A major mortgage franchise has called on the government to introduce a raft of changes incorporating ASIC’s mandate, financial literacy and home loan advertisements, in order to improve the country’s financial system.
Yellow Brick Road has released its draft submission to the Financial Systems Inquiry outlining its “five point plan for a fairer, more cost-effective, more competitive financial system for all Australians”.
“Many of us are aware that our financial system favours (and is designed by) a small number of finance ‘insiders’,” said a statement from YBR.
“But the vast majority of Australians are locked outside the system. They have been forgotten by the financial system and are struggling to achieve two great Australian dreams – to own their own home and to retire comfortably.”
The first key point raised by the submission takes on the “indecipherable” information consumers receive on interest rates.
“It is ironic that consumer get better information about the contents of their Vegemite jar than they do about the composition of their home loan or savings account,” said the submission.
While YBR acknowledged that lenders are required to give disclosure information “these documents are often indecipherable, bulky and designed as much to deter the average consumer from reading them let alone absorbing them”.
The requirement to give comparison rates is often circumvented by lenders by advertising just the discount off the standard variable rate, leading to confusion from borrowers, said the submission.
YBR recommends the government mandate ‘true rate’ advertising for financial products “ by amending comparison rate legislation to reflect a true average mortgage of $300,000 and amend the Trade Practices Act 1974 to require the standardised, annualised interest rate to be prominently displayed and communicated pre-contractually, to avoid confusion over compounding and other gradated rises”.
Discount advertising should also be banned because of its high potential for confusing customers into buying poor products, read the recommendation.
In order to achieve further clarity for consumers, the submission also recommended simplification of the current financial services legislation.
“In particular, processes and requirements for advice delivery across the basic needs of savings, superannuation, risk and mortgages should be simplified for those under 45 and below certain income thresholds.
“Advice to clients currently crosses regulatory channels, which adds expense for the client and adds excessive paperwork, making it difficult and confusing for the consumer to absorb.”
Improving financial literacy would also help to ensure borrowers were informed of their rights, options and obligations, said the submission. YBR recommended an amendment of the national education curriculum to include the fundamentals of financial management.
Introducing tax-deductible financial advice for people earning up to $75,000, up to a value of $1500 per annum would also “empower all Australians to be able to manage their finances and protect them and the government from negative consequences of financial decisions”, said the submission.
A further recommendation suggested that, in the event of refinancing, legislation should require “the timely discharge of a mortgage by alender within 14 days in order to allow Australians to exercise their consumer choice rights efficiently”.
The submission also criticises the lack of competition in the Australia’s banking system, recommending three changes to help address this:
- Introduce a bank levy to price the taxpayer guarantee of deposits of up to $250,000 to provide Australians with a return on their investment and compensate for the risk shifted to the taxpayer.
- The Australian Government should invest the proceeds of the banking levy into a fund that invests in securitisation of home loans through the Australian Office of Financial Management, thereby providing smaller and non-bank lenders with the ability to compete with the four major banks, which currently benefit unfairly from a Government guarantee on deposits but also dominate the market for deposits (and therefore access to funding).
- The Australian Government should amend the Australian Securities and Investments Commission Act 2001, to change ASIC’s mandate to include promoting competition in the financial services system.
Read the full submission here