Vertical integration: no good for brokers or consumers

If you haven’t read through the Financial System Inquiry’s final report released in November last year, you should try to find time to do so.

The report is an impressive one. Impressive in its scope, attention to detail, the consultative approach it took, the deep thought behind many of the recommendations, and the clear and easy-to-understand language in which it is written.

One of the recommendations was to “rename ‘general advice’ and require advisers and mortgage brokers to disclose ownership structures”.

The report went on to explain that:

“Often consumers do not understand their … mortgage broker’s association with product issuers. This association might limit the product range an adviser or broker can recommend from. Of recently surveyed consumers, 55 per cent of those receiving financial advice from an entity owned by a large financial institution (but operating under a different brand name) thought the entity was independent.

“Although stakeholders have provided little evidence of differences in the quality of advice from independent or aligned and vertically integrated firms, the inquiry sees the value to consumers in making ownership and alignment more transparent. In particular, these disclosures should be broader than Financial Services Guide and Credit Guide rules currently require.”

The reading of this might suggest one of two things – either that the authors of the report don’t understand the widespread negative impact that vertical integration has on the mortgage and finance broker industry – or they don’t believe it to be an issue.

But the real problem could be that the terms of reference for the report only went as far as the need to “make recommendations that meet the needs of users with appropriate financial products and services”. This is very different from making recommendations “that lessen consumer disadvantage when dealing with financial products and services”, which is what it should have read.

There is no doubt that vertical ownership structures within the mortgage space are of great disadvantage to the consumer.

If you listen to those that are given a microphone and tend to have very large vested financial interest in the success of the vertical ownership structure, they will of course advocate that they are of benefit to the consumer.

Such comments can be best described as self-indulgent representations with the intention of being deceitful, and often underpinned by nothing more than naked financial greed.

In an interview with the Australian Financial Review last September, John Symond of Aussie Home Loans was quoted as saying that “the concern over the banks’ growing control was irrelevant to consumers seeking a better deal”.

He is often quoted about how bank ownership doesn’t affect mortgage broker decisions about where they direct clients.

The problem is that nobody is stopping to think. No journalist wants to ask the hard questions. Here are some questions that need answering:

To aggregators: how is it good for consumers when banks own aggregation networks?

As an owner, can’t a bank control which lenders are permitted on the aggregation panel? Can’t they control the level of commissions paid to the broker, and position themselves as one of the better (if not the best) paying? Can they not use their ownership status to gain an advantage over its competitors by way of permitting a legal way of gathering what would otherwise be highly protected market intelligence (such as product success, pricing initiatives and sales training)? Can the bank not target the better performing brokers for the aggregator and afford them special privileges as a result of the relationship to attract more business?

To wholesale funders – “When banks own wholesale funders, do they control the product pricing, and thus the profit margin, allowing them to push up delivery rates and ensuring their own bank-priced products are cheaper and thus more in demand?”

If they really want to retain any level of esteem, then it’s easy – just be openly transparent about the privileges that the banks are permitted as a direct benefit of the ownership.

Protected by confidentiality? Confidentiality is used as convenient excuse any time transparency is sought by people who want no more than to be able to make better and more informed choices about their business partners.

It is somewhat ironic that the same entities who dislike misconduct by individuals generally dislike having to account for their actions and refuse to be transparent themselves.

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