Connective-AFG merger gets the go-ahead

A combined Connective-AFG entity would cover approximately 40 per cent of the broker channel.

While the ACCC had issued preliminary concerns that a merged entity would reduce competition in the supply of mortgage aggregation services to brokers, reduce competition in the supply of mortgage distribution services, and lead to non-major lender foreclosure and reduced competition for the supply of home loans, it seems that the concerns have now been assuaged.

Acknowledging that the proposed acquisition represents a “major structural change” and “will have an impact on competition”, the ACCC added that it considers the impact to be “unlikely to substantially lessen competition in any relevant market due to existing competitive constraints”.

What it found

In fact, the ACCC concluded there would “remain sufficient competition” from existing aggregators, who would be likely to offer brokers competitive offerings should the combined AFG-Connective decrease the quality of its services or change its pricing structures. It also found that the acquisition would be unlikely to materially change competing aggregators’ incentives to invest in innovation and platform improvement.

In terms of lending, it said the combined aggregation group would have “limited ability and incentive to raise costs or reduce service levels to lenders”, because aggregators have an incentive to maintain a broad and diverse panel of lenders in order to attract brokers. Moreover, it said it considered that some lenders have bargaining power (such as the major lenders and those with in-demand products) which they could leverage to “counter any attempts by the combined AFG-Connective to raise commission rates and/or sponsorship payments”.

The ACCC also found that despite the fact non-major lenders may have less bargaining power, a number of “alternative aggregators will continue to provide access to consumers through brokers”.

The competition watchdog added it considered that brokers did not appear to be strongly incentivised to promote own-branded products at the expense of lenders with “in-demand products”, and upcoming regulatory changes (i.e. best interests duty) could further limit any ability to do so. 

As such, the ACCC said it would not oppose the merger.

Merged entity ‘likely to continue to face robust competition’

In its conclusion, the ACCC said it considered the acquisition’s potential impact on lenders, mortgage brokers and consumers.

ACCC chair Rod Sims said: “Brokers play an important role for many consumers seeking a mortgage, and their services also allow individual lenders to access a wider group of potential consumers.

“The proposed acquisition will create the largest mortgage aggregator in Australia. Our initial inquiries identified a number of preliminary concerns, as set out in our statement of issues in February.

“We have now completed a second round of inquiries. After our extensive public review of the acquisition and our consultation with a wide range of interested parties, we believe the combined AFG-Connective is likely to continue to face robust competition.”

While the ACCC found that AFG and Connective compete closely with one another, it said that other established aggregators, including “Finsure and the aggregators owned by the National Australia Bank”, are likely to continue to provide strong competition.

“Mortgage brokers will still have a range of other aggregators, should they become dissatisfied with the combined AFG-Connective’s pricing or service. Lenders will likewise have a range of aggregators through which they can access potential consumers,” Mr Sims said.

The ACCC added that the combined Connective-AFG is likely to have the incentive to retain lenders on their panel who are popular with consumers.

“More generally, aggregators have an incentive to maintain a broad and diverse panel of lenders to attract brokers,” it suggested.

Mr Sims concluded: “Ultimately, we found that a substantial lessening of competition was not likely.” 

Aggregators welcome decision

The heads of the two groups have welcomed the decision, with AFG CEO David Bailey saying: “We welcome the ACCC’s decision to grant merger clearance to AFG and Connective. This is good news for competition in Australia’s home loan sector.

“In response to the digital disruption and other challenges facing the sector, our merged businesses will be better positioned to invest in digital technologies and innovation.”

He continued: “The transaction reinforces the combined group’s ability to continue to offer consumers a broad range of home loan products at competitive interest rates, provides a sustainable channel for non-major lenders and helps ensure comprehensive compliance systems are embedded within the merged AFG-Connective businesses.”

Likewise, Connective CEO Glenn Lees said: “The ACCC review has been comprehensive and rigorous and its decision is a reflection of the ever changing competitive landscape where new technology and regulation are driving fundamental change in the mortgage broking sector.

“The merged business will provide a strong and sustainable channel for non-major lenders, deliver consumers a broad range of home loan products at competitive prices, and help ensure embedding of comprehensive compliance systems while also enabling further investment in digital technologies and innovation.” 

The groups have both reiterated that both the AFG and Connective brands will continue to operate concurrently following completion of the proposed transaction.

The transaction is subject to court approval (a non-customary condition), which has already begun.

However, a final decision is not currently anticipated until after the second half of FY20. 

[Related: ACCC raises concerns about AFG-Connective merger]