The inquiry pointed to the current regulator mandates that adopt an “inconsistent approach to competition” following a proposal to empower ASIC in matters of competition.
The FSI recommends a review of the state of competition in the sector every three years, improvements to the reporting of how regulators balance competition against their core objectives, identification of barriers to cross-border provision of financial services, and consideration of competition in ASIC's mandate.
“The benefits of competition are central to the Inquiry's philosophy,” the report stated.
“While competition is generally adequate in the financial system at present, the high concentration and steadily increasing vertical integration in some sectors has the potential to limit the benefits of competition in the future.”
The inquiry has also called for greater transparency in the case of vertically-integrated broker groups.
The final report states that often consumers do not understand the association their adviser or broker has with product issuers.
"This association might limit the product range an adviser or broker can recommend from," the report stated.
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, the report stated.
"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, and could include branded documents or materials.
"The inquiry believes the benefits to consumers would outweigh the transitional costs to industry of effecting branding changes," the report said.
To combat increasing vertical integration and promote healthy competition within the system, the FSI suggested three-year external reviews of the state of competition in the financial system, including regulatory barriers to foreign and domestic entrants.
“As an immediate first step, regulators should examine their rules and procedures to assess whether those that create inappropriate barriers to competition can be modified or removed, or whether alternative and more pro-competitive approaches can be identified,” the report stated.
“Each regulator should report back to Government prior to the first external review of the state of competition.”
The inquiry urged the government to update ASIC's mandate to include a specific requirement to take competition issues into account as part of its core regulatory role.
“At present, regulator mandates adopt an inconsistent approach to competition,” the report stated. “The PSB has a clear competition objective. APRA is required to consider competition and contestability in its decisions, although the industry frameworks do not adopt a consistent approach to this issue.
“ASIC lacks an explicit competition mandate. Furthermore, there is no current requirement for regulators to explain how they balance competition considerations with other regulatory objectives in reaching decisions.”
The inquiry found there is currently no process for regularly assessing the state of competition in the financial system, as there is for assessing stability in the form of the Financial Stability Review.
“This creates the risk that broader competition issues will 'fall between the cracks' as regulators focus on their specific mandates for stability or consumer protection,” the report stated.
“For example, no regulator has direct responsibility for removing barriers to consumers switching products.”