Out of cycle rate rises to cost brokers

by Miklos Bolza06 Jul 2017
If the recent spate of rate increases by the major and non-major banks continues out of sync with the Reserve Bank of Australia (RBA), this will erode trust and have financial ramifications for brokers, says one leading industry guru.

Paul Ryan, financial services executive and founder of digital marketplace simplyaskit, has called on the federal government and the Australian Competition and Consumer Commission (ACCC) to intervene in an environment where it was deemed normal for banks to raise rates outside of an RBA decision.

Repeated rate rises are an issue because no one is prepared to speak about them, he told Australian Broker.

“It’s the norm these days. Pre-GFC, it was very rare that banks would move outside of the RBA cycle. On the back of the GFC, the Reserve Bank would increase rates by 0.25% and the banks would raise theirs by 0.38%; the RBA would come down by 0.25% and the banks would only come down by 0.12%.

“We’re not blinking an eyelid and the banks’ value and profits have soared over the past ten years on the back of this repricing.”

While this type of environment created serious issues for consumers, brokers have also been caught up in the crossfire, Ryan said.

“It takes a lot of work for a broker to win the trust of a consumer. Once they’ve won the consumer’s trust, they’ve submitted and settled the loan, and been paid for the work they’ve done, the customer’s happy. However, in a few months, through no fault of the broker, the banks have repriced. The customer will be very upset with the lender but they also can be questioning the broker.”

Not only does this make it difficult for brokers to maintain trust but the bank’s decision can also cost the broker financially, he added.

“When the customer refinances, the broker will be up for a clawback. Not only does this create a degree of frustration and degrade trust between a customer and a broker, but the broker loses revenue if the customer is annoyed enough that after a few rate rises, they refinance elsewhere.”

The government and the ACCC needed to create a discussion around controlling these rate hikes, he said, to present a more transparent environment where banks have to clearly explain the reasons behind these decisions.

“If it was good enough for the Australian government via the Australian taxpayer to provide a guarantee to the banks during the GFC, why isn’t it good enough for the Australian government via the banks to protect Australian home loan borrowers?”

He suggested a government mandated guarantee from the banks that loan interest rates would not be shifted outside of the RBA cash rate decisions for the first three years of the loan.

“Banks have got shareholders so they’re growing and making incredible profits. The shareholders are happy so they’re not going to change. This needs action from the ACCC to promote greater transparency of why banks increase their rates.”

Current excuses such as the recent lending restrictions by the Australian Prudential Regulation Authority (APRA) weren’t viable reasons to increase rates, he added, especially since the banks could simply change their lending policies instead.

“Reducing 95% lending ratios to 90% or 80%, increase serviceability factors from 2.5% to 4% – that takes the heat out of the property market because people can’t borrow as much. There’s absolutely no reason why they need to be increasing rates.”

There is also an imbalance between how banks are treating new and existing customers, Ryan said.

“They’re raising rates which increases repayments and there’s no reason to do so for existing customers. On one hand, the banks are out there creating incentives and offering discounts to brand new customers but yet their existing customers have had three rate hikes while the cash rate hasn’t gone anywhere.”

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