COBA, the lobby group for customer-owned banks, has hit out at APRA for stifling competition and called for the Productivity Commission to follow the UK's lead and expand the prudential regulator's role to include promoting competition in banking.
The extent to which the regulator should beef up its role in monitoring competition is being looked at by the Productivity Commission in its current competition in banking inquiry.
In its submission, COBA made three key recommendations to the Commission. Firstly, COBA asked regulators to consider the impact of regulatory compliance burden on competition and ensure that regulation is targeted, proportionate, risk-based and, where possible, graduated.
Second, the lobby group argued that interventions are needed to empower consumers to switch between banking products but said these interventions should be cost effective and based on rigorous studies of banking product markets and consumer behaviour.
But the third and main suggestion is for the government to build an explicit "secondary competition objective" into APRA’s legislative mandate - along with an accountability mechanism.
According to Luke Lawler, COBA’s policy director, the enduring solution to concerns about the banking market is action to promote sustainable competition.
“We don’t have sustainable banking competition. A lack of competition can contribute to inappropriate conduct by firms, and insufficient choice, limited access and poor-quality products for consumers," he said.
“The regulatory framework over time has entrenched the dominant position of the largest banks. Promoting a more competitive banking market does not require any dilution of financial safety or financial system stability."
Lawler claimed a competition goal for the prudential regulator would raise the relative priority of competition compared to APRA’s "other considerations".
The secondary responsibility would formalise the relative "prioritisation" of competition and ensure that it becomes ingrained into APRA’s day-to-day regulatory processes. He also pointed to the UK banking regulator, which became responsible for competition in 2014.
'Inadequate and inconsistent'
According to Lawler, the outcome is a "material change of gear" where "competition is gaining airtime and traction at all levels" and "there are numerous instances where competition considerations have influenced policy outcomes".
Judging APRA concern about increased competition to be "inadequate and inconsistent", Lawless listed the prudential regulator’s failures.
These include: a lack of urgency in addressing the market distortions caused by the unfair funding cost advantage enjoyed by the major banks due to the implicit guarantee; the continuing wide gap in mortgage risk weight settings between the major banks and smaller lenders; and running macro-prudential measures that rewarded the big banks, which had grown their investor loans aggressively before the 10 per cent cap was applied.
In its submission to the Productivity Commission, APRA has argued that too much competition in financial services could lead to instability in the financial system.
“Periods of excessive and unsustainable competition can result in financial institutions inappropriately pricing risk or unintentionally accepting excessive risk in order to gain or retain market share," it said.
"Facilitating an appropriate balance between financial stability and competitive dynamics requires a considerable amount of judgement in understanding and weighing potential trade-offs when considering action."