The state of competition
Finding 2.1 KEY FEATURES OF WORKABLE COMPETITION IN THE FINANCIAL SYSTEM
The key features of workable competition in Australia’s financial system at which we can aim, include: • a high awareness of changes in market opportunities along with low costs for consumers when switching to preferred products • active support for consumers by public advice or private advisers to conveniently make informed decisions in their best interests • an Open Banking regime that gives consumers perpetual access to their data, with the capacity to see that data safely moved from one provider to another • minimal limits to either entry by new providers or expansion or exit of existing providers, in regulated product markets (subject to other regulatory objectives such as prudential outcomes) • regulators who anticipate that financial products and the ways of delivering them will change with technology and consumer preferences, and be willing and able to change regulation as required • effective and timely scrutiny of the adverse use of market power, including as a response to regulator interventions.
Finding 2.2 COMPETITION AND STABILITY MUST CO-EXIST
Competition and stability are both important to the Australian financial system. Since the global financial crisis there has been a focus on requiring prudentially regulated institutions to be unquestionably strong. It is important to ensure that the essential role of competition in economic growth is not eroded by having stability as the default regulatory position, to the exclusion of competition. Competition can support stability, checking irresponsible behaviour of providers and improving outcomes for consumers, and must be allowed to flourish.
Finding 3.1 STATE OF COMPETITION IN THE BANKING SYSTEM
Price competition in the banking system is limited. Although institutions claim that they compete in loan markets by discounting, such behaviour is not indicative of a competitive market when price obfuscation is common and discounts are specific to groups of customers. Competition on product features and service is more evident. But the large number of marginally different products appears more reflective of a capacity for price discrimination than of competition.
Finding 3.2 THE STRUCTURE OF THE BANKING SYSTEM
Australia’s banking sector is an established oligopoly with a long tail of smaller providers. The four major banks as a group hold substantial market power, as a result of their size, strong brands and broad geographical reach. This is substantially supported by regulatory settings, which contribute to the major banks’ structural advantages. As a result, 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. The smaller banks and non-bank financial institutions typically follow the pricing trend set by the major banks, and are not a significant competitive constraint on the major banks’ market power. Adding cost to the larger banks without altering their market power does not lift competition, harms consumers and is counter productive. Policy measures aimed at addressing either conflicts of interest or regulatory interventions that disregard competition, can mitigate adverse outcomes for consumers even if the current industry structure remains largely intact.
Finding 6.1 BETTER RATINGS AND COST OF FUNDS FOR ‘TOO BIG TO FAIL’ BANKS
The major banks in Australia benefit from a ‘too big to fail’ status reflecting an expectation of government intervention if one or more of these banks were in financial difficulties. This status lowers the cost of funds for these banks. By incorporating perceived government support in their relative ratings of Australia’s banks, rating agencies further embed the major banks’ ‘too big to fail’ status.
Finding 8.1 COST OF FUNDS FOR DIFFERENT SIZE BANKS
Larger banks benefit from lower costs of funding, compared with smaller institutions. Size, scope and incumbency have enabled them to increase their share of the deposit market, retain better access to offshore funding markets and raise funds at relatively cheaper rates due to their higher credit ratings, which in part reflect an expectation of government support. Risk weights determined by the prudential framework have a substantial impact on the cost of funds. The major banks have invested in approved internal risk management models, gaining a further cost advantage from being allowed to use risk weights that are generally lower than APRA’s standard requirements. Cost interventions (such as changes to risk weights) have been presented as targeting both stability and competition. While such interventions may have achieved stability objectives, they have had adverse consequences for competition. Interventions that raise the cost of funds for larger institutions to offset their cost advantages do not improve competition and will harm consumers.
Finding 8.2 NEW WAREHOUSING RULES COSTLY FOR NON-ADIS
Prudential regulations (Prudential Standard APS 120) affecting warehousing activities (temporary lines of credit provided by larger banks to other lenders) that came into effect on 1 January 2018 take a one-size-fits-all approach to risk ratings for smaller authorised deposit-taking institutions (ADIs) and non-ADIs. These have increased the costs of warehousing and reduced the competitiveness of those (generally small) institutions that rely on warehouse funding.
Recommendation 8.1 COMPETITION IMPACTS OF APS120 SHOULD BE ASSESSED
Consistent with recommendation 19.3, APRA should conduct a post-implementation review on how the changes in Prudential Standard APS 120 have affected the costs of funds and competitiveness of non-authorised deposit-taking institutions.New entrants in banking
Finding 4.1 A CONSOLIDATION IN BANKING There has been substantial consolidation in Australia’s banking system. From 2005 to 2017, the number of organisations with a banking licence fell by almost 40%. This was largely a result of mergers between institutions, rather than exits.
Finding 4.2 FOREIGN BANKS TEND TO OPERATE IN SELECT MARKETS
Foreign banks have shown that they are willing to enter Australia’s banking system — between 2007 and 2018, the vast majority of new entrants to the banking system were foreign bank branches. The regulatory framework incentivises foreign banks to enter and compete in the wholesale banking sector, rather than compete for household deposits. While they are important to innovation and to price competition in certain market segments, foreign banks remain focused on specific market segments and are not likely to prove a competitive threat in the broader retail banking sector.
Finding 4.3 MOST FINTECHS ARE FOCUSING ON LESS REGULATED SERVICES
Australia’s fintech sector has grown substantially in recent years and offers a range of financial services. However, few fintechs consider themselves to be challenger banks. The vast majority are focused on providing services in areas of the financial system with less onerous prudential regulation, such as small scale funds management and lending, and payments systems. Global technology companies, said to be the potential disruptors, are yet to make a mark in banking and the broader financial system in Australia.
FINDING 4.4 FINTECH COLLABORATION AND COMPETITION
Fintechs are not, on present indications, likely to have the kind of competitive disruptive effect that would alter the market power of major banks in the foreseeable future. In the long term, lowering barriers to entry and growth, including greater access to consumer data, may lead fintechs to favour competition against incumbents over collaboration. We must look further afield for substantial offsets to current market power.
Recommendation 4.1 EXPANDING ASIC’S REGULATORY SANDBOX
The Australian Government, in consultation with ASIC, should expand the scope of products eligible for testing under ASIC’s regulatory sandbox, beyond the proposed enhanced regulatory sandbox, to include prudentially regulated fintechs that want to hold household deposits and issue or provide other financial products or services. At the same time, ASIC should take a more hands on approach to approving and supporting fintechs in testing their products or services, particularly to help with judgments on whether and how products may harm consumers. ASIC should also consider requests from existing institutions to access the sandbox on a case-by-case basis. An ongoing program of regulatory improvement in support of the sandbox should be a standing item for the Commonwealth Treasury’s legislative program.The role of integration
Finding 9.1 COMPETITION ISSUES NOT CLEARLY CAUSED BY INTEGRATION The Productivity Commission has not found any competition issues in either mortgage or wealth management markets that are clearly associated with integration. Where poor consumer outcomes arise in these markets, these outcomes may be compounded at times by integration, but are more likely associated with poor transparency and adverse remuneration incentives that arise even absent integration.
Finding 9.2 FORCED SEPARATION IS NOT A PANACEA
Forced structural separation is not likely to prove an effective regulatory response to competition concerns in the financial system, specifically not in either home loan or wealth management markets.
Recommendation 9.1 UNDERSTANDING THE EFFECTS OF INTEGRATION
The ACCC should undertake 5-yearly market studies on the effect of vertical and horizontal integration on competition in the financial system. The first of these studies should commence in 2019 and include establishing a robust evidence base of integration activity in the financial system.Consumers
Finding 5.1 CONSUMERS’ CAPACITY TO PUT COMPETITIVE PRESSURE ON PROVIDERS IS OFTEN LIMITED
For many financial products, consumer responses to variations in price and service are limited. Consumers lack meaningful transparent information and face switching barriers; and they perceive insufficient ongoing difference between providers and product offerings to make the process worthwhile.
Finding 5.2 VARYING PRODUCT USAGE RATHER THAN PRODUCT HOLDINGS
Multiple account holdings (such as transaction accounts and credit cards) allow consumers to change their product usage but not switch their product holdings. Whether this translates to demand-side pressure depends on the extent to which financial service providers are responsive to the volume of business that they receive, or just the number of customer accounts that they have. Where multiple products that are very similar can be held at a relatively low cost, a switching (of product holdings) and the long history of reforms aimed at this, become less important as policy objectives.
Finding 5.3 MARKET SEGMENTATION CURTAILS CONSUMER COMPETITIVE PRESSURE
Financial service providers are able to selectively offer products, prices or terms to different customers, using the information they have about individual consumers. This curtails the ability for an active subset of consumers to drive increased competition in the broader market.
Recommendation 5.1 DATA ACCESS TO ENABLE CONSUMER CHOICE The Open Banking system proposed for Australia should be implemented in a manner that enables the full suite of rights for consumers to access and use digital data (as set out in the Productivity Commission Inquiry report, Data Availability and Use).Mortgage brokers and home loan markets
Finding 11.1 BROKERS ARE NOT CONSISTENTLY FINDING LOWER INTEREST RATES FOR CONSUMERS While many consumers believe that mortgage brokers can secure them a lower interest rate, interest rates on home loans obtained through brokers are not significantly different to those obtained directly from lenders.
Finding 11.2 BROKERS ARE A COST–EFFECTIVE WAY TO DISTRIBUTE HOME LOANS FOR LENDERS WITHOUT WIDESPREAD BRANCH NETWORKS For smaller lenders without national branch networks, brokers tend to be a more cost effective distribution channel than branches, since branches involve a significant investment. Competition is thus assisted by the presence of brokers. Larger lenders with established branch networks generally find brokers less cost effective than existing branches.
Finding 11.3 TRAIL COMMISSIONS ARE NOT CONSISTENT WITH BORROWERS’ INTERESTS There is little if any evidence to substantiate the claim that trail commissions are a payment for the ongoing provision of services to borrowers. In practice, trail commissions have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower.
Recommendation 11.1 BROKER REPORTING THAT ACCORDS WITH IT BEING THE DOMINANT HOME LOAN DISTRIBUTION CHANNEL
As part of the process of issuing credit licences, ASIC should provide clear definitions for, and collect information from licensees about whether they operate as mortgage aggregators, mortgage broker businesses or individual mortgage brokers. This information should be collected in a way that can be reliably used for analyses of the mortgage broking industry. Aggregators should be required to report to ASIC annually on the number of individual brokers operating under them, whether as credit representatives of the aggregator, credit representatives of another credit licensee, credit licence holders or direct employees of a broker business.
Recommendation 11.2 REFORMING MORTGAGE BROKER COMMISSION STRUCTURES
An enforceable Code applying to all mortgage lenders should be created and imposed by ASIC, to implement the following reforms to broker remuneration structures: • ban the payment of trail commissions in mortgage broking for all loans originated after end 2018 • require upfront commissions to aggregators and brokers to be paid based on the funds limit drawn down by customers, net of offset, instead of the limit of the loan facility • ban the payment of volume-based commissions, campaign based commissions and volume-based payments • limit to two years the period over which commissions can be clawed back from aggregators and brokers.
Recommendation 11.3 REFORMING COMMISSION CLAWBACK ARRANGEMENTS
The Australian Government should extend the ban on early exit fees to explicitly prohibit commission clawbacks being passed on to borrowers. ASIC’s powers should be expanded to allow it to enforce the ban.
Recommendation 11.4 BEST INTEREST OBLIGATION FOR CREDIT LICENSEES THAT FACILITATE HOME LOANS
The Australian Government should amend the National Consumer Credit Protection Act 2009 (Cth) to impose best interest obligations on licensees that provide credit or credit services in relation to home loans. These best interest obligations should comprise: • a duty to act in the best interest of the client • a requirement that any resulting recommendations must be appropriate to the client, having regard to the duty to act in the best interest of the client • a duty to prioritise the interests of the client, in the event of a conflict • a duty to ensure that certain information is disclosed to the client. Where the lenders have an ownership interest in firms that provide the credit assistance services, those lenders should also have a legal responsibility to ensure that the licensee discharges its best interest obligations.
Recommendation 9.2 A PRINCIPAL INTEGRITY OFFICER
The Australian Government should mandate the appointment of a Principal Integrity Officer (PIO) in parent financial entities — authorised deposit-taking institutions in the first instance, but with potential extension to other Australian Credit Licensees and Australian Financial Service Licensees. The PIO should have independent status within the entity and would have a direct reporting line to its board. Once created, the position must not be vacant for more than a minimal period defined in legislation. The PIO should have a statutory duty to advise the entity’s board on performance related to remuneration and practices that may be inconsistent with serving a customer’s best interests, including breaches of commission or other remuneration benchmarks and regulations. The PIO should also review internal business practices as they develop over time that may be inconsistent with the entity’s obligation to act in the customer’s best interests. The PIO would be required to report independently to ASIC on unsatisfactory responses to its reports, including persistent failure of its board to observe standards supporting consumer best interest obligations. The PIO should be protected from adverse action by statute where they do so report. Details of the PIO, related legislative changes and penalties, should be determined through a consultation process starting by end-2018.
Recommendation 12.1 INTEREST RATE TRANSPARENCY FOR HOME LOANS
APRA should continuously collect data from mortgage lenders (authorised deposit-taking institutions (ADIs) only) on interest rates of new residential home loans by borrower and loan characteristics. Consideration should be given to adding non-ADIs to the data set, once the collection process from ADIs has become streamlined. Using this data, ASIC should develop an online calculator that reports, with an elapsed time of no more than 6 weeks, median interest rates for loans issued according to different combinations of loan and borrower characteristics. The underlying data should be published in a way that is accessible to third parties such as web application developers. At a minimum, data should be published in a machine readable format.
Recommendation 13.1 LENDERS MORTGAGE INSURERS SHOULD DISCLOSE INFORMATION ABOUT PAYMENTS TO LENDERS
APRA should update its disclosure requirements for lenders mortgage insurers to require them to disclose the amount and purpose of all payments made to lenders.
Recommendation 13.2 OFFERING BORROWERS MORE CHOICE FOR LENDERS MORTGAGE INSURANCE
ASIC should require all lenders to provide those borrowers that are levied with lenders mortgage insurance (LMI) with the option of being levied once at the commencement of their home loan (whether paid as a lump sum or as deferred payments) or being levied annually over the first 6 years of their loan, with transparency around the comparison of these options. Where LMI is levied at the commencement of the home loan, all lenders should be required to set a schedule of refunds on the cost of LMI when borrowers choose to refinance or pay out their loan within 6 years of the loan being originated. The refund schedule should be made available to the borrower before any fee or charge is levied.General insurance
Finding 14.1 MARKET POWER IN GENERAL INSURANCE PROVISION
General insurance markets are concentrated. In the home insurance, domestic motor insurance, travel insurance, lenders mortgage insurance and reinsurance markets, the largest four firms (which are not always the same four) hold market shares in excess of 70%. This concentration has increased slightly in recent years, mostly as a result of consolidation activity. The domestic motor insurance, travel insurance, lenders mortgage insurance and reinsurance markets are particularly concentrated, and while the domestic home insurance market is less concentrated, the two largest firms still account for more than half the market. But because many insurers supply their products under multiple brands, consumers may see more an illusion of robust competition than a reality.
Recommendation 14.1 COMPARATIVE PRICING INFORMATION ON INSURANCE RENEWAL NOTICES
Renewal notices for general insurance products should transparently include the previous year’s premium and the percentage change to the new premium. This policy should commence by the end of 2019 and be enforced by ASIC.
Recommendation 14.2 TRANSPARENCY ON INSURANCE UNDERWRITING
In addition to specifying which insurer underwrites their products, each insurance brand should specify on their website any other brands that are underwritten by the same insurer, for that particular form of insurance. Insurers should provide an up-to-date list of the brands they underwrite to ASIC. ASIC should transparently publish this information as a list on its website.
Recommendation 14.3 PHASE OUT DISTORTIONARY INSURANCE TAXES
Consistent with the Productivity Commission’s 2014 Natural Disaster Funding Inquiry (recommendation 4.8), state and territory taxes and levies on general insurance should be phased out.
Recommendation 15.1 DEFERRED SALES MODEL FOR ADD-ON INSURANCE
ASIC should proceed as soon as possible with its proposal to mandate a deferred sales model for all sales of add on insurance by car dealerships. The deferral period should be a minimum of 7 days from when the consumer applies for or purchases the primary product. Following implementation, the Australian Government should establish a Treasury-led working group with the objective of comprehensively extending the deferred sales model to all other add on insurance products, with the model set in legislation and ASIC empowered to offer exceptions on a case-by-case basis.
Recommendation 15.2 REVIEW OF NCCP ACT EXEMPTIONS
The Treasury should complete its 2013 review into the current exemption of retailers from the National Consumer Credit Protection Act 2009 (Cth), with a view to removing or reforming the exemption. The report should be made publicly available on completion.Financial advice
Recommendation 10.1 ASIC TO ASSESS A NEW LICENCE TO ALLOW FINANCIAL ADVISERS TO ADVISE ON HOME LOANS
ASIC should assess the feasibility of financial advisers providing advice on home loans and other credit products, via a new Australian Financial Services Licence that would not require a separate Australian Credit Licence to be obtained. This assessment should examine the costs and benefits of a new licence, the consequences of various remuneration models and the applicability of a Principal Integrity Officer.
Recommendation 10.2 RENAME GENERAL ADVICE TO IMPROVE CONSUMER UNDERSTANDING
General advice, as defined in the Corporations Act 2001 (Cth), is a misleading term and should be renamed. Any replacement must ensure that the term ‘advice’ can only be used in association with ‘personal advice’ — that is, advice that takes into consideration personal circumstances. Consumer testing of alternative terminology is required to ensure that misinterpretation and excessive reliance on this type of information is minimised. Including time for consumer testing and a transition period to enable industry training and adjustment, a new term should be in effect by mid 2020.
Recommendation 10.3 GREATER TRANSPARENCY OF PRODUCTS ON THE APPROVED PRODUCT LIST
Australian Financial Service Licensees should disclose to ASIC (for each broad class of financial product): • the number of products on their approved product list (APL) • the proportion of in-house products on their APL • the proportion of products recommended that are in-house • the proportion of products recommended that are off-APL ASIC should publish this information annually. ASIC should also conduct selected audits of the information received to facilitate assessment of the effectiveness of advisers in meeting clients’ best interests.Payments system
Recommendation 17.1 BAN CARD INTERCHANGE FEES
The Payments System Board should introduce a ban on card payment interchange fees by the end of 2019. Any other fees should be made transparent and published.
Recommendation 17.2 ANALYSIS AND ASSESSMENT OF THREE-PARTY SCHEMES
The ACCC, with input from the Payments System Board, should investigate: • whether current or recommended interchange fee regulation favours three party card schemes and, if such a distortion exists, whether it is significant enough to require further regulatory intervention; and • if further regulatory intervention is desirable, the nature of such intervention, including, but not limited to, the possibility of regulating merchant service fees as an adjunct to the interchange fee ban. This investigation should be completed by no later than mid 2019.
Recommendation 17.3 MERCHANT CHOICE ROUTING FOR DUAL-NETWORK CARDS
The Payments System Board should set a regulatory standard that gives merchants the ability to choose the default network to route transactions for dual network cards. As the technology is readily available, this reform should be in force by 1 January 2019 at the latest.
Recommendation 17.4 REVIEW TRANSPARENCY OF FEES ON FOREIGN TRANSACTIONS
By end 2019, the ACCC, in consultation with ASIC, should investigate what additional disclosure methods could be used to improve consumer understanding and comparison of fees for foreign transactions levied by authorised deposit-taking institutions and other payment providers. This should include determining the feasibility of using benchmark exchange rates to improve transparency of international money transfers, as well as measures to improve transparency for fees on overseas purchases.
Recommendation 17.5 REVIEW REGULATION OF PURCHASED PAYMENT FACILITIES
The Council of Financial Regulators should review the current regulation of Purchased Payment Facilities (PPFs). The review should develop an approach to simplify the regime, develop clear thresholds for regulatory responsibility and reduce barriers to growth in this sector. The review should consult on and design a tiered regulatory structure for PPFs, including one tier that does not attract prudential regulation. The review should be completed by end 2018 at the latest and provide a path forward for regulators by mid 2019.
Recommendation 17.6 UPDATING AND MANDATING THE EPAYMENTS CODE
The Australian Government should give ASIC the power, by end 2018, to make the ePayments Code mandatory for any organisation that sends or receives electronic payments. ASIC should review the ePayments Code and update it to reflect changes in technology, innovative business models and developments in Open Banking. ASIC should more clearly define the liability provisions for unauthorised transactions when third parties are involved, including participation in financial dispute resolution schemes. ASIC should update the ePayments Code by end 2019 and commit to 3 yearly reviews.
Recommendation 17.7 ACCESS REGIME FOR THE NEW PAYMENTS PLATFORM
As a significant piece of national infrastructure for which the competition benefits hinge on widespread access of both financial system providers and consumers, the New Payments Platform (NPP) should be subject to an access regime imposed by the Payments System Board (PSB). As part of the regime, the PSB should: • allow specialist payment providers that hold an Exchange Settlement Account to connect to the NPP without the need to be an authorised deposit taking institution • review the fees set by NPP institutions and transaction fees set by New Payments Platform Australia Limited • require all NPP institutions that use an overlay service to share de identified transaction level data with the overlay service provider. The PSB should consult the ACCC on the final design of the data sharing obligations, having regard to impending Open Banking reforms.
Recommendation 17.8 IMPROVING FUNCTIONALITY OF THE NEW PAYMENTS PLATFORM
The ACCC, in consultation with the Payments System Board, should investigate different ways that New Payments Platform Australia Limited and its participating financial institutions can improve the functionality of the New Payments Platform (NPP) to promote competition within the NPP and across the payments system more broadly. This includes investigating the feasibility of additional functionality for PayID to give customers the ability to both send and receive recurring bank transfers, direct debits and card payments. The investigation should be completed by mid 2019, with a view to implementing additional functionality by end 2019.Regulators
Finding 6.2 THE FOUR PILLARS POLICY IS REDUNDANT
The Four Pillars policy is a redundant convention. There are sufficient provisions within the Competition and Consumer Act 2010 (Cth), the Banking Act 1959 (Cth) and the Financial Sector (Shareholdings) Act 1998 (Cth) that give the government or the designated regulators power to intervene to ensure competition, prudential outcomes and the broader public interest are protected. There is no evidence that the Four Pillars policy has enhanced competition; and far more reasons to conclude that it may have dissuaded it by embedding a fixed market structure.
Recommendation 18.1 STATEMENTS OF EXPECTATIONS FOR REGULATORS
Updated Statements of Expectations for regulators, as agreed in the response by the Australian Government to the Murray Financial System Inquiry, should be published as a matter of priority. They should be written in clear language and updated at regular intervals thereafter. Regulators should publish Statements of Intent within three months of receiving the Statements of Expectations. In their annual reports, the financial regulators should provide information on the actions they have taken in line with their Statements of Intent and outcomes on performance measures.
Recommendation 18.2 ASIC To Publish Data
The financial regulators already collect large amounts of data, which is a valuable public resource. Subject to privacy requirements, much more such data should be made publicly available. As a first step towards improving the availability of data, ASIC should publish a list of the datasets collected and used in its research projects and reports and release any non-sensitive datasets.
Finding 7.1 COST OF APRA INTERVENTIONS IN THE HOME LOAN MARKET
APRA’s actions to slow interest-only lending on residential property in early 2017 resulted in banks imposing higher interest rates on both new and existing residential investment loans, despite the regulatory objective being to slow only new lending. This led to a windfall gain for the banking sector. Up to half of this gain is in effect being paid for by taxpayers, as interest on investment loans is tax deductible. The Commission estimates that the cost borne by taxpayers as a result of APRA’s intervention was up to $500 million a year, depending on various tax permutations. Competition between lenders was restricted, and there was limited competitive variation in lenders’ responses to the regulatory intervention.
Finding 18.1 APRA NOT WELL PLACED TO CONSIDER COMPETITION EFFECTS
APRA is not well placed to balance the cost to competitive behaviour in its regulatory actions. Although the legislation that requires APRA to give weight to competition is valuable, its remit quite reasonably must favour system stability — even where its actions could impose a significant cost to competition. The capacity to generate timely and trusted debate among relevant regulators on the question of whether the public interest is served by restricting competition is a desirable addition to the regulatory structure. This is particularly the case given our finding that key financial markets are characterised by large institutions that hold substantial market power. The Council of Financial Regulators is a valuable forum with the scope and leadership in which to deliver this debate. In the absence of such a debate, consideration of competitive effects will inevitably continue to be subordinate to stability.
Recommendation 19.1 COMPETITION CHAMPION FOR THE FINANCIAL SYSTEM
To address gaps in the regulatory architecture related to lack of effective consideration of competitive outcomes in financial markets, the ACCC should be given a mandate by the Australian Government to champion competition in the financial system, including in decisions taken by regulators that have or may have the outcome of restricting competition. To minimise cost and disruption, this role should be implemented in substantial part through the Council of Financial Regulators (CFR) by making the ACCC a permanent member of the CFR. There should be no change under this recommendation to the current legislated responsibilities of the regulators. Rather, the Australian Government should include in its Statement of Expectations for each of the financial regulator members of the CFR that the ACCC should be given the opportunity as a member of the CFR to advise the Council on regulator actions that may have material effects on competition, before they are implemented. The functions of the ACCC within the CFR would be: • preparing transparent analysis of competition impacts of material market interventions by financial market regulators • publishing a bi-annual financial system competition report which would be the competition equivalent of the RBA’s Financial Stability Review.
Recommendation 19.2 TRANSPARENCY OF REGULATORY DECISION MAKING
The Council of Financial Regulators (CFR) should apply the ACCC analysis in a discussion amongst members on interventions that may have a material impact on competition in a product market. The ACCC assessment of competition impacts should be published in a simple form and timely manner as part of a new commitment to publish Minutes of CFR meetings.
Recommendation 19.3 ROBUST AND TRANSPARENT ANALYSIS OF MACROPRUDENTIAL POLICIES
APRA should conduct and publish annually quantitative post-implementation evaluations of its material prudential interventions, including costs and benefits to market participants and the effects on competition.
Recommendation 16.1 STANDARDISED RISK WEIGHTINGS FOR SMALL BUSINESS LENDING
Instead of applying a single risk weight to all small and medium business lending not secured by a residence, APRA should provide for a broader schedule of risk weights in its Australian Prudential Standard (APS 112). It should take into account the different risk profile and the type of lending (such as the value of the loans made to an individual business and alternative forms of loan security including commercial property and differing loan to value ratios on this security) to better reflect the Basel Committee’s standardised risk weightings. In light of apparent major improvements in the collection and use of data (including via the New Payments Platform), APRA should also consider proposals by authorised deposit-taking institutions (ADIs) for variations from the standardised risk assessment for small and medium enterprise lending, based on the ADI improving its data and risk management systems. International best practice should be closely considered as APRA reviews proposals from ADIs.
