Treasurer Scott Morrison will deliver a speech today in which he will chastise the big four banks for having “subsumed much of the broker industry” and reducing competition.
The Treasurer is expected to reveal some of the contents of the Productivity Commission (PC) report into competition in the Australian financial system later today.
It was expected that the final report, which was handed to the Australian government on 29 June 2018, would be released once Parliament came back from its winter break on 13 August. However, the government has surprised the industry by outlining that it will release the report on Friday (3 August), during its non-sitting days.
While the report has not yet been published, an advanced copy of the Treasurer’s speech to the Australian British Chamber of Commerce, seen by The Adviser, reveals that the report will take a sledgehammer to the power wielded by the big four banks and the impacts it has on competition.
According to the Treasurer, the PC report claims: “There is evidence that they have sustained prices above competitive levels, offered inferior-quality products to some groups of customers, subsumed much of the broker industry and taken action that would inhibit the expansion of smaller competitors in some markets. All are indicators of the use of market power to the detriment of customers.”
Indeed, the PC has previously said that it believed conflicts of interest that arise from ownership are especially apparent where lenders own a mortgage aggregator and also fund a white label product, highlighting that in 2015, CBA had a 21 per cent overall market share within the broker channel, but its market share within Aussie Home Loans (in which it had an 80 per cent ownership stake at the time) was 37 per cent.
CBA has since announced that it will demerge its broking businesses into a new group.
While it has formerly said that disclosure can highlight potential conflicts of interest, it “does not necessarily resolve them”.
In its draft report, the commission therefore considered it necessary for a legal duty of care to act in consumers’ best interests to be imposed on lender-owned aggregators and the brokers working under them.
Treasurer Scott Morrison will tell the Australian British Chamber of Commerce later today that the big four banks own more than 75 per cent of the market for loans, personal deposits and credit cards and are in an “entrenched, dominant market position”.
While Mr Morrison will suggest the competition is not necessarily weak in the Australian financial system, it is the “exploitation” of that power that has the potential to constrain competition and deliver poor consumer outcomes.
Adding that the government needs to ensure that consumers “aren’t getting the raw end of the stick”, the Treasurer will highlight that the government is working to ensure competition can thrive through initiatives such as enabling more lenders to use the word “bank” (thereby boosting their market appeal), creating a regulatory sandbox for fintechs, bringing in comprehensive credit reporting and showcasing open banking.
However, the Treasurer is also expected to say that governments “can’t solve everything in this space” and that “banks have made this mess for themselves”.
“They should play a key role in cleaning shop,” Mr Morrison is expected to say.
While the details of the PC’s recommendations on broking have not yet been released, it is widely expected that the position of the PC on broking has not changed since it released its 640-page draft report, in which it put forward a recommendation for trail commissions to be removed, despite widespread industry criticism of the idea.
As first outlined in the PC’s draft report and reiterated by the PC’s outgoing chair, Peter Harris, the commission was considering a recommendation for trail commissions to be removed, largely pointing to a belief that it is a conflicted form of remuneration that creates “perverse incentives” for brokers by “rewarding” them for keeping customers in their current loan.
This echoes thoughts made by the NSW government’s Fair Trading body earlier this week that trail is not tied to a requirement for a broker to provide any additional advice to their client, the PC report said.
More to come.