Competition in the Australian financial system

Inquiry report

Released 03 / 08 / 2018

The report looks at the provision of financial services and the interaction of market participants, issues facing the consumers of financial services and the functions and activities of the regulators.

This report was sent to Government on 29 June 2018 and publicly released on 3 August 2018.

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There has not been a government response to this inquiry yet.

Key points
Contents

The Australian economy has generally benefited from having a financial system that is strong, innovative and profitable.
There have been past periods of strong price competition, for example when the advent of mortgage brokers upset industry pricing cohesion. And technological innovation has given consumers speed and convenience in many financial services, and a range of other non-price benefits.
But the larger financial institutions, particularly but not only in banking, have the ability to exercise market power over their competitors and consumers.
- Many of the highly profitable financial institutions have achieved that state with persistently opaque pricing; conflicted advice and remuneration arrangements; layers of public policy and regulatory requirements that support larger incumbents; and a lack of easily accessible information, inducing unaware customers to maintain loyalty to unsuitable products.
Poor advice and complex information supports persistent attachment to high margin products that boost institutional profits, with product features that may well be of no benefit.
- What often is passed off as competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products and ‘white labels’.
For this situation to persist as it has over a decade, channels for the provision of information and advice (including regulator information flow, adviser effort and broker activity) must be failing.
In home loan markets, the mortgage brokers who once revitalised price competition and revolutionised product delivery have become part of the banking establishment. Fees and trail commissions have no evident link to customer best interests. Conflicts of interest created by ownership are obvious but unaddressed.
Trail commissions should be banned and clawback of commissions from brokers restricted. All brokers, advisers and lender employees who deliver home loans to customers should have a clear legally-backed best interest obligation to their clients.
Complementing this obligation, and recognising that reward structures may still at times conflict with customer best interest, all banks should appoint a Principal Integrity Officer (PIO) obliged by law to report directly to their board on the alignment of any payments made by the institution with the new customer best interest duty. The PIO would also have an obligation to report independently to ASIC in instances in which its board is not responsive.
In general insurance, there is a proliferation of brands but far fewer actual insurers, poor quality information provided to consumers, and sharp practices adopted by some sellers of add-on insurance products. A Treasury working group should examine the introduction of a deferred sales model to all sales of add-on insurance.
Australia’s payment system is at a crucial turning point. Merchants should be given the capacity to select the default route that is to be used for payments by dual network cards — as is already possible in a number of other countries. The New Payments Platform requires a formal access regime. This is an opportunity — before incumbency becomes cemented — to set up regulatory arrangements that will support substantial competition in services that all Australians use every day.
More nuance in the design of APRA’s prudential measures — both in risk weightings and in directions to authorised deposit-taking institutions — is essential to lessen market power and address an imbalance that has emerged in lending between businesses and housing.
Given the size and importance of Australia’s financial system, and the increasing emphasis on stability since the global financial crisis, the lack of an advocate for competition when financial system regulatory interventions are being determined is a mistake that should now be corrected. The ACCC should be tasked with promoting competition inside regulator forums, to ensure the interests of consumers and costs imposed on them are being considered.

Preliminaries
- Cover, Copyright and publication detail, Terms of reference, Disclosure of interests, Acknowledgements, Contents and Abbreviations
Overview - including key points
Findings and recommendations
Chapter 1 An Inquiry focused on competition
- 1.1 Why this Inquiry?
- 1.2 Australia’s financial system
- 1.3 The Commission’s approach to the Inquiry
Chapter 2 Examining competition in the financial system
- 2.1 Competition in the financial system — what it looks like and why it matters
- 2.2 How we assess competition in the Australian financial system
Chapter 3 Market power in the banking system
- 3.1 How do ADIs gain — and boost — market power?
- 3.2 The current balance of market power
Chapter 4 Can new players change the game?
- 4.1 Entry, exit and contestability in banking
- 4.2 Foreign bank impacts are limited to select markets
- 4.3 Fintechs can change the rules of the game
Chapter 5 Can consumers change the game?
- 5.1 Consumer switching
- 5.2 Consumer feedback and negotiation
- 5.3 Recent policy activity
- 5.4 Consumers and demand side pressure
Chapter 6 Policy settings and interventions affect competition
- 6.1 Prudential standards
- 6.2 Targeted prudential interventions
- 6.3 Government policy measures
- 6.4 Ownership restrictions
Chapter 7 Banks’ responses to pervasive regulatory action
- 7.1 The prudential regulatory landscape is changing — and ADIs are changing along with it
- 7.2 Targeted interventions by regulators can have dramatic effects on competition
- 7.3 Explicit inducements and their effect on competition
Chapter 8 Funding models and their effect on competition
- 8.1 Mix and cost of funding for different types of lenders
- 8.2 Regulatory influences on funding models
Chapter 9 Integration in the financial system
- 9.1 How integrated is the Australian financial system?
- 9.2 How has integration affected competition?
- 9.3 Is there a case for forced structural separation?
- 9.4 A Principal Integrity Officer for all ADIs
Chapter 10 Financial advice
- 10.1 The financial advice sector — a brief introduction
- 10.2 Seeking a new source of competition in home loan distribution channels
- 10.3 General advice — a case for reform
- 10.4 More information about APLs to enforce the current best interest duty
- 10.5 Scope for digital advice to increase consumer access to financial advice
Chapter 11 Are mortgage brokers a force for competition?
- 11.1 Overview of the mortgage broking market
- 11.2 Why do consumers use brokers?
- 11.3 Why do lenders use brokers?
- 11.4 Mortgage broker commissions
- 11.5 A best interest obligation
Chapter 12 More transparent home loan pricing
- 12.1 Poor price information in the home loan market
- 12.2 How do consumers choose the best home loan?
- 12.3 Access to actual home loan interest rates via an online calculator
Chapter 13 Lenders mortgage insurance
- 13.1 What roles does LMI perform in the financial system?
- 13.2 Competition in the LMI market
- 13.3 LMI and borrowers
Chapter 14 General insurance providers and products
- 14.1 The general insurance sector
- 14.2 Who are the providers of general insurance?
- 14.3 State of competition in general insurance
- 14.4 Reforms to promote competition in general insurance markets
Chapter 15 Add-on financial products
- 15.1 Competition concerns with add on insurance
- 15.2 Improving competition and consumer outcomes
Chapter 16 Provision of finance to SMEs
- 16.1 Finance provided to SMEs
- 16.2 Is there a problem in accessing finance?
- 16.3 Can the provision of finance to SMEs be improved?
Chapter 17 The payments system
- 17.1 Competition in the retail payments system
- 17.2 Addressing distortions in the payments system
- 17.3 Barriers to innovation can stem from regulation
- 17.4 The New Payments Platform
Chapter 18 Where does competition fit in the regulatory architecture?
- 18.1 Australia’s system of financial regulation
- 18.2 The regulators’ biggest challenge: balancing competition and systemic stability
- 18.3 Who regulates the regulators?
Chapter 19 Reforming the regulators to support competition
- 19.1 A champion for competition
- 19.2 A new approach to transparency
Appendix A Inquiry conduct and participants
Appendix B The regulatory environment
Appendix C The Australian banking and wealth management sectors
Appendix D How do consumers make decisions?
References

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