Opaque pricing, bad products, unnecessary fees: The Productivity Commission goes to town on the banks

Stephen Morton/Getty Images
  • A report by the Productivity Commission into competition in the financial system says Australians are paying unnecessary fees for low-value products.
  • The commission recommends the appointment of Principal Integrity Officer within banks to monitor the best interests of customers.
  • Also recommended is a ban on trailing commissions for mortgage brokers.
  • The report says the banks have got highly profitable on the back of opaque pricing, conflicted advice and remuneration arrangements.

Australian banks use their market power to the detriment of customers, according to the Productivity Commission’s final report into competition in the Australian financial system.

The report says prices are not transparent and product choice is often vague or overwhelming.

“We find that households and businesses may be paying, through unnecessary fees and low-value products, for a system that is exposed to use of entrenched market power,” the report says.

The report says that 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.

“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,” says the report.

Among the commission’s recommendations is a proposal for an independent Principal Integrity Officer, a senior executive within the bank reporting to the board of directors, with the power to report problems to regulators.

This officer would be obliged by law to report directly to the board on the alignment of any remuneration or payments with the best interests of customers.

“Many banks claim to put the customer first,” says the report. “A formal, accountable reporting line to both board and regulator would put substance to this marketing.”

‘Conflicts of interest… are obvious’

Barbara from Bank World – not entirely fictional. Picture: ANZ

The report says financial institutions have achieved high profitability via 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.

“In home loan markets, the mortgage brokers who once revitalised price competition and revolutionised product delivery have become part of the banking establishment,” says the report.

“Fees and trail commissions have no evident link to customer best interests. Conflicts of interest created by ownership are obvious but unaddressed.”

The Productivity Commission recommends trail commissions should be banned and clawback of commissions from brokers restricted.

“All brokers, advisers and lender employees who deliver home loans to customers should have a clear legally-backed best interest obligation to their clients,” says the report.

Australia’s financial system is dominated by large players, with the four major banks covering retail banking, four major insurers in general insurance, and some of these same institutions feature prominently in funds and wealth management.

The combined market shares of major players in banking and insurance are well over 70% in some product lines.

Internationally, Australia’s banking concentration is on par with that of Canada and the Netherlands, but well above that of the UK, US and Japan.

Hearings resume next week in the financial services royal commission which is investigating misconduct by the banks, including the fee-for-no-service scandal.

The business lines of the banks:

Source: Productivity Commission

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