Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited
[2013] FCA 1206
•18 November 2013
FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2013] FCA 1206
Citation: Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2013] FCA 1206 Parties: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522 File number: QUD 252 of 2007 Judge: DOWSETT J Date of judgment: 18 November 2013 Corrigenda: 6 February 2014
21 November 2013Catchwords: COMPETITION – whether respondent bank engaged in conduct that had purpose or effect, or was likely to have purpose or effect, of fixing a rebate – where mortgage broker, Mortgage Refunds Pty Ltd offered refunds to borrowers based on value of loan if successful in applying for loan – respondent bank wrote to finance aggregator to prevent Mortgage Refunds Pty Ltd to limit amount of refund offered on the bank’s loans – whether conduct had effect of lessening competition between respondent bank and mortgage brokers – whether respondent bank’s mortgage division was in competition with mortgage brokers – where market pleaded by ACCC was for the provision of “loan arrangement services” – whether mortgage brokers and respondent bank both provided loan arrangement services and thus competed in the same market – consideration of features of mortgage broking business model
COMPETITION – indicia of competition between banks and mortgage brokers – consideration of hypothetical monopolist test (small but significant non-transitory increase in price, “SSNIP”) – whether banks and mortgage brokers engaged in rivalrous behaviour – whether banks and mortgage brokers believed themselves to be in competition
Legislation: Trade Practices Act 1974 (Cth) ss 4, 4E, 45, 45A Cases cited: Arnott’s Limited v Trade Practices Commission (1990) 24 FCR 313 applied
Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Company Limited (1988) 167 CLR 177 cited
Re Queensland Cooperative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169 applied
Seven Network Ltd v News Ltd (2009) 182 FCR 160 cited
Shaddock and Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 cited
TPC v Australia Meat Holdings Pty Ltd (1988) ATPR 40-876 citedMiller RV, Miller’s Annotated Trade Practices Act (26th ed, Lawbook Co, 2005)
Oxford English Dictionary (2nd ed, OUP, 1989)
Shorter Oxford DictionaryDates of hearing: 26 and 27 March 2012 and 2, 3, 4 and 5 April 2012 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 659 Counsel for the Applicant: Mr S Couper QC with Ms M Brennan Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr A Archibald QC with Dr M Collins SC Solicitor for the Respondent: Herbert Smith Freehills FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2013] FCA 1206
CORRIGENDUM
1.In paragraph 627 of the Reasons for Judgment, in the fourth sentence, the word “serviced” should read “secured”.
2.In paragraph 637 of the Reasons for Judgment, in the fifth sentence, the word “lender” should read “broker”.
I certify that the preceding two (2) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate:
Dated: 21 November 2013
FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2013] FCA 1206
CORRIGENDUM
1.In paragraph 13 of the Reasons for Judgment, in the last sentence:
· delete the word “a”;
· the word “payment” should read “payments”; and
· the word “was” should read “were”.`
2.In paragraph 15 of the Reasons for Judgment, in the first line of the first sentence, delete the hyphen between “alter” and “ego”.
3.In paragraph 17 of the Reasons for Judgment, in the third bullet point in the quote, replace “[sic[” with “[sic]”.
4.In paragraph 19 of the Reasons for Judgment, in the fourth line of the first sentence, delete the word “of”.
5.In paragraph 28 of the Reasons for Judgment, in the second last line, the word “are” should read “were”.
6.In paragraph 29 of the Reasons for Judgment:
· in the first line of the first sentence, the word “provided” should read “provides”;
· in the second sentence, the word “was” should read “is” and the word “provided” should read “provides”.
7.In paragraph 51 of the Reasons for Judgment, at the beginning of the first sentence, the words “The appellant” should read “Mr King”.
8.In paragraph 149 of the Reasons for Judgment, in the second sentence, the word “compete” should read “competed”.
9.In paragraph 151 of the Reasons for Judgment, in the first sentence, the word “important” should read “importance”.
10.In paragraph 243 of the Reasons for Judgment, in the second sentence, insert a comma after the word “assumptions”.
11.In paragraph 446 of the Reasons for Judgment, in the first sentence, the word “lender” should read “borrower”.
12.In paragraph 522 of the Reasons for Judgment, in the first sentence, in the second line, insert a quotation mark after the word “services”.
13.In paragraph 541 of the Reasons for Judgment, in the fourth bullet point the word “charges” should read “changes”.
14.In paragraph 563 of the Reasons for Judgment, in the last sentence:
· in the third last line, the word “involves” should read “involve”; and
· in the second last line, the word “frequently” should read “often”.
15.In paragraph 590 of the Reasons for Judgment, in the third last line, the word “borrows” should read “borrowers”.
16.In paragraph 618 of the Reasons for Judgment, in the last line on page 196, the word “lenders” should read “borrowers”.
17.In paragraph 627 of the Reasons for Judgment, in the first line on page 200, the word “serviced” should read “secured”.
I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate:
Dated: 6 February 2014
FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2013] FCA 1206
CORRIGENDUM
1.In paragraph 627 of the Reasons for Judgment, in the fourth sentence, the word “serviced” should read “secured”.
2.In paragraph 637 of the Reasons for Judgment, in the fifth sentence, the word “lender” should read “broker”.
I certify that the preceding two (2) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate:
Dated: 21 November 2013
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 252 of 2007
BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
ApplicantAND: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522
Respondent
JUDGE:
DOWSETT J
DATE OF ORDER:
18 NOVEMBER 2013
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.the application be dismissed;
2.a party requiring further findings of fact submit to the other party, on or before 2 December 2013, a list of such proposed findings, with all relevant references to the evidence;
3.the opposing party, on or before 16 December 2013 indicate to the first-mentioned party whether it supports or opposes my making such findings, where necessary adding all relevant references to the evidence;
4.the said documents be filed on or before 23 December 2013; and
5.costs be reserved.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 252 of 2007
BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
ApplicantAND: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522
Respondent
JUDGE:
DOWSETT J
DATE:
18 NOVEMBER 2013
PLACE:
BRISBANE
REASONS FOR JUDGMENT
GENERAL
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.
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.
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
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.
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].
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].
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.
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.
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.
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.
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.
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.
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.
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.
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
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 … .
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.
It is common ground that the proposal was accepted by Mortgage Refunds and that, thereafter, the named persons were re-accredited.
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.
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.
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.
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
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).
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 …”.
At para 7.2 of the statement of claim ACCC alleges that such loan arrangement services comprised:
7.2.1advice as to the features of available loan products;
7.2.2advice as to which loan products were available to persons in the customer’s circumstances;
7.2.3advice as to which loan products best suited the customer’s needs;
7.2.4assistance to customers to complete and lodge applications in a manner that met the requirements of the loan provider;
7.2.5facilitation 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
7.2.6submission of an application for a loan product for a customer to a loan provider, or the relevant section or division of the loan provider.
ACCC then asserts at para 8 that such loan arrangement services were, at all material times, provided by:
8.1loan providers, including ANZ;
8.2agents and franchisees of loan providers …;
8.3persons 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 … .
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.
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
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.
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 … .”
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”.
THE WITNESSES
Jason Graham King
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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”.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
“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”.
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.
Mr King was asked:
Why did they require those things, Mr King?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
I consider that there was no market in which the franchisees supplied loan arrangement services.
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.
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.
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.
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
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.
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.
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.
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
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.
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.
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.
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
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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. Associate:
Dated: 18 November 2013
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