Financial services comparison sites “do not necessarily provide good advice” to customers and often operate on conflicted business models, the Productivity Commission has claimed in its long-awaited report.
The Productivity Commission’s final report on competition in the Australian financial services industry, presented to the public on 3 August, questioned the accuracy of comparison sites, noting they are “only as good as the input they use”.
In a blunt appraisal, the PC further claimed that many such comparison sites operate on conflicted business models. Of particular concern to the PC was the situation where comparison sites have a commercial interest in the products it features, such as through ownership or commission structures that allow the sites to benefit from recommending certain products over others.
“These arrangements are common,” the PC said in its report.
In a chapter on competition in the insurance industry, the government advisory body noted that iSelect and Compare the Market receive an upfront commission for every insurance policy purchased through their sites and may also receive trail commission if the customer sticks to the same service provider.
It further noted that Compare the Market is owned by the same holding company as Auto and General Insurance and features many of its products.
Meanwhile, Canstar and finder.com.au “work on a ‘cost-per-click’ model” where the vendor pays a fee for every customer referred to them.
According to the PC, these commercial arrangements could mean that consumers are accessing information that “only covers a portion of the market” due to the way the information is framed.
“For example, only products from commercially related parties may be included in search comparisons,” the PC report stated.
The government advisory body explained that the algorithms used to whittle down the number of products presented to consumers can be “manipulated to display results based on commercial objectives rather than purely on the consumer’s stated preferences”.
“One such example may be presenting different comparison results depending on whether or not consumers identify their current supplier from the outset,” the PC report stated.
“The ACCC have issued guidelines for comparison website operators regarding the use of algorithms to minimise consumers being misled.”
The PC further acknowledged the argument put forth by the Consumer Action Law Centre, the Financial Rights Legal Centre and Financial Counselling Australia, that comparison sites often encourage comparisons on price alone, overlooking other aspects of product suitability.
Citing the views of the Australian Securities and Investments Commission (ASIC), the government advisory suggested that for comparison websites to work effectively, they should cover most of the products available in the relevant market, avoid or manage conflicts of interest, disclose how its rating system works and provide additional information on products beyond price.
The PC did say, however, that comparison sites can make a positive contribution to the market as they “facilitate demand-side competitive pressure assisting consumers to quickly and easily compare products”.
Additionally, comparison sites may also lower barriers to entry for new market entrants that do not have the scale and reach of established players, the PC said.
Lack of price transparency a “distinguishing feature” of the banking industry
The final PC report also touches on a lack of transparency around mortgage rates, suggesting that advertised prices are often inconsistent with actual prices paid by customers.
“The absence of accessible public data on actual prices is a distinguishing feature of this industry,” the report stated.
It added that discounts offered on standard variable rates are generally not publicly accessible, and further, that the rate borrowers will pay are revealed once they are well into the application process.
Additionally, bundled products, such as those that combine mortgages with other credit products, “further obscure the actual value and comparability of individual components”.
A single financial product can also have multiple prices structured in different ways based on, for example, borrower characteristics, the commission noted.
At present, the PC said that the onus is on customers to negotiate prices with banks, but a lack of price transparency leaves them negotiating from a position of weakness.
The PC claimed that the “rise of brokers” and accompanying costs (i.e. upfront and trail commissions) have been “fuelled” by the lack of price transparency, and warned further that some brokers might not be aware of all the options available to customers because “unadvertised and uncertain discounts are common”.
It also said that a “blizzard of barely differentiated products” — nearly 4,000 different residential property loans and over 250 credit cards — combined with opaque pricing means customer loyalty is easy to exploit.
“The large number of marginally different products appears more reflective of a capacity for price discrimination than of competition,” the report stated.
The PC therefore recommended the development of a home loan interest rate calculator, to be accessed via ASIC’s website, that takes into account the many variables that impact rates.
It suggested that the data that is fed into the calculator should be collected and provided by the Australian Prudential Regulation Authority (APRA).
“Consumers would be able to see the market median interest rate offered to all home loan borrowers in similar circumstances to them,” the PC report stated.
“The specific loan and borrower characteristics that are included in the online calculator should be developed through consultation and consumer testing.”