A new $6.2 billion levy over four years on the top five banks contained in the federal budget has been cautiously welcomed by the Finance Brokers Association of Australia (FBAA), but it warns the decision could backfire on borrowers if the banks react badly.

FBAA executive director Peter White said while the government’s move is aimed at helping smaller banks compete with the big five, there is a risk the big banks could increase interest rates to cover the tax.

“I dare say the banks won’t simply absorb this levy, and if they don’t, this will be a bad outcome for home loan and business borrowers.

“It’s possible the banks could raise interest rates and that could put housing affordability out of the reach of more borrowers, so we are urging the banks to give an ironclad guarantee that they won’t pass on those costs.”

Meantime, Mr White hails as a good move the budget initiative to bring forward a comprehensive package of reforms to strengthen bank accountability and competition.

“The banks will need to be more accountable with the government to legislate a new banking executive accountability regime.

“It will increase competition in the financial system and improve consumer choices.”

Other components of the budget relating to small business also meet the FBAA’s approval, including the extension of the $20,000 immediate tax asset write-off for businesses with up to $10 million turnover.

The tax rate for small business is now at 27.5 per cent with the government aiming to lower that to 15 per cent.

Mr White said the budget also contained positive news for finance and mortgage brokers in other areas such as the government accepting all eleven recommendations of the Ramsey Review to combine the two industry ombudsman services into the Australian Financial Complaints Authority (AFCA).

The FBAA advised in December last year that such a move would bring better consumer and business outcomes for those needing to access this service.

He said the FBAA had also been signalling over the past eleven months that the treatment of serviceability for credit cards needs to be based on repaying the limit on a principal and interest basis over a defined term.

“The government has now confirmed this will be the case, among other beneficial consumer reforms, the banks will need to comply to.”