HomeView 2018 Media Releases COBA Opening Statement - PC Inquiry

COBA speaks for mutual banks, credit unions and building societies – customer-owned banking institutions that provide important competition and choice in the retail banking market and bring an unmatched customer focus to the market.

COBA speaks for mutual banks, credit unions and building societies – customer-owned banking institutions that provide important competition and choice in the retail banking market and bring an unmatched customer focus to the market.

The success of our model is demonstrated by our sector’s consistently market-leading customer satisfaction rankings compared to major banks and other listed banks.

Customer-owned banking is distinguished by:

  • prioritising customer benefit over profit maximisation
  • conservative business models and prudent risk management, and
  • deep community engagement and strong customer loyalty.

Making regulators more accountable about competition

We agree with the Commission that there is a need to increase the focus on competition in prudential regulatory decision-making.

Our view is that APRA does give some consideration to competition and its performance in this regard has improved since the Financial System Inquiry.

However, there are multiple examples of where APRA has not given enough consideration to the impact on competition.

We support the use of Statements of Expectations to deliver further improvement but a more effective way forward is to change APRA’s legislative mandate to introduce an explicit ‘secondary competition objective’.

APRA’s mandate currently mentions competition, but elevating its status as a clear secondary objective behind financial safety and stability will increase APRA’s focus on competition.

This ‘secondary competition objective’ does not mean APRA would have to sacrifice its other objectives in pursuit of a more competitive environment but APRA would be more accountable about its approach to competition.

APRA’s peer regulator in the UK, the PRA, was given a secondary competition objective in 2014 and the outcome is a “material change of gear” where “competition is gaining airtime and traction at all levels” and “there are numerous instances where competition considerations have influenced policy outcomes.”

A competition ‘champion’ on the CFR?

The Draft Report’s proposal for a competition champion on the Council of Financial Regulators is welcome but would not necessarily address all the problems we have identified.

The Council of Financial Regulators is concerned with macro-prudential policy but many of APRA’s micro-prudential decisions can and do affect competition. These decisions would not typically be matters for consideration by the Council of Financial Regulators.

Our proposal for a change in APRA’s mandate would supplement the concept of another regulator – the ACCC or ASIC – having the role of competition champion on the Council of Financial Regulators.

Our preliminary thinking is that the ACCC is more naturally suited to the role of competition champion and would therefore become a permanent new voice on the Council, while ASIC would have an obligation to consider competition added to its mandate.

We agree that the lack of an advocate for competition is a mistake that should be corrected. APRA’s excessively blunt macro-prudential intervention into the home loan market has harmed competition and unfairly affected smaller banking institutions.

One of the major issues on the agenda of the Council of Financial Regulators that will affect competition is tackling the ‘too big to fail’ problem that gives the major banks an unfair funding cost advantage over their smaller competitors.

The government endorsed the Financial System Inquiry recommendation to reduce any implicit government guarantee and the perception that some banks are too big to fail. The recommendation was made in 2014 and accepted by government in 2015. APRA announced recently it expects to commence consultation later in 2018 on proposals to implement the Financial System Inquiry recommendation.

Mortgage risk weights

We agree with the PC Draft Report’s recommendation for a review of mortgage risk weights to better reflect risk.

APRA has recently issued a paper on proposals to revise the capital framework, including changes to mortgage risk weights.

COBA and its members are examining these proposals and we note that APRA will also carry out further analysis of the impact of the proposed changes on banking institutions.

We want to see a further narrowing in the capital requirements for mortgages held by smaller banks compared to the major banks.

The Financial System Inquiry identified this as a significant anti-competitive problem and APRA has since taken interim steps to reduce the gap.

There is still some way to go but we are encouraged by APRA’s statement that “the revised risk weight framework is likely to reduce any competitive differential in regulatory capital requirements between large and small ADIs, improving the competitive position of the latter.”

Cumulative regulatory compliance burden

A key concern of our members and a key factor influencing the competitive capacity of smaller challengers to the major banks is the regulatory compliance burden.

The fixed costs of complying with regulation fall more heavily on smaller firms.

The regulatory compliance burden provides yet another advantage to major banks because they can spread their costs over a vastly bigger revenue base.

Regulation should be targeted, proportionate, risk-based and, where possible, graduated.

Decisions to impose new regulation should be co-ordinated and the cumulative impact should be assessed. Seen in isolation, a particular regulatory measure may appear relatively benign but the continual introduction of new measures can amount to death by a thousand cuts to smaller players in the market.

Our sector, with its strong customer focus and good compliance culture, is being caught up in the backlash against the conduct and culture that is the focus of the Royal Commission.

For example, all banking institutions are to be subject to the Banking Executive Accountability Regime. A 12-month extension for smaller banks is welcomed.

Another example of where regulation could be better targeted is the Government’s proposed financial product issuer ‘design and distribution’ regime.

In relation to basic banking products, such as savings accounts and debit cards, there is no evidence that the regime will improve consumer outcomes and there is a clear risk it will lead to worse consumer outcomes.

Proposal to ban card interchange fees

Finally, I will make some brief comments about the Draft Report’s recommendation to ban card payment interchange fees.

We oppose this recommendation.

Interchange fees are a mechanism to enable sharing of costs of certain benefits that card issuers provide to merchants. These benefits include processing transactions, preventing fraud and authorizing transactions.

Merchants should bear at least some of the cost of benefits provided to them by card issuers.

Banning interchange fees would affect competition by having a disproportionately greater impact on smaller card issuers that do not participate in the merchant acquiring market.

Major banks dominate both the card issuing and merchant acquiring sides of the payment card market. The loss of compensation for costs sustained by the card issuing side of their business could be balanced by not having to pay interchange fees from the merchant acquiring side of their business.

I note that the Payment System Board carried out a comprehensive review of card payment interchange fees in 2015 and 2016 and the new benchmarks commenced only last year.

Thank you for the opportunity to appear today.

COBA CEO Michael Lawrence

Productivity Commission Inquiry into competition in the financial system

Public hearing, Sydney, 1 March 2018

COBA Opening Statement179.81 KB

For more information please contact:

Daniel McDougall, Senior Manager – Media and Communication

02 8035 8444 or 0407 637 541, This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Customer Owned Banking Association is the industry body for mutual banks, credit unions and building societies.  See www.customerownedbanking.asn.au


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