The Productivity Commission's lapidary comment is
Prices are not transparent and product choice is often vague or overwhelming. Regulation is dense and it may act against customers’ interests. Those who advise and assist customers face conflicting, unclear incentives. In brief, we find that households and businesses may be paying, through unnecessary fees and low-value products, for a system that is exposed to use of entrenched market power.The report states
High market concentration does not necessarily indicate that competition is weak, that community outcomes will be poor or that structural change is required. Rather, it is the way market participants gain, maintain and use their market power that may lead to poor consumer outcomes.
Indeed, the Commission has concluded that changes to the structure of Australia’s financial markets are not very prospective as a means for improving market outcomes. Too many regulatory imposts — most readily displayed by persistent attachment to the Four Pillars policy — act against that.
Nor are forced divestitures likely to improve competition. Instead, they risk creating unviable businesses that are ‘unscrambled’ from existing businesses as regulators are never able to check that the parent entity has relinquished control of the key customer information, intellectual property, technology and staff that are needed to make the separated entity competitive.
Rather, reforms that alter incentives of Australia’s banks, brokers, insurers, and advisers, aimed directly at bolstering consumer power in markets, and reforms to the governance of the financial system, should be the prime focus of policy action.
The major banks’ market power is a defining feature of the financial system
While some of the major banks argued that they do not, individually, exercise market power, they have been able to insulate themselves from competition and sustain returns despite the massive system-wide shock of the global financial crisis. There is evidence that they have sustained prices above competitive levels, offered inferior quality products to some groups of customers (particularly those customers unlikely to change providers), subsumed much of the broker industry and taken action that would inhibit the expansion of smaller competitors in some markets.
All are indicators of the use of market power to the detriment of consumers.Key points are -
• 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.