The Commerce Commission's final report into competition in personal banking services sector unsurprisingly concluded that the dominance of the four large Australian-owned banks has led to a lack of effective competition and excess profits.
The Commission makes a series of wide-ranging recommendations to improve competition. The Government has pledged to implement them. The recommendations, once implemented, will have a significant impact on mortgage advisers, their financial advice providers (FAPs) and aggregators.
Mortgage adviser recommendations
The recommendations specifically in relation to mortgage advice are intended to increase competition, by allowing customers to access better information and mortgage offers from more lenders. Those recommendations are:
- Standardised offers: Home loan providers should present offers in a readily comparable manner, accounting specifically for the effective value of cash contributions
- Pro-rata clawbacks: Home loan providers should pro-rate all clawbacks for mortgage adviser commissions and bank cash contributions
- Streamlined bank processes: Banks must improve their processes, to make it easier for mortgage advisers to submit multiple applications, and to more quickly process loan applications
- Ban on conversion rate conditions: Banks should ensure that “conversion rate” targets for mortgage advisers are not discouraging mortgage advisers from submitting qualifying home loan applications to multiple lenders
- Lender panel disclosure: Financial advisers must highlight which lenders are not on their panel of lenders
- Superior headline rates highlighted: Financial advisers must identify any superior headline interest rates offered by lenders outside of their panel
- Multiple offers presented: Where possible, advisers should present at least three actual offers to their clients
Financial advisers will immediately identify some issues with the recommendation. It’s possible that some of the recommendations will look somewhat different once implemented.
The goods news for advisers
Perhaps the best outcome for advisers is that the Commission has largely stepped away from its criticism of the advice sector contained in its August 2023 preliminary issues paper.
That followed effective submissions and engagement from the sector, as well as information provided by the Financial Markets Authority.
The report now focuses more on the role mortgage advisers and associated businesses can play in improving competition in the mortgage market. And, if it is of any comfort to advisers, the Commerce Commission did not pull its punches with respect to regulators and other market participants.
In particular, the Commission asserts that there are shortcomings in some aspects of the Reserve Bank’s approach.
The Commission does not recommend a move away from commission-based payments, or changes to commission structures.
In my view it’s possible that the recommendations in relation to mortgage broking will have the largest immediate impact on competition.
This reflects that, as the Commissions notes, “home lending [is] the key value driver in [the large banks’ business]”. It also reflects that the Commission’s two key recommendations, better capitalisation of Kiwibank so it can be a market disruptor, and implementation of open banking, will likely take longer to implement, and that their effectiveness is inherently less certain.
The road ahead
It’s clear that the recommendations, if implemented, will have a significant impact on the mortgage advice sector. It may lead to a reduction in business, particularly if the public has greater access to more information on interest rates and other lender information.
Workloads may also be increased, by requiring advisers to make more applications. But this may be offset by benefits arising from other recommendations including that banks improve their systems for mortgage applications and make offers more comparable.
Improving transparency
The Commission considers discretionary discounting and cashback offers in some detail. It considers that these lead to a lack of price transparency, hindering consumers’ ability to compare loans. The Commission was influenced by feedback from advisers that they tend to focus on credit policies rather than interest rates, on the basis that lenders will match market leading rates regardless.
One recommendation to address this is that lenders “should present offers in a readily comparable manner” via an “effective interest rate” that factors in cashbacks.
The Commission acknowledges concerns with that level of prescription and suggests that what is implemented will be informed by consumer testing.
While well-intentioned, prescription will likely lead to attempts redesign products to avoid full disclosure. Also, overly prescriptive rules could stifle innovation, ultimately reducing competition.
It is difficult to see how a duty to advise clients of better headline rates will help, unless those headline rates themselves factor in cashbacks and other incentives.
A potentially more effective solution might be to require banks to make their lending data accessible to all, supporting advisers as well as fostering the development of platforms that provide detailed and nuanced information to the public. While this might reduce the demand for traditional advice services, it aligns with the Commission's goal of enhancing price transparency without the drawbacks of prescriptive regulation.
A best interests duty
The Commission proposes that advisers “become champions of price competition” and states that advisers “need… to go further to promote the best interests of consumers”.
The Commission effectively recommends replacing the adviser duty to prioritise client interests in the event of a conflict, with a duty to act in clients’ best interests.
A best interests duty would cause advisers to become fiduciaries with wider obligations to clients. The wider obligations that the Commission envisages are to identify lenders who are not in the advisers (and FAP’s) panel of lenders, and to identify better headline interest rates offered by lenders outside of the panel.
The Commission says that this would align with the law in Australia.
Shortcomings in that approach are obvious and were highlighted by advisers in their engagement with the Commission. One obvious issue is that there are many lenders in the market. Also, there is strong evidence that disclosure does not significantly affect customer behaviour in any case.
The Commission notes that but does not address it. The Commission seems to assume that this will push advisers towards offering whole-of-market advice, but it is unclear whether this would happen in practice and exactly how much this would increase effective competition.
The obligation to highlight better headline rates may also have limited impact, if these rates do not account for cashbacks and other incentives. The Commission acknowledges that this requirement could reduce adviser income. It suggests that, in response, advisers shift to a fee-for-service model.
However, this could inadvertently reduce competition, by discouraging consumers from seeking advice.
The Commission notes that an obligation to highlight better rates has the potential to reduce adviser income. It suggests that advisers and aggregators address this by moving to a fee-for-service model. However, the Commission does not deal with the implications of that including the reduction in competition that will likely arise from the fall in the number of people using advisers as a result.
Navigating complexity
The report notes that in 2003 the Commission approved ANZ's purchase of National Bank. The Commission concluded at the time that any loss of competition from creating a bank with about 40% market share would be less than substantial, despite that being well outside of the Commission’s safer harbour for market concentration.
That conclusion was based on the Commission’s assumption that ASB would act as a disruptor that “is unlikely [to] have an incentive to participate in coordinated market power to maximise profits, at the expense of its expansion.”
The Commission does not address the fact that its assessment was overly optimistic. In fact, one of its two key recommendations is that Kiwibank be better capitalised, in order to act as a disruptor.
If nothing else, the National Bank episode highlights that markets are complex. It is often difficult to intervene in markets without creating further problems and unintended consequences.
That’s not to suggest that the Commission hasn’t undertaken an impressive level of analysis and engagement in preparing its report. It clearly has. But in my view the wide scope of its considerations, and the complexity of the market, mean that some areas have not been given the degree of analysis they deserve.
The result is that the Commission is unlikely to be right in all respects, as I’ve suggested.
There will be further opportunities for the public to engage during the required law-making process, so the Commission’s recommendations are not the last word.
The Commission has taken bold steps to reshape the personal banking services market. The journey from recommendation to implementation will require careful navigation, to avoid the risks that arise from such sweeping changes.
