Allens

Unintended market effects of past policy decisions

Past policy decisions have caused unintended market effects to the detriment of consumers:

• in the financial services sector, stability (including through the Four Pillars policy) has been promoted at the expense of competition; and
• in the retail electricity market, excessive reliability standards have encouraged network businesses to over-invest in infrastructure, the costs of which have been passed on to consumers.

Role of the ACCC

In addition to the ACCC's existing role as competition authority, solutions involving the ACCC that have been put forward include:

• becoming the competition champion for the financial services market, including formally joining and advising the Council of Financial Regulators on the competition effects of regulatory interventions, and undertaking regular market studies; and
• monitoring and reporting on prices, profits and margins in the supply of electricity and working with the AER to set a default offer.

Data as a panacea

Both the ACCC and PC advocate for the Consumer Data Right as a way to improve competitive outcomes by:

• enabling consumers and businesses to access historical product and transaction data;
• assisting consumers to better compare products and prices;
• encouraging switching and helping consumers to avoid the loyalty tax by making markets more transparent; and
• increasing firms' incentives to innovate to retain customers.

Pricing controls and transparency

Both reports emphasise the need to reduce retail prices and improve the ways in which offers are marketed. It is suggested that this could be achieved by:

• introducing an online calculator (based on data regularly collected by APRA) that would provide consumers with the median interest rate offered to home loan borrowers in similar circumstances to them;
• reforming remuneration structures in home loans and increasing scrutiny of conflicted remuneration in the financial services sector generally to better-promote the interests of consumers; and
• requiring discounts on electricity prices to be offered from a consistent benchmark, allowing consumers to easily compare offers.

Reticence towards structural reform

Neither the ACCC nor the PC recommend proactive changes to market structure, such as forced divestitures, and instead focus on driving behavioural change through incentives and governance. However, both reports propose monitoring market structure:

• the PC did not advocate for divestment of vertical assets because of the risk that the carved-out businesses would be unviable; however, the PC suggested that the ACCC undertake five-yearly market studies on the effect of vertical and horizontal integration on competition in the financial system; and
• the ACCC did not recommend functional separation of the big three gentailers but did propose placing restrictions on further acquisitions within the electricity market. This would be achieved by placing a 20 per cent cap on total market ownership by any one market participant. Separate to the ACCC's report, politicians have proposed the introduction of a divestiture power.

Illusion of choice

The proliferation of offers gives the illusion of competition:

• in the financial services sector, large banks, insurers and brokers sell a 'blizzard of barely differentiated' products, resulting in a perception of a greater degree of competition than actually exists; and
• in the retail electricity market, price comparison websites give a perception of choice, but recommendations can be driven by the level of commission earned by the comparator website.

Customer inertia

Consumers rarely engage with the market or switch suppliers:

• in the financial services sector, half of Australians continue to bank with their first ever bank, and very few consider switching; and
• in the retail electricity market, there are low levels of switching despite consumer concerns about high electricity prices and the availability of better offers in the market.

Loyalty tax

Consumer inertia has enabled suppliers to charge loyal customers higher prices:

• in the financial services sector, interest rates paid by existing home loan customers are on average up to 0.4 percentage points higher than those paid by new customers; and
• in the retail electricity market, around 20 per cent of consumers are on standing offers due to inertia, and these are generally the highest priced offers in the market.