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.