David Coleman – Recommendations to come into effect after bank inquiry

David Coleman, the Chair of the House Standing Committee on Economics talks about recommendations that will come into effect, following the inquiry into the banks.

Introduction – Recommendations to come into effect after bank inquiry

Ross Greenwood: I want to take you now to banks. Obviously, as we’re telling you with the treasurer on a little bit later, the response of the banks in regards to the new bank tax, the levy if you like, $6.2 billion over four years is all important, but there’s more because do bear in mind along with not only the levy that’s going to go in the big banks, there were other things.

That was in regards to senior executives. That all senior executives have to be registered with APRA, the banking authority that effectively, they can have almost their license if you like, to operate as bankers withdrawn, they can also effectively have money taken from them. There’s a whole bunch of things. Now, the government is going to put in place to make certain the banks do operate to community standards, which is interesting.

That all of this comes out of the house of economics, or the house of representatives economics committees review into the big four banks. As a result, there were 10 recommendations which came out. Many of which now have been taken up by the government. Let’s go to the chairman of the house of economics committee that was responsible for this review, David Coleman is on live. Many thanks for your time, David.

Interview with David Coleman

David Coleman: No worries Ross. Good to be with you.

Ross: You lead this review, and we certainly know that you’ve been grilling the bank bosses over a period of time. You’ve recommended 10 changes that the government should pick up. How many have the government taken up?

David Coleman: Nine out of 10, Ross. We’re really pleased with that. As you mentioned, there’s issues around executive accountability, putting in space the permanent ACCC team to investigate competition, putting in place an open data regime for getting information out of the vaults of the banks and to their competitors which will be good for competition and whole range of other things.

Yes, nine out of the 10 things we’ve recommended have been taken on and we’re pleased with that outcome.

Ross: Let’s just start with the ACCC, The Australian Competition and Consumer Commission. What will happen here is that there will be a permanent team created within the ACCC. As a result then, it will review the banks when they make interest rate moves because this came after you did investigation that showed in most of the non-reserve bank moves that they’ve made that effectively that it has not been to the benefit of the customer, it’s increasingly been to the benefit of the shareholder. Is that a reasonable assessment?

David Coleman: Yes it is. Since 2000, we’ve found that there have been 20 occasions with the banks had moved interest rates out of step with the ABA, and on 19 of those occasions, it was bad for the consumer, bad for the customer. That gives you a pretty clear indication of the trend there. What we uncovered during this inquiry Ross is that there is actually no regulator looking at systemic issues in competition in the banking sector.

That came as something of a surprise because you know, you had Rod Sims, the ACCC chairman saying that he thinks that there’s a lack of competition in banking and it’s a bit cozy at times, Greg Medcraft from ASIC, he said that it’s oligopoly but the practical reality is that there wasn’t a team focused on structural competition issues in banking.

We thought that was a big issue, and we recommended the ACCC put in place a permanent force to scrutinize the banks and competition and make recommendations to the treasurer and that’s what the government’s doing. We think it’ll make a big difference.

Mortgage Competition

Ross: Okay, so the big banks hold around 80% of mortgages and around the 80% of deposits in Australia. They have significant market power, there’s no doubt. If say for example, even in its current situation with the tax, if they were to try and pass on the tax as they say to consumers, if there was sufficient competition in the marketplace, then consumers would have other alternatives, potentially cheaper alternatives to go to if the banks were going to pass when interest rate rises to them.

David Coleman: Yes, that’s right. If you think about other industries, Ross, it’s not the case that in every industry in Australia when they suffer an increased cost or a change in their business circumstances. If they can simply pass on 100% of that to customers. There’s a lot of businesses in Australia that would think you’re living in a fantasy land if you thought you could actually achieve that.

The reality is that’s what the banks are set to do and that is their suggestive, but there are issues in competition in banking in Australia . It’s not just me saying it, it’s the chairman of the ACCC, the chairman of ASIC and most banking analysts that have looked into the sector. Of course, we want a strong banking sector that’s good for the country, it’s good for the economy, but we also want one that’s truly competitive.

One of the other interesting things that came out of our inquiry, Ross was in the last 10 years, there has only been one new license for a domestic start-up bank in Australia. In the entire decade, one new local entity getting into the banking industry.

That shows you that it is incredibly onerous to start a bank, there’s a whole lot of red tape and some of it’s frankly unnecessary. We recommended that a range of rules about that stop people from starting banks be changed and the government’s also adopted that recommendation.

Ross: There’s one that’s controversial to many people, and that is there’s always been a protection of the banks because they are limited to 15% foreign ownership. What you’re saying, however, is in regards to substantial shells in particular that it should be lifted. That potentially, somebody can walk in and buy more than 15% of what about our big banks?

A lot of people don’t like the idea that our banks are Australian, but what you’re saying is maybe, having this arrangement that we have actually curtails competition in the economy.

David Coleman: Well, not quite, Ross. I wouldn’t quite agree with that description of what we recommended. The issue relates more to little banks trying to get off the ground. Today, if you want to start a bank, you have to get a license to do so. If anybody owns more than 15% of that bank, it might be a tiny, little company, you can’t do it, they say no. As you know in start-up situations, you often have a founder or an investor.

They might own more than 15% and at the moment, and that’s very typical in start-up companies. At the moment, if you have more, if someone owned 16%, the founder, he can’t start a bank. Once you’ve got your license, it’s likely that you’ll do more capital raisings and that founder will be deluded further and further down.

If you’re at less than 15% on day one, you could end up at very low one or two percent by the time you’re in any decent size. A number of start-ups or potential banking start-ups identified this issue and raised it with us and said, “Well, this is a problem. It’s some stunting competition. It’s basically mean people aren’t even getting out of the starting walls.”

When you look at that, and you say, “What does the data tell us?” The data tells us in the entire decade, there was one new banking license from an Australian start-up. That tells you something’s wrong with the system. I’m pleased that the treasurer’s taken on that recommendation. The other thing is that if you have a license to operate as a deposit taker, but less that $15 million in capital, currently you can’t use the term ‘bank’.

In the UK you can, in other countries you can. The government’s going to relax that as well. What this is about is it’s taking away artificial barriers that are stopping competition. In the UK, this is a few years ago, they’ve had dozens of new banking licensing raise in years. We should be able to achieve the same thing here.

Ross: I tell you, great to have you on the program. The other big review in there was about a single stop shop for all sorts of shall I say, to look after financial disputes and so it’s going to be a banking and financial sector tribunal to replace the various ombudsman’s games around the place.

David Coleman is the chairman of the house of representatives economics committee that’s done their review nine out of 10 of its recommendations will be taken up by the government and David, we appreciate your time in the program this evening.

David Coleman: Thanks very much, Ross.

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