THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES BANKING AMENDMENT (DELIVERING ESSENTIAL FINANCIAL SERVICES) BILL 2010

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1 2010 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES BANKING AMENDMENT (DELIVERING ESSENTIAL FINANCIAL SERVICES) BILL 2010 EXPLANATORY MEMORANDUM Circulated by the authority of Adam Bandt 1

2 Banking Amendment (Delivering Essential Financial Services) Bill 2010 OUTLINE The Banking Amendment (Delivering Essential Financial Services) Bill 2010 (the Bill) amends the Banking Act 1959 (the Banking Act) in four ways. The Bill: requires banks to offer basic transaction accounts that are free from account keeping fees and penalty fees for the actions of third parties, and that limit other fees to a level sufficient to recover the cost to the bank of the penalised conduct; provides that transactions at a bank's own-branded ATMs are to be free of charge, and caps charges for the use of a bank's ATMs by customers of another authorised deposittaking institution (ADI) at the cost of service provision; requires ADIs to offer 'fixed interest gap' loans and mortgages with an interest rate fixed at a negotiated margin above the institution's cost of funds; and caps mortgage and loan exit fees at a level sufficient only to recover the cost to the lender of the early termination, and requires that exit fees are mentioned in advertising and included in mortgage contracts in a uniform way to ensure customers are aware of them when deciding whether to sign the contract. NOTES ON CLAUSES Clause 1 Short Title This is a formal provision specifying the short title. Clause 2 Commencement The Bill's provisions are to commence the day after the Bill receives Royal Assent Clause 3 Schedules This clause provides that an Act that is specified in a Schedule is amended or repealed as set out in that Schedule, and any other item in a Schedule operates according to its terms. 2

3 Schedule 1 Amendments to the Banking Act 1959 Part 1 Conditions on banks' authorities Item 1 APRA's power to impose the provisions of the Bill Item 1 amends existing subsection 9(4) of the Banking Act to empower APRA to vary an authority to conduct a banking business in Australia by introducing a requirement that the business abide by the provisions of this bill. Item 2 Basic accounts and ATM fees Item 2 inserts a new section 9AA into the Banking Act. Subsection 9AA(1) provides that the Australian Prudential Regulation Authority (APRA) must vary banks' section 9 authorities to give effect to this section within 30 days of the Bill commencing operation. Subsection 9AA(2) introduces the requirement for retail banks to offer basic accounts (9AA(2)(a)) and an obligation upon banks to make their customers and prospective customers aware of these accounts. Subsections 9AA(3) and (4) describe basic accounts. Paragraphs 9AA(3)(a)-(d) detail the mandatory minimum features of basic accounts, while paragraph 9AA(3)(e) prohibits ongoing service fees and penalty fees for the actions of third parties. Subsection 9AA(4) provides that the relevant actions of third parties are to be detailed by APRA in a legislative instrument. It is envisaged that they will include transgressions over which the account holder has no control, such as inward cheque dishonour. Some fees are still permitted under subsections 9AA(5) and (8), as discussed below, but paragraph 9AA(3)(f) provides that any attempted transaction that will result in the imposition of these fees must first trigger a real time warning to the customer and the opportunity for the customer to rescind the transaction. This is akin to the automatic warnings that are presently given to customers before they are charged for the use of an ATM. Subsections 9AA(5) and (6) relate to penalty fees for breach of contract for basic account holders. Such fees may not be levied unless they have been approved by APRA (9AA(5)), and APRA may only approve fees that have not been imposed for the actions and transgressions of third parties and are not greater than the reasonable costs incurred by the bank as a result of the breach (9AA(6)). Subsections 9AA(7)-(9) introduce restrictions on the charges banks may levy for the use of their ATMs, or for the use of other ATMs by their customers. These restrictions apply to all banking customers, not only those with basic accounts. Under these rules, a bank may not 3

4 charge its customers for the use of the bank's own ATMs (9AA(7)). Banks are also not permitted to charge their customers for the use of any other ATM (9AA(8)(a)), or to charge non-customers for the use of their own ATMs (9AA(8)(b), unless the fee has been approved by APRA. Subsection 9AA(9) provides that APRA may only approve such fees if it is satisfied that they do not exceed the banks' reasonable costs of providing the ATM service. Subsection 9AA(10) provides definitions of terms used in section 9AA. Part 2 Fixed interest gap loans and mortgages Item 2 Item 2 inserts a new section 9AB into the Banking Act. Subsection 9AB(1) provides that APRA must vary banks' section 9 authorities to give effect to this section within 30 days of the Bill commencing operation. Subsection 9AB(2) introduces the requirement for ADIs to offer 'fixed interest gap loans and mortgages' to their customers and prospective customers (9AB(2)(a)), including when selling such products through a third party. Paragraph 9AB(2)(b) requires ADIs to develop a formula for calculating their cost of funds, submit it to APRA for approval (9AB(3)), which APRA may only grant if it is satisfied that the formula will yield a result that does not exceed the ADI's cost of funds (9AB(4)). As with variable rate loans and mortgages, fixed interest gap products will need to be recalculated periodically so that customers benefit from reductions in the ADI's cost of funds and the ADI is able to maintain its margins if its costs increase. Subsection 9AB(5) provides for APRA to issue guidelines that will identify the triggers for recalculation. Subsection 9AB(6) defines various terms used in section 9AB. Part 3 Exit fees on mortgages Item 3 Item 3 inserts a new section 9AC into the Banking Act. Subsection 9AC(1) provides that APRA must vary banks' section 9 authorities to give effect to this section within 30 days of the Bill commencing operation. Subsection 9AC(2) introduces a requirement for ADIs that offer variable rate loans and mortgages and fixed interest gap loans and mortgages (including where these products are sold by third parties) to submit a formula to APRA linking any early termination fees to the actual and reasonable costs sustained by the ADI as a result of the early termination (9AC(2)(a)). ADIs are also required to include the early termination fee under the uniform 4

5 heading 'Early Repayment Charges' in the mortgage/loan contract (9AC(2)(b), and notify customers of the existence of the charge when advertising these loans/mortgages (9AC(2)(c)). Subsection 9AC(3) imposes the same obligations upon ADIs with respect to fixed rate loans and mortgages, with the sole exception that paragraph 9AC(3)(b) requires that the early termination fee is to be expressed in the loan/mortgage contract as a plain English explanation of how the charge will be calculated rather than a figure. This is to accommodate the fact that ADIs are unable to anticipate what an early termination of a fixed rate loan or mortgage will cost them in advance. Subsection 9AC(4) provides for APRA to issue guidelines regarding an ADI's ability to vary its formula for calculating the early termination fee. Subsection 9AC(5) defines 'early termination fee' for the purpose of this section. 5