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Opening Statement - BEAR Bill


COBA Opening Statement - Senate Economics Legislation Committee inquiry into the BEAR Bill
Luke Lawler, Director – Policy, COBA

COBA is the industry association for Australia’s customer owned banking institutions: mutual banks, credit unions and building societies.

Our sector has $108 billion in assets and 10 per cent of the household deposits market.

The 79 institutions in our sector are all Authorised Deposit-taking Institutions (ADIs) regulated by APRA under the Banking Act 1959. This means that our entire sector will be subject to the BEAR.

We estimate that around one-third of “accountable persons” under the BEAR will be from the customer owned banking sector, based on the Explanatory Memorandum estimate of total accountable persons of 2,535.

We accept that the Government is determined to impose a heightened accountability regime for the banking sector in response to the erosion of trust caused by the behaviour of major banks.

We do not oppose the principle of greater accountability and we accept that all ADIs should be subject to the same prudential regulatory framework, subject to that framework being proportionate and taking account of size, risk and complexity.

The Treasurer’s second reading speech says that, in addition to enhanced accountability, the Government also wants a “robustly competitive” banking system.

To meet the twin objectives of an “unquestionably accountable” banking system and a “robustly competitive” banking system, it is critically important to minimise the regulatory compliance cost burden on smaller ADIs.

Generally speaking, the regulatory compliance burden is a critical factor in determining whether the competitive fringe of second tier firms can challenge the major banks. This is because the regulatory compliance burden is effectively a competitive advantage for the major banks because they have vastly greater resources and capacity than their smaller competitors to cope with new regulatory obligations.

In the case of the BEAR, reducing the regulatory compliance burden can be achieved by giving small and medium ADIs sufficient time to plan and prepare for the BEAR and for APRA to give due consideration to relevant guidance and prudential standards to implement a proportionate BEAR.

COBA recommends that commencement of the BEAR for small and medium ADIs should be two years after commencement for the major banks (“large ADIs”).

The additional time for smaller ADIs to comply with the BEAR is justified for the following reasons:

  1. the BEAR is a response to the findings of an inquiry into the major banks and this inquiry did not find any accountability problems with smaller ADIs
  1. there is no evidence that the existing accountability regime for ADIs has failed in the case of smaller ADIs and smaller ADIs will continue to be subject to that regime until the BEAR commences for them
  1. there is no urgency to apply the BEAR to smaller ADIs
  1. rushed commencement for smaller ADIs will harm their competitive position and damage the Government’s objective of promoting competition in retail banking
  1. rushed commencement will force smaller ADIs to reallocate resources that have been earmarked by orderly planning processes to other, arguably more important, projects – for example, delivering better risk management or customer benefit 
  1. delayed commencement for smaller ADIs will, appropriately, see major banks bear the costs of teething problems and unintended consequences during initial implementation, and
  1. the bulk of the compliance costs of the BEAR are upfront costs and a phased commencement process will allow these costs to be reduced for smaller ADIs.

Phased commencement will help to ensure that the transition to the BEAR is achieved in the least costly way possible for smaller ADIs while delivering on the Government’s policy intent.

Previous international and domestic experience indicates that measures similar to the BEAR require a significant amount of consultation with industry and hence adequate implementation timeframes.

The BEAR marks a significant change in APRA’s powers and imposes significant new obligations on ADIs. If an ADI breaches its BEAR obligations, significant civil penalties may be imposed by a court. If an accountable person breaches BEAR obligations, that person may face disqualification or financial consequences through the reduction of variable remuneration.

The BEAR is intended to work with existing legislative and regulatory frameworks but it is not clear how this will be achieved and there is a high risk of ADIs having to comply with two distinct prudential regulation frameworks – the existing prudential standards and the BEAR.

APRA’s submission to this Committee notes that the current implementation timeframe is “challenging” and that “both APRA and the banking industry will have a great deal of work to do to implement the accountability regime by the scheduled commencement date of 1 July 2018.”

APRA also notes that there will be “overlap between the existing set of responsible persons under APRA’s Fit and Proper framework, and the accountable persons under the BEAR.”

Mutual banks, credit unions and building societies will have to immediately reallocate internal resources in order to meet the BEAR requirements. These resources may have been earmarked for other priorities, in some cases years in advance. These activities may be activities that would deliver a greater prudential benefit than the BEAR or would significantly improve customer service.

A phased implementation will allow APRA and the major banks to resolve practical BEAR issues before the regime is applied to the broader ADI sector. APRA will also be able to further develop its thinking on the BEAR and engage in discussions with smaller ADIs on its expectations and the development of clear guidance.

Without clear guidance, there will be uncertainty around the BEAR and this is likely to increase the compliance costs. In order to effectively and efficiently implement the BEAR there are a number of things that must happen prior to the implementation date:

  • APRA to develop its initial expectations in the form of draft standards and guidance
  • APRA to consult with industry on these expectations
  • APRA to communicate its finalised expectations
  • ADIs to understand the impact these expectations have on their business, and
  • ADIs to implement compliance with these expectations through changes to policies, procedures, training, IT systems and so on.

COBA notes that, in general, APRA consults for at least 3 months on proposals that it considers will lead to material changes, including with a period for public consultation.

Similarly, APRA generally aims for a period of 1 year from finalisation for ADIs to implement any material prudential standards. Six months is clearly insufficient time to do this.

Thank you for the opportunity to make these points.

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