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Asia-PacificApril 6 2008

Switching rule makes banks twitchy

A new law in Australia to make it easier to change banks will disadvantage the main players and encourage switching for switching’s sake, writes Michael Imeson.
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What is it?

Australia’s Rudd government has rattled the country’s major banks by making it easier for people to switch banks if they are cheesed off with their current provider. The account switching package (ASP) is likely to benefit the mutually owned building societies and credit unions at the expense of the big boys.

Who dreamed it up?

Australia’s treasurer Wayne Swan. He says that the initiative “shows how determined we are to make the banking system work for Australian families and not against them”.

What are the main provisions?

  • A listing and switching service. This will require banks to provide customers with information on all direct debits and credits to take to a new bank for easier transferral;

 

  • A consumer complaints hotline provided by the Australian Securities and Investments Commission (ASIC);

 

  • Comprehensive consumer education resources – including a website advising how to switch; and

 

  • An ASIC-led review of entry and exit fees for mortgages. The aim is to put downward pressure on fees and help people to change mortgage provider.

The first three will be operational by November. There is no deadline as yet for the fourth.

What is in the small print?

 

The listing and switching service will require a customer’s existing bank to provide a list of the past 13 months’ direct debits and credits to be given to the new bank.

What does the industry say?

 

In public the major banks, represented by the Australian Bankers’ Association (ABA), support the account switching measures. Privately they have reservations. However, the banks are combative on the mortgage fee review. “The ABA does not agree that these fees are high,” says chief executive David Bell. Building societies and credit unions, represented by Abacus – Australian Mutuals, believe that the measures will benefit them. “The customer-owned banking sector stands to benefit from moves to facilitate account switching because our customer satisfaction ratings strongly outperform the major banks,” says Louise Petschler, chief executive of Abacus. Yet Mr Bell says: “It is simply speculation on behalf of Abacus that credit unions and building societies will increase market share”.

How much will it cost?

 

Institutions will incur administrative costs, which they will pass on to customers. Increased competition will force profit margins down on current accounts and some institutions will lose more business than they gain.

What do the regulators say?

“The ASP will reduce unnecessary barriers to customers changing providers and increase customer awareness of financial services products and their costs,” says Mr Swan. It will increase competition and choice for customers and reduce prices, he adds. ASIC has started collecting data on mortgage fees and will soon “announce a tight timetable to complete the review”, says chairman Tony D’Aloisio.

The law of unintended consequences

Switching for switching’s sake would lead to higher than anticipated administrative costs. “We would be very concerned if the reforms encouraged high churn in the mortgage market without consumer benefit,” warns Ms Petschler of Abacus. “We still don’t have effective regulation of mortgage brokers and we are anxious that the government doesn’t create artificial incentives for switching – it just adds costs without focusing on genuine consumer benefit.”

Could we live without it?

Yes… many banks have already implemented their own account-switching procedures.

Rating: 2

Rating scale: 5 = Essential 4 = Useful 3 = Neutral 2 = Unnecessary 1 = Waste of time

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