In brief
Written by Partner Carolyn Oddie
The financial services sector has been under scrutiny for some time with many different voices clamouring for further regulation or inquiries in a sector that is already highly regulated. The recent Federal Budget included a number of measures focused on the state of competition in the financial system, and provided a road map for a significant amount of activity over the next few years. Among the measures announced by the Treasurer are a Productivity Commission Inquiry, a dedicated ACCC unit for the financial system, an ACCC inquiry into residential mortgage pricing, an open banking regime, a reduction of regulatory barriers to entry and a banking executive accountability regime.
Productivity Commission inquiry
In the 2014 Financial System Inquiry, concerns were expressed that, although competition seems healthy, 'the 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'.
Following on from this, one of the announcements in the recent budget was that the Productivity Commission will undertake an inquiry into competition in Australia's financial system.
The Commission has been instructed 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. There will be a public consultation process, including hearings and public submissions. The Government has encouraged all parties with an interest in competition in the financial system to consider making a submission to the Productivity Commission once the Consultation paper is released. This is something to watch.
ACCC Financial Sector Competition Unit
Perhaps one of the most important changes announced in the budget is that 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.
The establishment of this unit is intended to facilitate greater and more consistent scrutiny of competition matters in the financial sector. It implements the House of Representatives Standing Committee on Economics' recommendation in its report Review of the Four Major Banks that the ACCC, or the proposed Australian Council for Competition Policy, establish a team to report to the Treasurer every six months to recommend measures to improve competition in the banking sector. Interestingly, in the report's recommendations there is a paragraph that says:
Given repeated statements from the ACCC that the sector is uncompetitive, if the ACCC/ACCP does not make any recommendations for policy change in a given period, it should explain why that is appropriate.
To my mind, this will place quite a bit of pressure on the ACCC to come up with regular recommendations for change.
This industry-specific ACCC unit follows the same model as in the agricultural industry. The ACCC Agricultural Unit was established 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 agricultural sector, and investigating and prosecuting breaches of the competition laws.
I think that the ACCC's dedicated Financial Sector Competition Unit is likely to take a similar path. What we have seen in Agriculture is that the unit was established with 14 staff and had a mandate to conduct investigations as well as engagement activities in the sector. There has been a cycle of industry studies in different sectors starting with the cattle and beef industry and moving to a current inquiry into the competitiveness of prices, trading practices and the supply chain in the dairy industry.
In each of the inquiries, the ACCC has sought extensive information and submissions from industry participants, has been looking for any potential breaches of the competition provisions, and has made a number of recommendations at the end of the inquiry aimed at improving the competitive process and creating greater transparency of, among other things, prices.
We are likely to see similar action in the financial sector. In fact, the first inquiry is an inquiry that was also announced in the budget.
ACCC inquiry into residential mortgage pricing
In conjunction with the introduction of a major bank 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 has been asked to inquire into prices charged or proposed to be charged by ADIs (Authorised Deposit-Taking Institutions) affected by the Major Bank Levy in relation to the provision of residential mortgage products in the banking industry from 9 May 2017 to 30 June 2018. The terms of reference state that:
[In undertaking the inquiry] the ACCC is to have regard to the Government's view that banks need to fully and transparently account for their decisions, and hence how they balance the needs of borrowers, savers, shareholders, and the wider community.
The Treasurer's direction indicates that he is particularly interested in receiving an update from the ACCC if it begins to find any evidence of relevant ADIs passing on the costs associated with the Major Bank Levy to their residential mortgage product customers. The passing on of costs is a contentious issue.
This type of inquiry is similar to that which is currently occurring in the dairy industry. What we have seen in the dairy inquiry is that the ACCC has issued a number of formal requests for documents and information. It is likely that the same demands will be made in relation to the residential mortgage pricing inquiry.
The ACCC has had a number of 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. Companies will need to be particularly careful about representations they make about pricing and support for changes in this regard.
Open banking regime
The Government has also committed to requiring banks to share proprietary data about customers, with customer consent. 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.
Data sharing can help to reduce the barriers to entry for alternative lenders because it enables them to access large data sets that major banks hold on individual customers and gives them the tools to assess and price risk. It can also provide consumers with more pricing transparency and encourage switching. There are a range of difficult issues associated with data sharing, including who bears responsibility for the data, its accuracy and protection.
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. The report is likely to look to the changes occurring in the UK. The review might also need to consider whether a bank's data is a property right that is protected against an acquisition other than on just terms by the Constitution.
Reduction of regulatory barriers to entry
As another means to reduce barriers to entry and encourage new and innovative entrants to the banking system, the Government has also said that it will:
- relax the legislative 15 per cent ownership cap; and
- lift the prohibition on the use of the term 'bank' by ADIs with less than $50 million in capital, to allow other ADIs to benefit from the reputational advantages of the term.
In assessing competition in the financial system, the ACCC is likely to continue to look at factors that may cause barriers to entry, entrench existing participants or reduce innovation. However, in making recommendations they will also need to be alert to the requirements of good compliance and financial stability. This is one of the factors that has encouraged the Government to establish the Banking Executive Accountability Regime, about which we will be writing a lot on in Unravelled over the next months.