Financial Services Regulation

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Unravelled: Productivity Commission releases draft report on competition in the financial system

20 February 2018

Written by Partner Rosannah Healy, Associate Fiona Sam and Lawyer Nicholas Allingham

The Productivity Commission released its draft report on competition in the financial system on 7 February 2018. The PC considers that Australia's prudentially regulated institutions are unquestionably strong, but that prudential stability may have reduced the benefits of competition. The PC makes 25 draft recommendations, a key focus of which are reforms to the regulatory system. A final report is due to the Government by 1 July 2018, following further public consultation. We take you through key issues and recommendations.

PC concerns

Draft Recommendations

Barriers to entry

Licensing and other regulatory requirements are a significant barrier to entry and expansion in banking, including ADI licensing, restrictions on the use of the word 'bank' and the 15 per cent ownership cap of an ADI's voting shares.

  • APRA should finalise its phased approach to licencing ADIs and revise its policies for removing restrictions on the use of the term 'bank'.
  • The Australian Government should expedite its review of the ownership cap in respect of both new entrants and existing banks. For existing ADIs, share ownership limits should be reviewed without the presumption of the Four Pillars policy.

Home loans

Lenders' advertised standard variable rates are not reflective of what the majority of consumers actually pay once discretionary discounts are taken into account. To compare products, consumers require information on the rates that are actually being issued by lenders.

  • APRA should collect and publish monthly data from residential mortgage lenders on median interest rates for new residential home loans.
  • ASIC should develop an online tool that enables consumers to enter loan and borrower characteristics and view median interest rates which satisfy those criteria.

There is a high degree of vertical integration in the mortgage broking market, which can create conflicts of interest.

  • ASIC should impose a clear legal duty on mortgage aggregators owned by lenders to act in the consumer's best interest.

The existing disclosure obligations imposed on brokers by the National Consumer Credit Protection Act do not facilitate consumer understanding of the services provided by brokers and the quality of recommended loans.

  • ASIC should impose broader disclosure obligations on brokers regarding which loans are available, whether the broker is limited in its ability to deal with certain lenders, broker remuneration and any relationships between lenders and aggregators.

The regulatory capital requirements for residential mortgage loans that apply to the majority of ADIs could be more closely aligned to risk. Increasing the precision of the standardised risk weights is more likely to create the environment for improved competition without detracting from prudential outcomes.

  • APRA should review the standardised risk weights for residential mortgages in APS 112. In particular, APRA should consider replacing the single risk weight that applies to standard eligible residential mortgages with a loan-to-valuation ratio below 80 per cent with risk weights defined in more narrow bands.

SME lending

Home ownership rates in Australia are decreasing, yet Australia's risk weighting system for SME loans continues to emphasise home ownership. Credit availability could be improved by moving to a more nuanced approach to risk weightings for SME loans that are not secured by a residential mortgage.

  • Instead of applying a single risk weight to all SME lending not secured by a residence, APRA should provide a broader schedule of risk weights in APS 112, which takes into account the different risk profiles and types of lending to better reflect the Basel Committee's standardised risk weightings.

Payment systems

In Australia, 'tap and go' facilities at the point of sale default dual network card payments through the higher charge credit card route rather than the lower cost eftpos system.

  • Merchants should be able to choose their default network to route transactions for dual-network cards.

The Payments System Board (PSB) currently regulates the price of 'interchange fees' paid on card transactions by a merchant's financial institution to the customer's institution. However, the justification for interchange fees is not strong – the actual cost of an additional transaction on a card network is negligible.

  • The PSB should ban interchange fees. Any remaining fees on card payments should be directly related to the costs incurred in operating the card payment system and should be published.

Purchased Payment Facilities (PPFs) or payment methods that use stored value (eg PayPal) have the potential to be a significant source of competition to traditional payment methods, but they face excessive regulation.

  • APRA should design a tiered prudential regime for PPFs to reduce barriers to growth. PPFs with total stored value below $50 million and individual holdings of no more than $500 would not face prudential regulation.

The New Payment Platform (NPP), owned by 13 initial shareholders, including nine banks, will enable transaction settlement in real time and reduce technical barriers for new financial institutions to enter the payments system.

  • The NPP is a significant piece of national infrastructure and more transparency is needed to avoid conflicts of interest that could hinder access and restrict competition. The NPP should be subject to an access regime imposed by the PSB.


Annual renewal reminders should act as a trigger point for consumers to reconsider their general insurance providers, yet consumers are not switching.

  • Renewal notices for general insurance products should transparently include the previous year's premium and the percentage change.

Many general insurers provide insurance under multiple brands, which creates the illusion of more competition than actually exists. Consumers need to be aware of who is underwriting an insurance brand and other brands underwritten by the same insurer.

  • The insurance brand's website should identify the insurer who underwrites the product and all brands underwritten by the same insurer.
  • Insurers should provide the brands they underwrite to ASIC. ASIC should publish this information on its website.

Consumer outcomes have generally been poor across add-on insurance markets (ie where the insurance is sold alongside another product). Deferred sales models impose a mandatory time delay into the sales process to separate the purchase of the primary and add-on products and have been introduced overseas to improve consumer outcomes.

  • ASIC should proceed as soon as possible with its proposal to mandate a deferred sales model for all add-on insurance sales by car dealerships.
  • The Australian Government should establish a working group to extend the deferred sales model to all add-on insurance products.

Mergers and acquisitions

There has been a high degree of horizontal and vertical integration in the Australian financial system over time. To effectively assess the impacts of integration on market outcomes, regulators require data on the extent of integration.

  • All financial services firms that engage in mergers and acquisitions within the financial system should be required to notify the ACCC and ASIC of the transaction.
  • ASIC should maintain a public database on the relationships between related entities and report annually on notifications received.

Warehouse funds

The revised prudential standard for securitisation (APS 120), which came into effect on 1 January 2018, requires banks and other financial institutions providing warehouse funds to hold additional capital against their securities than previously, driving up warehouse costs that are then passed onto those accessing the warehouse facilities. The revised standard takes a 'one size fits all approach' to all lenders accessing warehouse funding, imposing disproportionate costs on non-banks.

  • The implementation of the revised Prudential Standard APS 120 should be limited in its effect, in the first instance, to warehouse funds provided to ADIs. Before any extension to non-ADIs, the costs to non-ADIs of changes to regulatory capital requirements for the provision of warehouse facilities should be subject to a public cost-benefit analysis.

Improving outcomes for consumers

There is evidence that consumers do not fully understand the nature of the information provided in 'general advice' under the Corporations Act. The label of 'advice' adds to this confusion.

  • 'General advice' as defined in the Corporations Act is misleading and should be renamed. The term 'advice' should only be used in association with 'personal advice' that takes into account personal circumstances.

The Productivity Commission previously recommended that consumers have a Comprehensive Right to their consumer data. Open Banking implements significant aspects of the Comprehensive Right but is limited to banking transactions data and does not confer rights in relation to editing data or being informed about the trade or disclosure of data.

  • Open Banking should be implemented in a manner that enables the full suite of rights for consumers to access and use digital data.

Reforming the regulators

There is no one organisation responsible for promoting competition in financial services. One of the existing regulators should be appointed as competition champion. The role is to advocate on competition issues in the financial services market and to lead consideration of the competition impacts of planned regulatory interventions in meetings of the Council of Financial Regulators (CFR).

  • An existing regulator (either the ACCC or ASIC) should be appointed as competition champion.
  • In addition, the CFR should implement a process of review before any member puts in place regulatory interventions that may have a material impact on competition.
  • Competition analyses and CFR meeting minutes should be made public.

Other article in this edition of Unravelled

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