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Exit fees to be axed nearly three years after I suggested as such

So the Gillard Government in response to the political pressure building over the interest rates banks charge will now look at cracking down on exit fees. A good question is why this hasn’t already been done, given that the Rudd Government talked about doing the same thing.  Hopefully the Gillard Government isn’t as bad as the Rudd Government in terms of being all talk and no action on nearly every issue, including climate change, tax reform, economic conservativism, budget surpluses, ending the blame game,  spending cuts, effective action on petrol and grocery prices, making tough decisions etc etc.

In February 2008, I in fact suggested that the exit fees should be cut, and gave my reasons. Below is the entire post, as it appeared on my personal blog back then:

 

Swan threatens, we say do much more

Time for Labor to walk the walk

Wayne Swan has threatened the banks with minor regulation for raising interest rates above the Reserve Bank’s increase. Under the plan, banks will be required to produce lists of credits and debits on request.

Once again, we can see that this is more spin and process which is not guaranteed to help the average mortgagor in any way. Lots of spin, little substance.

We only wish Swan stopped threatening and started to act with much more severe measures. Readers well versed in the history of economic reform in Australia may recall that it was actually Labor who introduced competition for the banks by opening up the industry 25 years ago. This was under the Hawke/Keating government of 1983 – 1996, a period of glorious and bold economic reform which on most occasions had the full backing of the Opposition, who started to realise just how much the Fraser government had been guilty of inaction in this area.

Unfortunately, there seems no such boldness by Swan, just a timid little threat that ultimately amounts to nothing. It’s not as though Swan owed the banks any favours: firstly, many have failed to consult with him before rising their interest rates above the Reserve Bank rise. Secondly, they can always be expected to donate more to the Liberal Party’s campaign chest.

Under the Hawke and Keating Governments, Labor felt free to upset as many businesses as it pleased, because before then business had always strongly backed the Coalition. Ironically, it was with the Hawke government that many businesses were sufficiently impressed with Labor that they started to donate to the Labor cause. You see, for every few businesses you upset by deregulating and increasing competition, you benefit many more who are then able to enter the industry, as well as those who greatly appreciate getting better prices for capital. Finally, there are also the consumers, who always stand to benefit the most. Competition keeps prices in check, and that’s a great thing for every household and government.

As a result, we would like to see Swan become bolder by asserting his authority. What we would propose is the abolition of bank exit fees. This would immediately dismantle one of the strongest barriers to competition between banks in the mortgage market. Banks could always try and recoup their expenses through raising their interest rates, if they dare. For if there are no exit fees, consumers will be as free as possible to shop around every time there is an interest rate hike. With this, banks would be well and truly put on notice by their own customers. And, Swan would be able to achieve his professed aim:

What we’ve got to get is the power of competition, the power of competition out there so people who are unhappy with what their bank is doing have the option of changing their account.

We couldn’t agree more. That’s why we would like Swan to walk the talk.


23 Comments

  1. Sax says:

    Hmm ?

    1. There is no competition between the banks, never was.
    I think the correct term to use these days is “collusion” ?

    2. The federal government, under the RBA, cannot do anything, as the banks are now deregulated. If they still owned the C’Wealth, perhaps they could, by introducing competitive market moves, that would force the others to follow, but as that is near privatised, that opportunity is gone ?

    3. Increase LCD’s through the Reserve Bank ?
    Can’t do that either. The economy is in the cra**er now, so if you halt bank’s ability to lend, that would bring the economy to a brick wall ?

    The banks years ago, snuck fees in, under the guise of offering higher interest rates to compensate. You only paid fees if you went over the specified transactions. How long did that last, until the banks reduced the number of transactions, and begin to successfully milk all of us, until there is nothing left.

    Remember the story Today Tonight did about the kid’s passbook account in all the major banks, as well as a few building societies. They put fifty odd dollars into it, and left it. No transactions at all for a year. All the banks, without a miss, took the bloody lot, and only two out of the building societies had left any money in the account. Neither party have come to grips with the idea, of just what an election winner this could be, but both are gutless when it comes down to it. For both sides, too much of their campaign finances/donations come from big business, including probably banks, to risk it all by doing the right thing.

  2. Ray Dixon says:

    If they abolish exit fees the banks will simply increase entry fees (or in some other area) to compensate. Which means borrowers who chop & change mortgages will be no better off.

    I don’t think you can regulate over profit margins but you can certainly regulate over the obscene remuneration packages that CEOs pay to themselves and other executives. I’ve got no doubt at all that the recent CBA rise was directly linked to the desire of Sir Ralph to keep his own wage up in the stratosphere.

  3. Leon Bertrand says:

    Curbing exec salaries will only have the effect of driving board talent to other countries. We would all be worse off as a result.

  4. Ray Dixon says:

    How would we be worse off, Leon? What “board talent” do you think we need in Australia, people like Sol Trujillo or Sir Ralph Norris? Give me a break – I would do the CEO’s job for $1million per year or maybe even less. And believe it or not I reckon I’d do just as good a job. You see, I’m not a greedy, selfish pig.

  5. Sax says:

    I agree with Ray for a change here Leon. If the strict regulations, governing the banking industry were still in place, then there would be no need for the massive salary packages to enlist high flyers to rip us off ?

    Eventually, (at least in hope ?), one of the big banks will sit down, scratch their heads (or whatever is close), and realise a simple marketing strategy. A lot of little profits are far better than no big ones.

    They have for years now, in that relentless search for shareholder profits, forgotten their social roles within our society. The first thing taught to me many years ago, going out into business, was to go and introduce myself to my local bank manager, and make him my bestest friend ? Hmm, couldn’t tell you who my local manager is now, don’t even know if I have one anymore ? In that relentless search for profit maximisation, the industry has forgotten that it needs us ? The first of the biggies, that begins to remember that, and return to that ideology, would dominate the market place very quickly.

    They won’t do it though, and they are blaming their own shareholders for the situation. The excuses ? Ah, the shareholders need dividends, they want to see profits, they want to see share growth. My reply, BULLSH*T !

    Good corporate citizens, in other words, our trade icons in Australia, haven’t succeeded by gouging their customers at every opportunity.
    They have succeeded by providing world class products, and second to none service. Hell, the banks want to even charge a buck, for every over the counter withdrawal these days ?

    What other industry would survive five minutes in our market place other than the banks, if they wanted to charge their customer, as they walk in through the door ? It is time the respective political parties in this country, and yes both Liberal and Labor are equally responsible here, stopped mollycoddling our banks, stopped protecting them, and let them stand on their own feet. Apply the same regulations that every other business in Australia suffers when unconscionable conduct occurs.

  6. Leon Bertrand says:

    Ray,

    I have to disagree with you when you suggest that you could do as good a job as the current execs. Neither could I by the way.

    Sax,

    In the days of regulated interest rates only those who were mates with the bank manager could get a loan. That seems hardly fair as a basis of determining who should be accepted for a loan.

    And like it or not, there are costs associated with coming into branches for deposits and withdrawals. It’s simply not reasonable to expect banks to bear those costs. If you don’t like it I suggest you do internet banking, where the fees are much lower.

  7. Ray Dixon says:

    How do you know that, Leon? To start with I wouldn’t have got the bank into the USA Sub-Prime market where they lost $billions. I know enough about real estate finance (I worked in it for years and ran my own brokerage) to know that was a market to stay out of. So I would start with a pretty good record over the current crop of dimwits.

  8. Sax says:

    Spot on Ray.

    Leon, in your days of “regulated interest rates” as you specified, you could get a loan. Certainly, the qualification standards were more stringent, but money was still advisable, as long as you could show ‘capacity to repay’, and a good previous savings record. Just the way the credit availability criteria should be perhaps ?

    Australian banks, for the past couple of years, have been heavily exposed in the once much profitable US market. They got their ar*es burned when the US crashed. Serves them right, and now finally, they are paying the price for that greed. Come to think of it, WE are now paying the price of that greed aren’t we ?

    Every business on the planet, asks its customers to pay its running costs. As you put it, branch costs et al ? Hell, even your local petrol station, only charges a few cents on top of its wholesale price, to cover these same sorts of costs ? Wages, rent, power etc are charges every business in Australia has to bear. That is what they call a “profit margin” ?

    They also have loans with the banks, but don’t find it necessary to charge their customers outrageous fees and charges do they ? If they did, the customer would simply go somewhere else wouldn’t they ? That is the point of the post I think. Not only are there bank mortgage transfer fees to consider, but also legal fees to change the mortgage at the title office, as well as the title office b/s fees as well ? Added to that, they are all in collusion when it comes to products, and the prices of those products. Competitors trying to come into this market to compete, can’t, simply because they cannot get the same protectionism from governments for their clients, hence they get left out. That is why Building Society’s interest rates, finance company rates etc, can’t compete with banks. Banks have enviable deposits available to them, all at rediculously low, and in the case of cheque account balances etc, at no cost to them. No interest bills to pay, the money just sits there in a massive slush fund, available to loan out, at their whim. That is why LCD’s exist. If they didn’t, the bank would lend out nearly all of their deposited funds. That is where and how these banks make their money.

    Again the question that we all should ask is, …… when is enough, enough ?
    When does “enough” become gouging ?

    Finally, if, any other type of business in Australia made their money like banks did, they would be shut down overnight, under the guise of unfair, or unconscionable business practice. Why should the banks be any different here ?

  9. Sax says:

    BTW for nought Leon ?
    Internet banking costs the banks bugger all. BUT, all fees and charges still apply. My accounts still attract transaction charges, monthly a/c keeping fees, and the bank does nothing for them. I pay the same as someone who deals over the counter. the only difference, is that someone doing a withdrawal over the counter gets ‘creamed’. That is why the government made a law, to protect pensioners who were being ripped off in this manner. Why stop there ? Too gutless to go the full route ?
    And the banks have the entire country by the nuts.
    There’s justice and a fair go for ya ?

  10. Leon Bertrand says:

    Ray and Sax,

    Australian banks were the least exposed in the developed world to the US sub-prime fiasco. If I recall correctly, only NAB and ANZ were exposed, but never to the extent where they had to be bailed out by the government. That’s the forgotten reason that we fared so much better than the rest of the developed world.

    Sax,

    It is a fact that back in the day it was much harder to get a loan than it is now. Thankfully, it dosen’t really matter if the local bank manager knows or likes you anymore.

    Also, your comparing of the banking industry to other industries is without substance. Banks provide a service to customers, just like all other businesses who provide services. Banks are entitled to charge for their services just like other businesses do. There’s nothing unfair or unconscionable about this.

  11. Ray Dixon says:

    Actually Leon, I think it was ANZ, NAB and Westpac – i.e. 3 of the 4 banks – who were involved in the subprime saga and lost $billions between them. Why are you attempting to downplay that as insignificant? It was a major bungle and they made Aussie customers pay for their mistakes by jacking up rates above RBA increases and increasing fees. As I said before, if I’d been CEO of one of these 3 banks I’d have stopped them from entering that market thereby saving them (and Australians) a lot of money. Give me the job.

    Come on Leon, don’t be afraid to admit you might be wrong.

  12. Sax says:

    They may have been the least exposed, but as Ray mentions, they still got their ar*ses severely burned in the process.

    Certainly, banks are entitled to charge for their services, and they are most certainly entitled to make a profit. BUT, it is fundamentally a service industry, and was a successful one, without having to gouge its customers in the process. That is the reason as to why these new charges, have become so hard to fathom. For nearly their entire existence, they have not had felt it necessary to charge these nuisances, so what has changed ? As a service industry, they should be made to compete on those terms, but that is not happening is it ? As I mentioned above, they are protected in their day to day processes by the RBA and government. There is little or no competition. Where and in what other Australian industry, would this sort of anti competitive behavior be allowed ?
    I can’t think of any ?

  13. Ray,

    I fail to see what exactly I am “wrong” on. Even if I were to accept your view that you would have avoided the US sub-prime market, there’s a lot more to running a bank than that. Unless you have experience in the senior levels of the banking industry, there’s probably a lot of “unknown unknown’s”, to borrow a Donald Rumsfeld phrase, because there’s a lot more to it than meets the casual observer’s eye.

    Sax,

    I don’t like bank fees either. Thats why I also bank with credit unions. I suggest that you do the same. I hope you aren’t one of those people who spends more time whiningeing about the bad deal they get with the banks than the time they spend trying to shop around.

    You don’t have to pay the fees if you are willing to shop around.

  14. Ray Dixon says:

    Leon, my point was not really about my own credentials to be a CEO of one of the major banks (although I reiterate that I reckon I’d do a better job). Where I think you were “wrong” was to say that limiting CEO salaries to a max. of say $1mill per year would diminish the talent pool.

    On the contrary, I believe it would increase the talent, as it would get rid of bozos like Ralph Norris. He can go back to New Zealand. Do you seriously believe we can’t find extremely competent people to work for $1million per year?

    The banks have just reported super profit increases of up to 60% to about $6billion each and then the CBA goes and doubles the RBA increase? Don’t you realise that one of the main reasons they do that is because CEO & executive salaries get a major boost for those kind of obscene results?

    I’m not begrudging the banks making very good profits and I acknowledge it’s healthy for our economy to have a very viable banking industry. However, it’d be just as healthy if say they’d only made $3 to $4billion profit wouldn’t it? Of course it would.

    The problem is that a CEO like Norris knows that if he keeps making obscene profits the shareholders will keep on approving his equally obscene $16million salary. And that’s why he justifies the rate increases. Leon, these bastards running the banks are just lining their own pockets and bleeding homebuyers dry.

  15. Ray,

    I think you are the first person I am aware of who has suggested that paying less for a position will attract more talent. Basic economic theory would suggest the opposite.

    The most talented executives will not accept a salary of $1m when they can get many times that in another country. As I suggested earlier, the only effect would be that talent would be driven away from Australia. We would essentially become a nation that does not appreciate talent and whose economic policies would be officially directed at cutting down (financial) tall poppies.

    I don’t think that’s where we would want to be. Any company understands that it needs to attract talent by offering competitive salaries. Offering substantially less would not benefit anybody in the longer term.

  16. Ray Dixon says:

    Leon, these are not your normal “salaried positions”. These are chief & senior executives who start on a much lower base wage and then award themselves bonuses and free shares based on company profit performance & share price. All with shareholder approval.

    But they only achieve those goals and get that approval because they have manipulated the rates & fees to ensure the targets are met. Oh, and by laying off low paid employees.

    And they do it in advance.

    In other words it’s borderline illegal manipulation of the company’s books. It certainly is an area where the government can & should legislate over and stamp out.

    It’s just wrong to equate this so simplistically with normal supply & demand economics for employment. And we’d certainly be better off by NOT attracting the likes of Ralph Norris or Sol Trujillo to head up our major corporations.

  17. Ray,

    I honestly fail to understand the criticism you are making of the bank executives. By your own account they are making the company perform strongly, they are achieving their profit goals, steamlining the business where necessary and earning the approval of shareholders.

    I think that governments should be encouraging business success, not trying to stamp it out.

  18. Ray Dixon says:

    They’re ripping off the public and their own companies, Leon. This is not just a matter of how much salary they are paid, it’s how they manipulate the market and their business to line their own personal pockets. People have been sent to jail for doing things not as bad as what they do.

    Businesses can still be successful without dishonest, greedy people at the helm. I suppose you reckon HIH were just being “successful” too?

  19. Charlie Milburn says:

    I think we have Dr Evil here. He still thinks a million dollars is a lot of money.

    The cheif exec of one of the best performing banks in the world should receive one of the best pay packets in the world. Pay him less and he’ll simply go to another place where he gets more.
    I played in the VFL. I go paid for it and thought it was a good quid too, but nothing like these blokes do in this AFL.
    Imagine if Carlton said to Chris Judd that he should play for $40,000 (a tenth of his current pay)when he can get $400,000 at any other club? The asphelt outside Prince’s Park would melt as he left.
    So when the going rate is $10 mil then why not pay at least a competative rate and have the best people.
    And I always ask – if you could do a better job that the bloke running a business that makes $6 bil, then why are you blogging on at website and not running a business that makes $6 bil?

  20. What Charlie points out is just common sense. Of course if people are paid less than what they can get elsewhere they will go elsewhere. Just look at the effects of the NRL’s “salary cap” and all the players that have left to play Rugby, AFL or League in England.

    Perhaps Ray should read the following column: http://townhall.com/columnists/ThomasSowell/2007/01/23/the_greed_fallacy

  21. Ray Dixon says:

    Oh God, football comparisons. Comparing the packages of CEOs and senior execs to how football players, or any other salaried/contracted employee is remunerated is ridiculous. These guys are awarding themselves out of whack bonuses and shares for increasing the banks’ profits by hiking up interest rates unreasonably, charging unwarranted fees to customers and laying off staff. Why? Because they can.

    It should be outlawed.

    But I’ve already pointed all that out and you haven’t addressed it. There’s no point continuing this – I’ve been here before with you “Charlie” and your style just stands out like dogs balls. Go hassle someone else.

  22. Sax says:

    You guys seem to forget, that these banks/businesses, that were performing well, were doing so, before the high flyers took the helm ? They were doing their job, day in and day out, ‘living’ the business, without the massive bonuses, or incentives, and the businesses were still making massive profits.

    Whatever way you look at it Charlie, a million bux is still a million bux, and a lot of money. Ok, certainly, I have nearly 100m bux, sitting in a hangar outside, and I can still sleep at night, but as a CEO (or any other glorified label you want to give me), I don’t find it necessary to demand a massive salary package, nor demand massive profit margins from my clients ? I would be out of business in a heartbeat if I tried ? I guarantee neither does any other small or medium business owner in Oz either. The ‘talent’ to which you refer to is here in Australia, and always has been. It is all about public exposure, and egos. There is no way a bank, can justify paying such rampantly over inflated salaries to executives, when they have a vast, and unbelievably highly qualified underling staff talent pool to draw from.

    Surely one only has to look at that w*anker Sol Trujillo to realise that ?
    Man, now there was value for money personified ?

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