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. It makes a number of wide-ranging recommendations to improve competition, many of which have been mirrored in other reviews and considered by the Royal Commission.
The Treasurer has not indicated the Government’s response to the Report’s Recommendations including the role of the regulators in competition in the Australian Financial System.
The Report concludes that while the Australian economy has generally benefited from having a financial system that is strong, innovative and profitable the larger financial institutions have the ability to exercise market power over their competitors and consumers.
The Report observes that competition and stability are both important to the Australian financial system.
The core finding is:
“Australia’s banking sector is an established oligopoly with a long tail of smaller providers. The four major banks as a group hold substantial market power, as a result of their size, strong brands and broad geographical reach. This is substantially supported by regulatory settings, which contribute to the major banks’ structural advantages. As a result, the major banks have the ability to pass on cost increases and set prices that maintain high levels of profitability — with minimal loss of market share. The smaller banks and non-bank financial institutions typically follow the pricing trend set by the major banks, and are not a significant competitive constraint on the major banks’ market power.
Larger banks benefit from lower costs of funding, compared with smaller institutions.”
In home loan markets, the Report says that 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. All brokers, advisers and lender employees who deliver home loans to customers should have a clear legally-backed best interest obligation to their clients.
In general insurance, the Report found 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.
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.
Impediments to competition
The report identifies the following factors which facilitated reduced competition:
- 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.
The Report concludes that 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.
The recommendations include:
Competition Impacts of APS120: APRA should conduct a post-implementation review on how the changes in Prudential Standard APS 120 have affected the costs of funds and competitiveness of non-authorised deposit-taking institutions.
Reforming Mortgage Broker Commission Structures: An enforceable Code applying to all mortgage lenders should be created and imposed by ASIC, to implement the following reforms to broker remuneration structures:
- ban the payment of trail commissions in mortgage broking for all loans originated after end-2018
- require upfront commissions to aggregators and brokers to be paid based on the funds limit drawn down by customers, net of offset, instead of the limit of the loan facility
- ban the payment of volume-based commissions, campaign-based commissions and volume-based payments
- limit to two years the period over which commissions can be clawed back from aggregators and brokers.
Reforming Commission Clawback Arrangements: The Australian Government should extend the ban on early exit fees to explicitly prohibit commission clawbacks being passed on to borrowers. ASIC’s powers should be expanded to allow it to enforce the ban.
Best Interest Obligation For Credit Licensees: The Australian Government should amend the National Consumer Credit Protection Act 2009 (Cth) to impose best interest obligations on licensees that provide credit or credit services in relation to home loans. These best interest obligations should comprise:
- a duty to act in the best interest of the client
- a requirement that any resulting recommendations must be appropriate to the client, having regard to the duty to act in the best interest of the client
- a duty to prioritise the interests of the client, in the event of a conflict
- a duty to ensure that certain information is disclosed to the client.
Where the lenders have an ownership interest in firms that provide the credit assistance services, those lenders should also have a legal responsibility to ensure that the licensee discharges its best interest obligations.
Lenders Mortgage Insurance: ASIC should require all lenders to provide those borrowers that are levied with lenders mortgage insurance (LMI) with the option of being levied once at the commencement of their home loan (whether paid as a lump sum or as deferred payments) or being levied annually over the first 6 years of their loan, with transparency around the comparison of these options. Where LMI is levied at the commencement of the home loan, all lenders should be required to set a schedule of refunds on the cost of LMI when borrowers choose to refinance or pay out their loan within 6 years of the loan being originated. The refund schedule should be made available to the borrower before any fee or charge is levied.
Comparative Pricing Information on Insurance Renewal Notices: Renewal notices for general insurance products should transparently include the previous year’s premium and the percentage change to the new premium. This policy should commence by the end of 2019 and be enforced by ASIC.
Transparency on Insurance Underwriting: In addition to specifying which insurer underwrites their products, each insurance brand should specify on their website any other brands that are underwritten by the same insurer, for that particular form of insurance. Insurers should provide an up-to-date list of the brands they underwrite to ASIC. ASIC should transparently publish this information as a list on its website.
Deferred Sales Model for Add-On Insurance: ASIC should proceed as soon as possible with its proposal to mandate a deferred sales model for all sales of add-on insurance by car dealerships. The deferral period should be a minimum of 7 days from when the consumer applies for or purchases the primary product. Following implementation, the Australian Government should establish a Treasury-led working group with the objective of comprehensively extending the deferred sales model to all other add-on insurance products, with the model set in legislation and ASIC empowered to offer exceptions on a case-by-case basis.
Review of NCCP Act Exemption of Retailers: The Treasury should complete its 2013 review into the current exemption of retailers from the National Consumer Credit Protection Act 2009 (Cth), with a view to removing or reforming the exemption. The report should be made publicly available on completion.
ASIC to Assess a New Licence to Allow Financial Advisers to Advise on Home Loans: ASIC should assess the feasibility of financial advisers providing advice on home loans and other credit products, via a new Australian Financial Services Licence that would not require a separate Australian Credit Licence to be obtained. This assessment should examine the costs and benefits of a new licence, the consequences of various remuneration models and the applicability of a Principal Integrity Officer.
Rename General Advice To Improve Consumer Understanding: General advice, as defined in the Corporations Act 2001 (Cth), is a misleading term and should be renamed. Any replacement must ensure that the term ‘advice’ can only be used in association with ‘personal advice’ — that is, advice that takes into consideration personal circumstances. Consumer testing of alternative terminology is required to ensure that misinterpretation and excessive reliance on this type of information is minimised. Including time for consumer testing and a transition period to enable industry training and adjustment, a new term should be in effect by mid-2020.
Greater Transparency Of Products On The Approved Product List: Australian Financial Service Licensees should disclose to ASIC (for each broad class of financial product):
- the number of products on their approved product list (APL)
- the proportion of in-house products on their APL
- the proportion of products recommended that are in-house
- the proportion of products recommended that are off-APL.
ASIC should publish this information annually. ASIC should also conduct selected audits of the information received to facilitate assessment of the effectiveness of advisers in meeting clients’ best interests.
Ban Card Interchange Fees: The Payments System Board should introduce a ban on card payment interchange fees by the end of 2019. Any other fees should be made transparent and published.
Review Transparency Of Fees On Foreign Transactions: By end-2019, the ACCC, in consultation with ASIC, should investigate what additional disclosure methods could be used to improve consumer understanding and comparison of fees for foreign transactions levied by authorised deposit-taking institutions and other payment providers. This should include determining the feasibility of using benchmark exchange rates to improve transparency of international money transfers, as well as measures to improve transparency for fees on overseas purchases.
Review Regulation Of Purchased Payment Facilities: The Council of Financial Regulators should review the current regulation of Purchased Payment Facilities (PPFs). The review should develop an approach to simplify the regime, develop clear thresholds for regulatory responsibility and reduce barriers to growth in this sector. The review should consult on and design a tiered regulatory structure for PPFs, including one tier that does not attract prudential regulation. The review should be completed by end-2018 at the latest and provide a path forward for regulators by mid-2019.
Updating And Mandating The ePayments Code: The Australian Government should give ASIC the power, by end-2018, to make the ePayments Code mandatory for any organisation that sends or receives electronic payments. ASIC should review the ePayments Code and update it to reflect changes in technology, innovative business models and developments in Open Banking. ASIC should more clearly define the liability provisions for unauthorised transactions when third parties are involved, including participation in financial dispute resolution schemes. ASIC should update the ePayments Code by end-2019 and commit to 3-yearly reviews.
Access Regime For The New Payments Platform: The New Payments Platform (NPP) should be subject to an access regime imposed by the Payments System Board (PSB). As part of the regime, the PSB should:
- allow specialist payment providers that hold an Exchange Settlement Account to connect to the NPP without the need to be an authorised deposit-taking institution
- review the fees set by NPP institutions and transaction fees set by New Payments Platform Australia Limited
- require all NPP institutions that use an overlay service to share de-identified transaction-level data with the overlay service provider.
The PSB should consult the ACCC on the final design of the data sharing obligations, having regard to impending Open Banking reforms.
Competition Champion For The Financial System: To address gaps in the regulatory architecture related to lack of effective consideration of competitive outcomes in financial markets, the ACCC should be given a mandate by the Australian Government to champion competition in the financial system, including in decisions taken by regulators that have or may have the outcome of restricting competition.
Standardised Risk Weightings For Small Business Lending Instead of applying a single risk weight to all small and medium business lending not secured by a residence, APRA should provide for a broader schedule of risk weights in its Australian Prudential Standard (APS 112).