Mortgage break fee investigation concludes
(12 May 2010 – New Zealand) The Commerce Commission has concluded its investigation under the Credit Contracts and Consumer Finance Act (CCCF Act) into the mortgage break fees charged by banks when customers repay their fixed-rate loans early.
The Commission began investigating the break fees, also known as full prepayment fees, after a range of complaints from bank customers about the fees following sharp drops in interest rates in late 2008 and early 2009.
The decrease in interest rates led to banks imposing significant prepayment fees on customers breaking fixed-rate mortgages.
The first stage of the investigation ended in April 2009 with no enforcement action taken when the Commission concluded that four banks, ASB, SBS Bank, BNZ and National Bank, were likely to be charging reasonable fees.
These banks charged fees based on the change in retail interest rates, which is consistent with a formula set out in the CCCF Regulations (colloquially known as the safe harbour formula).
Since then the Commission continued to investigate the fees charged by Kiwibank, HSBC, Westpac, ANZ and GE, who charge prepayment fees based on the change in wholesale interest rates. The Commission concluded that this basis is likely to produce a fee which is reasonable and therefore complies with the CCCF Act.
In relation to ANZ, Westpac and GE the investigation was closed with no enforcement action being taken.
Kiwibank and HSBC were each issued with a warning on the basis that the formulae they were using until mid-2009 had technical deficiencies, which meant that they were likely to have breached section 54 of the CCCF Act.
However, during the investigation process both banks changed their formula and in addition, Kiwibank made ex-gratia payments to its customers totalling approximately NZ$689,000 (A$550,000) while HSBC made ex-gratia payments to its customers totalling approximately NZ$113,000.
The Commission determined that a warning is appropriate in the circumstances.
Graham Gill, fair trading manager Auckland for the Commerce Commission said that the Commission recognised, given the variance in fees being charged, that this was a significant and important issue for many bank customers and accordingly it conducted a comprehensive investigation of the matter.
There is a great deal of complexity in the formulae, the underlying banking arrangements, related legal issues and in the Act itself, and the Commission needed to be thorough in considering every aspect, added Mr Gill.
Mr Gill highlighted that creditors were in-fact entitled to charge a reasonable estimate of their loss on prepayment of a loan.
The Act gives creditors a wide ranging discretion in assessing its loss, and this investigation was focussed on the nature of the loss suffered by the banks. The key loss suffered by the banks relates to interest rate swap contracts, which banks enter into when customers enter into fixed rate loans, noted Mr Gill.
Consumers entering into fixed-rate mortgage contracts need to ensure they fully understand the implications of the contract they are signing. If they choose to, or need to, exit the contract earlier than the agreed term they face legitimate bank charges. They should also be aware that, under the CCCF Act, banks can alter the basis of their prepayment fees at any time if they provide customers with appropriate notification of the change, said Mr Gill.
The Commission noted that the Ministry of Consumer Affairs was currently reviewing the Credit Contracts and Consumer Finance Act and the results of this investigation, which may be helpful to that review, have been provided to the Ministry.
The decrease in interest rates led to banks imposing significant prepayment fees on customers breaking fixed-rate mortgages.
The first stage of the investigation ended in April 2009 with no enforcement action taken when the Commission concluded that four banks, ASB, SBS Bank, BNZ and National Bank, were likely to be charging reasonable fees.
These banks charged fees based on the change in retail interest rates, which is consistent with a formula set out in the CCCF Regulations (colloquially known as the safe harbour formula).
Since then the Commission continued to investigate the fees charged by Kiwibank, HSBC, Westpac, ANZ and GE, who charge prepayment fees based on the change in wholesale interest rates. The Commission concluded that this basis is likely to produce a fee which is reasonable and therefore complies with the CCCF Act.
In relation to ANZ, Westpac and GE the investigation was closed with no enforcement action being taken.
Kiwibank and HSBC were each issued with a warning on the basis that the formulae they were using until mid-2009 had technical deficiencies, which meant that they were likely to have breached section 54 of the CCCF Act.
However, during the investigation process both banks changed their formula and in addition, Kiwibank made ex-gratia payments to its customers totalling approximately NZ$689,000 (A$550,000) while HSBC made ex-gratia payments to its customers totalling approximately NZ$113,000.
The Commission determined that a warning is appropriate in the circumstances.
Graham Gill, fair trading manager Auckland for the Commerce Commission said that the Commission recognised, given the variance in fees being charged, that this was a significant and important issue for many bank customers and accordingly it conducted a comprehensive investigation of the matter.
There is a great deal of complexity in the formulae, the underlying banking arrangements, related legal issues and in the Act itself, and the Commission needed to be thorough in considering every aspect, added Mr Gill.
Mr Gill highlighted that creditors were in-fact entitled to charge a reasonable estimate of their loss on prepayment of a loan.
The Act gives creditors a wide ranging discretion in assessing its loss, and this investigation was focussed on the nature of the loss suffered by the banks. The key loss suffered by the banks relates to interest rate swap contracts, which banks enter into when customers enter into fixed rate loans, noted Mr Gill.
Consumers entering into fixed-rate mortgage contracts need to ensure they fully understand the implications of the contract they are signing. If they choose to, or need to, exit the contract earlier than the agreed term they face legitimate bank charges. They should also be aware that, under the CCCF Act, banks can alter the basis of their prepayment fees at any time if they provide customers with appropriate notification of the change, said Mr Gill.
The Commission noted that the Ministry of Consumer Affairs was currently reviewing the Credit Contracts and Consumer Finance Act and the results of this investigation, which may be helpful to that review, have been provided to the Ministry.
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