2017 Budget: increased scrutiny on competition and accountability in the financial system

In brief

Treasurer Scott Morrison this week announced that he has tasked the Productivity Commission to review the state of competition in Australia's financial system. The Budget has also included other measures focused on competition in the financial sector, including funding to establish a dedicated ACCC unit to undertake regular inquiries into specific financial system competition issues, an ACCC inquiry into residential mortgage pricing, and an open banking regime. The Government has also announced the introduction of a Banking Executive Accountability Regime. These measures follow a series of recent reviews and inquiries into the financial services industry. Partner Carolyn Oddie and Senior Associate Lisa Lucak report.

Productivity Commission inquiry

To implement one of the recommendations made by the Financial System Inquiry Committee in 2014, the Government has tasked the Productivity Commission with an inquiry into competition in Australia's financial system. Treasurer Scott Morrison considers that '[t]he high concentration and degree of vertical integration in some parts of the Australian financial system has the potential to limit the benefits of competition... and should be proactively monitored over time'.¹  

The Productivity Commission is to consider:

• how to improve consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and support financial system innovation, while balancing financial stability objectives;
• the level of contestability and concentration in key segments of the financial system, including the degree of vertical and horizontal integration; and
• competition in the provision of personal deposit accounts, mortgages and services and finance to small and medium businesses.

The inquiry will commence on 1 July 2017 and is due to report to the Government by 1 July 2018. The Government has encouraged all parties with an interest in competition in the financial system to consider making a submission to the Productivity Commission.

Dedicated ACCC unit for the financial system

The Government will provide $13.2 million to the ACCC over four years to establish a dedicated unit to undertake regular in-depth inquiries into specific financial system competition issues. This is intended to facilitate greater and more consistent scrutiny of competition matters in the financial sector. The announcement implements the House of Representatives Standing Committee on Economics' recommendation in its report titled Review of the Four Major Banks that the ACCC establish a team to report every six months to the Federal Treasurer to recommend measures to improve competition in the banking sector.

The ACCC established an Agricultural Unit in October 2015, to examine competition and unfair trading issues in agricultural supply chains after it was provided with $11.4 million over four years to do so. The Agricultural Unit has been very active since its establishment in undertaking market studies, raising awareness about the law and competition issues in the sector, and investigating and prosecuting breaches of the competition laws.

We would expect that the ACCC's dedicated financial system unit, once established, may be similarly active in relation to  the financial services sector.

ACCC inquiry into residential mortgage pricing

The Government has introduced a major bank levy to apply to ADIs with licensed entity liabilities of at least $100 billion from 1 July 2017.

In conjunction with this levy, the Government has asked the ACCC to undertake a residential mortgage pricing inquiry over the next year. As part of the inquiry, the ACCC can require relevant ADIs to explain changes or proposed changes to residential mortgage pricing, including changes to fees, charges or interest rates. The ACCC has had a number of similar roles in the past when legislative changes were occurring, including at the time of the implementation of the GST and carbon tax. At these times, the ACCC had significant powers to question corporations about their pricing and representations associated with the introduction of these taxes.

Open banking regime

The Government will also introduce an open banking regime in Australia to give customers access to and control over their banking data. This is intended to improve the information available to consumers, increase consumer choice and improve competition in banking by better enabling innovative business models to create new products tailored to individuals.

The Government will commission an independent review to recommend the best approach to implement the open banking regime, which is to report by the end of 2017.

Reduction of regulatory barriers to entry

The Government intends to reduce regulatory barriers to entry for new and innovative entrants to the banking system by:

• relaxing the legislative 15 per cent ownership cap, whether through the existing ministerial discretion or legislative change; and
• lifting the prohibition on the use of the term ‘bank’ by ADIs with less than $50 million in capital, through legislative change, to allow these and other ADIs to benefit from the reputational advantages of the term.

Other measures aimed at the financial sector 

The Budget also included other measures aimed at improving accountability in the financial sector, including:

• a new Banking Executive Accountability Regime that will make senior bank executives more accountable and subject to additional oversight by the APRA, and a new civil penalty with a maximum penalty of $200 million for larger ADIs, and a maximum penalty of $50 million for smaller ADIs, for breaches of this regime. This reflects a trend towards senior executives being held accountable for misconduct in their organisations, such as in the UK under the Senior Managers Regime which commenced in 2016; and
• a new dispute resolution framework for external dispute resolution and greater transparency of internal dispute resolution by financial firms. This includes:
  • a one-stop-shop, the Australian Financial Complaints Authority (AFCA), which will deal with all financial disputes, including superannuation, and provide access to free, fast and binding dispute resolution;
  • stronger powers for ASIC to oversee AFCA to ensure it complies with legislative and regulatory requirements; and
  • a requirement on financial firms to report to ASIC on internal dispute resolution outcomes.

Recent scrutiny of the financial services sector

The measures announced in the Budget reflect increasing scrutiny of the financial services sector in recent years. They follow a series of reviews and inquiries into the financial services industry, including those conducted by the Parliamentary Joint Committee on Corporations and Financial Services, the House of Representatives Standing Committee on Economics, and the root and branch examination of Australia's financial system by the Financial System Inquiry Committee.

The announcement of the Productivity Commission inquiry stems from recommendations made by the Financial System Inquiry Committee in 2014 that the Government:

• commission a review into the state of competition in the financial system every three years; and
• amend ASIC's mandate to include a specific requirement to take competition issues into account as part of its core regulatory role.

The Government flagged in its response to the Financial System Inquiry that these recommendations would be implemented in 2017.

How does this impact you?

Companies in the financial services sector should:

• consider whether they may want to make a submission to the Productivity Commission inquiry when the Terms of Reference are released;
• keep abreast of developments in respect of the ACCC inquiry into residential mortgage pricing (and any guidelines that the ACCC may issue), the Banking Executive Accountability Regime and dispute resolution framework; and
• be aware that there will be increased scrutiny of conduct across all segments of the financial system. The ACCC will be particularly active and alert to anti-competitive conduct in the financial sector, which will be a key focus.

We will keep you informed of any further developments.