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Royal commission a ‘non-event’ for the mortgage industry

Commissioner Hayne’s investigation into the efficiency and prudential effectiveness of mortgage lending was “clearly a non-event”, according to a chief economist.

Dr Andrew Wilson, chief economist at My Housing Market, has expressed disappointment towards Commissioner Kenneth Hayne’s final report for the banking royal commission, arguing that the insights have proven to be a “non-event”.

Instead of ironing the kinks out of mortgage lending, Dr Wilson added that some of Commissioner Hayne’s recommendations – such as the removal of lender-paid mortgage broker commissions – would be counterintuitive to competition and improved consumer outcomes. This is because changes that threaten the viability of the mortgage broking industry could leave consumers fending for themselves when navigating the complexities of the lending market, which regulators have concluded is rife with “opaque pricing”.

Dr Wilson said that the final report predictably revealed that when financial institutions have “unbridled market power”, it could lead to issues around corporate competency and management culture.

According to the chief economist, the market power of banks was recognised generations ago and was one of the reasons for establishing government-owned banks, particularly for mortgage lending.

“People forget that Commonwealth Bank was a government-owned bank, primarily responsible for mortgage financing. Due to economic circumstances [and issues with] mismanagement, Commonwealth Bank had to be sold and privatised,” Dr Wilson told Mortgage Business.

Since then, mortgage lending transitioned from being “largely a government-controlled undertaking” to being a “very significant money spinner in the private sector”, the My Housing Market chief economist said.

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“This has created issues [because of the] high profits [of] organisations that have significant market power in a field [that] you would consider to be an essential service,” he added.

“We have to seriously think about controlling the market power of banks.”

The Productivity Commission’s inquiry into competition in the Australian financial system last year found that the major banks had “exploited” their market power to the “detriment of customers”, as their dominant position in the market allowed them to control and move prices at their own discretion.

“Major banks are the dominant force in the market. As a result, they are able to charge higher premiums above their marginal costs, compared with other institutions. Approximately half of the loan price that major banks charge is a premium over the marginal cost — double the margin that other Australian‑owned banks have,” the final Productivity Commission report stated.

The banks’ refusal to acknowledge their power over market prices is further contradicted by a “recurring argument” the industry has used against increasing costs, which is that such cost rises will have to be passed on to consumers, the Productivity Commission said.

As such, Dr Wilson said that any changes to the mortgage industry that empower the major banks would “realistically put up prices” for consumers.

The chief economist called it “perplexing” that mortgage brokers are being blamed for the negative outcomes that have resulted from “poor corporate governance and management culture in the banks”. He added that reduced competition in the mortgage market – for example, through legislating radical changes to the way mortgage brokers are paid – would likely “exacerbate” this.

“I’m not sure that you [can] blame the one competitive part of financial services, which is mortgage broking, for the negative outcomes that were revealed [by the royal commission]… Poor management practices will only be exacerbated if you reduce competition,” Dr Wilson said.

He suggested that the government consider introducing rules that require banks to demonstrate their actions are for the benefit of the public.

“I think politicians should rationalise what the public good is in terms of the management of banks. In other words, it’s a quid pro quo that they have market power, but the offset to that is that they must be able to show that they’re operating in the public good,” the My Housing Market chief economist said.

“I think that’s where we need to start talking about making rules for banks that they should be able to prove that they’re operating in the public good, not just for their shareholders’ good.”

[Related: New banking inquiry in the offing]

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