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Exit fee ban fails to tackle competition: MFAA
Released 15 December 2010

The Federal Government's Banking Reform package fails to deal with the root cause of lack of competition in the banking sector, according to the Mortgage & Finance Association of Australia (MFAA).

MFAA CEO Phil Naylor said banning deferred establishment fees, or exit fees, will mean that non-bank lenders will be unable to compete with the banks.

"While appearing on the surface to deal with competition issues, the Federal Government Banking Reforms have failed to deal with the root cause of lack of competition in the banking sector - a reliable funding source for non-bank lenders," he said.

"The package does nothing for non-bank lenders, in fact, it distinctly disadvantages them."

Naylor said non-bank lenders have been able to offer competitive interest rates to consumers by deferring the establishment costs. These fees are paid only if there is an early termination of the loan.
"It is futile to establish mechanisms to enable switching if there is no viable and competitive alternative to switch to," he said.

"The reality is that exit fees may in fact be replaced by establishment fees, making it harder for consumers to get a home loan."

Naylor said the Government has squandered a "golden opportunity" to introduce something like the Canadian Mortgage Bonds systems, which have significantly boosted the non-bank lending sector in that country.

While he welcomed the $4 billion of securitisation funds included in the package, he said it will be a drop in the ocean that will not deal with long-term funding needs of the sector.

"The Federal Government's investments pale to those made by the Canadian Mortgage and Housing Corporation, which during the past three years has invested $300 billion in the National Housing Act Mortgage-backed Securities and Canadian Mortgage Bonds programs," Naylor added.

"The MFAA accepts that it is not as simple as just importing an overseas model into Australia, but there are many similarities between the two economies and banking systems that would suggest the model could easily work.

"These include similar population sizes, the number of major banks operating, similarities in the prudent banking systems, state of economy and an ability to avoid the worst impacts of the GFC."