Australia’s banking system has become so concentrated its major banks can pass on costs and set prices to boost profits without fear of losing market share, through every stage of the economic cycle, the Productivity Commission has found.
The “four pillars” policy, which has underpinned Australia’s banking system since the 1990s, and which was designed to prevent mergers between the four biggest banks to maintain competition, has likely contributed to the problem, with evidence showing it is now preventing competition.
The reality of Australia’s “oligopolistic banking system” means the biggest banks are now regularly exploiting the inertia of existing customers, maintaining their market position with persistently opaque pricing, conflicted advice and remuneration arrangements, and a lack of easily accessible information that induces their customers to maintain loyalty to unsuitable products.
They are also overwhelming the population with a proliferation of thousands of similar financial products that are impossible to sift through.
Those are some of the damning conclusions in a report on the competitiveness of the financial system by the Productivity Commission (PC), released on Friday.
The treasurer, Scott Morrison, has welcomed the report, saying he will consider which recommendations to adopt after consulting widely, and after the banking royal commission has wrapped up.
Morrison said the banking system was unquestionably strong but some regulations had not necessarily made customers stronger.
“Too often we have also become willing participants in a game where the deck is stacked against us,” he said on Friday. “Because you can almost guarantee it, the more passive a customer is, the worse deal they are going to get.
“Real market power needs to be put back in the hands of the customer ... and we the customers have a role to play in this. Customers must stop being passengers and bystanders in their own cause.”
In a speech on Friday, Morrison said from July next year banks would have to start sharing more information on credit and debit cards, and deposit and transaction accounts, so customers could make better-informed choices.
“Open banking will be a game-changer,” he said. “Granting third-party access to your data securely will also make the process of switching between banks less painful and help overcome the ‘hassle factor’. More choice, more competition and importantly, more power.”
However, he has already rejected a key recommendation from the report that the Australian Competition and Consumer Commission (ACCC) become a formal “competition champion” that stress tests the competitive implications of proposed regulatory changes before they are implemented.
It said the ACCC, as competition champion, should become a permanent member of the Council of Financial Regulators so it can be in regular formal discussions with the Reserve Bank, the Australian Prudential Regulation Authority, and the Australian Securities and Investment Commission.
However, Morrison has rejected that recommendation.
The report also found the major banks benefit from a “too big to fail” status and an expectation of government intervention if one or more of these banks were in financial difficulties.
This status lowers the cost of funds for these banks and means larger banks benefit from lower costs of funding, compared with smaller institutions.
The Productivity Commission recommended the ACCC undertake studies on the effect of vertical and horizontal integration on competition in the financial system every five years. The first of these studies should begin in 2019
It has also called for the fine tuning of Apra’s prudential measures to address the imbalance in lending between businesses and the home mortgage market.
