A loan comparison tool proposed by the Productivity Commission could compete with the broker channel, according to six of Australia’s largest non-major banks.
In a joint submission to the Productivity Commission (PC), AMP, the Bank of Queensland, Suncorp, Bendigo Bank, MyState and ME Bank warned that an online loan comparison tool could undermine the broking industry.
In its draft report, the PC called for the Australian Prudential Regulation Authority (APRA) to collect interest rate and fee data and use it to determine a median rate that would be published via an online tool.
The PC claimed that such a reform could help increase transparency for customers and enhance competition.
The non-majors claimed that a proposed comparison tool with the “authority of a government agency” could undermine the broker channel.
“[The] online tool would, in some respects, compete with the broker channel, particularly given the proposal is for the comparison tool to have the authority of a government agency standing behind it,” the banks stated.
“Such an approach could potentially undermine the broker industry and eventually favour the banks with larger bricks and mortar networks,” the banks added.
Further, the lenders argued that the publication of a median interest rate could “mislead customers”.
“While this has the potential to improve competitive pressure from the demand side of the market, it may also involve considerable practical difficulties,” the submission read.
“More importantly, it may mislead customers as to the true cost of a product. The main problem with such tools is that they have a tendency to lead to ‘gaming’, whereby suppliers develop products that rate well on the tool but have shortcomings in other areas.
“For example, comparison tools have difficulty capturing the full benefits of a ‘bundle’ of services offered by a financial institution.”
The banks claimed that the tool could also create an incentive for some lenders to “shift costs” to products and services outside the tool’s scope.
“They also provide an incentive for suppliers to increase costs for services outside the scope of required disclosures. For example, in the case of mortgages, suppliers could shift costs to account closing or switching fees,” the submission said.
Additionally, the banks claimed that the tool could instigate a “race to the bottom”, with lenders creating products that “fall short of expectations”, potentially requiring regulatory intervention.
The lenders said: “[Some] financial institutions may respond by choosing not to offer services outside what the tool requires, and consumers could end up with products that fall short of expectations.
“Such an approach could see suppliers in a race to the bottom, offering only the most basic and feature-free products in order to present the most attractive median interest rates to the comparison tool.
“This would then inevitably result in additional regulatory interventions as governments attempt to patch over the shortcomings of the tool.”
Moreover, the banks advised against changes to the broker remuneration model, claiming that “consumers have a strong tendency to resist paying for services”.
The lenders added that “disruption” to the broking industry’s remuneration model could have a “material” impact on market competition.
“A significant disruption to the economic viability of the broker industry would be a material competitive neutrality issue for smaller banks.”
“Disclosure of mortgage broker ownership is a priority”
In their submission, the banks also expressed support for the PC’s call for increased disclosure for mortgage brokers.
The non-majors noted that they believe customers should “know the identity of the broker’s owner”, and they claimed that the level of business activity directed to an aggregator’s owner or associated company should also be published.
“[We] believe it is important to ensure that the customers of mortgage brokers know the identity of the broker’s owner so they can factor this information into their decision-making process.
“In addition to ownership disclosure, [we] recommend that broker networks and aggregators publish information showing the amount of business directed towards their owners or associated companies, relative to the proportion directed elsewhere.”