Reforms in the Australian Banking Industry - Assignment Example

Reforms in the Australian Banking Industry in the Last five years Name Course Tutor’s Name Date Introduction Several banking reforms have been introduced in Australia’s banking sector in the last five years (i.e. from 2007/2008 to date). This paper identifies the reforms and indicates that with the exception of the covered bonds reform, all the other reforms are suited to enhance the competitiveness of the banking industry in the country. The paper concludes by noting that encouraging new market entrants would enhance competition in the Australian banking sector. The reforms to the banking sector include: i. The National Consumer Credit Protection Act 2009 (Cth), which scrapped the exit fees requirement on home loans starting from July 2011. Schedule 1 of the Act contains the National Credit Code, which is a replacement of the Uniform Consumer Credit Code (UCCC) (Australian Securities & Investments Commission (ASIC), 2013). This reform has opened the banking system (especially the mortgage dealing banks) for more competition as consumers now have the flexibility to switch to better deals offered by different banks. This legislative reform empowers ASIC to pursue and impose fines on lenders who re-badge the exit fees to prevent consumers from switching. ii. The National Consumer Credit Protection Amendment Regulations 2011 set out a reform requiring lending institutions to provide consumers with standardised loan fact sheets by 1st January 2012. According to Oriti (2010), the law makes it mandatory for banks to provide a one-page standardised fact sheet to potential borrowers, indicating the money one is required to pay in the course of the loan, and indicating where else the borrower can shop for home loans. According to Oriti (2010), the reform is meant to empower consumers by enabling them to make informed choice based on standardised terminology and transparent information provided by lenders. iii. An amendment to the Trade Practices Act 1974, which has since been renamed as the Competition and Consumer Act 2010 brought about a reform which sought to wipe out anti-competitive behaviours among banks. According to Oriti (2010), the new law prohibits banks from using the investment community networks or the media to signal intentions related to interest rates. The law also prohibits interest rates-related tip-offs of whatever nature, and indicates that breaches to the law will attract penalties that equate to three times the benefit that a bank obtained from its conduct or 10 per cent of the bank’s annual turnover – whichever is greater. The law puts a limit to how much penalties a lender can pay at $10 million. iv. The banking reform package announced on December 2012 seems to empower consumers hence enabling them to get better deals from the banking sector (The Treasury 2013). The reform package further seeks to position small lenders “as safe and competitive alternatives to the big banks” (The Treasury 2013, para.2). Lastly, the reform package seeks to secure the sustainability and long-term safety of Australia’s financial system by creating an environment where small businesses and households can access fairly-priced credit from mainstream banks or from mutual banks. Notably, mutuals can now be referred to as banks, something that the Australian financial regulators made possible by making banking licenses accessible to more deposit-taking institutions. v. The Financial Claims Scheme (ADIs) Levy Act 2008 is a reform that makes it possible for the treasury to impose a levy on the liabilities of all authorised deposit-taking institutions (ADIs) for purposes of protecting depositors in case of ADI failure (APRA 2013). The scheme provides a buffer for the Australian banking system against a potential crisis. vi. The Banking Amendment (Covered Bonds) Act 2011 is an amendment to the Banking Act 1959, which introduced reforms into the banking industry by allowing banks and ADIs to start issuing covered bonds as of 17 October 2011. According to Frydenberg (2011), covered bonds “allow banks to diversify away from unsecured debt source” and into secured debt sources acquired from the Australian market. Depositors can make claims via the bank to a pool of assets which is used to secure the bond. Previously, banks and ADIs would not issue covered bonds because they were not consistent with the provision of deposit holders in the Banking Act 1959. vii. Credit card reforms that took effect from 1 July 2012 based on the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 (Cth) paved way for new requirements that require banks and other credit card issuing financial institutions to: provide customers with key fact sheets before signing a contract with them; abide by restrictions governing offers made to customers with a view of increasing their credit limits; notify customers who exceed their credit limits and abide by restrictions governing the interest rates, charges and fees charged on credit cards; and abide by requirements made in relation to applying customers’ payments (Association of Corporate Counsel 2013). Have the reforms made the banking sector more competitive? The reforms indicated above do indeed make the Australian banking system more competitive because they have given consumers more choices while levelling the playground for all banks regardless of their size. According to Scholtens (2000), the size of the bank is a hot issue in real life, although it is theoretically argued that a bank’s size does not affect its competitiveness. Scholtens (2000) notes that larger banks enjoy economies of scale, something that is not true for the relatively smaller deposit-taking institutions. In Australia, the reform that allowed mutuals to be recognised as banks is especially relevant in increasing competitiveness in the banking industry, since it also seeks to portray the smaller lenders as equally competitive and safer as their larger counterparts. Scrapping of exit fees on home loans means that consumers have been empowered with flexibility, and as such, banks can compete to provide consumers with the most appealing package deals. The foregoing is a big boost to competitiveness, just as the requirement to give consumers standardised loan fact sheets is. The latter will specifically make it easier for consumers to compare and contrast different offers by mortgage lenders, hence making it easier for them (the consumers) to identify the most suitable deal. In response, banks and mortgage lenders will strive to provide consumers with the best deals hence enhancing competitiveness. The reform banning interest rate signalling is also important for competitiveness in the banking industry since it levels the playing ground for all banks and ADIs. Consequently, banks, regardless of their size and/or network connections, will not have a platform through which they can benefit from interest rate signalling. The reform that authorises the Treasury to impose a levy on all ADIs also enhances competitiveness in the banking industry because consumers will have the assurance that their money is well protected and as such, will be more willing to participate in financial activities involving different ADIs. This means that consumers will be more willing to save their money in the financial institutions, borrow from the same financial institutions and take up other financial services such as mortgages from different players in the industry. As would be expected, the reassured and confident consumers will inspire more competitiveness from banks as each tries to garner as many customers as possible. The reform allowing banks and other ADIs to use covered bonds enhances competition in the Australian banking sector because as Oriti (2010) observes, banks and ADIs can now access funding from both the domestic and offshore capital markets. Such funding is likely to be more stable and cheaper compared to the offshore funding sources that banks and other ADIs previously relied upon. Commentators cited by Oriti (2010) suggest that covered bonds would attract local investments from superannuation funds, and this would undoubtedly improve the banks’ and ADIs’ financial position, hence improving their competitiveness. Notably however, some critics like Bouris and Joye (2012) argue that covered bonds will benefit the bigger banks (which have assets to secure more funding) as opposed to the smaller banks which do not have as much assets hence meaning they would not access the same amount of financing like their larger counterparts. When the size of the bank determines the amounts of funds that the bank can access, the covered bonds reform should not be considered a reform that entirely enhances competitiveness. The credit cards reform also has an indirect impact on Australia’s financial sector competitiveness, since all banks and ADIs are now required to abide by indicated credit card requirements. As such, no specific banks have undue advantage over others in relation to matters relating to the issuance of credit cards, charges, interest rates, and/or customers’ payments. The reform also protects consumers from exploitation, and this could lead to more confidence by consumers towards the financial sector, hence increasing their participation therein. Overall therefore, it appears that all the reforms that have taken place in the Australian banking sector in the last five years have generally enhanced the competitiveness of players in the industry. What additional reforms are needed to make Australian banking more competitive? The sentiment expressed by Bouris and Joye (2012) that Australia has too few banks to be competitive is in my opinion very true. Much as the reforms (especially the one recognising mutuals as banks) seek to open up the banking sector and give consumers more choices, I still believe that the dominance of the four major banks will always have an anti-competitive effect on the banking sector. The buying out or mergers of smaller banks such as the Adelaide Bank, Aussies, Bankwest and Bendigo Bank among others by or with the four major banks following ACCC’s waiver of competition concerns during the global financial crisis only complicated the competitive environment further. In my opinion, the Australian regulators need to put in place measures that deter mergers or buyouts in the banking sector. Additionally, the regulators need to examine the operating environment and remove all factors that give the four major banks undue advantage over smaller banks. For example, the AAA-rated covered bonds by the bigger banks have been accused of making it more expensive for smaller banks to acquire funding (due to their lower rating) (Bouris & Joye 2012). A policy paradigm shift is also in my opinion an additional way through which the Australian regulators can enhance competition. The four pillars concept, which has dominated Australia, has to change and in its place, APRA and the Reserve Bank of Australia (RBA) need to embrace the probability that a more competitive banking system, founded on more pillars, would contain less risks in the financial system as opposed to the current concentration of risks in four banks only. Conclusion Several reforms have taken place in Australia’s banking sector in the last five years. With the exception of the covered bonds reform, all other reforms are arguably positioned to increase competition in the sector. For the sector to become fully competitive however, it would be recommendable for Australia to open up for more players to make an entry into the banking sector. References APRA 2013, ‘Financial claims scheme’, viewed 25 September 2013, . Association of Corporate Counsel 2013, ‘A facelift for Australia’s credit card laws’, viewed 25 September 2013, . Australian Securities & Investment Commission (ASIC) 2013, ‘National credit code’, viewed 25 September 2013, https://www.asic.gov.au/asic/asic.nsf/byheadline/Consumer-Credit-Code?openDocument. Bouris, M & Joye, C 2012, ‘Our banks too big to fail, too few to be competitive,’ The Drum, viewed 25 September 2013, . Frydenberg, J 2011, ‘Banking amendment (Covered Bonds) bill 2011’, Speeches, viewed 25 September 2013, . Oriti, H 2010, ‘New government banking reforms’, Donavan Oates Hannaford Lawyers, viewed 25 September 2013, . Scholtens, B 2000, ‘Competition, growth, and performance in the banking industry,’ 1-14, viewed 25 September 2013, . The Treasury 2013, ‘Competitive and sustainable banking system’, viewed 25 September 2013, . Read More