Senator CHAPMAN (9:39 AM) —I present the report of the Joint Parliamentary Statutory Committee on Corporations and Securities on fees on electronic and telephone banking, together with the Hansard record of the committee's proceedings and submissions received by the committee.

Ordered that the report be printed.

Senator CHAPMAN —I move:

There can be no doubt that electronic banking is here to stay. Undoubtedly, there will always be an important role for bank branches. However, there can be no doubt that the efficiency and convenience that the various electronic forms of banking provide will see increasing numbers of bank customers opting for these types of transactions, especially as the proportion of computer literate people in our community increases and newer technology makes the process simpler. Given this, it is essential that customers are fully informed about the cost of each and every transaction before it is undertaken so they can exercise choice about which bank offers the best deal for them. Only then will market forces operate as they should to ensure that competitive pressures keep fees for electronic banking as low as possible. It was in this context that, as Chairman of the Corporations and Securities Committee, I foreshadowed an inquiry on this issue just over 12 months ago. I became aware that a proposal in the draft code of conduct for electronic funds transfer being negotiated between the financial institutions and the Australian Securities and Investments Commission to require up-front, real-time disclosure of electronic banking fees had been removed from the draft. This was unacceptable to me and, in calling for disclosure to be restored, I foreshadowed an inquiry if it was not.

In May, the research group Cannex released its report showing a dramatic increase in electronic banking fees during the past two years. Meanwhile, there was no progress in restoring to the draft code the real-time disclosure provision. Hence, the committee accepted my proposal for this inquiry. The committee received 30 submissions in relation to the inquiry, with strong representation from all of the major players—financial institutions, rural and urban consumer groups and experts, as listed in chapter 1 and appendix 2 of the report. These witnesses represented a very comprehensive and balanced selection of expertise and personal experience, which is reflected in the conclusions and recommendations of the report.

The first issue, which the report addresses, is the reason for fee increases on electronic banking. The committee concludes that increases have been due primarily to the adoption by banks of a user-pays fee structure on most banking products in place of the margins between borrowing and lending rates cross-subsidising transaction costs and other services provided by financial institutions. Nevertheless, substantial cross-subsidies remain, which make it difficult for customers to know whether they are paying a fair or competitive price. Once a substantial body of customers had been attracted to electronic banking, our evidence shows that financial institutions, having initially underpriced these transactions, substantially increased fees. This indicates market failure, which we find is largely due to the absence of real-time disclosure of electronic banking fees.

American research clearly shows that customers will vote with their feet and change behaviour and service provider if given adequate information on costs. While the overall lack of specific electronic transaction fee information concerns the committee, a particular concern is fees charged for the use of foreign ATMs, which are those operated by financial institutions other than the one with which the customer holds an account. Banks may be making abnormal or supranormal profits on so-called foreign ATM withdrawals, possibly through collusion and certainly from a disinclination to compete, as a result of the interchange fee system that operates. Evidence from the Reserve Bank and the ACCC confirms that oligopoly profits are being earned through the ATM interchange fee system. Accordingly, we recommend that all interchange fees between banks in relation to foreign ATM transactions be abolished immediately and replaced by direct charging, to reduce foreign ATM fees from approximately $1.50 to approximately 50c. While this may seem a drastic step, it is essential to protect consumers against possible collusive practices and certainly against a lack of competition and pricing unrelated to cost.

The committee also recommends that all ATMs immediately display a warning notice indicating that a fee will be charged on foreign ATM transactions. Westpac is to be commended for moving in this direction, no doubt in anticipation of this report. It is confirmation of the significance and effectiveness of parliamentary inquiries. On the impact of increases in fees on electronic banking, for those who choose to engage in serial bank bashing, it is pertinent to record that not all the news is bad on this front. Certainly, there have been substantial fee increases. However, the committee concludes that the majority of fee revenue has been reinvested into new and innovative electronic banking services, resulting in a substantial increase in access to these services with associated benefits to users. Also, the impact of fee increases on lower income groups has been reduced by safety net services which have been voluntarily offered by banks.

We accept evidence that up to 75 per cent of bank customers pay no fees at all and that there are substantial fee exemptions and discounts for people who are financially disadvantaged or disabled and for pensioners and students. As to the availability and transparency of fee information for consumers of electronic banking, there also is some positive news. The committee concludes that the general provision of information is good, being based on ASIC approved codes. These codes are market based and self-regulatory, providing more effective outcomes than direct regulatory intervention. Banks publish more information than the codes require, expressly to assist customers to minimise fees. Increasingly, banks are providing account statements which break down fees and charges, rather than providing just one amount. They are also publishing more fee information on the Internet, a particularly effective channel of disclosure.

All these practices considerably assist consumers. However, our report also finds that there is a lack of fee disclosure at the point of transaction—usually called real-time disclosure, which is often the most important time for informed consumer decisions. This is a major shortcoming which should not continue. The issue of real-time disclosure, or disclosure at the point of transaction, was one of the most important matters raised during the inquiry. Both the banking industry and the consumer groups agreed that it was a key area in relation to the availability and transparency of fee information. However, the banks claimed that real-time disclosure was not possible in the near future because of technical difficulties and costs. They acknowledged that, with advances in technology, real-time disclosure of fees on electronic banking should be available in the medium to long term. The consumer groups, on the other hand, regarded a time frame of one to two years as appropriate.

ASIC, as the coordinator and facilitator of the Transaction Fee Disclosure Working Group, advised that its initial view was that guidelines should provide principles which banks should meet within three to five years. The committee considered this conflicting evidence and concludes that consumer interests demand an earlier rather than later implementation of real-time fee disclosure. Consumers would benefit from all aspects of such disclosure, in particular because it would result in downwards pressure on fees and charges. The committee accepts that there would be substantial costs if real-time disclosure were introduced immediately, but we also emphatically find that a five-year delay would be quite unacceptable.

Accordingly, the committee recommends that a real-time disclosure framework for Internet, telephone and ATM banking should be established within two years and implemented within six months of the finalisation of the framework. We consider that this timetable is so important that we also recommend that ASIC report back to us on a quarterly basis on its progress in implementing the recommendation, with the committee to review progress at the two-year period. We are willing to exclude EFTPOS transactions from the timetable, with ASIC and the consumer groups advising that there is no pressing need to provide real-time disclosure for EFTPOS and that the technological challenge is much greater.

The committee recommends several other ways to improve the availability and transparency of fees and charges. We also addressed surcharging, which has the potential to become an important consumer issue. Surcharging is a practice widespread in the United States, and is becoming so in Australia, whereby ATMs are operated by independent owners rather than by banks and who charge a fee every time the ATM is used. There are recommendations regarding implementation, and I seek leave to have my remarks on these matters incorporated in Hansard.

Leave granted.

The remarks read as follows—

In conclusion, the committee has confidence in the effectiveness of market pressure in causing financial institutions to reduce fees for electronic transactions. However, market forces can only operate in a situation where the consumer has adequate information. Real-time disclosure of fees is an essential component of that information. My thanks to all members of the committee for their work on this inquiry. I welcome the Democrats support for the report and the qualified support of the opposition, who I hope might resist last minute temptations to indulge in some bank bashing and indeed give the report unqualified support. My thanks to the committee staff—the committee secretary, David Creed, and his staff—along with my own staff, Rob Young and Andrea Bell, for their tireless work in ensuring an effective inquiry and a quality report. I commend the report to all honourable senators. (Time expired)