Professor Janek Ratnatunga, CEO of the Institute of Certified Management Accountants (ICMA), has commented that whilst the recently released interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry highlighted many practices of “greed” in the pursuit of short-term profit - the biggest fraudulent or dishonest act or practice of how banks calculate mortgage interest appears to have gone undetected.
The report said that, as the products and services offered by the banks and other financial institutions proliferated, “selling” became their focus of attention - too often, becoming the sole focus of attention. Further “compliance” appeared to have been relegated to a cost of doing business; i.e. pay the small fine if caught!
However, whilst there were many examples of behaviour falling below community standards and expectations such as banks pursuing of profits rather in looking after the interests of their customers in approving loans, giving biased financial advice; charging 'fees for no service' and fees dead people, and selling dodgy low value funeral insurance to Indigenous customers, Professor Ratnatunga is of the view that this is only the tip of a very big iceberg.
“The biggest rort that appears to have gone undetected is the way banks use basic finance annuity equations to calculate monthly mortgage principal and interest repayments and the interest on deposits into offset accounts. The finance equations used to calculate the mortgage interest by banks are either erroneous, or are skewed to provide answers always in the bank’s favour at the expense of their customers”, he says.
Professor Ratnatunga has collected many examples where a mortgagee’s monthly interest and principal repayment stated in his or her bank mortgage statement was different to that obtained by using that bank’s own loan calculator (available on the internet). In one case, the difference was $14.49 per month over 30 years. This amounted to a present value of $2,493.45 (in the bank’s favour) which is a substantial amount of money. In another case, the mortgagee elected to repay the interest and principal fortnightly. The bank simply halved the monthly rate and told the customer to pay this fortnightly. When this calculation error was pointed out to the bank in question by Professor Ratnatunga, i.e. as the principal is being repaid at a faster rate, just halving the monthly rate is incorrect, the bank in question admitted that that it had changed the method of calculation only in February of this year.
Professor Ratnatunga supposes that this was probably due to the pressure being applied to banks by the Royal Commission.
“Even if the banks use the correct equations, how they apply these equations when interest rates change is always in the bank’s favour. When interest rates go up, the change in mortgage interest payable is applied immediately; but when interest rates go down, these are only applied from the beginning of the next monthly cycle date of the loan”, says Professor Ratnatunga.
Professor Ratnatunga says such practices have been going on for at least the last 30-years, netting all banks many billions of dollars cumulatively. This is the real tip of the iceberg.
The banks hide these sorts of rorts with incomprehensible mortgage loan statements that lack any semblance of transparency. These statements are extremely difficult for even a finance specialist to comprehend. In addition, a number of unexplained “interest corrections” or similar amounts appear constantly in the statements without any explanation. Each correction is of a small amount - but such corrections spread over all loan accounts at the bank could amount to many millions of dollars.
The Royal Commission’s interim report does allude to bank statements lacking transparency in charging overdraft and dishonour fees, which while small, can add up to significant amounts over time. The report also said that Indigenous customers in remote communities faced problems with access to basic accounts, informal overdrafts, dishonour fees and identification issues.
Professor Ratnatunga says, “Let alone Indigenous customers in remote communities, that even professors of finance in big cities will find it difficult to analyse these opaque statements”.
Professor Ratnatunga urges the Royal Commission to undertake a forensic audit of the Mortgage Interest calculations of a sample of Mortgage Loans, covering all banks.
“The ideal time to do such an audit is when the Bank is asked to provide a final discharge amount on the termination of a loan. If given access to bank records, a simple calculation by a finance expert will indicate if the discharge amount is correct, or if its substantially in the bank’s favour.”, he says.
For further comment on the above topic, please contact:
Prof Janek Ratnatunga
CEO, ICMA Australia
About the Author
Professor Janek Ratnatunga is the CEO of Institute of Certified Management Accountants. He has held senior appointments at the University of South Australia, Monash University, University of Melbourne, and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked as a chartered accountant with KPMG. He has also been a consultant to many large Australian and international companies and to the World Bank.