A new Customer Owned Banking Association (COBA) commissioned report has warned of the “possible unintended consequences” increased regulatory scrutiny could have on smaller players in the wake of the banking royal commission.
According to the report, smaller and customer-owned banks could be unable to factor in the extra costs of increased compliance and has instead argued the case of proportionate regulation “tailored to the size, complexity and risk profile of an institution”.
Monday's Grant Thornton report co-authored by Madeleine Mattera and Darren Scammell said this would allow banks similar in size to COBA’s membership to sidestep the “increased costs in terms of skills required, bodies on the ground, time to address new requirements and the hardware and software to make it all run smoothly” that accompanies increased regulation – which would leave them otherwise unable to compete.
“The difference between a smaller institution and a big bank is substantial – both in terms of cash flow and priorities,” Scammell told AB+F.
The report drew attention to the different in wages for these players outlined in a 2018 IBISWorld report. For the average credit union 25 wages make up around 25 per cent of all revenue, despite being up to $60,000 less than the average within the major banks; or less than 20 per cent of their total revenue.
The difference manifested difficulty in how both would appoint a Principal Integrity Officer (PIO), a new executive position recommended by the Productivity Commission at the end of their enquiry into the financial system that would ensure all interactions are in the customer’s best interest.
“For the major banks with an average of 39,757 full time employees, the appointment of another executive may not have a major impact but for smaller [banks], some with as little as 19 employees this can have significant implications in term of additional cost,” the report said.
However, Scammell said the difference extended to how the smaller operators “banks are focused on the communities they operate in and that takes a toll on overall profits as well”.
“I don’t think the Broken Hill Community Credit Union has defaulted on a mortgage for 30 years.”
He is fearful that the interim report from the royal commission could lead to a kneejerk “one-size-fits-all" reaction from government that would see them “take a sledgehammer to crack a nut”.
“I think if the royal commission's interim report comes out and the government ends up scared of that they might request [Australian Prudential Regulation Authority] and [Australian Securities and Investment Commission] to be much harsher than needed.”
“These banks already have controls, it’s just the rules haven’t been followed.”