This has been highlighted in a submission to the Commerce Commission’s market study into banking competitiveness by financial technology platform AERA, the bank alternative for first home buyers.
AERA says simply the tool is a bank’s measure of how many applications are settled versus the number of applications received.
“We are concerned this particular measure encourages mortgage advisors to only apply for a mortgage at one (or maybe two) banks which may be to the detriment of the customer. Anecdotally, mortgage advisers are actively encouraged to maintain a certain closure rate with a lender, and non-performance of this metric could place their lender facility at risk.”
AERA says it feels this is contrary to the customers’ view of a mortgage adviser’s ability to “shop around for the best deal” amongst all of the lenders in market. “It is also a metric that may result in multiple poor customer outcomes where Mortgage Advisors are actively discouraged from requesting competitive tenders for their customers,” the submission says.
The company says it is lucky to work with experienced, customer centric mortgage advisers who have the knowledge of each lender’s appetite and approval process. “Having a strong adviser community who can navigate this is an important way to creating better customer lending outcomes in the face of the current closed home lending process.”
Consumer NZ in its submission says in an ideal world, mortgage advisers should put competitive pressure on banks and other lenders, leading to better deals for consumers. However, it has not seen any strong evidence that using a mortgage adviser will ensure consumers get a better rate on their mortgage. The consumer organisation says it wants to see further analysis of this.
Incentives distort picture
While mortgage advisers have been described by Heartland Bank as an important part of the home loan industry, bank-to-adviser mortgage incentive structures possibly distort that picture in favour of larger banks who have the scale to cover the initial cash outlay that is required when paying adviser fees.
“Some banks offer a cashback (with an associated clawback period) to attract and retain customers. These cashbacks can have a similar distorting impact to mortgage adviser incentives due to also requiring an initial cash outlay which favours larger banks who have the scale to cover this outlay,” Heartland’s submission says.
In addition, the bank says cashbacks can also make it more difficult for customers to compare home loan offers between providers on a ‘like-for-like’ basis and the associated clawback period can also disincentivise customers to switch providers.
Regulatory regime stifling
On the regulatory front, the CCCFA has been defined by Heartland as being so complex and uncertain that lenders are forced to adopt conservative business approaches to ensure compliance; stifling innovation and dynamism in important banking product markets.
The Financial Services Federation (FSF) goes a step further and says if it was to single out one piece of legislation or regulation that has done more to stifle innovation and competition than any other, it would have to be the December 2021 changes to the Credit Contracts and Consumer Finance Act 2023 (CCCFA).
Its submission says the highly prescriptive process these changes introduced to the way in which lenders are expected to assess the suitability of their loan products and their affordability, coupled with the extremely punitive personal liability on lenders’ senior managers and directors means all lenders have to apply a “one size fits all” approach to their credit process which leaves no room for lender discretion or judgment.
“This has resulted in severely limiting access to credit for consumers from responsible lending providers if a customer, who they might previously have been able to assist using their experience and judgement, does not tick all the required boxes,” the FSF says.
“The problem here is that the customer’s need hasn’t gone away just because a lender has declined their loan and that leads to desperate people seeking the lender of last resort to meet that need which may lead them to a provider for whom compliance is not so important.”
It has also led to lenders quitting the consumer lending market altogether to focus on less heavily regulated business lending which is certainly not helpful to promoting a competitive market.
A further unintended consequence of the overly prescriptive CCCFA regime, the FSF says, is it has created a significant barrier for consumers to be able to change providers in order to obtain a better deal. It has effectively created “mortgage prisoners” where the granular and intrusive assessment of all household expenses rather than just the individual’s fixed outgoings renders their loan “unaffordable” to a new provider (even though they may be meeting higher existing commitments with their current lender) and reduces their ability to switch to obtain a better deal.
Westpac says in it submission it supports the recently announced review of the CCCFA. It considers a return to a principles-based regime and removal of prescriptive requirements would lead to better customer outcomes including easier access to credit from banks for a wider range of customers. This may also facilitate the introduction of more innovative products and services.
Challenging process
Monopoly Watch, a public policy group that studies research and comments on competition issues in capital intensive utility and commodity industries, says the CCCFA changes have required banks to collect more information and this has become an even more challenging process for borrowers.
“The process is typically easier if the borrower is applying to their existing transactional bank because that bank will already hold most of the information required,” its submission says.
However, it says advisers create competition. “Yes, they cost money but traditionally they have helped ignite lower rates and enable new players. Going forward broker fees may be used as discounted rates and similar to travel agents (brokers) get disintermediated by apps, so with new digital banks the brokers may be removed and may be replaced by lower prices for self-service , like easyJet. Advisers should be encouraged, once new operators are introduced to the market.”
Praise for advisers
Kiwibank says mortgage advisers have positive impacts on competition through significant knowledge about what different lenders can offer, including how product offerings, credit criteria, and service levels differ; they develop a broad understanding of what does and does not work for borrowers and can provide lenders with feedback to help them improve their offerings. This helps lenders to keep their offerings competitive; and, they can help borrowers to negotiate home lending terms, including rates, where customers might not otherwise have the knowledge or the confidence to do so.
The bank’s submission says there may be a perception that mortgage advisers are inclined to encourage borrowers to select their existing transactional bank because a mortgage adviser typically includes their existing bank. “However, it makes sense for a borrower to consider their existing bank (usually alongside at least one other) because the CCCFA regulatory framework makes applying to another bank more challenging.
“For example, when making a home loan application, borrowers are required to submit information about their income and expenses so that banks can carry out suitability and affordability assessments. Recent changes to the CCCFA have required banks to collect more information and this has become an even more challenging process for borrowers. The process is typically easier if the borrower is applying to their existing transactional bank because that bank will already hold most of the information required,” Kiwibank says.
The Commerce Commission will now publish its draft report in March next year setting out its preliminary findings about competition for personal banking services. Its final report Is due by August 20.
