Chapter 17

Chapter 17. Reserve Bank possessed and exercised 'extensive powers' under Section 50 of the Banking Act 1959 to regulate/cap bank deposit/investment interest rates from 1969 to 1980.
Reserve Bank must regulate interest rates and fees according to User Pays Principle to bring Credit Card Products into line with all other 'goods' and 'services, incl. other banking lending products because Australians with low Financial Literacy Capacity have been exploited by some Credit Card Issuers

The below four quotes from "Overview of Financial Services Post-Deregulation" by (Dr) Diana Beal, Director, Centre for Australian Financial Institutions, University of Southern Queensland, evidence that the Reserve Bank rigorously regulated bank deposit rates until 1980 when restrictions on interest rates were dismantled after adopting Campbell Committee recommendations:

"Interest-rate ceilings on deposit accounts restricted the banks’ ability to attract funds particularly during the 1970s when inflation was rampant. In the June quarter of 1975, inflation rose to 16.9% pa. At the same time, interest payable on amounts held in savings accounts offered by savings banks, for example, was restricted to 3.75% from 1969 to 1980 (Foster, 1996). In contrast, the interest rates offered by non-bank financial institutions (NBFIs) were not controlled and they were able to pay around 10% on passbook accounts."

"Banks in 1980 still operated in a highly regulated environment which was an artefact of previous economic and social conditions. Indeed, an extensive collection of controls remained from regulation introduced under the National Security Regulations in 1941."

"Interest rate ceilings on trading bank and savings bank deposits were dismantled from 1980; some limits on minimum and maximum terms on fixed deposits remained."

"The maximum interest rate payable on small balances in savings accounts was fixed by regulation at 3.75% from 1969 to 1980."

The Writer worked for CBA for 37 years commencing in 1970 where he worked in four branches 'til 1974 whence bank interest rates were rigidly controlled by the Reserve Bank and uncontrolled by the NBFIs.

Below is an extract from ABC website, 'Australian Banking History':

"Looking back in time, Australian banks collapsed in almost every decade of the 19th century. In 1893 after the failure of fraudulent land banks in Victoria triggered a wholesale run on banks. In the space of six weeks, 12 banks closed their doors. Those banks accounted for two-thirds of the total banking assets in Australia. That crisis increased pressure - which had been building for some time - for the formation of a central bank. The Commonwealth Bank was formed by the Federal Government in 1911 to issue notes which would be backed by the resources of the nation. Banking became more tightly controlled during World War II, with the central bank dictating overdraft rates and, later, statutory reserve deposit ratios and liquid asset ratios. To avoid a patent conflict of interest, the Commonwealth Bank's 'central banking powers' were transferred to the newly formed Reserve Bank of Australia in 1959."

Between 1960 and 1980 the Reserve Bank diligently regulated commercial Australian bank interest rates relying on the below Section 50 of the Banking Act 1959 as amended:

BANKING ACT 1959 - SECT 50

Control of interest rates

             (1) The Reserve Bank may, with the approval of the Treasurer, make regulations:

                     (a) making provision for or in relation to the control of rates of interest payable to or by ADIs, or to or by other persons in the course of any banking business carried on by them;

                     (b) making provision for or in relation to the control of rates of discount chargeable by ADIs, or by other persons in the course of any banking business carried on by them;

                     (c) providing that interest shall not be payable in respect of an amount deposited with an ADI, or with another person in the course of banking business carried on by the person, and repayable on demand or after the end of a period specified in the regulations; and

                     (d) prescribing penalties, for offences against the regulations, not exceeding:

                              (i)   if the offender is a natural person--a fine of $5,000; or

                              (ii) if the offender is a body corporate--a fine of $25,000.

The purpose of regulation (until 1980) was "......... to achieve monetary policy, public sector financing and sectoral assistance objectives....." as well as safeguarding against further bank collapses.

Until 1980, banks could not offer more than 3¾% on a passbook account and 6½% interest on a Savings Investment Account (minimum account balance of $500, deposits and withdrawals must be $100 or greater, and 7 days written notice had to be given to the bank for all withdrawals). Leading up to 1980, building societies (unregulated) were offering materially higher interest rates and attracting bank customers 'in droves'.

The Campbell Committee was established in 1979 and reported in 1981. The recommendations of the inquiry were targeted at ..... the abolition of direct interest rate and portfolio controls on financial institutions. Campbell did not recommend removal of any powers held by the Reserve Bank to regulate interest rates or demand financial information. The Campbell recommendations were made following an extended period of high interest rates. High deposit interest rates by NBFIs existent circa 1980 are no longer an impediment to regulating credit card interest rates. The abovementioned reference to Chapter Nine (in Chapter 15 above): 'Stability and Payments' of the Wallis Enquiry noted "the RBA should retain overall responsibility for the stability of the financial system, the provision of emergency liquidity assistance and for regulating the payments system."

Reserve Bank was aware as early as 1992 that deregulation wasn't going to evidence Credit Card Issuers lowering Credit Card Interest rates when the wholesale cost of funds (Overnight Cash Rate) fell

Below are extracts from Reserve Bank report titled: LOAN RATE STICKINESS: THEORY AND EVIDENCE - RBA 1992 Philip Lowe and Thomas Rohling - Research Discussion Paper - June 1992 which evidence:

A). The 'iron fist control' that the Reserve Bank had over commercial bank interest rates, both deposit and lending, until deregulation in 1980, whereupon when the jail gate was no longer locked; and

B). It was apparent to the Reserve Bank as early as 1992 that deregulation wasn't going to evidence banks lowering loan rates when the cost of funds fell.

"April 1985.
In the case of overdrafts the maximum rate on all overdrafts was set by the Reserve Bank prior to February 1972". At that time interest rates on overdrafts drawn on limits over $50,000 became a matter for negotiation between the banks and their customers while those drawn under limits less than $50,000 remained regulated. In February 1976 the threshold level was increased to $100,000 and in April 1985 all regulations were lifted.

From 1966, when personal loans were introduced, the maximum rate that banks could charge was set by the Reserve Bank. Once again, in April 1985, the controls were removed. At the same time, the maximum interest rate that could be charged on credit cards was deregulated. Prior to this time the maximum rate had been set at 18 per cent per annum.

The period of housing loan rate regulation extended beyond that for the other lending rates. Until 1973, the maximum rate that could be charged on housing loans was the same as that on overdrafts although banks typically charged a lower rate. In October 1973 banks agreed to a "consultative maximum" on housing loans which was below the overdraft rate. This was formalised in December 1980 when the maximum rate that could be charged on owner-occupied housing was set one percent below the maximum overdraft rate. The ceiling on new owner-occupied housing loans was finally removed in April 1986.

In the deregulated period, data on certain actual lending rates is readily available. For example, the actual rate charged on credit card loans is directly observable and is the same for all classes of borrowers.

In contrast, the rates on personal loans and credit cards do not appear to be more flexible in the deregulated period.

For credit cards, personal loans, owner-occupied housing loans and the standard overdraft rate, changes in the banks' marginal cost of funds have not been translated one for one into the contemporaneous lending rates."

Prior to Aug 1993, Credit Card Issuers were restricted from charging an Annual Fee on Credit Cards as the various State Credit Acts prohibited most Credit Card Issuers from charging annual fees if they charged interest on credit card purchases (e.g. Credit Act 1984 (NSW) s 54). Following a recommendation from the Prices Surveillance Authority’s 1992 'Inquiry Into Credit Card Interest Rates', State legislatures issued exemption orders which allowed all financial institutions to charge both interest and fees on credit cards from 1 August 1993.

At the beginning of the definition of User Pays Principle is noteworthy evidence that Australia's Principal Regulator of the Payments System, namely the Reserve Bank issued "RBA's Reform of Credit Card Schemes in Aust: "A Consultation Document" – Dec 2001 with lofty goals to apply the User Pays Principle to -

(i) better meet the public interest by lower interest rates and fees; and

(ii) lower Interchange Fees levied upon Merchants through requiring the Four Party Schemes to publish their Interchange Fee rates.

Malcolm Edey, Assistant Governor (Financial System) in a Speech at the Cards & Payments Conference on 21 May 2015 noted:

"But of course the PSB does have a regulatory mandate, and it has used its powers to regulate a number of aspects of card payments where it judged that there was a public interest case to do so. Probably the aspects of this regulation that have attracted the most attention have been those related to interchange and surcharging....."

There is a patent "... public interest case to ..." re-introduce the 18% cap on credit card interest rates that applied until 1985 - as called for in Chapter 5 above.

Below is a extract from Interest rates and informed choice in the Australian credit card market - December 2015:

"1.8 Dr Edey quite rightly made the point that Australia does not regulate interest rates, and, as such, there is no interest rate regulator. He told the committee that Australia does have 'an ACCC [Australian Competition and Consumer Commission] that can investigate uncompetitive conduct if they see it, but they clearly have not seen it in this market'.3 It was put to Dr Edey that the issue was not so much whether there was uncompetitive conduct in the market, but whether regulatory settings were conducive to the promotion of sufficient competition to put downward pressure on credit card interest rates.4 In part, the committee's inquiry has been directed at understanding whether existing regulatory settings in relation to credit cards are appropriate in this respect. More broadly, the committee has sought to determine what might be done to improve competition in the credit card market or otherwise put downward pressure on credit card interest rates."

Reserve Bank's Payment, clearing and settlement systems in Australia - 2011 includes:

"The Payment Systems (Regulation) Act 1998 also gives the RBA extensive powers to gather information from payment system participants and operators."

Payments System Board - Responsibilities and Powers includes:

"Increasingly, central banks are being given explicit authority for payments system safety and stability, but the Board's legislative responsibility and powers to promote efficiency and competition in the payments system are unique. This responsibility has broadened the Bank's traditional focus on the high-value wholesale payment systems which underpin stability, to encompass the retail and commercial systems where large transaction volumes provide scope for efficiency gains."

Below is an extract from Chapter Five: Philosophy of Financial Regulation of the Wallis Report on the Australian Financial System dated 1996 - '97: Summary and Critique:

"Regulation of all markets for goods and services can be categorised according to three broad purposes. First, regulation is to help ensure that markets work efficiently and competitively, and thus to overcome sources of market failure. Second, regulation can prescribe particular standards or qualities of service, especially where the consumption of goods and services carries risks, so that safety is a focus of concern. Third, regulation can help achieve social objectives such as, for example, 'community service obligations' which typically take the form of price controls."

The Reserve Bank retains the same 'extensive powers' that it relied upon from 1969 to 1980, to again cap interest rates on Australian Credit Card Issuers. The Reserve Bank presently regulates the Overnight Cash Rate. If the Reserve Bank no longer has such regulatory powers, then those 'extensive powers' must have been transferred to APRA, ASIC or possibly ACCC. If that is the case, then the Reserve Bank would be able to provide a written explanation of the particular legislation/s and legislative process for transfer of the interest rate regulating powers and the MOI with the other regulator that accepted and acknowledged subrogation of interest rate regulation to it.

The Campbell Committee recommended deregulating interest rates. It did not recommend reducing the 'extensive powers' bestowed upon the Reserve Bank by Parliamentary Acts.

Below is a quotation from Westpac's submission to the Wallis Inquiry, submitted by the then CEO, Bob Joss, that may have anticipated that after deregulation several Credit Card Issuers would run amuck:

"Also relevant is the Inquiry’s concern with fairness, or the equitable treatment of the various users of the financial system."

"Protection of consumers

On-going monitoring of credit card pricing in anticipation of a substantial inquiry into the effects on consumers of the deregulation of credit card interest rates"

Refer:

Chapter 18.

Summary Page re Written Questions and the Grounds/Reasons

Grounds/Reasons (one document with 21 Chapters)

Grounds/Reasons (21 separate Chapters)

Written Questions (one document with 13 Written Questions)

Written Questions (13 Individual Written Questions)