Why a banking commission would be a royal waste of time

The merits of a Royal Commission into Australia’s banking system have been hotly debated. However, we at RateSetter don’t believe this should be pursued.

Despite the appearance of serving consumers’ interests, we think that a large-scale inquiry is likely to take a significant amount of time, be highly politicised, and will in the end only delay positive actions that Government should be taking immediately to help Australian consumers and businesses.

Further, the conclusions that might be drawn from a Royal Commission would mirror many of those made less than two years ago in the Financial System Inquiry led by David Murray. Despite a plethora of sensible recommendations that came out of that inquiry, few have been enacted.

We believe Australian consumers and small businesses would be better off if the Government moved beyond the constant cycle of investigation and enquiry into financial services, and instead implemented reforms that have already been considered and recommended.

Below are five of the actions we believe the Government should take immediately

1. Make comprehensive credit reporting mandatory

Australia is one of the only developed nations globally without a functioning Comprehensive Credit Reporting (CCR) regime. This would allow credit providers to report positive credit behaviour to credit bureaus, rather than just negative behaviour such as defaults as is the case currently.

Additional credit data helps foster greater competition between investors and ensures that consumer and business borrowers have faster access to lower-cost finance. It also helps support more responsible lending practices and helps underserved segments of society gain access to credit, such as younger applicants and new immigrants.

Legislation facilitating the sharing of comprehensive data was enacted more than two years ago, yet only a handful of credit providers, led by RateSetter, are participating. Unfortunately, in Australia, the large banks generally see this data as being owned by them, rather than by their customers. This thinking is unique to Australia, and something that can only be combated through policy settings.

The Government needs to make CCR mandatory for all credit providers immediately.

2. Give consumers control of their banking data

Australian consumers and small businesses should be able to use their banking history and related data to their own advantage. Again, Australia is a laggard. Many overseas governments are pushing forward with aggressive data sharing policies, including mandating open bank APIs allowing customers to share their bank data with others.

For example, the UK Competition and Markets Authority announced last month they will compel banks to make customer data more widely available – with customer permission – via open bank APIs.

The Government needs to give customers control of their data by making it mandatory for banks to provide access to customer data via open APIs.

3. Improve transparency of costs for consumer and small business borrowers

Consumers and small businesses in Australia are often exploited because regulations relating to the disclosures of interest rates, fees and charges are inconsistent and in some cases non-existent.

When was the last time you saw what your credit card interest rate was on your monthly statement? We’ll hazard a guess – never! Can you find on your bank’s website what the monthly fee is on a personal loan? Hope you have some time on your hands!

If you own a small business, do you know what the annual effective interest rate is, including all fees and charges, on your loan? Highly unlikely, as credit providers aren’t obliged to provide this information.

The Government needs to work with ASIC to address the lack of transparency of costs for consumers and small businesses.

4. Use Sovereign funds to help support greater competition in our financial system

The British Government has been supporting British small businesses by lending sovereign funds directly to them via alternative finance providers and peer-to-peer lenders, including the RateSetter group. The objective of this lending has been to help promote competition in the small business lending market, and to help support small businesses in underserved niches.

There is an opportunity for the Australian Government to give effect to the rhetoric around FinTech, competition and small business empowerment by implementing similar initiatives here. As well as helping small businesses secure cost-effective finance and introducing much-needed competition to the ‘big 4’ banks, the Government would also be able to earn attractive and stable returns.

The Government should consider lending sovereign funds to small businesses to help encourage competition and support underserved businesses.

5. Make the banks compensate taxpayers for Government deposit protection

Deposit guarantees are an anti-competitive, costly anachronism.” This was the headline of an article in the Financial Times this week, written by its financial editor.

Banks were established to provide a safe place for money to be stored. This model worked well until banks started to use deposits to fund investments in inherently risk assets, including investing in loans. The banking system is therefore fundamentally out of balance – banks are matching supposedly safe capital against risky assets, with tail risk borne by the taxpayer through the Financial Claims Scheme’s deposit guarantee. In the long run, this outcome is not a fair outcome for taxpayers, as they are underwriting risk without earning a related return. And the capital banks are required to hold will never be enough to satisfy the demands for an entirely safe deposit product: given enough time, the probability of a one in one hundred year event occurring approaches 1.

We see three potential solutions: i) banks should cease deposit-based lending, and alternative models such as peer-to-peer lending that directly match risk and return should be promoted, ii) the Financial Claims Scheme should be terminated, or iii) taxpayers should be compensated by the banks for the value of the risk that they underwrite.

The Government should ensure that taxpayers no longer underwrite risks in the banking system, or alternatively ensure that they earn an adequate return for underwriting such risks.

By moving past a Royal Commission into banking and instead implementing the reforms we already know need to be made the Government would materially improve the welfare of Australian consumers and small businesses, whilst avoiding millions of dollars of cost and years of delay.

This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.