The Productivity Commission has lashed the banks for flooding the market with similar products, ripping off loyal customers and drumming up new business with temporary and illusory benefits.
The final report from PC chairman Peter Harris pulls no punches with its analysis of competition in the financial system in which it calls out for its “a blizzard of barely differentiated products” creating “an illusion of choice”
“The huge product variety combined with price obfuscation provides latitude for exploitative price discrimination, with associated profit opportunities for the relevant financial institutions” the report says.
“Typically, it is existing customers that get a poor offer, as institutions jostle to attract new customers with products that offer temporary benefits (such as discounted interest rates and fee-free periods).”
The report contains more than a dozen recommendations including the establishment of a publicly available home loan rate comparison website, the banning of all trailing commissions for mortgage brokers from 2019 and greater transparency of products on financial advisors approved lists.
It also names the ACCC as its preferred candidate to take up the role as competition champion, says ASIC should establish a clearinghouse to publish its vast data sets and recommends the establishment of a best interest obligation for companies that provide home loans.
Treasurer Scott Morrison will use the report at a lunch in Sydney today to launch a fresh attack on the banks, which reveals how customers are penalised by remaining loyal to the tune 0.3 to 0.4 percentage points or up to $87 a month on the average home loan balance.
The report finds that up to half the cost of an average mortgage is profit for the major banks which is double the margin enjoyed by smaller Australian-owned banks and much higher than banks in high income countries.
It also says that present conditions are unlikely to be disrupted by the new breed of financial technology companies saying there is no indication they “alter the market power of major banks in the foreseeable future”.
The high levels of customer satisfaction exhibited by the sector is itself a cause for concern the report says.
“When considered in conjunction with what we know about a lack of responsiveness to better offers, it indicates a substantial failure in financial product information and advice.”
On the subject of consumer choice, it points to the 4000 different residential home loans available and more than 250 credit cards. It calls out insurance company Hollard for underwriting 23 out of 25 different brands of pet insurance.
The model of mortgage broker remuneration is broken according to the PC and may be imposing additional costs to all home loan borrowers regardless of which channel they choose.
The PC said it had not been able to prove this conclusively because “lenders were not forthcoming when we asked them to explain further the basis for aggregator ownership”. It also suggested new obligations needed to be imposed on brokers.
“Unlike in wealth management (a similar advisory business, involving serious financial cost), mortgage brokers are not presently obliged by law to act in the best interest of the customer” it says.
The Productivity Commission made more than 20 recommendations in its draft report released on February 7. The initial report found there was little evidence of competition among the big four banks on price and concluded that APRA’s caps on investor lending delivered the banks a billion profit windfall.
More to come