Broker the exit fee ban has negatively impacted the market.

“Everyone agrees they shouldn’t have banned exit fees. The reason the banks have clawback is there’s no exit fees. No-one would need to ‘bash up’ anyone else if there were exit fees,” Denovan said.

Borrowers switching banks every two years each time they find a better deal is not fair, he said.

“It’s so inefficient for our economy – it’s ridiculous and doesn’t happen anywhere else in the world.”

CHOICE also sounded off on housing affordability. To combat rising house prices, CHOICE recommended the inquiry examine macroprudential tools to keep the market in check, although its notes current regulatory arrangements “should be sufficient” to manage such developments on both a prudential and consumer protection level.

“We note that there have been increasing anecdotal suggestions of risks rising in the mortgage market, with the re-emergence of high LVR loans, evident in late 2013…CHOICE would welcome this Inquiry’s consideration of the NZ experience in light of current developments in the Australian mortgage market and whether the current domestic regulatory arrangements provide ASIC and APRA with sufficient power to address these issues.”

The consumer action group also thinks there is a “strong case” for ongoing reforms to increase consumer-led competition between financial services providers.

“There is a lack of competitive pressure, evident in the fact that those providers who best meet consumers’ preferences are not necessarily rewarded.

“CHOICE believes the most productive focus in this area would be on measures that increase customer mobility and empower consumers with better information to more easily act on their preferences.” 


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Ban on exit fees still hurting small lenders

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  • by Scott Beattie - Cube Home Loans 7/04/2014 9:36:33 AM

    Why not this option for client - (as an example) - I haven't done maths on the rates, it's purely an example.....
    Option 1 has no exit fee and the rate is 5.1%
    Option 2 has an exit fee of up to 4 years and the rate is 5%
    Which would you prefer?
    A clawback applies with Option 1 to introducers
    No clawback would apply to Option 2

  • by The Sage 7/04/2014 9:38:39 AM

    So a consumer group that specialise in reviewing whitegoods thinks they are qualified to make comment on the Financial Services industry.

    What is their qualification, experience and expertise in this area.

    Last time I looked, issuing media releases and reviewing products wasn't a qualification for anything, let alone trying to guide a Financial Services review!

  • by Albert Waldron 7/04/2014 9:48:51 AM

    Loan setup costs add to the cost of funds. Exit fees helped recoup those costs when a loan discharged in the first 2 years. The continued banning of exit fees causes direct to Bank branch customers to have to suffer a higher interest rate to spread the loan setup costs across the life of the loan. And gives lenders the excuse to punish brokers for clients who are unhappy with the quality of the lenders service via clawbacks. I thought we lived in a free capitalist country, let the markets and customers decide if they want cheaper interest rates and an exit fee or higher rates and no exit fee.