Banks exploiting loyal customers, warns commission
The Australian financial system is uncompetitive, allowing banks and insurers to boost profits by exploiting loyal customers and adding up to $87 a month to the average mortgage repayment.
That is the conclusion of the Productivity Commission's highly critical draft report into the sector, which finds it is "unquestionably strong" but calls for greater transparency to compare financial products and for regulators to gain powers to promote competition.
Competition was at a "less than desir- able" level in the market for home loans, credit cards, home insurance, wealth management and financial advice, it said. The most uncompetitive markets were small business credit, lenders mortgage insurance, add-on insurance and pet insurance.
The report stated that Australia's big four banks had "substantial market power", allowing them to "pass on cost increases and set prices" without losing market share. The major banks had delivered "substantial profits to their shareholders", in excess of banks in most other developed countries since the global financial crisis.
Regulatory changes affecting banks' funding costs were passed on to borrowers, it said. For example, when the Australian Prudential Regulation Authority limited interest-only lending to 30% of new residential mortgage lending in 2017, the banks increased the interest rates on all interest-only loans, including existing loans. The Productivity Commission said the move was "completely unsurprising" but smaller banks could not win over dissatisfied customers because the new lending benchmark applied to them.
Up to half of the increase in lenders' profit that resulted was "in effect paid for by taxpayers", as interest on investment loans is tax deductible. The Productivity Commission said that the cost to taxpayers was up to $500m.
The report said that barriers to switching financial institutions, particularly for home loans, made "loyal customers ripe for exploitation".
It noted the Reserve Bank had found that existing home loan customers paid 0.3% to 0.4% higher rates than those offered on new home loans. "These higher rates are paid by around 15% of existing customers and equate to an extra $66 to $87 per month on the average home loan balance." The Productivity Commission said growth in mortgage brokers and other advisers "does not appear to have increased price competition".
"The revolution is now part of the establishment," it said. "Non-transparent fees and trailing commissions, and clear conflicts of interest created by ownership are inherent." It noted that mortgage brokers "are not obliged by law to act in the best interests of the customer" and recommended that such a duty be extended to lender-owned aggregators and brokers, which write 70% of broker mortgages.
The Productivity Commission said that "no agency is tasked with overseeing and promoting competition in the financial system" and regulation had persistently favoured stability over competition.
"We need one of the regulators to be appointed by government as the competition champion - to take primary responsibility for putting the case for competition inside what are otherwise closed shop discussions," the chairman of the Productivity Commission, Peter Harris, said. He said: "The early 2000s was the last time Australia's financial system saw a period of fierce competition ... If we are to see its like again, we will need a series of policy shifts, and a champion to own them." The report noted the sector was characterised by a "large number of marginally different products [which] appears more reflective of a capacity for price discrimination than of competition".