New recommendations from Council of Financial Regulators applauded by small and medium-sized banks
Smaller lenders could capture a larger slice of the mortgage lending market if new recommendations from the Council of Financial Regulators (CFR) are put in place.
Published this Wednesday, the CFR’s Labor government-commissioned Review into Small and Medium-sized Banks proposed nine changes to the current regulatory regime to promote the competitiveness of smaller lenders.
Proportional regulation was the running theme of the recommendations.
Eight of nine proposals supported by treasurer
The CFR is calling for a three-tiered approach to banking regulation, where smaller lenders will enjoy lighter and more flexible reporting and compliance standards.
For example, one recommendation is for the government to remove small banks from the requirement to automatically report certain breaches to the Australian Securities and Investments Commission (ASIC).
The government should also consider allowing the Australian Prudential Regulation Authority (APRA) to take a lighter-touch approach to regulating very small banks, provided there are corresponding adjustments to protect depositors and financial stability.
It is up to the relevant regulatory bodies to implement these changes.
Labor Treasurer Jim Chalmers has thrown his support behind eight of the nine recommendations outlined in the report. “We will seek feedback on the final recommendation for APRA to introduce a lighter touch framework for very small banks, accompanied by adjustments to the Financial Claims Scheme,” Chalmers said of the one recommendation he did not back.
These changes would be a boon to the customer-owner banking market, according to Michael Lawrence (pictured, left), chief executive of the Customer Owned Banking Association (COBA).
“Regulation plays an important role in creating a competitive banking landscape, and by striking the right balance, effective regulation establishes guardrails to address risks while promoting growth and innovation,” Lawrence said in comments sent to MPA.
“The current regulatory framework, while not intentionally anti-competitive, has created an uneven playing field that benefits large, investor-owned banks,” Lawrence said. “This review is the first step to address those systemic inequities and create a truly competitive banking environment, and we look forward to working with the Government and regulators to achieve this.”
Customer-owned banks, noted Lawrence, “offer a powerful counterpoint to the investor-owned banking model and provide purpose-led banking that puts people and communities first”.
Non-major AMP Bank also applauded the recommendations.
“A competitive banking sector is essential for delivering better outcomes for consumers, fostering innovation, and ensuring banks, along with brokers, support all parts of the community – smaller and mid-tier banks play a critical role in this ecosystem,” AMP Bank’s chief executive Sean O’Malley (pictured, right) told MPA.
“We particularly welcome the focus on regulatory simplification, proportionality, and funding relief – key measures that will help build a more sustainable banking industry. We look forward to seeing the detailed response and implementation plans from regulators.”
Mortgage brokers driving competition in banking sector
The CFR made it clear that mortgage brokers are major drivers of healthy competition in the banking sector.
“Competition was seen as strongest in the residential mortgage market, with mortgage brokers playing a large and growing role in supporting consumers exercising choice in residential mortgages,” the report said.
Product segments with less broker engagement tend to be less competitive, noted the CFR.
“The rise of mortgage brokers provided a channel for origination that supports a more competitive marketplace for mortgages,” it said. “This has occurred in part due to brokers’ role in mitigating the impacts of various obstacles to switching and the threat of switching.”
However, while mortgage switching rates have definitely increased, the extent to which this has been driven by temporary factors such as higher interest rates, or by the expansion of broker channels and digitisation, “is unclear”, said the CFR.
Brokers bring more information and financial literacy to customers, mitigate cognitive and behavioural biases, and are simply more convenient, the CRF noted. However, they can also increase the cost base of lending because of associated rates and fees.
Mortgage brokers disproportionately benefit small and medium-sized banks, added the report. The data certainly supports this notion.
Non-majors step up
According to the Mortgage and Finance Association of Australia (MFAA)’s The Value of Mortgage and Finance Broking 2025 report, 38% of brokers’ loan portfolios are with banks outside of the Big Four lenders (Commonwealth bank, NAB, ANZ and Westpac) and their sub brands, despite these heavy hitters owning 75% of the mortgage market.
Smaller banks tend to rely on brokers for home loan originations since they lack the retail presence of the Big Four.
Take ING Australia (which, as the country’s sixth-largest lender is admittedly not a ‘small’ bank) as an example. As a digital-only lender without zero retail presence, some 95% of its home loans come from the broker channel.
Meanwhile, CBA, with its vast brick-and-mortar network, sells around two thirds of its home loans direct to customers.
It’s closer to a 50-50 split at the likes of Westpac, where proprietary (i.e. direct) lending comprises around 47% of its Australian mortgage portfolio. However, Westpac has also signalled that it intends to increase the proportion of mortgages sold direct to customers.
“We are simplifying mortgages end-to-end by moving to one suite of mortgage products, processes and applications. This supports our strategic focus on fostering deeper customer relationships and improving the proprietary lending proportion,” Westpac said in its latest interim report.
NAB is making similar moves to prop up its direct-to-customer channel, having added around 150 new proprietary home lenders in 2025.
NAB boss Andrew Irvine, who was recently shamed for enjoying perhaps a few too many beers, said “improving proprietary lending and growing business banking” are the two pillars of long-term growth for the bank.
Read more: NAB boss Andrew Irvine has most to lose from broker-led assault on business lending
As it stands, roughly 53% of NAB’s mortgage portfolio is broker originated (as of March 2025), up from below 49% in September 2023.
It is hard to blame CBA and its Big Four brethren for hitting back. By all accounts, the decline in CBA’s net interest margins (NIMs) has a neat inverse correlation to the rise of the broker channel.
In fact, NIMs among the major banks have decreased from around 5% to just 2% over the past 24 years. Mortgage competition – whether from brokers or elsewise – is undoubtedly the biggest driver of this trend.
But with 75% of the mortgage market held by just four gigantic financial corporations, competition still remains highly concentrated. Perhaps not forever though, if these recommendations get put to good use.
