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Competition in the Australian Financial System

Draft report

This draft report was released on 7 February 2018.

You were invited to examine the draft report and to make written submissions by 20 March 2018.

The final report is expected to be handed to the Australian Government by 1 July 2018.

Under the Productivity Commission Act 1998, the Government is required to table the report in each House of the Parliament within 25 sitting days of receipt.

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Download the draft report

  • At a glance
  • Infographic
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Media release

The financial system needs a competition champion

'The early 2000s was the last time Australia's financial system saw a period of fierce competition. If we are to see its like again, we will need a series of policy shifts, and a champion to own them,' Chairman of the Productivity Commission Peter Harris said on the release of the Commission's draft report into Competition in the Australian Financial System.

Amongst other issues, the report finds some notable failings in competitive behaviour evident in markets of home loans and for small and medium enterprise (SME) finance.

In home loan finance, the widespread use of published loan benchmarks that do not reflect actual practice, accompanied by the lack of a legal duty of care by mortgage brokers, means consumers can be left unaware of better deals available to them.

And regulator impacts on competition are evident, with insufficient attention being paid to opportunities to improve weighting of SME loan risks and lower smaller banks' cost of capital, in a manner practiced by other comparable nations. Some home loans are also not as well risk-weighted as they could be.

These failings have the capacity to prevent loans being made, or cost borrowers significant sums.

The Productivity Commission has accordingly recommended financial regulators collectively place more emphasis on competition, after a sustained period since the Global Financial Crisis emphasising stability.

The Commission noted that competition in Australia's financial system is without a champion among the existing regulators — no agency is tasked with overseeing and promoting competition in the financial system.

'We need one of the regulators to be appointed by government as the competition champion — to take primary responsibility for putting the case for competition inside what are otherwise closed shop discussions,' Productivity Commission Chair Peter Harris said.

The Inquiry draft report recognises that both competition and financial stability are important to the Australian financial system, and are an uncomfortable mix at times. The legislators' solution to date has been to specify a need for balance between the two. But balance is not evident — decisions have persistently favoured stability.

As a case in point, APRA's 2017 actions to slow growth in interest‑only lending on residential property allowed banks to move in concert to increase interest rates on both past and future investor borrowings. Yet the only ostensible target was future borrowing. Collective action allowed profits to increase without risk, as competitive alternatives for borrowers were also restricted. Ultimately, taxpayers are covering part of the cost of this intervention — the tax deductibility of additional interest on investment loans is estimated to be up to $500 million per annum.

The Commission found that competition is weakest in markets for small business credit, lenders' mortgage insurance, consumer credit insurance and pet insurance.

Proliferation of products (4000 varieties of home loans, 20 brands of pet insurance underwritten by a single insurer) and information complexity means little ability for consumers to stay abreast of market trends and serve their own best interests when the time comes to negotiate.

And once-revolutionary information sources such as mortgage brokers are now part of the establishment, often owned by banks, and with their financial incentives generally aligned against keeping clients informed of opportunities to switch loans.

'We have recommended a 21st century disclosure regime that leverages the benefit of consumer digital data to make actual real-world prices openly available to the consumer public,' Mr Harris said.

'And lender-owned aggregators and the brokers working under them should always have a clear legal duty to their clients best interest. This is not a fringe concern — around 70% of broker mortgages are written by lender-owned aggregators.' Mr Harris said.

The draft report has also commented on the absence of market discipline on major bank management failures under the 4 Pillars policy, and legislated restrictions on bank ownership.

The Commission welcomes post-draft submissions or comments from interested parties by 20 March 2018. Public hearings for this Inquiry will be held in Sydney on 28 February and 1 March 2018, and in Melbourne on 5‑6 March 2018.

Background information

Leonora Nicol (Media, Publications and Web) 02 6240 3239 / 0417 665 443

Key points

  • Competition — and the innovation it fosters — has given us a financial system that offers ready access to funds at all hours of the day, safe and quick movement of money between accounts, payment via personal devices such as mobile phones, and speedy loan approvals.
  • Yet the system is also generally highly profitable (which may be no bad thing) and lacking strong price rivalry. We examine why this is so.
  • First, the benefits of competition to the individuals and businesses for whom the financial system exists are being reduced in the quest for stability. Regulators have focused almost exclusively on prudential stability since the Global Financial Crisis, promoting the concept of an unquestionably strong financial system.
  • Second, although financial institutions generally have high customer satisfaction levels, customer loyalty is often unrewarded with existing customers kept on high margin products that boost institution profits. For this to persist, channels for provision of information and advice (such as mortgage brokers) must be failing.
  • In retail banking, market concentration is very high in many product markets, but concentration by itself is not the calamity that it is often made out to be, so long as new and innovative business models can thrive.
    • Scope for price rivalry in principal loan products is constrained by a number of external factors: price setting by the Reserve Bank facilitating price coordination by banks; expectations of ratings agencies that large banks are too big to fail; and some prudential regulation (particularly in risk weighting) that favours large institutions over smaller ones.
    • Competition in quality of services — effective use of technology to better price risk, responsiveness to demand shifts, simpler and cheaper processes — is not so constrained. But much of what passes for competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products and ‘white labels’.
    • The growth in mortgage brokers and other advisers does not appear to have increased price competition. The revolution is now part of the establishment. Non-transparent fees and trailing commissions, and clear conflicts of interest created by ownership are inherent. Lender-owned aggregators and brokers working under them should have a clear best interest duty to their clients.
  • In general insurance, market concentration is high and camouflaged, with a proliferation of brands but far fewer actual providers. Consumer confusion on product differences is attributable to the poor quality of information required to be provided to consumers and, to a lesser degree, the incentives faced by advisers.
  • While new entrants to financial markets have brought increased competitive pressure in the past, evidence over the past decade suggests they cannot be counted on as a primary source of competitive pressure. Thus, reforms to the regulatory framework under which incumbents operate are also essential to realise further benefits of competition in the financial system.
  • The institutional responsibility in the financial system for supporting competition is loosely shared across APRA, the RBA, ASIC and the ACCC. In a system where all are somewhat responsible, it is inevitable that (at important times) none are.
  • More nuance in the design of APRA’s prudential measures — both in risk weightings and in directions to authorised deposit-taking institutions — should be sought. This would help address issues of market power and imbalance that have emerged in lending between businesses and housing.

Background information

Leonora Nicol (Media, Publications and Web) 02 6240 3239 / 0417 665 443

Video: Competition in the Australian Financial System - Draft report

Transcript of video

Many of us like to shop around to get the most bang for our buck.

We compare features, benefits, price and decide what is the best value.

But when it comes to banking and insurance many of us can't easily shop around.

And while most people have more than one bank account, one in two people still bank with their first-ever bank.

And this isn't because we are getting the best deals by staying put, it might be that it's just too complex to be sure about making a change.

Whether you get told it or not we all pay one way or another for advice on good deals.

The adviser is not always working just for you and there should be a simple way to check that advice.

Most of us with a mortgage more than a few years old could be paying more interest than newer customers with the same bank.

Wouldn't it be good if you could find out what interest rates other people are paying on similar loans.

Imagine, if this led to our broker or bank sending us the same offers they make to new customers.

And then there's insurance.

We get reminders every year that our insurance will need to be renewed.

But there's a lot of other offers out there now.

What we need is more reliable information on them information about why premiums are up would also be useful in statements from insurance companies.

The four major players in both banking and insurance have a combined market share well over seventy percent.

There are so many brands, but many of them are from the same company.

Maybe more than lots of extra brands, we need more reliable information.

Better competition in the financial system is best served by allowing us to feel comfortable about complex decisions.

If you are interested check out our draft report at

Download the infographic

xxx infographic. Text version follows.

What you should know about competition in the Australian financial system (Text version of infographic)

  • In retail banking, and many general insurance markets, the four largest players hold more than 70% of market share
  • Engagement with mortgage brokers now makes up over 50% of the way people obtain homeloans and around 70% of broker mortgages are written by aggregators that are owned by lenders
  • 20 of 22 pet insurance brands are underwritten by a single insurer
  • The big four insurers provide more than 30 brands between them
  • There are nearly 4000 different residential property loans and 250 different credit cards on offer
    • Consumers need usable information, without overload and confusion
Our draft report finds that in the financial system …
  • Service competition is more apparent than pricing competition
  • Consumers’ capacity to put competitive pressure on providers is limited
  • Concern for financial stability often trumps innovation and competition
It’s time our financial system had a competition champion

... to put the case for competition inside what are otherwise closed shop discussions.

Read the draft report and make a submission.

  • Preliminaries: Cover, Copyright, Opportunity for further comment, Terms of reference, Contents, Abbreviations
  • Overview - including key points
  • Draft findings and recommendations
  • Part I Setting the scene
    • 1 An inquiry focused on competition
      • 1.1 Why this inquiry?
      • 1.2 Australia’s financial system
      • 1.3 Risks from the financial system
      • 1.4 Concerns about the level of competition in financial services
      • 1.5 Financial system policy developments in recent years
      • 1.6 The Commission’s approach
    • 2 Framework to examine competition in the financial system
      • 2.1 Competition in the financial system — what it looks like and why it matters
      • 2.2 How we will assess competition in the Australian financial system
  • Part II Which financial services are competitive?
    • 3 Market power in the banking system
      • 3.1 How do ADIs gain — and boost — market power?
      • 3.2 The current balance of market power
    • 4 Can new players change the game?
      • 4.1 Entry, exit and contestability in banking
      • 4.2 Regulatory barriers to bank entry are falling
      • 4.3 Foreign bank impacts have been limited to select markets
      • 4.4 Fintechs can change the rules of the game
    • 5 Funding models and their effect on competition
      • 5.1 Which types of funding?
      • 5.2 At what cost?
      • 5.3 What determines the funding mix?
      • 5.4 Should regulation target the cost of funds?
    • 6 Banks’ responses to pervasive regulation
      • 6.1 The prudential regulatory landscape is changing — and ADIs are changing along with it
      • 6.2 Targeted interventions by regulators can have dramatic effects on competition
      • 6.3 Explicit inducements and their effect on competition
    • 7 Dominance through integration?
      • 7.1 Integration can reinforce market power
      • 7.2 Major banks have led the integration charge
      • 7.3 Integration isn’t an ongoing threat to competition
      • 7.4 The need to assess integration impacts on competition
    • 8 The residential home loan market
      • 8.1 Are mortgage brokers a force for competition?
      • 8.2 How standard is the standard variable rate?
      • 8.3 Lenders mortgage insurance
    • 9 Provision of finance to small and medium businesses
      • 9.1 Finance provided to SMEs
      • 9.2 Is there a problem in accessing finance?
      • 9.3 Can the provision of finance to SMEs be improved?
    • 10 The payments system
      • 10.1 Competition in the retail payments system
      • 10.2 Empowering users can promote competition
      • 10.3 The New Payments Platform
    • 11 General insurance providers and products
      • 11.1 The general insurance market
      • 11.2 General insurance providers
      • 11.3 The current state of competition in general insurance
      • 11.4 Reforms to promote competition in general insurance markets
  • Part III Are consumers able to exert competitive pressure?
    • 12 Advice and information
      • 12.1 Information is crucial to competition
      • 12.2 Are the sources of information empowering consumers?
      • 12.3 Principles of 21st century disclosure
    • 13 Consumer switching
      • 13.1 Why switch?
      • 13.2 Switching and competition
      • 13.3 Evidence about switching behaviour
      • 13.4 Impediments to switching
      • 13.5 Revitalising consumer switching
    • 14 Add-on insurance
      • 14.1 Competition concerns
      • 14.2 Improving competition and consumer outcomes
  • Part IV Are regulators supporting competitive outcomes?
    • 15 Where does competition fit in the current regulatory system
      • 15.1 Australia’s system of financial regulation
      • 15.2 Who regulates the regulators?
      • 15.3 Competition — the missing piece of the regulatory puzzle
    • 16 Prudential regulation, systemic stability and competition
      • 16.1 Prudential standards
      • 16.2 Macroprudential policy
      • 16.3 Government support
      • 16.4 The Four Pillars policy
    • 17 Reforming the regulators to support competition
      • 17.1 A champion for competition
      • 17.2 A new role for the Council of Financial Regulators
  • A Inquiry conduct and participants
  • B The Regulatory Environment
  • C The Australian banking system
  • D Asset management and financial advice
  • References

Printed copies

Printed copies of this report can be purchased from Canprint Communications.