Bad Things Happen: a series on banking
In August, Financial Markets Authority chief executive Rob Everett told journalists that “bad things happen” when no one’s regulating the banks. He meant bad things for customers, and maybe for New Zealand. Because, of course, going unscrutinised is great for our super-profitable banks.
Newsroom’s “Bad Things Happen” series scrutinises some of the products and practices that some in banking would far rather went under the radar. And we crunch some numbers on what this lack of scrutiny is costing us, the banks’ customers.
It is many millions of dollars.
Business editor Nikki Mandow begins today by examining in a news feature published first on our subscriber site Newsroom Pro, and free on Newsroom.co.nz from tomorrow, the issue of Low Equity Premiums which banks charge on certain mortgage arrangements.
The premiums are supposedly charged until a customer pays off enough of a loan to fall beneath a threshold. But the banks don't automatically remove the premium - unless you ask. Unless you know to ask. In the meantime, the passive gains for the banks could be as high as $30 million a year, even if only 10 percent of borrowers are affected. If it is 25 percent of borrowers, the extra interest paid to banks would be around $75 million a year.
LEPs are not illegal. And all the banks say they advise people to notify the bank when their circumstances change and the premium can be removed. But our inquiries show many people do not realise or notify their bank and just carry on paying. It seems the banks' IT systems are not smart enough to work that out and do it for the customer.
In the second instalment, Mandow looks at the vast sums of money deposited with banks but earning negligible interest. For example, 'bonus saver' accounts which offer more interest to savers so long as certain conditions are met through a month or qualifying period. If a saver makes a more than the allowed withdrawals or fails to add enough to savings in that period, the interest on the whole sum saved reverts to a low, almost unnoticeable amount. Newsroom estimates the conditions, which can be alerted to bank customers as they are about to make transactions, are absolving banks of potentially hundreds of millions in unpaid interest.
Authorities here have decided there is no need to follow Australia or the UK's lead in holding formal inquiries into the banking system. But when no one is looking, any system can fall into bad practices. And in New Zealand's case, those practices can mean lead to a situation where we have the most profitable banks by market size in the world.
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