Government moves to boost bank competition

  • By AB+F Editorial

On Monday, the Federal Government said it would rollout a number of measures announced in the May budget, aimed at boosting competition in the banking system. 

Chief amongst these was lifting the prohibition on the use of the word 'bank' for authorized deposit-taking institutions with less than $50 million in capital. The aim of the measure is to reduce regulatory barriers to entry for new and innovative entrants to the banking system. 

“The restriction on ‘bank’ may also lead the public to mistakenly believe that small banking businesses differ from the larger players in terms of regulatory protection. The fact is that all ADIs are subject to the Australian Prudential Regulation Authority's prudential framework,” Minister for Revenue and Financial Services Kelly O’Dwyer said in a statement.

“Likewise, deposits at all ADIs are protected by the Government’s Financial Claims Scheme guarantee. That is why the Turnbull Government has announced that it will lift the prohibition on the use of the word 'bank'.” 

In addition, the legislation will reinforce APRA’s discretion over whether or not to permit the use of 'bank', ensuring that community expectations around the application of the term are maintained. Lobby group, the Customer Owned Banking Association supported the decision

The Government also announced that it would extend APRA's powers to non-bank lenders – also announced in the May budget.

New powers

Since December 2014, APRA has taken a series of steps to address emerging financial stability risks by tightening the lending practices of banks and other authorised deposit-taking institutions (ADIs), particularly in relation to residential home loans.

However, the prudential regulator does not have powers over the lending activities of non-bank lenders, even where they materially contribute to financial stability risks.

Under the Government’s draft legislation, APRA’s new powers will include: 

  • The ability to Issue rules relating to lending practices of non‑bank lenders, where it considers that they materially contribute to financial stability risks; 
  • These new rules will be backed by appropriate enforcement mechanisms. If a non-bank lender fails to comply with a rule, it will be directed by APRA to comply. If it fails to comply with an APRA direction, the non-bank lender will face appropriate penalties; and 
  • The legislation also enhances APRA’s ability to collect data from non-bank lenders, so it can better tailor the use of these new powers. 

“These new powers will allow APRA to manage the financial stability risks posed by the activities of non‑bank lenders, complementing APRA’s current powers over ADIs,” a statement from the Government said. 

“The Turnbull Government’s practice is to approach financial risks with a scalpel rather than a chainsaw – this measure provides APRA a new scalpel to deal with risks specific to non-bank lenders.” 

APRA will use its independent judgement to determine how and when to use this tool, in consultation with the Council of Financial Regulators.

However, in June, Patrick Tuttle, the former chief executive of Pepper Group, warned that these new regulatory powers over non-banks would kill competition

Submissions for both pieces of legislation are due by Monday 14 August. Further information can be found on the Treasury website