HomeView 2018 Media ReleasesCOBA CEO Speech at Parliament House on proportionate regulation of retail banking

Good afternoon and thank you for coming.

Good afternoon and thank you for coming.

I am Michael Lawrence, CEO of the Customer Owned Banking Association.

On behalf of our member mutual banks, credit unions and building societies, I particularly welcome members of Parliament who have taken time out of your busy day to attend this event.

Let me start by saying that Australian consumers deserve a lot better than the treatment that has been exposed by the Financial Services Royal Commission.

It is not surprising that the response to this misconduct is likely to be even more regulation of the already heavily-regulated banking sector.

My members have come to Canberra from all over Australia and we are here at Parliament House to launch a campaign to make sure that regulation of retail banking is proportionate and tightly targeted at regulatory objectives, and does not harm competition.

We are here to remind the nation’s key policymakers not to lose sight of actual consumer outcomes and the critically important role of competition in delivering positive consumer outcomes.

We are here to remind everyone that retail banking consumers have real choice beyond the big four banks. When it comes to banking, there are more than four.

A competitive banking market is needed to drive innovation, keep downward pressure on prices and meet the changing needs of consumers.

Banking must be strongly regulated but excessive regulatory costs damage competition and consumers ultimately pay the price.

The evidence is in: excessive regulation harms competition.

Australia’s banking market is not as competitive as it could be and a big part of the reason for this is high regulatory costs on smaller banking institutions.

Smaller banking institutions are subject to relatively higher regulatory costs due to the high fixed costs of regulatory compliance – costs such as information technology, staff and specialised skills.

High regulatory costs handicap the capacity of challenger banking institutions to grow and expand into new markets. This reduces competitive pressure on major banks.

High regulatory costs hurt consumers because resources are diverted away from investment in product innovation, better service and better pricing.

We are not alone in making these points.

The Commonwealth Treasury, in a submission to the Royal Commission last month, said:

“Regulatory costs are borne by financial firms and, in turn, by consumers either directly through higher costs for financial products and services, or indirectly through the impact of such costs on competition or innovation in the choice and quality of products and services that consumers can access.”

“Regulatory costs impact all firms but can have a disproportionate impact on smaller firms and new entrants.”

Benefits of Proportionate Regulation

What we are calling for is Proportionate Regulation.

Proportionate regulation is regulation that is proportionate to the risk, size and complexity of the regulated entity and is tightly targeted at the regulatory objectives.

Proportionate regulation will enable the delivery of regulatory objectives, such as consumer protection and system stability, in a more cost-effective, pro-competitive way.

Keeping regulation proportionate will boost competition in retail banking, promoting innovation and efficiency and more choice and lower prices for consumers.

A more competitive banking market will increase the consequences for individual banks of engaging in misconduct, forcing banks to improve their behavior and hence helping to restore community trust in banking.

Keeping a tighter rein on regulatory costs will allow challenger banks, such as customer owned banking institutions, to grow more rapidly. An expanding customer owned banking sector is good for consumers because of our unmatched consumer focus and prudent risk culture.

A more competitive customer owned banking sector will make major banks think twice about how aggressively they put shareholders ahead of customers.

Commitment needed now

Making a strong commitment to proportionate regulation would be good policy even if we had a healthy banking market, but we do not have a healthy banking market.

The need for a new approach to regulation is urgent.

The Productivity Commission’s Report on Competition in the Australia Financial System released this month found that the banking sector is an “established oligopoly” where the four major banks hold substantial market power over their competitors and consumers.

This structure is supported by regulatory settings which contribute to the major banks’ advantages.

The PC found that the major banks have the ability to pass on cost increases and set prices that maintain high levels of profitability — with minimal loss of market share.

After a searching look at the Australian financial system over 12 months, the PC found evidence that the high concentration of market power among a very small number of institutions is resulting in poor consumer outcomes in Australia.

Regulation is partly to blame for this state of affairs.

The PC found that: “Regulators largely have the tools to support a competitive marketplace but their focus is tilted towards the stability of the system, with regulatory regimes that are indifferent to, or actively discourage, innovation and competition.”

That is completely unacceptable.

So, how do we change this picture?

The best way forward is to strengthen the capacity of the major banks’ smaller competitors to apply competitive pressure.

The PC found that “neither foreign entrants nor fintechs appear to pose a substantial threat to major banks’ dominant positions: more entrants alone are not a panacea to drive sustained competition across Australia’s financial system.”

That leaves customer owned banking institutions and the regional banks.

Our sector’s competitor potential is demonstrated by our market leading products, consistently high customer satisfaction ratings and highly competitive pricing.

We have an existing customer base of 4 million Australians who are the owners and customers of 74 individual banking institutions based in cities and towns right across the country.

We are profit-making but not profit-maximising.

We are not trying to squeeze our customers to please shareholders.

We are not perfect but we are not conflicted about who we are working for.

The success of our model is demonstrated by our sector’s consistently superior performance in customer satisfaction ratings, as measured by independent research houses such as Roy Morgan.

Our sector’s performance on the Net Promoter Score scale is in a completely different ballpark from the major banks. The major banks are at minus 6 compared to the mutual sector at plus 26.

Net Promoter Score is a measure of customer trust, loyalty and advocacy.

As I said, we are not perfect but we are a long way in front of our largest competitors in terms of consumer trust.

Despite the constraints imposed by the unfair regulatory framework, our growth performance has been pretty good.

Collectively, we hold 96 billion dollars of deposits – the fifth largest pool of household deposits outside the major banks. Since the Financial System Inquiry in 2014, our growth in deposits of 30 per cent has outpaced the major banks’ 20 per cent.

On the other side of the balance sheet, we now have 83 billion dollars in home loans, with a growth rate since 2014 of 35 per cent compared to the major banks’ 27 per cent.

More Australian are choosing customer owned banking institutions for their home loans because we have highly competitive home loan products, in addition to our unique customer focus. Half of CANSTAR’s 2018 outstanding value owner-occupier home lenders are customer owned banking institutions.

Customer owned banking institutions are investing in digital strategies and are at the leading edge of initiatives such as the New Payments Platform and the adoption of Apple Pay and Google Pay. Many customer owned banking institutions are partnering with fintechs and many are eagerly anticipating the introduction of Open Banking.

Imagine what our sector could do if regulatory settings are adjusted to promote competition?

Principles of Proportionate Regulation

Policymakers, regulators and legislators must be more vigilant and pro-active about the need to minimise regulatory costs on banking institutions.

Policymakers, regulators and legislators should apply the following principles to regulatory design, implementation and review:

  1. Recognise that regulatory costs can affect competition and are ultimately borne by customers.


  1. Avoid a one-size-fits-all approach to regulation.


  1. Ensure regulation is tightly targeted at a clearly defined problem or regulatory objective and seek to minimise regulatory costs.


  1. Recognise the impact of the cumulative regulatory cost burden, particularly on smaller banking institutions, i.e. those with total assets up to $20 billion.


  1. Positively consider banking institutions’ size, risk profile and complexity when designing and implementing new regulation
    1. for smaller banking institutions, only impose new measures after considering whether to:

                                         i.    exempt smaller banking institutions, or

                                        ii.    tailor the measure for smaller banking institutions.

  1. Allow smaller banking institutions at least 12 months extra time to comply with significant new measures.


  1. Recognise that for the same regulatory proposal, economies of scale could potentially result in costs outweighing benefits for smaller banks but the benefits outweighing costs for larger banks.


  1. Accommodate different models, such as the customer-owned model, particularly where the model itself can mitigate risks that are otherwise addressed by regulation (e.g. lending standards).

Current regulatory measures

Let me take you to some real life examples of what we’re talking about.

Imposing the Banking Executive Accountability Regime – the BEAR – on smaller banking institutions is a good example of a failure to adopt proportionate regulation. The case for the BEAR was based entirely on the conduct of the four major banks. There was no accountability problem identified with smaller banking institutions.

Another failure to adopt proportionate regulation was APRA’s macroprudential intervention to impose a 10 per cent cap on investor lending growth on all ADIs, regardless of size or risk. This measure was poorly designed and had an unfair impact on smaller banking institutions.

The Government is currently planning to impose elaborate new ‘design and distribution obligations’ in relation to basic deposit products. This is an example of poorly targeted regulation because these new obligations are completely over-the-top for simple, low-risk products. This is a regulatory idea that is crying out for a proper cost-benefit test.


We are experiencing wave after wave of regulatory change in retail banking and there is far too little attention being devoted to ensuring this regulation is proportionate.

Rules are made with the big four banks in mind. The big four have massive resources and large compliance teams to cope with new regulatory measures. And as the PC has found, the big four have the market power to pass on regulatory costs to consumers.

Policymakers need to recognize that there are more than just four big players in the banking market.

That’s why we’re calling our campaign ‘MoreThan4’.

I am launching the campaign today and - with the support our members - we hope to get our messages across to government, to all MPs, to regulators, and to the government’s key advisers in the Treasury and other departments.

The hearings of the Royal Commission and the work of the PC and the ACCC on banking are all telling us that we need a new approach to regulation and regulatory policy.

Adding yet more layers of regulation, without fully considering the impact on competition on consumers, would be a terrible mistake.

If I may quote Albert Einstein: “The definition of insanity is doing the same thing over and over again, but expecting different results”

We are asking MPs to support our campaign, to amplify our ‘MoreThan4’ message on social media and to meet their local customer owned banking institutions.

So I hope you can join us in this campaign to promote competition in banking and to make sure that regulation is designed and implemented with the real impact on the customer in mind.

Thank you.

COBA CEO Speech179.5 KB


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