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The chief executive of the Customer Owned Banking Association (COBA), Mike Lawrence, has once again warned that uniform regulation across the banking landscape disproportionately hurts smaller competitors due to economies of scale in compliance, which could have “unintended consequences such as stifled innovation, regional branch closures and reduced investment in the community”.
Over the long term, this could mean diminished competition in the financial system and poor customer outcomes.
Citing a survey of COBA members, conducted by Grant Thornton, the association said that there is a growing fear among non-major and mutual bank executives about the “disproportionate cost of regulatory compliance”, with smaller institutions already shouldering a larger share of the regulation and compliance burden compared to their asset and actual size.
Respondents are concerned about the potential introduction of further layers of complex regulation as decision makers try to address the public trust deficit brought on by the litany of abuses exposed through the royal commission, despite it being “the big four who were ultimately responsible for the bad behaviour which led to the Hayne royal commission”, COBA said when announcing the release of A case for proportionate regulation: The cost of compliance report.
Over the next 12 months, 92 per cent of survey respondents expect the task of managing regulatory risk to either increase or increase significantly, 88 per cent expect their compliance budget to either increase or increase significantly, and 77 per cent expect time spent liaising with regulators to either increase or increase significantly.
Darren Scammell, Grant Thornton’s financial services leader for Victoria, said: “The royal commission will have implications for how risk to the consumer is minimised in the banking sector, most likely through regulation and additional resources, such as a Principal Integrity Officer.
“However, the level of risk isn’t the same across the sector, nor are the resources to carry the burden of additional regulation and requirements. For instance, we know of one credit union that hasn’t foreclosed on even one mortgage in more than 40 years. Compare this to one of the big banks which could have upwards of 900,000 mortgages on its books.
“The risk is disproportionate, and the regulation to safeguard consumers should be proportionate to reflect this.”
Responsible lending requirements topped the ranks as the most onerous area of compliance, with respondents also concerned about the growing amount of information required before lenders can grant loans to customers.
“The result could be that mutuals simply have to turn away many more customers who then end up in the arms of less regulated lenders, such as shadow banks,” COBA chief executive Mike Lawrence said.
According to the COBA-commissioned Grant Thornton report, the big four banks have a competitive advantage over smaller players as fixed regulatory costs can be spread across a broader asset and revenue base.
The same regulatory costs are not as easily absorbed by non-major and mutual banks that have substantially higher cost-to-income ratios, according to the recently published report.
“The big four banks’ average cost-to-income ratio at 44.5 per cent is significantly smaller than those of the other domestic banks (62.7 per cent) and mutuals (76.2 per cent). This indicates that despite clear differences in size, economies of scale work in favour for the majors,” the report stated.
The study further noted that compliance staff account for around 1 per cent of the major banks’ employee base, compared to 2 per cent at non-major banks and 4 per cent at mutual banks.
“This demonstrates that addressing compliance and regulatory requirements requires a level of staff which is not necessarily proportionate to the size of the entity,” the report stated.
Key recommendations from the COBA-Grant Thornton report include:
- “Positively consider the authorised deposit-taking institution’s size, risk profile and complexity when imposing regulation and have it apportioned accordingly”
- “Allow more possibilities for exemptions from reporting on risk factors which are not related to an ADI’s business model”
- “Ensure that the cumulative regulatory cost burden is considered at the regulatory policy design stage”
- “Avoid layering regulation”
- “Increase consultation between regulators when implementing changes to avoid ambiguity and complexity”
Mr Lawrence had recently said that if the Treasury Laws Amendment (Mutual Entities) Bill 2018 gets the green light in Parliament, it would allow the customer-owned banking sector to raise capital more easily and grow, ultimately improving competition and customer outcomes.
The draft bill proposes to introduce a definition for a mutual entity as a company where each member has no more than one vote, to establish an enhanced disclosure regime for members to make more informed decisions, and to improve access to capital without the risk of demutualisation.
Speaking at the COBA 2018 Convention in Melbourne last month, former chair of the Australian Competition and Consumer Commission (ACCC), Professor Graeme Samuel, said that the misconduct exposed through royal commission presents an opportunity for the customer-owned banking sector, even saying that the sector is “in a pretty good place”.
However, according to the Grant Thornton report, the CEO of an unnamed COBA member has noted: “To be competitive in the financial services industry, you must remain progressive, innovative and certainly offer interest rates that are available in the market. But if small operations have to continually meet the many compliance and regulatory imposts that keep coming, layer after layer, with no extra risks evident that do not produce revenue, only extra cost, then that slight chance of being competitive disappears.”
[Related: Impending law to poise mutuals for faster growth]
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