Big banks, mortgage brokers slammed in damning report

THE big four banks have feasted on their market power, using it to “insulate themselves from competition”, and mortgage brokers have become “part of the establishment”, a scathing new report says.

THE big Aussie banks have used their market power to “insulate themselves from competition” and beef-up profits, a scathing new report says.

And they have succeeded in doing so “despite the massive system-wide shock of the global financial crisis”, the Productivity Commission report says.

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In a scathing report on competition in the financial services sector, the federal government advisory body has outlined a shopping list of potential reforms for the industry.

Banks have been able to boost their earnings by keeping customers in products that don’t suit their best interests, the report says.

Banks should have “integrity officers” that ensure the lenders aren’t short-changing their customers, the Productivity Commission says.

“What often is passed off as competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products,” it says.

Lawyers who have helped many victims of the misconduct cases examined during the banking royal commission said the government need to implement the reforms.

“Trust is broken in our banks and lenders,” Consumer Action Law Centre senior policy officer Katherine Temple said.

“This is a mess of their own making. They can’t be trusted to fix the problem and it is up to government to implement this urgently.”

The Productivity Commission gave its final report to the government on June 29 was it was released yesterday by Treasurer Scott Morrison.

Mr Morrison encouraged consumers to switch banks, saying that for a typical home loan, “the price of loyalty” was between $66 and $87 a month.

The big banks have been using their market power to “insulate themselves” from competition, the Productivity Commission report says.

The report recommends every bank be forced to appoint a “principal integrity officer”.

That person would have to ensure staff compensation schemes were aligned with banks’ obligations to act in the best interests of customers, and would be “obliged by law to report directly to their board”.

Integrity officers would be compelled to contact regulators if their boards were “not responsive”.

The report also says the “four pillars policy” — where the big four banks are barred from merging — is a “redundant convention”.

There is no evidence it helps competition, the Productivity Commission says, and it may have in fact “dissuaded it by embedding a fixed market structure”.

“In Australia … there is much hand-wringing about competition, (but) there has been little shift in the regulatory culture,” the report says.

It acknowledges the Australian economy has benefited from having “a financial system that is strong, innovative and profitable”.

Banks have been overcharging customers, the report says.

But there is evidence big banks have charged consumers prices above competitive levels and offered inferior-quality products, and the problem has existed for more than a decade, the report says.

Among suggested reforms, it says trailing commissions — ongoing payments from banks to, for example, mortgage brokers who refer borrowers — should be banned.

While mortgage brokers once revitalised price competition and revolutionised product delivery, they have “become part of the banking establishment”, the Productivity Commission says.

“Conflicts of interest created by ownership (of mortgage brokers by banks) are obvious but unaddressed,” the report says.

It also says the big banks “subsumed the broker industry” and have taken action that would inhibit the expansion of smaller competitors in some markets.

“All are indicators of the use of market power to the detriment of consumers,” the report says.

Among big takeovers of mortgage brokers since the 1990s, the Commonwealth Bank bought Aussie Home Loans and Westpac acquired Rams.

The CBA in recent weeks has unveiled plans to spin-off Aussie and some of its other businesses into a separate company.

Among its other suggestions, the Productivity Commission says the government should set up an official comparison website for home loan interest rates.

While there are already many comparison websites, they are commercial ventures generally compromised by commission agreements or sponsorship deals with home loan providers.