Competition in the Australian financial system report

The Productivity Commission has released its draft report on competition in the Australian financial system.

The Report clearly states its objectives:

“The financial system must be strong and stable. But equally, it should ensure that Australia’s businesses and households are well-served and can have confidence that ‘unquestionably strong’ institutions are not exploiting the market power that might accompany this exalted status.

This inquiry focusses on competition in Australia’s financial system as a means to improve consumer outcomes, enhance the productivity and international competitiveness of the financial system and the broader economy, and support ongoing financial system innovation — without undermining financial stability objectives.”

Findings

The draft Report contains substantial analysis of the financial system, including pricing of products in different sectors.

Its key findings include:

“State Of Competition In The Financial System
Australia’s banking sector is a strong oligopoly with a long tail of smaller providers. The general insurance sector similarly has a small number of very large providers and a long tail of smaller providers. Prudential regulation substantially limits the scope for traditional price competition in banking and, to a degree, in insurance. The Reserve Bank of Australia setting of cash rates offers an opportunity for coordinated pricing in banking that is unique to this industry. Competition on product features and service is less constrained, and thus more evident. But the large number of marginally different products appears more reflective of a capacity for price discrimination than of competition.

• Although at less than desirable levels, there is evidence of more competition (albeit on product features rather than price) in the markets for home loans, consumer credit cards, home insurance, wealth management and financial advice.

• There is evidence of less competition in the markets for small business credit, lenders mortgage insurance, add-on insurance and pet insurance.”

“Key Features Of Workable Competition In The Financial System
The key features of workable competition in Australia’s financial system must include:
• an open digital information capacity for consumers to assess how prices or features vary between products and choose (including switching to) preferred products
• consumers actively supported by public advice or private advisers to conveniently make informed decisions regarding aspects such as risk (including credit worthiness)
• an Open Banking regime that gives consumers perpetual access to their data that is useful to other providers, with the capacity to see it safely moved from one provider to another
• minimal limits to entry by new providers, and expansion by existing providers, into regulated product markets (subject to other regulatory objectives such as prudential outcomes)
• regulators more open-minded towards innovation and aware of the effects of their actions on weakening competition and creating consumer detriment
• effective scrutiny of the adverse use of market power by any participant or set of participants.”

Key draft recommendations include:
• Duty of care obligations for lender-owned aggregators;
• Mortgage broker disclosure requirements;
• Lenders mortgage insurance refund when customers choose to refinance or pay out their loan;
• Review regulation of purchased payment facilities;
• Ban card interchange fees;
• Comparative pricing information on insurance renewal notices;
• Rename general advice to improve consumer understanding;
Deferred sales model for add-on insurance; and
Review standardised risk weights for residential mortgages

The Productivity Commission will conduct public hearings in relation to its Report.

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