Tag: Productivity Commission

ASIC resistant to role as ‘competition champion’

From InvestorDaily.

In ASIC’s post-draft submission to the Productivity Commission’s Inquiry into competition in the Australian financial system, the corporate regulator said it “support[ed] the Productivity Commission’s recognition of the importance of ASIC having a broad, proactive competition mandate”.

“An explicit and broad competition mandate for ASIC would ensure we have a clear basis to consider and promote competition in the financial system,” ASIC’s submission report said.

A broad mandate would allow competition to be factored into ASIC’s regulatory decision-making, as well as the capability to “address market failure as a driver of misconduct or poor consumer outcomes”.

ASIC also acknowledged previous instances of “uncertainty” regarding “if and how ASIC could consider competition factors”, but pushed back against the idea of actually regulating competition.

“Having a broad competition mandate – to ensure we can appropriately incorporate competition considerations into our existing role as a market conduct regulator – would not make ASIC a competition regulator,” the submission report said.

“We would not have a role in enforcing competition laws – for example, regulating corporate transactions from a competition perspective or monopolies, bringing abuse of market power cases, or regulating pricing and access regimes.”

The regulator added that it supported the co-operation of different regulators in tackling competition issues and the value of learning from each other.

However, ASIC pointed out that each regulator had its own specified area of expertise and “therefore best placed to assess how competition should be weighed and balanced within its area”.

“While we appreciate the Productivity Commission’s concern to ensure that all regulators give appropriate consideration to the competition impacts of their decisions, we are not sure that the role of the competition champion, as envisioned in the draft report, is necessarily the best option to achieve that goal,” the submission report said.

Furthermore, ASIC highlighted the “significant role” of the Australian Competition and Consumer Commission as a regulator of competition “for the entire economy”, as well as its role as a “competition advocate”.

“We acknowledge and support the ACCC’s establishment of its Financial Services Unit, and the role it plays in the financial sector,” the submission report said.

“ASIC maintains a strong working relationship with the ACCC, and welcomes the ACCC’s views and input, including in our work to encourage positive consumer outcomes through effective competition.”

Customer owned banking for the people

COBA today said Australians looking for banking that focuses on them as people should look no further than Customer Owned Banking.

You might like to watch my recent discussions at their forum in Sydney.

Commenting on the Greens calling for a bank owned by the Government and RBA run, COBA CEO Michael Lawrence said:

“If Australians want banking that’s truly focused on people, that model has been operating in Australia for more than 70 years.

“More than 70 customer-owned banks, credit unions and building societies across Australia put their customers as their number one priority.

“The customer owned banking sector is profitable, has more than $111 billion in assets and a strong presence across Australia.

“We’re focused on delivering for the 4 million Australians and local communities we already serve and expanding beyond that.

“Customer owned banking has featured in the considerations of the Productivity Commission (PC) and a range of pro-competition announcements by the Federal Government.

“It’s positive that there are ideas to make the banking market more competitive.

“The current PC Inquiry into competition in financial services is an important investigation into the steps that need to be taken to spark better outcomes for consumers.

“Our submission in response to the PC Draft Report outlines some of the steps COBA would like to see taken.

“We look forward to seeing the detail of the Greens’ proposal and consulting our members about the proposal.”

RBA supports best interests duty for brokers

From The Adviser.

The Reserve Bank of Australia has revealed that it believes all brokers should be required to act in a consumer’s “best interests”.

In its response to the Productivity Commission’s draft report into competition in the Australian financial system, the RBA came out in support of several of the commission’s draft recommendations.

Notably, the central bank revealed that it was in support of the draft recommendation that the Australian Securities and Investments Commission impose on lender-owned mortgage aggregators (and the brokers that operate under them) a “clear legal duty” to act in the consumer’s best interests.

Further, the RBA called for such a duty to be extended to all brokers, not just those operating under lender-owned aggregators.

The bank’s submission reads: “The bank supports the draft recommendation to require lender-owned aggregators and the brokers who operate through them to act in consumers’ best interests… We would support extending this to all brokers.

“While there may be some benefit in enhancing mortgage broker disclosure requirements to consumers to improve transparency, it is important to recognise that some consumers may nonetheless still not fully understand the information provided (given its complexity and the backdrop of consumers not taking out a mortgage frequently).

“Steps to address the underlying conflicts of interest and misaligned incentives are therefore crucial to improving consumer outcomes.”

Further to this, the RBA pulled on several findings from ASIC’s remuneration review, highlighting a number of other factors that it believes “inhibit the effectiveness of competition through mortgage brokers”.

These included:

  • Smaller lenders find it harder to get onto aggregator panels due to fixed costs
  • Brokers need to be accredited with a particular lender to sell their loans and they have incentives — “partly due to variations in commissions and the burden of seeking accreditation” — to concentrate their recommendations on a small number of lenders rather than the whole panel of potential lenders
  • Lenders “may compete on their incentives to brokers, rather than on the quality of their loan products, creating competitive barriers for smaller lenders who find it too costly to offer such incentives”
  • Higher commissions for brokers “may also drive up costs for consumers”

The RBA said that it is therefore in support of “enhancing” the transparency of mortgage interest rates paid by borrowers.

It suggested that possible ways of doing this could include “asking the banks to publish these rates directly” or “conducting a survey of the largest mortgage brokers to obtain representative rates”.

The RBA made several other statements in its submission, including:

  • The bank agrees that, when formulating prudential regulatory measures, it is important that any potential effects on competition be considered
  • It did not believe that the setting of the cash rate either constrains competition or substantially facilitates price co-ordination (as had been suggested by the PC)
  • The bank supports the commission’s draft recommendation to make risk weights “more sensitive to risk”
  • It did not recommend excluding warehouse loans to non-ADIs from the scope of Prudential Standard APS 120 as it “opens the possibility of regulatory arbitrage by treating loans of identical risk differently depending on who the ultimate lender is”
  • The RBA agrees that a review of the regulation of Purchased Payment Facilities “would be desirable” and that a tiered prudential regime is “likely to be appropriate”
  • It agrees with the commission’s draft recommendation that merchants should be provided with the ability to determine the default network for contactless transactions using dual-network cards

Fees for service would only benefit major banks: AFG

AFG, a major Mortgage Broker Aggregator says that introducing fees for service would cause a “major disruption” in the finance industry, be a “clear disincentive” for borrowers to use brokers and “further entrench the oligopoly powers of the major banks”, in a response to the Productivity Commission, as reported by The Adviser.

In its response to the Productivity Commission’s (PC) draft report into competition in the Australian financial system, the Australian Finance Group (AFG) responded to the call for more information on the effect of replacing broker commissions with a fee-for-service model.

The group pulled no punches in warning that the introduction of such a model would “provide a clear disincentive for consumers to use brokers and would inevitably cause a major disruption in the finance industry”.

“The four major banks would be the only beneficiaries of a change of this kind as they would gain an additional competitive advantage over competing lenders that do not have extensive direct distribution channels,” the broking group said.

“This would further entrench the oligopoly powers of the major banks, which, coupled with the commission’s observations concerning the regulatory advantage of D-SIBs, ha[s] a negative impact on competition in the finance sector and [will] lead to a loss of the pricing benefits that resulted from the development of the mortgage broking industry.”

AFG also predicted that should such a change occur, it would not necessarily mean that any savings would be passed on (i.e. that loans would be repriced or that consumers would save money), as banks would have to distribute their products and would have additional costs (including increased staffing) “to deal with direct applications that have not been professionally compiled and pre-assessed by a broker to meet the lender’s requirements”.

“It is AFG’s contention that the presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market,” the response reads.

“A consumer dealing directly with a lender has limited negotiating power or knowledge of the interest rates and lending criteria offered by competitors. A mortgage broker with access to a panel of lenders drives competition between lenders to the benefit of all consumers, not just their own clients.”

Touching on trail, AFG said that it “strongly supports” the removal of trail that increases over time, but that it does not agree that the standard trail commission operate as a disincentive to switching.

It said: “When a broker assists a consumer to refinance, trail commissions that cease with respect to the repaid loan will be replaced with the trail commissions payable on the new loan. As a result, it is AFG’s view that, in the absence of increasing trail commission rates over time, trail commissions per se are not likely to have a negative impact on broker behaviour.”

It concluded: “It is important that any changes should not result in an economic drift away from the broker to the lender, as devaluing the service provided by brokers would have significant and long-term detrimental effects for consumers by lessening the competitive tensions that currently exist in the credit industry.

“It is essential that anticompetitive conduct is not permitted to proliferate under the guise of regulatory reform.”

Best interests duty

In regard to the PC’s suggestion that a duty of care be implemented on lender-owned aggregators to act in the consumer’s best interests, AFG said that it was “very concerned” about introducing a test that would be applied to only one section of the industry “as it is likely to result in market distortions and unintended consequences”.

For example, it suggested that lender-owned aggregators could suggest that consumers are at risk if they use a broker that is not subject to the same test (and assert that the safest course for consumers is to only use brokers that are subject to the additional “best interests duty”).

Noting that the Combined Industry Forum has been working on a reform package, AFG added that “before considering additional law reform proposals, sufficient time must be allowed for those proposals to be implemented and embedded into the processes, procedures and culture of individual broker businesses”.

“Once that has occurred, it will be an appropriate time to again review the extent to which community expectations are met and good consumer outcomes are achieved,” the group said.

Lack of data on costs “disingenuous”

Noting that the commission found it difficult to ascertain from lenders the costs and benefits of using brokers rather than branches to source home loans, AFG said that the lack of information from lenders “should be considered to be disingenuous”.

“It is difficult to accept that entities that are sophisticated enough to develop and manage banking products and meet complex legal and regulatory obligations do not have information about product costs that would be needed to price those products,” the group said.

“However, absent a willingness to publicise that information, AFG submits that the willingness of lenders to embrace broker distribution should be considered reasonably reliable evidence that brokers provide an efficient and cost-effective means of distributing lending products.”

It added: “Brokers provide a variable cost base for lenders, with payment only required when a loan is settled and while it remains undischarged and not in default. This means that the risk of non-completion by a prospective borrower is substantially borne by the broker. As a result, lenders using broker distribution (as opposed to fixed-cost branch networks) can more easily price loans in a way to ensure that they are profitable.”

AFG also outlines that it believes ASIC should be responsible for advancing competition in the financial system, that consumers would receive “an inferior standard of service” should financial advisers also offer credit advice, and that ASIC could produce a best practice guide on disclosure requirements.

Commissioner suggests trail could be paid to borrowers

From The Adviser.

The chairman of the Productivity Commission has restated his concern regarding the payment of trail commission, warning that “someone is going to have to deal with this question of commission”.

Despite ASIC’s remuneration review finding that ongoing trail “usually provides an incentive to aggregators and brokers to put forward higher-quality loans where consumers are less likely to default on their obligation”, and despite several industry figures — including FBAA head Peter White, MoneyQuest managing director Michael Russell and National Australia Bank CEO Antony Cahill — giving evidence at the public hearings last month of the benefits and necessity of trail commissions, the PC’s chairman suggested that trail could instead be paid to borrowers.

Speaking at ASIC’s Annual Forum on Tuesday (20 March), Peter Harris argued that he had not been convinced that trail commission benefits customers.

He told delegates that while the commission “didn’t make a clear statement saying they’re rotten and evil”, they do believe that trail commissions are “quite odd”.

“[It] is purported to be the case that [trail commissions] are either paid by the banks in order for the broker to look after you during the period of the loan. But when we ask the banks, ‘Are there any performance standards that go with this in return for your money? Have you asked them if they’ve spoken to the customer in the last 12 months?’, the answer generally appears to be ‘no’.

“[There’s] a good chunk of money out there paying for service for which there is no performance standard, which is an interesting development. The other rationalisation is [that] it’s there to stop churn.”

However, Mr Harris stated that there was “conflicting evidence” given surrounding churn.

“In some cases, exactly the same broker representative who told us that churn wasn’t relevant [was] in a public statement, on record, saying it was exactly the reason why [brokers are] getting these payments,” the chairman said.

“Somewhere, someway, someone is going to have to deal with this question of commission.”

Remarkably, Mr Harris suggested that instead of banks paying brokers trail commission, the payment could be made direct to a borrower.

He said: “There are alternatives into the idea of a [trail] commission paid to a broker. The average $665 a year payment could be paid to the consumer not to switch loans,” Mr Harris suggested.

The commissioner noted that the final draft of the Productivity Commission’s report (due in July) is likely to address the impact that trail commission has had on competition.

“Has the revolution been captured by the establishment?”

Mr Harris also suggested that while brokers may have disrupted the mortgage market, he questioned who now held the most market power.

“The question is who’s exhibiting the market power? That is the most important issue,” Commissioner Harris said.

“There are a number of potential suspects starting from, of course, the banks themselves, but equally it is possible that mortgage brokers themselves have substantial market power in this marketplace.

“[What] are [brokers] doing today with that particular power? [I] think a number of people haven’t focused on [that] in exactly the way we would in a competition inquiry. We would say: ‘Gee, that’s interesting, these banks don’t appear to be able to push back on the brokers’.”

Commissioner Harris referred to testimony made by the major banks to the financial services royal commission and suggested that the banks’ ability to “re-determine payment arrangements in the customer’s best interests” has been diminished by the broking industry’s increased market share.

“Even the Commonwealth Bank can’t act on its own, which is an astonishing reflection of apparent market power,” Mr Harris said in reference to the bank’s appearance before the royal commission.

Mr Harris acknowledged the role that the “broker revolution” played in enhancing competition when the industry first emerged, but he questioned whether brokers still work in the best of interest of customers.

“Brokers are potentially wonderfully competitive forces. The question is, has the revolution been captured by the establishment?” the chairman said.

Mr Harris asked: “After 20 years, has this degree of change now being turned around from being a potential benefit to consumers to being potentially acting somewhat against their interest and that is clearly within scope for us — that is a competition issue.”

The Productivity Commission’s draft report was widely criticised by the broking industry, with the associations calling some of its views on broking “limited”, “amateur” and — in some cases — “nonsense”.

Best Interest and Brokers – It Could Be Positive – ANZ

From The Adviser.

Applying best interest obligations to brokers could help preserve the integrity of the third-party channel, according to ANZ CEO Shayne Elliott.

In his opening address to the Productivity Commission (PC) on Tuesday, 6 March, Mr Elliott claimed that a “best interest duty” applied to the broking space could enhance consumer protection.

“About half of our mortgages originate from brokers. As such, while we don’t own a broker network, we believe the integrity of the channel is critical,” the CEO said.

“The Productivity Commission has made some recommendations concerning brokers. We see merit in enhancing the consumer protections in this space.

“A best interests duty could support the existing law to promote consumer interests when receiving help from a broker.”

In draft recommendation 8.1 of its report, the PC called for the Australian Securities and Investments Commission (ASIC) to impose a “clear legal duty” on lender-owned aggregators, which should also “apply to mortgage brokers working under them”.

The ANZ CEO told commissioners that despite the absence of a legal duty of care, consumers may be under the impression that such obligations already exist.

Mr Elliott added: “I imagine that a lot of people think that the broker does have a duty of care to them. I imagine that when mums and dads walk into a [brokerage], they assume that is the case.

“You may go as far as to say that they have a best interest duty as well — I don’t know — but I think there is an expectation.

“[I] think FOFA [Future of Financial Advice reforms] and others have probably raised that expectation and say well if that’s the rule for a financial planner, we assume it is for a broker, but I think it’s important to go and ask consumers and their representatives.”

ANZ on fees for service

Further, PC commissioner Peter Harris inquired about the feasibility of a fixed fee model as opposed to a volume-based commission paid to brokers.

“I have the impression that perhaps a fee is a better proposition. The question might be, should it be paid by the consumer, or should it still be paid by the bank?” Mr Harris said.

In response, the ANZ chief said that there is “absolute merit” in exploring such a model, and he pointed to the use of a fixed fee structure in Europe.

“The reality is, today, in an open, highly competitive market, [we have been] taken down a commission-based structure,” Mr Elliott said.

“There’s an understandable logic to that given that there’s an alignment between the commission and the volume obviously driving revenue to the bank.

“I think there’s merit in looking at a fee-based structure. I can’t imagine [that] it would evolve naturally — that would require some intervention. Either as an industry or through regulation would be my guess.”

ANZ on financial planners entering the credit space

The major bank chief also commented on calls from the PC to introduce financial planners into the credit space.

Mr Elliott highlighted the difference between the two services and noted that there are no restrictions on financial planners obtaining a broking license.

“To my knowledge, there’s nothing stopping people from doing that today, so if I have a financial planning license, I can go and get a broking license — there’s nothing prohibiting that, but for some reason, that has not evolved,” the CEO said.

“Our view from experience, and just looking at the products, they are different and our customers think about them in a very different way.

“There’s an old adage: wealth products are sold and mortgages are bought. People think about them very differently; they think about who they go to for that advice.”

Would Switching To Fee For Service For Mortgage Brokers Be “Anti-competitive”?

Some participants in the mortgage industry are mounting a push to argue a switch from mortgage broker commission payments, which normally  includes an upfront fee and a trailing payment for the life of the loan paid by the lender to the broker, to a fixed fee for advice would be “anti-competitive.

The former Mortgage Choice chief Michael Russell in evidence to the currently running Productivity Commission (PC) Inquiry into Financial Services said:

Is the outcome of directing more consumers that can’t afford the fees for service back to first party [in] any way in the consumer’s best interest? Is that outcome, in any way, a positive thing to be promoting competition in the lender market?

This is in response to the PC suggesting there was no rationale for the trailing commission payments and that mortgage brokers should move towards a fee for service payment, instead of a commission, paralleling changes in the financial planning sector. The moves in the financial planning sector was a response to perceived conflicts of interest where planners perhaps shaped their advice driven by the remuneration they might receive.

Non-transparent fees and trailing commissions, and clear conflicts of interest created by ownership are inherent. Lender-owned aggregators and brokers working under them should have a clear best interest duty to their clients.

The commission’s draft report released in early February says that based on ASIC’s findings, lenders pay brokers an upfront commission of $2,289 (0.62%) and a trail commission of $665 (0.18%) a year on an average new home loan of $369,000. $2.4bn is now paid annually for mortgage broker services.

The discussion of trailing commissions centered on whether there was downstream value being added to mortgage broker clients, for example, annual financial reviews, or being the first port of call when the borrower has a mortgage related question. The interesting question is how many broker transactions truly include these services, or is the loan a set and forget, whilst the commissions keep flowing?  There is very little data on this.

In the UK, mortgage brokers work within a range of payment models. Many mortgage brokers are paid a commission by lenders of around 0.38% of the total transaction and some mortgage brokers also charge a fee to their customers.

On average, you pay £500 for a broker to arrange your mortgage. But different firms charge in different ways:

  • Fixed fee. Your adviser will agree to arrange your mortgage for a fixed amount of money. This should be agreed in writing so there isn’t any room for dispute.
  • Hourly rate. Some advisers will charge per hour. Make sure the adviser gives you an estimate of how long the work will take.
  • Commission. If a mortgage adviser is ‘fee free’, they may be receiving payment in the form of commission from the lender. Make sure you ask about it right at the start so you can’t be misled.
  • Percentage. Some advisers will charge you a percentage of your mortgage. For example, if you agree a 1% charge for a £300,000 mortgage, the fee will be £3,000. Some advisers will cap fees to a certain percentage.
  • A combination. Some advisers will charge fees but still receive commission. Others will charge fees, but agree to cap them at a percentage of the mortgage.

So, a fee, is not always simple to calculate and compare.

A fee for service may be cleaner, but it might put access to broker services out of the reach of some potential borrowers, as has been the case in the UK.  Would better disclosure of the commissions and the relationships with lenders would offer an alternative path? But then, would that remove the conflicts?

The final PC report will be out later in the year, and it appears the question of broker commissions, which are often not disclosed in a way that is meaningful to clients, will certainly be an area of interest.

 

 

 

ASIC Highlights Burgeoning Referrer Market

From The Adviser.

The financial services regulator has told the Productivity Commission that there is now “an industry of referrers” who are often being paid the same amount as mortgage brokers despite doing less work.

At the final day of public hearings for the Productivity Commission’s (PC) inquiry into competition in the Australian Financial System, the financial services regulator outlined its thoughts on a range of topics, including mortgage brokers’ duty of care obligations, broker remuneration, comparison rates and financial advisers giving advice.

Speaking for the Australian Securities and Investments Commission (ASIC), Greg Kirk, the senior executive leader for strategy, and Michael Saadat, the senior executive leader for deposit takers credit & insurers, noted that there was a growing referrer market that are being paid a relatively high commission despite not being bound by the same regulation and compliance as brokers.

Mr Kirk said: “In our work on [broker] commissions, there were a separate category of people who are paid commission who don’t arrange the loan but just refer the borrower to the lender. It seems to be that professionals — lawyers, accountants, financial advisers — are reasonably prominent among people who are acting as referrers and that this strange one in that commissions they were paid for just a referral was almost as large as that [for a] mortgage broker doing all the extra [work].”

Indeed, Mr Saadat emphasised that although there is an exemption within the law for referrers, he noted that there is now “a fairly large industry of referrers comprising professionals, lawyers, accountants and advisers who do directly refer consumers to particular lender[s]” and that the commissions paid to these referrers “can be quite significant”.

“In some cases, [they are] as close to the commissions that are paid to mortgage brokers, who are doing more work than a referrer is supposed to be doing,” Mr Saadat said.

ASIC’s senior executive leader for deposit takers, credit & insurers continued: “What they can do under the law is quite limited. I guess there is a risk that some might be going beyond what they are allowed to do under the exemption and that risk is potentially exacerbated by the incentives that are provided by banks. And we have seen cases where misconduct has occurred by so-called referrers and ASIC has taken action against those.

“But, yet, it is a feature of the law, and as a result, there is now an industry of referrers that includes financial advisers and therefore they are paid for that referral.”

The Productivity Commission also asked ASIC about whether financial planners should be given the ability to move into the credit space, to which the senior executive leader for strategy outlined that there seems to be little appetite from planners to offer it.

Mr Kirk said: “Financial advisers can and do provide advice on credit now, and in fact, our regulatory guidance encourages them to in some circumstances… We’re going through at the moment some of our databases to try and get you some data on the level of crossover, but as a broad indicator, it would look to be about 4 per cent licences have a dual licence.”

ASIC on remuneration and changing standards

Touching on the potential of increasing standards for mortgage brokers and potentially changing broker remuneration, the regulator suggested that only small tweaks, rather than drastic changes, would be needed.

Mr Kirk said that when mortgage brokers were first regulated, the standard set was the same as that of the product issuer (i.e. a bank), but he said that “it does seem now that a mortgage broker is [working] to offer customers something more”, such as help with navigating the marketplace. As such, he said that “there is scope to increase the standards expected on mortgage broker”.

However, the strategist argued that “it may be better to start with the obligation that is on [brokers] now and to work in some more specific requirements”, rather than bring in a new “best interests” duty.

Mr Kirk explained: “Typically, there are two elements now of responsible lending; the loan has to be repayable by the consumer given their financial circumstances without undue hardship, but it also needs to meet their needs and objectives.

“And I think often, at the moment, the needs and objectives are only explored in very broad terms [such as] the main need is to buy a house… rather than more detailed needs and objectives about looking for the most competitive loan [a borrower] can get, the best priced one across the market, etc.

“There is something more explicit about what they should be canvassing and addressing in meeting consumer needs and objectives [and there] may be a more direct way to get to this sort of solution.”

Mr Saadat went on to highlight that ASIC’s report for its review into broker remuneration last year suggested “improvements” to the standard commission model rather than fundamentally changing commissions structures, and noted that the “industry has come together and proposed a number of improvements to that standard model” which he believes are “positive suggestions”.

He told the PC: “I suppose one thing to consider is whether you wait for the impact of those to flow through to the market and then assess whether further change is required or whether there is enough evidence now to say that more fundamental change is required to those commission arrangements.

“And for our own purpose, I don’t think we have landed on that position.”

Productivity Commission Homes In On LMI

The public hearings which the Productivity Commission has been running in relationship to Competition in Financial Services covered a wide range of issues.

One which has surfaced  is the Lenders Mortgage Insurance (LMI) sector. With 20% of borrowing households required to take LMI, and just two external providers (Genworth and QBE LMI), the Commission has explored the dynamics of the industry. They called it “an unusual market”, where there is little competitive pricing  nor competition in its traditional form.  Is the market for LMI functioning they asked?  Could consumers effectively be paying twice?

On one hand, potential borrowers are required to pay a premium for insurance which protects the bank above a certain loan to value hurdle. That cost is often added to the loan taken, and the prospective borrower has no ability to seek alternatives from a pricing point of view.

Banks who use external LMI’s appear not to tender competitively.

On the other hand, ANZ, for example has an internal LMI equivalent, and said it would be concerned about the concentration risk of placing insurance with just one of the two external players, as the bank has more ability to spread the risks. The Commission probed into whether pricing of loans might be better in this case, though but the bank said there were many other factors driving pricing.

All highly relevant given the recent APRA suggestion that IRB banks might get benefit from lower capital for LMI’s loans, whereas today there is little capital benefit.

This will be an interesting discussion to watch as it develops towards the release of the final report.

They had already noted that consumers should expect to receive a refund on their premium if they they repay the loan.

Rate Transparency Could ‘Diminish’ Broking Industry

From The Adviser.

The Bank of Queensland has told the Productivity Commission that greater visibility of mortgage rates could make the mortgage broker proposition less compelling for consumers.

Appearing before the Productivity Commission, the bank’s CFO, Anthony Rose, said that “greater transparency [could] see a diminished utilisation of the broker space”.

“We have seen that the broker market has certainly been beneficial in allowing the non-major banks compete in the mortgage space,” Mr Rose said.

Commission chairman Peter Harris acknowledged that smaller banks have been “assisted by the broker revolution and have saved the need to occupy branch space in [more] locations”.

“You’re saying, therefore, if the pricing impact did encourage more people to look for a branch, then the entities with the biggest branch network are advantaged by that,” Mr Harris said.

When asked whether the Bank of Queensland, which receives 25 per cent of its home loans through the third-party channel, has had to re-strategise in response to vertical integration, Mr Rose admitted that the bank has been monitoring aggregator ownership structures with concern.

“We thought that those that own aggregator networks should actually be required to publish the degree of flow relative to their market share for the public interest to understand whether is there anything to see here or not,” the CFO said.

“To be honest, the information that you’ve provided in your report is new information to us as well but doesn’t surprise us. It’s hard for us to access that information as well.”

Representatives from both the PC and the Bank of Queensland agreed that the lack of publicly available data has made it difficult to measure the actual impact aggregator ownership has had on the flow of mortgages in Australia, though Mr Harris has previously suggested that bank-owned aggregators control about 70 per cent of the mortgage broking market.

As such, the Bank of Queensland supports the PC’s proposed duty of care obligations, which would require the Australian Securities and Investments Commission to impose a clear legal duty on lender-owned mortgage aggregators to act in the best interests of the consumer.

“We do think that’s important because the degree to which major banks are getting flow of business over and above their natural market share is, in effect, market access that would have been available to the non-big four that is no longer available to us for whatever reasons that are driving that outcome,” Mr Rose said.

“It does appear that there is quite a trend towards an over-allocation of flow back into the proprietary products of the owned business, which I think is addressed by putting that duty of care obligation in.”