Submission to the Productivity Commission Inquiry into Competition in the Financial System 2. Developments since the Financial System Inquiry

Competition in the financial system was last considered by the Financial System Inquiry (FSI), which reported in 2014. This provides a useful benchmark for recent progress on competition.

The FSI Final Report concluded that competition was generally adequate, but noted that high concentration and increasing vertical integration in some parts of the financial system had the potential to limit the benefits of competition (Financial System Inquiry 2014). Since 2014, concentration in some banking markets has declined modestly (see the ‘Assessing Competition in the Financial System’ chapter). Vertical integration has also reduced somewhat as the major banks have divested some wealth management businesses.[1]

A number of FSI recommendations had a bearing on competition. Some were focused on the regulatory system, given the FSI's observation that policy settings with respect to Australia's financial system did not focus on the benefits of competition. The FSI recommended making competition a specific focus of ASIC and encouraged regulators to clearly explain in annual reports how competition was considered in their decision making processes. It recommended that the state of competition in the financial system be reviewed every three years (leading to the current inquiry).

The FSI noted that reforms that increased the resilience of the financial system, especially for the larger banks, would work to reduce the perception of an implicit guarantee, thereby reducing competitive distortions. It recommended regulatory settings that would lower the probability of a bank failure through ensuring Australian bank capital ratios are unquestionably strong, and reduce the cost of failure, by ensuring banks maintained sufficient loss-absorbing capacity. The Inquiry similarly recommended reducing the differences in risk weights on mortgage lending between banks using model-based weights (the large banks) and other ADIs.

Other competition-focused recommendations included:

  • developing a national strategy for a federated style model of trusted digital identities
  • graduating fundraising regulation to facilitate crowdfunding for both debt and equity
  • supporting data-driven business models through an inquiry into the costs and benefits of increasing data access
  • supporting expanded positive credit data sharing and, if voluntary participation is inadequate, considering mandated participation.

In respect of the payments system, the Inquiry recommended:

  • enhancing graduation of retail payments regulation by clarifying thresholds for regulation
  • clarifying and broadening card interchange regulation and lowering interchange fees.

The government's response to the FSI Final Report followed most of the recommendations (The Australian Government 2015). Significant progress has been made on implementation since that time, including:

  • implementation by the Australian Prudential Regulation Authority (APRA) in 2016 of changes to mortgage risk weights for ADIs using model-based weights (APRA 2015)
  • the recent announcement by APRA of changes to capital requirements to ensure that Australia's banks are ‘unquestionably strong’ (APRA 2017a)
  • establishing an expectation that regulators report each year on how they have taken account of competition in their decisions
  • establishing a regulatory framework for crowdsourced equity funding, allowing small business greater access to capital – the government is currently seeking to extend the framework to proprietary companies
  • establishing an independent review to recommend an approach to establishing an open banking regime in Australia (The Treasury 2017)
  • supporting the uptake of the current voluntary comprehensive credit reporting regime; a failure to meet a target of 40 per cent voluntary reporting by the end of 2017 will result in the government legislating a mandatory regime (The Australian Government 2017)
  • establishment by the Reserve Bank of a revised regime for interchange regulation, which has broadened the application of regulation and lowered interchange fees (see the ‘Competition in the Payments System’ chapter) (RBA 2016b).

In addition, as part of the 2017/18 Budget, the Australian Government announced measures:

  • establishing a dedicated unit within the Australian and Competition and Consumer Commission to undertake regular in-depth inquiries into specific financial system competition issues
  • legislating an enhanced ‘regulatory sandbox’ to allow businesses to test for a period of 24 months a wide range of new financial products and services (The Australian Government 2017).

Further, in August APRA initiated a consultation on the possibility of introducing a phased approach to authorisation, which would provide a restricted licence while an entity is developing the full range of resources and capabilities necessary to meet the requirements of the prudential framework (APRA 2017b).

Collectively these measures suggest substantial progress on further enhancing competition in the financial system since the 2014 FSI Final Report.


In 2016 NAB sold 80 per cent of its life insurance business, in 2017 Westpac sold part of its stake in BT Investment Management, while ANZ has announced plans to divest its Australian wealth management business. [1]