Client Update: Review into four major banks – money for consultants?
25 November 2016
In brief: The Parliamentary Economics Committee released its report following its review into Australia's four major banks yesterday. Our Financial Services Regulation team has a look at the recommendations in this update.
The Parliamentary Economics Committee released its first report following its first annual review into the four major banks yesterday, and there is a lot in it. The 10 recommendations include:
- replacing the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT) with a Banking and Financial Services Sector Tribunal;
- a new requirement for financial services licensees to make public reports of any significant breaches that include names of the responsible senior executives;
- six-monthly reviews into competition in the banking sector;
- open access to customer data; and
- the recommendation that will be exciting the consulting firms, that the major banks engage an independent third party to undertake a full review of their risk management frameworks.
Unsurprisingly, the Committee did not recommend (or consider) a Royal Commission.
- Banking and Financial Services Sector Tribunal
- Publication of breach reports
- Access to data and account portability
- Independent review of risk management systems
The Committee recommends a new Banking and Financial Services Sector Tribunal that will be funded by the 'members'. All Australian financial services licensees and APRA regulated superannuation fund trustees will be required to be a member of the Tribunal. The new Tribunal will replace the Financial Services Ombudsman, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. It will be free and, subject to what the Ramsay review recommends, won't have any monetary limits and won't permit legal representation. The Tribunal will have a Board that represents consumers and industry. In short, it sounds more like FOS and CIO than a Tribunal, but Professor Ramsay will have much more to say on this topic soon.
This section in the report is headed 'Make Executives Accountable'. The way it proposes doing so is by requiring financial services licensees to publicly report on any significant breaches of their licence conditions within five business days of reporting to ASIC or APRA. The report should include a description of the breach and how it occurred, steps to be taken to ensure it won't happen again and the names of the responsible senior executives and if they have not been terminated (by which we assume they are referring to their employment), an explanation of why not.
Reports have to be sequentially numbered so that people can see how many significant breaches a licensee has had in a year – if anyone is looking.
The purpose is to increase executive accountability. The Committee notes that the UK has adopted the responsible manager regime that attaches personal liability to individuals. But despite wanting to increase accountability, the Committee does not recommend a similar regime, noting that there are problems with it (although it does not say what they are). Instead, they think that the prospect of public shaming will provide the necessary stick, but the more likely outcome might be that public breach reporting will give ammunition to the plaintiff law firms. It's unclear if that is the Committee's intention. .
Despite the Murray review deciding that there was in fact sufficient competition in the banking industry, the Committee disagrees. It says the Australian banking system is an oligopoly, which sounds pretty dangerous to us. In support they say that there is insufficient pressure on pricing in the sector – the spread between the cash rate and interest rates on credit products have increased steadily since 2000. They also note that the cost of higher capital and liquidity requirements have been met by consumers rather than shareholders. Given these kinds of statements and the push for banks to give priority to their customers, it would be interesting to know the extent to which customers and shareholders are the same people.
The Committee recommends that the ACCC, or the proposed Australian Council for Competition Policy, establish a team of people to make recommendations to the Treasurer to improve competition in the banking sector on a six monthly basis and if they have no recommendations to make, to explain why not. No pressure. It also recommends that the Financial Services (Shareholdings) Act be reviewed to remove some of the barriers for new entrants setting up shop in Australia as a bank, and it suggests there should be a more transparent and staged approach for getting a licence from APRA to operate a bank.
The Committee also recommends that deposit product providers be required to provide open access to consumer and small business data by July 2018. It recommends data be made available through 'Application Programming Interfaces' (APIs), in simple terms - software that allows sharing of data. Compared to other ways of sharing data, APIs require greater investment upfront and so are initially more expensive, but have advantages including allowing access to up to date data that could be read without the customer having to give the reader rights to edit the data.
There are a couple of reasons to do this: first to help banks tailor their products, second to promote competition by removing the advantages the big banks have because they have more information about their customers and finally to help consumers move about and choose the best products for them.
This is all going to be achieved by allowing access to customer data, and requiring the release of standardised, machine-readable terms and conditions for each bank's full product suite. This would enable easier comparison of products, including by computer programs and tools, which again could assist those providing advice or developing applications that allow customers to compare products.
These comparisons might persuade a customer to switch banks. Currently, this can be difficult and clunky. The Committee recognises the problem, but suggests waiting until the implementation of the New Payments Platform (NPP), which should come on-line in late 2017, before considering whether additional account switching tools are required. The NPP may make switching transaction accounts easy as payments made to the account will be able to be directed to the customer's new account using the customer's 'alias' (such as an email address or mobile phone number), but it will be more difficult to switch credit accounts, and so additional measures may be required to allow portability.
All of this sounds pretty good, but superannuation fund members have been able switch between funds for years now and, even armed with information and an easy process, the evidence suggests that they tend not to exercise choice. It is also unclear how the regulators will feel about banks creating personalised products in the face of their reservations about bundled products, vertical integration and sales methods.
The Committee says that banks have terrific financial risk management frameworks, but that they could not say the same about their frameworks to manage (other) risks that threaten consumers.
The Committee recommends that the banks engage an independent person to undertake a full review of their risk management frameworks and recommend ways the banks can identify and respond to misconduct. The Committee wants those reviews completed and provided to ASIC by July 2017 and the recommendations implemented by the end of that year. This may well prove a bonanza for the consulting firms, but it's less clear what it will achieve for bank risk management frameworks.
- Michelle LevyPartner,
Ph: +61 2 9230 5170
- Geoff SandersPartner,
Ph: +61 3 9613 8673
- Michael MathiesonSenior Regulatory Counsel,
Ph: +61 2 9230 4681
- Marc KempPartner,
Ph: +61 2 9230 4991
- Penny NikoloudisPartner,
Ph: +61 2 9230 4805
- Karla FraserPartner,
Ph: +61 7 3334 3251
- James DarcyPartner,
Ph: +61 3 9613 8516
- Belinda ThompsonPartner,
Ph: +61 3 9613 8667
- Gavin SmithPartner, Sector Leader, Technology, Media & Telecommunications,
Ph: +61 2 9230 4891
- Malcolm StephensPartner,
Ph: +61 2 9230 4828
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