The Commerce Commission expands on its 2024 market research into personal banking services
The Commerce Commission recently shared further insights into its landmark report on personal banking services, and notably, its impact on mortgage advisers.
Anne Callinan, deputy chair of the Commerce Commission, commented on issues such as commission clawbacks, banks disincentivising “shopping around” through performance targets, and the controversial “three offer” recommendation at the Financial Advice New Zealand (FANZ) conference.
This comes off the back of the August 2024 market study into personal banking services, which found that the country’s five largest banks—ANZ, ASB, Westpac, BNZ and Kiwibank—dominate personal banking in New Zealand, particularly when it comes to home loans and deposit accounts. The major banks hold between 85-90% of all banking assets and have consistently posted higher profits than their international peers, which Minister of Finance Nicola Willis characterised as a “cosy oligopoly.”
One of the clearest messages from the Commerce Commission was that mortgage advisers are increasingly central to creating a fairer, more competitive lending environment.
Advisers crucial in helping customers switch
The commission’s consumer research found that banking customers are highly “sticky,” often staying with the same provider even when better deals are available. Legal costs, administrative hassle, and bundled services all contribute to low switching rates, especially in home lending.
“Throughout the survey, we heard that consumers turn to advisers for their expertise and in-depth knowledge of the market, and that advisers help navigate the complexities of different mortgage products and lenders,” Callinan said.
“Advisers are now the dominant distribution channel for new home lending, and this trend looks set to continue. That’s fantastic news for us as competition regulators.”
She said that advisers are often crucial in facilitating easier switching between providers, particularly where consumers face blocks in accessing information on rates and discounts.
“Consumers can easily see and compare the headline interest rate on home loans from different banks, but the final cost of a mortgage can be significantly improved if a customer shops around for ‘below the line’ discretionary discounts and cash back offers,” Callinan said.
“These are not easy to find, and often aren’t available for a consumer unless they make a home loan application. This lack of pricing transparency makes it really hard for consumers to make the best choices.”
Clawbacks, disincentives and conversion tracking under scrutiny
One of the commission’s key concerns is the practice of lenders tracking adviser conversion rates, and monitoring the percentage of submitted applications that result in settled loans.
While this is often used as a proxy for application quality, it can also create pressure to submit fewer applications and avoid testing the market.
“At the extreme end, this might result in losing accreditation with the lender,” Callinan said.
“We think that conversion rates are a poor way to do this and create a significant disincentive on mortgage advisers to submit multiple qualifying home loan offers. This reduces the competitive pressure on banks, the transparency of competing home loan offers, and consumer choice.”
Another focus was on adviser commission clawbacks, particularly how they may influence switching behaviour. The commission has recommended that banks shift to a monthly pro-rata model, with no clawback after two years.
“We appreciate that some clawback is justified where a customer leaves in the very early term of a mortgage,” Callinan said. “But we recommend that clawback of commissions are pro-rated, reduced monthly, and there should be no clawback of commissions after two years. I’m pleased to say that banks are making progress in implementing this recommendation.”
Panel transparency and the controversial ‘three offers’
The report also flagged potential issues around lender panels. While it’s understood that not all advisers will work with all banks, and the current duty of disclosure does cover this point, the commission still recommends greater transparency if a better deal exists outside an adviser’s panel.
“We know that might be a bit provocative,” Callinan said. “But we think that a reasonable consumer would be concerned if an adviser knew of a better option outside of their panel and didn’t share this opportunity and explain why the panel lender they work with is the better option.”
The most contentious recommendation was the suggestion that advisers present at least three offers to clients – something Callinan pointed out was qualified with the phrase “where possible.”
“We’re not suggesting that advisers should be forced to present three offers, full stop,” she said. “Obviously, the characteristics or time constraints of a particular borrower may mean that this just isn’t feasible. But we are setting expectations—on advisers and on banks—to make this possible more often.
“We think it’s entirely reasonable for consumers who are often making the single biggest financial commitment of their lives to be presented with a few detailed options, and for the independent adviser to explain which option is best for them and why.”
