Published by Australian Financial Review on Wednesday 7 February
The Productivity Commission draft report into banking competition is very large, but it really focuses on just four issues.
The first is that people buying financial products should have better information about them than they do at present. The second is that purchasers should be able to act on that information by switching providers easily and quickly. The third point is that there is no active entity which promotes competition in the Australian financial system – and there should be. And the fourth is that the Australian Prudential Regulation Authority has actually taken a range of decisions which unnecessarily impede competition.
In addition to these issues of principle, the report makes a number of specific points. Perhaps the most important was the suggestion that APRA change how it regulates bank loans to SMEs. The current rules effectively forces banks to lend against residential property. The PC argues that this is too restrictive and that the Basel framework actually provides scope for more diversified lending to SMEs.
The other very specific recommendations relates to payments and the role of fintechs. There is a clear view that between the Payments System Board and APRA we are losing opportunities to break the tight control over payments held by the major banks and the card companies. Interestingly it finds that “eftpos is often the most price‑competitive debit card scheme, but is nevertheless rapidly losing market share” – which better regulation might fix. Several ideas are promoted including to provide easier access by fintechs to the payments platforms under a formal set of access regulations.
Despite this, the most important point in the report is that the Australian Competition and Consumer Commission should take over responsibility for competition in the financial sector.
The argument is twofold. The first is that APRA’s primary responsibility is as prudential regulator. It must continue to ensure that the system is safe. The PC view is that this responsibility for the system is inconsistent and fundamentally in conflict with a responsibility to promote, increase or protect competition in the sector. It cites numerous examples where APRA has taken decisions intended to protect the system but which either actually lessened competition or missed an opportunity to promote competition. The PC sees the best solution then being to give the competition responsibility to one of the other regulators.
The subsequent question is whether the Australian Securities and Investment Commission or the ACCC should have the responsibility. The case for the ACCC is clearly much the stronger: it is already a competition regulator, has large teams, significant knowledge and a lot of experience in dealing with competition across many sectors of the economy. Its knowledge of the finance sector is more limited. ASIC on the other hand has substantial knowledge about the finance sector albeit as a product level, but knows nothing about competition or pro-competitive regulation. The core judgment is whether it is better to give regulation of competition in finance to an entity which knows about competition, or one which knows about financial products. Clearly the ACCC is the more logical home for competition regulation.
The politics is also likely to favour the ACCC getting the guernsey. The Treasurer has to choose between announcing that he has put the Australian Securities and Investment Commission onto the job of promoting competition in finance, or that he has put the Australian Competition and Consumer Commission onto the job. It seems clear that setting the competition watchdog onto ensuring competition in finance is the better announcement as well as the better policy.
Assigning the ACCC to protect competition, will also lead to more robust discussion at the Council of Financial Regulators. Most interestingly the PC recommends that the minutes of these meetings should be made public. At the moment there is no transparency around decisions made the APRA or ASIC while the RBA minutes are released. Public policy will be improved if we can read the positions taken by the Council in its balancing of prudential and pro-competitive priorities, and potentially criticise them.
The PC also issues a number of cautions about industry structure and its implications for regulation. One is that using policy to raise the costs of the major banks in the hope this will provide consumer benefits is a false hope. The fringe banks are far more likely to raise their margins than compete so there is no more competition, just higher costs. The very limited potential for the mortgage brokers to promote competition also comes in for question.
As we might expect of the PC, the report makes lots of suggestions about how to empower purchasers – better information, more benchmarking, less obfuscation and easier switching between product – open banking.
These are all important but bringing the ACCC into the game is the big stick. It will require business and regulators to be much more mindful of competition in the future. It is surely a recommendation the Treasurer must accept.