- Connective Group Pty Ltd
Australian Finance Group Ltd proposes to acquire Connective Group Pty Ltd.
AFG and Connective are both mortgage aggregators that provide their affiliated brokers access to loan products (from their panel of lenders) which brokers in turn provide to their customers. Mortgage aggregators like AFG and Connective also provide a range of support services to brokers to assist them in running their businesses.
The ACCC considered the impact of the proposed acquisition on the markets for:
- the supply of mortgage aggregation services to mortgage brokers in Australia; and
- the supply of mortgage distribution services to lenders in Australia.
The ACCC found that consumers’ ability to bypass the broker channel and go directly to lenders (known as the direct channel), is not a close substitute for the range of services provided by mortgage brokers, and is not a suitable option for all consumers.
Similarly, lenders’ ability to market and sell directly to consumers is not a perfect substitute for the broker channel. While lenders could seek to increase reliance on direct sales in response to a small but significant increase in the price of aggregation services in the broker channel, it would not replicate the broker channel. Accordingly, the ACCC concluded that the direct channel does not form part of the relevant markets, however the ACCC noted that the direct channel does place at least a degree of competitive constraint on the entire broker channel.
The ACCC also considered the impact of the proposed acquisition on the broader supply of mortgages to consumers in Australia.
AFG and Connective are significant mortgage aggregators, who provide mortgage aggregation services to brokers, and mortgage distribution services to lenders. The proposed acquisition represents a major structural change, and while the ACCC recognised that this will have an impact on competition, the ACCC considered that it will be unlikely to substantially lessen competition in any relevant market due to existing competitive constraints.
The supply of mortgage aggregation services to brokers in Australia
AFG and Connective currently compete for brokers, and the ACCC focussed on the impact of the loss of this competitive rivalry. The ACCC found that mortgage aggregators compete for brokers on a number of different factors, such as pricing, breadth of lender panel, contract terms, technology and other service levels. While different types of mortgage aggregators, such as specialist, franchise and bank-owned aggregators, compete for brokers on different aspects of their offer, the ACCC considered all of these aggregators also compete with AFG and Connective for brokers.
While the ACCC considered barriers to entry in mortgage aggregation to be reasonably high, with no new entry in recent years, barriers to expansion were considered to be relatively low. The ACCC considered the recent growth of competing aggregators, as well as the ability for brokers to switch, indicated existing smaller aggregators could expand.
The ACCC concluded there would remain sufficient competition from existing aggregators, who would be likely to offer brokers competitive offerings if the combined AFG-Connective were to decrease the quality of its services or change its pricing structures. The ACCC also found that the acquisition would be unlikely to materially change competing aggregators’ incentives to invest in innovation and platform improvement.
The supply of mortgage distribution services to lenders in Australia
AFG’s acquisition of Connective would create the largest supplier of mortgage distribution services to lenders in Australia, providing distribution opportunities through approximately 40 per cent of the broker channel. The ACCC considered the extent the combined AFG- Connective would be able to raise costs or reduce service levels to lenders for a sustained period.
The ACCC concluded that the combined AFG-Connective would have limited ability and incentive to raise costs or reduce service levels to lenders for the following reasons.
The ACCC found that mortgage aggregators have an incentive to maintain a broad and diverse panel of lenders in order to attract brokers. Mortgage aggregators also have the incentive to retain lenders where the lender is offering a product that is profitable, and in demand by brokers and consumers.
The ACCC considered that some lenders have bargaining power (such as the major lenders and those with in demand products) which they could leverage to counter any attempts by the combined AFG-Connective to raise commission rates and/or sponsorship payments.
The ACCC recognised however that there may be some non-major lenders with less bargaining power. The ACCC ultimately found that for those lenders, a number of alternative aggregators will continue to provide access to consumers through brokers.
The supply of mortgages to consumers in Australia
The ACCC also considered whether a combined AFG-Connective would have the ability and incentive to foreclose non-major lenders by:
- restricting access to the combined AFG-Connective’s lender panel;
- raising costs, such as requiring higher commission or sponsorship rates; and/or
- inducing its affiliated brokers to recommend its own branded products over those of rival lenders,
and whether this would have the effect of substantially lessening competition in the supply of mortgages to consumers. The ACCC considered that brokers did not appear to be strongly incentivised to promote own-branded products at the expense of lenders with in demand products, and upcoming regulatory changes to the industry may seek to further limit any ability. The ACCC also found that the likelihood and impact of foreclosure attempts would be low.
|23/10/2019||ACCC commenced informal review under the Informal Merger Review Process Guidelines.|
|14/11/2019||Closing date for submissions.|
|09/12/2019||ACCC requested further information from the parties. Former provisional date for announcement of ACCC’s findings (23 January 2020) is delayed.|
|14/01/2020||ACCC received information from the parties.|
|12/02/2020||ACCC published a Statement of Issues outlining preliminary competition concerns.|
|05/03/2020||Closing date for submissions relating to Statement of Issues.|
|19/03/2020||ACCC is awaiting information from the parties. Former provisional date for announcement of ACCC’s findings (7 May 2020) is delayed.|
|04/05/2020||ACCC received further information from the parties.|
|18/06/2020||ACCC announced that it would not oppose the proposed acquisition.|