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How consumers can lose post-Royal Commission: the dangers of unfair regulation

COBA Comments: Sally Mackenzie on how smaller banking institutions are being unevenly caught up in the clean-up of the banking market.

No one would question that consumers benefit from a strongly regulated banking sector. Especially after some of the stories that we heard at the Royal Commission into Financial Services. However, there is a real risk that Australian consumers could ultimately be the losers from excessive regulation. How can this be the case?

To carry on the business of banking in Australia, you must be licensed by the prudential regulator to be an ‘Authorised Deposit Taking’ institution, or ADI.

Everyone knows about Australia’s largest ADIs - the four major banks, but many people may be surprised to know that there are 93 Australian-owned ADIs. In fact, 72 of these are credit unions, mutual banks and building societies.

Australia’s credit union, building societies and mutual banks are all subject to the same regulation as the big four banks.

This means that any regulation, aimed at addressing the cultural problems in the big four banks, is also applied to all 93 Australian-owned ADIs. And just like it any other sector, it impacts smaller players disproportionately.

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Imagine if customers were outraged at the behaviour of the two largest supermarkets in Australia, demanding Government increase regulation and oversight.  Also imagine that the local corner store was subject to the same regulation as the very large supermarkets.  Because of their size and profitability, the very large supermarkets can more easily absorb the cost of this additional regulation. Whereas the smaller corner store, who was not responsible for the behaviour of the larger supermarkets, winds up being hit harder. The cost of compliance for the smaller supermarket is much greater than the larger one.

This is the case in the banking market. And the additional regulation that has been piling up over the past few years is really hitting smaller players.

The Productivity Commission has said that: ‘Regulation is dense and it may act against customers’ interests.’ This is because more and more regulation weakens competition. Regulatory costs handicap existing challenger banks and raise barriers to entry.

When this happens, consumers ultimately end up as the losers.

It is important that regulation is tightly targeted at the identified problem and weighed against the impact on competition.

When smaller banking institutions are spending a huge amount of their time and resources on compliance with new regulation, it makes it even harder to compete with the ‘Big Four’.

Consumers need to have confidence in the banking market, and regulation is an important part of that. But it needs to be targeted and proportionate. It should not be a ‘one size fits all approach’.

Making sure regulation is proportionate is good for competition and good for consumers. Stronger and more competitive customer owned banking institutions will make the major banks think twice about how aggressively they put shareholders ahead of customers.

As the Federal Election campaign continues, Australia’s customer owned banking institutions are calling on all candidates and MPs to commit to making Australia’s banking sector more competitive by making sure laws and regulations don’t unfairly impact smaller institutions.

COBA is encouraging consumers looking for a new bank to visit ownyourbanking.com.au to investigate a customer owned banking institution that suits them.

Sally Mackenzie is Director Strategy and Stakeholders at the Customer Owned Banking Association. She lead’s COBA’s lobbying and advocacy agenda, working to achieve a more competitive banking market.

Sally has worked in the public and private sectors across the Asia Pacific. She has worked in banking and finance domestically and off-shore for NSW Treasury and as an advisor to the Thai, Philippines and Mongolian governments.  She is also an experienced diplomat, having worked in the Australian Embassy in Jakarta and High Commission in Honiara. Sally also served as Deputy Chair of the Canberra Rape Crisis Centre.

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