Banks Exploit Us? Whoever Would have Thought That? By James Reed
After waiting for 30 minutes in a line at the bank to get out my pension, with crippling heartburn, or is it heart disease (?), I was well in the mood for this article, which tells us that banks are an oligopoly that exploit customers:
“Australia’s banking system has become so concentrated its major banks can pass on costs and set prices to boost profits without fear of losing market share, through every stage of the economic cycle, the Productivity Commission has found. The “four pillars” policy, which has underpinned Australia’s banking system since the 1990s, and which was designed to prevent mergers between the four biggest banks to maintain competition, has likely contributed to the problem, with evidence showing it is now preventing competition. The reality of Australia’s “oligopolistic banking system” means the biggest banks are now regularly exploiting the inertia of existing customers, maintaining their market position with persistently opaque pricing, conflicted advice and remuneration arrangements, and a lack of easily accessible information that induces their customers to maintain loyalty to unsuitable products. They are also overwhelming the population with a proliferation of thousands of similar financial products that are impossible to sift through. Those are some of the damning conclusions in a report on the competitiveness of the financial system by the Productivity Commission (PC), released on Friday. The treasurer, Scott Morrison, has welcomed the report, saying he will consider which recommendations to adopt after consulting widely, and after the banking royal commission has wrapped up.”
The 686 page report, a most gripping read, can be found at this link:
The key findings are neatly summarised as follows, just in case readers have lives to live:
“• The Australian economy has generally benefited from having a financial system that is strong, innovative and profitable.
• There have been past periods of strong price competition, for example when the advent of mortgage brokers upset industry pricing cohesion. And technological innovation has given consumers speed and convenience in many financial services, and a range of other non-price benefits.
• But the larger financial institutions, particularly but not only in banking, have the ability to exercise market power over their competitors and consumers. – Many of the highly profitable financial institutions have achieved that state with persistently 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.
• 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. – 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 and ‘white labels’.
• For this situation to persist as it has over a decade, channels for the provision of information and advice (including regulator information flow, adviser effort and broker activity) must be failing.
• In home loan markets, the mortgage brokers who once revitalised price competition and revolutionised product delivery have become part of the banking establishment. Fees and trail commissions have no evident link to customer best interests. Conflicts of interest created by ownership are obvious but unaddressed.
• 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.
• Complementing this obligation, and recognising that reward structures may still at times conflict with customer best interest, all banks should appoint a Principal Integrity Officer (PIO) obliged by law to report directly to their board on the alignment of any payments made by the institution with the new customer best interest duty. The PIO would also have an obligation to report independently to ASIC in instances in which its board is not responsive.
• In general insurance, there is a proliferation of brands but far fewer actual insurers, poor quality information provided to consumers, and sharp practices adopted by some sellers of add-on insurance products. A Treasury working group should examine the introduction of a deferred sales model to all sales of add-on insurance.
• Australia’s payment system is at a crucial turning point. Merchants should be given the capacity to select the default route that is to be used for payments by dual network cards — as is already possible in a number of other countries. The New Payments Platform requires a formal access regime. This is an opportunity — before incumbency becomes cemented — to set up regulatory arrangements that will support substantial competition in services that all Australians use every day.
• More nuance in the design of APRA’s prudential measures — both in risk weightings and in directions to authorised deposit-taking institutions — is essential to lessen market power and address an imbalance that has emerged in lending between businesses and housing.
• Given the size and importance of Australia’s financial system, and the increasing emphasis on stability since the global financial crisis, the lack of an advocate for competition when financial system regulatory interventions are being determined is a mistake that should now be corrected. The ACCC should be tasked with promoting competition inside regulator forums, to ensure the interests of consumers and costs imposed on them are being considered.”
Apart from the revelations about exploitation, there is nothing on the need for an alternative financial system, as championed by the social credit movement, because these folk exist in a different reality to us, one where the system is basically ok, except for the need of fine-tuning. We believe that, not only are the individual instruments out of tune, but the entire orchestra is dysfunctional, and playing in a wildly divergent fashion.