Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 252 of 2007

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

AND: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522

JUDGE: DOWSETT J DATE: 18 NOVEMBER 2013 PLACE: BRISBANE

GENERAL 1 The applicant ("ACCC") is incorporated pursuant to statute and is entitled to sue in its corporate name. It was, at all material times, the body primarily responsible for enforcing various aspects of the Trade Practices Act 1974 (Cth) (the "TP Act"). The respondent ("ANZ") is a body corporate and trading corporation within the meaning of s 4 of the TP Act. It is a major Australian banking corporation. 2 One aspect of ANZ's banking business is the provision of finance for the acquisition of residential properties. Such finance may be supplied upon different terms, depending upon the circumstances of the borrower and other relevant circumstances. Repayment is generally secured by a mortgage over the relevant property. ANZ has developed a number of "models" for the supply of such finance. In the jargon of the industry, these models are described as "loan products". At the relevant time housing loans were made by a "department" called "ANZ Mortgage Group". That group designed loan products, identified lending criteria and decided whether or not to approve applications for loans. It received applications through internal (or "in-house") and external "distribution" channels. Throughout the relevant period, the in-house channels included Mortgage Direct (a call centre), Personal Mortgage Managers ("pmms") who were specialist sales persons, One Direct (a low cost alternative to ANZ branded products) and ANZ branches. A further channel, Mortgage Solutions, was being tested in late 2003 and early 2004 but did not commence operations until July 2004. Mortgage Solutions used franchisees to distribute ANZ products on a commission basis. Whether these franchisees should be described as "in-house" is a matter of opinion. In some of the evidence they are described as a "tied" channel. In general, I shall adopt that usage. All of those distribution channels distributed only ANZ loan products. 3 Apart from the in-house and tied channels, loan products were distributed by independent brokers who were not tied to ANZ, also supplying loan products provided by other lenders. The evidence suggests that brokers usually offered a wide variety of products, supplied by a wide variety of lenders. The evidence demonstrates that ANZ and other lenders trained and accredited brokers from whom they were willing to accept loan applications. The evidence also indicates that brokers derived their remuneration from lenders in the form of commission for loan business introduced to each lender.

THE ORIGINATOR AGREEMENT AND THE USER AGREEMENT 4 On 7 July 2001 ANZ entered into an agreement with Australian Financial Group Ltd ("AFG") (the "originator agreement"). Pursuant to that agreement ANZ appointed AFG to market the loan products identified in another document described as the "Approved Originator Operations Manual" (the "manual"). The originator agreement recited that AFG carried on an independent business, acting for its clients in arranging mortgage loans and other financial transactions, and that it wished, in conjunction with that business, to market ANZ's loan products. Clause 2.1 provided that ANZ might, from time to time, revise the descriptions and purposes of its products. AFG was to be an independent contractor, "exercising free and independent judgment" and was to pay all of its own marketing costs and expenses. It was not to represent that it was acting in any capacity other than as an independent contractor. It had no authority to bind, or purport to bind ANZ, without ANZ's prior consent in writing. 5 Pursuant to the originator agreement AFG was to: • Meet the agreed minimum performance targets as set out in Schedule 1 of this Agreement which may be amended from time to time by agreement between [ANZ] and [AFG]; • ensure that all applications from its clients to [ANZ] for loan products are in a form approved by [ANZ] from time to time as they apply to particular loan products; • ensure that every application form which [AFG] assists a customer to complete accurately records the customer's instructions, and is signed by the customer and the authorized officer of [AFG] who has assisted the customer to complete the form; • exercise the skill and care appropriate to that of a prudent person in similar circumstances in marketing [ANZ's] Loan Products and in doing any related things; • disclose in a manner approved by [ANZ], in all cases where [AFG] solicits or attempts to solicit applications for [an ANZ] Loan Product, to the customer concerned, [AFG's] relationship with [ANZ], and the fees (if any) to which [AFG] is or may become entitled; • hold all loan application fees, or other money received from customers in relation to Loan Products on trust for [ANZ] and immediately send them to [ANZ] upon receipt; • attend any training session that [ANZ] may require [AFG] and its employees to attend; • observe all applicable provisions of the Code of Banking Practice; • observe all applicable provisions of the Privacy Act 1988 or any code of conduct issued by the Privacy Commissioner under that legislation; • observe all applicable provisions of the Consumer Credit Code; • observe all applicable provisions of the Trade Practices Act 1974; and • observe all other applicable legislation or legal requirement which relates or may relate to [AFG]. 6 Clause 2.5 prohibited certain conduct by AFG, including: • (offering) … the Loan Products at rates or on terms other than those advised by [ANZ] or published by [ANZ] from time to time unless with the written permission of [ANZ]; or • (inducing) or (causing) to induce any party to apply for any Loan Products by offering gifts or prizes or other inducements of whatever kind, without the prior written approval of [ANZ]. 7 Clause 2.6 provided: [ANZ] is under no obligation to give approval to any particular loan application submitted to [ANZ] by [AFG] and may decline or approve any application in its absolute discretion. 8 Clause 2.7 provided: Nothing in this Agreement prevents [AFG] from engaging in any other business or undertaking or transacting any business with any other bank, insurance company or other financial institution. 9 ANZ was entitled to make rules and regulations specifying the manner in which AFG was to act in accordance with the agreement. Clause 4 dealt with fees (or commission), the rates being set out in a schedule. Such rates might be amended by agreement. Clause 6.1 provided that AFG was: … at all times responsible for the conduct of its employees, contractors and agents and must ensure that those parties act lawfully and in good faith at all times and are fully informed of and observe [ANZ's] practices and procedures for marketing its products. 10 Clause 6.2 provided that: The Authorised Officers being employees, contractors or agents of [AFG] are set out in Schedule 4 attached to this Agreement which may be amended from time to time by agreement between [ANZ] and [AFG]. Only the Authorised Officers of [AFG] who have been approved by [ANZ] from time to time can act on behalf of AFG in performing its obligations under this Agreement. 11 The position of authorized officer is of some significance in this case. It seems that, prior to 22 March 2004, AFG entered into an agreement or arrangement (the "user agreement") with Mortgage Refunds Pty Ltd ("Mortgage Refunds"), pursuant to which persons nominated by the latter company were to be accredited for the purpose of receiving and processing applications to ANZ Mortgage Group for its loan products. I infer that, for the purposes of the originator agreement, they were to be authorized officers. Mortgage Refunds was not an authorized officer. These authorized officers were some of the brokers to whom I have previously referred as being external distributors of ANZ loan products, together with the loan products of other lenders. 12 Clause 7 of the originator agreement related to its termination. Either party could terminate it on giving 30 days' written notice to the other. ANZ could terminate for material breaches which included any breach or default "of any provision of this Agreement". On 16 March 2005 another agreement was executed in much the same form. As far as I am aware there is no suggestion that there was any relevant variation of the terms. 13 The respective roles of AFG and Mortgage Refunds potentially raise complications in this case. AFG agreed to provide services to ANZ, which obligation was to be performed through its authorized officers (or brokers). The evidence demonstrates that AFG received commission from ANZ. Initially, the commissions were paid by AFG to Mortgage Refunds, after deduction of AFG's share. Mortgage Refunds and its brokers operated on a business model which involved the payment to the borrower of part of the commission otherwise payable to the broker by the lender. As between the broker and Mortgage Refunds, the latter had the obligation to make such payments to borrowers. Thus, when Mortgage Refunds received commission from AFG (which had, in turn, received it from ANZ) it would deduct its agreed share of the commission and then pay the amount due to the borrower and the balance to the broker. At a later stage, AFG paid the broker's share directly to each broker. By that time, it was thought that Mortgage Refunds might have been about to experience financial difficulty. Such a direct payment was intended to protect the brokers in that event. 14 As far as the evidence goes, neither AFG nor Mortgage Refunds was directly involved in the submission, by brokers to ANZ, of applications for finance. The brokers dealt directly with ANZ. AFG may have carried out some quality assurance role. Mortgage Refunds acted as a provider of support services to individual brokers. The evidence suggests that they were self-employed, although ACCC suggests otherwise. Such services included the supply of office facilities, training, operating systems and advertising. Mortgage Refunds was often the first point of contact for potential customers who were then assigned to individual brokers. However, once a potential borrower had made application for a loan, or perhaps had indicated an intention to do so, the broker would cause the borrower to enter into an agreement with Mortgage Refunds (the "cash back agreement"), primarily providing for the payment by that company to the borrower of the relevant refund. The terms of the cash back agreement assumed that the relevant loan would be arranged "through" Mortgage Refunds. 15 Mortgage Refunds seems to have commenced operations as the alter-ego of Mr King, a witness in this case. He was a broker, authorized by ANZ through AFG. He subsequently arranged for other persons to acquire accreditation through AFG and to operate as independent brokers, but under the Mortgage Refunds "banner".

THE IMPUGNED CONDUCT 16 On 22 March 2004 an ANZ officer wrote to an AFG officer as follows: Re: Mortgage Refunds Pty Ltd Dear Kevin It has come to our attention that a business, accredited under the Australian Finance Group, is actively advertising and promoting a "mortgage refund" offer involving the rebate to the customer of part or all of the commission paid by ANZ. Our records indicate the following individuals accredited under [AFG] belonging to the "Mortgage Refund Pty Ltd" group: • Jason King (1561-875); • Leon Stark (1775-173); • Estera Studin (1775-233); • Guiseppe Chillemi (1776-264); and • Sue Hagendyk (1775-361). Under the terms of the agreement held between ANZ and Australian Finance Group, an approved originator must not: … induce or cause to induce any party to apply for any loan products by offering gifts or prizes or other inducements of whatever kind, without the prior written approval of the bank. As ANZ has not provided written permission for the offer advertised, we are cancelling the accreditation of the Mortgage Refund Pty Ltd group. Accordingly, each of the individuals listed above are no longer eligible to submit applications to ANZ. If you are aware of any other originators accredited under Australian Finance Group with the Mortgage Refund Pty Ltd group, or operating a similar model, please advise accordingly. Should you require any further information or wish to discuss, please contact me … . 17 Negotiations ensued, involving representatives of ANZ and AFG and Mr King. As a result, on 29 April 2004 an ANZ officer wrote to the directors of Mortgage Refunds as follows: Re Mortgage Refunds Pty Ltd I refer to our recent discussions regarding accreditation with ANZ of third party introducers who operate under your company. Under the terms of the agreement held between ANZ and the Australian Finance Group, an Approved Originator must not "induce or cause to induce any party to apply for loan products by offering gifts or prizes or other inducements of whatever kind, without the prior written approval of the bank". We consider that the current business model that you advertise and operate to be in breach of this agreement and we have not given prior written approval. On this basis accreditation was cancelled. After our discussion of this matter with yourself and representations from [AFG], we hereby give specific agreement to the following in regard to ANZ loan products, • The maximum refund that can be provided to the customer in relation to an ANZ Loan Product is to be no greater than the amount of the Loan Approval Fee as determined by the ANZ Bank. The amount of this fee may be altered at any time and at the Bank's sole discretion. • You may not advertise this refund in any form without the specific written agreement of the ANZ Bank, this is to include use of the ANZ logo in any advertisement. At this time agreement is not given. • ANZ retains the right to withdraw or amend this agreement, at it's [sic] sole discretion, at any time. We trust that the above accurately reflects our discussions and would ask that the enclosed duplicate of this letter be signed by the relative [sic] officers of your company as acceptance of the terms above. Upon receipt of the signed acceptance we will activate the accreditation of your loan writers. Should you have any queries regarding this matter please do not hesitate to contact me. 18 It is common ground that the proposal was accepted by Mortgage Refunds and that, thereafter, the named persons were re-accredited. 19 ACCC asserts that the agreement evidenced by the letter of 29 April 2004, and Mortgage Refunds' acceptance of it (the "Mortgage Refunds agreement"), contained a provision which, broadly speaking, had the purpose, effect or likely effect of fixing, controlling or maintaining of a discount, allowance, rebate or credit in relation to the supply of services by Mortgage Refunds and/or its brokers. It is said that Mortgage Refunds and/or its brokers were in competition with ANZ in a market described in the further amended statement of claim (the "statement of claim") as the "loan arrangement market". ANZ's conduct is said to have been in breach of s 45(2)(a)(ii) of the TP Act. In so asserting ACCC relies upon s 45A of the TP Act. ACCC also alleges that ANZ breached s 45(2)(b)(ii) of the TP Act by giving effect to the Mortgage Refunds agreement in accepting loan applications from Mortgage Refunds and/or its brokers and paying commission, through AFG to them. Again, ACCC relies on s 45A. 20 Section 45 relevantly provided: (2) A corporation shall not: (a) make a contract or arrangement, or arrive at an understanding, if: (i) … (ii) a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition; or (b) give effect to a provision of a contract, arrangement or understanding, whether the contract or arrangement was made, or the understanding was arrived at, before or after the commencement of this section if that provision: (i) is an exclusionary provision; or (ii) has the purpose, or has or is likely to have the effect, of substantially lessening competition. (3) For the purposes of this section and s 45A, competition, in relation to a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding, means competition in any market in which a corporation that is a party to the contract, arrangement or understanding or would be a party to the proposed contract, arrangement or understanding, or any body corporate related to such a corporation, supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the provision, supply or acquire, or be likely to supply or acquire, goods or services. 21 Section 45A(1) provided: Without limiting the generality of s 45, a provision of a contract, arrangement or understanding, or of a proposed contract, arrangement or understanding, shall be deemed for the purposes of that section to have the purpose, or to have or be likely to have the effect, of substantially lessening competition if the provision has the purpose, or has or is likely to have the effect, as the case may be, of fixing, controlling or maintaining, or providing for the fixing, controlling or maintaining of, the price for, or a discount, allowance, rebate or credit in relation to, goods or services supplied or acquired or to be supplied or acquired by the parties to the contract, arrangement or understanding or the proposed parties to the proposed contract, arrangement or understanding, or by any of them, or by any bodies corporate that are related to any of them, in competition with each other. 22 ANZ was, at all material times, a bank which lent money to persons wishing to acquire residential properties. However ACCC asserts that ANZ was also in the business of offering, through its branches and the Mortgage Solutions franchisees, services of the same kind as those supplied by brokers. As I have already said, apart from the branches and franchisees, there were other in-house mortgage "specialists" who sold ANZ loan products. They were managed by and, I infer, part of ANZ Mortgage Group. However they are not directly relevant to ACCC's pleaded case. ACCC asserts that ANZ (through its branches and franchisees) competed with Mortgage Refunds and/or its brokers in a market for the supply of such services.

THE RELEVANT PRODUCT 23 ACCC asserts in the statement of claim that: at all material times persons throughout Australia were seeking to acquire residential property loans to enable them to purchase residential properties (para 4); such loans were provided by banks, including ANZ and by other lenders (para 5); persons seeking to acquire such loans created a demand for services to assist them in choosing and acquiring loans ("loan arrangement services") (para 6). 24 At para 7.1 of the statement of claim ACCC pleads that loan arrangement services were "supplied in relation to either the loan products of a single loan provider, or the loan products of more than one loan provider …". 25 At para 7.2 of the statement of claim ACCC alleges that such loan arrangement services comprised: 7.2.1 advice as to the features of available loan products; 7.2.2 advice as to which loan products were available to persons in the customer's circumstances; 7.2.3 advice as to which loan products best suited the customer's needs; 7.2.4 assistance to customers to complete and lodge applications in a manner that met the requirements of the loan provider; 7.2.5 facilitation or liaison in transactions for the acquisition of loan products between the customer and the section or division of a loan provider which was responsible for providing loan products; and 7.2.6 submission of an application for a loan product for a customer to a loan provider, or the relevant section or division of the loan provider. 26 ACCC then asserts at para 8 that such loan arrangement services were, at all material times, provided by: 8.1 loan providers, including ANZ; 8.2 agents and franchisees of loan providers …; 8.3 persons who are neither agents nor franchisees of loan providers but who are accredited by, or for or on behalf of, one or more loan providers, to submit loan applications on behalf of customers direct to those loan providers … . 27 The plea in para 7.1 seems to sit awkwardly in para 7 which seeks to define the services with the supply of which this case is concerned. Paragraph 7.1 effectively asserts that there were two distinct types of service, depending upon whether the supplier chose to supply such services in connection with one lender's product or those of many lenders. In fact, the distinction is between in-house and tied channels which supply only the products of their respective employers or franchisors on the one hand, and the brokers, who supply the products of numerous lenders on the other. Thus the service providers identified in paras 8.1 and 8.2 offer only ANZ loan products whilst the persons identified in para 8.3, who are the brokers, offer the products of numerous lenders. 28 ACCC asserts that lenders competed with brokers in the supply of loan arrangement services. In its amended defence (the "defence") ANZ uses the term "broking services" to describe the services provided by its accredited brokers. One matter in dispute in this case is whether such "broking services" replicated the services provided by ANZ's branches and franchisees. I shall generally refer to the services provided by brokers to potential borrowers as "brokers' services", and to the "services" allegedly provided by branches and franchisees to potential borrowers as "lending" services. Where appropriate, I shall refer to both collectively as "intermediary services". The ultimate question for resolution is whether ANZ competed with the brokers in supplying loan arrangement services. My use of different terminology is not intended to confuse. It is rather intended to highlight the fact that the case is primarily about identifying the services, if any, which are provided to potential borrowers by in-house and tied channels on the one hand, and brokers on the other.

THE MARKET 29 Section 45(2) provided that the word "competition" means competition in a relevant market. The term "market" was explained, if not defined in s 4E which provided: For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first mentioned goods or services. 30 A "market" is the field of activity in which buyers and sellers interact (TPC v Australia Meat Holdings Pty Ltd (1988) ATPR 40-876 at 49480 per Wilcox J). In Miller's Annotated Trade Practices Act (26th ed) the author says at 1.4E.20: Because it is the delineation of relevant markets which enables the necessary process of competition to be assessed, identification of the relevant market is an essential step in the analysis of conduct which might be thought to breach a number of the provisions of Pt IV of the [TP Act]. … (I)dentification of the relevant market is a focussing process. The court must select what emerges as the clearest picture of the relevant competitive process in the light of commercial reality and the purposes of the law … ." 31 A market is generally said to have four dimensions, identifying the relevant product, functional level, geographical boundaries and temporal boundaries. In this case, ACCC describes the relevant market as an "Australia-wide market for the supply of loan arrangement services to members of the public by loan providers, franchisees and brokers".

Jason Graham King 32 Mr King swore two affidavits, one filed on 28 October 2010, and the other filed on 20 December 2011. He established Mortgage Refunds and was its sole director. He was personally accredited "under AFG" and described himself as "belonging to the 'Mortgage Refund Pty Ltd' group". Generally, he was a satisfactory witness although, towards the end of his cross-examination, he demonstrated some hostility towards ANZ. Such hostility may have arisen out of a perceived need to defend his business model, and a belief that its failure was caused by ANZ's conduct. The evidence suggests that he also demonstrated some hostility towards ACCC which (as he saw it) did not offer him substantial assistance in connection with the difficulties which he had experienced with various banks, including ANZ. 33 Prior to October 2010 Mr King had been engaged in the "banking and broking sectors" for 16 years. Between November 1994 and February 1999 he held various positions with the Commonwealth Bank, including as a sales and service representative, a telephone sales representative and a manager (personal lending) in its Casino, New South Wales branch. Between March 1999 and January 2002 he was employed by Suncorp Metway as a call centre consultant for insurance sales, and then as a mobile lending manager. Until September 2002 he worked in a similar role with another employer. At that time he commenced as managing director and sole shareholder of Mortgage Refunds. He occupied that position until early 2007. After he ceased to carry on business through Mortgage Refunds he took employment with Westpac as a home finance manager at the Ballina branch. However such employment lasted for only a few months. 34 Mr King claimed that until November 2003 he, alone, operated the Mortgage Refunds business. He wrote and submitted all loan applications and received commissions for so doing. A novel aspect of his business model was that he offered each borrower a refund of part of the commission received from a lender for submitting a successful application for finance. In about February 2003 he received a certain amount of favourable publicity. As a result, his business expanded, so that he was able to introduce other brokers into the business. In November 2003 he engaged Leon Stark, another witness. By March 2004 he had three other brokers, Estera Studin, Guiseppe Chillemi and Sue Hagendyk. Initially, Ms Hagendyk performed administrative duties as well as selling some loan products. Subsequently, she became a franchisee as did Ms Studin and Mr Chillemi. Mr Stark had negotiated his own special arrangements. I shall discuss these matters in more detail. However I observe that Mr King's evidence as to his role in the company between 2002 and November 2003 may not be entirely consistent with other evidence. 35 Although the evidence is a little equivocal Mr King said, at ts 220 ll 6-8, that where lenders dealt with Mortgage Refunds through AFG, the individual brokers were accredited through AFG but dealt directly with the lenders. This was the position with ANZ. From about March 2004 Mr King was selling franchises for the Mortgage Refunds business through a second company, Mortgage Refunds Australia Pty Ltd. As I have said Ms Studin, Mr Chillemi and Ms Hagendyk became franchisees. 36 Mr King claims that as a result of ANZ's impugned conduct, the franchises became less valuable, and so he ceased selling them. From April 2006 until the business was sold in early 2007, Mortgage Refunds operated through "accredited mortgage consultant contracts". As managing director of Mortgage Refunds he oversaw all of its general operations, supervising the franchisees and loan writers, as well as writing loans himself. He said that in 2006, shortly before he sold the business, Mortgage Refunds had up to 30 brokers in the group, being either franchisees or contracted loan writers. A further 14 people were in training. 37 Initially and principally, Mortgage Refunds operated in south-east Queensland. However it also dealt with customers throughout the whole of Australia, except for the Australian Capital Territory. At para 20 of his first affidavit, Mr King describes the services provided by Mortgage Refunds and its brokers as: … (providing) services to customers who were seeking a home loan. Those services included giving information about the various home loan products and lenders, general reports (from computer software) that compared the products most suited to the customer's needs and preferences, and giving advice about the relative benefit of each loan product. Once a customer chose a home loan product, Mortgage Refunds assisted in compiling and submitting the customer's application and documentation to the relevant lender on the customer's behalf. 38 In this evidence there is an obvious emphasis upon providing information and advice, the compilation and submission of any application being a natural adjunct to the adviser's role. Of course, it was the real source of a broker's remuneration. Mr King considers that Mortgage Refunds' services were "an alternative to a borrower seeking a loan directly through a lender". A broker such as Mortgage Refunds distinguished its services from those offered by a lender by offering access to a wide range of loans and lenders, and independent comparative information, whereas a lender would only offer access to, and advice about its own products. A broker also usually offered a more convenient, flexible and personalized service than a lender, such as being available after hours, and travelling to the customer's home to meet with him or her. 39 Mr King claims that Mortgage Refunds attracted customers from: across the spectrum, including those who were considered by lenders to be high value customers …, inexperienced first-home buyers who needed extra guidance and reassurance, and higher default risk and so-called low document (or "low doc") applicants who, because of their inconsistent income or poor credit history had to go through extra application steps to secure loan approval and might have more limited loan products available to them. 40 Mortgage Refunds and its brokers did not charge borrowers for their services but generated income by receiving commission from lenders for originating successful loan applications. Commissions were usually paid in two parts, an upfront component, usually between .66% and 2% of the value of the loan, and a trail component paid throughout the life of the loan, ranging from .25% to .8% of the outstanding loan amount. He considers that the practice of paying part of the commission to the borrower was a sustainable and attractive business model. The refund was in the same amount, regardless of which lender the customer chose. Thus the customer could focus on choosing the best product, without fear that the amount of the refund would be reduced. Mortgage Refunds brokers did not seek to influence customers to take the loan products which would yield the greatest returns to them. Rather, they identified the products which best suited the customers' needs. Mr King considers that it was important to have a good reputation, and that the special nature of the business model was clear and uncomplicated. From November 2002 until early 2004 the amount of the refund was generally, for a loan above $240,000, $1,000, for a loan above $150,000, $500 and for a loan above $95,000, $300. It subsequently varied from time to time. Mortgage Refunds also offered other incentives to potential borrowers. 41 Mr King says that whilst some lenders were prepared to enter into agreements directly with brokers, the larger lenders generally preferred to deal through "aggregators" such as AFG. The aggregator was a "go-between" for lenders and brokers, particularly individual brokers or smaller broking groups which did not meet a lender's minimum volume requirements. Aggregators were responsible for distributing commissions to brokers, after taking their own percentages for their services. They were also responsible to each lender for ensuring that brokers acted in accordance with the lender's requirements. Lenders preferred to deal with brokers through aggregators because it simplified the administrative function for the lenders, as compared to dealing with a large number of brokers directly. Mr King doubts that explanation, although it seems sensible enough to me. 42 The user agreement (between AFG and Mortgage Refunds) is exhibit JGK 1 to Mr King's first affidavit. The agreement is headed "Commission and Software User Agreement". It recites that AFG was engaged in "the business of finance, and residential mortgage broking/facilitation" and that: In consideration of [Mortgage Refunds] completing, processing or referring residential mortgage or non-residential mortgage finance applications to AFG, AFG agrees to pay commission to [Mortgage Refunds] on the terms and conditions set out in Part One of this Agreement. 43 The user agreement also recites that AFG was the supplier and owner of certain software which it was to allow Mortgage Refunds to use during the term of the agreement. AFG appointed Mortgage Refunds "to introduce to AFG finance applications for a term of 10 years" in accordance with the terms of the agreement. In consideration of Mortgage Refunds introducing, referring to or submitting applications to AFG, AFG agreed to pay commission calculated in accordance with a schedule. The commission was to be paid "in consideration of [Mortgage Refunds] referring or submitting to AFG finance applications by prospective borrowers acceptable to AFG and lenders …". There appears to be no other reference in the user agreement to lenders' requirements concerning loan applications. Although the user agreement provided that Mortgage Refunds was to submit its applications for finance through AFG, such applications seem to have been submitted directly by Mortgage Refunds' brokers to the ultimate lenders. 44 Mr King considers that it was important to the success of his model that he be able to offer access to products of each of the major banks, namely the Commonwealth, Westpac, National Australia and ANZ, together with most other lenders. In order to be able to offer loan products, a broker had to be accredited with the relevant lender. Such accreditation involved online or face-to-face training with each lender to learn about the loan products which it offered, and how it wanted loan applications presented. Mr King says that when he was seeking accreditation, he explained to the various lenders, including ANZ, his refund model, and that none raised any concerns with him about it. With some lenders the accreditation was granted to Mortgage Refunds but with others, it was granted individually to him and other brokers. In some cases it was held by AFG. In about February 2003 Mortgage Refunds obtained accreditation with ANZ through AFG. It seems that such accreditation was of Mr King personally, rather than of Mortgage Refunds. He says that from the inception of the Mortgage Refunds business until about November 2003, he submitted about 170 successful home loan applications from about 300 applications. Included in this number were five loans from ANZ. In each case he offered the borrower a refund. 45 On 25 March 2004 he received from AFG a copy of the ANZ letter of 22 March 2004. He had not previously had dealings with Mr Sirianni, the author of the letter, nor had he seen the originator agreement. He was upset by the withdrawal of accreditation, believing that Mortgage Refunds had not done anything wrong, and that ANZ had been fully informed of the nature of the refund model. He was concerned that if Mortgage Refunds were not able to offer ANZ loan products, it would be at a major disadvantage. He also considered that Mortgage Refunds' reputation might be adversely affected by the withdrawal of accreditation, and that other lenders might follow ANZ's lead. He was concerned that he might lose his franchisees and accredited consultants. As a result he spoke to officers of AFG, asking them to support him in his attempts to recover ANZ accreditation. Mr Kevin Matthews, an officer of AFG, said that he did not wish to jeopardize his relationship with ANZ or upset AFG's other brokers. 46 On 29 March 2004 Mr King sent a letter to Mr Sirianni. The letter is exhibit JGK 3 to his first affidavit and reads as follows: In relation to your letter dated 22 March 2004 to Kevin Matthews of the [AFG] I wish to provide the following information. Mortgage Refunds does not in any way "induce or cause to induce any party to apply for any Loan Products by offering gifts or prizes or other inducements of whatever kind". We offer a service to help clients find the right home loan from over 30 different lenders. Any cash-back payment is not based on the lender or loan the client should choose however is recognition for the client having used our service and therefore clearly not an inducement to take an ANZ or any other lender's home finance product. We also do not provide financial advice or recommend finance products, as this is not part of the service we provide. Our offer is based on providing genuine value. Not unlike countless similar offers currently available from banks, finance companies and mortgage brokers alike. Often in recent months many major players in the market including mortgage brokers have offered prizes and reduced fees simply by applying for their products or using their service. Your bank in itself has often made similar offers such as waiving establishment fees, reducing interest rates and giving people a chance to win prizes just by applying for a loan. I have attached supporting information for your consideration. These are genuine examples of how we have not only assisted the client but also our lenders and the community as a whole. The industry needs players in the market who look beyond short-term gain. Brokers who have a genuine interest in keeping the client happy with the lender of their choice well into the future. We hope this matter can be resolved as we are keen to continue to develop our relationship with the bank and distribute its product. Should you wish to discuss these issues further please don't hesitate to contact me at any time. 47 A three page document was attached. I can best summarize its content by reference to the headings which are "Other mortgage brokers", "Our customers", "How we help first home buyers", "Finance research company Cannex gave Mortgage Refunds a good report", "Positive reviews in the media", "MIAA" (an industry association), "Marketing budget slashes by offering real value to the client", "We don't pay referrers", "Churning", "Trail retention", "Our broker's commissions and sustainability", "Mortgage brokers in other countries" and "We have been open and honest about our business structure". 48 On 30 March 2004 Mr King met with representatives of AFG and ANZ. He went through his letter of 29 March 2004, explaining how Mortgage Refunds operated, and his dealings with both ANZ and AFG when setting up the business. The reference to the letter of 29 March 2004, being exhibit JGK-4 to his affidavit is, I think, a reference to exhibit JGK-3. He had previously explained that he proposed to give refunds to customers. Nobody had taken any issue with this proposal. Mr Carroll, a bank manager previously known to Mr King said: We have a problem with your refund model. I'm not sure what we can do about it. Wayne Ormond (of Refund Home Loans) has rocked the boat. He has been giving refunds to customers. He has pointed the finger at you and we have had to take a stand. We could look at you not giving any refunds to ANZ customers, or limiting the refund to a certain level for ANZ loans. But I'd have to go back to my guys and see about it. We'd need you to be offering something the branches could offer as well so it's a level playing field. If your refund was the same as the $600 establishment fee, then your refund would be matching what the branch staff can waive. Its not like you negotiate with the customers in an ad hoc way what amount of refund you're giving. For example it's not like you offer them $1,000 refund and they negotiate with you to get $1,500. 49 Mr King understood that Mr Carroll's proposal was designed to ensure that Mortgage Refunds did not attract customers away from ANZ branches. For reasons which appear later, I do not place great weight upon this perception. Mr King said that he had to be able to offer refunds to customers as that was his entire business model. However he also said that he would do whatever ANZ wanted in order to keep his ANZ accreditation. He did not recall any specific discussion as to the sustainability of the business model, although Mr Carroll mentioned that the issue had been raised by other brokers. No resolution was reached at the meeting. Subsequently, Mr King received the letter of 29 April 2004 from ANZ. On 10 May 2004 he accepted its terms and told his contractors and franchisees that any refund had to be limited to $600. Had it not been for ANZ's actions he would have continued to offer and pay to all customers the same refund amounts, regardless of the identity of the lender. 50 Mr King claims that the Mortgage Refunds agreement caused difficulty for Mortgage Refunds. The imposition of the upper limit for ANZ loans was contrary to his basic business principle. Some customers insisted that they be paid the same refunds as were paid for other home loan products in accordance with Mortgage Refunds' advertisements. At about the same time Westpac and St George also withdrew accreditation. Westpac subsequently reinstated such accreditation with no limitation of the kind imposed by ANZ. However St George would not negotiate with Mortgage Refunds or consider re-accreditation. From the time at which Mr King entered into the Mortgage Refunds agreement with ANZ until he sold the business in early 2007, Mortgage Refunds submitted about 30 loan applications to ANZ, of which about a third were approved. Mr King initially adhered to the terms of the agreement but, after a short time, he decided to pay the same refund amounts to all applicants, regardless of the identity of the lender. However his starting point with ANZ loans was the $600 limit agreed with ANZ. He only paid more than $600 if the customer insisted on bargaining with him. He does not know whether ANZ sought to discover whether he was abiding by the terms of the agreement. 51 The appellant left Australia for some time but returned in late 2009, primarily to care for his mother who was ill. He obtained a job with the Westpac branch in Ballina as a home finance manager, working there from late 2009 until early 2010. He left the job because of increasing friction with management over the level of customer service provided by Westpac. His duties as home finance manager involved "all aspects of mortgage retailing, from originating loans through to after sales service". He considers that the services were "all but identical to those I offered through Mortgage Refunds". I shall address this proposition in more detail at a later stage. He would provide information and advice about Westpac loan products, do a preliminary assessment to make sure that an applicant was at least potentially qualified for a loan, and help the applicant to complete the forms and compile the necessary documentation for submission to the bank's central loans approval section. He would also monitor progress and eventual outcome. He considers that the only real difference between the service he provided to customers at Westpac and that which he provided at Mortgage Refunds was that he could only market Westpac products. Westpac had a variety of home loan distribution channels, including home finance managers situated in the branches, brokers accredited through AFG or having direct accreditation, mobile lenders, the internet and call centre. All of the home loan products could be sold through all of the distribution channels. However, on occasions, home finance managers were authorized by the lending section to offer special deals through discounted fees and rates. It was always possible to do a special deal if it were needed in order to win a customer's business. 52 Mr King says, concerning trail commissions, that although it was suggested that they were for the provision by brokers of after-sales service, such explanation was "complete nonsense". A broker could offer only very limited after-sales service. In such matters the borrower would deal with employees of the lender rather than the broker. He considers that the trail commission was payment to the broker for not "churning" the customer to another lender. This seems to have meant that the broker would not induce a borrower to refinance in order to generate a further commission for the broker. The threatened loss of the trail commission would make such conduct less attractive to the broker. I suspect that Mr King is at least partially correct in this belief. 53 Mr King considers that as loans were "generic" products with few basic adjustments, a lender might risk marketing products solely through internal channels, without using brokers. However he considers that unless a lender was particularly good at marketing and distribution, it would lose market share to a competitor who was no worse at marketing and distribution, but also used brokers. A lender would generally prefer that a customer apply for a loan through an internal channel rather than a broker, thus avoiding any external payment of commission, reducing the risk of churn and of disruption of the bank's relationship with its customer. He said that at Westpac numerous measures were taken to ensure that a borrower came through an internal channel rather than a competing external channel. Such measures included incentives to home finance managers and discounted lending rates if there were any risk that a prospective customer would go to an external broker. He said that Westpac also engaged in internal churning, encouraging broker-originated borrowers to refinance through Westpac channels. One of his duties was to try to refinance Westpac loans which had originated with brokers. He considers that in all of his jobs as a lending specialist and broker, he had competed against brokers and other lending specialists to attract and service customers. The expression "lending specialist" apparently describes persons employed by lenders in that capacity. 54 In his second affidavit Mr King says that he had always intended that Mortgage Refunds act as a broker, writing loan applications for customers. Initially he was the only person writing loans and considered that any profit made by Mortgage Refunds was his. He made all decisions and entered into all agreements on its behalf. Mr King considers that people who contacted Mortgage Refunds as a result of its advertising and associated telephone number were "contacting Mortgage Refunds and not me personally". He gave further evidence concerning the engagement of other brokers. Some of this evidence may be a little inconsistent, but it is not particularly relevant. 55 In cross-examination Mr King was asked about his experience in personal lending as an employee of the Commonwealth Bank. He agrees that as a bank employee he would take any opportunity to sell bank products, other than home loans to people seeking home loans. At one stage he was employed on a "home-hotline", dealing with customers by telephone. He considers that he was competing with other hotline operators employed by the bank, mobile lenders and brokers. Similarly, when he became personal lending manager in the Casino branch, he considered that he was competing with mobile lenders and others. Customers coming to the bank through brokers would be expected to open accounts with the bank, creating a direct relationship between branch and borrower, with the opportunity to cross-sell other bank products. Mr King agrees that finding an appropriate loan product for each client, based on individual needs, was a major part of the business conducted by Mortgage Refunds. 56 In para 19 of his second affidavit Mr King asserts that individual brokers derived their entitlements to commission only through agreements with Mortgage Refunds. It was suggested to him that this was incorrect. Mr King disagrees. He was asked if he had always intended to operate his business under the auspices of an aggregator such as AFG. He says that he would have preferred to deal directly with lenders but that such option was not available to him. He saw the existence of a wide panel of lenders as being critical to the success of the business. People who came to his operation wanted choice in order to be able to shop around and to get the best deal in the market place. He agrees that if he had not had a wide panel of lenders, he would not have been able to offer that choice, and would not have had an attractive offering to the client base. He agrees that at any one time there would have been a maximum of between 38 and 40 lenders. In fact, in 2006 there were 43 lenders, to six of which the brokers were directly accredited, that is otherwise than through AFG. Mr King says that quick responses from lenders were important to his clients. He says that one of the problems with ANZ was that it frequently did not reply quickly to applications. It was suggested that his business had attracted a substantial proportion of "low-doc type borrowers". He says that his business attracted: The average Joe Blow that would go out and, you know, shop around for anything because at the end of the day, we were offering the best deal in the market for the same product. You know, apples for apples. 57 He was asked whether or not one of his advertising themes had been "Have you had credit problems?". He responded: Well, that was, like, for any mortgage broker. I mean, at the end of the day, if you're going to be a good mortgage broker in the market, you can't expect to walk along and, you know, pick up the A1 client every single time. … A good mortgage broker will go out there and, you know, go into bat for the people that are having difficulty getting a loan through their own lender. 58 He was asked about rejection rates and whether, in the event of a rejection, he would counsel an applicant to apply to another lender. He says that his advice might have been: Don't apply again yet. Wait until you get a bit more savings in the bank and then have another go. 59 He agrees that the services provided by brokers were alternatives to services provided by lender branches and the like, and to other in-house channels. He says that: "I was basically just giving them more, you know, more options, …". It was suggested to him that there were three particular differences between the services offered by brokers and those offered by "in house channels", namely: access to a wider range of lenders and loan products; independence from lenders, and therefore the capacity to offer independent advice and information; and convenience, flexibility and personalization of service. Mr King agrees. 60 At p 234 ll 30-46 the following passage appears: So is this the position, while the number of the things that both the branches and the brokers were doing coincided, such as providing information, such as helping with application forms, although there was overlap in activity, there was significant difference in the elements of the service offering which differentiated brokers on the one hand from branches on the other hand?- - -Well, I would say the only difference, really, would be the fact that if you walk into a bank, unless they are writing other people's paper, you've only got the option of writing their home loans so you're tied into their policies, their procedures, their costs, their interest rates and so forth. Their products?- - -The only difference between that and being a broker is the fact that you've got 30 or 40 different lenders and all those different policies and procedures and so forth that you can work with to tailor it to the individual customer's needs. Plus the independence which you agreed to a few minutes ago?- - -Yes. Plus for convenience you agreed to a few minutes?- - -Yes. 61 On p 235 ll 1-3 the following passage appears: So choice on the one hand and refund on the other hand were the two most prominent elements of the Mortgage Refunds offering, weren't they?- - -Yes. 62 Mr King agrees that he had accurately described the business of Mortgage Refunds as "discount mortgage brokers". He also agrees that his advertising indicated that the refund reduced the net cost to the borrower because the refund was coming out of the commission which the lender paid. He was then referred to a number of testimonial statements which appear in exhibit 5. The testimonials suggest a high degree of satisfaction with Mortgage Refunds, referring to "access to all the top institutions", speed and flexibility, guidance and the refund. 63 Mr King agrees that any mortgage broker would try to find the best deal for the client. He says that: The whole basis of the whole mortgage broking industry to be sustainable, realistically, is to be able to get all of your customers on side so that they don't just use you once, they use you again and they refer you to their friends and family. 64 He was directed to a statement in his first affidavit to the effect that: Mortgage Refunds was able to assist [high value customers] in shopping around for their best deal as they were the type of customer that lenders would discount their fees and rates for. 65 "High value customers" are customers who propose to take out a big loan and have good credit credentials or high net worth. He was asked if Mortgage Refunds or its brokers would negotiate with a lender on behalf of a high value customer to get a reduction in advertised rates. He replied: Yes. Sometimes that would be the case; other times, it would be the case that the business development manager from the bank might have some sort of a promotion or something and he might come to us and say, "Look, if you've got anyone that fits these boxes, please run them by us". 66 Lenders sometimes advertised special offers on television. Later in the affidavit Mr King says that Mortgage Refunds could help low doc customers become mortgagees because Mortgage Refunds provided the extra product knowledge, experience, advice and general hand-holding that they required. 67 Mr King was asked: Why did they require those things, Mr King? 68 He responded: Well, once again, it would depend on the circumstances. You know, I mean, at the time especially, there were an awful lot of people coming into the market buying their first homes or an awful lot of people that were trying to navigate, you know, the minefield of all of the different types of low doc facilities that were available. I mean, some lenders literally - you know, some customers were paying $20 or $30,000 to the lender just to take out a loan whereas they could walk up the street and get virtually exactly the same product at possibly even a cheaper rate. 69 He agrees that even low doc loans were a "minefield". He was asked about the meaning of the term "lending specialist", to which I have referred. A lending specialist is a sales person employed by a bank, in selling loans rather than making them. He considers that he was in competition with brokers and other lending specialists. 70 Mr King denies that he had any conversation with Mr Matthews from AFG in which Mr Matthews suggested that his business would not be viable if he made refunds of the amounts which he was proposing. He agrees that at about the time at which ANZ withdrew its accreditation of the Mortgage Refunds brokers, he had an argument with Mr Matthews. It was put to him that when he met with Mr Carroll, Mr Carroll said to him that the bank had a problem with the refund model. He denies that Mr Carroll said that the problem was sustainability. He agrees that sustainability was mentioned but says that the problem was that other brokers had made comments in the media about his model. He considers that although they had spoken of sustainability, they were "clutching at whatever they possibly could to stop us from doing what we were doing so that they didn't have to do it". Mr Carroll said that it was possible that the bank would agree to accreditation on the basis of no refund or a limited refund. It is, perhaps, curious that Mr King should suggest that the problem was the concerns of other brokers, given that he had previously suggested that Mr Carroll was trying to prevent competition with the branches. 71 Mr King agrees that of the 300 applications he had made to lenders, only five were made to ANZ. However he says that all lenders were important to him. It was suggested to him that notwithstanding ANZ's withdrawal of accreditation, Mortgage Refunds' brokers could still offer refunds with respect to loans from other lenders, and that ANZ activity accounted for less than 2% of loan applications which had been submitted in a particular period. He replied: Yes. But having said that, if a customer came to us and they rang up on the telephone and said "Do you offer ANZ home loans?" and we said no, and they wanted an ANZ loan, even if we went out and saw that customer and they took a Suncorp loan, it's the perception in the market. 72 He was then cross-examined about a complaint made by him in 2004 to the ACCC. The complaint was primarily about the conduct of Westpac and St George in removing accreditation. In his complaint he said that he "believes that this is because other brokers, including brokers in which these banks have ownership interests, cannot compete with Mortgage Refunds in terms of the cash rebate". He had also referred to the fact that the Commonwealth Bank had proposed dropping his accreditation, but he had dissuaded them from doing so. He indicated in his complaint that the ANZ bank had dropped accreditation but reinstated it. Again, Mr King seems to attribute his problems to other brokers, albeit broking companies in which the banks had interests. 73 He was then referred to an undated letter to the Australian Securities and Investment Commission ("ASIC") in which he indicated, at para 9, that Mortgage Refunds had not employed staff in the period from 1 July 2005 and until the date of the relevant notice, that is 25 October 2006. He agrees that Mortgage Refunds had not employed any staff for a year or so prior to 1 July 2005. Mortgage Refunds Australia was in a similar position. He was then referred to another statement made to ASIC to the effect that, "(w)e now have an experienced bookkeeper working on maintaining all records and obligation as required by law and assisting in clarifying my obligations as director moving forward in conjunction with our accounting firm". It was put to him that previously, the books of both companies had been "in a mess". He disagrees. He agrees that he had regarded the profit of Mortgage Refunds as his own and that, to a certain degree, he considered that he was able to do what he wished with both companies' funds, including meeting private expenses. It was put to him that if commission went into Mortgage Refunds' account, he regarded it as in effect paid into his own account and withdrew against it. He replied: Well, I would, but obviously if I had other liabilities that had to be covered, and so forth, the business came first. 74 One other matter emerged from Mr King's cross-examination. He was referred to a business plan proposed by one of the Mortgage Refunds brokers. The cross-examination seems to have proceeded on the undisputed basis that Mr King would have seen it at about the time of its creation, presumably after June, 2006. It identifies a number of brokers as competitors, but no lenders, suggesting that the broker did not see lenders as competitors. Mr King did not suggest to the broker that he should consider lenders to be competitors. 75 The major themes emerging from Mr King's evidence are: whilst brokers offered a wide range of products supplied by a wide range of lenders, in-house and tied channels offered only the products of one lender; the broker sought to identify a product which suited the needs and circumstances of the potential borrower and gave independent advice about the relative benefits of each product; a broker usually offered a more convenient, flexible and personalized service than a lender's in-house and tied channels; the success of Mr King's business model depended upon his being able to offer access to each of the major banks; to this end, Mr King was willing to accept a limitation upon the amount of any refund on ANZ products, rather than accept loss of access to ANZ products; lenders using only in-house channels would be excluded from business which would have been available to them had they used brokers; and a broker's attractiveness to customers depended upon access to the products of a wide range of lenders. 76 Mr King had been employed by a number of lenders. He suggests that the services which he provided in such employment had been largely the same as those which he and other brokers provided under the Mortgage Refunds banner. However, in my view, a major qualification to that proposition was that he was providing access only to his employer's products. To my mind that distinction is significant. It necessarily resulted in the broker comparing various lender's products and, inevitably, an element of advice as to suitability. The distinction also raises questions about the relative independence of the advice received from in-house and tied channels, as compared to the advice from brokers. As I shall demonstrate, when ANZ was setting up its Mortgage Solutions franchisee arrangements, it accepted that the franchisees would be disadvantaged by their capacity to offer only ANZ products. ANZ proposed to compensate them accordingly. Further, ANZ Mortgage Group seems to have accepted that brokers were more trusted than were in-house channels. 77 Although I accept that Mr King was generally truthful, I do not necessarily accept any of his opinions. Under this heading I include his assessment of the degree of similarity between services provided in bank branches and those provided by brokers. I also include under this heading his opinion as to Mr Carroll's motivation in imposing the limitation upon the Mortgage Refunds brokers and views as to competition between brokers and lenders.

Leon Elliott Stark 78 Mr Stark is an advisory consultant with Ernst & Young. From about 2000 until 2003 he worked as a mortgage lender at Suncorp Banking Corporation and there met Mr King. At Suncorp Mr Stark was paid a base salary plus commission. In 2003 he heard that Mr King was setting up, or had just set up a broking business and approached him to discuss the possibility of his joining as a broker. Mr King's company was Mortgage Refunds. He and Mr King discussed the terms of his engagement with Mortgage Refunds. Mr Stark then drew up a contract which reflected that discussion. He has not retained a copy of it but considers that it set out the terms of a "gentlemen's agreement". He was not an employee of Mortgage Refunds and obtained his own Australian Business Number and appropriate insurance. He was able to obtain such insurance through a scheme operated by AFG. He understood there to be no partnership between him and Mr King or Mortgage Refunds. He did not expect to receive a share of that company's profits and was not liable for its debts. 79 The arrangement was referred to in the written document as a "franchise". Mr Stark paid about $10,000 for the franchise, understanding that the money was to be used to purchase office equipment which was installed in an office at Clayfield from which he worked. Later, Mortgage Refunds and other brokers also operated from that office. Mr Stark did not consider that he had acquired any asset or valuable right as a result of his payment. In particular, he did not acquire ownership of any part of Mortgage Refunds' business or any other business. He was not able to assign or on-sell any part of Mortgage Refunds' business or any other business, and there was no "cooling off period" in which he might seek a refund of the $10,000. 80 From September 2003 until 2006 Mr Stark worked as a mortgage broker, associated with Mortgage Refunds. He was the first broker contracted by Mortgage Refunds. He was accredited to make loan applications to ANZ and other lenders. When he eventually left Mortgage Refunds he took several desks which he had bought with his own money but nothing which represented his payment of $10,000. Such payment was made in order to assist Mr King in setting up the business in which Mr Stark was to work as a broker, earning commission. Mr Stark understood that in his position as a broker: he was to conduct a mortgage broking business using only contracts, letters, forms and promotional material branded as "Mortgage Refunds"; any material which he created for promoting the business, such as newspaper advertisements and letterbox flyers, was to use the Mortgage Refunds template and display its brand; he was to offer to customers a refund of part of Mortgage Refunds' commissions from lenders; such refunds were to be in amounts set from time to time by Mortgage Refunds; he was to enter into cash back agreements on behalf of Mortgage Refunds, providing for refunds to customers, not incurring any personal liability himself, but incurring liability on behalf of Mortgage Refunds; and he was to be paid his share of any commission received from a lender when a loan application which he had submitted was approved, after deduction of the amounts payable to AFG and Mortgage Refunds, presumably including the amount payable to the relevant borrower by Mortgage Refunds. 81 When Mr Stark commenced at Mortgage Refunds, Mr King trained him in its systems. The majority of this training was "on-the-job" and involved his going to meetings with Mr King and observing the process. He had previous experience in the industry and understood the basic aspects of it. However it was the first occasion on which he had been involved as a broker who was not tied to the products of a particular lender. Mr Stark was subsequently involved in training new brokers when they joined the Mortgage Refunds team. He received some adjustments in his commission in recognition of that role. 82 As a broker he was responsible for completing all necessary paperwork connected with an application for a loan, meeting with clients, advising on the best available product for each client, collecting personal details and lodging applications and other documents with the lender. He would also liaise with the lender and the client until he was able to advise the client of the final outcome of the application. He considers that the work was "almost identical" to the work which he performed whilst he was working at Suncorp, the main difference being that he had access to loan products from a range of lenders rather than only the products of one lender. Another difference was that he did not have access to lenders' internal credit departments. Whilst he was with Mortgage Refunds, he effected more than 100 loans, averaging between five to ten loans per month. He always presented himself to clients and potential clients as a member of the Mortgage Refunds team. 83 All promotional or advertising material had to be approved by Mortgage Refunds or based on a Mortgage Refunds template. Mr Stark occasionally inserted advertisements in newspapers. The advertisements always carried the Mortgage Refunds logo. Similarly, he distributed flyers that were based upon a Mortgage Refunds template. The telephone number on the flyer was the "general number for the Clayfield Mortgage Refunds office". It would be answered by a receptionist or, if the office were unattended, it would be automatically diverted to Mr King's mobile telephone. All day-to-day work material was provided by Mortgage Refunds, including business cards, stationery, customer brochures and printed polo shirts. Car magnets were apparently also distributed. He had a personal email address provided by Mortgage Refunds. At para 26 Mr Stark said: A broker offers an independent observation of the market in my view. This means that a customer gets a better insight and a better deal as brokers work independently of the banks and are specialists in finding the best deal available. 84 I should say something about the flyer which was distributed by Mr Stark, a copy of which is exhibited to his affidavit. It is as follows: Mortgage Refunds Discount Mortgage Brokers. $1000 CASHBACK* Whether you are refinancing, Debt consolidating, Purchasing or constructing a home, up to 100% Finance available** Have a bad credit report??** We help you find the home loan that's right for you. Then give you money back through our attractive CASH BACK* Offer. *On Loans above $250,000. Other discounts apply for smaller loans. Subject to Mortgage Refunds terms and conditions. 85 Of particular importance are the description of Mortgage Refunds as "Discount Mortgage Brokers", and the assertion that Mortgage Refunds will "help you find the home loan that's right for you". In my view these statements suggest a significant difference between the operations of a broker and those of a lender's in-house or tied channels. 86 Concerning the refund process, Mr Stark said in his affidavit that Mortgage Refunds undertook the obligation to pay the refund to the client if the loan application were approved. Each broker had, in his or her kit, certain standard documents including copies of the cash back agreement (exhibit "LES 2" to Mr Stark's affidavit). This document would be signed by the relevant "loan writer" on behalf of Mortgage Refunds. It included the amount of the loan and the amount of the agreed refund. Mortgage Refunds undertook to pay the relevant amount within 60 days "of the funding of your home loan" but reserved the right to request repayment in the event that the loan was repaid in full within 12 months. 87 Whilst working at Mortgage Refunds Mr Stark obtained new leads and clients in a number of different ways. He obtained much business by way of personal referral and word of mouth. Mortgage Refunds also referred clients to him. Those clients would have contacted Mortgage Refunds and been allotted to him. Such clients were distributed amongst the various brokers according to availability. 88 Mortgage Refunds attracted a certain amount of media attention as a result of Mr King's appearance on television programs, promoting its business model and the benefits which it offered to borrowers. Mr Stark considers that a substantial amount of new business was directly generated from those appearances. He says that commissions were at one stage paid to him through Mortgage Refunds. At a later stage the commissions were paid directly by AFG because of the fear that Mortgage Refunds might be facing financial difficulties. 89 In early 2004 Mr Stark learned that ANZ had withdrawn the accreditation of brokers associated with Mortgage Refunds. Mr King understood that the reason for such action was Mortgage Refunds' practice of offering refunds, and that ANZ did not want refunds offered in respect of its loans. This problem had the potential to cause difficulties for Mortgage Refunds in that it would have to qualify its advertisements concerning refunds because refunds for ANZ's products would be different from the refunds in connection with other lenders' products. He considered this to be a problem for Mortgage Refunds as ANZ's loan products were significant in the market, and a broking business needed to be able to offer them to its customers in order that it be credible. All communications with ANZ and AFG concerning this matter were conducted through Mr King. Mr Stark did not consider that it was either possible or appropriate for him or any other broker to approach either AFG or ANZ directly in order to obtain re-accreditation. He was not approached by anybody from either of those entities. He understood that Mortgage Refunds and ANZ subsequently resolved their differences, and that they agreed that the maximum refund to be offered on ANZ loan products was the amount of $600, which was the amount of ANZ's loan establishment fee, in various places in the evidence also described as a "loan approval fee" or an "establishment fee". Although Mr King told Mr Stark about the problem, he did not consult him or obtain his opinion as to how it should be resolved. When the problem arose Mr King told Mr Stark to stop writing ANZ loans and subsequently, to comply with the maximum $600 refund limit. 90 In his oral evidence-in-chief Mr Stark indicated that he had heard Mr King give directions to other staff in connection with the $600 limit. As far as he knew other brokers complied with the direction. There was some disagreement as to the admissibility of aspects of paras 40 and 41 of his affidavit which deal with this matter. I accept that Mr Stark was aware that the matter had been raised with other brokers. In a small office, somebody in Mr Stark's position would have been aware that such a matter was being widely discussed. In any event, nothing hangs upon that evidence. 91 I turn to Mr Stark's cross-examination. In 2004 he became aware that Mr King was reorganizing the business as a franchise-based business, and that Mortgage Refunds would assist franchised brokers, providing administrative support, advertising and giving them leads. It was suggested that Mr King spent all of his time attending to those matters. Mr Stark said that he understood that he was also writing loans. He understood that pursuant to his arrangement with Mr King, after a certain period of time with Mortgage Refunds, perhaps two years, he would have "full access" to his commission. On this basis he understood that he was entitled to sell off his trail commissions. 92 Mr Stark agreed that as a matter of practice, he would recommend a proposal to the lender, giving his own imprimatur or endorsement to the application. He would also summarize the strengths of an application. Advice from the lender as to approval of an application would come directly to Mr Stark. The various assessments which he presented to lenders reflected his views as to the best deals for the clients concerned. 93 Mr Stark was referred to para 26 of his affidavit in which he describes the independent nature of the service provided by a broker. He agrees that the broker would try to find the best deal available from a multiplicity of lenders in the marketplace. He provided a service on behalf of the borrower rather than the lender. He had a duty to present the truth to the lender, and a duty to the customer to get the best deal. He agrees that a borrower who approached a broker would be seeking advice about the range of options available in the marketplace. A borrower who went to the bank would want a loan from that bank. He says that: When a borrower goes directly to the bank, then they've obviously done their own research, and so they have - they have pretty much taken their own matters into their own hands … . 94 He was referred in cross-examination to exhibit "LES 1" and asked to explain the term "debt consolidation". He gives the example of a credit card with a $30,000 limit. The interest rate on a credit card is "obviously" more than that on a mortgage loan. If a party had equity in an existing property or an investment property, one might consider rolling the credit card debt into the mortgage loan, thus getting the advantage of a lower interest rate. He was then asked about the reference to a "bad credit report". He says that some of Mortgage Refunds' lenders would deal with customers who had bad credit reports, so that there were options available to them notwithstanding such bad reports. These lenders were generally financial institutions other than banks. Mr Stark agrees that the thrust of the document was the thousand dollar refund. He understood that this was the "hook" which might encourage a borrower to go to Mortgage Refunds rather than another broker. The customer would know that the refund came from the broker's commission. 95 Mr Stark was then taken to material which had appeared on the Mortgage Refunds' website whilst he was working there. This material is at exhibit 3 tab 11. Counsel referred particularly to the following passages: "At Mortgage Refunds we search the market"; "Mortgage Refunds puts cash back in your pocket"; and "Choose from the same home loans you could get from other mortgage brokers with the added bonus of money back". 96 Mr Stark agrees that these statements were designed to attract borrowers to Mortgage Refunds rather than to other brokers, and that other brokers were "rivals". He agreed that Mortgage Refunds had about 20 to 30 lenders, and that other brokers had similarly sized lending panels. 97 He was then referred to references to "honeymoon rates" and "low interest loans". A honeymoon rate was a reduced interest rate for the first year or two of a loan. Mr Stark did not like honeymoon rates because of associated additional costs to the customer, but he would explain them to customers. He was then asked about a reference to "professional packages". A professional package is a loan which covers the acquisition of a number of similar-type properties which would then secure the relevant loan. He was referred to p 369 and a heading "Did the bank say no?" It continued: At Mortgage Refunds we specialize in helping people whose financial situation falls outside normal bank guidelines. 98 He agrees that this statement was designed to encourage people who had been rejected by mainstream lenders to approach Mortgage Refunds to see if it could assist, thus offering a service which a bank would not provide. The following passage appears at ts 160 ll 1-20: So if you submitted a loan application to one lender and the lender said no, would you then submit that application for your client to another lender?- - -The credit policies for individual banks can be very different so what I would say is that when you submit a loan to one bank and they say, "Look, this is too high of a risk for us, for our credit policy." The credit policy changes all the time as well. So you submit a loan to say Westpac. They say no, then you go to a financial institution say like Macquarie Bank. Their lending policy is actually a little bit more liberal than say Westpac so you would be able to get the loan through them with that particular customer. And the art of being a good broker is to know all of these intricacies of the market, isn't it?- - -Absolutely. Yes, and keep abreast of changes in credit policies?- - -Absolutely. And different lenders would have different acceptable loan-to-value ratios, would they?- - -Absolutely. Yes. And you would be attuned to that and - - -?- - -I would absolutely do my diligence to do that, absolutely, yes. 99 This evidence demonstrates that a potential borrower might meet the lending criteria of one lender but not those of another, and that the brokers advised on that basis. 100 In re-examination Mr Stark said that whilst working at Suncorp he considered that he had responsibility to his customers, as loan seekers, and that his livelihood depended upon the number of approved applications. Suncorp had several products. He was asked whether, when he was at Suncorp, he had advised customers. He bridled at the suggestion that he gave advice but agreed that he talked about the different products which were available from Suncorp, and tried to identify the product which best suited a customer's needs. He had some knowledge of the products offered by other lenders. Where a customer had previously had contact with a different lender he would talk to them about the differences between Suncorp products and the products of that other lender. 101 As to his practice of recommending or endorsing individual applications, he developed this practice at Suncorp, where he had direct access to the credit department. Those responsible for approving loans benefited from his views, based upon his close association with prospective borrowers. In so doing, he was acting in the best interests of Suncorp. 102 It is clear from Mr Stark's evidence (which I accept) that his initial relationship with Mortgage Refunds was not that of employee and employer. Mr King said, in his second affidavit at para 8, that Ms Studin and Mr Chillemi were engaged on the same basis as Mr Stark. It follows that they, too, were not employees of Mortgage Refunds. Ms Hagendyk was initially an employee, at least for some purposes. When she became a franchisee, that relationship ceased. Thereafter, none of the four was an employee of Mortgage Refunds. There is no evidence that Mr King was ever an employee of that company. He was, however, a director. The brokers dealt directly with lenders and potential borrowers. However Mortgage Refunds prescribed some aspects of their operations. It also provided support services, including advertising, and was frequently the first point of contact for members of the public seeking broker assistance. As I have said, initially, it received commission from AFG, paid the refunds to borrowers, deducted its own share of the commission and paid the balance to the broker. Later, AFG paid each broker's commission directly, apparently because of a fear that Mortgage Refunds might become insolvent. 103 As with Mr King, Mr Stark asserts the similarity of the services which he provided when working for lenders, to those which he provided at Mortgage Refunds, save for his access to the products of a wide range of borrowers. He also says that in his work with Mortgage Refunds, he did not have access to lenders' credit departments, presumably the areas in which lending decisions were made. However he submitted loan applications to ANZ Mortgage Group directly. Mr Stark was a little wary about the proposition that brokers offered advice, no doubt out of concern for the possible operation of legislation regulating the provision of financial advice. However he clearly discussed different products with customers in order to find those which suited their needs. That process may correctly be described as "advice". 104 Mr Stark agrees that as a broker, he would offer personal support for an application, a practice which he had adopted when working with lenders. This practice suggests that he was trying to make contact with the lenders' decision-makers, replicating the contact which he had enjoyed when working for lenders. He accepts that a potential borrower who went to a bank would have done his or her own research and, inferentially, made a decision to go to the bank. He also agrees that both the refund model and statements on the Mortgage Refunds website were designed to attract business away from other brokers whom he saw as rivals. 105 The website material gives some insight into Mortgage Refunds' business model. The material appears at tab 11 in exhibit 3. The first document bears the sub-heading "Mortgage Refunds puts cash back in your pocket". The passage which follows invites a comparison between Mortgage Refunds (a "discount mortgage broker") and "other mortgage brokers". The second document is a three page document which commences with the question "What is a discount mortgage broker?". The distinction seems to be based on the refund. The document also refers to the Mortgage Refunds service as taking the "hassle" out of dealing with different banks, highlighting the difference as between broking services and those available from banks. The choice of lenders is also stressed. The document recommends that potential borrowers speak to other brokers. Further, it encourages the continuation of any established relationship with a bank. 106 One document, having the sub-heading "Credit problems" and "Did the bank say no?", focusses on people who might have difficulties in obtaining loans from traditional lenders. Another document, under the sub-heading "The Right Home Loan" stresses the need to investigate options and to choose a preferred lender. It recommends that borrowers speak to qualified financial advisers and even refers to ANZ and Suncorp as having financial advisers "who are very happy to assist with these matters". 107 It is difficult to read this material and not conclude that Mortgage Refunds saw other mortgage brokers as competitors. Nothing suggests that it saw lenders as competitors. It encouraged people to maintain satisfactory relationships with banks and to avail themselves of bank advisory services.

Roger Ian O'Malia 108 Mr O'Malia is a police officer. He and his wife have, since the 1990s, purchased a number of properties. In the course of so doing, they have sought advice and assistance in choosing and applying for loans. In this way Mr O'Malia became aware of the existence of mortgage brokers. He understands that brokers and lenders offer effectively the same service in regard to choosing and applying for loans, the only significant difference being that brokers offer access to the loans of more than one lender. 109 In the late 1990s Mr O'Malia and his wife approached Suncorp to obtain mortgage finance. Mr King attended to their needs. Between that time and late 2000, they dealt with Mr King on three occasions. After Mr King formed Mortgage Refunds, they used its services. Their primary reason for moving to Mortgage Refunds was the high level of service which they had received from Mr King and their confidence in him. The refund arrangement which Mortgage Refunds offered was a further incentive. Initially, Mr King attended to them on behalf of Mortgage Refunds. Subsequently, Mr Stark dealt with their business. 110 Between March and November 2004, Mr and Mrs O'Malia dealt with Mr King in relation to two mortgage transactions. They also sought his assistance in connection with the possible acquisition of other properties, which transactions did not proceed. Mr O'Malia considered that Mortgage Refunds provided essentially the same service through Mr King as they had received from him at Suncorp, except that they were offered access to loans from more than one lender. Mr King would visit them at home to discuss the various loan options. They were very cost-conscious and wanted to get the best deal. Mr King "had a great understanding about the costs involved with the various loan products available". He would present a number of different loan products from a variety of lenders, explaining those products and assisting them to make a decision. Mr King attended to all necessary paperwork and the lodgement of applications. He continued to liaise with them after lodgement, advised of any problems and as to final approval. 111 On occasions Mr O'Malia dropped off documents at Mortgage Refunds' Clayfield office. He was also aware of an East Brisbane office which he never visited. The Clayfield office was branded with the Mortgage Refunds logo. Whenever Mr O'Malia dealt with Mr King at Mortgage Refunds, he was wearing a Mortgage Refunds logo or a suit which may also have had a logo attached to it. The letterhead, business cards and email addresses were all branded with the name "Mortgage Refunds". Mr O'Malia understood that he was dealing with Mr King as the representative of Mortgage Refunds, just as he had previously been the representative of Suncorp. In February 2004, at Mr King's request, Mr O'Malia appeared in one of Mortgage Refunds' advertisements. In the advertisement he was asked about his experience and responded positively. 112 He first met Mr Stark when Mr King brought him to his home. Mr King said that he was training Mr Stark to be a mortgage broker for Mortgage Refunds. On one occasion Mr and Mrs O'Malia dealt with Mortgage Refunds through Mr Stark instead of Mr King. Mr O'Malia had no concerns about dealing with Mr Stark in relation to his private affairs, bank account details and other matters. He understood that Mr Stark worked for Mortgage Refunds, which company he trusted because of Mr King's involvement with it. 113 In cross-examination Mr O'Malia said that at the time at which he first dealt with Mr King at Suncorp, he was a mobile lending manager. Mr O'Malia probably went to Suncorp because of interest rates which were then his "main driver". He had no other dealings with Suncorp at that time. When he commenced to deal with Suncorp he knew that he was dealing with a bank, and that the inevitable result of going to Suncorp to obtain a loan was that he would acquire a Suncorp product. He understood that Mr King's role was to "extol to you the virtues of getting your loan with Suncorp rather than going to another institution". Mr King was an employee of Suncorp and was there to sell its products. Counsel asked Mr O'Malia about his statement that in 2004 he had been very cost-conscious and wanted to get the best deal. He said that the best deal meant the best interest rate and the best fees. He said that he may have had previous dealings with Suncorp. 114 He was asked how many different lenders he had discussed with Mr King when he consulted him at Mortgage Refunds. He said: I remember there was a book, and in - it was like a folder, and in that book I remember seeing all the usual bank logos. I seem to remember St George Bank in particular, and I know - I think St George was discussed as a comparative. 115 Mr O'Malia was somewhat surprised at the choice offered to him. He agreed that choice was an advantage because it meant he could get comparative information. It saved him the trouble of having to shop around from one bank to the next. He was asked if Mr King had made any recommendations as to the best product for their needs. He said that they were familiar with Suncorp and already had mortgages with Suncorp, so that there was a predisposition to stay with that company. If Suncorp was a viable contender the mechanism was already in place to make it as easy as possible for them to complete the transaction. Nonetheless he agreed that he was interested to hear what Mr King had to say about other lenders including, at least, St George. 116 Mr O'Malia understood that at Mortgage Refunds, Mr King owed no allegiance to any particular lender, and that he was independent of the banks. He also understood that he would "go into bat for you" to find the best deal. His job was to find a suitable loan and to keep working until he succeeded. In the end it seems that Mr and Mrs O'Malia submitted an application only to Suncorp. Mr O'Malia understood that if that application had been unsuccessful, Mr King would have sought an alternative lender. He understood that Mr King was remunerated by way of commission paid by the lender. He considered the refund to be "an inconsequential amount". 117 Mr O'Malia may, at this point in time, consider that the services provided by Mr King at Mortgage Refunds were substantially the same as the services which he provided at Suncorp, save for the wider choice of lenders. However it is clear that Mr O'Malia went to Mr King at Mortgage Refunds in the expectation that he would derive the same services. Thus he was surprised at the choice which he was offered. Further, the choice seems to have led to comparisons between lenders, a function which had not occurred at Suncorp. The O'Malias were pre-disposed to continuing with Suncorp. Mortgage Refunds' preference for maintaining existing, satisfactory banking arrangements would no doubt have re-inforced this pre-disposition. He dealt with Mr King at Mortgage Refunds because of their pre-existing relationship. In any event, it is telling that the available choice made such an impact upon him. Further, he accepted that at Mortgage Refunds, Mr King was independent and would act as an advocate. I consider that Mr O'Malia's evidence as to the service which he received at Mortgage Refunds suggests that it was noticeably different from that received at Suncorp. His opinion as to the similarity of such services is not supported by his evidence.

John Zachary Black 118 Mr Black is a pharmacist who owns his own pharmacy in Casino, New South Wales. Mr King is a long-time family friend. In 2002 Mr Black went to see Mr King, who was then working at HSBC Bank, seeking assistance in obtaining a loan in order to acquire a residential property in Brisbane. Mr King provided information and advice concerning various products offered by HSBC, assisted with the collection of relevant documents and proposed and submitted a loan application. The application was successful. 119 In 2003 Mr Black wanted to acquire an investment property. Mr King had left HSBC and started his own mortgage broking business, Mortgage Refunds. Mr Black understood that a broker would "research" the finance market in order to get the best deal for the client. As Mr King had arranged the earlier loan and was well-known to Mr Black, he trusted him to look after his business and give him good advice. Mr Black knew that Mr King had previously worked for a number of banks and believed that he knew how his competitors operated. He also understood that Mortgage Refunds was offering a "refund" to customers out of its commission. At about this time, Mr King appeared on a television programme promoting Mortgage Refunds. In any event Mr Black again consulted Mr King. At that time Mr Black did not have the time to shop around for himself. As a result of discussions with Mr King, Mr Black decided to seek a loan from the Commonwealth Bank and, at the same time, to refinance the existing loan. Mr King collected all the necessary documentation and prepared and submitted the relevant application. It was approved. 120 The service provided by Mr King at Mortgage Refunds was "fundamentally the same as that which he had provided at HSBC". The only difference was that Mr King offered information and assistance with regard to a broader range of loan products from a number of lenders, and not solely HSBC products. Mr Black understood the refund to be an incentive or bonus to customers for utilizing Mortgage Refunds' services. It was "an extra carrot to do business" with Mortgage Refunds. Mr King had once explained to Mr Black his business model for Mortgage Refunds, saying that he had seen the model in use overseas. He had lower overheads and so was able to refund part of the commission. 121 Mr Black was aware that he could have approached various lenders directly, asking them to assist him in choosing from amongst their loan products, without using a mortgage broker. Because of time commitments in his business, he decided to consult Mortgage Refunds. He did not visit Mr King's office. All meetings were at his home or at organized lunch or breakfast meetings. Mr King provided him with a business card bearing Mortgage Refunds' logo. Mr Black also saw the logo on letterhead. 122 In cross-examination Mr Black said that he had a familial connection to Mr King, and had known him for the best part of 30 years. When Mr Black approached Mr King at Mortgage Refunds, Mr King said that he had set up Mortgage Refunds, and that he would "shop the market and find the best possible loan for me, and also when the deal was done, there would be a $1,000 refund back to us for doing business with Mortgage Refunds". 123 Mr Black appears to have consulted Mortgage Refunds because he did not have the time to "shop around". He could not leave his pharmacy unattended. Mr Black understood that Mr King would continue his enquiries until he found the best possible deal for his needs, and that if the Commonwealth Bank rejected his application, he would have sought another lender. Mr Black did not apply to any lender other than the Commonwealth Bank. Mr King charged no fee. Mr Black obtained a refund, probably in the order of $1,000. 124 My comments concerning Mr O'Malia's evidence are generally applicable to Mr Black's evidence.

Ms Manuela Zacka 125 Ms Zacka is an insurance sales adviser. From 1999 until 2009 she was a business development manager with AFG. As previously indicated, that company had agreements with mortgage brokers to provide services in relation to home loans. AFG also had agreements with about 35 national lenders and about six state-based lenders. These arrangements enabled AFG's member brokers to provide services to potential borrowers in relation to loan products supplied by those lenders. A broker who was accredited with a lender was able to prepare and submit to that lender, a potential borrower's application for a loan product. If an application was approved the broker, through AFG, would receive a commission. Ms Zacka's duties with AFG involved the management of its relationships with approximately 90 member brokers. She provided support to those brokers, meeting regularly with them, often on a monthly basis, in order to review performance, the applications which had been submitted and any issues with lenders. 126 She was familiar with the services which brokers offered to potential borrowers. Such services included giving advice about various loan products, and assisting in the completion and submission of loan applications. AFG provided its member brokers with access to computer modelling software which contained information about the features of numerous loan products offered by the lenders with which AFG had agreements. A broker could enter specific data concerning an individual client's circumstances and preferences and, from the output, be able to provide to the client, information and comparisons concerning loan products which were available to, and suitable for him or her. 127 AFG received aggregated lump sum commission payments from lenders for approved loans originated through AFG brokers. In turn, AFG calculated and paid to those brokers, their individual commissions. AFG retained a small proportion of each commission payment as payment for its services to brokers and lenders. The commission payments to brokers consisted of an upfront component paid when a loan settled and, sometimes, a trail component, paid monthly over the life of the loan. Most brokers did not charge their clients for their services, deriving their income from commission paid by lenders. In some circumstances brokers charged clients directly, for example where the client had a credit history problem so that extra work was required to put together the application for a loan. Alternatively, some brokers charged an upfront commitment fee of about $250 before undertaking work for a client. This fee was refunded if the client entered into a loan, and the broker accordingly received commission from the lender. 128 Lenders generally preferred to deal with brokers through AFG because it was more convenient for those lenders than dealing directly, and individually with numerous brokers. Further, AFG assisted the lenders by ensuring compliance by brokers with the lenders' application requirements. Whilst Ms Zacka was principally responsible for dealing with brokers, she was also in regular contact with the mortgage divisions of the lenders. One of the main issues with which she dealt was conflict between brokers and the lenders' own mortgage originators who were trying to win the same clients. Channel conflict became less common from about 2004. Prior to 2004 Ms Zacka would receive several complaints a month but from 2004, she received an average of only one complaint every two or three months. By that time brokers could usually offer a client the same deals and incentives as were offered by lenders' internal channels, including discounted interest rates or waiver of fees. 129 From about November 2002 Ms Zacka was responsible for managing AFG's relationship with Mortgage Refunds. She dealt regularly with Mr King. She first met him in about November 2002 when he applied for membership of AFG. They discussed his proposed business model. It involved paying back to a borrower a portion of the commission received by the broker. Ms Zacka had heard that such a model was operating overseas but had not previously encountered it in Australia. She considered that the model was sound in the sense that other brokers commonly made payments from their commissions to real estate agents or marketers who had referred potential borrowers to them. Mortgage Refunds was, in effect, proposing to make similar payments to borrowers instead of third parties. 130 In March 2004 Ms Zacka received a copy of the letter to AFG from Mr Sirianni dated 22 March 2004, to which letter I have previously referred. Following receipt of the letter she had discussions with Mr King and with her supervisor at AFG, Ms Beccy Ras, as to what could be done to restore Mortgage Refunds' accreditation with ANZ. On 30 March 2004 Ms Zacka attended a meeting with Mr King, Ms Ras and Mr Carroll. The purpose of the meeting was to determine whether there was some way of resolving ANZ's concerns and having Mortgage Refunds' accreditation reinstated. In the course of the meeting Mr Carroll said words to the effect of: I want to get Mortgage Refunds back on board. We need to find a way around this. I need something to take back to Joe Sirianni. The problem is you're offering something that branches can't offer. We need a level playing field. You could limit your refund for ANZ loans to the amount of $600 establishment fee, because the ANZ branches can waive that fee. Then you'd be offering the same deal as the branches. 131 At the conclusion of the meeting Mr Carroll said that he would suggest to Mr Sirianni that Mortgage Refunds limit its refunds on ANZ loans to $600 as a way of resolving the matter. In April 2004 ANZ offered to reinstate Mortgage Refunds' brokers' accreditations on the basis that they limit refunds to the amount of the ANZ application fee. Ms Zacka saw a copy of the letter of 29 April 2004 to which I have previously referred. Shortly after the date of that letter Mr King informed Ms Zacka that he had accepted the offer. The brokers were re-accredited. 132 In April 2004 Craig Kedel of Westpac and Shane Davis of St George had each separately contacted Ms Zacka by telephone, each saying that he had been asked to notify AFG that Mortgage Refunds' brokers' accreditation to offer loans had been cancelled. When asked why each bank had decided to do this, each said that the decision had been made at a higher level, and that he had simply been told to pass on the message. Ms Zacka asked for written reasons for the decisions but did not receive any. Mortgage Refunds' brokers were subsequently reaccredited by Westpac but continued to be unable to offer St George loans, at least until the time at which Mr King sold his business. 133 It may be relevant that by 2004, the incidents of conflict between brokers and lenders' channels had virtually disappeared, largely because lenders had adopted a policy which is elsewhere described as "channel neutrality". 134 Ms Zacka's version of the conversation with Mr Carroll does not really support Mr King's view that Mr Carroll was motivated by a desire to prevent competition with the branches. He was certainly trying to resolve unhappiness about the Mortgage Refunds model, but the eventual resolution of the matter did not have the effect suggested by Mr King. Mortgage Refunds continued to be able to pay refunds in connection with ANZ products. Although the branches may have been able to waive the loan approval fee, the evidence does not suggest that they regularly did so, perhaps because the amount would come out of Personal Banking's "bottom line". I shall return to this matter at a later stage.

Paul Alan Lahiff 135 Mr Lahiff owns and operates a consultancy business, consulting on matters of strategy, succession planning, talent management, executive coaching and mentoring. He is also currently a director of Thorn Group Ltd which is in the business of renting electrical appliances to Australian consumers. He is a Fellow of the Australian Institute of Management and a Fellow of the Financial Services Institute of Australasia. He has over 30 years' experience in senior executive positions, working in the financial services industry and in a range of private and public organizations which provide or provided financial and professional services. In particular, from 1987 to 1994 he was employed by Westpac Banking Corporation in various positions, including senior executive positions. He was subsequently the managing director of Heritage Building Society and, between August 2003 and July 2009, he was managing director of Mortgage Choice Ltd, a leading mortgage broking group. 136 Concerning residential lending in Australia, Mr Lahiff said that any commercial lending arrangement involved an ongoing relationship between the credit supplier and the borrower for the term of the loan. That term might be as long as 20 or 30 years. In this respect lending differs from the supply of goods and most other services. The supplier has a strong interest in the identities of those to whom it provides it products because it requires that they be responsible and credit-worthy. Thus lenders need to ensure that potential borrowers meet lending criteria. Residential lending involves the most significant asset that most borrowers will ever own. The borrower will have emotional attachment to it. Such borrower may not have had previous financial dealings of the same magnitude. The language used and the legal relationships are often not well understood. Thus less than 2% of mortgages are sold over the internet. For most customers there is simply too much complex information to be processed in that way. There is a great sense of risk about the level and duration of financial commitment. These considerations lead lenders to develop "sophisticated means of dealing with the challenges they present" through specialized product development, application approval processes, customer service and arrears and delinquency management. 137 A commercial lender will have a central product development division which sets lending features and criteria for its various products, including interest rates, loan to valuation ratio range, fees and costs to be charged, mortgage insurance requirements, commission payable to brokers and the qualifications necessary in order that a borrower attract certain interest rates, or be allowed to borrow at all. Usually, this division also receives loan applications from potential borrowers and is responsible for approving or not approving them, and processing them. Mr Lahiff refers to these functions as "lending functions". Each lender also has staff who attend to activities such as attracting new customers for its loan and other products, explaining to, and advising potential borrowers on relevant terms and conditions, submitting applications from applicants who comply with lending criteria and maintaining and building on customer relationships throughout the life of the loan, thus facilitating the sale of other products. These are described as "customer functions". Some lenders outsource some or all of these functions. 138 The process of submitting compliant applications to the lending division necessarily involves some element of assessment and rejection prior to submission. Each non-compliant application which is submitted and assessed involves time and attention for the lender, translating into an unrecoverable cost. For this reason a lender seeks to minimize the number of submissions of non-compliant applications. Mortgage brokers are one means by which lenders can outsource customer functions. Mortgage brokers receive training from broking groups and various lenders, and are then accredited by each of those lenders to make applications on behalf of borrowers. Brokers may offer advice and assistance to potential borrowers in relation to the features, relative benefits and suitability of those products, and assist borrowers to make applications which comply with lending criteria. The lender pays a commission to the broker if the broker lodges a successful application. When Mr Lahiff first started in the industry in 1980, all of the customer functions were performed in and by lenders' retail branches. Prior to the early 1990s a potential borrower had either to visit a branch or have a mobile lender visit him or her. Because each lender would typically provide information and advice about only its own products, a potential borrower could only determine the availability of products from other lenders by approaching them individually, in order to obtain information and advice. The potential borrower would then have to analyse and compare the various loan products in order to determine the appropriate choice. 139 From the early to mid-1980s there were changes in the Australian banking and lending markets, brought about by the deregulation of the banking industry, and the development of a system of securitization of residential mortgages. Such securitization was a process by which a pool of illiquid assets, such as residential mortgages was converted into tradeable securities. The global financial crisis terminated this process. 140 Following deregulation of the market the advent of new lenders increased lending competition. However many new lenders did not have local branch structures which could supply customer functions to potential borrowers. The coincidence of the entry of new bank lenders and the rise of securitization significantly increased the number of suppliers of mortgage loan products and the demand for the services of mortgage brokers, from both established banks and new entrants. These brokers were able to provide customer functions, regardless of whether the lender had branches convenient to the potential borrower. In the early 1990s new brokers and broking groups further transformed the industry and the broker's role. Some of the smaller regional banks began to enter into arrangements with brokers for the promotion and distribution of their products beyond the boundaries of their traditional geographical markets. Lenders paid brokers a commission for these services. In the case of foreign and regional lenders, these commissions were effectively an alternative to investing in physical branch networks. In August 2003 brokers originated about 18-20% by value of mortgage loans. By mid-2009 that figure was between 35-40%. Both customers and lenders found the extended use of brokers to be useful. The banks realized that they risked losing market share if they did not use brokers. 141 Mortgage Choice Ltd was founded in 1992 as a broking business but subsequently moved to a franchising structure. It offered services to potential borrowers, including the supply of information and independent advice about a range of lenders' mortgage products, and assistance in completing and lodging loan applications. It offered lenders knowledgeable and accurate promotion of their products to persons who were screened to ensure that they met lenders' selection criteria, and lodgement of compliant loan applications. During Mr Lahiff's time at Mortgage Choice, it did not, itself, make loans, although it may subsequently have commenced to do so. It provided extensive training of franchisees and business support to them, operated call centres and provided lead referrals, analyses of available products and up-dated computer programmes. It negotiated and dealt with lenders on behalf of franchisees, particularly concerning product availability and commissions. 142 Mortgage Choice and its franchisees were remunerated by lenders by way of commission for the successful origination of loans. There was no direct charge to potential borrowers. Mortgage Choice received from the lenders all commissions earned by franchisees for originating loans, deducted its fees (approximately 35% of the upfront and trail commissions) and passed the rest onto the franchisees. Mortgage Choice assumed responsibility for ensuring that correct commission payments were made by the lenders. Mortgage Choice also advertised on behalf of the group, seeking to build its brand profile. In July 2009 Mortgage Choice had 29 lenders with whom it had agreements, and between 300 and 400 different mortgage products. Mortgage Choice considered it to be important that brokers had a deep and current knowledge of the various mortgage products and provided accurate information about those products. Lenders would keep in contact with Mortgage Choice to inform it of changes in the products and of the introduction of new products. Such contact would be through the lending division of each lender. Loan applications were also lodged with those divisions. Mortgage Choice was particularly attractive to first home buyers. They were about to make a big financial decision, and were faced with a large number and range of products and lenders. They lacked experience with mortgages and other associated concepts. About one-third of the Mortgage Choice business came from first home buyers; about a third of customers were looking to refinance; and the remainder were buying second or third properties. 143 When a customer first made contact with Mortgage Choice a representative would arrange an appointment with the customer. A franchisee would find out where and when the customer would like to meet, frequently at the customer's home, and outside normal working hours. Franchisees also maintained offices for customers who preferred to meet there. The first meeting would generally take between one and two hours. The customer would be asked about his or her preferences, needs and circumstances, including his or her current relationship with any bank or lender, circumstances in relation to current and expected employment, income, assets and liabilities, the property he or she was looking to buy, the amount of the loan and factors which were important to him or her in terms of a mortgage product. The Mortgage Choice franchisee would compile all of this information and, using a computer model, identify appropriate loan products which would then be discussed with the customer. If the customer wished to proceed, an application was prepared and submitted. In the case of many lenders, approval could be given by the franchisee, although it was conditional upon the lender's ultimate approval. The Mortgage Choice representative would also collect any additional documents from the customer for submission to the lender, together with the application. Any questions from the lender would be dealt with by the Mortgage Choice franchisee. 144 If the application was approved, the lender would advise Mortgage Choice, who would then advise the customer and make an appointment for the customer to sign the formal mortgage documents. At this point the formal involvement of the franchisee ended. However, until settlement, the franchisee would stay in contact with the lender and keep the customer informed of progress. The franchisee would continue to keep in touch after settlement, to answer any questions about the product and to be available in the future if the customer wished to use Mortgage Choice services again. This ongoing contact was considered to be important. 145 Mr Lahiff understands that many broking groups offered similar services to those offered by Mortgage Choice, competing primarily through the quality of their service, mainly the personality, training, commitment and expertise of the broker concerned, referrals and the quality of technical support. Referrals came from advertising, websites and call centres, personal networks and word-of-mouth. Mortgage Choice invested more heavily in advertising its brand than did other, similar companies and maintained call centres and a website. It also encouraged its franchisees to take active roles in local communities and to treat broking as a career. In the case of other brokers the rate of commission was negotiated by aggregators with lenders, depending on the volume of loans, level of compliance, proportion of electronic, as opposed to paper lodgement and the proportion of successful applications. The amount which an aggregator would retain out of brokers' commissions would depend on the level of service provided and the volume of loans which each broker facilitated. Some aggregators passed on 100% of the up-front and trail commissions and simply charged a fee per month per successful application. 146 During his time at Westpac Mr Lahiff acquired a detailed understanding of how it distributed its mortgage products. It responded to the increased influence of brokers by employing staff as mortgage specialists to provide the customer function to prospective borrowers. Services provided were essentially the same as those provided by Mortgage Choice. They would: meet with a potential borrower; discuss and record their circumstances, needs and preferences; assess that information to identify a suitable mortgage product, discuss options and give advice; assist in completing an application and compiling necessary supporting documentation, and liaise between the mortgage division and the applicant if further information were required; inform the borrower if the application was successful; maintain the relationship with the customer, including the pursuit of opportunities for the sale of further Westpac products; and from the early 1990s, travel to customers' homes if required, offering services out of office hours. 147 Mr Lahiff said that the only significant difference between services offered by a Mortgage Choice broker and a Westpac mortgage specialist was that the Westpac employee could offer information and advice about, and assistance in applying for only Westpac mortgage products, whereas the Mortgage Choice broker could do so in relation to a range of lenders. Mr Lahiff's view that this capacity was a "significant" difference between the services provided by Westpac and those supplied by the brokers may be important. Mr King and Mr Stark also seem to have considered the distinction to have been significant. 148 Most, if not all lenders, and certainly the major banks employed specialist lending staff. By 2003 the major banks and other lenders were providing a number of different means by which potential customers could enquire about, and apply for a mortgage product. These various means were called "distribution channels" and included bank branches, internet and telephone contact, mobile lenders, franchisees and mortgage brokers. Most branches had staff who specialized in dealing with customers who enquired about mortgage products. Mobile lenders specialized in residential mortgages and had vehicles so that they could visit customers at their homes. (Other evidence suggests that the ANZ Mortgage Solutions franchisees (who provided the mobile service) were not fully deployed until mid-2004.) Mobile lenders were usually based at retail branches. Internet and telephone contact would usually provide less than a full service, so that some contact with a branch was also necessary. 149 Mr Lahiff considers that mortgage brokers competed with each other for customers from amongst potential borrowers. In the past they had not really compete in providing services to lenders, because lenders would basically accept any broker who could pass their training courses, apply that training and keep up-to-date. However, since about 2008 lenders have been consolidating the number of brokers which they accredit by imposing more stringent performance requirements. Many of the smaller brokers and broking groups do not meet lenders' current requirements with regard to volume, quality and compliance. However they need to be accredited to at least the major lenders in order that they be credible and competitive with other brokers. 150 Brokers may generate income either by charging a fee to the customer or by being paid a commission by the lender. Generally, potential borrowers will favour brokers who do not charge fees. Brokers know that a lender will usually have access to enough money to be willing to accept as many suitable loan applications as it can attract. They generally base their business models on earning income in the form of commission from lenders on successful loan applications. If the level of commission were reduced to a level that did not afford brokers a sufficient return, they would have to charge fees. There is very little fee-for-service broking in Australia. At least 95% of brokers are "commission-only". A lender will not pay commission to a broker on a successful loan application unless the application is submitted through the broker. A commission-earning broker will rarely introduce a loan applicant to a lender unless he or she knows that the lender has agreed to pay a commission. A broker would only do so if it could not get a loan for the customer with any of the lenders on its panel and simply wished to help the customer by referring him or her to another lender who might be willing to lend. Hence, if a loan is originated by a broker, a lender will almost invariably have to pay a commission. 151 It may be of some important that, until about 2008, lenders were willing to accredit as many brokers as could demonstrate adequate competence. Further, such lenders were willing to accept any "suitable" loan application, presumably an application which complied with its lending criteria. ACCC's assertion of competition between brokers and in-house and tied channels must be seen in this context. 152 Mr Lahiff says that much of the cost to a lender of providing an in-house distribution channel involves the provision of accommodation, maintenance of a branch office network and the training of staff. These costs are "sunk". They will be incurred regardless of whether or not a potential borrower makes a successful application through that channel, although the costs are partly defrayed by other products and services supplied by the branch. Accordingly, there is an advantage to the lender if a borrower comes through an internal, rather than an external channel. Brokers such as Mortgage Choice work very closely with lending divisions of lenders and become, and remain expert in the lenders' products and conversant with their features and benefits. Lending divisions are responsible for providing information to brokers concerning new products and changes to products, in forms which can be quickly assimilated and, in the case of Mortgage Choice, uploaded onto its computer system. 153 Brokers need a strong working relationship with lenders in order to ensure processing is performed as quickly and seamlessly as possible. This requires a high level of understanding of the lenders' internal systems so that there is both formal and practical compliance. Issues must be raised and dealt with quickly on both sides, so that unsuccessful applications are minimized, thus enhancing the lenders and brokers' reputations with customers. Some borrowers will have time-critical needs which might require flexibility in normal processing times. Some lenders make special efforts in that regard, but only if there is a strong and successful relationship with the broker concerned, and there is value to the lender in attracting that borrower's business. Mr Lahiff considers that in this way the lender and the broker are "collaborators", perhaps suggesting a relationship which cannot easily be described as competitive. 154 Mr Lahiff considers that the two "strongest" channels for all lenders with retail presence are the retail branches, including their specialist mobile lenders and franchisees, and the broker channel. He considers that the competitive strengths of the retail network include: the brand (major banks in Australia all have very strong brands, maintained by high levels of advertising) which means that customers are confident in dealing with them and think of them first; they are traditional sources of loan advice, a matter which is particularly relevant to older customers; the customer may already have a relationship with the bank in connection with other banking services such as debit and credit accounts and personal loans; the persons offering the advice and assistance will (other than possibly for franchisees) be employees, not seen to be earning a commission, and thus seen as neutral and frank in their advice; and being a representative of the bank, such persons are perceived to be able to get the best possible deal from the bank, or offer access to deals only the bank could offer. 155 On the other hand brokers enjoy the following competitive strengths: ability to offer the products of more than one lender and thus a wider choice; they are independent of the lender and thus perceived as more trustworthy; they are more willing to come to the customer and meet at the customer's convenience; they do the research for the customer and thus save him or her time and effort; and as they operate on commission-only and are not salaried, they will strive hard to make a loan application successful. 156 Retail banks have modified their practices to maximize their competitive advantage and address relative disadvantage. Steps have included more customer-friendly service and staff incentive schemes, which incentives echo those of brokers. Brokers have invested heavily in advertising to establish their brands and the sort of trust that major banks enjoy. They have also invested heavily in sponsorship of, or involvement in community groups and events, both to generate awareness of the brands and to counter the banks' ability to profit from existing customer relationships. In other words, the banks have tried to improve their services whilst the brokers have tried to raise their profiles. 157 Some lenders rely very heavily on the broker channel because they do not have existing branches throughout Australia. ING Direct, which commenced operations in Australia in 1999, has no branches and utilizes telephone and internet channels for its banking and mortgage services. For such a bank the broker channel is crucial. It has been a strong supporter of broking businesses. Mr Lahiff considers that the internet is not a suitable vehicle for many customers to use in acquiring information concerning the variety of available options and consequences of choice. Suncorp has also actively supported the broker industry. It had an existing branch network in Queensland but, in order to expand its business outside of Queensland, it needed a presence in other parts of Australia. Instead of building physical branches it relied on distributing its mortgage products to customers outside Queensland through the mortgage broker channel. 158 The Mortgage Choice business model is based on the belief that lenders must work with brokers, even if the major banks and those with extensive retail presence might consider themselves better off without them. Lenders would prefer potential customers to deal directly with themselves, and not through mortgage brokers, because the inevitable commission payments are costs to the lenders. If the mortgage is originated directly through the lender, there may be an internal transfer of revenue, but it is retained by the lender. A borrower will also be less likely to "churn" to another lender if he or she does not have a relationship with a broker. At Mortgage Choice it would have been regarded as unethical, and not in the interests of the company or the lender, to encourage "churn" solely for the sake of earning another commission. However less ethical brokers may not have had the same concerns. Further, even an ethical broker would be responsive to a customer-initiated request to look at other lender options. If the customer had a direct relationship with the lender (rather than through a broker) he or she would be more likely to refinance with the same, rather than a different lender. 159 One part of Mr Lahiff's role with Mortgage Choice was to negotiate with lenders so that it could offer its customers access to the same products, on the same terms as those offered by the lenders' internal channels. This is described as "channel neutrality". Whilst only about five or six of the 29 lenders, whose products Mortgage Choice was accredited to sell, formally agreed to that neutrality, most others informally endorsed the principle. Mortgage Choice brokers saw the ANZ bank as a competitor, but Mortgage Choice simultaneously worked closely and harmoniously with its lending area. Mortgage Choice was aware that some Queensland broker groups sought to compete by offering refunds of parts of their commissions. Mortgage Choice regarded such brokers as its competitors. 160 In the course of cross-examination Mr Lahiff was asked to explain what was meant by an "aggregator". The following passage appears at ts 101 l 44 to ts 102 l 36: An aggregator provides an umbrella of services, usually involved around the relationship with the lenders, but not too much more than that. It doesn't provide technology; it doesn't provide advertising; it doesn't provide compliance; it doesn't provide risk management, so the franchise structure usually is a more all-encompassing service provision. Yes. So, what lies underneath the aggregator on the mortgage broker side of the structure? Individual small businesses. Sometimes accountants, sometimes solicitors, sometimes other people involved in other parts of the mortgage process. Yes. But very commonly, those who devote all their time to mortgage broking?- - -Not necessarily. No, but includes that category?- - -It would include it, but not necessarily. A lot of them, mortgage broking would be an addition to their normal business activity. Yes. And so it's the aggregator who has the relationship with the lending sector; is that right?- - -Correct. And that will normally be by a form of written agreement, often called an originator agreement?- - -That's correct. Yes. But the aggregator doesn't originate the loan itself, it's those who have a relationship with the aggregator who do that?- - -That is correct. That will be the broker or the real estate agent or the solicitor or whatever?- - -Correct. Thank you. And the aggregator will accredit individuals who will be authorized by the aggregator to originate loans?- - -They're not accredited to the aggregator. The aggregator will facilitate them being accredited by the lender. Yes, I was putting to you that there would be a first step, "You're a member of my aggregation group". But critically, the second step, "You the member of the aggregator group are accredited up to the lender". Is that right?- - -That's correct. And you are unable to write any loans for that lender until such accreditation is received. And if accreditation ceases, you cease to be able to write loans for that lender?- - -That is correct. 161 This passage reflects a distinction between the Mortgage Choice business model (which involved the franchisor/franchisee relationship) and the aggregator model. At ts 104 ll 1-6 Mr Lahiff agrees that accreditation to a lender would not generally preclude a broker from being accredited by other lenders, and that one strength of mortgage brokers is that they are accredited by a large number of lenders. When Mr Lahiff joined Mortgage Choice the proportion of home loans originating from brokers was between 15 and 20% but more recently, it was around 42 or 43%. He agrees that this is the result of increased demand for broking services, and that "the benefits that mortgage brokers provide certainly seem to have struck a chord with the Australian public". 162 Mr Lahiff agrees that three features are prominent in the services offered by brokers, which features are "reactive to demand from borrowers". The first is access to a wide range of lenders and lender products. The second is the offering of advice, free of any pressure or elements of favouritism relating to any one or more lenders. Mr Lahiff was reluctant to use the words "independent" or "unbiased", apparently because ASIC has bridled at the use of such language. The third advantage is the capacity to provide "a path through what had become a maze of lenders and products". It was put to him that the internal lending channels could not provide these services. He agreed that such channels did not offer a wide range of products. With respect to the question of complexity of the range of products, most financial institutions try to describe all of the product features in comprehensible language. He considers choice to be an important aspect of the advantage which brokers afford to customers, thus use of the word "choice" in the business name "Mortgage Choice". 163 Mr Lahiff was then taken to a document headed "Mortgage Choice". Apparently it was (in 2003) on a Mortgage Choice website. It may be found in exhibit 1, tab 3, p 3. Below the heading is the question: "Why Mortgage Choice instead of a Bank?" The answer to the question so posed is as follows: Banks and other financial institutions enthusiastically support the services provided by Mortgage Choice. Demand for the service has been driven by the consumer and it is a cost-effective channel for the bank to seek new home loan customers. New entrants into the mortgage finance industry, such as insurance companies, building societies and credit unions, can now market their products beyond regional boundaries without building expensive branch structures by joining the panel of Mortgage Choice. Why choose Mortgage Choice over a bank to help you find your loan? Choice - Mortgage Choice can offer you hundreds of loan products from more than 20 lenders. A bank can only offer you a limited range of their own loans. Unbiased - Mortgage Choice will not "plug" a specific product to you. You will be offered a range of options depending on your individual circumstances and you will ultimately make the final decision. Convenient - At Mortgage Choice you pay nothing for us to shop around for the right home loan for you. FOR UNBIASED HOME LOAN ADVICE. 164 Mr Lahiff agrees that these statements were made and were true. Concerning the claim to be "unbiased" Mr Lahiff says that the primary basis of that claim was that irrespective of the level of commission paid to Mortgage Choice by different lenders, Mortgage Choice averaged or "homogenised" those commission rates, so that the Mortgage Choice franchisee received the same commission rate irrespective of which lender he or she recommended to the customer. He also said that ASIC had a problem with the use of the word "unbiased", and so its use was discontinued. As to convenience, he agreed that one aspect of the convenience was that the broker would shop around for the customer. A second aspect was that Mortgage Choice franchisees were more inclined to visit clients than were bank staff members. 165 This document exemplifies the question for resolution in this case. Whilst the banks were enthusiastically supporting the brokers, the brokers were, at least on one view, taking borrowers away from the banks' in-house and tied distribution channels. 166 Mr Lahiff was then taken to another document displayed on the Mortgage Choice website in 2003. See exhibit 1 tab 3 p 2. The subheading is "The Mortgage Choice Difference". It states: Hunting down the right home, residential, investment or business loan can be a daunting task for any borrower. With a proliferation of lending products and organizations from which to choose it's not surprising that an increasing number of home buyers are turning to Mortgage Choice to help them hunt down the best home loan option. At Mortgage Choice we have the technology needed to aid you in comparing banks, interest rates, fixed or floating rate mortgages, initial fees, and insurance requirements. Our unique Loan Qualifier software helps to ensure that not only can you find a loan that best suits your requirements, but also that you can have the right information for the lender. Our unique Loan Qualifier system provides up-to-date information on lender's criteria, costs and interest rates. This allows us to bring right to your home a total picture of the loans available and so help you make an informed decision. Why not test the Loan Qualifier system while you are visiting our website and experience the service we offer? Offering choice is our business. 167 Mr Lahiff agrees that this statement reflected one of a broker's functions at that time. Mr Lahiff was then taken to a document headed "Customer Charter", also a Mortgage Choice document. It appears at exhibit 1, tab 1. It is the current charter rather than the charter in force at the time at which Mr Lahiff was with Mortgage Choice. However he agrees that in 2004 he saw the role of the broker as "(saving) Australians time, confusion, hassle and possibly money by helping them to find a suitable finance solution for their individual circumstances". He was referred to a claim that 41% of home loans were sourced by mortgage brokers. He says that in 2004 the share would have been substantially less. The percentage grew gradually between 2004 and 2008, a period during which "home loaning" was growing very strongly in Australia. He considers that in 2004 the figure would have been in the "high teens or low twenties". He was then taken to a passage which states: With access to an extensive panel of lending institutions such as banks, non-banks, credit unions and building societies, our loan consultants offer an advantage to consumers that one lender simply cannot - a wider choice of lenders and loan products. 168 Mr Lahiff agrees that as much was the case between 2004 and 2006, and that this quality was an element of a broker's offering which "cannot be a part of a lender offering". 169 He was then taken to a paragraph headed "What to expect from your consultant". It read: Your consultant is a trained loan specialist, committed to best industry practice, who will: • Discuss your requirements for the loan and obtain the information needed for your application to proceed (e.g. your financial requirements and objectives). • Analyse and match your information and requirements to features of loans offered by our lender panel. • Explain the types of loans available to you from the lender panel then provide you with a selection to choose from. • Outline features, fees, costs and other details associated. If you are buying property or refinancing, they will outline the fees and costs involved here, also. • Provide timely and professional assistance with your loan application, dealing with this process in a fair and ethical manner. • Submit your loan application to the lender you choose. • Communicate with your chosen lender through the loan submission to settlement process, passing on relevant information to you along the way. • Assist you with any borrowing queries and further financing needs you may have, such as changing your loan. Our service continues for as long as you need it. 170 Mr Lahiff was asked to comment on some of these points. In particular, he was asked how the broker translated the information obtained from the borrower into identified products. He said that the process was performed using proprietary software called "Loan Qualifier". 171 Mr Lahiff was then taken to p 5 of the annual report of Mortgage Choice for the year 2006. See exhibit 1 tab 2. Mortgage Choice was a listed company, floated in August 2004. Mr Lahiff agreed that he had seen the material on that page and "vetted" it before it became part of the annual report. On p 5, under the heading "Competitive Advantage", the document states: Mortgage Choice believes that the combination of the fundamental components of its business model provide it with significant competitive advantages over other brokers in the market place: • high quality service: Mortgage Choice continually aims to provide a high level of support to its Franchisees, in marketing, technology, training/professional development, legal and compliance; • franchise business model: Mortgage Choice operates through a national network of Franchisees. The relationship between the Franchisees and the Company is underpinned by the Franchisees being incentivized to grow their business whilst valuing the services and policies provided by the Company; • brand: Mortgage Choice is recognized as a leading consumer brand and has been built upon a proposition of being transparent in its dealings with, and an advocate for, the customer; • no product of its own: Unlike some of its competitors, Mortgage Choice does not distribute its own products, instead choosing to treat all lenders and products equally; • strength of lender relationships: Mortgage Choice generates significant volume and quality of loans for lenders and this places it in a strong position to shape key operational relationships with lenders; and • economies of scale: Mortgage Choice's business model is scalable, allowing it to grow its originations and loan book without growing its cost base at the same rate, thus giving Mortgage Choice financial strength and stability. 172 It was put to Mr Lahiff that in 2006, Mortgage Choice saw its competitors as other brokers, and only other brokers. He disagrees. It was pointed out to him that there was no suggestion in this part of the report that lenders were in competition with Mortgage Choice. He agrees. He also agrees that other mortgage brokers were in competition with Mortgage Choice, but says that it does not follow that there were no other participants in the financial services sector which were also competitive. It was put to him that the statement was designed to demonstrate how Mortgage Choice would fend off competition in the market place. He agrees that it described fending off competition from other brokers. It was suggested to him that Mortgage Choice would have been careful to inform the market place and its investors of the existence of other competition, if there were any, and the way in which it would deal with that competition. The witness replied that: Mortgage Choice was competitive with a range of participants at that time. The primary emphasis was on competition with brokers. 173 On the right-hand side of the same page there is a heading: "A complex marketplace made easy". Beneath it, the following passage appears: Mortgage Choice assists customers in the selection of a mortgage from the complex range of products from its lender panel by identifying the most suitable loan, based on an individual's particular needs. Customers are provided a choice across a broad range of over 330 housing loan products offered by a panel of 27 of Australia's leading lenders, representing each major category of lender. Mortgage Choice brokers use the Company's proprietary software system to compare the customer's financial situation and loan requirements with the products offered by the lender panel. The system generates a list showing which lenders would approve the customer's application according to details given. Based upon the customer's circumstances the broker then uses the system, together with their own experience and expertise to analyse features of loan products in order to identify those most suitable for the customer. Completed loan application forms are submitted and followed up by the broker on the customer's behalf, thereby saving the customer time and the associated administrative burden. These services are provided at no direct cost to the customer. 174 This passage indicates that the process would identify all lenders on Mortgage Choice's panel having lending criteria with which a potential borrower would comply. Counsel put to Mr Lahiff that as well as using the computer system, the process involved judgment on the part of the broker. Mr Lahiff agreed, saying that the more experienced brokers would rely on their experience, whilst the newer brokers would probably rely more upon the software. 175 On p 6 of the document, under the heading "Lender Partners", the following passage appears: Mortgage Choice recognizes the importance of developing and nurturing the relationships between broker and lender. Dedicated specialist staff oversee the operational relationship between the Company and its Franchisees and the lender panel. This team provides lenders with structured access to the Franchise network and promotes operational effectiveness by working with lender partners to improve service and processing efficiency. The panel includes Australia's leading lenders, providing a cross-section of products and lender types that Mortgage Choice considers to be a representative spread of available quality housing loans. Mortgage Choice believes the benefits enjoyed by lenders from dealing with credible brokers such as Mortgage Choice include: • volume: Brokers provide incremental mortgage business that would not necessarily be generated through the lender's branch or other networks; • cost flexibility: By outsourcing an element of their origination business, lenders attract new business on a variable cost basis; • education: Aided by specialist skills and product knowledge, brokers educate consumers on the full range of mortgage products offered by lenders on the Company's panel; • geographic expansion: Brokers have facilitated low cost geographic expansion for lenders into areas where branch networks are less extensive or do not exist; • profitability: By originating mortgages of a higher average loan size and potentially of a longer loan life, broker sourced business can be as or more profitable than business sourced through the branch or other networks; and • efficiency: A broker's familiarity and experience with each lender's process can increase the efficiency of the lodgement and settlement process. 176 Counsel pointed out to Mr Lahiff that this description spoke of lenders as partners, not competitors. The following passage appears at ts 111 ll 19-25: Yes. Meaning allies not rivals: correct?- - -Partners in the sense that there is a relationship between the two. Yes. And an amicable, synergistic, harmonious one; correct?- - -On the basis of working with him in partnership, yes. Yes?- - -But that's not to say that there wasn't competition. 177 Counsel then addressed the six dot points set out above. Mr Lahiff agrees that brokers could assist lenders to increase their volumes of business. Concerning the question of geographical expansion, Mr Lahiff says that the relevant statement related particularly to lenders with less extensive, or non-existent branch networks, a group which included a majority of Mortgage Choice lenders, but not all. In particular it applied to second and third tier banks such as Suncorp, Bendigo, Adelaide and BankWest. 178 As to the suggestion that broker-sourced business could be as, or more profitable than business sourced through the branch or other networks, Mr Lahiff says that this was true, or at least as much was Mortgage Choice's contention. He says that there had been a debate since mortgage broking started as to whether a broker-generated loan or a branch-generated loan was more profitable. In 2006 he contended that broker-generated loans were more profitable. There is a substantial volume of internal ANZ documentation in which there are references to the cost to ANZ of brokers' commission. However there is little or no attempt to quantify the actual savings likely to be achieved by deflecting work away from the brokers and into ANZ's internal or tied channels. It may be that the lack of such detail suggests uncertainty as to the outcome of any close examination of the matter. Mr Lahiff's evidence suggests such uncertainty. 179 Although counsel did not take Mr Lahiff to the second and third dot points, they are worthy of mention. Under the heading "cost flexibility" it is said that "an element" of a lender's "origination business" is outsourced to brokers, suggesting that both brokers and lenders accepted that brokers were not the only channel in use. Further, brokers could attract new business for lenders on a "variable cost basis", presumably meaning that any additional cost was incurred only if new business was written. Under the heading "education", there is a suggestion that brokers effectively provide a public relations service to the lenders. 180 Mr Lahiff was then taken to p 7 of the report under the heading "Information Technology" where the following passage appears: Mortgage Choice has leveraged 14 years' experience in the Australian market to develop proprietary software to assist in matching our customer's needs to the most suitable product from our panel of lenders. This software allows our Franchisees to market to their prospects, capture customer information and preferences, qualify potential loan applicants, submit home loan applications to panel lenders and reconcile payment of commissions. Mortgage Choice recently implemented its third generation Mortgage DiscoveryTM system to accommodate changes to our Franchisees evolved business structures, deliver improved customer relationship management capability and provide a platform for continued business growth. 181 Mr Lahiff agrees that the statement is correct. 182 This evidence suggests a high level of expertise developed over a lengthy period of time. It also discloses the development of specialized equipment to facilitate the broker's role. All of this seems to suggest a strong practical basis for differentiating between the broker's product and that of a lender's in-house and tied distribution channels. 183 Counsel then took Mr Lahiff to p 18, under the heading "Principal Activities", where the following passage appears: During the year the principal continuing activity of the Mortgage Choice Group was mortgage broking. This activity involves: • the provision of assistance in determining the borrowing capacities of intending residential mortgage borrowers; • the assessment, at the request of those borrowers, of a wide range of home products; and • the submission of loan applications on behalf of intending borrowers. 184 Mr Lahiff agrees that the passage provided an accurate summary of the principal activities of Mortgage Choice as at 30 June 2006. 185 Mr Lahiff says that whilst he was at Mortgage Choice he became aware that an organization called Refund Home Loans used a "refund business model" which involved the offering of refunds to borrowers. Mortgage Choice concluded that it did not "fit our particular way of operating", and that "the way the Mortgage Choice model operated, providing a range of different services to franchisees for a percentage of the commission the lenders offered, was the best way forward". He was asked, "Do you mean without reducing the commission that came into the hands of franchisees by sending on some of that commission to the borrowers themselves?" He replied, "We didn't make that judgment". Mortgage Choice considered that its own business model was "a more sustainable model in the longer term". He does not agree that the refund model was less sustainable in the long run, but rather considers that the Mortgage Choice model was more sustainable than a series of other models, including the aggregation model. Mr Lahiff was asked whether a broker, trying to live off trail commissions, would have a difficult time. He responded at ts 118 ll 45 - ts 119 l 2: I can only answer the question on the basis that we felt that under the Mortgage Choice might - well, a combination of both the upfront commission and the trailing commission was necessary to sustain the business. 186 Mr Lahiff agrees that during his period at Mortgage Choice, all of the major lenders had their own internal distribution channels. All of them also had accredited brokers, although the Commonwealth Bank only "entered the mortgage broking fraternity" towards the end of Mr Lahiff's time at Mortgage Choice. 187 Mr Lahiff accepts, as a general proposition that some in-house channels would bring in more business than others. Some would cost more to run than others. He also agrees that a lender would, from time to time, consider whether its distribution structure was "optimal or sub-optimal". He said, "You would make that judgment based not only upon the economics of the distribution channel but the customer demand for it." At ts 119 l 40 - ts 1120 l 2 the following passage appears: Yes, indeed. So that if that's what customers want, you would stay with it regardless?---No. You would look at, in the light of your economics and then make a judgment from that point on. Thank you. So you would take into account the customer demand rather than ignore it and in arriving at a conclusion as to whether you adjusted the relationship between distribution channels, you would not do it simply upon the hard financials of it but you would take into account the customer demand as well?---You would need to take into account all of those factors, yes. 188 At ts 120 l 4 to l 13 the following passage appears: And where there is an imbalance which yields greater opportunities for one internal channel than another, is that what, in your usage is channel conflict?- - -No. What is channel conflict in your usage?- - -Channel conflict is where a product is offered under a different pricing regime or a different set of serviceability criteria to one channel that is clearly different to another channel. And so if they're all identical you have channel neutrality, do you, in your terminology?- - -That's correct. 189 It was suggested that jealousies may arise within distribution channels if personnel in other channels are being offered higher incentives. He was unable to comment. He was then taken to para 83 of his affidavit. This paragraph had not been received into evidence. In particular he was taken to the following sentence: The internal channels of a particular lender may also compete with each other as lenders will usually have some component of performance-based remuneration for their mortgage-selling staff. 190 He agrees that he was there speaking of performance-based remuneration for mortgage-selling staff. At ts 120 l 35 to ts 121 l 16 the following passage appears: … the tensions which you've otherwise identified in your evidence, are tensions between internal distribution channels because some personnel are getting better remunerated than others simply because one channel is doing better than others. Is that the case?- - -That would certainly apply internally, but I would also argue that it applies externally as well. Yes. And so an internal channel might similarly be jealous, if you like, of a broker channel that is enjoying the attraction of higher consumer demand and yielding a larger throughput through that channel and lesser throughput through the internal channel. And that …? - - -And vice versa. And that's what you've been speaking of in your evidence about competition, isn't it, and what you are speaking about in relation to channel contract (? conflict)?- - -In this context I'm talking about competition between internal channels as much as I'm talking about between internal and external challenges. You go further, don't you - I withdraw that. You say not only is there a channel conflict between an internal channel and an external channel, but there's the same phenomenon between internal channels. You say they compete with one another, correct?- - -There is certainly competition. There is no channel conflict within the internal channels because it's the same organization. Yes. But you say they compete, and the reason you say they compete is because they want to earn as much money, if not more money, than their fellow person in the neighbouring channel?- - -But it's certainly not channel conflict, because the same product is being delivered at the same price and under the same serviceability criteria. 191 Other evidence suggests that the term "channel conflict" denotes conflict between channels for custom. The supply of products on equal terms to all channels may be a way of avoiding channel conflict. It is better described as "channel neutrality". Notwithstanding channel neutrality, conflict may still arise as the result of discounts or other incentives offered for dealing with one channel rather than another. In the ANZ documents the term "channel conflict" seems to be used in this way. Indeed, Mr Lahiff seems to use the term in that way at ts 121 ll 2-5 but resiles from that position at ts 121 ll 9 and 10 and 14-17. I suspect that he was momentarily confused. 192 In re-examination Mr Lahiff said, concerning his evidence that Mortgage Choice franchisees visited clients, that the major financial institutions had now adopted a more "fully encompassing approach to distribution", and that they were much more inclined to visit clients' premises through their mobile lenders and their franchise staff. Thus Mortgage Choice had previously enjoyed a benefit which it no longer enjoys. 193 Other aspects of the annual report are of some interest. On p 1 it is said that "This business is built on a series of partnerships". One "critical" partnership is said to be the franchise network. The report then continues: Our lender partners are also critical as they provide us with the products and services demanded by customers. Our overriding objective is to work in an empathetic and mutually beneficial relationship with our lenders. 194 On p 3 the report discusses regulation of the mortgage broking industry and Mortgage Choice's support for such regulation in order to effect consumer protection. There is also reference to various mortgage industry awards. These references suggest the existence of a discrete group, namely mortgage brokers. At p 5 under the heading "A complex marketplace made easy", it is said that: Mortgage Choice assists customers in the selection of a mortgage from a complex range of products from its lender panel by identifying the most suitable loan, based on an individual's particular needs. Customers are provided a choice across a broad range of over 330 housing loan products offered by a panel of 27 of Australia's leading lenders, representing each major category of lender. 195 On p 9, concerning the future outlook of the business, the report states: Mortgage Choice expects some consolidation to occur in the mortgage broking industry. A number of factors could potentially act as catalysts, including a stricter regulatory environment, economies of scale in marketing, support and administration, and a preference by lenders to deal with a smaller number of larger, high quality broker organizations. The company will be alert to acquisition opportunities given this environment, but will review any opportunity cautiously and prudently. Clearly, however, the major focus of the business is on organic growth. 196 This passage identifies a separate "mortgage broking industry" which does not include lenders, in which industry Mortgage Choice was functioning. 197 Mr Lahiff suggests that mortgage brokers are seen by lenders as a way of outsourcing customer functions. Outsourcing is usually designed to effect economies. However, in the present case, it clearly also enables lenders to attract business which might otherwise not flow to them. Given the emphasis placed by ANZ upon maintaining direct connection with customers, I infer that it would balance those advantages against the inevitable risk associated with the fact that brokers stand between the borrower and the lender. 198 It is also significant that mortgage brokers are trained, accredited and paid by lenders, suggesting that the lenders have at least some degree of investment in them and in their skills. Mr Lahiff considers that advice and assistance in relation to the features, relative benefits and suitability of products is within the ambit of the broker's operation, as is assistance in making applications which comply with lending criteria. He also accepts that brokers accumulate information concerning the various products and analyse it for the benefit of potential borrowers. 199 Mr Lahiff highlights the historical inter-relationship between increases in the number of lenders and range of products (together with the emergence of lenders without branch networks) and the growth of the broking industry. He also highlights the necessarily close relationships between lenders and brokers. 200 Mr Lahiff asserts that the services provided by lenders' internal channels are substantially the same as those provided by brokers, save for the range of products and lenders, and the associated need to explain the differences and to advise as to appropriateness. To say that this is the only distinction may conceal its importance. In fact, Mr Lahiff identifies it as a "significant" difference. Numerous witnesses, including Mr Lahiff (at ts 104 ll 4-6) have identified access to a wide range of products and lenders as being important to a broker's business. I have already highlighted the significance of Mr King's willingness to compromise his refund model in order to ensure continued access to ANZ products, notwithstanding the relatively low volume of those products which he had previously supplied. Further, in constructing its Mortgage Solutions franchise model, ANZ was conscious of the fact that its franchisees would be at a disadvantage as opposed to the brokers because of the limited range of products available them. 201 It may be that the apparent under-estimation of the importance of a wide range of products and lenders is partly caused by a tendency to look at a broker's role from the lender's point of view, rather than from the point of view of the potential borrower. The market pleaded in the statement of claim is a market for the supply of services by brokers and lenders to potential borrowers. As I shall demonstrate in my discussion of Dr Fitzgerald's evidence, he identifies a two-sided market, with brokers providing services to potential borrowers on the one side, and services to lenders on the other. For present purposes we are considering the first-mentioned market which Dr Fitzgerald is content to treat as a separate market. It is relatively clear that since the mid-1990s the broking industry has greatly expanded, with the rapid increase in the number of lenders and lending products, highlighting a need for broking services. There is no reason to believe that this need had abated at any presently relevant time. Satisfaction of that need is a major reason for the existence of the broking industry in its current form. It is therefore difficult to treat the advisory function as other than a critical aspect of the broker's services. 202 It is important to note that Mr Lahiff's view that brokers compete or, in his time competed with lenders, finds no expression in the annual report of Mortgage Choice for 2006. Mr Lahiff was the managing director of Mortgage Choice. He at least "vetted" the annual report. The company felt the need to identify in its report its "competitive advantage". It said nothing about competing with lenders. Rather, lenders are treated as being partners, critical to Mortgage Choice's operation, with whom it develops and nurtures important relationships. 203 The annual report leads me to infer that Mr Lahiff's view as to competition with lenders, as expressed in his evidence, is either an ex post facto rationalization or reflects use of the word "competition" in a way which is not relevant for present purposes. It may be that he is using it to describe generally, competition in the supply of loan products in the lending market.

Damian Joseph Percy 204 Mr Percy is employed by the Bendigo and Adelaide Bank Group. In 2007 the Adelaide Bank merged with the Bendigo Bank. In 2008 the Bendigo and Adelaide Bank Ltd was formed (the "B&A Bank"). The two brand names continue to be used. Since December 2008 Mr Percy has been the General Manager (Third Party Mortgages). He is responsible for managing various aspects of B&A Bank's intermediated mortgage lending business. He commenced employment with the Adelaide Bank in 1999 managing its insurance business. He had previously spent 15 years in the general insurance industry. In 2002 he moved to a leadership role in Adelaide Bank's mortgage business, including wholesale mortgage distribution, mortgage product development and mortgage strategy. 205 Mortgage products marketed under the Adelaide Bank brand are not distributed through retail branches. On the other hand "Bendigo Bank" branded products are distributed only through retail branches. This dichotomy reflects the history of the two banks. Adelaide Bank had historically focussed on the use of brokers, whilst Bendigo Bank had focussed on its own retail channels, having both company-owned and community-owned branches. The Adelaide Bank's small branch network (located in South Australia) has been transferred to the Bendigo Bank. The B&A Bank has deliberately continued brand differentiation to build on the strengths of each strategy, to eliminate channel conflict and to provide a clear delineation between the two brands. That approach also enables it to provide two different value propositions to the customer for effectively the same asset class, thereby increasing market presence. This proposition is explained elsewhere in Mr Percy's evidence. 206 All Bendigo Bank branches have suitably qualified officers available for face-to-face consultation with potential mortgage customers. They are trained in the different mortgage products which the bank has to offer and in advising, marketing and tailoring the features of those loan products to meet customers' needs. Staff members also take customers through the application process, helping them to fill out the necessary application forms. Customer information is entered into the bank's computer system which offers automated loan approval. The system also performs credit references and credit checks. After approval, branch or processing centre staff members handle the remainder of the process through to settlement. 207 Mr Percy considers that a broker provides a service which is largely analogous to that offered in Bendigo Bank branches, namely the supply of information, together with advice and assistance in completing and submitting a mortgage loan application. However he identifies the obvious difference, namely that the broker may offer loans from a number of other lenders. Nonetheless the service is aimed at the same end, "fitting a loan with different features to suit the customer's needs and for which the customer is qualified". Whether or not a customer gets an Adelaide Bank brand loan through a broker, or a Bendigo Bank loan through a branch, the same documentation, credit checks, income information and similar information are required. The approval process involves the same steps. Branch applications are processed through the "legacy" Bendigo system and broker applications, through the "legacy" Adelaide Bank system. 208 Concerning competition and channel conflict, Mr Percy says that the B&A Bank is conscious of its small market share, about 3%, and the need for growth. It does not enjoy sufficient existing brand awareness to attract all the business that it would like to have, especially given the number of competitors in the lending market, or an advertising budget sufficient to build such brand awareness. For these reasons the bank relies on external brokers to bring in business. The brokers provide the B&A Bank with a variable cost base, a broad distribution footprint and the ability to access specific market segments by targeting those brokers who serve them. In other words, brokers provide an alternative marketing method which is cheaper than building a branch network and has an optimal geographic coverage. As a general proposition, however, branch-originated mortgage customers are considered more desirable than broker-originated customers. The branch-originated mortgages are likely to produce more profitable outcomes for the bank. 209 Such comparison is not straightforward. It involves a comparison between the cost of building branches and paying staff, on the one hand, and paying commission to brokers on the other. However there is a difference between, on the one hand, starting a new bank, and deciding whether to invest in branches or distribute through brokers and, on the other, treating the capital cost of existing branches as a given, and then deciding whether branches, brokers or other channels offer the best strategy. Branches do not only write loans. They also attract other types of business. At the time of merger the B&A Bank already had a branch network, and so the cost was a given, or "sunk" cost. In other words, it could not be readily recovered, other than by its utilization. The fixed cost of the retail branch network is its biggest cost. The bank therefore seeks to recover that cost by utilizing the investment, including by marketing mortgage loans through the branch network. When a branch originates a loan, the bank gets a better opportunity to recover its costs. This is partly because a loan is not profitable for a bank in the first two or three years as there are costs involved in developing, marketing, distributing and administering the loan. Not all of those costs are recovered in loan establishment fees and break fees. Quite often such fees will be waived in order to win customer business. The longer the customer stays with the bank, the more profitable the loan is for the bank. 210 Brokers who originate an Adelaide Bank loan are paid an upfront commission and a trail commission. However they provide no ongoing service on behalf of the bank. The upfront commission is paid to bring in the customer. The trail commission is paid as an ongoing recognition of the value of that transaction. Few brokers are unethical or otherwise act contrary to the bank's interests, presumably by unnecessarily producing churn. The bank has good and mutually beneficial relationships with many brokers. If a customer comes to the bank through a Bendigo branch, then there is no pre-existing broker/borrower relationship, and the bank will have already had an opportunity to build its relationship with the borrower. The bank seeks to cope with the risk of losing customers to other lenders through broker-assisted refinancing (ie churn) by contacting its borrowers at least once every 12 months in order to build and maintain relationships and encourage customers to stay with the bank. 211 Loan defaults and arrears are contrary to a lender's interest because they involve the lender in the cost of extra steps to secure such interest by bringing the repayments back into compliance, refinancing the loan or exercising the mortgagee's rights. Apart from financial cost to the bank, such steps represent a loss of goodwill. Such a loss is particularly harmful for a small and growing bank. A loan in arrears or default is an unprofitable and unpleasant business. The bank therefore prefers to minimize the proportion of loans that experience default or arrears. Notwithstanding its preference for branch-originated loans, the bank accepts the notion of customer choice and recognizes that customers will make their own decisions, based on their own needs and perceptions of service and value. 212 A certain proportion of people want to deal face-to-face with branch staff, and so Bendigo Bank provides a branch presence in a large number of communities, positioning itself to capture some of that share of the market in competition with other branch-based lenders. On the other hand, a significant proportion of potential mortgage loan customers will only deal through brokers. They understand that a broker provides a customer with access to a wider range of lenders' products and options than will be available through direct dealing with a lender. A broker also does the "running around" and negotiation on behalf of the borrower, saving him or her time and effort. Adelaide Bank products compete "in this segment of the market". 213 Some potential customers are open to dealing directly with either a branch or a broker. In order to maximize the growth of the B&A Bank loan book, it needs to capture as much of this part of the market as possible. Where a customer enters a branch and indicates that he or she is also considering going to a broker, the staff are trained and instructed to do their best to get the customer to take the loan through a Bendigo branch branded loan. Branch staff are provided with incentives to write loans based on key performance indicators, regular performance reviews and occasional campaign incentives. The community-owned Bendigo branches provide a structure which is, in some ways, analogous to a franchise structure. They receive "margin share" for products which they write, and are motivated to build their income streams, to enhance the brand's profitability and to enhance the bank's financial support to the local community. 214 In his oral evidence-in-chief Mr Percy said that the B&A Bank regards brokers and branch channels as being in competition with respect to customers. He said that customers have a choice between seeking an "intermediated experience" or going direct to the lender. The bank has a clear preference for customers coming through internal channels and originating their business through the branch network. The word "channel" describes the "method through which the customer engages with the bank". Mr Percy also said, at ts 178 ll 5-8: So a direct - coming directly to your branch and proprietary infrastructure - or intermediated, where they go to an independent intermediary and you then compete with other lenders for the intermediary's decision. 215 Mr Percy seems to be saying that where a potential borrower goes to a broker, the bank runs the risk that the broker will recommend the product of another lender. 216 In cross-examination at ts 178 ll 10-16, the following exchange appears: And in what respects do you regard the branch channel and the broker channel as being in competition?- - -For customers. You might need to clarify the question for me. Yes. I will ask in these terms: what is it, in your view, that either the branch channel or the broker channel provides to a customer which makes them in competition?- - -Loan products. 217 At ts 178 ll 20-27, this exchange appears: And how do you compete?- - -In the case of the Bendigo and Adelaide Bank Group, we offer distinct value propositions. So the branch channel has a series of products, a particular value proposition and a way of providing that service to the clients which is through the branch network. In the intermediated channel, we have distinct product sets, slightly different pricing and we seek to attract customers - or, convince brokers who have already attracted the customers - to provide an Adelaide Bank product to that customer as distinct from somebody else's. 218 The competition to which Mr Percy refers is for the supply of loan products, not loan arrangement services or broking services. Such competition takes the form of differentiated products. This evidence suggests that the broker is really seen as the bank's customer in the sense that the bank tries to induce the broker to recommend one of the bank's products rather than one of another lender's products. 219 Counsel pointed out to Mr Percy that any concern on the part of the B&A Bank as to competition between brokers and branches could be resolved by not accrediting brokers. Mr Percy agreed with this. At ts 178 l 46 to ts 179 l 12 the following passage appears: But you choose not to because it is beneficial to your bank to have the brokers and the originators sourcing customers; correct? In so far as customers have made a choice that they would prefer to deal with an intermediary. If you choose not to deal with intermediaries, then you cut that market out, yes. Yes. Because some customers want the service that brokers provide; correct?- - -Correct. Yes. And other customers want the different service that the branch provides; correct?- - -Correct, though some customers prefer both. Yes. But because there are some who want the broker service, you want to accredit brokers so that you can capture that portion - or some of that portion - of the market?- - -Correct. 220 Mr Percy said that in addition to the Adelaide Bank and Bendigo Bank brands, there is a third brand, "HomeLend", which is a further "legacy" from Bendigo. Bendigo has almost 500 branches. The Adelaide Bank distributes its products through a number of third party channels including brokers, mortgage managers and originators. The distinction between a mortgage manager and a broker is that a broker is involved exclusively in the "client acquisition stage", whilst mortgage managers "also provide ongoing management of loans on behalf of a lender, generally speaking under their own brand". Although, from the borrower's point of view, a broker may maintain contact after the loan is approved, from the lender's point of view, the broker has no further function. Mortgage originators are a hybrid. They do a little more work than a mortgage broker, but do not manage the client post-settlement as mortgage managers do. There are both Adelaide and Bendigo branded call centres. Potential borrowers may also apply online to Bendigo for a loan. HomeLend products are distributed through brokers. However, unlike the traditional broker model, the broker, and not the lender, has the flexibility to fix the price. It is "more a wholesale rate type mechanism and they do a little bit of extra work. They arrange the mortgage insurance and valuations and the like". 221 Mr Percy considers that channel conflict is: that tension between distribution channels each trying to outdo the other and suffering perhaps the prospect that one channel is advantaged against the other. 222 Mr Percy was asked to explain what he meant by his evidence that the two bank sectors provided different value propositions. He said: So to take our example, the Bendigo branch network's customer intimacy-based model, it is highly regional, it has a range of products that are targeted and tailored for their markets and there form a distribution [sic]. The Adelaide Bank model is very much broker and intermediary focussed, so the processes, products and pricing are aligned to the economics of the expectations of that model. 223 It was put to him that when a customer enters a branch, he or she deals with the bank, and not with an intermediary standing between him and the bank. Mr Percy replied: That's the way a consumer would see it. It is worth noting that the Bendigo retail business, of course, has a slight hybrid distribution model and that half the branches are company owned and the other half are owned by local community companies. 224 The community-owned branches are largely, but not entirely in rural areas and are owned by companies established in the communities for the purpose of establishing bank branches. He agrees that the branch staff, in dealing with a customer who came into a Bendigo branch, would seek to sell a Bendigo product to the customer. Mr Percy also agrees that the proliferation of products in the market causes some consumers to require assistance, or to prefer to have assistance and guidance in making a selection amongst the various products, and amongst lenders. In large part those who walk into a branch are those who do not have problems with the range of products. Customers requiring assistance generally go to brokers, although brokers report that some customers want a particular product and seek their assistance in obtaining it. Only a broker will provide the full spread of possible lenders. The role of the broker is to help the customer to understand the available products and make a choice. 225 Prior to the merger, the Adelaide Bank had only a small branch network and otherwise relied upon brokers for its distribution. It sought to expand its asset book in the most cost-effective way, that is by using brokers. Having the two methods of distribution produces more loans in aggregate. Choice is important to potential borrowers who go to brokers. For Adelaide it was an alternative to building a branch network outside of South Australia. The decision as to the distribution of operations between Bendigo and Adelaide following the merger was taken at the most senior levels of management. Instructions were given to the branches as to how they were to conduct their business post-merger. The branches were not permitted to make their own decisions concerning such matters. 226 Mr Percy agrees that a broker is generally engaged by a potential borrower to give advice on behalf of that person, in order to enable him or her to make a decision about borrowing. Such advice will be directed towards assisting the borrower to decide which, out of a wide range of lenders and lending products, is most suitable for him or her. Choice is important to potential borrowers who go to brokers. The broker acts on behalf of the borrower, not the lender and is independent of the lender. Mr Percy points out that ASIC does not allow use of the word "independent" to describe brokers. However he agrees that "in general parlance", brokers would be seen as acting independently of the lender to the extent possible. 227 Counsel referred to a previous statement by Mr Percy that an experienced broker would know how to present the best face of a deal to the bank. At ts 186 l 26 to ts 187 l 24, the following passage appears: What did you mean by that Mr Percy?- - -One of - the observation you made earlier, that sometimes borrowers with more complex needs or more difficult needs will go to a broker, because they have some sense of, maybe, a difficult deal to get on terms that they would prefer from a lender, they will go to a broker because a broker is familiar with lender processes and what lenders are concerned about or not concerned about, and it gives the borrower an opportunity prior to submitting the deal to the lender to either make adjustments and remove credit card debt, those sorts of things, or to create a narrative around the loan that will be most readily accepted by a given lender. That sounds like business jargon to me, if I may say so, Mr Percy. What do you mean by presenting a narrative? Do you mean - - -?- - -It was the case particularly in the last few years, where credit was reasonably tight and lenders are fairly conservative, that simply taking the borrower's facts and throwing them at the lender, particularly if it's a deal that's on the periphery, will generally be knocked back from the - by the lender fairly promptly, so good brokers know how to fit a given set of circumstances to a given lender in such a way that improves the odds of the deal getting through on terms acceptable to the borrower. So the astute broker can help the borrower get over the line to meet the lender's criteria, whereas without that help, they might fail. Is that what you're saying?- - -Yes. The broker can both assemble the deal most effectively, but also tell them the better story, perhaps. Yes. Tell it in the way that would be most - would be best received by the lender?- - -Yes, and to be candid - not tell the lender things that perhaps a borrower might let slip that a lender might not be that appreciative of. Yes. So if you've got a broker alongside you, you've got a professional rather than an amateur performing the task haven't you?- - -One would hope so. Yes. And the professional can sometimes achieve things - without stepping over the visible line - can achieve things that the borrower, without assistance, wouldn't achieve. Do you agree with that?- - -That's quite right. They're also very aware of where the line is. Yes. I understand that. I understand that. And again, from your own knowledge or research, you're aware that borrowers appreciate these factors, and that's a reason they go to brokers to obtain the broker's service?- - -Yes. Yes. The bank branches don't approach the completion of application forms in the same way though, do they?- - -No. Thank you. Because their loyalty is to the bank, isn't it, not to the borrower?- - -Yes. 228 Mr Percy agrees that he has, on occasions, expressed the view that brokers should be remunerated on a fee-for-service basis. Concerning that proposition he said at ts 187 ll 40-43: I don't see it as an either/or proposition. More just that the - there's an opportunity for brokers to charge for the services they provide, above and beyond simply filling out paperwork and submitting a deal. 229 He considers that brokers provide a valuable service to borrowers and that, if the commission received from lenders is not sufficient, they should be able to charge fees. In other places around the world fees for service are charged by brokers. That approach was more prevalent in the early days of mortgage broking in Australia. The present system arose later. Mr Percy considers it to be anomalous that the broker provides the service to the borrower, but the lender pays. He was asked if he could envisage a bank branch ever charging the borrower for providing information about the bank's products. He said that he could foresee such a possibility. The notion of fee for advice exists in all sorts of businesses. He does not rule it out as a future possibility in the case of bank branches. Such branches might become more "advice-based locations" than "transaction-based locations". It was suggested to him that the branches would, nonetheless, be limited to selling the relevant bank's product. He said that a credit union in South Australia sells its own products but also operates as a mortgage broker, providing products from other lenders where its own products are not suitable. However he agrees that presently, lenders generally limit their staff to the supply of their own products. 230 Mr Percy agrees that when a customer walks into a Bendigo Bank retail outlet, he or she has generally decided to seek a loan from the Bendigo Bank. Some clients might still be shopping around, but it is likely that they will have made at least one telephone call in order to narrow down the choice. He agrees that if a customer goes to a broker seeking a loan from a particular lender, the broker might well suggest that a different lender's product is better. Mr Percy also agrees that if a particular loan application is not accepted, a broker will generally seek to find another acceptable lender. Interest rates and loan ratios vary from lender to lender. A good broker keeps abreast of all such "differentials" in the marketplace. Mr Percy also agrees that broking groups or their aggregators or originators develop their own proprietary systems for identifying appropriate loan products. 231 Mr Percy was referred to para 27 of his affidavit in which he refers to a broker "doing the running around" and negotiations on behalf of the borrower. Mr Percy says that such negotiation would be in seeking to obtain a better deal than published rates and terms. He agrees that a broker might be described as an advocate for the borrower. 232 The last sentence in para 27 of Mr Percy's affidavit is, "Our Adelaide Bank branded loans compete in this segment of the market". He agrees that he was there saying that Adelaide Bank loans compete against other lenders who are credit brokers. He agrees that a broker might be accredited by numerous lenders, and considers that the Adelaide Bank's loan products compete, through the brokers, with other lenders' products. This passage again suggests that Mr Percy sees the brokers as being more like customers of the lenders than suppliers of services to them. 233 Mr Percy agrees that brokers, especially major brokers, would generally be accredited by a considerable number of lenders, and that the main brokers would be accredited by all main lenders. Some aggregators require that their brokers be accredited by all of their lenders. He also agrees that a broker might have other lenders apart from the aggregator's lenders. Brokers might be divided into three categories, "independents", "franchise models" and "aggregators". In a franchise model the franchisor will have an agreement with each lender, as would an aggregator. An "independent" would have direct arrangements with each lender. 234 Counsel asked whether a bank, having an extensive retail network, such as the Bendigo Bank, would find it more expensive to use a broker channel than its existing branch network. Mr Percy said that it depended on the circumstances. If the branch network were at capacity, then broker distribution might provide a flexible cost base above that capacity. If there were broker distribution points in a geographical region in which there was no branch, then using brokers would be an obvious alternative to building a branch. He could not generalize about the role of call centres in home lending activities because completion of such transactions usually occurs at the branches. 235 Mr Percy was then referred to para 20 of his affidavit, particularly to the sentence, "Few brokers are unethical or otherwise act contrary to the bank's interests, and indeed the bank has good and mutually beneficial relationships with many brokers". At ts 194 ll 1-5 the following passage appears: You see them [the brokers], in substance, as your partners - you're in alliance with them? Is that right?- - -Partnership is probably overstating the relationship. It's a - it's mutually beneficial, it's a supplier-distributor - and it's a very close relationship. Yes. And you work together to achieve the best outcome?- - -Absolutely, correct. 236 In re-examination Mr Percy was asked to explain his view that a branch would adopt a different approach to completion of an application form from that taken by a broker. He responded, at ts 194 ll 26-34: So I think it was alluded to earlier, brokers are, in practice, agents of and advocates of the borrower and the lending officer - for want of a generic term - in a branch is an employee and owes its primary duty to the bank. It follows, I think, that a broker, when looking at a client's circumstances when a client wants a loan, will do everything they can to ensure the client's needs are fulfilled and that means putting a particular - if that means putting a particular character to the loan or seeking to, as I said, put the best face on it, they're likely to do that, it's in the interests of their borrower. A branch staff member is far more likely to simply take it as it is, if you like, and pass it down the line. 237 He was then asked to identify the actual differences in the assistance offered by a branch employee and a broker. He said, at ts 195 ll 13-22: So a not uncommon question is around loan purpose so borrowers may be seeking to draw equity from a property for a range of purposes and bank credit policies tend to categorize purposes as acceptable or unacceptable but at the end of the day, it's just an amount of money being passed to the borrower for their use. Were a borrower to suggest to a broker they want some cash for a particular purpose and that purpose was not consistent with the lender policy, one is aware of examples where the broker has said, "Well, no don't say that to them money is for this purpose," and brokers in the room will be aware of the generic phrase "future investment purposes" which is generally acceptable to lenders. My experience is that same scenario in a branch, where the potential to say, "I intend to use the cash for this purpose," the lender - the agent of the bank - the employee of the bank would more likely say, "Well, that's not an acceptable purpose for the bank," they're on notice of that information and would more likely decline the loan than seek to encourage or lead the borrower to represent the purpose of the loan somewhat differently. 238 I asked whether or not a borrower would be more likely to be frank with a broker than with a bank. Mr Percy responded at ts 195 ll 34-40: Yes, it is, that your Honour, that advocacy notion, that a borrower tends to come to a broker with a problem or a need and the broker is to use their advice, their experience to say, "Well, this is how that need can be fulfilled,", "Here is the lender," or "You may wish to amend your finances somewhat prior to submitting the deal,", "You are going to reduce that credit card," whatever. While the bank staff member is more likely to just hear the problem in the first instance and make a judgment or be obliged to make the judgment straight away. 239 His attention was then drawn to a distinction made in cross-examination between professional assistance given by a broker and that given by an "amateur". He was asked how he would describe the assistance offered by a branch network to a potential borrower. Mr Percy replied, at ts 195 l 45 to ts 196 l 5 as follows: It's a vexed question. You would make the observation, at the moment, that the best broker is probably more informed and more educated than the best loan writer in a branch. The worst broker is generally far worse than the worst loan writer in a branch. But as a general proposition, the branch staff member is more likely to be very au fait with their own products and the solutions they have in their kit bag, very deep knowledge around that, but that knowledge is a narrower base than a broker, who would generally have a broader experience, for the most part. 240 Under further cross-examination Mr Percy agreed that his evidence as to current branch and broker behaviour reflected the situation as it was between 2004 and 2006. 241 Mr Percy's evidence highlights the complementary nature of brokers and internal distribution channels. Neither an established branch network nor the brokers can be ignored by a lender which seeks to maximize its share of the lending market. If there is no branch network, it may be cheaper to rely on brokers than to build such a network. Whist a lender may prefer that a borrower approach it through its internal channels, it needs both internal and external channels, if for no reason other than that of customer preference. Mr Percy also accepts that the broker's role includes providing information and advice and acting as an advocate for a potential borrower. 242 Mr Percy identifies two levels of interaction between B&A Bank and brokers. At one level the broker and the bank are competing to supply Adelaide-branded loan products to potential borrows. At another level, the broker is influencing the potential borrower's choice of loan product.

Vincent William Fitzgerald 243 Dr Vincent William Fitzgerald is an highly qualified and experienced economist. He is the only economist to give evidence in this case, and so his evidence is of considerable importance. However ANZ disputes a number of his assumptions conclusions and factual assertions upon the basis that they are not matters of expert evidence, are otherwise not proven or are inconsistent with other evidence. 244 The structure of Dr Fitzgerald's evidence reflects certain questions put to him by the ACCC for comment, upon the basis of identified assumptions. His evidence-in-chief is contained in two separate reports. The second was apparently provided in response to an expert report prepared for ANZ by Dr Pleatsikas, also an economist. However Dr Pleatsikas was not called. My understanding is that his report is in evidence only to the extent that it assists in understanding Dr Fitzgerald's second report. Dr Fitzgerald and Dr Pleatsikas conferred and produced a joint report which is in evidence. Dr Fitzgerald also had reference to affidavits sworn by Donald William Crellin and Michelle Gail Lenehan. Neither affidavit has been read. However I do not understand ANZ to take any point concerning Dr Fitzgerald's use of that material.

Dr Fitzgerald's first report 245 Dr Fitzgerald's first report is exhibited to his affidavit filed on 28 October 2010. It is based upon the following assumptions which are set out at p 2 of the report: (a) … that the purpose for which market is being defined in this matter is to analyse the alleged fixing of the price charged by a broker for its services. (b) … that: - the matters admitted in the defence; - the verified answers to interrogatories; - the statement of admitted facts; and - the matters in the documents briefed to you may be relied on in forming your opinion, together with your own experience in, and knowledge of, the banking industry. (c) unless otherwise specified, … expressions used herein are as defined in the statement of claim; (d) … that brokers provide the services to persons seeking to acquire loan products from loan providers: - as pleaded in paragraph 7 of the statement of claim as "loan arrangement services"; - as pleaded in paragraph 6 of the defence as "broking services"; (e) if the answer to any question materially depends on any difference between loan arrangement services and broking services, please identify the material difference relied upon, any further information required, and specify the different conclusions that would be arrived at by adopting each of the definitions. 246 Paragraph (d) is of particular importance. Paragraphs 4, 5, 6 and 7 of the statement of claim provide as follows: 4 At all material times there has been a demand from persons throughout Australia seeking to acquire residential properties, for residential property loans ("loan products") to enable the purchase of the said properties. 5 At all material times loan products were and are supplied by loan providers. The loan providers include: 5.1 ANZ; 5.2 other banks, including the Commonwealth Bank of Australia, National Australia Bank Limited, Westpac Banking Corporation, HSBC Bank Australia Limited, ING Australia Limited, Suncorp-Metway Limited, Bank of Queensland; 5.3 other lenders, including Credit Union Australia Limited, Homeloans Limited, Aussie Home Loans, National Mortgage Company, Bluestone Mortgages. 6 At all material times there has been a demand from persons throughout Australia seeking to acquire loan products ("customers"), for services to assist them in choosing and acquiring loan products ("loan arrangement services"). 7 Loan arrangement services: 7.1 are supplied in relation to either the loan products of a single loan provider, or the loan products of more than one loan provider; 7.2 at all material times comprised: 7.2.1 advice as to the respective features of available products; 7.2.2 advice as to which loan products were available to persons in the customer's circumstances; 7.2.3 advice as to which loan products best suit the customer's needs; 7.2.4 assistance to complete and lodge applications in a manner that meets the requirements of a loan provider; 7.2.5 facilitation or liaison in the transaction for the acquisition of a loan product between the customer and those sections or divisions of a loan provider responsible for providing loan products; and 7.2.6 submission of an application for a loan product for a customer to a loan provider, or the relevant section or division of the loan provider. 247 Paragraph 6 of the amended defence (the "defence") provides as follows: Mortgage brokers whom ANZ accredits, either directly or through an ANZ-approved aggregator ("ANZ approved mortgage brokers") provide broking services ("broking services") to their customers (that is, the customers of the ANZ-approved mortgage broker), namely: (a) the provision of advice and services to assist customers to identify an appropriate or preferable credit supplier or suppliers (which may not may not be or include ANZ) and loan products (which may or may not include ANZ loan products or ANZ home loan products) suitable for the needs of that customer, and (b) otherwise represent the customer's interests in dealing with the credit suppliers to whom any loan applications are made. 248 Clearly, para 6 of the defence does not deal precisely with the allegations contained in para 7 of the statement of claim. ANZ otherwise deals with para 7 in para 15 of the defence where it pleads: As to paragraph 7 of the … statement of claim, ANZ: (a) says that paragraph 7 does not contain any allegations of material fact and accordingly does not comply with rule 16.02(1)(d) of the Federal Court Rules 2011 and is embarrassing; (b) says further that the allegations in paragraph 7 are entirely general and lacking in particularity; (c) says further and in any event that it is not a supplier of loan arrangement services as defined and refers to and repeats paragraph 9(b) above; and (d) in these premises cannot otherwise plead to and does not admit the allegations made in paragraph 7. 249 In paragraph 9(b) ANZ pleads that: ANZ, as a supplier of credit, and in particular a supplier of ANZ loan products and ANZ Home Loan Products, does not provide either Broking Services or what are described as "loan arrangement services" in paragraph 6 of the … statement of claim … . 250 ACCC's case seems to be that ANZ branches and the franchisees supplied the same services as did brokers, including the Mortgage Refunds brokers, save that the branches and franchisees provided such services only with respect to ANZ products. ANZ's case is that, as a bank, it supplies loan products to borrowers. Implicit in that case is the proposition that there is no justification for treating supply of the loan product as being distinct from the supply of broker or lending services. 251 ACCC asked Dr Fitzgerald to answer six questions. I set out the questions below, together with a summary of Dr Fitzgerald's responses.

Question 1. Is there a market or markets in which brokers compete? 252 Dr Fitzgerald concludes that there is a market in which mortgage brokers compete, that market being for the provision of services to participants in the market for mortgage loans, that is loans secured by mortgages over property - predominantly home loans, but also including, for example, loans to businesses or their proprietors, secured by mortgages over commercial property. Dr Fitzgerald considers that brokers provide loan arrangement (or broking) services to prospective borrowers and distribution services to lenders. 253 The market so identified differs from that pleaded. The ACCC pleads only a market for the supply of loan arrangement services to people seeking loan products. The term "loan arrangement services" is defined in para 6. It is dependent upon the definition of the term "loan products". That term is defined to mean "residential property loans … to enable the purchase of residential properties". See para 4. Dr Fitzgerald's market includes the provision of services to persons borrowing for business purposes, with repayment of such borrowings secured by mortgages over commercial properties. Further, he identifies a "two-sided market", but considers that such market may be treated as two separate markets, in one of which brokers provide services to lenders, and in the other of which, brokers provide services to borrowers. 254 Dr Fitzgerald considers that the market which he identifies must be seen "… in the wider context of the mortgage loan market". At para 11 of his first report he says that brokers compete in: … a market for intermediary services, essentially a functional market. To the loan providers (or simply "lenders"), predominantly the retail mortgage lending arms of banks, (the brokers) represent a channel through which the business of eligible borrowers is brought to them, ie a distribution channel for their loan products. 255 On the other hand (at para 12) he says that: To prospective borrowers [the brokers] offer information and advice on available products, advice on suitability etc to their specific needs and circumstances, and assistance in the application process - essentially what are described as "loan arrangements services" … in paragraph 7 of the amended statement of claim or as "broking services" … in paragraph 6 of the defence. 256 In this paragraph Dr Fitzgerald effectively assumes that the services identified in para 7 of the statement of claim are the same as those identified in para 6 of the defence. As I have attempted to demonstrate, this assumption is, at least arguably, incorrect. Dr Fitzgerald considers that brokers are remunerated "by a combination of fees from the borrower and commissions from the lender". However the evidence suggests that at the relevant time, brokers were almost exclusively remunerated by commission paid by lenders. At para 17 Dr Fitzgerald suggests that the market for loans is a national market, primarily because rates of interest are fixed by reference to a nationally publicized "standard variable rate", and because 70% of borrowers use the internet as their main source of information on new loans, according to research provided to him. This research is contained in exhibit 2, entitled "The MFAA/Bank West Home Finance Index" (the "BankWest survey"). Dr Fitzgerald's reference to "70%" is incorrect. I shall return to that matter. 257 Notwithstanding Dr Fitzgerald's view that the lending market is national, he considers that it has a geographical dimension in that special adjustments, fees or interest rates might be adopted in particular regions where there is increased home-buying activity as compared to other areas. He considers that the services offered by brokers and other intermediaries to participants in the lending market also have "a very pronounced geographical dimension". Some brokers or broker groups have a: local physical presence, typically advertis[ing] locally … and form relationships locally eg with real estate agents, but also within the community and community organizations generally. 258 He considers that brokers operate in separate regional markets such as the Gold Coast, Brisbane or perhaps the west side of Brisbane. Dr Fitzgerald concludes that although some brokers operate nationally, the relevant market is essentially regional. In this respect, too, his views differ from ACCC's pleaded case.

Question 2. If yes to Question 1, is the market or are the markets two-sided? 259 Dr Fitzgerald considers that the market is two-sided but that, as the customer bases (borrowers and lenders) are distinct, it is appropriate to consider it as two separate markets, one for the supply of services to lenders, and the other for the supply of services to borrowers. Dr Fitzgerald notes that in that market, there are some participants who provide intermediary services and also lend. However he understands that the large scale retail mortgage loan providers (primarily banks) use brokers and other intermediaries who do not, themselves, lend. Dr Fitzgerald considers that such "intermediaries" include "in-house or tied distribution channels of loan providers". His opinion seems to depend upon his view that ANZ's lending division, ANZ Mortgage Group, can be validly treated as a separate economic entity from ANZ's internal distribution channels. The significance of such distinction seems to be that if ANZ is treated as one entity (which it is) it would almost certainly follow that its business was supplying loans in the lending market, through the brokers and the in-house and tied channels. As Mortgage Refunds (and most brokers) did not lend, they could not readily be characterized as competing with ANZ in that market. I shall say a little more about this distinction in connection with the next question.

Question 3. If yes to Question 1, please describe the services provided in the market or each of the markets and the persons to whom they are supplied. 260 This question is of primary importance. Dr Fitzgerald asserts the similarity, or absence of material difference between the ACCC's definition of loan arrangement services and the services provided by brokers as pleaded by ANZ. As I have observed, I consider this assumption to be incorrect, or at least a matter for proof. Dr Fitzgerald describes such services as "a package of information, advice and assistance with the application process". He does not refer to the range of products, from a range of lenders offered by brokers, or to the broker's role as a representative of the potential borrower, as pleaded by ANZ. 261 Dr Fitzgerald then discusses the distinction between business units within a banking group. He identifies one distinct business unit having responsibility for the development and supply of mortgage loan products, including fixing rates, terms and conditions and lending criteria, arranging funding of the overall loan book, processing and approving (or declining) loan applications and administering loans. In this case, the relevant unit within ANZ is ANZ Mortgage Group. Dr Fitzgerald also identifies business units which generate referrals of pre-vetted (eligible) prospective borrowers and provide frontline information, advice and process assistance. In the case of ANZ there are a number of such "internal distribution channels", including: Mortgages Direct (a call centre); Personal Mortgage Managers (specialist sales persons); Mortgage Solutions (mobile lenders, effectively operating from July 2004); One Direct (a low-cost alternative to ANZ brand products); and ANZ branches. 262 Dr Fitzgerald says that in the past, these functions were typically undertaken, wholly or predominantly, by bank branch networks which comprised separate cost and profit centres from the mortgage loan arm. However, since the mid- to late 1990s a "richer range of intermediaries" has emerged. The branch network is managed by the Personal Banking Business unit of ANZ. The other channels are managed by ANZ Mortgage Group. I understand the distinction which Dr Fitzgerald draws between business units. I can see how that distinction may apply to the branch network. However I find it hard to see how the other in-house or tied channels (other than the Mortgage Solutions franchisees) can be distinguished from ANZ Mortgage Group, given that it effectively manages them. As to the franchisees the evidence suggests that they adopt some of the business methods of brokers but supply only ANZ products. 263 Little has been said in the evidence about the circumstances in which it may be appropriate to treat profit and cost centres as separate economic units. Nor has much been said about the purpose to be served by so doing. I can see that where a corporation has chosen to provide an arguably discrete aspect of its operation through a particular cost or profit centre, it may suggest that the relevant aspect can properly be treated as a separate product, to be distinguished from any other overall product which the corporation supplies and which incorporates that aspect. That, of course, is the present case. Separate treatment might be particularly appropriate where the corporation was "acquiring" the relevant "aspect" from both internal and external sources. I can also see that in examining the corporation's conduct, it may be helpful to be able to distinguish between the conduct of the particular cost and profit centre and the rest of the corporation. However I suspect that the question of separation and the inferences to be drawn from it will be matters of degree. 264 Concerning the various distribution channels Dr Fitzgerald says: Based on my experience as a Director of a financial group and my general knowledge of the banking industry, different types of prospective borrowers (first home buyers, second or later home buyers/sellers, people with differing levels of income and assets or different degrees of financial sophistication, and so on) tend to obtain mortgage loans more through some channels than through others. Relationships are also a factor (eg an existing relationship with a particular bank branch). However such preferences among channels are no more than tendencies: similar borrowers can choose different channels according to their service attributes and costs, and the overall pattern of such choices has varied considerably over time - particularly the significance of the broker segment. 265 Whilst the factual content of this passage cannot be doubted, Dr Fitzgerald's view that preferences amongst channels are "no more than tendencies" is a little difficult to reconcile with the facts to which he refers. He has, after all, suggested that there are characteristics which pre-dispose potential borrowers to one channel rather than another. Other evidence, particularly that of Mr Stark and Mr Percy, suggests distinct preferences for one or the other, probably based on needs. I accept, however, that some people may have no such preferences, and that preferences may change over time. It may also be that in many, perhaps most cases, a potential borrower will choose the intermediary which best suits his or her current needs. 266 Dr Fitzgerald says that since the mid- to late 1990s, brokers have enlarged their role in connection with the facilitation of loans. Such enlargement has occurred as a result of the relatively easy availability of credit from banks and other financiers lacking an extensive branch presence. Such lenders turned to brokers as a way of promoting their products. At about the same time the major banks were closing some local branches, reinforcing the opportunities available for brokers to extend into areas previously served by the branches. At paras 30 and 31 Dr Fitzgerald says: 30 … (Brokers) were able to offer to prospective borrowers (on behalf of a range of lenders) attractive loan products in competition with those offered by the larger banks, as well as greater convenience and better service. Accordingly, the broker share of new loan intermediation rose and margins built into loan interest rates, and to a lesser extent, fees, tended to decline as a result of this enhanced competition. 31 Broking groups were able to provide incentives (funded by lenders and borrowers) to individual brokers operating under their banners to motivate them to work hard to source referrals (e.g. from real estate agents and other local relationships) and to offer better service to prospective borrowers. The services included, but were not confined to, information and advice on one or more lenders' offerings, personal tailoring of advice, and facilitation of the borrowing process generally. Successful brokers established a presence and networks of relationships in local areas, and some larger broking groups emerged, operating over wider areas, some organised nationally. 267 In para 30, Dr Fitzgerald seems to treat the range of lenders and choice as significant aspects of the brokers' attractiveness to borrowers. It is therefore curious that, in para 31, he effectively suggests that a broker might deal only in the products of one lender. Indeed, he subsequently suggests that he is not aware of "many brokers" who operate in that way. See his first report at para 45. The evidence discloses no such brokers. 268 Dr Fitzgerald says that in the period from late 2002 until 2006, all of the larger banks were "significantly reliant on brokers for distribution services". ANZ was particularly dependent upon brokers. In 2001/02, it made broker-originated loans totalling $5.7 billion out of a total of $19.5 billion, that is 29% of the total. By 2003/2004 the brokers' share was $14 billion out of $30.8 billion, or 45.5%. ANZ branches accounted for most of the distributions through in-house or tied channels, being responsible in 2003/2004 for $11.5 billion out of $30.8 billion, or 37%. 269 At para 33 of his first report Dr Fitzgerald observes: Banks, and in particular ANZ, thus relied very significantly on brokers in the relevant years, notwithstanding that these brokers were in competition with their own "tied" channels, and seen to be so within the Bank, ie that they were capturing (in the form of commissions paid to them by lenders) margins that would otherwise be retained by the distribution units within a banking group, either the mortgage lending business unit or the branches or other arms. 270 To this point Dr Fitzgerald has more assumed such competition than demonstrated it. His opinion seems to be based upon various bank documents to which I shall refer.

Question 4. Please specify the meaning of "competition" in economics and whether "compete" has a corresponding meaning. 271 Dr Fitzgerald considers that in economics "competition can be defined simply as rivalry in a market to win business". Competition is more often described than defined, "more attention typically being given to factors disposing to competition, and the outcomes that it is expected to produce, in particular for society's economic welfare, than to defining the term itself". Factors influencing the degree of competition include the structure of costs, the number and characteristics of market players, the structure of the market and barriers to entry, technology, the nature of demand (sensitivity as to price and other factors) and prevailing regulatory frameworks. He considers that "the higher the degree of competition, the greater the extent to which the competitors constrain each other, particularly in their pricing". The word "compete" has a corresponding meaning. When the term "compete" is defined, it is usual to elaborate upon the means which are employed by rivals to win business. At para 37 Dr Fitzgerald observes: Mortgage loan intermediaries, whether independent or tied to one lender, compete on such a bundle of attributes, including, but not limited to, the fees the client pays them, in conjunction of course with the costs and other attributes of the loan products they are accredited for. Indeed the means by which intermediaries compete will typically involve trade-offs between price and service attributes (loosely, price/quality trade-offs) and, possibly, trade-offs amongst the service attributes. If one of the intermediaries in a region changes its offering significantly, in either price (fees) or service attributes, or both, others can be expected to respond by modifying their own offerings in such ways. 272 In some respects, this passage is a little difficult to understand, given that borrowers do not generally pay brokers at all, and lenders only pay for loans which are actually made. Although the question addresses the meanings of the words "competition" and "compete", Dr Fitzgerald goes on to assert that: Mortgage loan intermediaries, whether independent or tied to one lender, compete on such a bundle of attributes, including, but not limited to, the fees the client pays them, in conjunction of course with the costs and other attributes of the loan products they are accredited for. 273 Use of the term "mortgage loan intermediaries" has the effect of equating the services provided by brokers with those provided by in-house and tied channels, which is one of the questions arising for resolution in this case.

Question 5. Applying your definition of competition, please give your opinion as to whether any of the following compete with brokers in the market or any of the markets identified above and specify the market(s) and the factual matters relied upon in coming to your opinion. 274 This question has numerous parts, and so the answer is somewhat complex. There are seven categories of possible competitor, with some sub-categories. The first category is: Other brokers in the same geographic market who are accredited in respect of loan products that differ from the loan products in respect of which the broker in question is accredited. 275 Dr Fitzgerald considers that in the lending market all mortgage loan products compete. This conclusion is based upon his view that lenders' benchmark lending rates are widely publicized on a national basis, and that extensive information concerning loan products is readily available on the internet, He asserts that more than two-thirds of prospective borrowers seeking loans use the internet as their main source of information. As I have previously mentioned, this statistical information is incorrect. Dr Fitzgerald considers that because of the ready availability of such information concerning competing products, pricing by lenders of similar products tends to be quite similar, at least in the case of similarly qualified borrowers. This consideration leads him to conclude that: … other components of the bundle of services that brokers and other intermediaries offer are likely also to be important in their competition for business - ie as well as the parameters of the particular loan products that they are accredited for. 276 Such other elements include: … local presence and prominence, relationships, convenience, quality and clarity of information and advice provided e.g. about suitability of product options, skills in tailoring advice to client needs, servicing the application process; and of course the intermediary's own fees, taken together with the lenders' fees, interest rates and other key loan features. 277 At para 42 Dr Fitzgerald says that these considerations and his experience as a director of the ING Group (which made loans through intermediaries) lead him to believe that brokers accredited in respect of loan products that differ from loan products in respect of which the broker in question is accredited would be in competition, both in the supply of intermediary services to lenders, and in the supply of facilitation (broking or lending) services to potential borrowers. At para 43 Dr Fitzgerald says: Thus if one intermediary in a given geographic market (region) were to implement, without materially changing the service attributes ("quality") (of its … offering (to potential borrowers) a small but significant non-transitory increase in prices (fees), ie a "SSNIP", that intermediary would lose share of the [relevant] market in that region; other intermediaries it competes with would gain market share. 278 Other evidence suggests that brokers generally offer a wide variety of loan products supplied by a wide range of lenders. There is some suggestion in the evidence that there are categories of lender and categories of loan product, and that a broker will try to balance its offering to reflect those categories. In that sense, it may be correct to conclude, as Dr Fitzgerald does, that the overall offerings of a particular broker may be sufficiently wide to match the ranges offered by other brokers, although some or all products may be offered by different lenders. However, much of the industry evidence suggests that the loan products of one lender are not necessarily the same as those of another. Some products will suit some borrowers and not others. Some lenders will have more flexible criteria than others. Such criteria may change over time. This proposition suggests that even if aspects of price do not vary much, products may still be differentiated in ways which affect the suitability of particular products for at least some potential borrowers. 279 The second category is: Other brokers in the same geographic market which are accredited only in relation to the loan products of a single loan provider. 280 Dr Fitzgerald again answers this question "yes": … essentially on the same reasoning that I have applied to the previous category, and my earlier commentary on the nature of the market for loan products per se (essentially national) and particularly, the market for intermediary services provided in respect of those products, the nature of the participants in the latter market, and the nature of their competitive armoury. 281 I have already discussed Dr Fitzgerald's views concerning the differentiation of loan products. His reference to "the nature of the participants in the latter market, and the nature of their competitive armoury" is somewhat vague. Those matters seem not to have been expressly addressed in considering the previous question. A more troubling consideration is that Dr Fitzgerald offers no explanation for his view that a broker, offering the products of one lender, would be in competition with a broker offering a range of products from various lenders. That is the primary distinction between this question and the preceding question. Given that the ANZ documentation (to which Dr Fitzgerald apparently had access) recognized the disadvantage inherent in offering the products of only one lender, I would have expected the question to be addressed. The industry evidence also suggests that the success of a broker depends upon its offering a wide range of products from a wide range of lenders. 282 As I have previously mentioned, Dr Fitzgerald then notes that he is not aware of any brokers offering the products of only one lender, and that such a person would probably be a franchisee, operating under the lender's "banner", rather than a broker. He then assumes that there may be brokers who, in a particular period, choose to offer only the products of one lender. Such a person would be free to seek accreditation from other lenders if their products became more attractive, whilst a tied franchisee would not be readily able to do so. However he does not consider that consideration to be relevant "from an economic perspective". 283 The next category is: Persons franchised by a particular loan provider to provide loan arrangement services or broking services, in the same geographic market, in respect of the loan products of that loan provider only. 284 For essentially the same reasons as he gives in connection with the two previous categories, Dr Fitzgerald concludes that such a franchisee would be in competition with brokers having a wide range of lenders. He considers that tied intermediaries (such as ANZ's Mortgage Solutions franchised mobile lenders) in their areas, compete directly with brokers who are accredited to offer the loan products of one or more lenders, whether or not those other brokers are also accredited to offer ANZ products as part of their range. This view is based upon his earlier reasoning, "buttressed" by material discovered by ANZ. He says that such material demonstrates that ANZ established Mortgage Solutions: … in order to reduce reliance on brokers, … [by seeking] to enlist prospective franchisees who would have the same skills and operate on a similar business model to brokers not tied to a single lender, and with a structure of incentives set explicitly in relation to, but a little below what ANZ and other lenders were offering to untied brokers directly, or through aggregators. 285 I do not accept that ANZ Mortgage Group's intention in establishing the Mortgage Solutions franchise model was as clear as Dr Fitzgerald suggests. Whilst it was intended that the franchisees act very much like brokers in some respects, they were not to offer non-ANZ loan products. As I have said ANZ seems to have recognized that such absence from the franchisees' offering would be a significant disadvantage. Further, as they were to operate under the ANZ banner, they were never going to look independent. The only strength of the broking model which they were to replicate was that of convenience in offering "out of hours" and "out of office" consultations. Further, at least part of ANZ's motivation in establishing the franchise model was that other lenders had such facilities and ANZ did not. It is difficult to accept that a franchisee (who sells only ANZ products under the ANZ banner) is operating on a similar "business model" to that of a broker whose business success depends on having a wide range of products supplied by a wide range of lenders, in connection with which he offers advice which is perceived to be independent. 286 Much of the ANZ "documentation" to which ACCC and Dr Fitzgerald refer is in the form of slides used in presentations, particularly, but not exclusively by the head of ANZ Mortgage Group, Chris Cooper. Of particular importance are the slides which relate to a presentation given on 16 September 2003. In those slides, there is reference to a franchised mobile specialist salesforce which will replicate broker performance to win new customers. It is also said that ANZ Mortgage Group will "move to a specialist distribution model in order to compete with the external specialists [the brokers]" and that "Specialization is the only true basis to take on the brokers …". 287 However the "document" is lengthy, and passages taken in isolation may not reflect its true intent. On slide 2 a "business strategy" is outlined. The strategy is presumably that of ANZ Mortgage Group. Concerning distribution it is said that: Distribution Strategy - Mortgages has defined a vision for building a distribution strategy that will drive the business for the next 3 to 5 years. The key elements of the strategy encompass: • Mortgage Specialists - focus on "mining" existing non-branch ANZ opportunities, e.g. Corporate customers' staff, ANZ credit card customers • ANZ Mortgage Solutions - a franchised mobile specialist salesforce that will replicate broker performance to win new customers • ANZ Correspondent Distribution - a new channel that will leverage existing salesforces of investment advisors/second-tier banks to sell "white-label" mortgages through a call centre. 288 Replicating broker performance involves using brokers' methods but does not necessarily imply competition. Indeed, on slide 3 a "tactical initiative" complementing the core strategies is identified as "Growth Opportunity - opportunity to deliver 20% uplift in broker sales through enhanced service delivery". Other evidence suggests that the intention was to improve the arrangements for dealing with applications submitted by brokers. These passages are difficult to reconcile with an intention to compete. Further, it seems unlikely that ANZ intended to threaten a major source of business which it had been training and encouraging for years. The real issue may appear at slide 21 where over-reliance on brokers and the risk of churn are raised as problems. It is also pointed out that 75% of broker sales and 90% of non-lender sales did not flow to ANZ. See also slide 41. Thus there was substantial room for improvement in market share in the lending market. Of the 11% of that market which ANZ had, 4% was attributed to brokers, 7% to "network" and 0.5% to "wholesale". ANZ Mortgage Group aimed to increase its share to 20% of which 4% would be from brokers, 4% would be "wholesale" and 12% would be from in-house and tied channels. In other words, the brokers' market share would remain constant, but ANZ's market share would rise substantially. 289 It seems that brokers' views of ANZ were important. At slide 11 there is statistical information described as "Broker Ratings", being brokers' views as to which of the major banks was best to do business with, and as to product strength and leadership. Interest in brokers' views suggests that ANZ saw the brokers as "customers" or collaborators rather than competitors. 290 At slide 16 there is a discussion of the evolution of the Australian mortgage industry from the mid-1990s until 2003 and a forecast for "2004+". It discloses a history of co-operation between brokers and the banks from the mid-1990s to 2003 but forecasts "closer competition" in "2004+". At slide 17 there is a discussion of changing industry dynamics from 2003 to 2007. It states that all banks seek to maximize broker support but anticipates that future broker growth will be limited, partly by ANZ's improved customer relations management and partly by increased focus on retention in a slowing market. ANZ's proposed franchise arrangements would also, it was said, "counter broker growth". It may be that "improved customer relations management" and "increased focus on retention" are similar concepts. Despite the suggestion that the relationship between brokers and ANZ might become more competitive, Mr Lahiff suggests that lenders continued to allow virtually unlimited accreditation of brokers until about 2008. There is no suggestion that ANZ adopted a different approach. One might have thought that one very effective way of competing would have been to limit the number of new accreditations. 291 On slide 30 it is said that: Mortgage managers facing increased competition from brokers offering multiple product choice - negative impact on volumes. 292 The short and medium to long term strategies for dealing with this and other challenges involved streamlining internal procedures, improving services and the creation of a "wholesale white label" product. 293 Dr Fitzgerald then refers to a report by Deacons Consulting, dated October 2003. At p 5, in connection with distribution channels, it states that one of ANZ's primary objectives was "To increase Market Share via a new Profitable Franchised Distribution Channel". 294 It was then said that: ANZ must continue to expand its position within the Australian Mortgage Market, by proactively combatting the strong growth of broker networks and other lenders. The adoption of a mobile distribution channel will facilitate this by increasing ANZ's ability to satisfy the evolving needs of existing and potential customers. This will also correct an existing gap in ANZ's distribution capabilities, in that ANZ does not currently have a dedicated specialist mobile salesforce. 295 Clearly, this passage deals with market share in the lending market, not in any market for the supply of loan arrangement services. Other lenders and strong growth in broker networks are implicitly said to be bars to ANZ achieving a greater market share in the lending market. Of course the brokers had played a large part in the establishment of ANZ's then position in that market. Presumably they posed a threat because of the extent to which they might deflect business away from ANZ and to other lenders. On p 6 the report considers the target groups in which ANZ proposed to expand its market share. Under the heading "Why they are important" it is said that the acquisition of new customers will detract from the strength of competitors' existing market position and their ability to further penetrate the market. This is clearly a reference to other lenders. The paragraphs headed "What they expect" and "How are their expectations going to be met?" suggest that the "fully mobile sales force" or the "franchise sales force" (presumably the same thing) was to be seen as part of the ANZ loan product. 296 At p 7, in discussing the proposed franchise network, it is said that: The source of prospective franchisees will predominantly be the financial and banking sector. This will include: • Broker networks; • Competitors; • ANZ. 297 Thus ANZ was contemplating the attraction of at least some brokers as franchisees. I note that broker networks are referred to in contra-distinction to "competitors". At pp 8-10, the nature of the franchise operation is discussed. It suggests that franchisees were to be an integral part of the ANZ operation rather than independent consultants or broker. At p 11 the report notes that franchisees would not be able to offer choice to customers and would not offer a "sub-prime product". These matters were apparently seen as disadvantages. The commission structure for franchisees was to offset the disadvantage of the "single brand" product offering, whilst taking account of the benefits which the franchisees would derive from their involvement with ANZ. 298 The commission structure set out on p 12 was said to remunerate franchisees at a level which is "market competitive", presumably meaning that it would be comparable to that received by other in-house ANZ channels and the brokers, taking into account the single brand disadvantage and (presumably) the benefit of the direct involvement with ANZ. It is suggested that the result would be a higher remuneration for the franchisee at lower cost to ANZ Mortgage Group, and a lower originating cost for new lending, resulting in a "higher net interest margin". I note that the commission paid to the branches was higher than that paid to the brokers. 299 It is a little difficult to see how the franchisees and ANZ could both be better off than under the existing regime. Other documents suggest that the saving to ANZ may have been based upon a comparison of the amounts of commission actually received by "consultants" after originators and broking companies had taken their respective shares. Thus the franchisees were to be remunerated at a level which was commensurate with that received by Mortgage Refunds brokers, but significantly less than the amounts actually paid by ANZ Mortgage Group to AFG and by AFG to Mortgage Refunds. There is some uncertainty about this approach in that the franchise proposal seems to have involved the franchisees in meeting at least some of the costs met by AFG and/or Mortgage Refunds, particularly the latter. There is no detailed indicative calculation of the benefit to be derived by ANZ. I am inclined to infer that the perceived benefit, in terms of franchise remuneration and cost to ANZ, were of secondary importance to the major aim of increasing market share in the lending market. 300 Dr Fitzgerald also refers to a document entitled "Toronto Mobile Economics" dated October 2003. However he refers to it only in connection with the commission structure for franchisees. The document appears not to have been provided in the final bundle of documents. It is probably of little significance. 301 Another set of slides, relating to a presentation on 28 October 2003 is entitled "Delivering service Convenience through a specialist Mobile Mortgage Workforce". Dr Fitzgerald says that those slides set out "the overall objective of countering the trend to increased reliance on brokers and discuss the benefits which ANZ could offer franchisees". The first slide is headed "The distribution strategy is aimed at positioning ANZ Mortgage Group ahead of the market in opening up new channels in growth markets". It then states that, "Mortgage brokers with dedicated specialist sales forces are achieving rapid growth". Relevant figures concerning ANZ business follow. It is then said: To counteract this trend a fully franchised mobile home loan specialist workforce is planned for launch in early 2004, with a pilot model due for test launch in December 2003. 302 The "fully franchised workforce" was to sell only ANZ mortgage products and to "adhere to ANZ branding, values and customer service level agreements". Clearly, the "growth markets" are markets for the supply of loan products, not loan arrangement services or brokers' services. On slide 2, a diagram identifies the various distribution channels used by ANZ Mortgage Group, including "third party mortgage originators", presumably the brokers. Slides 2 and 3 suggest that the franchisees were to be more closely associated with ANZ Mortgage Group than were the brokers. At slide 4 there is a discussion of benefits to ANZ and to the franchisees. There is no suggestion that a benefit to ANZ would be reduction in reliance on brokers, or of the cost of business written through brokers. On slide 5 "key findings" are identified. Although most findings identify benefits in the franchise model as compared to in-house channels, there is no suggested advantage as compared to the broker model. 303 On slide 7 the question of commission is discussed. In order to understand this slide, one must, to some extent, read between the lines. The Mortgage Solutions franchisees were to receive both upfront commission and trail commission at rates well below those paid to ANZ branches and to the brokers. However the franchisees were also to receive commission on loans written for borrowers referred to the franchisees by ANZ "leads", a source of business which was not available to the brokers. As I have said, ANZ considered that the proposed rates would be attractive to likely franchisees because they were higher than those received by the brokers' "consultants", after deduction of amounts payable to the aggregators, franchisors or entities such as Mortgage Refunds which stood between the consultants and the lenders. However, as I have also said, these figures say nothing about franchisees' outgoings, and do not attempt to quantify any saving to ANZ Mortgage Group, either as compared to broker-written business or business written through the branches. 304 Dr Fitzgerald refers to a series of slides associated with a presentation by Mr Cooper dated 25 February 2004. On the first slide it is said that ANZ Mortgage Solutions is "boldly creating the best Mortgages Company in Australia by providing product solutions and 'easy to do business with' processes and distribution channels". Again, the suggestion seems to be that ANZ Mortgage Group is seeking to improve the product and its delivery to customers in the lending market. At slide 2 Mr Cooper deals with emerging problems, including rising interest rates, movements in funding costs and high acquisition costs in generating new business. He says that "Distribution partners are also capturing a higher proportion of value leading to further margin decline". Slides 4 and 5 suggest that the "distribution partners" included both brokers and internal distribution channels. Thus it seems that the brokers were seen as partners. On slide 4, there appears to be a distinction between "competition pressures", presumably from other lenders, and "broker payments". Dr Fitzgerald refers particularly to slides 11-13. Slide 11 is headed "Core strategic themes focus on Distribution and Business Improvement". It identifies four key "distribution strategies". They are: Personal Mortgage Managers - focus on "Mining" existing non-branch ANZ opportunities, eg Corporate customers' staff, ANZ credit card customers. Mortgages Direct - fully leverage the opportunity provided by the 5,000+ calls per month received by the Home Buyers Line - 1800 035 500. ANZ Mortgage Solutions - a franchised mobile specialist salesforce that will replicate broker performance to win new customers. ANZ Correspondent Distribution - a new channel that will leverage existing sales forces of investment advisers to sell "white-label" mortgages through a call centre. 305 The difference between "replicating" broker performance and "competing" with brokers may be significant. It is possible that ANZ Mortgage Group was contemplating a sector of the market which brokers would not reach. The first two strategies are marked as "transform" and the third and fourth are marked as "build", apparently suggesting a difference between transforming existing facilities and building new facilities. On slide 12 it is said that: [ANZ Mortgage Group] is currently overly reliant upon the broker channel for FUM [funds under management] growth. Our goal is to reduce this dependency by increasing the number of sales through ANZ Mortgage Group's Specialist channels. We will achieve this through: - Growing the Personal Mortgage Manager channel - Transforming Mortgage Direct (Telephone Sales) - Implementing ANZ Mortgage Solutions (Franchise model) - Development and implementation of the Correspondent Distribution channel. 306 The Correspondent channel has not been discussed in detail in this case. There are a few references to it in the evidence. I understand it to involve the sale of cheaper, non-ANZ branded products, possibly by telephone or on-line. 307 There are also bar graphs which show the brokers' share of 2003 FUM ("funds under management") growth as 58% or $6.5 billion of the ANZ total of $11.3 billion. Target FUM growth to be achieved over three years was $19.5 billion of which the brokers were to contribute $6.5 billion, representing only 33% of the growth target. The branch network and the specialist channels were each also to contribute 33% of target growth or $6.5 billion. There seem to have been two underlying assumptions, namely that: if ANZ adopted new strategies for marketing its products in the lending market, it could substantially increase its share of lending in that market; the additional business would come through in-house and tied channels rather than through the brokers; and none of the new business would detract from the volume of business then being written by the brokers. 308 In other words, ANZ was quite willing to continue to pay brokers for introducing the volume of work that they were then introducing but proposed to attract other business, possibly more cheaply. 309 On slide 13 it is said that, "We are close to launching our mobile Franchise model, ANZ Mortgage Solutions - 'Mortgages Anywhere, Anytime' ". It is said that "The first rollout of ANZ Mortgage Solutions franchisees is planned for late May/early June and will continue with an ongoing progressive rollout to 175 franchisees". This statement may suggest that those franchisees were not yet "competing" with the brokers. It is also said that "Distribution gap filled with an innovative mobile solution", reflecting the perceived gap in ANZ's distribution channels, compared with those of other lenders, again focussing on competition in the lending market. On slide 16 it is said that the ANZ Mortgage Group is "standardizing its technology platform across all distribution channels", apparently including the brokers. 310 Dr Fitzgerald refers to another set of slides which accompanied a presentation on 24 March 2004 entitled "The ANZ Mortgage Solutions Franchising Initiative" and "Personal Bank/Franchisee Working Dynamics". The slides deal with the relationship between franchisees and borrowers, limiting the franchisees to "new ANZ home loan business". They were "not to directly market to existing ANZ customers" (underlining in original). At slide 6, franchisees' commission is discussed. It is suggested that the proposed commission is "competitive with commissions for Sales Consultants of major broker chains which provide operational support". This was said to deliver significant savings compared to current rates paid to brokers. I have discussed this matter. 311 Dr Fitzgerald then refers to a presentation entitled "Channel Neutrality" and "Breaking Channel Neutrality". It was prepared by Angus Gilfillan, apparently an economist employed by ANZ, and is dated 21 March 2005. On slide 1 it is said that: ANZ Mortgages sells mortgage products simultaneously through a number of channels. In many instances, these channels are competing to reach the same set of customers. 312 The various channels are said to include "Network", "PMM", "Mortgage Solutions", "Direct", "Broker" and "Origin (wholesale)". The advantages of a multiple channel distribution model are said to be: • Helps economise on efficiency and effectiveness • Internal channels can help manage external channels (ie points of comparison) • Help reach multiple customer segments • Help unbundle products and services (ie securitisation/unbundling of origination and funding). 313 The challenges of such a model are said to be: • Channel conflict and retaliation • Cannibalisation • Customer confusion • Customer need of full products and services • Loss of customer control and ownership. 314 The last "challenge" may concern brokers, but there is no other suggestion that brokers or brokers' commissions are a "challenge". 315 On slide 2 under the heading "ANZ has a strict policy of channel neutrality", it is said that: To ensure all distribution channels compete on an equal footing for customers, ANZ Mortgages has a strict policy of channel neutrality, where all channels receive the same pricing and fee structures. 316 Under the heading "Breaking channel neutrality", it is said that: • Breaking channel neutrality (eg undercutting brokers and sell cheaper products directly) could lead to dangerous channel conflict in particular with third party channels • The threatened channel could retaliate against ANZ Mortgages or simply stop selling its product • This could lead to deterioration of channel economics • At times destructive channel conflict because of a channel's decline may be appropriate. 317 I understand the last point to imply that if a channel is declining in importance or value to ANZ, destructive channel conflict may be appropriate in order to destroy it. 318 On this slide there is also a diagram in the form of a jig-saw puzzle with the heading "ANZ's retail multi-channel strategy" and "… one brand and one price across all channels". There are four pieces in the puzzle. The four pieces are entitled: • Network; • Brokers and Solutions; • PMM; and • Direct. 319 The combination of brokers and Mortgage Solutions franchisees suggests that the franchisees were seen as being in some way similar to brokers. It may follow that, if the brokers are competing with the branches, then so are the franchisees. However, as I have pointed out, other documents seem to treat the franchises as being an integral aspect of ANZ's loan products. 320 On slide 3 it is said that: New entrants have identified the direct market as an attractive low cost segment but ANZ finds it difficult to compete due to its policy of channel neutrality. 321 The "direct market" involves internet and telephone sales. This market is said to be of increasing importance. Further "direct niche competitors are entering the market and passing on distribution cost savings to customers via extremely low rates". This is clearly a reference to competing lenders. It is said that ANZ's "most competitive product" is uncompetitive with those of the "direct niche competitors". There is a table setting out competitors' interest rates and lending charges. On slide 4 it is said that: Even though ANZ has channel neutrality, the channels have very different economics. 322 The lowest cost distribution channel for ANZ is "Direct". However, because of the policy of channel neutrality, its products are priced in the same way as the products offered by all other channels. It is then said that for a standard variable loan of $200,000 with an average life of four years and 106 bps margin, the various distribution channels have vastly different economics. The following list shows the estimated relative average distribution cost of such a loan product on a marginal costs basis: Broker 41 Solutions 26 PMM 6.5 Network 6.1 Direct 3 323 The difference between the cost of broker-originated business and network-originated business may seem curious, given the fact that the commission paid to the branches was higher than that paid to the brokers. However, as appears elsewhere in the documentation, at some stage ANZ Mortgage Group addressed the overall benefit to ANZ of the supply of loan products by branches, treating the branches' commission as being retained within ANZ, as opposed to commission paid to brokers which was lost to ANZ. 324 The writer observes that, "The economics and flexibility (eg ease of re-branding) of ANZ Direct could be leveraged to compete with low cost niche players". It is further said that, "Ultimately value creation and profitability of each channel and product should be understood when considering channel decisions". 325 At slide 6 it is said that, "Aggressive players like ING Direct are likely to launch an assault and place further pressure on margins". The document then discusses the ING marketing strategy, in connection with deposits and mortgages. Concerning mortgages it suggests that ING's strong brand awareness, low cost dynamics and aggressive marketing could result in its developing a "strong foothold" in the direct mortgage space. Obviously, this discussion concerns the lending market. At slide 7 strategies are identified for dealing with such competition in the lending market. Four options are advanced, namely: 1. Compete on price and discount some of (or all) our products across all channels? 2. Break channel neutrality and offer additional discounts on existing products distributed via ANZ Direct? 3. Create a new discounted and differentiated product that is only offered via ANZ Direct? 4. Create a new direct "fighter" brand via which we sell discounted products? 326 These options all involved attempts to be more competitive in the lending market by reducing product prices. Options 2, 3 and 4 would involve such reductions being at least in part, at the expense of the more expensive distribution channels, including the brokers. The presentation recognizes that the outcomes of these options are unknown. 327 In slide 8, there is an extensive discussion of the dangers inherent in breaking channel neutrality, commencing with a discussion of the Bank of New Zealand's experience in offering a discounted product via its network and excluding the brokers. At the time brokers were not writing a large part of BNZ's mortgage business. The result was that the brokers wrote less BNZ business, providing an opportunity for other banks to capture additional broker volume, increasing their reliance on broker-originated loans. This eventually led to a change (presumably an increase) in the cost structure of those banks relative to BNZ. BNZ tried to "leverage" its lower cost base and started a price war. Other banks followed suit, resulting in lower margins and profitability for the whole industry. The author suggests that breaking channel neutrality could have the same effect in Australia, and that ANZ had the most to lose if channel neutrality were compromised, given its strong reliance on brokers (which then accounted for 46% of its originated loans). There is however a caveat to this view. It is said that: The dynamics of the Australian market differ from the NZ which may result in a different reaction if channel neutrality is broken. For instance, competitive forces in Australia limit banks from changing rates outside of RBA changes to the cash rate which is not the case in NZ where there is some flexibility. 328 Slide 9 is headed: "Breaking channel neutrality isn't just black or white … there is a continuum". There is then a diagram which seems to indicate the relative risk of channel conflict in each of five possible approaches, addressed in ascending order of risk. The first, described as "Minor Variations to Service" was said to involve: "Maintaining neutrality on price and product attributes but providing differential service to channels eg approvals within 48 hours for Mortgage Solutions compared to 96 hours for other channels". This alternative was seen to be at the "lower risk" end of the "continuum". 329 The second possibility, under the heading "New Brand and Tailored Products", was "Introduce a separate brand with tailored products for each channel eg HBOS or Homepath (CBA subsidiary)". The third possibility was headed "New Brand and Minor Product Modifications". It would "(i)ntroduce a new brand and channel with only minor product changes to ANZ product line up - only offering the illusion of differentiation". The fourth possibility was headed "New Brand Associated with ANZ Brand". The proposal was to: Introduce a new brand that is associated with the ANZ brand. Via this channel offer products that are similar to ANZ's products with only minor product changes eg Esanda Mortgages. 330 Finally, at the higher risk end there is a further option, the heading of which I cannot read. It is described as follows: ANZ Direct offers discounted product which isn't available to other channels eg ANZ Direct Mortgages. 331 On slides 10 and 11 the author seeks to identify and assess the degree of risk that the introduction of a discounted product (offered directly and not through other channels) would cause destructive channel conflict, and the importance to ANZ of the threatened channels. He recognizes that there is a high risk of destructive conflict involving brokers and Mortgage Solutions franchisees, and that those groups are of high importance to the bank. The presenter concludes that: The greatest potential retaliation and damage would come from brokers because of ANZ Mortgage's strong reliance on brokers which account for 46% of loans originated (exc. Origin). 332 Slide 12 seeks to demonstrate the consequences for ANZ Mortgage Group of broker retaliation, given its reliance on such brokers. Under the heading "Current Motivation in Using Brokers" it is said that: • All banks are using brokers to grow and/or protect market shares. No bank could afford to ignore the broker channel. • ANZ and CBA have moved to reduce commissions whilst others appear to be reviewing their position or taking a watch and see approach. Any movement from another major would most likely trigger others to follow. • WBC has been trying to grow at the expense of their broker channel. 333 Under the heading "Likely Reaction if ANZ Broke Channel Neutrality" it is said that other majors (presumably banks) may: • Try to increase broker flows given broker retaliation toward ANZ; • Follow and offer their own discounted product either across all channels (unlikely) or directly also breaking channel neutrality; or • Do nothing / wait and see. 334 Clearly, this discussion is about gaining market share in the lending market by offering low cost products, such low cost being financed, at least partially by offering the products through cheaper distribution channels. 335 Slide 13 is headed "There are 10 ways to manage channel conflict at different stages in its development". Three stages of channel conflict are identified, namely: Two or more channels target the same customer; Channel economics deteriorate; and Threatened channel stops performing or retaliates against the supplier. 336 Under each of those three sub-headings various possible strategies are identified. 337 During the first stage, conflict over customers may be resolved by providing different products to different channels, thus assigning market sectors to particular channels. Alternatively, channels might be allocated "territory" on a geographical basis. Thirdly, the ANZ could "enhance or change the channel value proposition", presumably involving some change in the manner of remuneration. It seems that at this stage, the problem is manageable. 338 In the second stage of channel conflict, when the economics of a particular channel are deteriorating, one solution would again involve financial adjustment and/or returning to the level playing field. Alternatively, certain "services" might not be made available through direct (in-house) channels. A third possibility was said to be "Complement value proposition of the existing channel by introducing new channels". I do not fully understand this proposition, but it seems to contemplate the provision of benefits associated with ANZ Direct to other channels, presumably the referral of business. Of some interest is the suggestion that this proposal would mean that ANZ Direct was both complementing, and competing with other channels. Finally, it was suggested that ANZ might foster consolidation amongst intermediaries. This approach was thought to be an option for the future as brokers became more heavily regulated. To suggest that ANZ might take a role in maintaining the broker channel by encouraging consolidation suggests that brokers were seen as likely to continue to play a significant role in ANZ's business for the foreseeable future. 339 At this stage the problem is seen as being sufficiently acute as possibly to justify a departure from the strategy which is creating the problem, or other drastic action. 340 As to the third stage, involving a channel ceasing to perform or retaliating, the solution seem to have been either to crush the channel or to withdraw from the battle, presumably by abandoning the changes which caused the problem or perhaps, offering compensation. This would be the most acute phase. 341 Slide 14 poses the question: What should [ANZ Mortgage Group] do in the face of the existing competition and potentially more aggressive competition? 342 Again, I stress that in the relevant context, such competition was between lenders in the lending market. The four options identified on slide 7 were then compared under the heading "Channel Conflict", "Sales" and "NPAT" (net profit after tax). 343 Options 3 and 4 were identified as being the most "plausible", apparently because the likely consequences were unknown, whereas option 1 offered a negative effect on NPAT, and option 2 offered the risk of channel conflict and uncertainty in other areas. On slide 15, Options 3 and 4 are compared. Option 3 was said to involve higher risk of channel conflict, in particular with brokers and Mortgage Solutions franchisees, than Option 4. There is a discussion of the advantages and disadvantages of each. 344 Concerning all of this material, Dr Fitzgerald concluded at the end of para 49 of his first report: It is evident from such material that the main advantage ANZ sought to gain from establishing Mortgage Solutions as its most overt counter to brokers was, apart from a somewhat lower cost in commissions, channel loyalty. Relative to being a member of an untied broking group, the main advantage for the franchisee would presumably be favoured access to a flow of referrals from ANZ, through the links on ANZ's website, from the Mortgage Direct Call Centre or from branches, plus the variety of forms of practice support (eg training, IT systems). 345 Whilst it is true that ANZ considered that Mortgage Solutions franchisees would be cheaper, from its point of view, than the brokers, there seems to have been no attempt to identify the overall amount of the benefit. Further, the franchisees were also to be cheaper than the branch network, although much of the branches' commission would remain within ANZ. No doubt customer loyalty was an issue. However I consider that rather more information emerges from the documents. Clearly ANZ Mortgage Group was anxious to avoid channel conflict, and was very conscious of the high level of dependence which it had on brokers. At least some of this concern was not about high commissions or customer loyalty, but about the risk that business might be suddenly lost in the event that relations with the brokers deteriorated. Further, ANZ Mortgage Group seems to have been primarily concerned with its share of the lending market. The brokers' share of ANZ Mortgage Group's business was a relevant factor in its attempt to become more competitive in the lending market by producing a lower cost product as compared with the products of other lenders. As I have demonstrated, at an earlier point ANZ had contemplated a substantial increase in the amount of business actually written by the brokers, although the evidence is somewhat equivocal on that score. Clearly, ANZ's focus was on capturing business which neither the brokers, nor ANZ's other channels were capturing. In that sense, ANZ's plans may not have involved any real threat to the brokers' existing business. The question may have been whether there would be competition between ANZ and the brokers for the business which neither was then receiving. 346 It is worth adding, at this point, that the position of the Mortgage Solutions franchisees is a little unclear. Much of ACCC's case seems to rely upon the assumption that the franchisees were, on behalf of ANZ (probably ANZ Mortgage Group) competing with brokers. One problem with this analysis is that the Mortgage Solutions plan was not really implemented, other than on a limited trial basis until mid-2004, after the Mortgage Refunds agreement was made, although implementation no doubt continued after that date. Another problem is that ANZ seems to have grouped the franchisees with the brokers, at least for some purposes. 347 This rather lengthy discussion of the ANZ documents arises in connection with ACCC's question to Dr Fitzgerald as to whether a lender's franchisee providing intermediary services in respect of loan products of that loan provider only, would compete with brokers who deal in a wider range of products supplied by a wider range of lenders. Dr Fitzgerald finds in these documents support for his view that brokers and franchisees do compete, largely because he reads the documents as disclosing that ANZ had that view. In my view, however, the documents disclose a fundamental concern about ANZ's market share in the lending market. Much of that market share came from the brokers. There was no desire to prejudice that source of business. ANZ certainly wished to reduce its reliance on the brokers in acquiring business in the lending market. It also wished to reduce costs and to foster customer loyalty to it. None of those aims necessarily leads to the conclusion that ANZ considered that it was competing with the brokers in the supply of loan arrangement services. Much of the evidence suggests a complementary relationship rather than one of competition. On some occasions the language of competition is used, but much of the discussion is about competition in the lending market. 348 Finally, it is not entirely clear to me why ANZ expected that persons who would otherwise have consulted mortgage brokers because of the available choice and independent advice, would choose to go to a Mortgage Solutions franchisee, or to any of the other internal channels, none of which offered advice, information and assistance concerning products other than ANZ's products. Indeed, ANZ seems to have recognized that those who valued choice would not do so, and so the franchisees were to be compensated for that disadvantage. Further, ANZ seems to have recognized the value of "trust" in the brokers' relationships with customers. On one view of the evidence, ANZ could only encourage potential borrowers to come to the in-house and tied channels by convincing them that they did not need the brokers' advice or assistance concerning the wider range of products and lenders. ANZ could probably only do that by making its product better understood and/or more attractive in comparison to other lenders' products in the lending market. 349 The next category of possible competitor is: Loan providers which, in respect of their own loan products, engage or employ persons to provide, and who specialize in providing [various kinds of advice and/or assistance]. 350 The question is divided into four parts by reference to different types of advice or assistance. The first is: Advice to persons seeking home loans as to the features of the respective loan products available from that loan provider. 351 Dr Fitzgerald considers that a key element of the bundle of services offered by brokers and other intermediaries to prospective borrowers who are seeking loans in the lending market is advice on the features of the various loan products. Thus he considers that the question is whether the services are in the same market if offered "under the lender's roof by its own employees or equivalent agents", as when it is offered by brokers. Dr Fitzgerald considers that such services are offered in the same market as that in which brokers operate, whether those services are offered by a lender's staff or a lender's franchisees. In answering this question Dr Fitzgerald seems not to have addressed the fact that the broker will be offering independent advice about the products of numerous lenders whilst the lenders' staff or franchisees will be offering advice only about one lender's products. 352 The second category of advice or assistance is: Advice to persons seeking home loans as to which of that loan provider's loan products are available to persons in those person's circumstances. 353 For similar reasons Dr Fitzgerald concludes that in giving such advice, the brokers and the lender's staff and franchisees are in competition. I make similar comments concerning the adequacy of the reasoning underlying this view. 354 The third category is: Advice to persons seeking home loans as to which of that loan provider's loan products are best suited to the person's needs. 355 Again, Dr Fitzgerald answers that the lender's staff and franchisees are in competition with brokers. I repeat my earlier comments. 356 The fourth category of advice or assistance is: Assistance to persons seeking home loans to complete and lodge applications for the loan product selected in a manner that meets the requirements of that loan provider. 357 Dr Fitzgerald concludes that such staff are in competition with brokers. I again repeat my earlier comments. 358 The next category of possible competitor is: Loan providers which offer [the four various categories of advice and assistance previously discussed] by either or both call centres and the internet. 359 Dr Fitzgerald considers that those channels offer some of the services offered by brokers, but that many people would find it "difficult to navigate fully most of these sites". Such channels are probably not as effective as physical (person-to-person) distribution channels in tailoring products to an individual borrower's requirements unless such requirements are very simple and straightforward. He understands that the processing of loan applications cannot be completed through these channels. He sees them as being "more suited to initial provision of factual information than to providing more sophisticated and tailored advice to individual borrowers or to completion of the process". His "overall impression" is that: … services these channels offer are sufficiently limited that they are not close competitors to brokers. It is my impression that those prospective borrowers who access them do not pay fees for doing so, and that call centre staff remuneration is typically salary-like (possibly with some performance loadings) rather than resembling the way brokers are rewarded, which is almost totally based on results, i.e. on successful loan applications. The basis for this difference is presumably that these channels are passive (i.e. enquirers come to them), whereas brokers, although some business may come to them by referral or in response to advertising or word-of-mouth, are more active in seeking out business and pre-vetting prospective lenders. 360 At para 63 Dr Fitzgerald concludes that: … while these channels offer some of the services that brokers do, and so are in some sense competitors, they are not very direct competitors. Rather … these channels (and particularly the internet channel) tend to complement rather than compete with brokers and other intermediaries. That is they would appear to serve as a first port of call for information and advice, and to narrow down the focus to a particular lender or shortlist and a particular range of loan options, after which many prospective borrowers would consult a broker or other intermediary for assistance in navigating the rest of the process and submission of documents. 361 The next category of possible competitor is: Loan providers which act to have potential loan applicants acquire the advice and assistance they require from, and make applications for their loan products through, persons engaged, employed or franchised by the loan provider rather than brokers. 362 Dr Fitzgerald deals with this question under the heading "Outsourced but tied distribution services". However the question is clearly not limited to outsourced services. Dr Fitzgerald does not see lenders per se as being in competition with brokers. Brokers do not lend, and the lending divisions of banks rely on other business units for distribution. There may be some doubt about this general proposition in view of the other ANZ channels (apart from the branches and, perhaps, the franchisees) which are managed by ANZ Mortgage Group. Dr Fitzgerald concludes that if a lender required a borrower to use an in-house or tied channel in obtaining its products, that channel would still be in competition with the brokers. He concedes that the competition would be constrained by the brokers' inability to supply the lender's products. Presumably, the in-house and tied channels would be supplying only the lender's products. Thus the two groups would be "competing" in selling different, although possibly similar products. 363 Dr Fitzgerald says at paras 66 and 67: 66 This conclusion follows from my observations above that ultimately, competition among loan products themselves constrains the main element of those products' pricing, although what prospective borrowers ultimately "buy" is the combination of the loan product itself and a bundle of loan arrangement services, the overall pricing of the combination including both the lenders' and the distributors' margins. 67 If the bundle of [intermediary services] offered by a broker is sufficiently attractive (including, but not only, in terms of what the broker charges for [such services], borrowers who may have considered the products of the first lender, ie one using only tied distribution, may in the end choose another lender's loan product even if it did not offer any advantage in terms of interest rates and fees over the first lender's loan product, or even possibly if the alternative lender's interest rates were a little higher. In that event the untied broker would have won for the second lender business that otherwise might have gone to the first lender through the latter's tied channels. Accordingly, the broker would win commission that would otherwise have been captured by a tied channel. Clearly, the broker has constrained the tied channel. In short, those tied channels compete with brokers. 364 I understand this to mean that competition between lenders, manifested through the attractiveness or otherwise of loan products, constrains the price at which each product may be offered, which price includes distribution costs. However the broker or other intermediary may influence the ultimate customer's decision as to which product to acquire by virtue of the quality of the intermediary services provided and/or the price at which such services are provided (including any rebate or refund). Thus the intermediary may make one product more attractive to the customer than it would otherwise have been, and therefore more attractive in comparison to other products. 365 Dr Fitzgerald seems to mean that brokers offering a wide range of different lenders' products may compete successfully with a franchisee or employee supplying only one lender's products if the quality of the "intermediary services" is high enough. No doubt this is true, but again, Dr Fitzgerald does not address the issues of choice and independence which flow from the brokers' offering of the products of numerous lenders. 366 In any event it is difficult to see how a lender could prevent a potential borrower from consulting a broker about the lender's loan products. The lender could make it difficult for the broker to obtain relevant information, although that would hardly be in the lender's interests. It could also simply refuse to accept applications other than those coming through the preferred channel, or refuse to pay commission to the broker. There is no suggestion that any lender was likely to take either course, at least prior to 2008. 367 Dr Fitzgerald was then asked whether "loan providers generally" competed with brokers. As previously noted, Dr Fitzgerald does not see brokers as competing with lenders in the supply of loan products, but with other providers of loan advisory services or broker services to prospective borrowers, and distribution services to lenders including, in each case in-house and tied channels. At para 69 Dr Fitzgerald said: A caveat to this is the point I have made earlier, that what the prospective borrower "buys" is a combination of the loan product itself and a bundle of loan arrangement services by an intermediary - a broker or other distribution channel. What the intermediary contributes … is essentially an input to what the prospective borrower seeks - a successful application for the loan product itself. The implication is that if some intermediaries are excluded by lenders from offering [intermediary services] in respect of some products, the ability of these intermediaries to compete with other intermediaries, including tied ones, may be affected. In this situation it could be argued that a broker restricted by such arrangements is being constrained indirectly by the lender in being able to compete with channels that are not so restricted in the market for mortgage loan intermediary services. 368 I am not sure where that "caveat" leads. Once again, I note that Dr Fitzgerald has not addressed the differences in the services offered by brokers, as opposed to lenders' in-house or tied distribution channels. 369 Dr Fitzgerald was then asked whether certain considerations might be material to his answers. The first consideration was: The services [previously described] are supplied by or through a retail branch network or other business unit of the loan provider, which is a separate business unit from that which is responsible for developing the loan products, setting their terms and to which loan applications must be submitted for assessment and approval (the "mortgage unit"). 370 Dr Fitzgerald understands that it is standard practice for the mortgage unit of a bank or similar institution to be a separate business unit from its branch network, and from other tied distribution channels such as mobile lenders/franchisees operating under its banner, notwithstanding the fact that these business units might be within a single legal entity. He considers that based on the ANZ documentation which he has seen, ANZ Mortgage Group was separate from the branch networks. Dr Fitzgerald also suggests that ANZ Mortgage Group considered the branches and other in-house channels to be alternatives, all competing with brokers. 371 Dr Fitzgerald continues at para 74: I might characterize the view by [ANZ Mortgage Group] of ANZ's high dependence on brokers as a "necessary evil": "necessary" because by the time of the alleged conduct the broker channel had become, as a distribution channel for Mortgages' loan products critical to maintaining ANZ's share of the mortgage loan market, at least for the time being; a "necessary evil" because it was a relatively costly channel, with the commissions paid outside to brokers reducing the overall margins earned within the ANZ Group from all levels of the mortgage loan and related intermediary services market. Moreover, the broker channel was not a loyal channel. 372 This conclusion is based upon Mr Cooper's statements in the slide presentation dated 16 September 2003 that ANZ had an over-reliance on brokers, exposing the business to sustainability risk and margin pressure, a high risk of churn (that is of borrowers changing from lender to lender) and that 75% of broker "sales" go to other lenders. I have previously explained my view that the presentation primarily addresses market share in the lending market, and pointed out that, at least at one stage, the presentation contemplated increases in broker business. Although, in some places, Mr Cooper uses the language of competition, his thrust seems to be that if ANZ actively sought new business, it would be more likely to pick it up through in-house and tied channels than through the brokers, apparently because conditions were likely to be more favourable for the internal and tied channels than for the brokers. 373 Dr Fitzgerald also refers to a slide presentation dated 1 April 2004. On slide 23 it is said that the ANZ Mortgage Group's goal was to reduce dependency on brokers by increasing the number of sales through ANZ Mortgage Group's specialist channels. The goal was to be achieved through: - Growing the Personal Mortgage Manager channel - Transforming Mortgage Direct (Telephone Sales) - Implementing ANZ Mortgage Solutions (Franchise model) - Development and implementation of the Correspondent Distribution channel. 374 Of those channels only Mortgage Solutions is presently relevant. Bar graphs show FUM growth in 2003 and a three year target figure. In 2003 ANZ acquired 12% of "new flows" and 12% of "market share". The three year goals were 20% and 14% respectively. The bar graph for 2003 shows that the contributions to growth in Funds under Management were attributable, as to 58% to brokers, 32% to the "network" and 10% to "specialist channels". The three year target involved each of the three categories contributing a third of the projected growth. The brokers' target was, in dollar terms, the same as the 2003 figure. At slide 77 it is said that continued growth in the "broker book" would "negatively impact" on margins as commissions increase. Clearly, the ANZ Mortgage Group expected that a substantial part of its business would continue to come from the brokers whilst anticipating (or hoping for) growth in the business coming through other channels. 375 Dr Fitzgerald's suggestion that brokers were seen as a necessary evil is not really correct. It would be more correct to say that they were seen as either partners or customers. It was important to ANZ that the brokers viewed it favourably. Although there was concern about the extent of ANZ's reliance on the brokers, there was no suggestion that it could abandon them. Indeed, it was concerned by increased use of brokers by the CBA (Commonwealth Bank of Australia) and Aussie Home Loans. Competitors' increased use of brokers might have adversely affected ANZ business. 376 Dr Fitzgerald also refers to an email dated 21 April 2004 from Mr Sam Boer who was the Senior Manager of ANZ Mortgages Direct. He calculated rebates being paid to lenders by (presumably) a broker and observed: One observation could be that Brokers are capturing too much of the Mortgage Value Chain if they can afford to do this. They must have very low overheads … perhaps an Aggregator? This has potential to further erode value in the marketplace, depending of course how much market share they capture. How do we compete with this sort of stuff? 377 This email appears to have been at the end of an email chain in which an offer made by a broker had been passed to ANZ, with an inquiry as to whether it would match it. I am not sure how I am to use that evidence. If ANZ Mortgage Group was willing to pay commission to brokers at a particular level, then it was determining the value which it placed upon their services. The opinions of its other distribution channels are hardly relevant. 378 At para 76, Dr Fitzgerald concludes: The documentation makes it clear, as I have noted earlier, that ANZ's tied channels were seen by ANZ (correctly in my view) as competing with brokers in respect of mortgage loan intermediation services, and the establishment of Mortgage Solutions was clearly intended (as discussed above) to broadly replicate the broker business model and its incentive structure - albeit on a somewhat less costly basis - and of course to be a tied, loyal channel. 379 I do not accept that concern about "over-reliance" on brokers necessarily suggests any perception of competition between them and in-house channels. ANZ's concern about the extent of such reliance resembles concern about certainty of supply of business rather than competition, again suggesting that the brokers were partners, or that the ANZ-broker relationship was that of supplier and customer. It may not have been so much a question of competition as of diversification. However that explanation does not necessarily exclude the existence of competition or an intention to compete. 380 Dr Fitzgerald was then asked whether his views would be affected if: The persons engaged or employed by the loan provider [providing information and assistance as previously outlined] also act as the liaison or otherwise to facilitate the dealings or transactions between a person seeking to acquire a loan and the mortgage unit. 381 The question seems to address the situation in which internal channels allegedly perform both advisory and assistance functions and liaison functions. Dr Fitzgerald says, in effect, that explicit assignment of the liaison role to the unit providing advice and assistance would make it clearer that "there was competition with brokers". He says that liaison services are "part of the loan arrangement services bundle". Loan arrangement services, in Dr Fitzgerald's terminology, are services provided to borrowers. Liaison is a two way process between the borrower and the lender. From the borrower's point of view, an application is made at the point at which it is submitted to a bank officer or to a franchisee. Making the application is part of the "assistance" referred to at para 5.4 of Dr Fitzgerald's report. Subsequent handling of the application is of no concern to the borrower, save that he or she must eventually learn of the outcome. I would have thought that whatever liaison duties a staff member or franchisee performs, he or she performs them for the lender, save for eventual advice as to the applicant's success or failure. I do not understand the purpose of distinguishing between assistance in preparing and submitting the application and subsequent "liaison" services. The attempt to draw such a distinction may, perhaps, draw attention to a larger question as to whether the in-house and tied channels provide any service at all to potential lenders. I shall return to this question. 382 Dr Fitzgerald says, at para 79: As in response to the previous point, however, even if there were not such an explicit assignment of roles to particular staff employed or engaged in units or teams within a loan provider group (such as the mortgage loan specialists employed with ANZ's branch network), there would still be competition with brokers as long as such assistance, or other [mortgage loan intermediary services], were provided 'in house' at all, as the services themselves are the same as, or substitutes for, all or a significant part of the bundle of services that brokers offer. Therefore in-house provision of them competes with and constrains brokers. 383 In other words, Dr Fitzgerald says that any in-house provision of liaison services will mean that the lender is in competition with the brokers, even though, as far as I can see, such "services" are merely part of ANZ's internal administration. This proposition suggests that the initial distinction between the business entity responsible for developing mortgage products and approving loans and the channels through which applications were made was of no consequence. On this assumption any ANZ employee who was involved in "liaison" with the applicant would be providing liaison services to the adviser and competing in the supply of loan arrangement services, even if he or she worked for ANZ Mortgage Group rather than the branches. 384 Dr Fitzgerald was then asked whether his views would be affected by the fact that: The persons engaged or employed by a loan provider [to provide the assistance previously outlined above] also submit or arrange for submission of applications for the loan product to the mortgage unit. 385 His response was essentially the same as his response to the previous question, as are my comments on his response. He was then asked whether his view would be affected by the fact that: The loan provider would offer to waive all or part of the fees charged by it in respect of assessing and approving an application for a loan product in order to secure or retain the custom of a person seeking to acquire a loan product. 386 Dr Fitzgerald considers the matter to be relevant but is unsure as to the degree of such relevance, largely because he assumes that if the lender wished to obtain the business of a particular borrower, it would probably allow some reduction regardless of the channel through which the application came. He says at para 82: The practice of reducing or waiving [intermediary fees] for some loan seekers implies, in my opinion, that the loan provider group is responding to competition for the combination of the loan product per se and the accompanying bundle of loan arrangement services, competition in which interest rates and fees (for the loan and any or all of the related services) are obviously a factor. If it is successful in making the loan, the particular loan provider constrains both other lenders and providers of distribution services other than the one involved in the successful loan application. In so concluding I note that whilst [such fees] are ostensibly imposed for processing loan applications, they are in substance just one element of the overall pricing of the combination of the loan and the loan arrangement services. 387 The question is surprising in view of the evidence that waiver of the loan approval fee lay with the branches, not ANZ Mortgage Group. In any event, whilst willingness to reduce price may, in certain circumstances, imply the existence of competition, that is not the only explanation. Further, it says little or nothing about the source of competition or the market in which it occurs. Dr Fitzgerald's view that the competition may be for the overall product, loan and associated services, suggests that the relevant competition is with other lenders. Further, it is worth keeping in mind that whereas Mortgage Refunds granted refunds to all borrowers, the question contemplates only occasional waiver of any fee by the relevant lender. Dr Fitzgerald was then asked whether his views would vary, depending upon whether: A particular broker is accredited directly by loan providers or through an aggregator. 388 He considers that distinction to be immaterial. Finally, Dr Fitzgerald was asked whether it would be relevant to his opinion if it were the fact that: The mortgage unit, in the event that another business unit of the loan provider submitted to it a loan application that is subsequently approved by it, credits or transfers to that business unit the amount that it would have paid to an aggregator or broker had they submitted the loan application to it. 389 Dr Fitzgerald understands that an ANZ in-house or tied channel, having successfully intermediated a loan, would receive a credit. That credit would be comparable with, although not necessarily identical in dollar terms to, the amount which would have gone to a broker producing the same result, including both an upfront payment and a trail commission. 390 I am not sure that such proposition reflects the evidence in the case. The term "tied channel" has generally been used to describe the franchisees. The franchisees were to be paid at a rate which was fixed having regard to brokers' rates of commission, but was to be less than the amount received by a broker. The question rather seems to address the payments at least notionally made by ANZ Mortgage Group to the branches. Dr Fitzgerald considers that these credits are intended to provide incentives similar to those offered to brokers. He notes that, in the case of ANZ mobile lenders (Mortgage Choice franchisees) ANZ Mortgage Group hoped to retain a greater share of the overall value than in the case of loans initiated by brokers. He does not refer to the fact that the commission paid to the branches was higher than that paid to the brokers. 391 Dr Fitzgerald then considers the question of channel conflict, referring to a number of ANZ documents. The first is an email chain concluding on 30 January 2004. It records a complaint by a broker that after he had discussed a proposal with ANZ, an internal channel approached the clients and enticed them to deal directly with ANZ. Whilst apparently upholding the principle of channel neutrality in connection with credit and pricing, Mr Sirianni asserted that: … no one owns the customer except the customer. ANZ and also the broker have equal rights to market to the client. What is offered by the channel as an inducement to secure the business is not my concern. In fact it is extremely common for brokers to offer significant incentives to the client to win the business. This is outside my control and recognize that this is a market factor. 392 In another email, also dated 30 January 2004 from Mr Sirianni to Mr Crellin, the former said, concerning the broker: This guy is a goose. Gets on his high horse and tells us how to run the business. I thought your responses were perfect, well done. In reality they were jumping up and down about nothing. They are more trouble than they are worth, and happy to remove them completely which will fix my channel conflict issue. 393 Clearly, the broker had not expected that when he referred a borrower to ANZ, it would try to write the loan itself. If this were to be a common practice, one suspects that the brokers would cease to write ANZ business. The broker certainly received little satisfaction from Mr Sirianni, but the emails may suggest some previous hostility. Mr Sirianni's willingness to remove the broker completely is certainly not reflective of ANZ's views of brokers generally, as evidenced in the other documents to which I have referred. If poaching were common, it seems unlikely that the brokers would have treated ANZ as a good company with which to do business. I draw no real assistance from this exchange, at least if it is taken in isolation. 394 Dr Fitzgerald then refers to emails sent between 6 and 11 February 2004. These emails concerned a broker's customer who, on the broker's advice, went to a branch to pay an amount in connection with a proposed loan. An ANZ officer contradicted the advice given by the broker, suggested a different product and offered incorrect advice as to fees. Mr Carroll, on behalf of the bank replied: I have spoken to both the District Manager and also the branch manager. Jenny has confirmed that she did give the customer the incorrect information regarding Lock Rate and has apologized for that. She did however point out that the customer had come into the branch as a last resort as they were not getting satisfactory responses from yourself. Please give me the customer's name and application number and I will ring the customer to clarify the situation. As regards taking business to other financial institutions this is obviously your option as a broker. If you chose not to use please [?] advise and I will arrange to cancel your accreditation. 395 This evidence certainly suggests that somebody at the Booval branch was trying to divert work away from the brokers. However the relevant broker considered that such conduct was worthy of complaint, suggesting that he did not consider it to be typical of the general relationship between his business and ANZ. It seems that the borrower was not attracted away from the broker, and so the "ownership" issue did not arise. 396 Dr Fitzgerald seems to refer to a second chain of emails between 6 and 11 February. However, if that is the case, they have not been included in the final bundle of documents. 397 Dr Fitzgerald also refers to emails sent between 29 April and 4 May. There are a number of email chains bearing those dates. Some relate to the Mortgage Refunds problem. Others relate to teething problems arising in the course of the trial and/or implementation of the Mortgage Solutions franchise scheme. A third category relates to a complaint by a personal mortgage manager. I infer that Dr Fitzgerald refers to that chain. The personal mortgage manager complained that he had lost a "deal" to a broker who was paying the loan application fee from his commission and enquired as to whether it was "worth doing anything from our end". The response, presumably from ANZ Mortgage Group, was that ANZ would receive the $600 loan approval fee from the broker and would not waive it if the application came through the personal mortgage manager. It was suggested that if the manager in question wanted to capture the deal, then he might consider doing so from the amount to be paid to the relevant ANZ section as commission for it, or at least that is my construction of the emails. This incident demonstrates that ANZ Mortgage Group was unwilling to waive a fee in order to ensure that the business in question came through an internal channel. Apparently any such waiver was to come out of the branch's bottom line. 398 Dr Fitzgerald then refers to a memorandum of understanding. In its draft form the parties were to be ANZ Mortgage Solutions and ANZ Personal Banking which was responsible for the branches. In its adopted form "Personal Mortgage Managers" and "Wealth Distribution" were also "parties". Dr Fitzgerald understood the memorandum of understanding to be designed to: manage (or head-off) channel conflict by defining boundaries, including rules as to the customers which each channel should target; deal with the sharing of "customer value-added" [CVA]; avoid conflict in marketing and shopfront locations; and provide a dispute resolution procedure. 399 This seems to be a fair description of the document. However it related only to in-house and tied channels, and not to the brokers. 400 Dr Fitzgerald then refers to "various documents espousing 'channel neutrality' ". They are said to include emails involving Mr Cooper and others dated 16 and 23 August 2004. These seem not to have been included in the document bundles. He again refers to the presentation by Mr Gilfillan dated 21 March 2005 and entitled "Channel Neutrality - Breaking Channel Neutrality: When Is It Dangerous?" I have previously summarized and commented on this presentation. 401 At paras 86 to 88 Dr Fitzgerald says: 86 I do consider these matters to be material to the forming of my opinion. They indicate that ANZ sought to develop a range of in-house or tied channels to compete with brokers, each designed to target particular customer segments, while recognizing that it would need to manage potential (or actual) conflicts among them - and vis-a-viz the broker channel, upon which ANZ would continue to rely also. 87 A key element in the approach was a "channel neutrality" philosophy which encompassed both comparability of the awards to intermediaries (having regard to the depth of services they provided and their contribution to CVA) and minimization of differences in which they offered (in terms of price, including fees) to prospective borrowers. 88 As the last document referred to just above indicates, complete neutrality was evidently seen as impossible to achieve (and exceptions like selective waiving of [fees] were made), but deviations from it were evidently seen to require consideration caution. Comparability of commissions among in-house or tied channels and vis-a-viz brokers, or deviations from it, were apparently seen as particularly sensitive. 402 I am not sure that I accept Dr Fitzgerald's understanding of the meaning of the "Channel Neutrality" policy. As I understand it, ANZ's policy was that each distribution channel was able to sell ANZ loan products to customers at the same price as other channels. That policy was not concerned with any incentive given by a channel to a borrower, although ANZ Mortgage Group would have wanted to resolve any channel conflict arising out of the supply of such an incentive. 403 Dr Fitzgerald considers that such credits indicate that ANZ sought to develop a range of in-house or tied channels to compete with brokers, each designed to target particular customer segments, while recognizing that it would need to manage channel conflict. I see no justification for the conclusion that ANZ had done anything of the kind. There is no evidence to suggest that it developed a range of channels to compete with brokers. It might be said that one reason for establishing the Mortgage Solutions franchise system was to adopt some of the brokers' techniques. It might be said that ANZ Mortgage Group sought to increase its market share in the lending market by producing a lower cost product and reducing distribution costs. It might also be said that the brokers were one of the channels upon which ANZ depended for the distribution of its loan products. 404 At para 89 Dr Fitzgerald summarizes his conclusions as follows: (i) Who competes: Mortgage brokers compete with each other and with other mortgage loan intermediaries, including distribution business units of loan providers or other intermediaries (such as franchised mobile lenders) tied to a single loan provider. That is, all such intermediaries compete whether they deal with the loan products of one lender or of more than one. (ii) Services they compete in: Mortgage loan intermediaries compete in providing a bundle of loan arrangement services (LAS) to prospective borrowers, and at the same time they provide distribution services to lenders (DSL). LAS and DSL are provided in separate customer markets, but as they are provided jointly (to participants on both sides of the mortgage loan market - both borrowers and lenders), the intermediaries that do so can be seen to operate in a two-sided market for mortgage loan intermediary services (MLIS). (iii) Where they compete: Brokers and other intermediaries may operate in (banner groups) that advertise widely, at state or national level, but they compete with each other within geographic markets at a sub-state region. They compete both on price (fees) and on the attributes of the service bundle they offer (loosely, on "quality"). Thus if one intermediary implements a small but significant non-transitory increase in price (SSNIP), without materially changing the quality of the LAS bundle it offers, it will lose share to other intermediaries in the same geographic market LAS (and hence that for DSL also). (iv) Relationship to mortgage loan market: The mortgage loan market itself is national and at least workably competitive. Loan features, interest rates and lenders' fees are readily able to be compared, increasingly via the internet, and more than two-thirds of seekers of new loans do so. Interest rates and the lenders' fees for similar loan products and for loans of similar "quality" (a function of size of loan, loan to valuation ratio, borrower's ability to service etc) thus tend to be similar also. Loan arrangement services are an input to what a prospective borrower ultimately seeks - a successful application for an attractive loan product suitable to their needs - and accordingly borrowers' choices are made in respect of the price and quality attributes of both the loan product and the LAS that facilitate obtaining it. Lenders have analogous choices amongst distribution channels - depending on their respective net costs and effectiveness.

Dr Fitzgerald's second report 405 As previously mentioned Dr Fitzgerald prepared a second report, apparently in response to a report provided to ANZ by Dr Pleatsikas and after a conference between them. Dr Pleatsikas's report is not in evidence. However Dr Fitzgerald refers to parts of it in his second report. I shall focus on Dr Fitzgerald's opinions rather than Dr Pleatsikas's. Dr Fitzgerald first deals with the question of whether or not people in business, particularly ANZ bank officers, use competition terminology in the same way as does an economist. I doubt whether that is a matter for evidence. I also doubt whether it is possible to generalize about it. The meaning with which such words are used must be determined by the Court, having particular regard to context. I shall not summarize Dr Fitzgerald's opinions concerning the matter. However I shall give them due consideration. 406 At para 14 of his second report Dr Fitzgerald summarizes the distinction between horizontal and vertical constraints in a market. He says: … in any case most real world restraint situations are not susceptible of being classified into these "black or white" categories, but have both horizontal and vertical characteristics, particularly where there are distinct functional markets along the supply chain, each with distinct competitors, and an upstream participant has a downstream presence. 407 At para 26(v) and (vi), in summarizing his views, Dr Fitzgerald says: (v) thus while Mortgages may have been in a vertical relationship with each of the downstream channels, ANZ's in-house or tied channels were in a horizontal relationship, as competitors, with brokers, in the market for loan arrangement services (as defined above), as well as in the inter-related market for DSL [distribution services to lenders], or mortgage referrals. Mortgages clearly saw them as competitors at the relevant time. Moreover, by way of elaboration of the discussion in my first report, I would note that a vertical restraint imposed on only one broker (or on just a few), rather than all - as was the case in this matter - could, at the least, affect competition among mortgage brokers since even in Dr Pleatsikas' characterization, brokers compete with one another in his market for mortgage referrals; (vi) therefore the restraint applied by Mortgages solely to Mortgage Refunds generated a horizontal restraint. It had the effect of limiting the discount Mortgage Refunds offered to loan seekers on their loan set-up costs to the maximum discount that an ANZ channel could offer, and so affected their ability to compete with other intermediaries, in particular ANZ's in-house or tied channels, downstream from Mortgages … . 408 I cite this passage in order to demonstrate Dr Fitzgerald's understanding of the distinction between vertical and horizontal economic relationships. The distinction between vertical and horizontal constraints was not clearly dealt with in the evidence, the distinction being assumed rather than explained. There is no issue in this case concerning the possible justification of otherwise anti-competitive conduct by reference to the competitive advantages of vertical constraints. Any discussion of vertical constraints seems to be relevant only to an understanding of the language used in the ANZ documents and the inferences which can be drawn from them concerning competition with brokers, and to an understanding of any horizontal relationship between ANZ and Mortgage Refunds or its brokers. 409 At para 32 Dr Fitzgerald says, concerning the identification of markets: All economists use the concept of substitution, demand side or supply side, to define markets whether or not they explicitly invoke the theoretical construct of the "hypothetical monopolist test", asking what is the smallest domain within which the hypothetical monopolist could profitably impose a small but significant, non-transitory increase in price (SSNIP). In considering the boundaries of the mortgage lending market … Dr Pleatsikas uses the language of applying that test, but in fact makes only a qualitative assessment and comes to essentially the same answer as I do without explicitly invoking the test. Both of us applied the relevant concepts qualitatively, in my case by identifying what services were close substitutes, and their providers thus close competitors. 410 I accept that approach. 411 At paras 35 to 38, after referring to certain elements of Dr Pleatsikas' report, Dr Fitzgerald says: 35 … any application of a hypothetical monopolist test in this case must consider all the competing channels, offering services for the substitutes - ie the in-house or tied channels and not just the broker channel - and must hypothesize an increase in the prices charged, or equivalently, a change in the service quality provided by participants in those channels to those agents whose choices actually determine relative market shares of the different channels, i.e. to loan seekers. That is a difficult exercise here, both conceptually and practically, given that in the overall mortgage loan intermediary services market it is the lending side that pays most of the costs, in the market for [services to lenders], and the channels compete for loan seeker custom, in the market for [services to borrowers], largely on the quality of the services they provide rather than on price. 36 For these reasons in para 43 of my first report, in order to explore the closeness of competition among mortgage loan intermediaries I briefly considered, qualitatively, the kinds of competitive (and market share) effects that a change in one intermediary's pricing to loan seekers might generate, with unchanged service quality. 37 I have always been attracted to the perspective on definition of markets and analysis of competitive effects (seeing the former as just one means to the latter) which was first expanded by Steven Salop and then in a subsequent stream of literature, some of which is cited in … Dr Pleatsikas' report … . Dr Pleatsikas notes that: Some (US) regulators have acknowledged that market definition is one tool in evaluating competition issues and may not, in some circumstances, be necessary for the analysis. 38 My view is that in a matter such as the present one, where the conduct in question is alleged to be between competitors, one should focus on what relevant goods and services are close substitutes, and thus their providers close competitors, in parallel with identifying the markets in which those goods or services are provided. In the present case, as I have discussed above, it is conceptually and practically very difficult to apply the hypothetical monopolist test in a formal way, and instead one must rely on qualitative analysis of substitutability and competition. 412 Concerning competition between brokers, on the one hand, and in-house and tied channels, on the other, and questions of substitution, Dr Fitzgerald said at paras 45 and 46: 45 Moreover, franchised mobile lenders operate in essentially the same way as brokers, and compete directly with them in a relevant geography, by offering most of the same services, notwithstanding that the choices of loan products they can assist loan seekers with are confined to those of one lender. In a world where a substantial majority of loan seekers begin by obtaining information about a number of competing lenders' products from the internet before going to an intermediary, this is not in my opinion a significant difference between the bundle of loan arrangement services that the two offer. 46 Equally, I believe that the bundle of loan arrangement services offered by ANZ in-house channels is not materially different from the bundle offered by brokers. With again the only significant difference being that the in-house channels assist with applications only in respect of choices from the range of products offered by Mortgages. I note that the evidence of Mr Donald William Crellin and Ms Michelle Gail Lenehan which has been briefed to me highlights some differences between the services provided by the in-house channels and those provided by brokers, but I do not regard these differences as fundamental, and I continue to regard the two as relatively close substitutes, in the economic as well as the technical sense. 413 I have difficulty with Dr Fitzgerald's dismissal of the wider range of products and lenders offered by brokers, as opposed to in-house and tied channels, and of the associated concept of relatively independent advice as to product suitability. The question of substitutability is, of course, to be determined by reference to behaviour in any relevant market, but the industry evidence seems to suggest that in the broking business, a high premium is placed on choice. One might expect that Dr Fitzgerald would have explained his reasons for discounting the matter. I also have difficulty with Dr Fitzgerald's insistence that loan products, themselves, are not significantly differentiated. Again, the industry evidence suggests otherwise. I shall return to these questions. As to Dr Fitzgerald's view that use of the internet may fill any gap in the services offered by in-house and tied channels, I have previously indicated that his understanding of the extent of such use in connection with borrowing involves a misunderstanding of the Bank West survey material. 414 Dr Fitzgerald then summarizes some of the information supplied by Mr Crellin. Mr Crellin suggests that brokers offer choice, advice and expertise, representation and advocacy and convenience, whilst in-house channels do not purport to offer customers a choice of products supplied by a variety of lenders, do not purport to represent customers' interests and do not have the same level of knowledge of alternative lenders' products and policies. However Mr Crellin acknowledges that in-house channels are provided with access to some information concerning third-party products. 415 Dr Fitzgerald considers that mortgage brokers are "very unlikely to be accredited with all lenders operating in Australia, and may not even be accredited with all major lenders". It is, however, clear from the evidence of Messrs King and Stark that accreditation with a large number of lenders was an important aspect of the Mortgage Refunds operation. Concerning the broking industry generally, Mr Lahiff was of similar opinion. Mr King considered accreditation with ANZ to be of particular significance. Although he had written relatively little business with ANZ, he was willing to sacrifice a key aspect of his business plan in order to regain such accreditation. This matter was addressed in more detail in cross-examination. 416 Dr Fitzgerald also dismisses the concept of the broker as an advocate for the customer, and any suggestion of differences in the extent to which brokers and internal channels may meet customer convenience. Again, the evidence from brokers is to contrary effect, although the introduction of the Mortgage Solutions franchisees may have dealt, to some extent, with the convenience point.

Cross-examination 417 Dr Fitzgerald agrees that the hypothetical monopolist (or SSNIP) test is used to delineate a relevant market of interest, the boundary being the point at which close substitution gives way to less close substitution. Dr Fitzgerald agrees (at ts 267 ll 1-4) that in the lending market, there was a vertical relationship between lenders and brokers. That relationship was, in a sense complementary. However the lender also had a "downstream presence", at the functional level of the overall mortgage market. At this level, there was an horizontal, and therefore competitive dimension. Dr Fitzgerald says that the relationship between ANZ Mortgage Group and the brokers was complementary in that the latter provided a distribution channel for the former's loan products. ANZ Mortgage Group had similar relationships with ANZ's internal distribution channels. He agrees that mortgage brokers competed amongst themselves. He agrees that in order to determine whether or not particular suppliers are in the same market, it is necessary that the relevant products be close substitutes, one for the other, and that products will be close substitutes only if a consumer can get the product from one source or another, so that if the consumer gets the product from one supplier, the other supplier does not supply it. He agrees that the inquiry is as to the effect of a small, non-transient change in the price or quality of the service or product, and whether such change would produce a significant reaction. 418 Dr Fitzgerald agrees that in applying the SSNIP test, one might vary price or quality, and that a broker might reduce the quality of service by not offering advice concerning the selection of a lender. Concerning this question the following passage appears at ts 270 ll 32 to ts 271 l 11: Yes. I understand that. Anyway, if we just look at quality, something that might cause a customer to leave a broker would be the customer [broker] saying, "Yesterday, I used to provide you advice and I would take you through my computer system to help you choose a lender, but tomorrow I'm not going to do that part of what I previously did." That would be a decrease in quality, wouldn't it?- - -That's an example of that, yes. And it might cause - that might cause - that decrease in quality might cause some of the customers of that broker- - -?---To choose another one. - - -no longer to patronise that broker. Yes?---That's quite possible, yes. And the question, Doctor, is, isn't it, would they go to another broker or would they go to a branch?---Well, it's - in the period concerned, more than 50 per cent did go to a branch or another in-house channel, and by far the majority of those went to a branch, so since the documents have all eventually got to end up at a branch, a lot of people who felt, presumably, they didn't need all the services of, you know, comparing loans already did go to branches. So that was an alternative. Yes. Not everybody goes to brokers; is that right, in your understanding?---No, not at all. Yes. But of those who did, those who wanted the broker's services, if there was a decrease in quality - the question is if there was a decrease in quality by the broker who provided a service to that broker's clientele, would those clientele switch to other brokers or to branches; is that right?---And my answer is either. It depends on the service. 419 Dr Fitzgerald concedes that call centres are not close substitutes for the services provided by brokers. However, at ts 273 ll 27 to ts 275 l 15, the following passage appears: So my question to you is why, if you conclude that the call centres are not close substitutes, do you conclude that the other internal channels are close substitutes? What's the difference between the internal channels?- - -Well, the difference is that at a bank branch to substantiate one's financial position when seeking a loan, it's almost - it's far better done, if not essential, to do it across a table. You've got to show documents. You've got to have an application in front of you. You can do that to an extent on line. But those services that brokers provide are most similar to what's done in person at a branch or with a personal mortgage manager or whatever. People who know what they want and who have all their information to their fingertips could presumably do it with a call centre, but the - you couldn't with the internet - not complete the process. But, Doctor, that's only to say that some of the provision of these services, although identical in their character, might be less satisfactory than others of them, so that I'm a weaker competitor rather than a stronger competitor; isn't that the case?- - -Well, yes, but - but the- - - It doesn't affect whether I'm providing that service does it?- - -Even within banks, the - the services are differentiated. There were specialist mortgage managers - personal mortgage managers they were called in the ANZ bank at this time - as well as general branch staff, who had some training, but not, presumably the same depth, so there - there was differentiation. But your critical distinction for the purposes of concluding that call centres are not close substitutes is that a call centre is a passive channel and not an active channel like some of the others; is that correct?- - -From the- - - Paragraph 62?- - -Yes. From the point of view of a distribution channel, a call centre is - is not one that - like a broker or an active franchise mobile lender or a branch that does a good job. They try to seek out business, and a call centre - you have to see a number on the internet site and call it, and I think therefore they're not - services they provide are not as close a set of substitutes as those - that those other channels provide. But that's just how effective a competitor you are, isn't it?- - -Yes. "Do I advertise? Do I drop leaflets in people's letterboxes?" Isn't that right?- - -Well, yes - the- - - It is. And if they- - -?- - -the - I still think that the - that there is closer substitution between what some channels within banking groups do and what brokers do- - -. But the- - -?- - -then there is between, say, the other couple - the internet site and, to a lesser extent, the call centre. But Doctor whether you are a close substitute depends upon the character of the service you provide, not the efficacy of the provision of that service, doesn't it?- - -Well, I'm not sure you can make that distinction as sharply as that. The efficacy is presumably part of the quality of the service. Yes, but quality has got nothing to do with whether it's the same service, has it?- - -I think it - I- - - That's why people go to one or the other: they're providing the same service?- - -I think it does - that - well the - we're talking about services here that are differentiated, and the fact that there is some differentiation doesn't mean they're different products, it just means that, you know, there's a Datsun and a Toyota and a whatever there may be. They're still in the same market. they're close substitutes, but they're differentiated. Yes. The bank branch has to wait for people to walk in off the street; doesn't it?- - -No, it doesn't. It can have a richer relationship with its customers. They may bank them as small business proprietors and raise with them, you know, whether they would look at a housing loan with the bank. There's - a bank can be more or less active or passive. Yes. But brokers have to be more active, that's certainly true. Yes. So the way bank branch gets people to walk in the door is to advertise, to ring people up to have contact with them to encourage that link?- - -Yes. And the call centre would be the same; wouldn't it?- - -Advertising, leaflet drops, all of that?- - -I don't think that any leaflet drops are done out of call centres, but- - - You don't think so - what is it, television advertising?- - -Well, the existence of the call centres is advertised, yes. Yes. Alright. Anyway, what I'm putting to you is you rightly concluded that call centres are not close substitutes and it should follow from that that you should have concluded that the other internal channels of the bank are, likewise, not close substitutes. Do you agree or disagree with that?- - -I disagree with that. 420 This line of cross-examination is more significant than it may first appear. One might assume that the shortcomings to which Dr Fitzgerald refers explain the fact that ACCC does not, in its pleading, rely upon the call centres as channels through which ANZ competed with the brokers. However ANZ's point is that there was no real difference between the services offered by the call centres and those offered by the branches. Dr Fitzgerald suggests that call centres may not have provided physical access to application forms and documents concerning the potential borrower's assets and liabilities. He also suggests that the call centres depended upon receiving calls. One might have thought that in many cases, the branches also awaited requests for loans. ANZ apparently advertised the availability of its call centre. 421 No doubt, as Dr Fitzgerald says, there were advantages in face-to-face dealings between the relevant distribution channel and the potential borrower. However the fact that it was at least theoretically possible to attend to much, if not all of the borrowing process through a call centre or on line tends to suggest that the functions performed by the branches may have been rather more routine than one might infer from the way in which ACCC and Dr Fitzgerald describe them. 422 The franchisees may have provided elements of convenience which the branches did not provide, particularly as to time and place of consultation. The call centres and internet banking also provided such convenience. The franchisees otherwise supplied much the same services as the branches. 423 At ts 275 l 45 to ts 276 l 6 the following passage appears: Now, you've observed, haven't you, Doctor, from the materials that you have looked at that the broker distribution channel is markedly more costly for lenders than the internal distribution channels used by those lenders?- - -It's more costly to the banking group, but if you look at it from the point of view of the mortgages unit within the ANZ bank at the time, they paid the same - or actually, slightly higher - upfront commissions and trails to the branches. But the cost to the bank as a whole is considerably less - banking group as a whole. And, so, from the point of view of the banking group as a whole, the external channels were more costly. There's no doubt. 424 At ts 276 ll 20-35 the following passage appears: So, a bank, - any commercial enterprise, including the bank - viewing its enterprise as a whole would be keen to reduce costs where it can without jeopardizing the utility of the activity which generates those costs; is that right?- - -That's true. Yes?- - -And I may just add that the most senior executives in any of the parts of the banking group, part of their incentives for the group's results - although a large part of their incentives were with their own business unit, as I understand it. Yes. Now, so, for the bank overall, including the broking channel as one of the distribution channels is occasioning higher costs overall than the respective internal channels for that lender?- - -Yes. It was a costly channel to use at the time. Yes?- - -But it was one they relied on for 45 and a half % or something, of their business. Exactly?- - -And it had risen quite a lot. 425 In other words, to ANZ Mortgage Group, the branches, not the brokers were the most expensive channel. To ANZ as a whole, the brokers were the most expensive. 426 At ts 276 ll 37-47 the following passage appears: But Doctor, where one - just leave lending aside for the moment, just take an enterprise that has five distribution channels - don't worry about whether they're internal or external. If those distribution channels are close substitutes, the enterprise can eliminate one of those channels without jeopardy to the efficacy of the overall distribution activity; is that right?- - -I think for there to be no jeopardy they would have to be a bit better than - they would have to be perfect substitutes, in which case it raises doubt on the premise that there were five. Yes, well, this is the point. If all of the channels are perfect substitutes, you could get rid of any of the five and still be left with the same efficacy of your distribution system, couldn't you?- - -That's right. 427 Dr Fitzgerald then explains that when he was associated with the ING Bank, which had no branch structure, it maintained a number of different channels. Some were better at targeting different customer segments than others. The various channels were kept in place in order to "cover the waterfront". The following passage appears at ts 277 ll 10-18: Yes. But if it were the case that one channel was more expensive than another channel, the enterprise that we're speaking of would be examining closely whether it would be desirable to eliminate that channel and rely upon the other channels because of their features of substitutability?- - -It might well decide - ask itself whether it could wind back the use of that channel or somehow reduce its cost. But if that channel provided some extra element of distribution - reached a different audience or was more effective in reaching some potential customer segments - then, presumably, they wouldn't wipe it out entirely, but perhaps try to cut down the use of it. 428 Dr Fitzgerald agrees that ANZ's broking channel was six times as expensive to ANZ as were branches, and twelve times more costly than the call centre distribution channel. Counsel suggested to Dr Fitzgerald that given the relatively high cost, the bank would be expected closely to analyse the justification for future use of the broking channel. He replied that in any business, some custom comes at less cost than other custom. The question is always whether the extra custom is worth the extra cost. 429 At ts 277 ll 41-46, the following passage appears: And one reason why it will bring in business that you otherwise wouldn't have got is if it is providing a different service which is not substitutable for the services provided by your other distribution channels; correct?- - -I think you're taking that too far. I think if it's better at providing the service for some potential customer segments or more effective in some way, then it may still be providing a substitute - indeed, even a close substitute - but not a different product. 430 Dr Fitzgerald was asked whether he had been instructed to assume that all internal and external channels were providing the same service. He replied at ts 278 ll 4-11: … I don't believe my instructions required me to find that they were all - they were finding - they were equally providing all of the elements of that basket. For example, quite clearly the Internet channel can't provide the last step of, you know, substantiating documentary proof and so forth, unless the bank waives that and so, perhaps in some cases, the Internet channel can be a conclusive channel, but the fact that it doesn't provide all the services to the same extent that comprise that bundle doesn't mean it's not a substitute that I said wasn't as close as the others. 431 Dr Fitzgerald agrees that the relatively high cost to the bank of brokers' services was attributable to the levels of commission paid and that, at least in 2003-2005, the brokers were able to command that level of commission because of the nature of the service which they provided. At ts 279 ll 1-21 the following passage appears: Yes. In any event, the ability of the brokers to command that level of commission is an indication from the point of view of economic analysis, isn't it, of the value of the service which they provide as a distribution channel?---Yes, they brought in additional business that was difficult to obtain to the same extent with the bank's own channels. Yes. And that different value may be attributable to the circumstance that they, the brokers, provide a different service to the service provided by the internal channels?---Not different so much as of different quality. But maybe of different character, maybe of different quality, it could be one or the other, is that right?---I don't think it was of different character in any fundamental sense. I'm not asking you for the view you might have reached in this case, Doctor, but analytically, it could be one or the other, couldn't it?---Analytically, it could, but - or rather, hypothetically is what I think you mean. No, no, approaching the topic where a distribution channel charges to its distributor a higher fee, that can be attributable either to a different service or a different quality of service?---Logically, yes. 432 This evidence raises a question as to why ANZ used brokers at all if it was able to replicate their services using significantly cheaper in-house or tied channels. The answers seems to be that the brokers were able to bring in business which the in-house and tied channels could not capture. If that is so, then the next question is as to the reason for the brokers' capacity to do so. 433 We know that some lenders used brokers because they lacked branch networks. However ANZ had a well-established bank network. No doubt there were areas which were not adequately served by branches. The brokers may have covered those areas. We know that prior to the establishment of the Mortgage Solutions franchise scheme, brokers offered a convenience which the internal channels did not offer. Both of these "advantages" enjoyed by the brokers seem also to be significant areas of differentiation between the services offered. We also know from industry witnesses that some persons wanted the services offered by the brokers and therefore consulted them instead of going to a branch. Those services included, but were not limited to advice, information and assistance concerning a wide range of products from a wide range of lenders. That aspect of the brokers' services was a problem for ANZ and the other lenders. Although the brokers offered a valuable distribution channel, it was not "loyal" in that a broker could advise borrowers to choose products of other lenders. However the lenders were generally willing to accept that disadvantage, presumably because, from an economic point of view they could not do anything about it. Thus, until 2008, the lenders continued to train, accredit and pay the brokers without placing any limit upon their numbers. 434 Dr Fitzgerald was invited to draw an analogy between mortgage brokers and insurance brokers. However the exercise was of little value. At ts 281 ll 19-32, this passage appears: Yes, but for those who want insurance broker services, the internal channel - internal distribution channel of the insurer is not a close substitute, is it? Is it?---Well, for those who want a richer service that the internal channel goes beyond what they do, I guess there may still be a degree of substitution, but it - obviously, you can think of cases where it's not close. Not close?---It may not be close. HIS HONOUR: The witness said you can think of cases where it's not close?---Mm. I think you said you can think of cases where it's not close?---Yes. It may be close, depending on what exactly it is, but there is - certainly there will be cases where it's not close. 435 At ts 282 to ts 285 Dr Fitzgerald was cross-examined concerning the question of substitutability. In particular, he was taken to para 45 of his second report where he suggests that the services provided by Mortgage Solutions franchisees were essentially the same as services provided by brokers, and therefore provided direct competition with the brokers, notwithstanding the fact that the franchisees offered the products of only one lender. Dr Fitzgerald justifies this view, partly upon the basis that a substantial majority of borrowers would begin the borrowing process by obtaining information about a number of competing products from the internet, before going to an intermediary. He also relies upon his perception that loan products are generally undifferentiated. Dr Fitzgerald was cross-examined concerning this view. Counsel referred him to evidence concerning difficulties in identifying and digesting information about the wide range of available loan products, and the computer software developed and used by brokers to analyse products in order to identify those which best suited the client. At ts 284 ll 40-45 the following passage appears: So it comes down to this, doesn't it, Doctor: that you've embarked upon your own sort of fact-finding quest, or your own factual evaluation, and you've arrived at the view that choice between lending products is not a matter of significance for those who go to brokers and use broking services; is that it?- - -I'm not saying that. I'm saying that, for many people, they have a fair idea of what the alternatives are, and that they - that it's not absolutely, therefore, essential that they have that idea that they have somebody, as you say, use one of those priority software engines to go and do it for them. 436 At ts 285 ll 1-27 the following passage appears: Doctor, are you of a view that if a person has sorted out for himself or herself a loan product that he or she wants, he or she will go to the branch or to the other internal channel of the bank and not bother with a broker?- - -That may be so. As I said before, even - even with ANZ at the time, 54.5% used an internet channel, and for National Australia Bank and Commonwealth Bank it was around about three-quarters. But just because you have a good idea of what the pricing of loan products and other features of them is doesn't mean you won't necessarily use a broker. You may - you may find the convenience of them coming to you, to help with putting the documents together - all that - still worthwhile doing. Yes. Doctor, you, for your part, expressed a view, didn't you, in your first report that people would find it difficult to navigate fully most of the internet sites that lenders provided. Do you remember saying that in your first report?- - -Yes. The easiest thing to find is - is the rates. In fact, you don't have to go to their individual site; you can go to CANNEX which is a much visited site. So you can get an idea of the most important parameters, the rates, pretty easily. If you want to know, you know, find details of terms and conditions, it's a bit hard to find. That's your - what your personal experience, is it?- - -Yes. I've got adult children who are in the housing market and - and my personal experience with them is that to find out all the terms and conditions you have to either ask a bank or ask a broker but you can find out the rates easily enough. Yes. So, for these purposes, you didn't confine yourself to the assumptions you were asked to make or the evidence you were provided with; you've relied upon your own personal experience?- - -I supplemented the evidence I was given by my own personal experience. 437 Counsel then took Dr Fitzgerald to para 46 of his second report. Dr Fitzgerald had said that the only significant difference between the services offered by ANZ in-house channels and those offered by brokers was that in-house channels assisted only with applications for products offered by ANZ Mortgages. He said that such distinction was not necessarily "significant" or "a fundamental difference in the services provided". Counsel put to him that the difference did not have to be fundamental in order to deprive one product of the quality of being a close substitute for another. He said: It doesn't follow that it deprives it of being a close substitute, but it means it's not identical; that's for sure. 438 At ts 286 ll 22-24 the following passage appears: But you don't have to have fundamental differences before you cease to be close substitutes, do you?---No, you don't, but whether or not that's true in this case is the issue. 439 Counsel pointed out that in para 46 of his report Dr Fitzgerald had said that he considered services provided by brokers and the internal and tied channels were "relatively close substitutes". It was put to him that he had not said that they were close substitutes. Dr Fitzgerald said that he thought that, "putting an adverb in front still leaves them close substitutes". He was asked why he had included the adverb. He replied that he could have left it out. It was put to him that the adverb was used "because you didn't regard them as truly close substitutes". He said that he used it to distinguish it from adverbs like "very", saying that he considered them "still to be close substitutes, but not necessarily as close as they would be if there were choice on both services". Counsel suggested that Dr Fitzgerald had chosen his words carefully, and that he considered that the most he could say was that the two products were "relatively close substitutes". He said: I don't know whether it was a question of "most"; it's what I thought was fair to say. 440 Counsel then took Dr Fitzgerald to paras 47, 48 and 49 of his second report. I have already referred to the fact that Mr Crellin said that brokers offered: • advice and expertise; • representation and advocacy; and • convenience. 441 At para 48 Dr Fitzgerald refers to evidence from Mr Crellin to the effect that in-house channels' services differed from those supplied by brokers in that they: • do not purport to offer customers a choice of the products of a variety of lenders; • do not purport to represent customers' interests; and • do not have the same level of knowledge of alternative lenders' products and policies (although noting that in-house channels' offerings by ANZ's marketing department and through being provided with access to third party information services such as CANNEX. 442 At para 49, Dr Fitzgerald suggests that brokers were very unlikely to be accredited with all lenders operating in Australia, might even have been accredited with all major lenders and might, in fact, have been accredited with only a few, so that the extent of the choice which they offered may have been limited. Counsel put to him that the evidence establishes that brokers regularly had a wide and balanced panel of lenders with which they were accredited. Dr Fitzgerald agrees that the big broking groups had such panels. Dr Fitzgerald did not know the extent to which Mortgage Refunds brokers were accredited but agreed that 43 is "a pretty big panel". At ts 287 ll 32-35 it was put to him that his reasoning at that point was based upon his perception that a number of brokers might offer only limited choices. He replied that the point was that different service providers might offer different choices. I am not sure that Dr Fitzgerald was making that point in para 49. Mr Crellin had said that in-house channels did not have the same level of knowledge of other lenders' products as did brokers. Dr Fitzgerald's first dot point suggests that brokers probably did not have such a wide knowledge of products because they were probably not accredited by all lenders, or all major lenders and might only be accredited by a few. In other words, in the first dot point in para 49, Dr Fitzgerald was suggesting that brokers would not be superior to in-house channel staff in their knowledge of a wide range of products, not that different brokers might have different ranges of products. 443 In para 49 Dr Fitzgerald also observes that more than two-thirds of new loan seekers do their own research on the alternatives offered by lenders before going to a physical channel, the most important parameters (principally interest rates) being widely publicized in print and on the internet. He said that apart from the internet, the print media would offer enough information to allow potential borrowers to select a preferred lender. In cross-examination he agreed that a potential borrower would have to do more research in order to compare the "fine detail" of different lenders' offerings, that is apart from details of price. He agreed that borrowing criteria were not available and that, "If you suspect that you may be a marginal case there's no substitute for going to a physical channel". However if a potential borrower had a low loan to valuation ratio, a good income and low credit exposure, he or she would not "necessarily need to worry too much about that". It was put to him that if a potential borrower did not know a lender's criteria there was, "no substitute for going to a broker". He replied: Well, you can go to a bank branch and if you believe that that bank is - maybe it's the one you bank with and its rates look competitive on what you've discovered - if you're not happy with their criteria, then you can go somewhere else, maybe to a broker. 444 It was put to him that a potential lender would not go to 40 branches. He agreed. It was suggested to him: "That's the logic of it", meaning, I think, that the alternative to going to a broker was to consult a very large panel of lenders. Dr Fitzgerald replied: No, the logic of it isn't from 0 to 43 in one step. Many people do go to branches of - as I have said before, the two of the big lenders - Commonwealth, the biggest home loan lender and National Australia Bank - three-quarters go to a branch. Yes. So- - -? Or to an in-house channel at least. Predominately branch. 445 It was put to him that potential borrowers, wanting the services of a branch, would go to a branch, whilst those wanting the service of a broker would go to a broker. Dr Fitzgerald eventually agreed with that proposition. He then pointed out that earlier questions had concerned the ascertainment by a potential borrower of lending criteria, and that a potential borrower might find that the first branch he or she visited suited his or her circumstances. It seems that Dr Fitzgerald was concerned that his answers in connection with lending criteria were being taken as concerning the obtaining of information as to the details of each loan product. The matter is of no great importance, but the passage from ts 288 l 17 to ts 289 l 28 is a little difficult to understand unless one understands that counsel and Dr Fitzgerald were, to some extent, at cross-purposes. 446 Counsel suggested that a potential lender, looking for the best deal in the market place, would not discover it by going to one branch, and finding out whether he or she met its criteria. Dr Fitzgerald considers that people who have good incomes and low debt are likely to meet any bank's criteria if the loan valuation is "okay", but if a proposed borrower is struggling to qualify for a loan, he would need a loan-to-valuation ratio and would need to do more research. He was reluctant to admit the rather obvious proposition that even a person who meets the criteria of the major banks might still wish to ensure that he or she is getting the best deal, and so go to a broker. Dr Fitzgerald considers that such a person could collect the relevant information by "going to a couple of branches" or the internet. 447 In para 49, Dr Fitzgerald also says that staff of ANZ in-house channels have access to information concerning competing lenders' products and so can, and do respond to comments or queries by potential borrowers concerning comparisons between such products and ANZ products. Counsel asked whether he meant to suggest that internal channels would provide "the same comparative information about other lenders' products as would be provided by brokers". Dr Fitzgerald said that such staff had access to information about other lenders' products, and so were able to answer questions about comparisons between those products and ANZ products, at least as to price, loan-to-value ratios and such matters. He does not know how often staff answer such questions. He agrees that in-house channel staff have a duty to present the ANZ products in the best light possible, as against other lenders' products. Counsel suggested that a broker would have an entirely different approach to the comparative exercise. Dr Fitzgerald replied, "Well, you would hope so". He would hope that the broker "wasn't being influenced by who gave him the best commission but in either case the - there are consumer laws and responsible lending policies that you've got to stay within". He seemed to accept that bank staff would try to sell bank products ethically, but that "good" brokers would give independent advice on the true merits of each product. See ts 290 ll 26-31. I shall return to the concept of bank staff being, in effect sellers of the bank's products. 448 In para 50 of his second report Dr Fitzgerald says that he sees no fundamental difference between the "bundles of loan arrangement services offered by in-house and independent channels", and that the products are "relatively close substitutes in the economic sense". He agrees that the question he had posed for himself was "Are those differences fundamental?" His reasons for concluding that they were not fundamental are those contained in para 49, together with the effectively competitive nature of the loan products themselves, resulting in the various prices being "clustered". He agrees that brokers would know the best deal at a particular time, but considers that a potential borrower could discover "some of that material" by "doing a bit of research". He does not accept that brokers could negotiate with lenders to obtain better than advertised rates, or at least that "brokers did that sort of thing on any scale". Such negotiation might occur for particular classes of borrower, such as well-qualified borrowers with significantly-sized loans. 449 He suggests that lending criteria are fixed, and that nothing done by a broker will change that fact. He suggests that an in-house channel may have greater capacity to assist a potential borrower whose application has been refused, by assisting him or her to adjust other borrowing arrangements such as credit card limits. He does not consider that a broker could assist a potential borrower by "putting the best face" on an application. As I have observed, this evidence is inconsistent with industry evidence. Dr Fitzgerald accepts that a broker might respond to a refusal by finding another lender who might be willing to accommodate the borrower in question. 450 At para 53 of his second report Dr Fitzgerald discounts any difference in convenience as between brokers' services and those of other channels as being significant or fundamental to the question of substitutability. He suggests that for most people, a mortgage loan is their most important financial relationship. They might appreciate the convenience of a home visit by a mobile lender (franchisee) or broker, but many would be willing to go to a branch. Counsel put to him that there is another dimension to convenience, namely that use of a broker obviates the need for a great deal of research by the borrower. Dr Fitzgerald agrees that some borrowers might appreciate that convenience. He agrees that for a borrower who wants the best deal "in fine detail, making sure you get the best help is obviously an advantage". 451 Counsel then cross-examined Dr Fitzgerald about the "SSNIP", or "hypothetical monopolist" test. The following passage appears at ts 295 l 34 to ts 296 l 19: On day 1 the broker gives full broker services, including advice on the best deal. The broker then announces on day 2 that he's no longer giving the advice on the best deal; he will do the rest, but not that part of it. On day 3 you look to see what switching behaviour occurs, don't you?- - -Yes. And if the reality is that any significant switching will involve the clientele of that broker going to another broker then we'll have established that the services the other broker offers are close substitute for the first broker won't you?- - -Yes. Yes. And in order to conclude that the services of - take the bank branch - in order to conclude that the services of a bank branch are a close substitute for the services of a broker who has changed his quality, you would need to conclude that a significant number of that broker's clients would switch not to another broker but to a bank branch, correct?- - -Yes that - well, yes. … And that's a factual question, isn't it?- - -Yes. And we don't have enough information to- - - You don't have enough, do you?- - -Well, there's not enough information in evidence to know exactly how significant the switching would be. But- - - You haven't seen any evidence from brokers to bank branches in what you've looked at have you?- - -No, but - - - Thank you. But what you have seen … however, is evidence showing that an increasing proportion of the borrowing public have been using the services of mortgage brokers compared to the services of internal channels of lenders?- - -I think we can only conclude, on the evidence, that that was true in the - in the years that the evidence covers. 452 Dr Fitzgerald agrees that between 2001-2002 and 2003-2004 the broker-originated share of the relevant category of ANZ business rose substantially, and that such increase was "quite a significant move". One reason for the increase in the use of brokers was the availability of cheap credit, and the increase in the number of wholesale lenders who did not have branch distribution structures. Thus broking could flourish. In that environment, it made business sense for the banks to use brokers because they could reach more business. He agrees that the growth in the broking industry coincided with the emergence of more lenders, more products and more choice, and therefore "more need for a borrower to identify which amongst the many was the best deal for the borrower". A potential borrower would either go to a broker, do his or her own research or both. 453 Dr Fitzgerald says that many people have relationships with particular banks, particularly small business people who borrow for their homes and businesses as part of an overall package. He says that there has been some unbundling over "the last decade or so", but that some people prefer to keep all of their dealings with one bank. He suggests that people "don't necessarily go to a broker unless … you're trying to find the very best deal". 454 Concerning a two-sided market, counsel put to Dr Fitzgerald that in order that there be a truly two-sided market, there must be a supplier who effectively provides a platform or an exchange, "both sides of which can satisfy two different sets of consumers". Dr Fitzgerald does not agree that both sides of the market need involve consumers but accepts that: There are two sets of demands for which the platform provides services. 455 He does not agree that a two-sided market is a rare phenomenon. He identifies the credit card market and newspapers as common examples. He agrees that on his definition of "two-sided market", a retailer would be operating in such a market. He agrees that in a two-sided market the two different sets of demand must be inter-dependent. The relevant price is the aggregate price charged after looking at both sides. He agrees that there are many cases in which one side pays and the other does not. There are also cases in which both sides pay. He agrees that the fact that one side pays, but not the other might demonstrate that one side values the market more than the other, rather than that one side had market power. 456 Dr Fitzgerald agrees that in a two-sided market, the essence of the supply is a type of exchange. In the case of the credit card, the credit card provider assists the merchant in the conduct of its business and the consumer, by providing a convenient payment mechanism. Thus they both resort to the platform by way of exchange, money coming in on one side and going out on the other. For economic purposes, in order to identify such a market, one must find a platform provider serving both sides, and a rival platform provider providing a platform that is a close substitute for the first provider's platform. 457 Counsel pointed out that in the credit card example, there are multiple consumers on both sides, contrasting that situation with the position of in-house and tied channels in the present case, providing services only to ANZ. Dr Fitzgerald considers that those channels might still be competing in the supply of such services to ANZ. 458 Counsel asked Dr Fitzgerald whether aggregators and franchise "groups" might be the relevant platforms, rather than individual brokers. Dr Fitzgerald considers that it is "just as valid" to consider the aggregator and its brokers as the platform. He agrees that an aggregator does not provide services to the individual, meaning, I think, to the potential borrower. However a franchise group would supply such services. 459 At ts 303 l 21 to ts 304 l 24, concerning brokers' services to both sides of the market, this passage appears: But, Doctor, the - I might go back a step. The lender pays commission to the broker; doesn't it?---Yes, to bring a pre-vetted borrower. And, essentially, it pays a commission because of the introduction into the lender of a suitable borrower?---Yes. Yes. And as you would see it in economic terms, the commission is being paid for that introduction not for the broker to have given advice to the broker's client that led to the submission of that application?---Well, not explicitly, but for the broker to be in a position to do it, obviously they've got to provide services to the other side otherwise the whole thing doesn't work. But the only entity on the lender's side who pays the commission is the one who actually gets the successful application; correct?---Yes, that's right. The lender isn't paying the broker to hold itself out on the market as giving advice about the whole panel of available lenders; is it?---No. Just like the advertiser in the newspaper case, they're buying the advertising and - but they do hope when they're buying the advertising that the newspaper will put eyeballs in front of the advertising. Yes?---And, so, from the lender's point of view they presumably do have an interest in the attractiveness of that broker to prospective borrowers. Yes, I understand that. Thank you. And in any one case when the client walks in the broker's door and say, "I want advice about the best deal in the market" - - -?---Mm. - - - the broker won't know and the client won't know at that stage which is the lender who is going to get the - have the application submitted to it?---I suppose that's commonly the case. Yes. But after the broker has provided its services, the loan will be submitted and if successful it will be that lender - rather than one of the other lenders - - -?---That's right. - - - who pays the commission?---That's right. Thank you?---Only paid for successful referrals. Yes. And you accept, don't you, from the economic point of view that the submission of the loan application to the lender is part of the service which that broker has agreed to provide to its own client?---Yes. Yes?---Well, to its loan seeker client. Sorry, I didn't hear that, Doctor?---To its loan seeker client, and - - - Yes. Yes. So it had to submit the loan in any event to fulfil its obligations to its own client?---Yes. And if it turns out to be successful, the lender pays the broker a fee for that?---Yes. 460 At ts 304 l 26 to ts 305 l 22, concerning the in-house channels, this passage appears: Yes. Thank you. Now, if we then take the non-broker case, you say, don't you, that the bank branch is a provider of an exchange in this two-sided market?---Yes. Yes. And the exchange consists of on the one side the branch providing loan arrangement services?---Yes. Yes. We won't go back into the detail of those services, but one standout feature of the branches platform which is different from the brokers platform is that the branch's loan arrangement services are confined to information, etcetera, about the particular lender of whose organisation that branch is a part?---Give or take the answering of comparative questions, I guess. They can only sell their own products, yes. Yes, thank you. They might give some comparative advice but the only sale - - -?---Yes. - - - that they will - - -?---Yes. - - - proffer is a sale of that lender's own suite of products?---And they only get the internal commission if they sell it. Yes. And then on the other side of the branch exchange, again, the singularity of demand isn't there, unlike the broker's case where the demand consists of all of the lenders on that broker's panel. On the branch's exchange there is only one on the lender side; correct?---Yes. So it's a very different exchange, isn't it?---It's certainly different. It's a very different exchange?---Well, I hesitate to use that adjective because in many respects it's very similar. HIS HONOUR: We're not going to get into adverbs of degree again, are we? COUNSEL: Yes. But it's critical to your two-sided market analysis that the exchange, if I can call it that, that is made available by the branch be a close substitute for the exchange which is provided by the broker?---Yes. Yes. Thank you?---For them to be in the same market. Yes. First, there has to be a service, second, it has to be in the market, and third, it has to be a close substitute; correct?---Yes. 461 Counsel then questioned Dr Fitzgerald about the difficulty of identifying the geographical boundaries of any relevant market in view of the national presence of aggregators. Dr Fitzgerald remains of the view that both sides of the two-sided market have sub-state boundaries. Counsel then cross-examined concerning the distinction which Dr Fitzgerald draws between ANZ Mortgage Group and the internal distribution channels. At ts 308 ll 1-6, the following passage appears: Thank you. Now, in order to establish either a loan arrangement services market of the kind that the Commission has pleaded or a mortgage loan intermediaries services market of the kind that you've referred to, you need for the purposes of your analysis, doctor - don't you - to differentiate between the mortgages division we've spoken of earlier and the internal channel which performs the distribution function for that lending division?---Yes. 462 In his view, at least in accounting terms, they are separate cost and profit-earning centres, looking both at the revenues which they generate and the costs which they incur. Dr Fitzgerald said that incentives offered to such units were largely, if not entirely, to do with maximizing the profit generated in those units. Counsel put to him that in fact the purpose was to maximize the profit of the bank, overall. Dr Fitzgerald replied at ts 310 ll 11-16: Well, that - as I said earlier, the senior people in the bank would obviously be given incentives that depend on the performance of the bank as a whole and strong incentives, for example, to use in-house channels rather than outside if they can. But down the line in one of these business units, the incentive is to get the best results within that business unit. 463 Counsel put to him that such a unit, for example a bank branch, would have to operate within, and subject to the constraints of the business structure of the overall entity. Dr Fitzgerald agreed. At ts 310 ll 30 to ts 312 l 16 the following passage appears: And, so, even though that branch may identify a course of conduct that would increase the profitability of a branch, it may be constrained from doing so because it needs to operate as a complement to other divisions of the bank performing similar activity; correct?---Certainly a complement to the lender above it. What I was actually going to look up is relevant, and that is that there's material in evidence - increasingly, as we go through the period in which the behaviour occurred - to the mortgages unit having to manage conflict among the internal channels. Yes?---And what that means is that to some extent they were rivals, but that in the interests of the bank as a whole - and Mortgages in particular - that rivalry had to be - they saw it as something to be managed - - - Yes- - -?---so that it didn't become destructive, and - - - Yes. Hence the adoption of the policy of channel neutrality, as it's called; do you agree?---And - well - - - Do you agree?---No. You don't?---They, obviously, from the evidence, had a debate about how far they could deviate from channel neutrality. It was a principle that [they] recognized as impossible to achieve fully, but that they had to have in mind in managing the different channels. But, basically, they were striking a balance between giving each of them their best shot and, yet, having them not have such different incentives that they were - there was hostility and the like. So you would see what was happening in this way, would you, Doctor - that where you have a multiplicity of distribution channels, each will strive to achieve its own optimum outcome?---Yes. But in the overall interests of the entity that has put those distribution channels in place, there needs to be some balance achieved to optimise the outcome for the top unit?---And within the bank there's- - - Sorry, do you agree with that?---Yes, but - - - Yes. But you go on to say?---Within the bank, yes. And you were saying "but" something - I didn't want to stop you?---Well, I think there's legal limits to how far you can impose it on someone outside the bank. Yes. But each of these distribution channels is not free, is it, Doctor, as you see it, to pursue that course which the individual channel would see as optimum for itself?---Within the bank that's certainly true. Yes. And that's why the branch is not its own profit-maximizing unit, notwithstanding that it has its own profit and cost centre?---It's subject to whatever - the incentives set for each channel were controlled by Mortgages, and the incentives given to the branches were quite generous - even compared to brokers outside - but viewed differently from above because they were within the banking group. But certainly the branches - in the period in question - had very strong incentives to get the business. Yes. But you accept, don't you, for example, Doctor, that a bank branch out in Clayfield, in suburban Brisbane, might see that it's to its advantage to offer not only the products of the group of which it's a member, but the products of some other group?---Not outside the bank, no. Well, no, it just can't do that; can it?---No, that's the constraint under which it operates, yes. But- - - Yes, exactly, even though to adopt that course would maximise the profit of the branch; correct?---That's maybe correct. Yes?---But obviously that's outside the rules of the game. Yes?---Whereas, for example, there is an instance in the evidence of a branch complaining that one of the new mobile lenders set up their office just around the corner and they didn't like that, that - - - No, because that reduced the chances of them making as many sales as they otherwise would?---That's right. Yes. Thank you. And is this - you've heard the expression "channel conflict", have you, before this case?---I heard it long before this case. Yes, it's a well-known and long-established phenomenon; isn't it?---Yes. And it reflects this endeavour by the - I will call it the parent, for the moment - endeavour by the parent to adjust the tensions that exist between the various distribution arms of the bank, whether they're internal or external?---To have rivalry but to manage it. 464 At the beginning of that lengthy extract, Dr Fitzgerald may have suggested that in a relevant period, there was an increasing need to handle channel conflict between internal channels. Whilst there is some evidence of conflict between channels, I am not sure that the evidence discloses any increase in frequency. Ms Zacka said that brokers' complaints in this area declined in 2004. It seems unlikely that such complaints were becoming more common as between internal channels. The matter is not of great significance. 465 Dr Fitzgerald agrees that a branch, as an independent economic unit, has a multiplicity of functions and activities, providing deposit accounts, cheque accounts and some functions in relation to home mortgage lending. Counsel asked whether the platform which he identified as being part of the two-sided market was the whole of the branch or part of it. The following passage appears at ts 314 l 8 to ts 315 l 19: Well, the - the - it's the branch. The branch is, as you say, multi-function. There are in - as I understand the ANZ material in evidence, that in at least a considerable number of branches, there were personal mortgage managers who were specialists, but most of the people who dealt with mortgage loan applications would have been just general branch staff. Yes. So there's an incongruity, isn't there, in your platform analysis, because what you put on the platform is this economic unit that has various functions which are wholly irrelevant to the market in which you say that platform occurs?---I think the fact that the platform is - has a number of - of services that it provides doesn't - it doesn't represent a significant incongruity. It's - - - But you have constructed, haven't you, Doctor, a mortgage loan - I'm going to use your exact words if I can manage it - mortgage loan intermediary services platform, but the - - -?---I don't think I actually use the word "platform" - - - No?--- - - -at least not very often, but yes. You have a service, a mortgage loan intermediary service?---Yes. But because you find that in the two-sided markets, it's effectively an exchange or a platform, isn't it?---It's in that category of things, yes. Yes. But the platform has a whole lot of discordant, inappropriate elements to it, such as cheque account functions and a whole lot of other things, doesn't it?---I don't see them as discordant at all. I - I - as I was saying before, particularly for small business customers, who are often mortgage loan customers as well, getting a transaction account service, a couple of kinds of loan, whatever else is - are things which are naturally provided together, and - - - But it's - well, that - but that makes it something other than a mortgage lending intermediary service, doesn't it?---I didn't say that that was its sole function. I said that's - that's a function it provided. Well, assuming it does provide that, you've got that on the platform, the one thing that the broker service doesn't provide, and is very different in that respect, is a cheque account facility, isn't it?---That's true. Yes. So the more you have the platform on the internal lending side considering the whole range and suite of branch functions, the more it is different from the broker platform, isn't it?---The more it has multiple functions. Yes, but - - -?---Remember, it isn't the only in-house channel. But you concede, don't you, that the broker - whatever services the broker does provide, it doesn't provide services of the kind that the branch provides in respect of other demands that a bank has - well, the other demands of a bank that the customer has?---Yes. That's obviously true. Thank you. And by separating out the branch or the mobile lender or whatever, separating those entities out from the bank as a whole, one doesn't thereby create a relationship with brokers which is competitive in nature if that element weren't present in any event, without the separation. Do you accept that?---I think as long as both provide mortgage loan intermediary services, the broker and the branch or other in-house channel, they're in competition for that business. Yes. But either there is competition or there is not?---Yes. 466 At the outset of this line of questioning, counsel for ACCC objected to it on the basis that the joint report of the economists recorded acceptance of "the existence of distinct economic units". The matter is primarily dealt with at paras 19-22 of the report. There is agreement that ANZ Mortgage Group was, effectively, the economic entity which lent. It was also argued that "downstream" from ANZ Mortgage Group at a similar, or the same functional level as brokers, there were "several customer-facing units or related franchise agents that assisted mortgage loan seekers in several respects". Whilst some agreement emerges from para 19, the extent or effect of such agreement is unclear. 467 In any event, the significance of this line of questioning is that it demonstrates that branches were not simply engaged in functions associated with loan products. Numerous banking functions were carried out in the branches and, as Dr Fitzgerald pointed out, not all branches or all staff had particular expertise in connection with loan products. 468 Dr Fitzgerald accepts that a firm would generally be better off without a competitor than with that competitor. The following passage appears at ts 315 l 46 to ts 317 l 16: But, Doctor, if brokers were competitors of lenders, lenders would be better off by not accrediting brokers, wouldn't they?---They would be if they could get the business that brokers get at similar cost and, you know - and so forth. The situation in the period we were looking at in this evidence is one where, despite their extra costs, they brought in business that their own channels couldn't as effectively reach. Yes. But one - - -?---You wish you could reach that business yourself, but if you can't - - - Yes, but the very fact that - I'm sorry, I withdraw that. You accept that the lenders are better off using broking channels than not broking channels, particularly in the period we're concerned with?---They - they were in the period we're looking at. Yes?---And probably generally. If there's - if there's some channel that brings in a bit more business that you can't bring in otherwise - - - Yes?--- - - -well, there you go. HIS HONOUR: I don't think those two statements were - I think what the witness is saying is that they're better off having broking channels than not having broking channels. THE WITNESS: Yes. HIS HONOUR: Not that they're better having - using broking channels than using non broking channels. COUNSEL: Yes. Yes, thank you, your Honour. But a lender would hesitate to add to a stable of distribution channels an additional channel were that channel to involve the activity of a competitor; correct?---It - I would put it this way, that you - if you're in the situation you don't want to add another distribution channel, that will simply cannibalize your own existing channels. Yes. Yes?---So - - - And that's what - - -?---So - - - - - -competitors tend to do, isn't it?---That's right. Yes?---And so if that's the main effect of that other channel, you don't want anything to do with it. And that's an indicator that brokers are not and are not seen to be competitors by lenders; correct?---No. The - they're competitors, and in the case of - as I put it in my characterisation of the material in evidence, they were seen as a necessary evil. Yes.---Necessary because they brought business that ANZ's in-house channels was not at that time as effective in reaching, and … put it colourfully, because they cost too much and to some extent were in competition with in-house channels. And one acceptable analysis you would concede, Doctor, is that brokers may engage in activities which are not entirely harmonious with the position of lenders but they are not close substitutes; correct?---They may - they may conflict with some of your in-house channels, but they're still providing substitute services - close substitute - or - I use the terminology relatively close substitutes frequently. One analysis is they may be - may be a low level of substitution but not close substitution; correct?---No, I don't agree with that. I know you don't agree with it, but I'm saying it is an analysis which is proper and open to be adopted as a matter of concept?---As a matter of concept one could adopt that, yes. 469 It may not be unduly pedantic to point out that at ts 317 l 3, Dr Fitzgerald describes the brokers as being in competition with in-house channels "to some extent", perhaps reflecting earlier references to "relatively close" competition. I have already discussed the apparent tension between ANZ's use of brokers and the proposition that it was competing with them. 470 Counsel then referred Dr Fitzgerald to the BankWest survey material concerning internet usage (exhibit 2). One question addressed in the survey was the frequency with which potential borrowers resorted to the internet for information. Dr Fitzgerald agrees that the statement at para 49 of his second report, that "more than two-thirds of seekers of new loans do their own research on the alternatives offered by lenders before coming to a physical channel" was based upon the second last point on the fourth page of the survey, under the heading "Key Findings". It reads as follows: The internet remains the main source of information on new loans with 70.1% of respondents using it. 471 He agrees that he inferred that borrowers go to physical channels after reference to the internet, using information from that source for comparative purposes. He also inferred that persons going to the internet looked at the rates charged by different lenders. Such material is available on the Cannex site, one of the most popular sites. He agrees that there was no indication in the survey material that other differences in the products were able to be ascertained from the internet. 472 Counsel also pointed out that the survey was conducted on-line, suggesting that the people surveyed were already internet users. Dr Fitzgerald says that at the relevant time, internet usage was already widespread in the community, and that the persons surveyed were "of a mid- to mass affluent respondent base". He agrees that other borrowers might be on the borderline of lenders' criteria and therefore need assistance in meeting such criteria. 473 Counsel took the witness to p 18 of the survey material. At the last point on that page it is said that 63% (presumably of respondents to the survey) used the internet to access loan information whilst 38.1% used it as their main source. Thus the survey does not demonstrate that 70.1% of respondents used the internet as their main source of loan information, a proposition upon which Dr Fitzgerald had, to some extent, relied. Counsel also pointed out that the figures on p 18 relate to home and investment loans, not merely home loans. Counsel then referred to p 16 of the survey material (exhibit 2). It demonstrates that, of those surveyed, 77.3% considered that one benefit of using a broker was that they had a wider loan range, and that 81.6% of respondents considered that they did all the leg work. 72.4% said that they were experts in the range of mortgages from various lenders, and 65.3% said that a broker enabled a borrower to obtain the right loan for his or her circumstances. Dr Fitzgerald agrees that these survey figures demonstrate the reasons for "a certain sector of the borrowing population" using brokers. 474 In re-examination counsel asked if there was any difference in the approach to identifying competition in a two-sided market, as opposed to doing so in a single-sided market. Dr Fitzgerald said that there was no fundamental difference, and that suppliers were in competition if the nature of their rivalry was such that if one gets the business, the other does not. In other words, they constrain each other. Counsel asked whether the fact that customers had different levels of needs, or types of needs affected the question of whether or not suppliers of those needs were in competition. Dr Fitzgerald said: I guess if the two customer segments are completely disjoint, then they can't really be rivals for the business of either segment. There has to be at least some significant overlap of the customer segments for them to be both looking for business which, if they get, the other one doesn't. 475 He said that it was not necessary that there be a complete overlap, the reason for this being: Well it's almost always true in markets where there is any differentiation of product - eg for motor vehicles - that there will be some people who'll have a pronounced preference for some particular features that only one brand has and some would prefer particular features that another brand has. But as long as there's a reasonable number of potential customers for both, they're in the same market. 476 Counsel asked about the relevance of any decrease in the quality of service. Dr Fitzgerald said: Well, where there's any differentiation of the product or service that firms offer - in this context, we would use the term "quality" to encompass a number of things that Mr Archibald queried me about - convenience and some of them were in that exhibit that he showed me in the survey. Those - you've got to think of quality-adjusted prices and if you significantly change quality, its equivalent to changing price in a quality-adjusted sense. 477 Counsel asked how the hypothetical monopolist test might be applied to changes in quality. Dr Fitzgerald said: It's very difficult to apply the hypothetical monopolist test in any way in this situation given the available information but that - to apply it without explicit changes in price, per se, that in quality-adjusted prices via a change in quality would be very difficult indeed because for a start, it's very hard to quantify quality.

OTHER DOCUMENTS 478 Apart from the documents and slide presentations which I have already summarized, ACCC, in its submissions, refers to a number of other documents and presentations. I shall now summarize them. 479 One such presentation was entitled "ANZ Mortgage Solutions Franchise Network Operations Manual". At slide 12 in para 2.3, ANZ Mortgage Solutions is identified as a "key division" of ANZ's Mortgage Group, established to provide ANZ with a mobile lending network on a franchisee basis. Its mission is to support franchisees in their franchise business. In other words, whilst Mortgage Solutions is part of ANZ Mortgage Group, the franchisees are separate businesses supported by Mortgage Solutions. It is also said that franchisees have been appointed "to market and promote, and procure applications for, ANZ Mortgage products". Perhaps inconsistently, it is then said that the franchisees will represent customers in dealing with ANZ, and provide services to them in connection with ANZ mortgage products. Notwithstanding the obvious potential for conflict of interest, the manual asserts, at p 14 that: Your dealings with customers, suppliers and ANZ staff must be at arm's length, to avoid the possibility of actual or perceived conflicts of interest. 480 ACCC then refers to slides which accompanied a presentation dated May 2003, entitled "Achieving the next step-up in mortgage sales". The slides seek to identify the differentiated services offered, and borrowers which the in-house and tied channels might target. It recognizes differentiated skills and skill levels. However it says little about the questions which I must address. On slide 11, it is suggested that specialist in-house "L&G" personnel "with the appropriate skill or level can compete for business" against other banks and brokers. Equating brokers with other banks suggests that the relevant competition is in the supply of loan products. 481 ACCC also refers to slides attached to an email dated 27 November 2003. The slides outline the roles which ANZ staff were to represent themselves as fulfilling when speaking to customers having different needs and/or attitudes towards ANZ. Some staff were to hold themselves out as being mortgage specialists, saying that, "Nobody knows more about mortgages than I do". One of the scenarios involved a customer saying, "With so many products and features available I need help to find the right mortgage for my specific needs", adding credibility to the evidence that there was a perceived need for services of that kind. The slides also highlight the fact that ANZ's in-house channels offered only ANZ products (as compared to the range of various lenders' products offered by brokers). Further, the slides contemplate a mobile mortgage specialist (or franchisee) telling a potential borrower that he or she builds "strong customer advocacy", to some extent contradicting Dr Fitzgerald's evidence that there is no place for such advocacy in the lending process. 482 ACCC refers to an email chain dated January 2004 concerning a complaint by a broker to which I have previously referred in my consideration of Dr Fitzgerald's evidence. This is the matter in which Mr Sirianni made his comment that nobody "owns" the customer. These emails are said to be "both an example of competition in fact and an example of the opinion of senior ANZ management that the particular situation was not unusual, but part of the ordinary operation of the market". For reasons which I have given it is difficult to accept that assessment. 483 ACCC refers to the document entitled "Mortgages" dated 25 February 2004 to which I have previously referred. This document was generated by Mr Cooper as Managing Director of ANZ Mortgage Group. I do not accept the submission that its major thrust is a strategy for the diversion of sales from brokers to in-house channels. Rather, it proposes a strategy for expanding market share in the lending market, to some extent using brokers' methods. It notes that Aussie Home Loans had moved to a broker model which had made the market for Origin more difficult, presumably because brokers were selling Aussie Home Loans' products. The document contemplates a reduction in the brokers' share of ANZ business but no overall reduction in dollar terms. 484 ACCC also refers to a discussion paper entitled "The ANZ Mortgage Solutions Franchising Initiative", dated 24 March 2004. It deals with the Mortgage Solutions franchisees. Other evidence suggests that as at that date, Mortgage Solutions had not yet been rolled out, other than on a trial basis. It was expected that Mortgage Solutions would target the 88% of the market which ANZ did not presently hold, thus inevitably focusing on non-ANZ customers wishing to access mortgages "at their preferred location/time ie a component of the successful broker sales proposition". Under the heading "Issues Canvassed for Discussion Today" it is suggested that the process was still under discussion. On p 3 it is said that franchisees would complement the branch network. There seems to have been a desire to avoid franchisees cutting across other in-house channels. On p 6 it is said that the commission structure is "competitive" with commissions paid to the sales consultants of major broking chains which provide operational support. The structure was also to deliver significant savings compared to current rates of commission paid to brokers. 485 ACCC relies upon this document as demonstrating attempts to limit competition as between branches and franchisees. Clearly, ANZ's aim was to increase its share of the lending market. At least one aspect of the proposal was to use franchisees in order to provide greater convenience to potential borrowers. There was also a hope, or an expectation that the franchisees would cost ANZ less than the brokers. There seems to have been no consideration of the extent to which commission paid to franchisees would reduce ANZ's bottom line as the result of money not remaining within ANZ. This may be consistent with the intention that the franchisees not take business from the branches. Having said that, there is no suggestion that ANZ could do without brokers. As far as the evidence goes, Mr Lahiff says that lenders continued to accredit brokers on an unrestricted basis until 2008. There is no suggestion that ANZ's practice was otherwise. 486 ACCC refers to an incident occurring in April 2004 in which a broker had recommended that a customer take a loan from either ANZ or St George Bank, in the amount of $705,000 with a proposed rebate from the broker. I have already referred to this incident. The potential customer contacted an ANZ mortgage consultant and advised that he had been offered a rebate if he obtained the loan through the broker. The ANZ consultant (Mr Boer) asked a bank officer whether ANZ would counter the offer, stating, "This customer will obtain a rebate of approximately $2,800 for his $700,000 in lending. Please let me know if we can counter". She responded, "I have been advised that ANZ do not support this practice and the matter has been raised with Joe Sirianni, however, I am not sure what ANZ can do to stop this behaviour. We certainly don't encourage it and we would not be looking to match this kind of offer". To this, Mr Boer responded: One observation could be that Brokers are capturing too much of the mortgage value chain if they can afford to do this. They must have very low overheads. … Perhaps an Aggregator? This has the potential to further erode value in the marketplace, depending of course how much market share they capture. How do we compete with this sort of stuff? 487 The ACCC submits that this incident demonstrates "an acceptance that this competition is a well understood aspect of the market". It is said that it is clear that, at this date, which was prior to the resolution of the dispute between Mortgage Refunds and ANZ, Mr Sirianni had implemented a policy against brokers giving refunds. I do not accept that the email chain demonstrates that proposition. It rather suggests that as far as Mr Sirianni was concerned, there was nothing that could be done about it. In the circumstances it suggests that ANZ's response to the events concerning Mortgage Refunds was not associated with any general policy. It may rather have been attributable to a need to resolve a particular channel conflict. Apparently, the same need was not identified in the case which concerned Mr Boer. As I have previously observed, one channel's view of the remuneration paid to another channel may reflect conflict, but it was for ANZ Mortgage Group to decide on the appropriate level of commission for the brokers. 488 ACCC refers to an email dated 22 April 2004 from Mr Brian Hartzer, the ANZ Group Managing Director, to Greg Camm, presumably somebody outside of ANZ Mortgage Group, perhaps associated with the branches. Attached were slides associated with a "board presentation" made by Mr Cooper in February 2004. Mr Cooper informed Mr Hartzer of events at the meeting concerning the transfer of marketing responsibilities within the Group, and between the Group and other parts of ANZ. The primary purpose of the email seems to have been to complain that following the transfer to ANZ Mortgage Group of the personal mortgage managers (formerly L&G), the transferor segment of ANZ sought to establish a similar group, thus "cannibalizing" the transferred business. Mr Cooper then said that the issue which ANZ was facing was the disproportionate increase in broker business growth, and that "our specialist channels are being geared to challenge this". In reply Mr Hartzer indicated that he would call a meeting of the parties for the purpose of reducing or eliminating channel conflict. 489 In the attached presentation there is a reference to distribution partners capturing a higher proportion of value, leading to further margin decline. The reference to "distribution partners" presumably refers to brokers, but apparently also to in-house channels. It is said that: • Continued strong sales further inhibit [net profit after tax] performance due to high commissions paid to the Personal Bank, and higher servicing costs due to strong broker channel ANZ external growth is strong. • Brokers are now 42% of new flow and 60% of new FUM, which left unchallenged is unsustainable. 490 Further: Distribution diversity is essential, we can no longer rely on the network, and must address the over-reliance on the brokers, to address major pressure and higher servicing costs. 491 Mr Hartzer was the ANZ Group Managing Director and Mr Cooper's superior. Hence the email was an attempt by Mr Cooper to engage Mr Hartzer in the resolution of a dispute between ANZ Mortgage Group and another group within ANZ. The other group is described as "EFK/Chelvi". The later reference to "network growth" may suggest that the other group was Personal Banking (the branches). In any event it is clear that the email is concerned with "competition" between ANZ entities as well as the brokers. 492 There is a reference to the franchisee model being similar to the brokers' operating model and a suggestion that we (ANZ Mortgage Group) "will partner with stronger brands and claim the 'trusted adviser' space avoiding the need for brokers". I have previously referred to this question of the "trusted adviser". 493 It is not always easy to understand the precise meaning of the internal ANZ documents. They were written in particular contexts which were no doubt known to the writers and the addressees. This presentation demonstrates that ANZ Mortgage Group was concerned about the relatively high cost of brokers' services and over-reliance on that channel. However there was also a problem with commission paid to the "Personal Bank" (or branches). The problem with the brokers was "higher servicing costs", presumably the cost of processing and maintaining loans written by the brokers. 494 ACCC refers to email correspondence in April 2004 concerning a potential customer who was referred to a branch but was then not contacted with sufficient promptness. The customer was a senior officer of an insurance company. It is said that he "was about to go to a broker when fortunately he contacted a Personal Mortgage Manager and we have looked after him". It is suggested that at the outset, the customer ought to have been referred to a personal mortgage manager and not to a branch. ACCC submits that this "illustrates an example of an experienced commercial customer switching between branches and brokers". In my view it indicates that when the branch failed to deal promptly with somebody who might have expected to be treated fairly well, given his position, he resolved to go elsewhere and chose a broker. This incident does not justify the assertion that generally, the services offered by brokers are close substitutes for those offered by internal channels, at least in the absence of evidence as to why the customer went to ANZ in the first place. 495 ACCC refers to minutes of the "Mortgage Solutions Steering Committee Meeting" chaired by Mr Cooper and dated 27 April 2004. In a slide apparently used in a presentation at the meeting, it is said that the objectives and benefits of the Mortgage Solutions project included: 3. To improve the current customer service proposition through greater accessibility, convenience and improved service delivery via a mobile sales force; and 4. To target sales opportunities currently being captured by the broker community and increase ANZ's overall share of the mortgage market. 496 Whilst objective 4 uses the language of competition, it is curious that nowhere in the material to which I have been referred is there any discussion of methods for capturing sales opportunities from the brokers. Further, any such objective was clearly closely associated with concerns about the appropriateness of the existing heavy reliance upon the brokers, and the expectation that brokers would continue to provide a substantial proportion of ANZ's mortgage business. The reference also seems to be to competition in the supply of loan products. 497 ANZ Mortgage Group seems to have sought to improve its performance by adopting a range of improvements in the internal management of its loan business and the establishment of the Mortgage Solutions franchise model. In the earlier stages it was expected that the management improvements would, to some extent, benefit the brokers as well as the other distribution channels. There was no plan to supply the loan products of other lenders through the in-house channels or through the franchisees. Thus ANZ Mortgage Group did not seek to address that disadvantage, other than by compensating the franchisees for it. 498 It is difficult to understand how ANZ Mortgage Group proposed to deal with the "trusted adviser" status of the brokers. No indication is given as to how the inevitable association between the in-house and tied distribution channels and ANZ was to be negated. The franchisees were to operate under the ANZ banner, offering only ANZ products. There remains a question as to why a broker should be in competition with ANZ in-house channels and a franchisee, not. A second question might be whether, to the extent that brokers and franchisees competed, the latter did so on behalf of ANZ so that it might be said, for the purposes of s 45A, that ANZ was providing services in competition with Mortgage Refunds. I shall return to these questions. 499 It must also be kept in mind, in assessing these documents, that ANZ's primary goal was to expand market share in the lending market. The brokers were to be part of that endeavour, although it was thought that in some respects, ANZ's capacity to compete in that market might be compromised by the high level of commission attaching to broker-written business. There seems to have been little discussion of any reduction in that commission, presumably because of the risk of broker retaliation. 500 ACCC also refers to another event which occurred in April 2004. A personal mortgage manager complained to the Manager Mortgage Pricing that he had lost a deal to a broker who had written the loan with ANZ, saying: Apparently the broker is paying the application fee from his commission. Hence the client says he may as well go through him as it's with ANZ anyway. 501 The manager responded: At the end of the day the broker is still collecting an LAF of $600 for Mortgages, so we wouldn't approve a waiver of an LAF (we won't get anything) to match a broker paying out of his own pocket. What you can do is ask Paul Barker if he will do the same for you ie cover the LAF from his expense account, against the sales revenue that is paid on the deal. 502 I have previously referred to this incident. ACCC submits that: This is an example of close competition between brokers and ANZ branches at work. This price competition for customers would not exist if the ANZ proposition about absence of close substitution was sound. 503 In my view ACCC's assessment of the incident is incorrect. First, it seems that the borrower was dealing with both the personal mortgage manager and the broker. The personal mortgage manager may have understood that he had secured the business before the involvement of the broker, but he does not actually say so. It is unclear whether the broker had, in fact, offered advice which led to the borrower's decision to take an ANZ product. The evidence suggests that it would be unusual for a potential borrower to go to both an in-house channel and a broker. The circumstances of the incident are not sufficiently clear to permit me to draw any relevant inference. However it suggests adherence by ANZ to the policy of channel neutrality, and no desire to favour an in-house channel at the expense of the broker. 504 It is somewhat difficult to see how ANZ Mortgage Group managed to differentiate between this situation and the Mortgage Refunds situation where the in-house channels apparently perceived that they were missing out on business, and therefore commission because Mortgage Refunds' brokers were paying money directly to the borrowers from their commissions. There is no real difference between that conduct and paying the $600 loan application fee on behalf of the borrower. The difference may be in bank politics. The branches, not being under ANZ Mortgage Group management, may have been able to make more trouble, perhaps with Mr Hartzer, than could the personal mortgage managers who were managed by ANZ Mortgage Group. Alternatively the relevant broker may have been more important to ANZ than was Mortgage Refunds. 505 In late April a personal mortgage manager complained that an internal channel had referred a potential borrower to a branch. As the proposed loan was complex the branch referred it to him. As a result of the delay, the customer had made an appointment to see a broker. It seems that pursuant to ANZ's internal arrangements, the inquiry should have been referred to a personal mortgage manager in the first instance. The personal mortgage manager said: Something needs to be done about this system, as we are losing too much business to brokers as it is, and this is the reason why! 506 ANZ seems to have treated the matter as a failure of the referral system. ACCC submits that the incident was an example of comparative quality of competitors' services affecting the customer's decision. It is difficult to reach that conclusion without knowing why, in the first place, the customer went to ANZ rather than a broker. It is possible that the apparent delay in dealing with the inquiry led the borrower to re-assess his perception that ANZ would provide the service which he needed. Loss of that perception may have led to a perception that he needed the assistance offered by a broker. 507 ACCC refers to a draft slide presentation headed "Mortgage Broker Channel Review" and dated September 2004. It seems to be an earlier draft of a similarly entitled document dated October 2004, to which I have previously referred. The draft was sent under cover of a letter dated 15 September 2004 from Angus Gilfillan, the Head of Business Economics at ANZ Mortgage Group, to Mr Cooper with copies to other officers including Mr Crellin. It seems that it was provided to Mr Cooper "prior to your meeting tomorrow with brokers". Its recommendations related to commission. ACCC submits that it demonstrates that there was substitution between the bank channels and brokers, and that loans originated in-house were significantly more valuable. The first proposition seems to be based on the heading on slide 4, "Customers are increasingly choosing mortgage brokers for loan origination instead of traditional bank origination channels". I do not read this heading as necessarily indicating substitutability. This tendency was, after all, the result of the multiplicity of lenders and loan products in the lending market. The evidence clearly demonstrates that increased choice, amongst products and lenders, created the need for brokers' services. The services provided by in-house channels had existed prior to the emergence of that need. The increase in broker usage demonstrated that existing services were perceived to be inadequate in the new lending environment. ACCC's interpretation of the heading assumes substitutability in order to prove that the products are substitutable. 508 The second proposition emerges from slide 9 which is headed, "Where the Network sells a mortgage, the distribution margin is captured by ANZ, making these loans significantly more valuable". The bar graphs on that page demonstrate two aspects of this case which may be significant but have been addressed only in passing. For present purposes I assume that the grey portions of the bars represent profit to ANZ, free of any commission paid to brokers or the branch network, and that the darker portions represent the commission paid to the branches. The respective values to ANZ of broker-originated and branch-originated loans have been assessed from the point of view of ANZ, not ANZ Mortgage Group. In other words the concern was with the profitability of loan products being supplied in the lending market. 509 The October 2004 version of this presentation notes that adverse movements in margins had impacted upon profitability. It also notes the increased use of brokers, and that ANZ's strong partnership with brokers had enabled it to grow more quickly than the market. Whilst acknowledging the importance of the brokers' channel strategically, it is said that margin compression was making the economics more difficult in that distribution was capturing more of the "value chain" at the expense of manufacturing, (meaning, I infer, ANZ Mortgage Group) which was absorbing all of the competitive and funding pressures. The author then notes the advantage to ANZ, as a whole where the distribution margin is captured by ANZ rather than external brokers. The document notes the risk of a negative broker response to ANZ's adoption of any of the options available for "recapturing value". The relevant changes proposed on slide 2 would have affected the structure of commissions. It required that brokers submit electronic applications, and that each broker achieve a "certain rate of settlement on applications in order that he or she maintain a particular level of commission. At this stage it was anticipated that these changes would be notified to the brokers during the next four to six weeks. 510 The background to these changes, and their possible effects were illustrated in a series of slides. Other options were also raised and dismissed, largely because of anticipated negative responses from the brokers. The options were divided into three groups - low risk, medium risk and high risk. Phase 1 risks, which dealt with the structure of agents' commission, were considered to be low risk. The phase 2 changes were considered to be medium risk strategies to be considered over the next six to 12 months, depending on the success of the Phase 1 changes. No timetable was suggested for introducing other medium risk options. None of the high risk options was to be implemented. 511 The earlier draft is to similar effect. However, at slide 24, (which does not appear in the October version) there is a graph plotting net profit after tax from the broker channel, with and without new sales, presumably as the anticipated result of broker retaliation. The graph shows a moderate increase in NPAT if new sales continued to be made, but a rapid decline if there were no new sales. It is said that in such case: Profitability of the existing book would fall rapidly due to - low interest generation FUM - continued amortisation of upfront commissions (upfront amortised over 4 years). 512 Thus the consequences for ANZ of broker retaliation were significant. 513 ACCC refers to an email dated 2 October 2004. A senior sales consultant complained that an ANZ staff member had used a broker when he or she could have used an in-house channel. In fact, the loan was written by a franchisee. Nonetheless it was said that a franchisee should be trying to build up business in areas "which would not otherwise naturally flow into the network - otherwise we are just competing with each other (again)". I make two observations concerning this email. First, it throws further doubt upon the assumption that the franchisees should be seen as in-house channels, competing with the brokers on ANZ's behalf. They seem to have been regarded as external channels with which the internal channels did not expect to compete, presumably because of a perceived limitation upon their appropriate areas of operation. Secondly, the focus is on the overall benefit to ANZ rather than any benefit to a profit centre within that organization. 514 ACCC also refers to the presentation entitled "Channel Neutrality" and dated 21 March 2005, to which I have previously referred. It points out that the document was prepared by Mr Gilfillan who was, according to ACCC, ANZ's Head of Business Economics. It refers to his observation on p 1 that: ANZ Mortgages sells mortgage products simultaneously through a number of channels. In many instances, these channels are competing to reach the same set of customers. 515 ACCC also refers to Mr Gilfillan's statement that channel neutrality meant that the channels "competed" on an equal footing. I have previously referred to that passage. I have also pointed out the concern about broker backlash which emerges clearly from this paper. The focus is on increased market share in the lending market, involving the launch of a lower cost product. At least part of the reduced cost was to be derived from reduced distribution costs, including reduced commission payable to brokers. 516 ACCC then refers to a number of documents dealing with the payment to the branches of commission. ACCC points out that in an email dated 8 October 2003 Mr Cooper disclosed the financial results for ANZ Mortgage Group for the second half of 2003. In that year it paid to Personal Banking (the branch network) the sum of $142.6 million in commission. Mr Cooper describes "higher levels of internal commissions paid to Personal Banking" as being "group neutral". 517 ACCC refers to a presentation dated 1 April 2004 entitled "Group Oversight Review - ANZ Mortgage Group" to which I have previously referred. ACCC refers particularly to slide 70 which is headed "Rising wholesale rates and higher commissions paid to the network have offset the benefit received from increased FUM". A further note says, "Higher sales have resulted in increased internal commissions paid to the network". On slide 72 it is said that, "Mortgages' results have been significantly impacted by funding costs and up-front commissions paid to the ANZ Branch Network". 518 I assume that ACCC's reference to this material is to demonstrate that amounts were paid, at least notionally, to the ANZ branch network. As I understand it, the term "network" does not include brokers. The references on slide 70 to "net internal group expenses" and "net internal commissions" demonstrate that the subject matter is internal commission payments. 519 ACCC also refers to a document entitled "Global CVA, Personal Banking Australia", dated October 2004. The document relates to changes in the way in which the branches were notionally remunerated for services. ACCC refers specifically to a passage at p 6 which states: All internal sales commission for mortgages will be removed. Instead of receiving sales and retention commissions only on mortgages sold by the branch, you will instead receive the Net Internal Interest and the Fees from the total Mortgage Funds Under Management held by the Bank. 520 ACCC submits that this demonstrates that one division was paid to provide services to another. That is true. However, for reasons which I have already given, it seems that ANZ Mortgage Group was willing to look beyond the notional position to the real position, namely ANZ's bottom line. Further, both in the covering emails and slide 6, (to which the ACCC refers) it is said that, "Instead of getting $150 for signing up a broker loan, you now get the full NII and fees, and the FUM". In other words, loans written by brokers were to generate branch income. The email of 29 September 2004 seems specifically to have been designed to make it clear that for the future, income from brokers' loans, "domiciled" in branches would result in the branches receiving "shadow income". It seems to have been thought that this change might improve the way in which broker-introduced customers were treated by the branches.

THE EVIDENCE - A SUMMARY 521 Broadly speaking, I accept all of the witnesses as being honest and reliable in so far as concerns matters of fact. To the extent that I place any qualification upon that view, such qualifications appear in my summaries of the witnesses' evidence. To the extent that they make assumptions (particularly in the case of Dr Fitzgerald) or draw inferences (particularly as to whether entities compete) I do not necessarily accept the evidence of any witness. I shall test the validity of assumptions and inferences, having regard to the evidence and the submissions. 522 I do not give great weight to the evidence of Messrs O'Malia and Black concerning the "similarity of services provided by Mr King as an employee of a lender and Mr King and Mr Stark as brokers. Both men went to Mr King (and Mortgage Refunds) because of their previous dealings with him. Mr Black also had a familial association with him. Further, Mr O'Malia seems to have had a preference for borrowing from Suncorp. At the time, there was no cause for either man to note or consider whether Mr King's services or those of Mr Stark were the same as, or different from those supplied on previous occasions. 523 The evidence of Messrs Lahiff, Percy, King and Stark is important to the extent that it concerns the broking industry at the relevant time. Their evidence was based upon substantial personal experience. Where it differs from Dr Fitzgerald's views and assumptions as to the functions and business models of the brokers, I generally prefer their evidence to his. I place a caveat upon my acceptance of Mr King's evidence, based upon the slight hostility towards ANZ which he seemed to manifest. I have referred to the evidence of these four witnesses as the "industry evidence". I shall continue so to do. 524 At the end of my discussion of Mr King's evidence, I identified a number of themes which emerged from that evidence. Similar themes emerged from the evidence of the other industry witnesses. The witnesses said frequently that the "only difference" between services offered by brokers and services offered by in-house and tied channels was that the former offered a wider range of lenders and products, whilst the latter offered the products of only one lender. That proposition tends to conceal the extent of the relevant difference, both in terms of the brokers' necessary knowledge and skill, and in terms of the services provided to potential borrowers and, perhaps, lenders. It is easy to underestimate the amount of time and organizational skill necessary to acquire the relevant knowledge concerning a wide range of products and lenders, and keeping it up to date. It is also easy to under-estimate the time and skill involved in maintaining the administrative structure necessary in order to be able to submit applications to a wide range of lenders. The availability of such comprehensive information, advice and facilities for access to lenders offers significant benefit to a potential borrower. In my view, Dr Fitzgerald failed to appreciate the full range of services offered by the brokers, particularly the range of products and lenders about which they were able to advise. The industry evidence demonstrates that access to a wide range of products supplied by a wide range of lenders, including the major banks, was essential to the success of a broking business. 525 The evidence concerning the expansion of the broking industry from the mid-1990s demonstrates a need for broking services, which need was evidently not previously being met by lenders' distribution channels. Further, the fact that lenders were willing to put time, and therefore money, into training and accrediting brokers, and then to pay them for their services demonstrates that lenders also valued their services, and that their role could not easily be performed by in-house or tied channels. The evidence suggests that some potential borrowers needed and appreciated the service provided by brokers and distinguished it from the service provided by such channels. Mr Percy considers that some potential borrowers require the services of brokers whilst some go to banks. Mr Stark's evidence was to similar effect. The proposition was probably implicit in the evidence of Messrs King and Lahiff. Of course, such needs and preferences may vary over time. It seems probable that, in particular, a potential borrower who does not have a close relationship with a bank would resort to a broker rather than a lender, as would a person seeking the "best deal". ACCC suggests that such a goal is illusionary, but even Dr Fitzgerald accepts that there are people who seek it. 526 I should say something about the use by the industry witnesses of the language of competition. Each of the four industry witnesses spoke of their "competing" with lenders. However it is not at all clear that they recognized ACCC's distinction between the supply of loan arrangement services and the supply of loan products. Mr Percy was certainly speaking of the latter, and I infer that the other industry witnesses were also doing so. After all, that is how brokers make their money. Mr King said, in cross-examination, that as a hot-line employee with the Commonwealth Bank, selling loan products, he was competing with other hot-line employees as well as mobile lenders and brokers. Dr Fitzgerald considers that call centres and the internet are not in close competition with brokers. Although Mr King considers that brokers' services were alternatives to services provided by lenders' internal channels, he considers that he was offering more options. He agrees that brokers' services differed from in-house channels in that brokers offered access to a wider range of products, from a wider range of lenders, independent advice and information and convenience, flexibility and personalized service. He says that Mortgage Refunds described itself in advertising as "discount mortgage brokers", and that the refunds reduced the net cost to the customer of the loan product. He also says that that brokers would negotiate with lenders to secure better rates for customers. 527 To my mind, Mr King's evidence suggests that the services offered by brokers were significantly different from those offered by in-house and tied channels. He sees the basis of business success for a broker as being access to a wide range of products from a wide range of lenders, access which an in-house or tied channel could not provide. Having access to loan products of the major banks is also necessary. He was willing to compromise his capacity to give refunds, an important aspect of his business model, in order to secure such access. 528 In summary, he recognizes that brokers offered services which in-house and tied channels did not provide, and that there was a demand for such services which was not met by in-house and tied channels. Certainly, his perception of competing with other hot-line employees, mobile lenders and brokers suggests that he does not use the term "competition" in the way in which Dr Fitzgerald uses it. 529 Mr Stark considers that his work at Mortgage Refunds was "almost identical" to his work at Suncorp. However he acknowledges the differences in the range of products and lenders. Paragraph 26 of his affidavit is of particular importance. I have set it out in my summary of his evidence. Mr Stark effectively recognizes that the broker offered to a potential borrower an independent view of the market, a better insight and a better deal, largely because of the broker's independence and specialized knowledge and skill. Mr Stark's flyer (set out above) stressed the broker's role in finding a home loan to suit the borrower. He says that a potential borrower who went to a broker would be seeking advice about the range of options available in the marketplace. Of course such a person would also be seeking assistance in applying for a loan. A potential borrower who went to a bank would be simply seeking a loan. That evidence is supported by evidence from other industry witnesses. I have previously referred to Mortgage Refunds' advertising. Mr Stark agrees that it was aimed at attracting business from other brokers. 530 Mr Lahiff agrees that a significant difference between Westpac's in-house channels and those of Mortgage Choice was the capacity to offer information and advice about, and assistance with other lenders' products. Clearly, Mr Lahiff recognizes that brokers competed with one another. It is of interest that Mr Lahiff considers that prior to 2008, they did not really do so with respect to lenders, simply because lenders were willing to accredit anybody who satisfied their requirements for accreditation, applied the training and kept up to date. There is no suggestion that ANZ took a different approach. However since about 2008 lenders have been consolidating their broking arrangements and imposing more stringent performance requirements. He identifies both collaborative and competitive relationships between lenders and brokers. 531 Mr Lahiff sees the strongest distribution channels as being the branches (with associated specialists, mobile lenders or franchisees) and the brokers. The branches' strengths included brand, their long-standing role as traditional sources of loans and existing customer relationships. These characteristics may be more typical of banks than of other lenders. Other strengths are said to have been a perception that lenders' staff were not earning commission and so were independent, and a perception that they were more likely to get the best deal from their respective lenders. The brokers' advantages were the range of products and lenders, independence (and therefore trustworthiness), convenience, doing the "leg work" and a perception that, as they were paid by commission, they would work harder to achieve successful outcomes. Mr Lahiff identifies some apparently competitive behaviour by retail banks in improving their services to match those available from brokers, with staff incentives similar to those available to brokers. Brokers' competitive conduct involved brand development and community involvement. 532 As I have previously indicated, Mortgage Choice's contemporary documentation does not support the view that it considered that it was in close competition with lenders rather than other brokers. Thus I do not accept Mr Lahiff's evidence in that regard, although I otherwise found his evidence very helpful. 533 Mr Percy's evidence was also very helpful. However his view was that the internal channels of the B&A Bank competed with brokers in the provision of loan products, not loan arrangement services or broking services. This view is re-inforced by his evidence that the B&A Bank competed by offering "distinct value propositions", that is different loan products through the branches as compared to those offered through the brokers. Thus Mr Percy was not speaking of competition for the supply of loan arrangement services or broking services. 534 In my view the industry evidence, all led by ACCC, offers little support for its case. 535 I turn to Dr Fitzgerald's evidence. The industry evidence also does not support many of his assumptions and conclusions. Dr Fitzgerald's assumptions concerning the product supplied by mortgage brokers, and the differences between that product and the product allegedly supplied by lenders is a particular example. One of his reasons for concluding that the products are substitutable is that the loan products, themselves, are not significantly differentiated, so that competition will focus largely on the accompanying services. The evidence from industry witnesses establishes that the broker's task is to find a loan product which suits a particular potential borrower's needs and characteristics, and that such a borrower may meet the lending criteria of one lender but not those of another. The evidence also suggests that lending criteria and product characteristics vary over time. 536 Dr Fitzgerald's view is also, to some extent, dependent upon his belief that many, perhaps most potential borrowers obtain significant amounts of information from the internet. This perception is based on a survey which was, itself conducted on-line. Further, it discloses only that in 2007 63% of respondents used the internet to "access" information on loans, and that 38.1% used it as their main source. However there is no evidence as to the next step taken by these respondents, in particular, as to whether they went to a broker or a lender. Nor is there evidence as to the nature of the information which they obtained from the internet. Dr Fitzgerald's inclusion of the internet as a major source of information concerning loans suggests that a lender's internal and tied channels are, by themselves, insufficient to compete with brokers, at least for some sections of the community, perhaps re-inforcing the proposition that brokers' services are significantly different from those provided by a lender's in-house and tied channels. 537 There is no evidence as to whether the sites visited by internet users are lenders' sites or sites dedicated to comparing available products, although Dr Fitzgerald says that the Cannex site (which provides some comparable information) is very popular. Access to lenders' sites would not provide comparative information. A potential borrower would have to visit numerous sites. A broker is not only a supplier of information. He or she is also a filter. If the internet user goes to a site offering comparisons, there may be questions about the accuracy of the relevant information, currency and general reliability. It may be that information from such a site is not as satisfactory to a potential borrower as information provided by a human being in an established office environment, particularly if the office has been in place for some time and/or the potential borrower has been referred to it by another person. Such questions have not been investigated. 538 Dr Fitzgerald and the ACCC seem also to discount the importance to potential borrowers of a broker's independence from potential lenders. Again, the industry evidence suggests that this is one of the broker's strengths. This aspect may not be as prominent in much of the promotional material as one might have expected. However the evidence demonstrates that ASIC has discouraged brokers from describing themselves as being independent of lenders, no doubt because of the universal, or near universal remuneration of brokers by lenders. Nonetheless, it is clear that brokers seek to create an image of ethical conduct which at least implies independence. See, for example, the Mortgage Choice Customer Charter in exhibit 1 tab 1. See also the BankWest survey material (exhibit 2) under the heading "Benefits of Using a Broker". The benefits surveyed clearly create an impression of expert (and therefore independent) advice as to a wide range of products. Further, ANZ seems to have believed that the brokers occupied an area of trust. 539 Finally, I have difficulty with Dr Fitzgerald's approach to a potential borrower's purpose when he or she approaches either a lender or a broker. Clearly, a potential borrower approaches a broker in order to obtain advice and assistance for the purpose of applying for a loan. When a potential borrower approaches a lender directly, he or she will generally be simply seeking a loan from that lender. There may be some people who go to bank branches or other lenders' internal channels to obtain information as to available and suitable products, intending to visit other lenders for the same purpose, and then to compare the outcomes. There is no suggestion that many people do so. In any event brokers offer an alternative to that time-consuming task. Some information may be acquired "over the counter" in branches. Lenders no doubt have brochures which provide information concerning their products, or some of them, but that is not the service which is alleged in this case. The in-house service, which is said to be offered in competition with that offered by brokers, includes assembling the necessary information and advising as to an appropriate product offered by the lender in question, completing and submitting the application and, possibly, providing follow-up services in connection with the application. 540 These criticisms, in general, have their genesis in assumptions which Dr Fitzgerald was asked to make, although some relate to his conclusions. I shall comment further on his evidence in considering the parties' submissions. 541 ACCC asserts that the ANZ documentation "is all one way" and that it recognizes and describes: customers choosing between brokers and in-house channels; one supplier gaining market share at the expense of another; services having differentiated features targeting the same customers; customers switching between suppliers in response to price and service level charges; alterations in service quality to cause switching; a customer's business going to one or other channel but not both; constraints imposed by one supplier upon another; and ANZ personnel speaking of competition between ANZ channels and brokers. 542 ACCC offers a long list of references to the evidence, purportedly in support of these propositions. Most of the references are to documents which I have previously discussed. The others do not seem to take matters any further, save for the reference to ACCC's Tender Bundle Tab 5, an email dated 13 August 2003 from Mr Hartzer (ANZ Group Managing Director) to a number of ANZ staff members. It seems that Mr Hartzer was, perhaps unwillingly, entering a debate concerning the question of whether "product areas" such as ANZ Mortgage Group should have their own distribution salesforces, and how such salesforces should interact with the branches. He felt that he should comment because, as a consultant, he had been involved in the design of the "mid-90s distribution strategy". 543 Mr Hartzer considered that whilst there should be some specialist salesforces (as in the case of ANZ Mortgage Group), not all business/product areas needed them. He identified a "pretty clear 'centre of gravity' " around the existence of a branch banking business focussed on deposits AND ancillary loans/services (not just deposits) to customers who continue strongly to want to be served out of a local branch. Evidence for this includes the continued success of regional banks and Bendigo [B&A Bank]". He considered that ANZ needed specialists in "branch banking" as much as it needed mortgage specialists. He also considered that it did not follow that only mortgage specialists, reporting to ANZ Mortgage Group should be allowed to sell mortgages. Mr Hartzer believed that there would be good "branch banking" sales staff who sold mortgages as well as other products. Were they to focus exclusively on selling mortgages, other sales in other areas would fall, diminishing the value of specialization for customers who wanted a branch banking service covering all products. 544 Mr Hartzer also said that: … I suspect that the branch based mortgage sales people are largely doing a different thing than the people who would be mortgage specialists, roaming the country competing with the brokers. 545 That view is hardly consistent with there being, at senior management levels, a view that the branches competed with the brokers. 546 Mr Hartzer considered that each local branch CEO should decide on the appropriate specialist composition of his or her staff, having regard to the maximization of branch profitability. He said, concerning commission paid to branches: … it seems to me that the commission system is leading the network to spend all their time on commission activities, to the detriment of easy-money activities that show up in someone else's P&L. 547 Mr Hartzer also said that: There's some distinction to be made, I suspect, between activities where the sale is really just order taking/service vs. where there's a real consultation and "sale". 548 Mr Hartzer's email is largely about the mortgage and other functions performed by the branches. ACCC pleads that the branches are one of the two ANZ areas in competition with the brokers, the other being the Mortgage Solutions franchisees. Yet, in this email, a senior ANZ officer suggested that whilst other ANZ channels may have been in competition with the brokers, the branches were not. Mr Hartzer suspected that the branches were focussing too much on their mortgage function because of ANZ's incentive system, and that they could make more profit, more easily in other areas. Finally, he suggested a restructuring of the commission system so that it reflected the real value of the services offered. He seems to have thought that sales work should involve more than "order taking/service". The email might be interpreted as implying that the present level of commission paid to the branches for that function was excessive, having regard to the services provided. 549 My consideration of the ANZ documentation leads me to conclude that a number of matters were under consideration by ANZ Mortgage Group in 2003-2004. They included: increasing market share in the lending market; providing customers with the convenience of mobile lenders, as did other lenders; reducing reliance on the brokers; maintaining the support of the brokers; avoiding retaliation from brokers; and improving customer management and relations. 550 Despite the occasional references to competing with brokers, little attention was given to the implementation of such "competition". There was no suggestion that ANZ should abandon the use of brokers, or that future accreditations should be limited. There was no suggestion of an advertising campaign focussing on the advantages of in-house or tied channels over brokers. Although brokers' methods were to be emulated, there was no suggestion that ANZ could neutralize the advantages of choice and relative independence which brokers enjoyed. There was no suggestion that there be a quota regulating the amount of business to be accepted from brokers. 551 As I have said, at least one, and perhaps the dominant aim in establishing the franchise model was to remedy a perceived shortcoming in ANZ's distribution channels as compared to those of other lenders. No real attempt was made to identify potential borrowers who might be tempted away from the brokers. Clearly, the expectation was that the brokers would retain existing levels of custom, even if their overall share of the ANZ "book" were to be reduced. ANZ was aware that its share of the lending market was only 11%. Thus there was plenty of room for expansion, by brokers and by ANZ in-house channels. Indeed, in the early stages, it was thought that ANZ's plans might result in extra business for the brokers. In any event, ANZ did not want to risk broker support. Any attempt to depart from the principle of channel neutrality was seen as fraught with the risk of retaliation by the brokers. Finally, any expansion of market share seems to have been sought in the lending market rather than in any market for loan arrangement services or broking services. ANZ simply wanted to sell more mortgages in the lending market, preferably through in-house and tied channels. 552 In the end I do not accept that the documentary evidence is "all one way". It rather demonstrates a desire for increased market share, possibly as a result of, and/or as well as reduced distribution costs. Those aims may have been translated into competition with the brokers, but the documents do not clearly demonstrate such translation.

COMPETITION AND MARKETS 553 At this point I should say something about competition and markets. The starting point is generally the decision of the Trade Practices Tribunal (Woodward J, J A Shipton Esq and Professor M D Brunt) in Re Queensland Cooperative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169. Concerning competition, the Tribunal said at 187-189: Since we give such importance to the relevance of competitive considerations in proceedings for authorization, we add a few comments on how the Tribunal views competition. However, "competition" is such a very rich concept (containing within it numbers of ideas) that we should not wish to attempt any final definition which might, in some market settings, prove misleading or which might, in respect to some future application, be unduly restrictive. Instead we explore some of the connotations of the term. Competition may be valued for many reasons as serving economic, social and political goals. But in identifying the existence of competition in particular industries or markets, we must focus upon its economic role as a device for controlling the disposition of society's resources. Thus we think of competition as a mechanism for discovery of market information and for enforcement of business decisions in the light of this information. It is a mechanism, first, for firms discovering the kinds of goods and services the community wants and the manner in which these may be supplied in the cheapest possible way. Prices and profits are the signals which register the play of these forces of demand and supply. At the same time competition is a mechanism of enforcement: firms disregard these signals at their peril being fully aware that there are other firms, either currently in existence or as yet unborn, which would be only too willing to encroach upon their market share and ultimately supplant them. This does not mean that we view competition as a series of passive, mechanical responses to "impersonal market forces". There is of course a creative role for firms in devising a new product, the new technology, the more effective service or improved cost efficiency. And there are opportunities and rewards as well as punishments. Competition is a dynamic process; but that process is generated by market pressure from alternative sources of supply and the desire to keep ahead. As was said by the US Attorney-General's National Committee to study the Antitrust Laws in its report of 1955 (at p 320): "The basic characteristic of effective competition in the economic sense is that no one seller, and no group of sellers acting in concert, has the power to choose its level of profits by giving less and charging more. Where there is workable competition, rival sellers, whether existing competitors or new potential entrants into the field, would keep this power in check by offering or threatening to offer effective inducements …". Or again, as is often said in US antitrust cases, the antithesis of competition is undue market power, in the sense of the power to raise price and exclude entry. That power may or may not be exercised. Rather, where there is significant market power the firm (or group of firms acting in concert) is sufficiently free from market pressure to "administer" its own production and selling policies at its discretion. Firms may be public spirited in their motivation; but if their business conduct is not subject to severe market constraints this is not competition. In such a case there is substituted the values, incentives and penalties of management for the values, incentives and penalties of the marketplace. Competition expresses itself as rivalrous market behaviour. In the course of these proceedings two rather different emphases were placed upon the most useful forms such rivalry can take. On the one hand it was put to us that price competition is the most valuable and desirable form of competition. On the other hand, it was said that if there is rivalry in other dimensions of business conduct - in service, in technology, in quality and consistency of product - an absence of price competition need not be of great concern. In our view, effective competition requires both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers. Competition is a process rather than a situation. Nevertheless, whether firms compete is very much a matter of the structure of the markets in which they operate. The elements of market structure which we would stress as needing to be scanned in any case are these: (1) the number and size distribution of independent sellers, especially the degree of market concentration; (2) the height of barriers to entry, that is the ease with which new firms may enter and secure a viable market; (3) the extent to which the products of the industry are characterised by extreme product differentiation and sales promotion; (4) the character of "vertical relationships" with customers and with suppliers and the extent of vertical integration; and (5) the nature of any formal, stable and fundamental arrangements between firms which restrict their ability to function as independent entities. Of all these elements of market structure, no doubt the most important is (2), the condition of entry. For it is the ease with which firms may enter which establishes the possibilities of market concentration over time; and it is the threat of the entry of a new firm or a new plant into a market which operates as the ultimate regulator of competitor conduct. 554 As to the identification of markets, the Tribunal said at 189 to 191: It follows that the identification of markets must be the essential first step in assessment of present competition and likely competitive effects. In our view the usefulness of the "market" concept goes beyond the determination of market concentration to the identification of rivalrous relationships between sellers. Yet we stress that market definition can be but a first step; and we agree with Mr Brennan when he said that mere specification of markets cannot be determinative by itself of some ultimate issue. … Before giving our reasons we should explain our understanding of the market concept, and of the relationship between "markets" and "sub-markets". We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, a field of rivalry between them. (If there is no close competition there is of course a monopolistic market.) Within the bounds of a market there is substitution - substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is a field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. Let us suppose that the price of one supplier goes up. Then on the demand side buyers may switch their patronage from this firm's product to another, or from this geographic source of supply to another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another in their output mix, or substituting one geographic source of supply for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance and cost and price incentives. It is the possibilities of such substitution that set the limits upon a firm's ability to "give less and charge more". Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to "give less and charge more" would there be, to put the matter colloquially, much of a reaction? And if so, from whom? In the language of economics the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, ie a relatively high cost elasticity of demand or cost elasticity of supply? The distinction between markets and sub-markets can be merely one of degree. Sub-markets are the more narrowly defined, typically registering some discontinuity in substitution possibilities. Where the defining feature of the market is the existence of close substitutes (whether in demand or supply), the defining feature of a sub-market is the existence of still closer and more immediate substitutes. Sub-markets may be especially useful in registering the short run effects of changes; but they may be misleading if used uncritically to assess long run competitive effects. The indicia of sub-markets listed in the American case Brown Shoe Co Inc v US … are suggestive: "The boundaries of such a sub-market may be determined by examining such practical indicia as industry or public recognition of the sub-market as a separate economic entity, the products peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialised vendors." But although it may be helpful to refer to such a list, it does not follow that it is exhaustive, nor that an area or product must meet all or a large number of these tests to be classified as a sub-market. And indeed the precise content to be given to such phrases as 'the product's peculiar characteristics and uses', 'unique production facilities', 'distinct prices' depends upon more fundamental economic ideas. 555 In Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Company Limited (1988) 167 CLR 177, the High Court considered the concept of a market for the purposes of s 46 of the Trade Practices Act. In particular, Mason CJ and Wilson J said at 187-188: The analysis of a s 46 claim necessarily begins with a description of the market in which the defendant is thought to have a substantial degree of power. In identifying the relevant market, it must be borne in mind that the object is to discover the degree of the defendant's market power. Defining the market and evaluating the degree of power in that market are part of the same process, and it is for the sake of simplicity of analysis that the two are separated. Accordingly, if the defendant is vertically integrated, the relevant market for determining degree of market power will be at the product level which is the source of that power: see the discussion of market power below. After identifying the appropriate product level it is necessary to describe accurately the perimeters of the market in which the defendant's product competes: too narrow a description of the market will create the appearance of more market power than in fact exists; too broad a description will create the appearance of less market power than there is. Section 4E directs that a market is to be described to include not just the defendant's product but also those which are "substitutable for, or otherwise competitive with", the defendant's product. This process of defining a market by substitution involves both including products which compete with the defendant's and excluding those which because of differentiating characteristics do not compete. In Hoffmann-La Roche v Commission ("Roche") …, the Court of Justice of the European Community said …: "The concept of the relevant market … implies that there can be effective competition between the products which form part of it and this presupposes that there is a sufficient degree of inter-changeability between all the products forming part of the same market in so far as a specific use of such product is concerned." Conversely, in United Brands v Commission ("United Brands") … whether other fruits should be excluded from the market which banana served, the European Court said …: "For the banana to be regarded as forming a market which is sufficiently differentiated from other fruit markets it must be possible for it to be singled out by such special features distinguishing it from other fruits that it is only to a limited extent inter-changeable with them and is only exposed to their competition in a way that is hardly perceptible." See also Re Queensland Cooperative Milling Association Ltd … (explaining that the defining feature of market is substitution). 556 Their Honours went on to consider market power. The references to market power in the above extract are, of course, not directly relevant for present purposes. However the approach to the market is useful. In the same case, Deane J said at 195-6: In the case of an alleged contravention of the provisions of s 46(1), there will ordinarily be little point in attempting to define relevant markets without first identifying precisely what it is that is said to have been done in contravention of the section. … Section 4E confines "market" for the purposes of the Act to "a market in Australia" and provides that, when the word "market" is used in relation to any goods or services, it "includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services". Section 46(4) provides that a reference in s 46 to a market is a reference to a market for goods or services. The Act does not otherwise seek to define what is meant by the word "market". That is not surprising since the word is not susceptible of precise comprehensive definition when used as an abstract noun in an economic context. The most that can be said is that "market" should, in the context of the Act, be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes … . The identification of relevant markets and the definition of market structures and boundaries for the purposes of determining [the case then under consideration] involves value judgments about which there is some room for legitimate differences of opinion. The economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their term, overlap, the one with one or more others. The outer limits (including geographic confines) of a particular market are likely to be blurred: their definition will commonly involve assessment of the relative weight to be given to competing considerations in relation to questions such as the extent of product substitutability and the significance of competition between traders at different stages of distribution. While actual competition must exist and be assessed in the context of a market, a market can exist if there be the potential for close competition even though none in fact exists. A market will continue to exist even though dealings in it be temporarily dormant or suspended. Indeed, for the purposes of the Act, a market may exist for particular existing goods at a particular level if there exists a demand for (and the potential for competition between traders in) such goods at that level, notwithstanding that there is no supplier of, nor trade in, those goods at a given time - because, for example, one party is unwilling to enter any transaction at the price or on the conditions set by the other. It is, however, unnecessary to pursue that question for the purposes of the present appeal. 557 Dawson J said at 198-200: Section 46 of the Trade Practices Act 1974 (Cth) in its present form prohibits a corporation that has a substantial degree of market power in a market for goods or services from taking advantage of that market power for certain purposes. The section throws up two basic questions. The first asks what degree of market power is required. The second asks what constitutes taking advantage of market power. Lying behind both of those questions is the concept of the market, a concept which is sometimes dealt with in a more complex manner than is necessary. A market is an area in which the exchange of goods or services between buyer and seller is negotiated. It is sometimes referred to as the sphere within which price is determined and that serves to focus attention upon the way in which the market facilitates exchange by employing price as the mechanism to reconcile competing demands for resources … . In setting the limits of a market the emphasis has historically been placed upon what is referred to as the "demand side", but more recently the "supply side" has also come to be regarded as significant. The basic test involves the ascertainment of the cross-elasticities of both supply and demand, that is to say, the extent to which the supply of or demand for a product responds to a change in the price of another product. Cross-elasticities of supply and demand reveal the degree to which one product may be substituted for another, an important consideration in any definition of a market. 558 His Honour then referred to the definition of "market" in s 4E and continued: Important as they are, elasticities and the notion of substitution provide no complete solution to the definition of a market. A question of degree is involved - at what point the different goods become closely enough linked in supply or demand to be included in the one market - which precludes any dogmatic answer … . The process is an inexact one as may be illustrated by reference to the concept of a sub-market which has been employed from time to time. In Re Queensland Co-operative Milling Association Ltd … the Trade Practices Tribunal observed: "The distinction between markets and submarkets can be merely one of degree. Submarkets are the more narrowly defined, typically registering some discontinuity in substitution possibilities. Where the defining feature of a market is the existence of close substitutes (whether in demand or supply), the defining feature of a submarket is the existence of still closer and more immediate substitutes. Submarkets may be especially useful in registering the short-term effects of change; but they may be misleading if used uncritically to assess long-run competitive effects." Too rigid an approach in defining a market is apt to lead to unrealistic results … But the existence or non-existence of sales of a product cannot conclude whether a market exists or not. It must be sufficient to constitute a market that there is a product for exchange, regardless of whether exchange or negotiation for exchange has actually taken place. In truth, the need to define the relevant market arises only because the extent of market power cannot be assessed otherwise than by reference to a market. 559 Again, the references to "market power" are not currently relevant, but the approach to the definition of a market is substantially the same, whether undertaken for the purposes of s 45 or s 46. 560 Finally, the Full Court of this Court considered the identification of a market in Arnott's Limited v Trade Practices Commission (1990) 24 FCR 313. The case was concerned with s 50 of the Act, dealing with acquisitions which have, or are likely to have the effect of substantially lessening competition in a market. After referring to Queensland Wire and Queensland Co-operative Milling, their Honours said, at 331: In evaluating the appellants' submissions relating to the definition of the product market it is important to bear in mind that substitutability involves matters of degree. The point was well made in a casenote by Dr Geoffrey Walker in (1976) 50 ALJ 89 at 89-92. Dr Walker pointed out that, in one sense, all goods and services compete for the buyer's custom; and, in that sense, are within the same market. In another sense, most items being distinct in some respect, each item has its own market. In the application of the concept of provisions such as s 50, an intermediate position is appropriate. 561 Their Honours referred to La Roche and United Brands, the cases referred to by the High Court in Queensland Wire, and then to the observations made by Deane J in that case, which I have set out above. Their Honours then continued, at 332: This observation was made in the course of a discussion which referred to s 4E of the Act. Deane J was making the point that the application of the concept of substitutability requires the making of a value judgment. The question of substitutability is not to be disposed of merely by showing that, upon some occasions, some people consume one product rather than another or that some products within a claimed market do not directly compete with some other products in that market, or do compete with some products outside that claim market. The same point was made, in different language, by Mason CJ and Wilson J in Queensland Wire at 188. Their Honours did so by their quotations from Hoffman-La Roche and United Brands (supra). Both quotations include words which indicate that substitutability is a matter of degree: "sufficient degree of interchangeability" and "only to a limited extent interchangeable". In the present case, emphasis is placed upon the fact that, upon some occasions, a consumer might select a non-biscuit product instead of a biscuit; … . But the fact that, upon some occasions, some consumers select one product rather than another does not establish that the two products are "substitutable", so as to be within a single market. No doubt there are many people who sometimes drink tea and, at other times, coffee. But if, for example, a particular company dominated the sale of tea within Australia, it would thwart the objectives of provisions such as ss 46 and 50 of the Trade Practices Act to deny their application because that company did not dominate the "hot beverage market". The fact is that tea and coffee are distinct beverages, for each of which there is a distinct demand. To adopt the test applied in Re Queensland Co-op Milling Association Ltd …, a rise in the price of tea would probably cause few consumers to abandon tea for coffee. It is important to remember that the notion of substitutability adopted in s 4E is one which looks to the market itself, not to the habits of individual consumers. The section speaks of "goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services". This point emerges clearly from United Brands. The applicant in that case was a major distributor of bananas. But it argued that it was not in a dominant position since the relevant market was not the banana market but the fresh fruit market. It submitted that bananas compete with other fresh fruit - in the same shops, on the same shelves - at prices that can be compared and to satisfy the same needs: consumption as a dessert or between meals. Moreover, statistics showed that consumer expenditure on the purchase of bananas dropped during that part of the year when there was a plentiful supply of other fresh fruit. Yet the European Court of Justice held that it was appropriate to speak of a banana market. This conclusion was partly based on the fact that bananas were available throughout the whole year, and therefore substitutability had to be considered on a year-round basis. But it was also based upon the fact that the banana is a distinct product with a distinct demand … .

PARTIES' SUBMISSIONS 562 ACCC provided an outline of submissions (dated 4 April 2012) and a "supplementary submission" which includes the substance of its oral submissions and its response to ANZ's submissions. ANZ has supplied an outline which includes the substance of its oral submissions and its responses to ACCC's supplementary submission. ACCC's outline seems effectively to assume that its pleaded case has been proven and then to seek to demolish ANZ's case. Its supplementary submissions adopt a similar approach. ANZ suggests that ACCC effectively seeks to reverse the onus of proof. There is something in that submission, although it might be more accurate to say that ACCC assumes acceptance in total of Dr Fitzgerald's evidence, failing to address gaps and weaknesses in his evidence and the many inconsistencies and contradictions between that and other evidence. To the extent that ACCC relies on the ANZ documents, it frequently fails to have regard to the context in which particular statements were made. 563 ACCC places great weight upon the fact that ANZ did not call evidence. I accept that to the extent that adverse inferences may fairly be open from ACCC's evidence, including ANZ's own documentation, the absence of any evidence to contrary effect from ANZ may permit me to be more courageous in drawing inferences than I might otherwise have been. However I do not consider that the lack of evidence from ANZ looms large in this case. The fact is that much of the evidence called by ACCC supports ANZ's case. In particular, much of that evidence undermines Dr Fitzgerald's assumptions and conclusions. ACCC's attempts to rely on ANZ documents frequently involves reliance on short extracts from quite complex documents where context is important, frequently undermining ACCC's reliance on such extracts.

ACCC's submissions 564 In ACCC's outline at paras 1 to 9 its case is summarized as follows: Dr Fitzgerald considers that the brokers and ANZ competed in the supply of loan arrangement service in a market for those services; ANZ documentation evidences customer choice between brokers and internal channels, and otherwise uses the language of competition; brokers provide four of the six services described in the statement of claim as loan arrangement services; industry witnesses (Messrs Lahiff, Percy, King and Stark) consider that brokers competed with in-house distribution channels; two of Mr King's customers considered that the services provided at Mortgage Refunds were the same as he had provided when he was a bank employee; ANZ's impugned conduct is explicable only by a belief that its internal distribution channels were competing with brokers; and ANZ's policy of channel neutrality was based upon a desire to restrict competition. 565 As to the first of these propositions I have expressed doubts concerning certain assumptions and conclusions in Dr Fitzgerald's evidence. Much of his evidence is inconsistent with the industry evidence. Whilst I accept his evidence as to economic principles, I do not accept, at face value, his assumptions or conclusions. 566 As to the documentation, I have already discussed the documents to which ACCC and Dr Fitzgerald have referred, seeking to identify the relevance and meaning of each of the cited passages. I do not accept that the documentation is "all one way" in the sense of necessarily identifying competition in a market for the supply of loan arrangement services to potential borrowers (or members of the public). 567 As to the "services" provided by ANZ branches and franchisees, there is a question as to whether they provide services of any kind to potential borrowers, save in the sense that sales assistance is frequently described as "customer service". Further, such "services" as they provide seem to be different from those supplied by brokers. 568 As to the industry witnesses' evidence concerning competition between brokers and in-house and tied distribution channels, I have demonstrated that contemporaneous documents suggest that Mr Lahiff and Mr King have not always seen lenders as being in competition with brokers. I have also demonstrated that Mr Percy (and probably the other industry witnesses) were speaking of competition in connection with the supply of loan products, not loan arrangement services. None of the industry witnesses offered any support for ACCC's distinction between a loan product and the alleged loan arrangement services or the services actually provided by brokers. 569 I do not necessarily accept that ANZ's impugned conduct is explicable only by a belief that its internal distribution channels (ie branches and franchisees) were competing with brokers. Such conduct may also have been motivated by a desire to avoid unnecessary and potentially disruptive disputes which may or may not have involved elements of competition. Nor do I necessarily accept that the policy of channel neutrality was designed to restrict competition. Nonetheless these matters are potentially relevant to the question of whether ANZ and Mortgage Refunds were in competition. Selective references to the evidence and assumptions as to the existence of such competition do not assist me in deciding the question. 570 As to the submission that ANZ admits providing four of the six features said to comprise loan arrangement services, it is true that ANZ admits, in answer to interrogatory 11 that in responding to inquiries as to ANZ home loan products, it: advised as to features of ANZ loan products; advised as to the availability of ANZ loan products to persons in the circumstances of the enquirer; advised as to ANZ loan products best suited to the enquirer's needs; and assisted in the completion and lodgement of a loan application. 571 However ANZ denied that it: provided liaison or other facilitation of transactions for the acquisition of loan products between enquirers and ANZ Mortgage Group; or submitted, or arranged for the submission of loan applications to ANZ Mortgage Group. 572 Such denials reflect ANZ's rejection of ACCC's assertion that the branches and franchisees should be treated as entities separate from ANZ Mortgage Group for the purposes of these proceedings. Further, both the "admissions" and the denials are consistent with ANZ's case that it was in the business of selling ANZ loan products, using various distribution channels. 573 ACCC submits, apparently purporting to rely on ANZ's answers to interrogatories 12 and 13 that: the services admittedly supplied by ANZ and the services provided by brokers "were not supplied simultaneously for the same customers"; they (ie brokers and ANZ) were "rival in consumption in that a customer who uses the services of one does not then need or acquire the services of the other"; both brokers and branches submitted loan applications to ANZ Mortgage Group; potential borrowers were unable to apply directly to ANZ Mortgage Group; and a customer required either ANZ's services or those of a broker in order to apply for a loan product. 574 In interrogatory 12, ACCC asked whether a potential borrower who had made an application to an officer or employee of ANZ, would also engage a mortgage broker or franchisee to make such an application. It is curious that ACCC here associates franchisees with brokers, as opposed to bank officers and employees. ACCC claims that ANZ competes with brokers through its franchisees and branches. In any event, ANZ replied that, in general, a person applying through a broker would not lodge a second application with ANZ directly. The answer does not really respond to the question. The question addressed the case of a person who applied to ANZ. The answer addressed the case of a person who approached a broker. 575 In interrogatory 13, ACCC asked whether a person, having acquired the services of a broker or Mortgage Refunds in connection with an application to ANZ, would lodge an application through a franchisee, agent or ANZ directly. ANZ replied that, generally, a person who had engaged a broker or Mortgage Refunds would not lodge an application directly with ANZ, or via a franchisee or agent. Unlike the previous interrogatory, this interrogatory treats the franchisee as being, in effect, an agent of ANZ. 576 ANZ's answers simply establish that generally, it did not receive more than one application from a potential borrower, using different channels. ACCC seems to treat these answers as admitting that brokers and ANZ were in competition for the supply of loan arrangement services. I do not accept the logic of that assumption. It may be that a customer who used ANZ's channels did not need the services of a broker, and vice versa, in the sense that if one application were made, there would be no need for another. However the assumption begs the question to the extent that it assumes that the brokers and the ANZ channels necessarily provided the same services. 577 ACCC then refers to the industry evidence, submitting that it establishes that the banks provide loan arrangement services and compete with brokers in so doing. As I have said I have doubts about both propositions. I have pointed out that the industry witnesses generally considered that access to a wide range of products supplied by a wide range of lenders, including the major banks, was an important aspect of a successful broking business. I have drawn attention to the industry evidence that brokers acted as advocates for potential borrowers. Dr Fitzgerald disputes that such advocacy could have any beneficial effect for the customer, and so doubts that it occurred. The industry witnesses are more likely to be reliable in this respect. There is no reason to believe that they would have engaged in such conduct if they believed that it could have no useful effect. I have also pointed to inconsistencies in the industry evidence concerning "competition" with lenders. In fact, I doubt whether ANZ branches and franchisees provide any services to potential lenders. Rather, they sell ANZ loan products. I shall return to this question. 578 ACCC then asserts that the existence of competition is demonstrated by the fact that ANZ tried to limit the amounts of the refunds paid by Mortgage Refunds. It submits that ANZ wished to stop the broker from breaking channel neutrality and so competing with the ANZ's internal and tied channels. In the evidence the term "channel neutrality" has not been used consistently. ANZ has generally uses it to describe the policy of supplying loan products to all distribution channels upon the same terms, particularly the price at which ANZ will provide a loan product to a borrower. At para 87 in his first report, Dr Fitzgerald uses the term in an extended way to encompass: … both comparability of rewards to intermediaries (having regard to the depth of services they provided and their contribution to CVA) and minimization of differences in what they offered (in terms of price, including fees) to prospective borrowers. 579 ANZ did not use the term in that way. As far as I can see, the evidence demonstrates only one occasion on which ANZ Mortgage Group intervened in connection with the terms upon which its distribution channels were dealing with potential borrowers, namely the incident in 2004 with which I am presently concerned. Indeed, Mr Sirianni's insistence that nobody owned the customer, and ANZ Mortgage Group's refusal to become involved in at least some disputes between channels suggest that in dealing with Mortgage Refunds on this occasion, it departed from its general practice. When in-house channels or brokers sought intervention on other occasions, they received little or no satisfaction. To the extent that ACCC submits that Mr Gilfillan's paper suggests a broader meaning for the term "channel neutrality", I do not accept that submission. 580 There is, however, another basis for doubting the correctness of ACCC's submission that the impugned conduct was motivated by a desire to prevent competition between the in-house and tied channels and the brokers. ANZ's action left Mortgage Refunds with the capacity to offer a refund up to the amount of the loan approval fee charged by ANZ. The only difficulty which Mortgage Refunds seems to have had with the limit was the problem with its advertising. The different level of refund for ANZ products, as compared to that for the products of other lenders, led borrowers who chose ANZ products to press Mortgage Refunds for higher refunds. As far as the evidence goes, ANZ in-house and tied channels did not generally waive the loan approval fee, whilst Mortgage Refunds always allowed its refund. Thus, in most cases, it would still have been offering a distinct benefit which the in-house and tied channels were not offering. It may be that from the point of view of ANZ Mortgage Group, the advantage of its proposed solution lay in ANZ's capacity to say to the in-house and tied channels that they could waive the loan approval fee at their expense, as it had suggested on at least one occasion, even if it suspected that they would not want to do so. 581 I should make one other point. ACCC's submission assumes that channel neutrality is inevitably motivated by an anti-competitive purpose. Yet there is logic in the proposition that an up-stream supplier may simply wish to avoid damaging and pointless conflict between distribution channels. In taking action in response to Mortgage Refunds' conduct, ANZ initially sought to enforce, as against AFG, the terms of the originator agreement. The subsequent "re-instatements" were, in fact, on more favourable terms than those contained in that agreement. ANZ approved the offering of a not-insubstantial refund which, as far as the evidence goes, the branches would not generally match. In order to demonstrate the existence of a competitive relationship by reference to conduct, one must show that a desire to hinder competition is a likely reason for such conduct. For what it is worth, I am simply unconvinced that ANZ's conduct was so motivated. Having regard to the apparently isolated nature of the conduct and the limited nature of the restraint imposed, I am inclined to the view that ANZ was trying to keep the branches happy rather than seeking to restrain perceived competition. That view is, of course, based on all of the evidence in the case. It does not dispose of the case. However it disposes of one basis upon which ACCC relies in order to establish that ANZ and Mortgage Refunds were providing services in competition with each other. 582 In its outline ACCC seeks to dismiss the proposition that potential borrowers chose to go to brokers or in-house and tied channels, depending upon their particular needs. The proposition is said to be inconsistent with the evidence. ACCC refers to evidence from Dr Fitzgerald in this regard. However, as I have pointed out, Mr Percy said otherwise at paras 27 and 28 of his affidavit, as did Mr Stark in his cross-examination at ts 155 ll 34-47. The history of the expansion of the broking industry, brought about by the proliferation of loan products and lenders demonstrates that the services provided by individual lenders were inadequate for substantial numbers of potential borrowers. Those needs may have changed from time to time, but that proposition does not detract from the proposition that brokers met needs which in-house and tied channels did not, and could not meet. 583 ACCC submits that ANZ's documents "identify and classify the pool of customers common to brokers and the bank's internal and tied channels …", referring to a number of documents which are said to support this proposition. They do not, however, do so. Tabs 22 and 68 deal exclusively with in-house and tied channels. They do not really identify any "pool" of customers. The other tab references refer to conflict situations. They also say nothing about such a "pool". I am unable to identify any relevant inferences available from these documents. 584 ACCC submits that there is "no evidence to support a classification of customers who want only an ANZ loan into their own market". That proposition may not be particularly relevant in this case. The pleaded market is not a market for loan products. It is a market for loan arrangement services. The point is that some potential borrowers go to brokers and some go to lenders, including ANZ. That a person goes to ANZ when seeking a loan suggests that he or she has decided to seek an ANZ loan product. There may be many different reasons for that decision. ACCC suggests that the fact that a senior ANZ executive consulted a broker suggests that the products are interchangeable. I would have thought that such conduct suggests that the attraction of the broker's services must have been very strong in that it overcame the loyalty that one would have expected from such a borrower. On the other hand, the executive may have simply wished to keep his or her private affairs separate from his or her employment. 585 ACCC seeks to discount the fact that brokers offered the products of numerous lenders, whereas in-house and tied channels offered only the products of one lender. It submits that ANZ's submission concerning this aspect of the matter ignores the fact that ANZ offered 36 different loan products. It also submits that this point of distinction "at a conceptual level" is misconceived because differentiation and customer perception do not create a "separate market for each combination of preferences". That statement may be true as far as it goes, but the question (as to whether differentiation leads to the identification of a different market) is a question of degree. The question is whether potential borrowers will switch between products, given appropriate incentives. Product differentiation may assist in that enquiry. ACCC asserts that ANZ's submission is that because some customers regarded the services offered by brokers as better than those offered by lenders, the brokers and lenders did not compete in supplying such services. ACCC's submissions assumes its own proposition that notwithstanding the differences between the "services" offered by brokers and lenders, such services were substitutable. Dr Fitzgerald certainly treats the differentiation in that way, but industry evidence suggests a much higher degree of importance. The extent of the differentiation is a matter of judgment, which judgment may have some relevance to the question of substitutability. However that question is, in the end, a matter to be determined by reference to actual or inferred consumer conduct. Finally, the difference between the offerings of the ANZ channels and the brokers lay not merely in the number of products, but also in the number of lenders whose products were offered, and the associated issues of choice and independent advice. 586 ACCC submits that ANZ has "sought to make much" of the principal/agent relationship between the brokers and/or Mortgage Refunds, on the one hand, and the employment relationship between ANZ and its in-house employees, on the other. It is said that characterization of the legal duty owed by the supplier of services to the customer cannot be determinative of whether the services supplied are relevantly distinguished by customers, for economic purposes. This proposition is based upon a misunderstanding of ANZ's case. The industry evidence suggests that brokers are seen as being independent of lenders, and so able to offer more independent advice than are ANZ's in-house or tied channels. The relevant consideration is that of the potential borrower. The proposition is that such a person might see a self-employed broker, who offers the products of a range of lenders, as being independent of all of them. I do not understand ANZ to deny that its employees and agents seek to offer a customer the most suitable product, having regard to the interests of ANZ, although such employee or agent would undoubtedly try to help the customer. Most sales staff, in most retailing outlets try to do so, or at least their employers hope that they do so. However the agent or employee has a primary duty to his or her principal or employer to sell one or other of its products. A broker has no such duty, although he or she nonetheless has an interest in selling a product to each customer. It is incorrect to assert that in each case, the duties are "practically indistinguishable". However it may be difficult to generalize about the content of the duty in connection with any particular loan application. 587 ACCC attacks the proposition that brokers will seek to put the "best face" on a loan application and/or act as advocate for the applicant, largely by reference to Dr Fitzgerald's views. However his views are not consistent with the industry evidence. I accept that evidence, based on the witnesses' experience of such practice. Dr Fitzgerald's evidence on this matter is largely speculative. 588 ACCC then addresses the "pleaded market". Curiously, ACCC does not address the fact that, as I have previously pointed out, Dr Fitzgerald's evidence does not actually establish the pleaded market. ACCC's pleaded case is that any relevant competition occurred in an Australia-wide market for the supply of loan arrangement services to members of the public by loan providers, franchisees and brokers. Loan arrangement services are defined as being associated with loans to acquire residential properties, with repayment secured by mortgages over such properties. Dr Fitzgerald identifies a market for such services in connection with loans for the purpose of acquiring residential properties, with repayment secured by mortgages over such properties, or loans for business purposes secured on business assets. Dr Fitzgerald considers that for practical purposes there was a market for the supply of such services, but its geographical dimension was "sub-state", suggesting a number of distinct geographical markets, an aspect of the case which may yet raise difficulties. The matter has not been addressed in any detail. ANZ submits that there is no such market, although it does not rely expressly on the geographical dimension. It may be suggested that the case has been conducted on the basis of Dr Fitzgerald's definition of the market rather than that established by the pleadings. However it would be more accurate to say that ANZ has simply asserted that ACCC's case is entirely misconceived, without placing emphasis on this aspect. I shall return to this matter. Dr Fitzgerald considers that such market should be examined in the wider context of the lending market. He also identifies the market for loan arrangement services as being part of a two-sided market, the other side being for the supply of services to lenders. 589 Under the heading "The Arrangement", ACCC addresses the impugned conduct. After setting out the relevant evidence, ACCC addresses its understanding of ANZ's case. First, it identifies a submission by ANZ that the Mortgage Refunds agreement did not fix, control or maintain any price or rebate for the supply of loan arrangement services, the broker's commission being part of the overall cost of the loan product. The statement of claim alleges (at para 30.1) the purpose, effect or likely effect of fixing, controlling or maintaining a discount, allowance, rebate or credit, but not price. ANZ's position is simply consistent with its rejection of the proposition that there is a separate market for the supply of loan arrangement services. ACCC then asserts that the payment of commission is "in respect of the service supplied by the broker to the customer and it is inseparable from it". It would be more realistic to say that the payment of the commission is in respect of services supplied to the lender by the broker. One might say that the commission was for effectively bringing about a sale of an ANZ loan product. In selling any product, the sales person performs his or her duty to the employer principally by "assisting" the customer, but the "assistance" is designed to bring about a sale. 590 This line of reasoning leads one to wonder why in this case, the sales process should be treated as being separate from the supply of the overall product, namely a loan. ACCC's case is not that the brokers, the branches and the franchisees simply found possible borrowers and passed their details on to ANZ Mortgage Group. ANZ Mortgage Group seems effectively to have had no contact with the customer, or at least not until the loan had been approved. Whatever their legal relationships, the brokers, branches and franchisees were its sales staff. ACCC's treatment of the branches and franchisees as providing a "service" to potential borrows may be valid only to the extent that it describes their attempts to sell loan products on ANZ's behalf. The brokers, on the other hand, seem to have assumed some responsibility to the potential borrowers. I shall return to this question. 591 ACCC submits that it is "entirely artificial" to pretend that the customer "did not pay for the service", in the sense that ANZ's prices for loan products included recompense for the cost incurred by ANZ in marketing its loan products. In one sense that may be true. However one might, in the same vein, say that the borrower paid the cost to ANZ of borrowing money, of maintaining its branch network or of meeting other overheads. Further, in some cases, a potential borrower would not pay for services. If, for example, he or she did not apply for a loan, such services as were provided were free of charge. In the case of the brokers, it is a little difficult to say that a lender pays for the provision to a potential borrower of information and advice concerning other lenders' products. 592 In its outline at para 35, ACCC cites the following paragraphs from Dr Fitzgerald's first report: a. "..ultimately, competition among loan products themselves constrains the main elements of those product's pricing, although what prospective borrowers ultimately 'buy' is the combination of the loan product itself and a bundle of loan arrangement services, the overall pricing of the combination including both the lender's and distributor's margins": [p.15] b. "The practice of reducing or waiving loan approval fees for some loan seekers implies that the loan provider group is responding to competition for the combination of the loan product per se and the accompanying bundle of loan arrangement services, competition in which interest rates and fees (for the loan and any or all of the related services) are obviously a factor." 593 Those paragraphs are not co-located in the report. The first paragraph is at p 15 (not p 16 as suggested in the outline). The second paragraph is at p 19. I draw attention to this fact only because it seems to me that the passages, taken together, are inconsistent with ACCC's case. Perhaps the context produces a different interpretation of them. However I have been unable to obtain any such assistance. The difficulty in the passages for ACCC's case is that each supports the view that the supply is of one product, the loan and associated services, by one supplier, ANZ Mortgage Group. The assertion that the "loan provider group" responds to competition by reducing or waiving loan approval fees is inconsistent with Mr Carroll's statement which suggests that the branches could waive the "establishment fee". The terms "loan approval fee", "loan arrangement fee" and "establishment fee" have been used interchangeably. See, for example, para 30 of the outline where ACCC refers to Mr Carroll's evidence concerning the "loan arrangement fee". See also para 17.4 of the statement of claim. 594 The difficulty with all of this is that if ANZ Mortgage Group supplies the combined product and waives the fee, it is difficult to see any justification for the assertion that any product was provided by the branches or the franchisees, other than as agent for ANZ Mortgage Group. If Mr Carroll's statement is correct, which it probably is, then it seems that this aspect of Dr Fitzgerald's evidence is misconceived. In any case, it seems that no real purpose is served in this case by distinguishing between ANZ Mortgage Group and the branches and franchisees. 595 At para 36, ACCC asserts that at para 24 of the economists' joint report, they agree that the Mortgage Refunds agreement imposes a restriction which is a form of retail price specification. I make two points concerning that matter. First, ACCC does not plead that any price was fixed. Secondly, Dr Pleastikas's agreement to that proposition must be seen in light of ANZ's rejection of the existence of a market for the supply of loan arrangement services. 596 ACCC then asserts that Mr Carroll disclosed ANZ's subjective purpose in imposing the relevant restriction on Mortgage Refunds' operation, and that ANZ has not called evidence to rebut the existence of that purpose. The submission fails to recognize the possibility that Mr Carroll was simply seeking to quell branch dissatisfaction, as his statement in fact suggests. I have previously expressed my preference for that view. As I have said, the branches may have disliked being disadvantaged as against the brokers. Disharmony of that kind can be damaging to productivity. ACCC seems to suggest that some adverse inference can be drawn from the fact that ANZ did not call evidence, presumably from Mr Carroll. It seems unlikely that Mr Carroll could have done any more than give his version of the conversation. ANZ has simply accepted the version given by Ms Zacka. He might perhaps, have given evidence of the adverse effects of channel conflict, but the potential for damage is obvious enough and seems to have been assumed in the conduct of the case. In any event, it was for ACCC to prove that ANZ and Mortgage Refunds were in competition. I suspect that ACCC's real complaint is that it would have liked to cross-examine Mr Carroll, but a decision not to call a witness, who will add nothing to the case in his or her evidence-in-chief, is a dubious basis for an adverse inference. As I have previously observed, it may have led me to be more willing to draw an inference adverse to ANZ's case than I otherwise would have been, but it does not lead me to draw the inference urged by ACCC. 597 Finally, ACCC addresses the question of whether it was Mortgage Refunds or its brokers which or who actually provided brokers' services to borrowers. It submits that whoever had the "contract" with the potential borrower provided the services. ACCC submits that such contract was with Mortgage Refunds. I shall consider this matter at a later stage.

ANZ'S submissions 598 Generally, ANZ submits that Dr Fitzgerald went beyond his role as an expert economic witness and sought to establish certain factual matters. That may be a fair comment. He certainly gave evidence as to the content of the internet and as to bank structures generally, in the latter case based on his experience with a bank other than ANZ. He also gave evidence based on the experiences of his children as borrowers. Some of his evidence was based on mistaken inferences drawn from the BankWest survey material. Although these matters caused Dr Fitzgerald's evidence to appear a little untidy, it did not necessarily undermine his evidence as to economic processes and concepts. I have already said something about the extent to which I have relied upon, or rejected both his assumptions and his conclusions. It does not reflect on Dr Fitzgerald that his evidence may not have been presented in a way which best suited its forensic purpose. That is the responsibility of the lawyers. 599 ANZ submits that the ACCC case is that ANZ competed with brokers in an Australia-wide, single-sided market for loan arrangement services, meaning that the services provided in each case must be closely substitutable. It submits that the services are not closely substitutable because: brokers offer a wide choice of products supplied by numerous lenders, whilst lenders supply only their own respective products; thus potential borrowers go to lenders, having already selected that lender; others go to brokers seeking advice in selecting a lender; brokers are independent of lenders and act in the interests of the borrower in advising as to suitable products, and in acting as an advocate for the borrower; and brokers offer convenience in that borrowers need not "shop around" for the best deal. 600 I have already addressed these themes. Industry witnesses saw these distinctions as being significant. Dr Fitzgerald saw no "fundamental" difference between services provided by brokers and services provided by in-house and tied channels. ANZ submits that ACCC's definition of the term "loan arrangement services" does not identify a product which is (without more) demanded or supplied in Australia. I take this to mean that the relevant demand is for loan products, and that it is loan products which are supplied. ANZ stresses the "vertical" nature of the relationship between lenders and brokers, starting with training and accreditation. ANZ Mortgage Group does not itself, accept loan applications. They must come through one of its distribution channels, thus putting each channel in a privileged position. ANZ pays each channel for referring a successful loan applicant to it. ANZ could have withdrawn brokers' accreditation and insisted that applications be submitted through in-house or tied channels but did not do so, presumably because it saw significant benefit in the complementary role performed by them. As I have previously observed, there is no evidence to suggest that ANZ ever sought to limit the number of accredited brokers, at least prior to 2008. 601 ANZ submits that channel neutrality and channel conflict are the inevitable consequences of multi-channel marketing. Each channel strives to maximize its sales of ANZ products. Mr Hartzer suggested that perhaps the branches spent too much time on selling loan products and not enough time on other branch functions. ANZ saw the brokers as a necessary and very successful channel. However it was relatively expensive. It was not, at the relevant time, as expensive to ANZ Mortgage Group as the branches, but the branches' commission stayed within ANZ. Distribution costs generally were seen as a barrier to competition based on price in the lending market. 602 ANZ submits that the various channels may well have seen themselves as being in competition, but ANZ Mortgage Group, and ANZ as a whole obviously had reasons for maintaining the broking channel. ANZ also disputes ACCC's assertion that a qualitative application of the SSNIP test would result in the conclusion that a SSNIP would cause customers to switch between brokers and in-house and tied distribution channels. I shall, at a later stage, consider a very rough version of such test. 603 ANZ submits that there is no basis in the evidence for the market pleaded by ACCC, pointing out that even Dr Fitzgerald's evidence does not fully support the pleading. It then submits that the only relevant markets were the lending market and a market for the supply of broking services. ANZ submits that whilst brokers competed with one another in supplying broking services, lenders competed with one another in the lending market. The services provided by lenders' staff to potential borrowers were performed in seeking to sell lenders' products. 604 ANZ then submits that there has been no case in which s 45A has been held to be engaged by a price-fixing agreement between the supplier of goods and a party accredited to facilitate the sale of those goods. It submits that care must be taken in determining whether, in a particular case, the section has been engaged. 605 ANZ also submits that in the present case there cannot be competition in relation to the price at which loan arrangement services are provided, and that any competition as between brokers and lenders with respect to the provision of loan arrangement services can only be in relation to non-price elements such as convenience, quality, the independence of advice and the range of available products. This proposition is presumably said to follow from the fact that neither brokers nor lenders directly charge borrowers for the relevant services. Further, lenders, as far as the evidence goes, do not regularly pay refunds to customers. 606 ANZ also submits that the Mortgage Refunds agreement did not fix, control or maintain any discount, rebate, allowance or credit. This submission is based upon the assertion that any "refund" was simply an amount paid by Mortgage Refunds to the borrower, and that such a payment could not accurately be described as a discount, rebate, allowance or credit. 607 It will be convenient if I deal immediately with this point. According to the Shorter Oxford Dictionary, a "discount" is "(a) reduction in the amount or in the gross value of something" or "(a) deduction made from an amount due or a price in return for prompt or early payment, or offered to special customers; any deduction made from a nominal value or price". A relevant discount must be in relation to services supplied by Mortgage Refunds or its brokers and ANZ in competition. For present purposes the relevant services are "loan arrangement services". It is difficult to characterize the so-called refunds as reductions or deductions from value, price or nominal value, unless one characterizes the broker as a retailer, an approach which ACCC has not taken. The promised refund may be an inducement to negotiate the purchase of a loan product through Mortgage Refunds, but it is no more a discount than would be the notorious set of steak knives. 608 The word "allowance" is relevantly defined as: The act of allotting a sum as payment or expenses. … A limited quantity or sum, esp. of money or food, granted to cover expenses or other requirements. … A sum or item put to someone's credit; deduction, discount. 609 None of these definitions easily accommodates a payment of the present kind. 610 A "rebate" is defined as "(a) deduction from a sum of money to be paid; a discount. … a partial refund of money paid". The refund was not a deduction. I have dealt with the meaning of the term "discount". It is at least arguable that the refund paid by Mortgage Refunds was a refund of money paid, or to be paid to the lender as part of the loan transaction. Mortgage Refunds obviously thought that the payment could be accurately described as a refund. The evidence does not disclose whether, at the time of payment of any refund, an amount would already have been paid by the borrower to the lender. Certainly, nothing would have been paid to the broker. If the borrower had paid anything to the lender, perhaps the loan approval fee and/or the first interest payment, then, from the borrower's point of view the term "refund" would appropriately describe the payment by Mortgage Refunds, notwithstanding the fact that it came from the broker and not the lender. Use in s 45A of the words, "price", "discount", "allowance", "rebate", and "credit" suggests an intention to cover all payments or reductions in payments due. I see no reason for taking an unduly narrow approach to the section. The refunds were "rebates". 611 The word "credit" is relevantly defined as "(a) sum at a person's disposal in the books of a bank, etc … . (t)he acknowledgement of payment by entering in an account (or sum entered or) the credit side … of an account". The word seems to have an accounting flavour which makes it difficult to apply in the present case. 612 ANZ then submits that any discount, allowance, rebate or credit was paid "in relation to" loan products, not loan arrangement services. ANZ's letter of 29 April 2004 certainly suggests that the maximum refund was "in relation to" an ANZ loan product, but the parties' choice of language cannot generally affect the question of whether or not s 45A is engaged. The refund may have been in relation to a loan product, but also in relation to the supply of loan arrangement services. The "refund" was of part of the commission paid by ANZ to the broker. The commission was, itself an amount paid in relation to services provided to ANZ by the broker. I consider that the broker provided significant services to both lender and borrower, but the provision of a large part of those services would not have led to the payment of a commission. A commission was only payable if a loan was approved and made. ACCC's case assumes that the broker was paid for all of his or her work. However the reality is that he or she was paid for only some of it, although the payment was at a sufficiently high level to make the non-earning aspects acceptable. The lender paid the broker for the introduction of a suitable loan candidate, a loan application and an actual loan. The commission was certainly paid in relation to a successful loan application. However the completion and submission of a loan application were aspects of loan arrangement services as pleaded. Those steps were also part of the process for acquiring a loan. The refund was in relation to such services in the sense that the availability of the refund was used as a "hook" to attract potential borrowers to avail themselves of the whole range of the brokers' services. I consider that the refund was a rebate in relation to the supply of the brokers' services. Whether those services were loan arrangement services as pleaded is another matter. 613 ANZ submits that the Mortgage Refunds agreement was between ANZ Mortgage Group and Mortgage Refunds. ANZ further submits that whatever the relationship may have been between the ANZ branches and/or franchisees and Mortgage Refunds, ANZ Mortgage Group did not compete with Mortgage Refunds in any relevant market. It rather acquired the services of Mortgage Refunds (amongst other brokers) for the purpose of selling its products. ANZ submits that ANZ Mortgage Group sold loan products on behalf of ANZ. It submits that Mortgage Refunds did not supply loan arrangement services. It merely promised to pay refunds to successful applicants for loans. I shall return to these questions.

ACCC's supplementary submissions 614 As to ACCC's supplementary submissions, I believe that I have already dealt adequately with them. Most relate only to the documents which I have discussed, make further comments upon the evidence or re-iterate the general lines of argument which appear in the outline. One error of fact should be noted. At para 73 ACCC submits that Ms Hagendyk was paid a salary and was therefore an employee. In fact the evidence suggests that at one stage she performed some duties as an employee and some broking functions on a commission basis. Only her broking work is presently relevant. See Mr King's second affidavit at para 9. Further, at some time in 2004 after the making of the Mortgage Refunds agreement she became a franchisee. See Mr King's second affidavit at para 16. 615 I should make one other comment concerning ACCC's supplementary submissions. ACCC seems to suggest that Dr Fitzgerald's experience as a director of a bank in some way equips him to give expert evidence other than as an economist. There are no doubt areas in which general banking experience may be of some assistance. However care must be taken to ensure that the two areas of expertise are not confused and/or used as a basis for saying anything at all about the case, simply because it is primarily about banks and economics. I suspect that unconscious merger of the two capacities in which Dr Fitzgerald gave evidence (three, if one includes his use of non-banking, non-economic personal and family experience) has led ACCC to assume the complete acceptance of all of Dr Fitzgerald's evidence as uncontradicted expert opinion. As I have said, I do not see his evidence as being beyond challenge in so far as it is based on assumptions which I do not accept or conclusions which do not seem to follow from the evidence, having regard to his expert opinions.

FUNCTIONS AND MARKETS 616 Although there is much detailed evidence in this case, the issues are relatively few. However they are not easily defined. This difficulty may be the result of the radically different approaches taken by the parties. The primary factual issues concern the alleged supply of loan arrangement services and any competition in such supply. Other issues concern the Mortgage Refunds agreement, including identification of the parties and its purpose, effect or likely effect. 617 Concerning the supply of loan arrangement services, the relevant question is whether, at the relevant times, the ANZ branches and Mortgage Solutions franchisees competed with Mortgage Refunds (or its brokers) in a market for loan arrangement services as defined in the statement of claim. That question dictates an inquiry as to whether the branches, the franchisees and the brokers each supplied such services and, if so, whether they competed in such supply. Section 4E of the TP Act defined a relevant "market" as including, in addition to the goods or services in question, any goods or services which were "substitutable for, or otherwise competitive with" those goods. Thus, in identifying a market, potential for competition may be relevant. 618 This case is primarily about the sale of loan products. ANZ sold such products through ANZ Mortgage Group. In so doing ANZ Mortgage Group used various distribution channels. They included ANZ branches, the Mortgage Solutions franchisees, brokers and a small number of specialized agencies managed by ANZ Mortgage Group. ACCC does not allege that such specialized agencies competed with the branches and franchisees or with the brokers in supplying loan arrangement services. The branches also performed other banking functions. Potential lenders might approach a branch, seeking a loan, because they had previously dealt with the branch for other purposes. Branches might seek to sell other bank products to persons who sought to acquire loan products. 619 ANZ Mortgage Group did not, itself deal with loan applicants other than through its distribution channels. However it finally approved or rejected all such applications. Nobody, apart from the distribution channels had contact with a potential borrower until after the relevant loan application had been approved. Thus the distribution channels, alone, brought about the sale of ANZ loan products, probably by engaging in the functions described in the statement of claim as loan arrangement services, or some of them, possibly in conjunction with other sales-like activities. The functions which ACCC describes as "loan arrangement services" were, in effect, functions performed in the course of selling ANZ's loan products. Whilst the word "sell" may describe the yielding of legal title to something, or agreeing to do so, the word can also describe the act of persuading a person to accept or buy. See the Oxford English Dictionary (2nd ed). 620 To some extent, ACCC's use of the expression "loan arrangement services", Dr Fitzgerald's identification of a two-sided market and the proposition that brokers do not, themselves lend have obscured the fact that the distribution channels really sold loan products on behalf of ANZ Mortgage Group. In this context the word "distribution" means "sale". One might say that the distribution channels provided ANZ Mortgage Group with "sales services". It may be that the effect of ACCC's treatment of the in-house and tied distribution channels as entities separate from ANZ Mortgage Group has further obscured the true nature of the various relationships and functions. The brokers were, at least partially independent of ANZ Mortgage Group, but they were also selling its loan products. 621 In Australia, the major banks have traditionally conducted banking business through branches which are relatively widely distributed around the country. Lending is a core aspect of banking business. Hence it is not surprising that loan products were supplied or sold through the branches. As Mr Percy said, if a bank has an established branch network, it must use it in order to utilize its investment. In any event, the branches seem to have been relatively successful in selling loan products. However there was a perception that more complex loans and, perhaps, higher value loans should be dealt with by the specialist channels to which I have referred. In supplying banking services to customers, including potential borrowers, the branches represented ANZ, including ANZ Mortgage Group. 622 Whilst it may accurately be said that ANZ provided banking services, including the supply of loan products at its branches, it does not follow that everything done at a branch, or even each interaction with a potential borrower involved the supply of a service to that person. Branch employees were employees of ANZ. They performed duties as directed by ANZ for the purposes of its banking business. Some branch employees, from time to time, performed duties in connection with the supply of loan products on behalf of ANZ Mortgage Group, including those duties identified in para 7.2 of the statement of claim, or similar duties. They performed such functions at the direction of ANZ and as an aspect of their employment. Such functions were, prima facie, steps taken at the request of, and for the benefit of ANZ Mortgage Group, and at its expense. In a sense the performance of such functions may have benefited potential borrowers, but again, it does not follow that the branch staff provided services to them. In effect, branch staff dealt with potential borrowers on behalf of ANZ Mortgage Group. Neither it, nor any branch staff member undertook a duty to a potential borrower to perform the functions identified in para 7 of the statement of claim. Nor did any obligation arise out of the performance of those functions, subject only to consumer protection and similar legislation, and the law relating to misrepresentation. It may not be necessary, in order that there be a supply of services, that there be accompanying or resulting legal consequences. Nonetheless the presence or possibility of legal rights, duties and liabilities may say much about the nature of a particular transaction or class of transactions. 623 It is by no means uncommon for the supplier of a product to assert that sales personnel provide "service" to customers. It may be that few customers take such characterization at face value. Helpful and courteous as sales staff may be, they are there to advance the supplier's interests, not those of the customers. 624 That there is an internal arrangement within ANZ which results in the branches being located in a separate "group" from that providing loan products does not, in my view, have any real relevance in considering the relationship between ANZ and its customers. The fact that there are notional monetary adjustments which reflect the functions performed in the branches similarly does not affect that relationship. In the end, as far as a customer (including a potential borrower) is concerned, all relevant functions are performed by branch staff who are ANZ employees. The evidence suggests that a potential borrower who visits a branch has probably decided to acquire an ANZ loan product from that branch. He or she goes to the branch to apply to ANZ for that loan product. 625 I have pointed out that neither ANZ Mortgage Group nor any branch staff member undertakes a duty to a potential lender to perform any or all of functions described in para 7 of the statement of claim. In a particular case, the relevant staff member may perform some, but not all of those functions. It is not clear whether the pleaded "loan arrangement services" comprise a discrete and indivisible bundle or alternatively, a range of services, only some of which may be supplied in a particular case. A potential borrower may have already chosen the product so that no advice will be necessary. He or she may not have satisfied the lending criteria, in which case no application would be prepared or submitted. Thus the process does not resemble the supply of a service. Rather, it resembles an interactive procedure between the potential borrower and a representative of the lender, anterior to the making of a loan. It is a process in which a potential borrower must participate in order to obtain a loan product. To characterize it as the provision of services would lead to the similar characterization of any pre-contractual negotiations. 626 I have previously observed that the various pleaded aspects of "loan arrangement services" describe the sales process. Unlike potential borrowers who consulted brokers, those who went to in-house or tied channels had already been "captured" by ANZ. The channel had to convince him or her to proceed with the intention of acquiring an ANZ loan product. The channel had a duty owed to ANZ, including ANZ Mortgage Group, to do so. It also had a duty to ensure that the potential borrower satisfied the relevant lending criteria and that an application was completed in accordance with the requirements of ANZ Mortgage Group. The channel may have had a further duty to ANZ to establish or enhance a long-term relationship with the potential lender as a customer for the whole range of ANZ banking services. 627 Turning to the particular services described in para 7.2 of the statement of claim, I note that the first three are said to comprise "advice", whilst the other three concern the making of an application. Once again, language should not be allowed to cloud the facts. It is difficult to believe that a potential borrower expected or wanted a general discussion concerning ANZ loan products for which he or she was unlikely to be eligible or which he or she might not want. The product sought was a loan to enable the acquisition of a residential property, serviced by a mortgage over that property. No doubt the relevant staff member would quickly identify the likely products, probably by reference to information, including financial information supplied by the potential borrower. In so doing, the staff member was performing a duty to ANZ Mortgage Group by identifying the potential borrower's compliance with the relevant lending and associated criteria. In some case, that process may have left the potential borrower with a choice. There is nothing unusual about sales staff assisting a customer to choose a product from a range. It is part of the process of convincing him or her that he or she should acquire one of the products on offer. 628 As I have said, it may be that the potential borrower derived some benefit from the process, but that was not its purpose. Nor is it likely that either the potential borrower or the relevant staff member thought that the process was about anything other than the supply and acquisition of a loan product. In the event that the potential borrower did not satisfy the relevant lending criteria or decided not to proceed, it is unlikely that he or she would have considered that he or she had acquired anything which he or she had sought. I do not understand ACCC to argue that loan arrangement services included demonstrating to a potential borrower that he or she was not qualified to acquire an ANZ loan product, or should decide not to do so. 629 With respect to the other pleaded aspects of loan arrangement services, they all involve compliance with the requirements of ANZ Mortgage Group concerning loan applications and the processing of such applications. The performance of those functions was of a duty incidental to the staff member's employment and was part of the process of exploiting the opportunity to sell ANZ loan products, which opportunity was presented by the potential borrower's visit to the branch. 630 I do not suggest that to describe a particular function as a "sales" function or as an employee's "duty" to his or her employer is necessarily to exclude the possibility that services were supplied to customers. However, for present purposes ACCC's case depends upon a distinction between the supply of a loan product and the performance of functions associated with such supply. In the case of the brokers, there may have been some justification for that approach. A broker's relationship with a potential borrower generally began with no particular preference for the products of any lender. The advice and information provided might have assisted the potential borrower to choose a lender and a product, thus providing a service to the borrower. However it does not follow that, where a staff member dealt with a potential borrower on behalf of a lender already selected by the borrower, the relationship was the same as that between broker and customer. In the branch, borrower and lender met face to face, and understood that to be the case. 631 I am not satisfied that the branches supplied loan arrangement services to potential lenders. In my view they supplied sales services to ANZ Mortgage Group and/or to ANZ. 632 Even if branch staff supplied some sort of service to potential borrowers, I consider that they did so on behalf of ANZ Mortgage Group and/or ANZ. I have pointed out that a potential borrower would go to a branch, expecting to deal with an ANZ staff member for the purpose of obtaining a loan product. As between the branches and ANZ Mortgage Group, the latter had arrangements with the former pursuant to which branch staff would deal with the potential borrower, identifying his or her financial capacity and needs, selecting a product and preparing and submitting a loan application. ANZ Mortgage Group paid the branches for the performance of that function. Obviously, the branch staff were acting on behalf of ANZ Mortgage Group and/or ANZ. The potential borrower would consider everything associated with his or her visit to the branch as being part of the larger transaction which he or she had in mind, which transaction was with ANZ. In those circumstances, there can be no justification for splitting the transaction into parts - loan product and loan arrangement services; or distinguishing between ANZ Mortgage Group and the branches as separate suppliers of those parts. The better view is that if branch staff provided any services to a potential borrower, they were provided by ANZ or ANZ Mortgage Group through the branches. 633 Whilst the Mortgage Solutions franchisees may have appeared to be more independent of the ANZ organization than were the branches, I see no basis for concluding that they supplied services to potential borrowers. They were effectively in the same position as the branches. A "franchise" is, according to the Oxford English Dictionary (2nd ed), an "authorization granted to an individual or group by a company to sell its products or services in a particular area". A "franchisee" is presumably the holder of such a franchise. The franchisees were to operate under the ANZ banner and perform much the same functions as the branches, but using some of the brokers' techniques. They were also expected to offer more flexibility in meeting the convenience of customers and, perhaps, to develop more expertise. Nonetheless they were selling ANZ loan products. If, in so doing they provided benefit to potential borrowers, such benefit was the consequence of their supply of sales services to ANZ Mortgage Group. Alternatively, if the franchisees supplied any such services, they did so on behalf of ANZ Mortgage Group. 634 I consider that there was no market in which the franchisees supplied loan arrangement services. 635 The brokers performed a different function. The Oxford English Dictionary (2nd ed) defines the word "broker", as "a retailer of commodities", "(o)ne who acts as middleman in bargains" or "(o)ne employed as a middleman to transact business or negotiate bargains between different merchants or individuals". Whilst the branches and the franchisees were performing functions on behalf of ANZ or ANZ Mortgage Group, and only incidentally providing benefits to potential borrowers, the brokers were holding themselves out as offering advice and information concerning a wide range of products, supplied by a wide range of lenders, as well as assistance in preparing and submitting loan applications. Whatever regulators may have thought, a broker, in so doing, might well have exposed him- or herself to the kind of liability identified by Mason J (as his Honour then was) in Shaddock and Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 at 250: … whenever a person gives information or advice to another upon a serious matter in circumstances where the speaker realizes, or ought to realize, that he is being trusted to give the best of information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party to act on that information or advice, the speaker comes under a duty to exercise reasonable care in the provision of the information or advice he chooses to give. 636 A broker, providing information and advice to a potential borrow concerning a wide range of products, supplied by a wide range of lenders, would be much more likely to incur such a duty than would a bank employee or franchisee selling a bank product. The evidence in this case demonstrates that at least some potential borrowers saw brokers as being more likely to have their interests at heart than those of the lenders. In my view, unlike the in-house and tied channels, the brokers undertook to provide advice, information and assistance to the potential borrowers who consulted them. I have no difficulty in characterizing the brokers' function as involving the supply of services to potential borrowers. However the brokers also sold lenders' products, or facilitated such sale. In so doing the brokers provided services to lenders in accordance with their accreditations. 637 The better view is that the broker's provision of information and advice to a potential borrower was not rewarded. However the broker used the outcome of that process to "sell" a loan product to him or her. In providing information and advice, the broker was providing services to the potential borrower as he or she had undertaken to do. In preparing and submitting the application, he or she was clearly providing a service to the lender. However the pre-existing relationship with the potential borrower meant that, unlike the branch employee or the franchisee, the lender had also undertaken an obligation to the potential borrower to perform the same functions, so that the broker also provided that service to the potential borrower. Hence a broker provided services to both potential borrowers and lenders, and no doubt competed with other brokers in so doing. 638 I have concluded that ANZ branches and franchisees did not participate in any market in which the brokers provided loan arrangement services to potential borrowers. That finding leads to the conclusion that ANZ was not, in any relevant sense, in competition with Mortgage Refunds. Thus s 45A is not engaged. The proceedings must be dismissed. However I should deal with a few other matters.

ABSENCE OF EVIDENCE OF COMPETITION 639 If the brokers were in competition with the in-house and tied channels, one might have expected to see evidence of apparently rivalrous conduct. With the exception of the occasional references in the ANZ documents to competition with brokers, there is little such evidence. The lenders' provision of training and accreditation to the brokers and payment of them is difficult to reconcile with the existence of such competition. ACCC's own witness, Mr Lahiff said that until 2008, lenders would accredit anybody who passed their training courses, applied that training and kept up to date. See Mr Lahiff's affidavit at para 74. There is no suggestion that ANZ followed a different practice. Further, lenders were usually willing to accept as many suitable loan applications as they could attract. See para 76. In other words, there was no attempt to limit the business written by the brokers. 640 By 2003-2004 ANZ Mortgage Group had allowed itself to become dependent upon the brokers for a large part of its lending business. The evidence suggests that this situation was, at least in part, attributable to historical factors. However there was concern that any significant interference in the brokers' business would cause retaliation which ANZ wished to avoid. Despite the occasional use of the language of competition, ANZ Mortgage Group did not want to offend the brokers. Talk of competition was not really translated into action. Apart from streamlining internal procedures and improving customer relations, the only innovative step was the Mortgage Solutions franchise model. That model did not deal with the major advantage enjoyed by the brokers, namely choice amongst products offered by different lenders. As a result, it also did not deal with the question of independent advice. In any event, the initiative seems to have been prompted, at least in part, by the fact that other lenders had such a service, but ANZ did not. 641 Concerning the franchisees, the evidence demonstrates little about events after the Mortgage Refunds agreement was made. The model was to be rolled out in mid-2004, but there is no real evidence that this occurred, or how it operated in practice. I have more or less assumed that it was rolled out and operated in the anticipated way. I have no clear idea as to how ANZ may have launched or conducted any campaign against the brokers, using the franchisees. 642 Documents from Mortgage Choice and Mortgage Refunds suggest that neither company identified lenders as competitors, whatever Mr Lahiff, Mr King and Mr Stark might now say. In my view the references in ANZ documents to competition probably reflected concern about the brokers' high share of ANZ business in the lending market. Mr Hartzer certainly did not see the branches as competing with the brokers.

SUBSTITUTABILITY 643 I have, in considering the evidence, identified significant distinctions between the services allegedly provided by in-house and tied channels and the services provided by brokers. I have, however, concluded that the in-house and tied channels did not provide loan arrangement services to potential borrowers. If, in fact, they provided some or all of those services, those significant differences would still exist. I do not suggest that there were discrete sectors of the community which would always use brokers, or always use in-house or tied channels, although Mr Percy came close to that position. Rather I consider that potential borrowers would use one or the other, depending upon particular needs at relevant times, choosing the service most suited to their needs. 644 Examination of the products yields only an indicative guide to the question of substitutability. The more telling test is likely market conduct, generally assessed by use of the SSNIP test. Dr Fitzgerald concluded that in this case, there could be only a qualitative application of the SSNIP test. With all due respect, his qualitative analysis was little more than a bald statement of opinion. Although I do so with some trepidation, it is possible to undertake a fairly basic SSNIP test, although it is only slightly more objective than Dr Fitzgerald's analysis. In so doing I assume that ACCC has established its pleaded case, save as to the question of substitutability. 645 The SSNIP test posits an hypothetical, monopolistic supplier of a product in a relevant market, who imposes a small but significant, non-transitory increase in price or reduction in quality. The test involves identification of whether such imposition would have any significant effect in causing customers to switch to a different product. In that form the test is designed to identify whether the two products are in the same market. Assuming for present purposes that the hypothetical monopolist is an ANZ branch or franchisee supplying loan arrangement services, one must consider whether a small, but significant increase in the cost of those services, or a decrease in quality would cause borrowers to switch to a broker in order to acquire those services, and vice versa. A small, but significant increase in price might be of the order of five to ten percent. Thus it is possible to make a rough assessment of the amount of a SSNIP in the present case. The loan approval fee charged by ANZ was $600. A SSNIP might be between $30 (5%) and $60 (10%). Given the substantial overall cost of the loan product, the length of time over which the loan was likely to endure and the probable importance of the transaction to the borrower, it seems quite unlikely that a person who would otherwise have gone to a branch, expecting to acquire an ANZ loan product, but faced with a loan approval fee of $630 or $660 instead of $600, would instead have gone to a broker. 646 As to the reverse situation, Mortgage Refunds was, in 2004 and 2005, providing refunds as follows: For loans over And up to $ 95,000 $180,000 $200 $180,000 $220,000 $400 $220,000 $250,000 $500 $250,000 $450,000 $1,000 $450,000 - $1,200 or as negotiated

647 Thus a SSNIP might be a reduction of between $10 and $20 for a loan between $95,000 and $180,000, and between $60 and $120 for a loan over $450,000, or a higher figure as negotiated. Again, having regard to the size of each overall transaction, it seems unlikely that a potential borrower who had identified the need for the services of a broker would, in face of such a SSNIP, have chosen to go to a lender. There were probably further complications with which I have not dealt. The wider range of services offered by brokers may mean that a potential borrower would have been more likely to switch from an in-house or tied channel to a broker, than vice versa. A second complication is that ANZ's policy of channel neutrality would have meant that any increase in the loan approval fee at a branch would also have applied to the acquisition of a loan product through a broker. 648 The application of the SSNIP test may also be complicated by ACCC's failure to prove an Australia-wide market, or to identify and examine any particular sub-state market. I suspect that it would have been relatively easy for a potential borrower to resort to an adjoining sub-state market in order to obtain the desired services. Similarly, it would have been relatively easy for a broker in one sub-state market to expand into an adjoining sub-state market.

SOME OTHER MATTERS 649 ACCC's case contains a number of inconsistencies, some of which I have mentioned. According to the statement of claim, ANZ's branches and franchisees supplied loan arrangement services in a loan arrangement services market. Such services were supplied to potential borrowers. As I have said, the evidence establishes that ANZ had other mortgage distribution channels which were managed by ANZ Mortgage Group, but were not part of ACCC's pleaded case. Thus, on any view of it, ANZ Mortgage Group had its own distribution network. ACCC's case is that ANZ's distribution channels should be treated as economic entities, separate from ANZ Mortgage Group (and presumably ANZ itself), and as participating in the loan arrangement services market as separate entities. The branches were certainly managed separately from ANZ Mortgage Group, but the franchisees were managed within that group. I have referred to other ambiguities and inconsistencies in the treatment of the status of the franchisees. If the distinction between ANZ Mortgage Group and the distribution channels were significant, one would have expected consistency in its application, or at least an explanation of any inconsistency. 650 ACCC pleads that Mortgage Refunds entered into the Mortgage Refunds agreement on its own behalf and/or on behalf of its brokers. ANZ denies that the brokers were parties to the agreement. In my view ACCC has not established that they were. Whilst there may have been a factual basis for alleging that the brokers, or some of them, knew that Mortgage Refunds was trying to sort out the problem with ANZ, and subsequently adopted or ratified the outcome or its effects, no such case has been advanced. In those circumstances I conclude that only Mortgage Refunds and ANZ were parties to that agreement. In ANZ's case, its status as a party was derived through ANZ Mortgage Group. 651 ACCC's case is that ANZ competed with Mortgage Refunds. Section 45A recognizes that relevant competition may occur between one party to the relevant arrangement and a body corporate related to another party. However it does not follow that s 45A applies where: there is a relevant arrangement as between A and B; two "profit centres" within B are to be treated as separate "economic entities" for the purpose of determining whether A and B were in competition; such competition is said to have been between A and one of B's separate economic units; but the agreement was between A and another of B's separate economic units. 652 It follows that ACCC's case must be that ANZ was in competition with Mortgage Refunds by virtue of the branches and franchisees being in competition with it, but was a party to the Mortgage Refunds agreement by virtue of the actions of ANZ Mortgage Group. I see no difficulty with either conclusion but together, they seem to challenge the validity of the distinction which is said to be critical to ACCC's case. 653 Whether Mortgage Refunds supplied broking or similar services to potential borrowers is also unclear. AFG had a contract with Mortgage Refunds pursuant to which the latter was to "introduce" applicants to AFG, in consideration of which it was to receive a percentage of any commission received by AFG. Both AFG and Mortgage Refunds were content to permit the Mortgage Refunds brokers to deal directly with ANZ in introducing potential borrowers, whilst keeping control over their commissions. Mortgage Refunds, itself was not accredited, at least in respect of ANZ loan products. However Mortgage Refunds advertised the availability of services which were, in practice, provided by the brokers. It provided other support services to the brokers, including office space and a "shop front". From ANZ's point of view, AFG and/or the brokers were distributing its products. From AFG's point of view, Mortgage Refunds was distributing ANZ's products, using its brokers who were AFG's authorized officers for the purposes of its originator agreement with ANZ. 654 The position, from the points of view of Mortgage Refunds and the brokers is unclear. Mr Stark's evidence strongly suggests that he operated as an independent contractor. Mr King says that initially, Ms Studin and Mr Chillemi operated on the same basis as did Mr Stark. Ms Hagendyk was in a different position, receiving a fixed salary and occasional bonuses for writing loans, suggesting that she was, at that time, an employee of Mortgage Refunds, at least for some purposes. However other evidence suggests that Mortgage Refunds had no employees. At some time after the Mortgage Refunds agreement was made, Ms Studin, Mr Chillemi and Ms Hagendyk, but not Mr Stark became franchisees. It seems unlikely that as franchisees, they were employees. 655 As Mortgage Refunds was generally responsible for advertising, it is likely that many potential borrowers would have approached it in the first instance. Some may have gone directly to individual brokers. The cash back agreement was signed at the time of consultation with a broker, presumably after the potential borrower had indicated that he or she proposed to apply for a loan product. The agreement assumed that any application would be made through Mortgage Refunds. 656 I find it difficult to generalize about Mortgage Refunds' involvement in the provision of broking services. Some borrowers may have had contractual relationships with it, whilst others may not have had such relationships, depending upon the circumstances in which they approached Mortgage Refunds or the relevant brokers. I doubt whether, on the evidence, it is possible to form a firm view as to whether Mortgage Refunds was supplying broking services. The answer may depend upon the circumstances of each case. 657 Finally, in the course of oral submissions, ACCC drew attention to its alternative pleadings in paras 20 and 21 of the statement of claim. In para 20 ACCC pleads that ANZ and Mortgage Refunds were in competition in supplying loan arrangement services. In para 21, such competition is limited to the supply of such services "in respect of ANZ loan products". On the approach which I have adopted, the distinction is of no relevance.

CONCLUSION 658 The application must be dismissed. Any party requiring further findings of fact is, within 14 days of publication of these reasons, to submit to the other party a list of such proposed findings, with all relevant references to the evidence. The opposing party is, within 14 days of receiving such list, to indicate to the first-mentioned party whether it supports or opposes my making such findings, where necessary adding all relevant references to the evidence. The said documents are to be filed within a further seven days. I shall then make such further findings as I consider appropriate. 659 I shall hear submissions as to costs. I certify that the preceding six hundred and fifty-nine (659) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.