Published by Australian Financial Review, Wednesday 10 May
Tuesday night’s budget had a lot for banks to think about. The fiscal part, the big tax hit on a select group of companies, was quite extraordinary. The contrast with universities, where all institutions have to pay a higher tax and not simply the big eight, is illuminating. The principles of good taxation normally require such neutrality between institutions. The precedent set is not encouraging.
However it is the policy part of the budget, not the fiscal part, which is the most interesting for the banking sector.
Banks are not regulated – they are supervised. The legislation gives the Australian Prudential Regulation Authority, as supervisor, powers to intervene quite deeply into the business decisions of the banks, and those powers are being strengthened. For example, the Treasurer said that APRA would have stronger powers to stop banks from lending in particular locations. Those powers to intervene in the direct business decisions of banks will also extend to human resources matters . APRA will have to approve senior appointments, executives and directors, under a new Banking Executive Accountability Regime. It will also be able to intervene in the pay decisions made by boards.
Meet your new co-manager
In effect, Wayne Byres’ APRA is becoming a co-manager of our major institutions. It will have a say in who gets appointed, how much they get paid, what their incentives are, and what lines of business they can pursue. It can also ban particular employees from the industry completely, although there will be scope for appeal of these decisions – but not the others.
This approach raises many issues. Clearly, there are practical questions about whether APRA has the skills to co-manage the banks. More fundamentally, we can ask whether a public agency should be asked to take on this responsibility for private companies. And the third set of issues relates to how responsibility would be allocated if a bank failed: could shareholders sue APRA?
Given APRA’s strong record as a pragmatic regulator, we can hope that it manages with a light touch. Ideally it would observe and guide rather than intervene. Only time will tell, but regulators tend to growused any new powers they are given, so APRA will require a lot of discipline to maintain its distance.
The decisions announced on competition should give the banks greater immediate concern.
The open-data regime, where customers have control over their data, will reduce the barriers to entry to banking. The large and historical data sets maintained by the banks will no longer be their property alone. Customers will have control of their own information and potentially be able to transfer it to third parties. Like telephone number portability, this should promote stronger competition for customers.
The challenge to the banks from fintech will strengthen. New providers will be able to offer better lending services when they have better customer data. Entrants among the payments companies, insurers and financial advisers will be keen to take advantage of this.
The Productivity Commission review of competition in the sector also has a lot of potential to change it. The commission has a strongly pro-competitive mindset and a tradition of making strong, even unpopular, recommendations. Having as well-regarded a body as the PC make recommendations for major structural change to banking will make it very difficult for any government to resist.
We have already seen that the commission’s review of superannuation defaults caused major concern for the industry, and the potential for it to do the same in banking is large. That said, it is not clear the commission has deep experience in analysis of the finance sector, so it will be on a steep learning curve.
The other major policy change, around improved dispute resolution, will cause the industry fewer concerns. There is already a range of public entities involved, so the focus will be more on improving processes rather than redesigning the system.
The central issue, however, will be how the entity sets priorities. Does it focus on cases where a very large number of people have been overcharged a small amount, or on the fewer cases where individuals have faced very large losses? The former might deal with a larger amount in total but the latter is much more newsworthy.
Taken as a package, I expect the competition changes to have the most lasting effect. The impact of the extension of APRA’s intervention powers is likely to be muted; the dispute resolution changes will have some small effect; and the tax changes will cause losses to be shared between consumers and the banks.