The Financial Services Council (FSC) has welcomed the Productivity Commission’s (PC’s) finding that vertical integration is “not a problem in and of itself” but has urged consideration be given to broadening its definition to better reflect the range of relationships it covers in practice.
In its submission to the PC Competition in the Australian Financial System inquiry, the FSC criticised the Commission’s draft report for taking “a very narrow view of vertical integration as it only focusses on [authorised deposit-taking institutions (ADIs)] owning advice licensees”.
In practice though, the Council said that the industry considered vertical integration to cover “many different forms” of relationships “between suppliers of financial products and services in at least two different stages of production”.
Many of these would not be covered by the PC’s strict definition.
The FSC used its submission to call on the Commission to “widen its consideration to all types of vertically integrated structures, to ensure its findings and recommendations are appropriate to all such structures”.
“Even if the PC believes that the focus should only be limited to relationships existing within the financial advice sector, this broader scope is essential,” the submission said.
“It is important that the PC understand the variety of vertically integrated business models within the financial services sector so that it can consider the impact of recommendations across all models, ensuring no unintended consequences arise.”
The Council agreed with the PC’s broader findings of the benefits of vertically integrated arrangements for consumers.
“With adequate reporting, the right regulatory levers, and regulators using those levers as necessary … the benefits of vertical integration to consumers should far outweigh the perceived shortcomings.
“Where competition is strong, integration may lead to efficiencies being passed on to the customer in the form of lower prices and/or increased product choice,” the submission said.
The Council believed that large vertically aligned institutions may be more willing to invest in product innovation and enhanced service offerings, both of which would benefit customers.
