Is competition the answer to meeting consumer needs in relation to banking services?
The draft report of the Productivity Commission into Competition in the Australian Financial System, released this week noted that competition in Australia is "constrained" when it comes to banking services, due to dominance by the four major banks.
Under a system where it is made difficult for consumers to switch banks, they are described as "ripe for exploitation" in the report. This is particularly the case with credit products such as home loans and credit cards, in relation to which there is little evidence of price competition.
It's about more than shareholders
The report declares that "consumers have lost their market power to shareholders", meaning that the banks' focus has been on delivering profits to shareholders, rather than delivering affordably priced, accessible financial services to consumers.
Certainly, given that Australian consumers are at the mercy of banks for essential financial services, those services should be affordable and accessible and arguably this should be the case, even where it might involve some profit sacrifice on the part of banking corporations.
Banks have social responsibilities beyond those owed to shareholders, to serve broader stakeholder interests, such as those of employees and customers and to serve rather than harm general public welfare.
In the same way that shareholders have long been recognised as requiring legal protection because of the separation of ownership and control within companies, because of the separation of production and consumption in an economy dominated by large corporations including banks, consumers are owed similar legal protections.
That is, those who must consume the services provided by banking corporations in circumstances where they have no control over the supply of those services, must be afforded protections so that their interests are not exploited.
The report suggests protecting consumers by increasing genuine competition in the financial services market, for example through lowering barriers for industry participants entering the market, reducing regulatory measures that pose a risk for competition, and then ensuring the provision of sufficient information and real choice for consumers.
Some caution should be exercised in relation to these recommendations.
There are potential shortcomings of both competition and information disclosure as measures to protect consumers and ensure accessible and affordable services.
In relation to competition, it is possible for competitive markets to fail consumers where consumers are not regarded as particularly profitable targets. This would include low income Australians who may well be the losers of competition, and who will continue to need the protection of stringent prudential regulation, such as responsible lending regulation, to ensure that they are not exploited by harmful non-mainstream products.
Low-income consumers at risk
While increased competition in the financial services market may bring about more affordable financial services for profitable consumers, such competition is unlikely to emerge and provide protection for low-income consumers who are perceived as risks and as unprofitable.
Competition does not remove harmful, exploitative products from the market, and in fact an emphasis on reducing regulation and "red tape" to encourage competition might potentially unleash harmful products.
In relation to increasing information disclosure, many studies have confirmed that the disclosure of information is ineffective where consumers are unable to act on it. A vulnerable, low-income consumer will pay exploitative rates of interest to fringe credit providers where they have no access to alternative, affordable credit, regardless of the extent of disclosure that is made.
While information disclosure may benefit middle-class consumers, it is unlikely to have impact on poorer consumers who may rationally decide not to act upon the information disclosed as they have no real choice in terms of available products.
Fortunately, the report does recognise that disclosure measures "are often ineffective" and so notes that the Australian Government plans to grant new intervention powers to the Australian Securities and Investments Commission to "issue product warnings, restrict product distribution and temporarily ban some financial products".
However the report goes on to state that "there is a potential for such powers to stifle innovation, and such powers as banning should be used as a last resort".
The report notes that much financial regulation hampers competition and that the regulatory system should be reformed to better support competition.
However, regulators should tread carefully in terms of prioritising regulation that encourages competition over regulation that protects consumers from harmful products.
Competition has its limits, and consumer protection regulation can and should sit alongside competition regulation.
Therese Wilson is an associate professor at Griffith Law School.