Monday, December 13, 2010

A Better Deal? Don’t Bank On It!

Well, after many weeks of anticipation, the federal government’s banking reform plan has been announced over the weekend by Treasurer Wayne Swan. While the wrappings have finally come off the package, there are no real surprises in what the government has put forward, including the most widely anticipated step: the abolition of mortgage exit fees. In fact, this move was so widely expected that some banks had already removed their fees in anticipation over the past couple of months. This, along with a proposal to make mortgage insurance portable, is intended to give consumers greater freedom to “go down the road”, as Treasurer Swan put it, and take their business elsewhere.

In theory, if it is easier for customers to abandon one bank and move to another in search of a better deal, it should result in greater competition between the banks. This should result in all banks giving their customers better service and keener rates. It’s an argument that would seem to make sense, but is it really likely to achieve such a result? Well, that depends. Many people are cynical enough to suspect that if banks are forced to abandon exit fees, they will simply find another way to replace the money they would have otherwise collected. That might come in the form of increased application fees, or higher establishment fees, or bigger account service fees. Or even a higher interest rate.

Of course, the move against exit fees is only one of the range of measures announced yesterday, and things are never quite as simple as they might first appear. Removing exit fees will help make it easier for people to change mortgages, and the other measures will mean that customers are better informed, and that banks and other institutions will be able to access more sources of funding. Consumer protection has been strengthened, and transparency has been improved. But none of that guarantees that customers will actually get a better deal. It doesn’t mean that loans will necessarily be any cheaper or easier to obtain in the first place.

And it certainly doesn’t do anything to guarantee that interest rates will be any lower.

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