With submissions now closed, the PC will examine how remuneration structures, market power and bank ownership are driving brokers, competition and serving customers
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With submissions now closed, the PC will examine how remuneration structures, market power and bank ownership are driving brokers, competition and serving customers.
In an exclusive interview with MPA, Productivity Commission chairman Peter Harris said while it could recommend a fee for service commission model in its final report, it’s well aware of the downsides to this arrangement and how little customers like to pay large amounts upfront.
“We’re not stupid; we wouldn’t necessarily go to a different arrangement just because it’s different. It would have to be different and effective. … Can we do anything that’s better?”
“We are considering doing something in the commission area; we didn’t say we are going to,” he said.
But when asked if the Combined Industry Forum’s progress on self-regulation to address ASIC’s concerns around commission were sufficient, he questioned how much they had actually achieved so far.
“Have those reforms actually progressed on making specific changes that are measurable and discernible on the ground?”
The CIF released its report last December. It has encouraged lenders to change commission structures based on facility drawdown, net of offset, by the end of 2018.
But Harris said: “You couldn’t say to us, ‘Don’t do anything in this area because a change that’s going to happen in December is going to solve all this’. We’re not likely to accept that as being a basis for not making change.”
Harris said the Productivity Commission is still trying to understand brokers’ payment structure “not because we hate brokers” but because it wants to work out who is incentivised to do what in favour of competition.
“Whereas once it was very clear brokers were a force for competition, the question is now, particularly with bank ownership having gone as far into the channel as it has, are they strongly incentivised to be a force for competition or are they really an information broker?”
The problem the commission is now dealing with is the inconsistent information regarding why brokers are remunerated the way they are, especially in regards to trail commission.
Harris said the fact brokers are being paid a trail commission to look after the customer and yet the financial institutions have no measurement of what they’re getting for that payment or if it does indeed prevent churn doesn’t stack up when there are a number of far more direct ways of achieving that objective.
“It is plausible that brokers have substantial market power here and that market power could be exercised in the consumer’s interest or it could be exercised in the personal interest of the broker, we just don’t know,” he said.
Written submissions to the Productivity Commission closed on Tuesday (20 March). According to the PC’s website, it received 67 submissions. The commission is slated to present its final report to government by 1 July, ahead of the royal commission’s interim report, which is to be submitted no later than 30 September.
