Regulator concedes comparison rates are ‘opaque’

In its draft report into competition in the Australian financial system, the Productivity Commission (PC) outlined that home loan products are advertised with a “comparison rate” that aims to allow consumers to compare products with different fees and charges.

The commission added that comparison rates are calculated using standard variable rates rather than average interest rates, and it would be in the benefit of consumers to “obtain indicator rates based on different loan and borrower characteristics”.

As such, it suggested that it would put forward a recommendation to government that the Australian Prudential Regulation Authority (APRA) should collect monthly data from mortgage lenders on median interest rates for different categories of new residential home loan (to be decided following consultation).

The data, which could include the size and term of the loan, the loan-to-value ratio (LVR), loan fees, the type of borrower, the type of repayments and the type of interest rate, among other features, would then be used by the Australian Securities and Investments Commission (ASIC) to develop an online tool that:

• allows consumers to select different combinations of loan and borrower characteristics
• reports median interest rates for loans issued in the previous month with those characteristics (by lender)
• details the specific fees and charges that would affect the total cost of a loan

The commission argued that ASIC, rather than individual lenders, should publish this tool so that consumers “are not required to bear the cost of entering search criteria on multiple lenders’ websites”.

“Truth in advertising would seem to be deeply desirable”

The PC chair said that it had a “clear interest” in looking at the comparison rate and would be looking for views on how a more transparent and accurate proposition could be designed. 

Chairman Peter Harris said: “If it is something called the comparison rate... you would expect that one of the key inputs to it is something like the median month[ly rate] that is continuously being updated... The use of that term does condition the expectation of a potential borrower. Whether it was deliberately designed to do that or not, it must. It says: here is the comparator. Having some, as it were, truth in advertising here would seem to be deeply desirable so the consumers aren’t conditioned to imagine they aren’t entitled to a better rate if they push [for one]. 

“That is a debate that can be had in a competitive market — what does push a little harder mean? — but I don’t think you should start out with a rate that says it is a comparator if it isn’t a comparator based around real-time data. It just seems to be very unusual and us trying to get to the bottom of this has been quite frustrating.” 

When asked for its thoughts on the draft recommendation, the financial services regulator suggested that it was largely in agreement that comparison rates could be improved as it believes that mortgage “pricing and comparative pricing is somewhat opaque at the moment”.

Greg Kirk, the senior executive leader for strategy at ASIC, commented: “Broadly, we would agree with you that pricing and comparative pricing of mortgages is somewhat opaque at the moment; that the standard variable rate is not what a lot of people get and whether the discount you’re getting is the same discount that other people are getting. So, more data, more public data, that can enable people to have a real idea of what the price of the loan they are getting is relative to what is being offered at the moment [could be very good]. 

“If we were going to embark on that, we would consumer test what is the most useful information and what is the best way to present it. I have certainly had it suggested to me that if you just gave the median, maybe the median then becomes the anchor and maybe that’s not a good thing. But some of that would need to be unpacked. But, broadly, we would be in favour of it.”

Michael Saadat, the senior executive leader for deposit takers, credit & insurers, added: “The trouble with the current comparison rate that is required to be disclosed in advertising is that it’s built on assumptions around the size of the loan and the term of the loan. And those assumptions are not necessarily reflective of what people are actually borrowing these days. 

“Moreover, the comparison rate is based on the advertised rate, not on the rate that people get if they talk to a broker or a lender. So, again, it’s not a very good guide as to whether the rate you’re being offered is a good rate.” 

Mr Saadat added that the rate also doesn’t include contingent fees, such as lenders mortgage insurance (because the requirement is that the comparison rate include mandatory fees but not contingent fees), so there is “certainly scope for better public disclosure of home loan rates because, at the moment, consumers only really have anecdotal information about that”.

However, ASIC said that if there were to be a recommendation to change comparison rates, it would wish to “consumer test what is the most useful information and what is the best way to present it”.

Those wishing to provide a written submission to the PC on this, and other matters listed in the draft report, are being asked to do so “preferably in electronic format” by 20 March 2018.

The final report will be prepared after further submissions have been received and will be forwarded to the Australian government by 1 July 2018.

[Related: ASIC highlights burgeoning referrer market]