Potential impact of AFG-Connective merger

by Victoria Ticha 16 Mar 2020

The ACCC has warned of the risks that could ensue from the proposed merger of Connective with AFG. Australian Broker talks to Mark Haron, executive director at Connective, and Graeme Holm, director at Infinity Group Australia, to examine how the merger could impact the broking industry

The ACCC recently issued a warning regarding the proposed acquisition of Connective by the Australian Finance Group (AFG), saying the deal could impact market competition in Australia.

The ACCC is concerned there will be limited similar alternatives for brokers to switch to, and this could negatively impact the services offered to brokers.

Indeed, combining AFG and Connective would create the largest mortgage aggregator in Australia by a significant margin, accounting for almost 40% of all mortgage brokers operating in Australia.

ACCC chair Rod Sims said, “AFG and Connective operate in an already concentrated market, and not many other mortgage aggregators offer a similar level or type of service. Additionally, potential entrants or small players may be deterred from expanding by various barriers, including compliance costs.”

So the ACCC sought information about the supply of mortgage aggregation, distribution services and home loans in Australia, and members of the industry had until 5 March to offer and submit their own concerns, with the regulator’s final decision expected to be published on 7 May.

“Mortgage brokers and lenders can expect a greater investment in technology and compliance to keep up with the changing nature of the industry” Mark Haron, executive director, Connective

Merger still offers brokers ‘plenty of choice'

According to the ACCC, mergers and acquisitions can be important to the efficient functioning of the economy. However, the Competition and Consumer Act prohibits those mergers that would have the effect, or be likely to have the effect, of substantially lessening competition in a market.

But Mark Haron, executive director of the Connective Group, believes there won’t be any substantial lessening of competition in any relevant market as a result of Connective’s merger with AFG.

He says the merged businesses will in fact be in a position to offer consumers greater choice and a market with greater competition.

Graeme Holm, director at mortgage broker Infinity Group Australia, points out that if AFG or Connective were to reduce their services as a result of the merger, then brokers would simply switch to another aggregator.

“The group’s aim is to grow its businesses, not do anything to risk alienating brokers. There is plenty of choice in the market,” he says.

If anything, Holm suggests the deal will only strengthen the offering for brokers. He says, “With ever-increasing regulatory demands placed upon brokers and aggregators, I would think a bigger, more sustainable entity would be more equipped to supply the level of investment in compliance and innovation required in our market.

“The big banks are pouring money into fintechs to try to take back the market share they are losing to the broker channel, [but] combined, Connective and AFG would be well positioned to take up the fight on behalf of the brokers.”

Holm adds that the ACCC’s concerns seem to be centred on the assumption that the merged entity would use its market power to squeeze brokers and lenders, but that “would seem counter-intuitive – why would they risk losing brokers or lenders? Brokers can easily move, and brokers want more lenders on the panels, not less”.

Competition to watch is ‘big-bank-funded fintech sector’

There is stiff competition between aggregators out there, Holm suggests. He explains, “Brokers have plenty of choice if they want to move, and I can’t see the merger changing that. The area of competition to watch is the big-bank-funded fintech sector.”

Indeed. Commonwealth Bank recently announced plans to launch 25 new fintech businesses over the next five years, while ANZ has poured $40m into Lendi in direct competition with the broker channel.

“The commentary I have seen has made it clear they intend to continue to operate the two  brands with the value proposition they offer their existing brokers,” Holm says.

“Why else would an ASX-listed company buy a business and offer to keep the founders on the board and in the business? They are paying for the brand and the people in it to keep the model intact; they wouldn’t jeopardise that by throwing out the model that Connective brokers value.”

Finally, Holm concludes, “I would think it’s a great opportunity for all concerned to have the best of both worlds – the brand and model and culture they value and the financial backing and security of a successful ASX-listed company to make sure they are all around for the long term.”

According to Haron, this merger ensures that Connective will continue to have a strong national footprint and presence in the mortgage industry, and it positions both Connective and AFG to better deal with the changes that come with operating in a dynamic industry.

“At a time when the industry continues to evolve to meet changing consumer demands, increased digital alternatives and regulatory scrutiny, and a higher expectation around customer standards, the merger puts us in a good position to adapt to these changes,” he says.

“This merged business will be able to combine the DNA of a collective 40 years operating in the broking industry, whilst continuing to support our brokers. Both Connective and AFG have built their businesses on providing exceptional service to brokers, and it is critical that we continue to not only provide great service but improve our service to retain brokers and recruit brokers into the future.”

Haron continues, “We have built our business on providing choice and flexibility for brokers, which ultimately benefits the customer. With a merged group, we will create a more comprehensive distribution channel and broader diversification of lenders and products.

“Mortgage brokers and lenders can expect a greater investment in technology and compliance to keep up with the changing nature of the industry, all resulting in better outcomes for brokers, which flow through to borrowers.”

Additionally, Connective will ultimately have the opportunity to offer the best aspects of both businesses for the benefit of brokers and their customers, Haron says.

“ACCC has a very robust process, and we are respectful of that. But we firmly believe there will be no substantial lessening of competition from Connective’s merger with AFG,” he says.

“It is business as usual for Connective and we remain focused on delivering excellent service to our brokers. There’s a lot for our brokers to look forward to this year at Connective: the team are making great progress with developments to Mercury, and we have a jam-packed learning and development program.

“Our commitment to our brokers won’t change; our values remain the same. We are committed to supporting our brokers and advocating on their behalf.”