06 Aug

'Treasurer Scott Morrison lashes the banks, regulators on competition' James Eyers, AFR

Treasurer Scott Morrison will deliver a harsh reprimand to the banks and regulators today, chastising lenders for exploiting customers' loyalty, which he says is costing each up to $87 a month.

As the banks promote their new code of conduct to protect consumers, the government will release on Friday the Productivity Commission's final report into competition in the Australian financial system, which has found banks have sustained prices above competitive levels, offered customers inferior quality products, subsumed much of the broker industry and stopped competitors expanding in some markets.

"All are indicators of the use of market power to the detriment of customers," the report says. 

The commission's recommendation for banks to create an "integrity officer" to monitor mortgage brokers is "an interesting idea" that could have broader application, Mr Morrison will say.

'Too often it's the loyal customers that are left to foot the bill through higher premiums and higher interest rates,' Scott Morrison will tell the Australian British Chamber of Commerce. Alex Ellinghausen

A new integrity officer, which would be a senior executive position, would have a statutory obligation to report problems inside their bank to regulators if they aren't satisfied with the board's response, just like a chief pilot in an airline has a duty to report issues to safety regulators. 

Mr Morrison will tell a business lunch in Sydney that loyal bank customers are paying up to $87 per month more on mortgages as banks issue discounts averaging 0.4 percentage points to new borrowers to chase market share. This lack of pricing transparency allows banks "to exploit customer loyalty". 

"Too often it's the loyal customers that are left to foot the bill through higher premiums and higher interest rates when financial institutions offer temporary discounts to lure in new customers."

Mr Morrison will also take a swipe at prudential regulation, saying it "has had a dulling effect on customers" and "put us to sleep".

"Regulation may have played a pivotal role in making our banking and financial system stronger in a prudential sense. But it hasn't necessarily made the customer any stronger," Mr Morrison will tell an Australian British Chamber of Commerce lunch in Sydney. "Power needs to be put back in the hands of the customer." 

With the PC finding banks have too many products that lack differentiation – there are almost 4000 different residential property loan products and more than 250 different credit cards in the market – Mr Morrison will say "the industry has created these complexities that do nothing for the customer, but leave them in the dark and more dependent upon advice". 

"This encyclopaedia of similar products, combined with the lack of transparency around pricing, opens up the door for financial institutions to exploit customer loyalty."

It is understood the government will wait until the interim report of the Hayne royal commission is delivered at the end of September before providing its comprehensive response to the PC's final report. 

Mr Morrison's speech on Friday will not address the commission's recommendations contained in the draft report for the Australian Competition and Consumer Commission to become the "competition champion" for the financial system by joining the Council of Financial Regulators, and for the minutes of CFR meetings to be published to enhance transparency. But a government source said it is not inclined to back these. 

But Mr Morrison has backed calls for regulation to focus more on the impact of customers, with the Productivity Commission critical of the Australian Prudential Regulation Authority's incessant focus on stability. 

After APRA chairman Wayne Byres pointed to the importance of strong banks in a speech last month, Mr Morrison will recognise "we need our banks strong, stable and profitable", given they are "the backbone of our economy, the creators of opportunity and jobs".

However, he will say "we also need to ensure that competition isn't being constrained and the customers aren't getting the raw end of the stick".

"In other words, there needs to be a healthy balance of the value exchange between the customer and ultimately the shareholder."

The Productivity Commission's final report – which will be closely scrutinised by the Hayne royal commission, which has found a litany of examples where banks rode roughshod over vulnerable customers – has also found customers are not being armed with the right information to make choices about switching banks. 

The government has already moved to address this through the creation of an "open banking" regime and, more broadly, a "consumer data right". Mr Morrison will say this will "shift the paradigm" as it will see "customers making the demands, setting the rules and forcing banks to react". Productivity Commissioner Stephen King told The Australian Financial Review Innovation Summit on Tuesday the new data rights being established in Australia "is appropriately balanced and likely to be pro‑competitive".

The government has created a range of other pro-fintech policies including allowing start-up banks, to create and foster an environment "where these exciting fintech firms can thrive and compete on fairer terms with the big lenders, and can forge their own path", Mr Morrison will say.

He also welcomes the the Australian Securities and Investments Commission and Australian Banking Association agreeing to a new Banking Code of Conduct, congratulating the industry "for being proactive in addressing genuine concerns from their customers".

"It is encouraging that the banks are starting to listen to the public and are looking to lift their game when it comes to how they behave and treat their customers."

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