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Implications of the PC report on competition

Monday 12 February 2018


The recent draft report from the Productivity Commission (PC) looking at Competition in the Australian Financial System reinforces the need for financial institutions to take a more consumer-centric view of their business.

The report also recommends financial institutions reconsider their GRC programs and focus on how, potentially, a new regulator—or an existing regulator with greater authority—might impact the industry and how industry might improve their risk and compliance systems.

Regulators, especially ASIC, have been promoting the importance of competition within the financial industry to gain better results for consumers.

At the last few ASIC Summits, significant emphasis has been placed on fintech innovation and the ‘regulatory sandbox’. Repeatedly, ASIC has said fintech businesses or start-ups will close the current gap between consumer expectations and industry practices of the incumbents. Indeed, the rise of tech-based products has been coined as the ‘fourth industrial revolution’.

The Australian Prudential Regulation Authority (APRA) has been looking at lowering the entry requirement for new banks by introducing phased banking licensing.
Consumers will have the power to direct their banks to share data collected about them with a third party of their choice.

According to the Productivity Commission’s report on the state of competition in the banking system:


Although a very small part of the financial system, fintechs represent a group that could fundamentally change the nature of competition in the banking system. While the overall trend towards collaboration between fintechs and incumbents may improve efficiency of operations and reduce transaction costs for both fintechs and incumbents, it also reduces the potential for these new entrants to be a source of competition. If barriers to entry and expansion continue to fall, and data reforms are pursued effectively by the Australian Government, fintechs will find it easier to compete against incumbents.
 
The ‘competition champion’
The PC has expressed interest in finding a ‘competition champion’ for the sector. But for risk and compliance professionals, this raises several questions. Who will be responsible for looking at competition in the financial system? What might that regulatory framework look like? How might this alter existing regulatory requirements and expectations?

How can risk and compliance professionals weather these changes as just another business risk?

 

Competitive behaviour reforms
The reforms posed for competitive behaviour include:
 
  • clarity around how prices or features vary with product differentiation, with minimal scope for a provider or group of providers (or, of less bearing in financial markets, for any single consumer or group of consumers) to exert significant influence over price;
  • sufficient information for both providers and consumers to make informed decisions based on factors such as credit worthiness, risk, or product choice (given product terms and conditions);
  • low barriers for industry participants entering the market, for those expanding within it, and for existing providers that want to exit; and
  • a regulatory environment that does not impose undue distortions on the provision of or access to particular financial products or particular providers, and is able to effectively assess and deal with the risks for competition that are posed by regulatory measures and market developments.
 
Most relevant to risk and compliance professionals in this context is how these reforms will affect the regulatory framework.

The PC report highlighted:

Under the current regulatory architecture, promoting competition requires a serious rethink about how the RBA, APRA and ASIC consider competition and whether the Australian Competition and Consumer Commission (ACCC) is well-placed to do more than it currently can for competition in the financial system.

It would be interesting to see what such a regulatory regime would look like and what it would mean for businesses in terms of obligations. Will the regulator’s guidance be detailed or will it be more general and principles-based, like the guidance offered by AUSTRAC?

According to the PC report, it is not looking to change APRA’s role—which is to maintain stability in the competition space; however, there is the sense that the PC requires a regulator to “…actively temper the spirits in the financial system.”

The PC did make some recommendations about the effectiveness of APRA’s role:
Some of APRA’s interventions in the market—while undertaken in a way that is perceived by the regulators to reflect competitive neutrality—have been excessively blunt and have either ignored or harmed competition. Such consequences for competition were neither stated nor transparently assessed in advance.

This certainly suggests the importance of rethinking the current methods used to encourage competition.

Further to this, the PC suggests the idea of a designated ‘competition champion’:


Such an entity should also undertake functions that include: transparent analysis of impacts of prudential and other regulatory measures on competition; recommending action where integration imposes barriers to competition; and ex-ante testing of the impacts on competition and community outcomes of additional provider integration.
 
While the ACCC does have some impact on the financial system, it is not regularly involved with the Council of Financial Regulations (CFR). If the PC intends the ACCC to take on the role of scrutinising competition in the financial industry, the regulator would need more authority to intervene at the CFR, which the PC draft report suggests would be the chief forum for discussing competition.

ASIC is already firmly entrenched in the financial system, and with a strong consumer-centric focus. However, the PC report suggests ASIC would have to look beyond their enforcement regulation role and consider tackling competition in a systemic way:


Turning ASIC into a strong and pro-active financial system advocate for competition would require changes to its culture. Structural change might also become relevant and we seek information on this.

Beyond the question of which regulator could be the ‘competition champion’, however, the PC believes there also needs to be greater transparency around the decision-making processes of regulators.

This would be good for accountability, and would help create awareness about how future decisions will impact competition in the financial industry.