The Australian banking sector is under pressure, with day three of the banking royal commission revealing a potential conflict of interest between mortgage brokers, banks, and their clients, and the Australian Consumer and Competition Commission revealing that bank home loans are too confusing for many consumers to understand.

Banking royal commission reveals conflict of interest

On Thursday, the Commonwealth Bank admitted to the banking royal commission that its commission payments to mortgage brokers can create a conflict of interest.

CBA's executive general manager of home buying, Daniel Huggins, told the commission's senior counsel, Rowena Orr QC, "the larger the loan, the larger the upfront commission".

Orr then quoted from a CBA report from February 2017, which said that broker-originated loans were associated with higher leverage, higher incidences of interest-only repayments meaning the loans are paid off more slowly, higher debt-to-income levels, higher loan-to-value ratios, and higher interest costs.

Orr said the findings support a case for discontinuing volume-based commissions for brokers.

Click here to view webcasts of the Royal Commission into misconduct in the banking, superannuation and financial services industry.

Visit the website for the Royal Commission into misconduct in the banking, superannuation and financial services industry.

ACCC interim report says mortgage pricing is not clear to consumers

Meanwhile, the ACCC released its 'Residential mortgage price inquiry' report on Thursday, which also said bank home lending practices are less than ideal.

The report says "opaque" pricing of discounts on residential mortgage rates makes it difficult for customers to make informed decision. 

The ACCC’s Residential Mortgage Price Inquiry is monitoring the prices charged by the big four banks - ANZ, the Commonwealth Bank, NAB, and Westpac - and Macquarie Bank.

The interim report says there is evidence of "less-than-vigorous price competition" among the big four.

“We do not often see the big four banks vying to offer borrowers the lowest interest rates. Their pricing behaviour seems more accommodating and consistent with maintaining current positions,” said ACCC Chairman, Rod Sims.

The ACCC found that banks offer discounts to borrowers that vary according to criteria such as the borrower’s characteristics, their value or potential value to the bank, and their ability to negotiate. The discount on variable interest rate loans can amount to as much as 78-139 basis points off the headline rate.

“The discounting by the big banks lacks transparency and it’s almost impossible for customers to obtain accurate interest rate comparisons without investing a great deal of time and effort. But the potential savings from these discounts are immense,” said Sims.

The report also found the average interest rates paid for basic or ‘no frills’ loans are often higher than for standard loans at the same bank.

Other key findings in the report include:

• existing residential mortgage borrowers paid significantly higher interest rates than new borrowers at the same bank,
• the large majority of borrowers are paying lower interest rates than the headline rate, and
• the bank with the lowest headline rate is not always the bank with the lowest average rate paid by borrowers.

“Existing customers are not being rewarded for their loyalty; in fact they are worse off," said Sims. 

"For example on a $375,000 residential mortgage, a new borrower paying an interest rate that was 32 basis points lower would save approximately $1200 in interest over the first year of a loan."

Click here to read the ACCC's 'Residential mortgage price inquiry' report.

Read more about the Australian banking sector:

Loyal bank customers exploited: Productivity Commission draft report

What will the banking Royal Commission mean for real estate?

Banks look inward to improve credit quality