Week in Review
Bad Things Happen: Fees, fees, fees
Banks make big profits from the fees they charge customers – but many fees have no direct relation to how much it costs the bank to provide the services. And often frontline staff apply fees inconsistently - meaning some customers get charged and others don’t.
In the third part of Newsroom’s Bad Things Happen series, where we investigate consumer-unfriendly bank products and practices, we discover a system of charging fees which can be ad hoc. Some of our Australian-owned banks are struggling to establish what fees they have, what they are meant to do, and whether they can be justified.
Industry watchers say until banks are forced to be more upfront about their products and the costs behind them, consumers will continue to pay more than they should.
Most court cases have big impacts for a few people, but don’t affect the rest of us. Commerce Commission versus Sportzone isn’t one of them. This innocent-sounding test case between our competition watchdog and the unlucky motorbike finance company it chose to pick on in its battle against unreasonable fees, has likely saved money for most of us.
Millions and millions of dollars in total.
That’s because Commerce Commission versus Sportzone, which took seven years to wind its way right through to the Supreme Court, established definitively what fees someone lending money (from banks to pawnbrokers) could - and importantly could not - charge borrowers. The final judgement, handed down in 2016, basically ruled that under the Credit Contracts and Consumer Finance Act it was illegal to make a profit out of fees around lending money for personal use.
That might be a mortgage, credit card, arranged overdraft, personal loan - even pawnbroking is covered by CCCFA.
ComCom versus Sportzone was “the final word on fee ‘reasonableness’”, as law firm Bell Gully put it at the time. A big step for consumer protection.
Basically, said the judges, companies could use fees to recover their costs, but only costs closely related to the activity for which the fee is charged. And it applied to all lenders.
A 36-page Commerce Commission guideline document released a year later clarified the situation for anyone who might have been in any doubt.
“Appropriate” staff and administrative costs were okay, for example, the ComCom said. But companies could not use fees to offset marketing and advertising, they couldn’t use them to recoup bad debt recovery or write-off costs.
Cost of capital? No. IT expenses? No, unless they were directly related to the particular product or service the fee was being charged for. Head office expenses? Only if the lender could establish a “sufficiently close connection” between costs and the particular fee.
Staff Christmas party? That’s fine. Just kidding.
The banks made a virtue out of a necessity.
In February 2017, for example, Westpac announced on its website: “Bank fees. Good news. Yes, you’re reading that right”. There, alongside a picture of some good-looking girls high fiving some fun-loving guys was the news that Wespac fees were going down.
The bank’s credit card over-the-limit fee went from $15 to $1. One dollar. Its credit card late payment fee went from $15 to $8, and there were a range of other fee reductions.
The big four Aussie-owned banks may have lost upwards of $150 million a year in CCCFA-related fee reductions. That’s a $150 million gain for customers.
Same for the other banks. BNZ announced its new fees in March 2018.
“BNZ has slashed fees on 26 products as part of its charm offensive,” said an article on the Good Returns website. This included the bank’s Mortgage One base fee falling from $20 to $2 per month, the fee for a personal loan dropping from $250 to $50, and credit card fees going down by an average 45 percent.
There were some non-CCCFA-related fee reductions around this time, or since then. ATM fees disappeared, for example, as did automatic payment fail fees, direct debit dishonour fees and cheque dishonour fees from some, but not all the banks.
Banks aren’t saying, but Newsroom suspects some sad faces in bank boardrooms around the time. We estimate the big four Australian owned banks may have lost upwards of $150 million a year in CCCFA-related fee reductions. That’s a $150 million gain for customers.
Not surprisingly, some banks seem to have delayed introducing the CCCFA-related fees reductions for as long as they could. After anti-fee High Court and Appeal Court decisions in 2013 and 2015, and government revisions to the CCCFA around the same time, it must have been pretty clear to the banks which way the wind was blowing.
But it took them between 18 months and three years to bring their fees down. And Newsroom reckons that may have cost bank customers up to $350 million in overpaid fees.
One banking industry figure spoken to by Newsroom calls that “dirty money”, the amount banks gained by not implementing the rules back in 2015.
“I believe the banks delayed implementing the reforms because they posed a substantial risk to their Australian owners’ bottom line,” the person said. “In fact I think it’s possible they only made the changes when they did because of the fallout from the Royal Commission [into Misconduct in the Banking, Superannuation and Financial Services Industry] in Australia. The parent banks wouldn’t have wanted any issues here in New Zealand to deal with.”
The industry figure questions the role of the regulators - the Commerce Commission, Financial Markets Authority, Reserve Bank and governments - in allowing banks to continue to charge high CCCFA-related fees as long as they did.
“Why didn’t they do anything to make them act sooner and save customers millions of dollars.”
The banks argue it wasn’t until the final Supreme Court decision in mid-2016 and the Commerce Commission guidelines in June 2017 that the rules were finally clarified.
A ComCom spokesperson said the commission wasn’t aware of any allegation that banks have been slow to comply with the fee provisions.
Interestingly, the Ministry of Business, Innovation and Employment is going through the process of tightening the rules even further. Amendments are working their way through Parliament which will, as law firm Bell Gully said in a recent paper “require lenders to change their fees any time they know, or reasonably ought to know, that there has been a change in their business costs likely to affect the reasonableness of the fee.”
Of course, all this talk of CCCFA-related fees begs the question:
What about all the other fees?
Here’s the rub.
CCCFA and Commerce Commission versus Sportzone only impact fees around consumer borrowing. The rules don’t touch other bank fees. Account fees, transaction fees, savings fees, foreign exchange fees, card fees. Unarranged overdraft fees aren’t covered by CCCFA, despite being a big source of stress, particularly for vulnerable customers.
Many of these non-CCCFA fees are big earners for the banks. The unpopular ATM fee banks used to charge customers for taking money out of another bank's machine, would have garnered around $20 million a year for banks, until it was scrapped last year. And that's just one of many fees the Aussie-owned Big Four banks charge New Zealanders.
ANZ, the country’s biggest bank, made $385 million in fees in 2018, it told Newsroom. And that is growing. ANZ’s “other operating income”, the part of the balance sheet where fee income appears, increased 25 percent in 2018.
Newsroom wasn't able to get fee figures for all the banks, though we did ask. But if their fees income is similar to ANZ’s adjusted for their size, banks could be making almost $1 billion a year in fees.
NZ banks are very profitable
Together, Westpac, ANZ, BNZ and ASB made $5 billion profit in 2018.
Analysis by interest.co.nz using Reserve Bank data released under the Official Information Act shows these four banks - all Australian-owned - are the second most profitable in the world, using the key measure of return on equity (ROI).
Interest.co.nz figures for ROI profitability have our big four banks coming in at 18.4 percent, higher than their Australian parent companies (16.7 percent) and considerably higher than the peer average of 12.9 percent, or the average for the five smaller NZ-owned banks (8.8 percent).
Only the big Canadian banks make more money than us - 20.3 percent return on investment.
Profitable banks are good for New Zealand - we certainly don’t want our financial institutions falling over. But excessive profits from the big four benefit only their Australian shareholders. And the money banks make, they make out of their customers - most through interest rate differentials, but plenty from fees.
So are banks charging us too much for non-CCCFA fees?
The answer is that it’s very hard to tell.
Certainly Jessica Wilson, head of research for watchdog Consumer NZ, would love to find out whether fees were fair for customers.
“We don’t know because banks have to provide so little information,” she says. “The Reserve Bank publishes aggregate figures, but they aren’t broken down by different accounts and services, so it’s hard to dig into the detail.”
She says the regulators should force banks to release more information about bank products and services, including costs.
“Banks are meant to be having more of a consumer focus,” Wilson says, with both the Financial Markets Authority and Consumer Affairs Minister Kris Faafoi looking for greater transparency and fairness. But whether that means customers get a better deal remains to be seen.
“Banks must have a lot of data, but public scrutiny is just not there because they don’t have to disclose this information.”
Even banks sometimes can’t be sure of all the fees they have, and how they are applied, Newsroom understands. As old products are replaced by new ones, technology changes, and banks adopt and adapt products from local competitors or from overseas, fees can lurk in the background, or end up bearing little relation to costs incurred by the bank.
Someone might just go into overdraft by a small amount each month, but the fees can add up.
There is also the problem of fees being applied inconsistently. Wilson says sometimes customers with lots of money might get fees waived, when less valuable customers don't. Or front line staff in one branch might apply fees differently to those in another branch.
“It’s vulnerable customers who are most likely to be hit with fees, so you get the situation where the people who can least afford it are paying the most in fees.”
Adrienne Gallie and David Houghton work for budgeting and financial mentoring service FinCap. They say fees like those charged for unarranged overdrafts ($5-$10, depending on the bank) and dishonoured direct debits (ANZ charges up to $5, the other banks don’t charge) can hit vulnerable families hard.
“It’s a significant problem,” Gallie says. “Someone might just go into overdraft by a small amount each month, but the fees can add up. They think they have some money in their account - maybe it’s just a small amount, but it’s something - and then it’s gone because of the bank fees.
“The whole thing is around customer care. They are making all this profit and they are making it from all the stuff that’s being added to people’s accounts each month. They have to be more accountable.”
Complaining about fees
Banking Ombudsman Nicola Sladden says her office has received almost 1000 complaints around fees and charges since 2015. More than half are about excessive or unfair fees.
But there’s not a lot the Ombudsman can do, unless the disputed fees are CCCFA-related.
“We can look at complaints about transactional fees if there is inadequate disclosure or they are not properly applied. But we can’t look at whether a fee is reasonable or fair. Transactional account fees are considered a matter of banks’ commercial judgment and there is no legislation governing how they set those fees.”
She says banks have simplified their products and changed some fee structures over the past few years.
“But the fact we are receiving a Iarge number of complaints reflects the level of consumer concern about the issue. And there are no fewer complaints.”
A Treasury report back in 2013 found bank fees were "concerning”, accounting for a higher proportion of pre-tax profits than in Australia.
“In 2012, Westpac NZ's fee income accounted for 38.9 percent of pre-tax profit, compared to 29.4 percent for the Westpac group overall. And ASB's fee income accounted for 36.7 percent of pre-tax profits compared to 30percent at its parent Commonwealth Bank of Australia,” the Treasury report said. "Comparisons of fees as a percentage of net interest margins yield similar results.
"While banks compete relatively fiercely on headline interest rates, it is possible that they use the lower level of scrutiny surrounding fees to extract uncompetitive profits."
Only ANZ was prepared to release its fees-to-profit numbers to Newsroom. The bank said its $385 million net income from fees in New Zealand represents 14 percent of its profit before tax, and 9 percent of its operating income.
ASB told Newsroom banking fees for the 2018 and 2019 were less than 15 percent of operating income, and the proportion reduced in 2019 financial year compared with 2018.
“We feel it is not meaningful to compare fee income with profit before tax as there are expenses incurred in earning the fees,” a spokeswoman said.
Westpac said non-interest income (which includes fees, but is not only fees) had fallen from 19.4 percent of income in 2017 to 16.9 percent this year, but didn’t give details of what proportion of profit fees made up.
However one banking expert told Newsroom our banks still use fees as a way to bolster their income.
“Interest rates are more visible and competitive,” he says. “But fees are not transparent and not easy for customers to understand. This makes it easier for banks to adjust fees to increase their revenue lines.”
Newsroom is aware of independent analysis raising questions about whether some bank fees can be adequately explained as covering the costs provided by banks for services.
Once the labyrinth of fees is entered, executives can be taken aback at the complexity that has developed.
And if executives struggle to internally rationalise the reasons for why a fee exists, why it is set at the rate that it is and what it covers, pity the poor retail customer.
The banks respond
Newsroom asked the banks about their fees. All said they reviewed fees regularly.
ASB Bank said “providing the best outcome for our customers” was top priority in setting fees, but it also looked at customer feedback, relevant regulation and “our focus on remaining competitive”.
Kiwibank said it had 60 retail-related fees. “All our fees align to costs incurred for providing the service, mostly staff time.” The bank said it had removed 15 of the 23 fees it used to have on home loan products since 2015 because they were no longer cost-justified.
BNZ said in 2018 it had started a project to get rid of half of the products it offered, simplify the remaining ones and reduce fees simplify. A spokesman said fees on KiwiSaver products had gone down as well as fees for customers making more than one withdrawal on its Rapid Save bonus interest accounts. Fees on the YouMoney transactional account would be removed in the week beginning December 2. “We believe fees for our products are appropriate and customers are not being overcharged.”
ANZ said it had 60 fees relating to personal customers, of which “52 were in scope for costing under CCCFA”. A spokeswoman said ANZ holds a fees register documenting all fees and charges. “We review all our fees regularly as per the requirements of the legislation, including CCCFA... Our continued focus on digitisation and efficiencies means we will continue to reduce fees for our customers where appropriate.”
But when Newsroom asked about non-CCCFA fees, ANZ was less forthcoming.
Newsroom: Apart from the CCCFA-related ones, are you able to be sure your fees are in line with the costs incurred by the bank?
ANZ: We took a wide view of which fees would come under the CCCFA fee review, ensuring fees that were, or could be, captured under CCCFA were costed.
Newsroom: Do you have evidence that fees (excluding CCCFA-related ones) are being levied fairly and consistently across the bank?
ANZ: ANZ regularly review fees as per the requirements of CCCFA legislation.
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Newsroom's Bad Thing Happen series is focusing on banks’ treatment of customers. The series takes its name from a quote from Financial Markets Authority chief Rob Everett that "bad things happen" when there's no regulation of banks.
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