Why is a discount bad? Supervisor of Banks David Zaken does not like to intervene in prices. He is in no hurry to put price controls on fees, based on his view that it isn't the regulator's job to set prices.
Zaken intervenes in fees only when he feels that he has no choice, and, through the Zaken Committee, he even abolished some fees, especially marginal ones. But he preferred a more elegant solution for bank's main fees on securities. Through the committee, he ordered the banks to reprice their price list for fees for the purchase and sale of securities. The demand was not made because the fees were too high, but because they were simply irrelevant.
For the first time, the report disclosed weighted data for the five big banks on the average discount that they offer customers on securities fees. The data were stunning: discounts reached 80% of the listed price. Discounts averaging 50% were given even on small portfolios of a few tens of thousands of shekels, essentially rendering the prices lists meaningless.
What is so wrong with big discounts granted by the banks? The problem is the banks hit upon a winning formula to charge the maximum possible fees. The average customer does not know just how big a discount can be, so if a bank offers a 20% discount, the customer will think he got a great deal, whereas he is actually paying well above the average.
The Zaken Committee did not like the differential either. "A comparison between the fees for managing securities in the price list and the actual fees charged found a large difference which does not reflect competitive equilibrium and may even indicate customer discrimination," it states. Zaken therefore ordered the banks to set new fees which would better reflect the actual prices.
Letting the cat guard the cream
But in practice, Zaken let the cat guard the cream. The banks knew they had the upper hand: if they slashed the fees, their revenue would be reduced, and the fees on securities were important to most of them. The banks asked themselves, "Why forego revenue in advance? The Bank of Israel wants a new price list, but it didn’t ask for big reductions."
As a result, only Israel Discount Bank (TASE: DSCT) made a large reduction of 20-30% in its fees, while the other banks made modest reductions averaging 10%. The average fee for buying and selling Israeli securities was reduced from 0.7% to 0.6%, and the average fee for buying and selling foreign securities was reduced from 1% to 0.86%. In other words, there is still a yawning difference between the price list and the actual fees; the banks spat in Zaken's face.
What now
The banks preferred the money, and opted for the easy solution to minimize the reduction to their revenue. But this may end up costing them dear.
We can assume that the Bank of Israel does not like what it sees. Zaken said when the eponymous report was published that he would not rule out cruder intervention to solve the problem. The banks are now waiting tensely to see how the Bank of Israel will respond to the new price list, and the response is due within days.
The Bank of Israel has several options. It can order the banks to make larger reductions in the fees, but this would be embarrassing, because the banks have already published the price list.
Another option is to deal more aggressively with the fat known as the custodian fees. In the original plan, the banks were supposed to reprice their custodian fee, where there are also wide differences between the price list and the actual fee. For some reason, the Bank of Israel withdrew the demand, and limited the repricing of fees only to the fees for the buying and selling of securities.
The Bank of Israel can order the banks to reprice the custodian, but this time, to avoid repeating the fiasco of the securities transactions fees, it should order the banks to show the new fees first, before a public announcement. If the banks first have to show their fees to the Bank of Israel, they will think twice before making merely token reductions.
There is a third option: there is a new Knesset with a lot of new motivated MKs, and we would not be surprised if one of them will notice that the banks have not properly priced their fees and sponsor a bill to cap fees. Either that, or the banks will realize that it would be better to price their fees fairly.
Published by Globes [online], Israel business news - www.globes-online.com - on February 27, 2013
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