Banking Reforms in Australia - Essay Example

Banking Reforms in Australia (Name) (Institution) (Date) Banking Reforms in Australia Banking reforms are measures introduced, by either the government or regulators of the industry, to streamline or improve the provision of financial services within the banking industry [Ste04]. Following the global economic meltdown in 2008, the regulatory agencies of different countries saw the need to introduce banking reforms that would change the way financial institutions operate. These reforms mainly focused on making banks more resilient towards such periods of financial and economic crises. In addition, these reforms would cushion customers from the severity of the meltdown and act as insurance when banks made losses. This paper explores the banking reforms introduced in Australia in the last five years, by the Australian government; their effects and future trends within the country’s banking industry. The banking industry in Australia consists of a mix of several domestic banks and foreign banks, which focus on such activities as retail and commercial banking, as well as capital market activities. In addition to these, there are building societies, credit unions and other deposit-taking institutions that offer financial services to Australian businesses and households. The industry is a significant contributor to the country’s economic development, with an estimated 12% of Australia’s national output being attributed to the banking industry. Furthermore, the banking industry in Australia capitalizes on the strengths of the country in such areas as Infrastructure, political stability and natural resources, which it uses as leverage in its global operations. According to Maximilian Hall (2003), the financial regulation structure in Australia comprises of three significant agencies, which are the Australian Prudential Regulation Authority (APRA), Australian Securities and Investment Commission (ASIC) and the Reserve Bank of Australia (RBA). APRA has the sole responsibility of governing, formulating policies, as well as, regulating the activities of these financial institutions. Before 1998, the Reserve Bank of Australia (RBA) had the responsibility of regulation. However, under the current financial regulation structure, the role of the bank only encompasses monetary policy and stability of both the financial and payment system, in addition to its statutory objectives [Res13]. On the other hand, ASIC mainly deals with consumer protection and the integrity of the financial market. Although Australia has a well-capitalized and organized financial sector, there have been several issues, such as lack of competition, which have necessitated the need for reforms [Ban13]. In recent times, interest and mortgage rates have been on the rise. Most clients are dissatisfied with these rates that never go down and hidden charges and fees that seem to be the norm nowadays. According to research by the ASIC, credit card holders in Australia have an estimated $4,757 in debt owed to various banks in the country. In addition, most of these citizens have home loans that need to be repaid every month. Such issues forced the regulatory bodies in the country to introduce banking reforms to address the dire financial situation. These reforms aim at increasing competition among financial institutions and thereby ensuring that clients get better deals and services. According to Richard Gluyas (2013), the Australian government introduced reforms that revolutionized the banking industry by giving more control and power to the Australian consumers. These reforms, which came into effect in July 2011, required financial institutions to provide more information to consumers than before, as well as, better offers on loans and credit cards. In order to do this, several building societies and credit unions were allowed to offer credit and lending facilities, thereby providing competitive alternatives to consumers. Some of these reforms were introduced for the first time while others outlined changes to existing regulations. One of the vital reforms introduced concerns home loans, particularly access to information about mortgages by consumers. According to Wayne Swan [ABC10], the then Deputy Prime Minister, financial institutions had to provide a fact sheet that outlined information about home loans and monthly mortgage repayments. These fact sheets would make it easier for consumers to shop around for better deals among the available options. In addition to this, the new reforms prohibited banks from charging exit fees on new contracts when clients desired to switch from one mortgage provider to another. This regulation came into effect as of July 1st 2011 and applied to only those mortgage contracts taken after that date. Another banking reform introduced by the government was account number portability, which allowed a consumer to switch from one bank to another without having to forgo the previous account number [Aus12]. Many consumers often want to change banks for one reason or another, but cannot due to all the stress involved in doing so and having to acquire a new account number. With account portability, all direct credits and debits concerning the customer’s account, for the preceding 13 months, are transferred automatically to the new financial institution if the client decides to change banks. Another reform introduced in 2010 was the upgrading of such financial institutions as mutual banks, credit unions and building societies into banks. This reform sought to debunk the myth amongst Australian consumers that such institutions were not as safe as banks in the provision of financial services. The Australian government also made banking licenses available to these institutions in order to increase competition among the lending institutions, and subsequently, obtain fair prices for Australian consumers and businesses [The10]. Not only have credit unions and building societies been given the go ahead to offer banking services to Australian consumers, the government has ensured that they can raise funds easily. Through the reforms, the government allowed financial institutions, for the first time, to issue such financial instruments as covered bonds [Pet11]. Small lenders like credit unions can increase their pool of funds easily and cheaply by buying into such government bonds. This means that more funds can be injected in the market for mortgaged-backed securities, thus reducing the pressure on mortgage rates [Sio10]. Given that the four major banks in Australia have a tendency to hike their mortgage rates, citing higher operation costs, this move was welcomed by consumers and businesses. The government in collaboration with the relevant regulatory bodies also introduced reforms concerning credit card contracts. This reform came into effect in July 2012. In a bid to empower the consumer, it is a requirement for financial institutions to provide fact sheets to consumers concerning credit card contracts. Just like home loan contracts, consumers can now have all necessary information on available offers and make comparisons of each financial institution. Furthermore, lenders must provide credit card holders with information on interest free periods so that they can take advantage of great offers during these periods and others when the rate of interest charged is reduced. The Reserve Bank of Australia is well on its way towards abolishing some of the excessive surcharges that credit card companies impose on credit card holders. These companies, often with a significant market share, take advantage of credit card surcharges to abuse credit card holders financially. However, the RBA seeks to end this form of consumer abuse while making sure that such distortions are eliminated from the financial market, and there is fair competition [Mic12]. The banking industry in Australia has been experiencing several transformations over the years. Increased technological innovation, competition and deregulations of financial services are some of the changes experienced by the industry in the last five years. With the entry of several foreign companies into the financial services market, there has been an increase in competition within the country, resulting in product innovation and a reduction in the price of financial services. There are over 35 foreign banks licensed to provide financial services in Australia. The entry of these financial institutions has resulted in increased competition within the banking industry with domestic banks fighting back to remain relevant and maintain their market share. The banking reforms introduced by the government gave financial institutions more power and freedom to develop new and better financial products and services, as well as, adopt efficient business practices. Subsequently, there has been an increase in competition among the participant financial institutions resulting in increased innovation and reduced margins in financial services. Furthermore, the decline in the number of regulation and restrictions that govern the operations of financial institutions have led to the adoption of new financial instruments, which are compatible with the level of competition within the banking industry. Indeed, a competitive and open financial market has succeeded, in compelling financial institutions, to be more efficient in fulfilling the demands of consumers, and adapting to changes on the technological front. The banking reforms have indeed served to make the financial institutions within the industry more competitive than before. These reforms have empowered the Australian consumer so much that financial institutions risk losing clients if they do not offer products, which are affordable to the client. As a result of competition, there has been a decline in the price of financial products and services, improvement of quality and an increase in a variety of available financial instruments. The decision by the Australian government to give banking licenses to such financial institutions as building societies and credit unions has widened the pool from which consumers can access financial services, and thus, increase competition among the participant financial institutions. These reforms have created a sense of business rivalry among financial institutions as they compete with other non-bank institutions in the supply of financial services such as consumer credit. It is inevitable that there will be a need for additional reforms to the banking industry given the increasing changes in technology, consumer preferences and demographics. From time to time, it will become necessary for the relevant regulatory bodies to update the existing reforms so as to keep up with changes in the economy. The reform regarding account portability, for instance, since the costs associated with switching from one financial institution to another still remains high. In addition to this, the entire process of switching banks is tedious since the consumer needs to have new credit cards, inform service providers and any other correspondence of the changes amongst other things. More reforms will be required, in the future, to make the process easier. Although the main aim of the reforms has been centered on making information available to the consumer, it is likely to hinder competition. Such an environment encourages information sharing amongst financial institutions, as well as full disclosure, which may restrict the level of competition amongst the institutions. This is because the institutions will no longer have an edge above their competitors as all will be operating at the same level. It is only through product innovation that banks will be able to maintain and gain new clients. Given that the last reforms introduced in 2012 played a significant role in boosting competition among financial institutions, it is likely that there will be a need for additional reforms that will act as a guideline on competition and the ethical conduct of business by such institutions. Competition has resulted in a significant decrease, in the price of financial services, and banks may collude to fix prices in order to earn more profits. New reforms will ensure better corporate governance and more regulations that will foster competition while at the same time overseeing the conduct of financial institutions. The Australian government together with the relevant regulatory bodies should formulate and implement a broader reform agenda, which will liberalize the overall development of the financial securities’ market and interest rates. Financial deregulation has reduced the sources of funds available to financial institutions and, therefore, strained their profits. As a result of the increased competition, these institutions can no longer subsidize some or all of their products and services leading them to impose charges on otherwise free services and price risks at a higher rate. The fact that the Australian government has provided banking licenses to non-banking institutions, like credit unions, has only made business harder for banks and a serious public relations challenge. Since Australia is a developed country, there will not be radical changes in the technological front. The advent of new technology will likely not affect the operations of financial institutions significantly. However, technology often becomes obsolete at a high rate and financial institutions have to keep up if they are to operate and compete efficiently within the banking industry. New technology will most likely translate to the introduction of new financial instruments and thereby creating the need for more reforms. In conclusion, the banking reforms, which have been introduced within the banking industry in the last five years, have been quite successful. They have succeeded in addressing concerns from consumers and businesses alike about the stability and long-term sustainability of the entire banking industry and participating financial institutions. In a world constantly marred by uncertain economic times, banking reforms are of high significance, to cushion both consumers and business from the negative impacts of widespread bank failures during uncertain periods. The banking industry in Australia is a key sector for the economy of the country. The entire financial system is a necessary good for the whole nation and any failure or risk to the system translates to a risk to the nation as a whole. The banking reforms have succeeded in making financial products and services more affordable and available to Australian consumers, as well as, making financial institutions more efficient. All these have taken place as a result of increased competition amongst both foreign and domestic banks within the industry. References Ste04: , (Bell, 2004), Res13: , (Reserve Bank of Australia, 2013), Ban13: , (Bank Reform Party, 2013), ABC10: , (ABC News, 2010), Aus12: , (Australian Government, 2012), The10: , (The Australian Government, Treasury, 2010), Pet11: , (Kuessner, 2011), Sio10: , (Ryan, 2010), Mic12: , (Pascoe, 2012), Read More