Competition in the Australian Financial System
Opening Remarks from Consumer Action Law Centre – Public Hearings on Draft Report
Thank you very much for having me present today.
Consumer Action Law Centre welcomes the Draft Report published by the Commission, and many of the recommendations. Today, I’d like to comment on three areas of the report:
- Proposals to strengthen power of consumer choice
- Proposals to address barriers to effective, competition like conflicts and commissions
- Proposals relating to technology, payments systems and open banking
To open with, however, I’d like to make the point that while we support efforts to make switching easier, the evidence shows that providing more information and a few prompts will not overcome consumers’ perception that the potential benefits of switching are simply not worth it.
Sticking with the same product and provider can be a rational decision. Consumers should not be penalised for this loyalty; the result should be neutral at worst. Remedies that focus on prompting consumers to switch do not encourage firms to treat their existing customers fairly in the first place.
Competition in insurance
That said, we’d like to voice our support for the discussion and draft recommendation that strengthen the power of consumer choice in insurance. In 2015, Consumer Action called on insurers to be more upfront with yearly price rises on renewal notice. We surveyed the community and 86 per cent of those surveyed wanted the change.
We called on insurers to include on renewal notice not only the price of the premium for the forthcoming year, but also the price paid last year and the reason for any change. Unfortunately, there hasn’t been any meaningful response from the industry. This change would do two things. First, particularly if the renewal discloses a premium increase, it would prompt people to question the value of the insurance and shop around. Second, information about the reasons for increased cost might help people take steps to mitigate the risk. For example, if they live in a cyclone prone area, they might learn about what changes they could make to their property to reduce the risk and premium.
We also strongly support the proposal to extend a deferred sales model to all add-on insurance products and sales channels. The harm caused by junk insurance is immense – in our submission to the Royal Commission into Misconduct in the Banking & Finance Sector, we estimated that misconduct in add-on insurance is likely to have costed consumers over a billion dollars over the last ten years. That’s money that should be returned to consumers’ pockets.
Since 2016, we have run an online tool called Demand A Refund which enables people to complain about the sale of add-on insurance and request a refund from the insurer or financier. Almost $1m have been claimed through the site. While most of the complaints have related to car dealers, around 33 percent relate to other sales channels like banks or finance institutions. It is clear that harm is occurring in other sectors.
An effective deferred sales model will break the sale between the loan and insurance, reducing the opportunity for pressure. However, it is important that there is careful design of a deferred sales mechanism. Unless it is robust, there will be circumvention or regulatory gaming. We’ve already seen proposals for ‘bridging’ insurance covering the deferral period, which would establish a new opportunity for high-pressure selling.
Examination of gaming or circumvention is important, because the real core of the problem is commission selling. The use of commissions drive reverse competition, where insurers are competing for access to the market through car dealers, banks, or other sales channels. This additional cost does not deliver a public benefit. That is self-evident when we see claims ratios of less than 10 cents in the dollar. We would encourage the Commission to require industry to set claims ratios that deliver consumer value, and then demonstrate that they can meet those – a performance standard if you like. Such a reform would provide an incentive for insurers to compete in a way that benefits customers.
Competition in mortgage markets
There are other products bundling practices in the finance sector that we consider should be examined as well. For example, the practice of bundling mortgages with credit cards. This is inherently anti-competitive as it hides the true cost, makes switching more difficult and raises responsible lending issues. An EU report from 2016 that collected and summarised the evidence on barriers to effective competition in the European mortgage market noted that it “did not find any compelling evidence that such practice was justified by efficiency purposes”.
I would like to also voice support for the Commission’s Draft Recommendation on home loan pricing disclosure. Unadvertised discounts are likely to mean that less savvy consumers end up paying higher rates, because they don’t know to push their lender. As I said at the beginning, in a competitive market, people should not be punished for being less literate or engaged.
To make sure that publication of a benchmark rate or rates actually helps consumers, we would encourage this idea to be consumer-tested. We think that to be effective, it will need to be simple as possible to enable people to understand it. The Commission’s draft recommendation talks of a tool which can respond to different combinations of loans or borrower characteristics. We suspect that the more complex this is, the less likely it will be used. Benchmarks work best for consumers when they are easy to understand and clear.
I’d like to respond to the Commission’s recommendation around brokers and a proposed best interests duty. Brokers act as advisers to consumers, and the public expectation is that they are acting in the customer’s interests, so this recommendation is very welcome. However, there is no clear policy reason for this only to apply to brokers owned by lenders. We consider that it should apply to all lenders. I must say that in our legal practice, we rarely see a broker sale add value to a consumer – rather the broker is used to find credit that is unaffordable.
We also support the view that mortgage broker commission structures weaken competition and switching. I’d like to particularly make a comment about clawbacks, which really are an anti-competitive exit fee in another guise. Exit fees on mortgages were outlawed in 2011. We’ve had complaints about clawbacks – on one occasion our client was unsatisfied with the service provided by the broker and wanted to refinance the loan again so as to no longer be associated with the broker. The broker later contacted the client advising that their commission had been clawed back by the lender and so the broker was in turn clawing it back from the borrower. The amount claimed by the broker was in excess of $2000, and requested within seven days. Clawbacks that charge a consumer should be banned.
Technology, payments systems and open banking
Consumer Action is very supportive of the ePayments code being made mandatory, and consider that it can be strengthened. Mandating the ePayments code has been recommended by a number of inquiries, but we’re yet to see it come into effect.
Liability arrangements or the ePayments code should be maintained and extended to Open Banking. The ePayments code includes the long-standing principle of banking law that the financial institution requires the mandate of its customer to validly debit an account, and that only in exceptional circumstances can a customer be held liable for unauthorised transactions on their account.
We do understand that Open Banking is to allow only read access to people’s account, not write access, like in the UK. However, it is important that this sort of principle be maintained. Banks hold a position of trust, and it is not only fair but also efficient for them to be responsible for third party access to customer information or accounts. Banks are in a much better position to ensure security is robust.
The Final Report into Open Banking identified a scenario where a bank shares customer data with a third party, but the data is inaccurate, incomplete or misleading. The third party offers the customer a product based on misleading information and the customer suffers loss. The report says that the bank should not be liable for the product of the data recipient. This sort of outcome seems fundamentally unfair. Really, the principle should be that a bank is liable and it should seek recovery from the third party.
Finally, we’d like to make a few points about customer consent in a fast-moving market. We think it is a concept that needs to be fundamentally revisited. To really give consumers power in a competitive market, consent cannot be hidden in terms and conditions or through pre-ticked boxes. Consent to sharing data with third parties cannot be a condition of accessing a service or product. The Open Banking review did say that express customer consent should be explicit, fully informed and able to be permitted or constrained to the customer’s instructions. We think it has to go further – consent must be separate, voluntary, clear, specific and time-limited. Consent also needs to be able to be withdrawn, and withdrawn simply. We would urge the Commission to recommend industry develop a standard to make sure consent operates pro-competitively, not anti-competitively.