Association heads welcome competition inquiry recommendations

The report put forward 44 recommendations to government to improve competition – including four specifically relating to mortgages.

Recommendation 33

That the Treasury Competition Policy Taskforce examine mechanisms to increase consumer engagement with mortgages and deposit products. Initially, this could take the form of pilots of one or more of the following:

• a) A requirement that banks should notify the base interest rate at the end of the introductory period where a retail deposit product is offered.
• b) A requirement that banks should clearly notify retail deposit holders of changes to their interest rates, changes to the eligibility requirements for a bonus interest rate and, where practicable, alert customers when they are approaching a threshold for eligibility for a bonus interest rate (e.g. a minimum balance level).

That APRA provide an independent benchmark (or series of benchmarks) for variable rates for new/switching customers over the preceding 12 months. That this benchmark be published for use by mortgage brokers and financial advisers to improve their capacity to contact new clients to improve churn rates.

Recommendation 34

That the government examine the merits of adopting a government-backed residential mortgage-backed securities (RMBS) scheme, taking into account the characteristics, and evaluation, of the Canadian RMBS model.

Recommendation 35

That the Australian Prudential Regulation Authority examine the suitability of macroprudential regulation of medium and smaller banks and, in particular, their capital holding requirements.

Recommendation 36

That the government explore co-operating with the banking sector in the development and evaluation of a pilot in relation to tracker mortgages.

Good for market ... if it happens

Speaking to The Adviser, Peter White AM, the managing director of the Finance Brokers Association of Australasia (FBAA), tentatively welcomed the mortgage recommendations.

For the recommendation that directly impacts mortgage brokers – Recommendation 33 – he said the body “supports the approach to this consideration”.

“This is something the FBAA has championed directly with Treasury on multiple occasions as well as through the media,” he said.

“The ‘real’ variable rate must be disclosed to customers so that they understand that the ‘special offer/teaser rate’ to entice new borrowers to switch is not the ongoing rate they will pay.

“The FBAA’s voice has been heard as this is directly what we have been asking for.”

However, he noted that the proposed pilot into tracker mortgages (Recommendation 36) was just for a pilot and therefore “may not go anywhere”.

“Tracker mortgages adjust the interest rate in line with movements in the RBA cash rate. While variables rates can move more than the cash rate, a tracker mortgage doesn’t,” he said.

“Tracker mortgages are generally a basic product so some things like offset accounts may not be available on these.

“We’ll wait and see if this is a good or average outcome, or if it happens at all.”

The FBAA MD concluded by saying that he believed a government-backed RMBS series (Recommendation 34) would “assist to strengthen the non-bank sector and will therefore greatly assist increased competition against the banks”.

However, he warned that such a scheme should not be offered to the banks “as they have the depth to support and promote internationally their own RMBS Series,” White said.

“The FBAA would support this as long as it assisted the non-banks rather than the mainstream banks, as this is part of the competition into the markets we have championed with government,” he continued.

“More appropriately aligned macroprudential regulations of small banks and their capital adequacy holds will help these smaller banks compete more competitively in the market.

“So, if this happens, it will lead to better outcomes and be supported by the FBAA.”

MFAA expects brokers to be part of anticipated pilots

The Mortgage & Finance Association of Australia (MFAA) said it was “pleased to see Recommendation 33, highlighting the important role brokers play in supporting switching”.

“The MFAA continues to support competition in the home loan market. As we highlighted to Dr Mulino, mortgage brokers are critical to driving this competition,” MFAA chief executive Anja Pannek told The Adviser.

“We have also continued to advocate to government and to Treasury that there needs to be a better process for switching for borrowers, specifically in relation to refinancing and discharge. This includes a standard discharge form and a maximum discharge time frame of 10 working days. Our efforts have clearly been reflected in the report.

“Importantly, the report highlights the importance of prompts or ‘behavioural prods’ to customers to consider switching to a better, more suitable product.

“In our engagements with Treasury and with Government, we have highlighted that brokers are integral in the design of these prompts and we have an expectation that the broking industry will participate in these pilots.”

The MFAA CEO said it was important that brokers were included in the pilots as “mortgage brokers prompt their clients to look at their option in what is dynamic market”.

“They provide guidance, under the Best Interest[s] Duty, to make recommendations of appropriate products for their clients to make the right decision for them,” she continued.

“Brokers support switching and refinancing, and promote competition and choice.

“Equally our brokers will be critical to any trial on tracker mortgages. As I said, every day our members are contacting their clients so they are aware of what is available and this would be no different.”

Others in the industry have also welcomed the report, with Greg Medcraft, the chair of aggregator Australian Finance Group (AFG) stating he was "very pleased" to see the committee recommend a public RMBS scheme, which he has long-argued would reshape competition in the Australian residential lending market.

“The model recommended by the Committee has an internationally proven track record of success. It will help drive competition in the lending market, foster innovation and provide further choice for consumers,” the AFG and former ASIC chair said.

“In times such as now, it will help lead to lower and more stable mortgage interest rates for consumers by enabling more competitive fixed interest rate offerings to provide certainty and reduce the stress from rising variable interest rates.

"A public RMBS scheme would also provide the country’s superannuation funds with liquid government guaranteed bonds, which is needed for their own liquidity, and will also support housing for Australians.

“I commend the Committee on their thorough and constructive approach to the important task at hand of examining how best to foster a fair and effective economy,” Medcraft concluded.

[Related: Government should look to pilot tracker mortgages, says competition report]