Members Equity Bank chief executive Jamie McPhee says he is encouraged by the draft findings of the Productivity Commission's inquiry into financial services, saying they address the most compelling competition concerns raised by challenger banks.McPhee told the inquiry in Melbourne on Tuesday that he welcomed the commission's draft proposals to overhaul prudential and other regulatory rules that have put customer owned banks and regional deposit takers at a cost disadvantage to the major banks."Since the global financial crisis the focus of regulators has been on ensuring the stability of the banking system but the draft report published recently by the Productivity Commission recognises that consideration needs to be balanced against the need to address competition issues," McPhee told Banking Day after the hearing."We're pleased to see that the Australian Prudential Regulation Authority in its recent discussion paper regarding bank capital requirements is proposing to narrow the gap between the risk weights that apply on mortgages sold by the major banks and other supervised lenders like ME Bank."I'm encouraged by the direction that banking reform is taking."A focus of the Productivity Commission's hearings in Melbourne this week has been on conflicts of interest in the mortgage broking industry, particularly in relation to aggregation platforms owned by two of the major banks.This heavily debated issue resurfaced on Tuesday when ASIC senior executives were questioned by inquiry chair Peter Harris about whether the current legal obligations of mortgage brokers toward clients were adequate. ASIC senior executive leader Michael Saadat responded by saying that statutory requirements should be strengthened to ensure brokers acted in the best interests of home loan applicants.Sadaat did not address whether such tightening of broker obligations should include the abolition of all trail commissions paid by lenders for the duration of loan contracts.Harris told a business lunch in Melbourne last week that trail commissions were an example of "misaligned" incentives in the mortgage market."Despite some recently announced industry changes to parts of the commission payment structure, commission earned by brokers remains far from aligned with the interests of the customer," Harris told the CEDA-sponsored gathering."Trailing commissions are an example of that."A stakeholder panel including representatives of consumer groups, brokers and aggregators last year deferred considering the future of trail payments in the industry, although it is expected to put a recommendation to the federal government before the end of 2018.ANZ chief executive Shayne Elliott also appeared at the Productivity Commission hearing, just ahead of ME's McPhee. Elliott said his bank saw merit in enhancing consumer protection in the broker market."A best interests duty could support the existing law to promote consumer interests when receiving help from a broker," he told the inquiry."About half of our mortgages originate from brokers. As such, while we don't own a broker network, we believe the integrity of the channel is critical."Elliott wants the Productivity Commission's final recommendations to take account of the need for trust in brokers as advisers and whether consumers are willing to pay for loan help.While the draft report is recommending