This article was written by Sarah Hickey and Lauren Murphy.
Following on from the Ramsay Review, House of Representatives Standing Committee on Economics report (Committee Report), the Carnell Inquiry and the final Productivity Commission Report into Data Availability and Use, the budget included a number of measures directly aimed at the Australian banks.
Major Bank Levy
As part of the Federal Government's plan to bring the budget back to surplus, a major bank levy will apply to ADIs with licensed entity liabilities of more than $100 billion from 1 July 2017. The levy is expected to raise $6.2 billion over the forward estimates period, covering liabilities such as corporate bonds, commercial paper, certificates of deposit and Tier 2 capital instruments at an annualised rate of 0.06%.
The levy will be calculated quarterly as at each APRA quarterly reporting date as 0.015% of an ADI's licensed entity liabilities and will not cover additional Tier 1 capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme.
Open Banking Regime
Following on from the Productivity Commission's final report into Data Availability and Use (see our alert here), the Government has announced that it will introduce an open banking regime. The Department of the Treasury will undertake an independent review to recommend the best approach to this, reporting by the end of 2017. The new regime will aim to provide consumers with greater control over their customer data and encourage competition in financial services by allowing consumers to request product and customer data from their financial institution when looking around for a better deal.
Increasing financial system competition
The Productivity Commission will commence a review of the state of competition in the banking system on 1 July 2017, with 12 months to report. The review will consider consumer outcomes, productivity and international competitiveness, innovation, and financial stability objectives. Further detail on this review was not provided in the budget.
A new unit will be established within the ACCC to undertake regular enquiries into specific financial system competition issues and facilitate greater and more consistent scrutiny of competition matters. This follows a recommendation from the Committee Report.
The Federal Government has also announced that it will reduce regulatory barriers to entry for new entrants to the banking system. Specifically, the Federal Government will relax the 15% ownership cap and the prohibition on the use of the term "bank" by ADIs with less than $50 million in capital will be lifted.
One stop shop for external dispute resolution
A new Australian Financial Complaints Authority will be created as a "one stop shop" to replace the existing external dispute resolution schemes (including the Financial Ombudsman Service, the Credit and Investments Commission and the Superannuation Complaints Tribunal). All financial firms (including super funds) which deal with customers will be required to be members of AFCA and will be bound by its findings. AFCA will hear consumer and small business disputes of higher values than the current three schemes. The Federal Government has indicated that the new framework will apply to small business disputes related to loans of up to $5 million with compensation capped at $1 million which is a significant increase on the jurisdiction of the existing schemes. This largely reflects the recommendations of the Ramsay Review, the Carnell Inquiry and the Committee Report. In addition, mandatory reporting to ASIC will be introduced for internal dispute resolution outcomes. We discussed the possibility of a 'one stop shop' in our earlier alert on the Committee Report, available here.
Banking Executive Accountability Regime
The budget provides funding for APRA to enhance its powers to make banks and their senior executives more accountable. This includes new requirements for bank executives to be registered with APRA, enhancing APRA's power to remove and disqualify an executive, new penalty provisions for breach (civil penalties will be a maximum of $200 million for larger ADIs and $50 million for smaller ADIs), deferral of remuneration for senior executives, and enhanced powers for APRA to intervene in remuneration decisions. An important question will be whether these provisions cover a broader range of executives to the current "senior manager" regime. Separate funding has been allocated for civil penalty enforcement.
The Federal Government has also announced it will legislate to establish an enhanced regulatory sandbox to promote greater innovation, competition and choice for Australian consumers. The sandbox will mean businesses have 24 months to test out new financial products and services without requiring a licence. However, businesses will still be subject to certain minimum consumer protection obligations.
Residential mortgage pricing inquiry
In conjunction with the introduction of the major bank levy, the ACCC will undertake a residential mortgage pricing inquiry until 30 June 2018. As part of the inquiry, the ACCC will be able to require relevant ADIs to explain changes or proposed changes to residential mortgage pricing, including changes to fees, charges or interest rates, with the aim of ensuring the cost of the major bank levy is not passed on to consumers.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2017-18.