British and Australian banks are worlds apart in terms of performance, yet both have been accused of ripping off customers by taking liberties with monetary measures designed to boost the economy.
By and large, British banks are in a mess. The methods they have used to scrape every penny out of customers – from aggressive sales techniques to decimating savings rates – are only drawing larger fines and increasing levels of ire.
On the other side of the equation, Australian banks are in increasingly rude health despite weakening economic performance, and it’s their flagrant profiteering that is starting to rile customers and business leaders.
The British Problem: Not Enough
The current accusation being levelled at British banks concerns the controversial Funding for Lending Scheme. With a record low interest rate of 0.5% failing to boost growth, and banks tightening their strings in the wake of new capital demands, the Bank of England devised the Funding for Lending Scheme to improve the coffers of ailing banks while incentivising them to lend outwards to households and businesses.
Of all the redundant schemes propagated in 2012 – including Newbuy, the National Loan Guarantee Scheme, and the Extended Collateral Term Repo – the FLS has had impact, though very much to the detriment of savers.
Just days ago, I was saying that conditions for savers would only get worse before they got better. And then we learnt that the best ISA rates have fallen below 3% for the first time since they were introduced back in 1999. (That is, unless you have a cool £40,000 to bag a 3% deal with First Direct).
Andrew Bailey, head of prudential regulation at the Financial Services Authority, has told MPs that interest rates for borrowers were lagging behind the collapse on deposits. He believes that “the jury is still out” on whether the FLS is fulfilling its goal.
It is hardly difficult to see why UK banks might wish to cash in. Taxpayer-supported banks remain in trouble and need billions in additional capital to prop up their balance sheets, the Bank of England says.
Both RBS and Lloyds have been given until March to address a black hole in their finances which has described as “a big number” by the Financial Policy Committee’s Michael Cohrs.
And RBS’ plight is likely to worsen as it awaits final details on the fine it will face for its role in the Libor interest rate-rigging scandal. The bank is in negotiations with regulators on both sides of the Atlantic, and is thought to be expecting a fine of around $800 million (£500 million) – most of which will be imposed by American regulators.
The one remaining question surrounds reputation: how much of the impending fine will RBS redeem from the bonus pool of investment bankers? Failure to do this could see public fury over the taxpayer-owned bank reach new heights.
The Australian Problem: Too Much
In Australia, the major banks face a different kind of pressure – the demands from shareholders to keep profits climbing higher and higher. But inevitably it brings a different kind of outcry.
Major banks made a staggering $1,460 for every person in the country last year, according to a report released last month by the Australian Institute. The most successful, Commonwealth Bank, raked in an eye-watering $7.11 billion in profit. The only major bank to see profit levels fall – National Australia Bank – still made a cool $5.43 billion.
Meanwhile, the Australian economy dwindles (by its own impressive standards, at least) and many are worried about losing their jobs.
Banking chiefs are not altogether shy about their headstrong mentality either. Early in 2012, directors at ANZ said that they had offered financial incentives for their chief executive to meet dividend and share targets because it would more closely link his interests with those of shareholders. Profits are not merely the top priority – they are the only priority.
This in itself is problematic because over half of the owners of Australia’s big four banks are in the same nominee companies, the Institute study showed, which has implications for anti-competitiveness.
The banks have long defended their profitability by arguing that it benefitted the economy, and that large chunks of the profits went into superannuation schemes (Australian retirement funds). The Institute study refutes this, saying that only a tenth at most gets returned to customers via pension funds.
And so, the latest accusation to be directed at Australian banks is that they have been profiting from interest rate reductions under false pretences.
Since November 2011, the Australian Reserve Bank has made a series of cuts to lower the cash interest rate from 4.75% to 3%. But when adjusting mortgage rates, major banks have retained an average of 0.39% (or 39 basis points) to boost their own coffers, which has deprived customers up to $1,000 every year.
Understandably enough, nervous Australian business leaders are now looking accusingly at super-profitable banks and questioning why they are not offering more to keep consumer confidence alive.
Banks have attributed this kind of behaviour to the higher costs of funding, as the markets tightened in the aftermath of the global financial crisis. However, having denied customers the full cuts when costs rose, they have failed to pass them back when the cost of lending fell back again. And smaller banks are even emphasising this now in their effort to steal a march on their larger rivals.
Angles of Incidents
The Australian financial system tends to learn a lot of lessons from monitoring what is going on elsewhere. If it glances in this direction, it will see that a mixture of consumer distrust and tightening regulation is slowly forcing banks to readjust their priorities away from profits and back towards customer service.
This week, the new Barclays chief issued an ultimatum to his staff: sign up to our new ethical code or quit. Soon, banks might want you for life again, not just for Christmas.
With formal disputes against major Australian banks on the rise, it may not be too long until customers begin to look for alternatives. There is enough knowledge around now to know that economies should not sink at the hands of banks that are flagrantly abusing the financial health of their patrons.