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Mortgage Business understands that Coles has already engaged a third-party distribution specialist to evaluate plans for the supermarket to begin distributing residential mortgages.
The major supermarket chain – which currently offers credit cards and home and motor insurance – would be playing in the largest profit pool in the financial services sector if it goes ahead with its home lending plans.
In its submission to the Financial System Inquiry (FSI), Coles outlines opportunities for Australian retailers to extend their financial services offerings.
The submission looks at offshore markets where other consumer brands, such as UK retailer Tesco in the United Kingdom and President’s Choice in Canada, offer mortgages to customers.
“Tesco, for example, has now commenced offering mortgages after gaining regulatory approval from the UK Prudential Regulatory Authority (PRA),” the submission said.
Richard Wormald, general manager of financial services at Coles, is leading the development of the retail giant’s financial services business.
Mortgage Business understands that Mr Wormald had previously worked in the UK and was involved with Tesco’s move into mortgages.
As a sign of mortgage distribution’s changing landscape, in their FSI submissions new entrants Coles and Australia Post slammed the complex banking regulations for failing to accommodate new entrants and innovations.
However, Coles in its submission blames Australia’s unnecessarily complex regulatory environment for not progressing sooner, pointing to overseas examples of simpler policy.
“The international experience in offshore jurisdictions provides several key lessons for Australia’s policy settings,” the submission said.
“First, the regulatory regimes in offshore jurisdictions have appropriately allowed for non-financial conglomerate groups to expand into the banking market by largely relying on their existing licensing regimes,” it said.
“Importantly, the regulatory approach in other jurisdictions has been to treat the bank on a stand-alone basis.
“There is no international precedent that sees a prudential regulator extend its supervisory reach by applying banking prudential requirements to the non-banking entities of a retail group that holds a banking licence.”
Coles also notes that since the GFC there has been a shift in the regulatory stance that has seen financial stability prioritised over a more competitive environment supportive of new entrants.
“The UK PRA’s more recent stance on new entrants in the banking market provides one example of this shift,” the submission said.
“The issue of regulatory conservatism is particularly important in the Australian context given APRA’s approach to prudential supervision is already ... one of the most conservative in the world.”
Coles also notes that certain requirements in relation to the provision of credit, contained within the National Credit Act and supporting regulations, do not appear to have kept pace with changes in the market or the use of modern delivery channels.
In addition, Coles recommends a review of the ACL and AFSL regimes, with a view to ensuring greater harmonisation between the two.
“This would help reduce unnecessary compliance costs for participants and allow new entrants to compete more efficiently.”
While Coles is clearly looking to extend its financial services offering, others in the mortgage space remain sceptical due to the large barriers to entry.
“What those consumer brands are really good at is data management and targeting offers that are relevant and meaningful for customers,” ING DIRECT’s executive director of distribution, Lisa Claes, said.
“They’re agile, they’re responsive and they’re pre-emptive,” Ms Claes said.
“However, for consumer brands to come into financial services, the barriers to entry, because of the capital requirements, are quite high, and the risk management skills [required] are quite high because you have depositors’ money which has to absolutely be kept
sacrosanct,” she said.
Ms Claes said she will be watching new entrants closely, but remains “alert, not alarmed”.