In Australia, financial services firms are big businesses and they provide one of the country’s largest exports. However, in the last couple of weeks, the financial services industry has fallen from grace and now, it is subject to increased regulatory oversight based on allegations of shady deals, fraud, and money laundering activities. Below are some of the major issues that triggered the need for a national inquiry into the country’s finance and financial services industry.
Australia’s confusing mortgage market
A house is probably the largest and single most-expensive purchase that most people will make in their lifetimes. Hence, the household mortgage market has a direct influence on the quality of life of most Australians. However, a mortgage is turning out to be more of a financial handicap than a financial assistance as mortgage brokers hide behind a veil of ‘smoke and shadow’ to push different kinds of mortgage offers that are not often in the best interest of homeowners.
On Monday, February 26, Peter Harris Peter Harris, Chairman of the Australian Government Productivity Commission while speaking with Committee for the Economic Development of Australia noted that the mortgage industry lacks transparency. In his words, “On its face, in fact, it is pretty absurd that customers still have to guess at what is a competitive rate for their new home loan might be before they commence negotiations.”
Mr. Harris’ angst is understandable if you consider the fact that homeowners don’t really know their loan rates because the lenders keep on throwing out jargons such as comparison rate or standard variable rate without explaining the hard numbers. Interestingly, banks pay as much as $2.4 billion in commissions to mortgage brokers annually; yet, many homeowners are getting behind their mortgage payments and they often have to look for debt settlement solutions to keep a roof on their heads.
Questionable lack of competition that could benefit consumers
In 2017 when critics started clamoring for an inquiry into Australia’s financial sector, Prime Minister Malcolm Turnbull deemed such an inquiry unnecessary. However, the staggering lack of confidence in the industry has made him agree that an inquiry is “regrettable but necessary”.
To begin with, the Productivity Commission’s report on ‘Competition in the Australian Financial System’ financial service companies enjoy an unwholesome level of near-monopoly on the market. For instance, there are about 4000 seemingly different home loan products in the market; yet, are only 106 finance companies offering home loan services. In essence, each finance company has an average of 37 home loan products being advertised at any one time.
Consumers will see different ads with slightly different terms and rates and then buy the one that seems to be the best deal. However, in reality, whatever you buy, you are essentially buying from the same company and you don’t really have a choice because the available options are limited.
An unending stream of public complaints
Apart from suspected instances of shady mortgages, borderline money laundering, and unreliable financial advice, Australia’s financial services companies have also been the subject of series of complaints to the Royal Banking Commission. Commissioner Kenneth Hayne observed that the commission can’t afford to ignore the striking patterns in many of the submitted complaints.
For instance, about 9% of complaints were related to financial planning advice, 17% of complaints reported discrepancies in superannuation, and a massive 31% of complaints were related to personal finance matters. Economists believe that the onus is on the financial services industry to show and prove that it had the best interest of customers at heart.
Unfortunately, shareholders in Australia’s banks and financial services companies don’t seem to be particularly perturbed by the questionable activities of their companies. It seems that these banks are more concerned with profits than helping their customers stay afloat financially. In the words of Peter Harris, “shareholders have gotten good consistent dividends and perhaps that’s all people worry about but from our perspective, we can go no further than saying that it is surprising.”