Heavy regulation hurting mutual banks’ competitiveness, innovation: Govt report

Regulation COBA mutual banks

A new Federal Government-commissioned report has found the regulatory obligations on customer-owned banks remain too onerous, with the mutual sector “disproportionately affected by the compliance burden”.

The report, Better Competition, Better Prices, drafted by the House of Representatives Standing Committee on Economics as part of an inquiry into Australia’s economic dynamism, found that the mutual banks’ compliance obligations ultimately threaten competition in the country’s already highly concentrated banking sector.

“For smaller and customer-owned banks, the obligations of regulatory compliance could force them to direct resources away from areas of natural competitive advantage, such as customer service, innovation, and attractive product pricing. This situation does not reflect well on competition in Australia’s banking sector,” the report read.

“For customer-owned banks – in contrast to for-profit banks with larger operations and resources – this can result in smaller retained earnings, because of the need to underpin loan growth in line with APRA’s capital requirements.”

For instance, the Committee highlighted a submission by BankWAW – a mutual bank based in regional Victoria and NSW with just 90 staff on its books – which noted that 80 per cent of new roles within its business were related to supporting risk and regulatory frameworks.

“For BankWAW, it was ‘challenging’ to simultaneously grow and invest in its network, develop competitive services and products for customers, and meet high regulatory and compliance standards,” the report said.

The Committee, as part of its report, also recognised the mutual banking industry’s call for the introduction of a regulatory roadmap, which could serve to improve competition, enabling smaller banks a chance to properly resource for forthcoming regulatory changes.

“This greater competition would, in the view of many witnesses, by extension benefit consumers through more innovative and competitive products and enhanced economic dynamism,” the report read.

The Federal Government earlier this month announced it would introduce a Regulatory Grid, modelled on the UK’s own Grid, a pipeline or roadmap of regulatory initiatives affecting financial services businesses.

According to Treasurer Jim Chalmers, the Grid will provide financial organisations with “clear visibility of regulation that might impact [their] businesses and will support engagement with proposed reforms and their implementation”.

The peak body for Australia’s mutual banking sector, the Customer Owned Banking Association (COBA), was among the roadmap’s key backers. COBA argued that the roadmap was necessary to reduce regulatory costs, which limit the ability of its members to compete by “diverting funding away from growth initiatives”.

However, the Committee noted that the concept of such a roadmap “enjoyed broad support across the industry”.

The Australian Banking Association (ABA), the peak body for Australia’s commercial banking sector, had, it said, already “discussed a regulatory roadmap in depth with its UK counterparts (based on their experience with the Grid)”.

“The ABA told the Committee that the key benefits of the roadmap concept were the visibility it gave all participants of upcoming regulatory changes, and that it enabled regulators to prioritise and phase in potentially overlapping reforms.”

However, while the peak body recognised the importance of having clear insight into upcoming regulations and government proposals in advance, it also warned that “the sheer volume of regulatory initiatives meant it could be difficult to prioritise them”.

“There are 130 new initiatives here for consideration in the next 12 to 18 months. These are all live. Some of these things will lead to a reduction in some of the regulatory burden, where it is appropriate. Many of them are very good proposals. Many of them are things that the industry would support. The prospect of trying to deal with them well at this pace, we think makes it impossible for the sector as a whole, and for government, to really identify which of the 130 should be the top 10 that people put their real effort into,” the ABA wrote in its submission.

Larger banks, overall, also supported the concept of a regulatory roadmap, with Westpac calling for the Government and Treasury “to stand back and look at the combined impact and sequence it so that we can deliver the best prioritised initiatives for the community.”

Macquarie Group argued that a roadmap made sense in an environment of quickly evolving regulation, where it becomes “very hard to plan things, automate…” and can challenge new entrants to compete and be innovative.

COBA chief executive Michael Lawrence said the peak body welcomed the findings of the report “which acknowledge that the regulatory burden is a disproportionate threat to customer-owned banks”.

“It can be challenging for smaller banks to efficiently resource constantly changing regulatory standards. Proportionate regulation allows smaller banks to invest in improvements for customers and provide much-needed competition in the banking market,” Lawrence said.