Tuesday, 18 July 2017

Australia Moves to Challenge the Banking Community with Reforms: A Workable Strategy?

Although Australia has weathered the supposedly global storm after the Financial Crisis (a number of countries, of course, were simply not as affected by the Crisis like their Western colleagues), with consistently positive results being reported by their largest banks (until recently), and solid economic fundamentals in place to protect them from external shocks, the Australian Government is pressing ahead with plans to reform the banking system in the Country and, in today’s post, these reforms will be the focus. We discussed the situation in Australia only recently here in Financial Regulation Matters in relation to the Credit Rating Agencies taking aim at Australian banks, so it is clear that the Australian banking system is currently experiencing a very challenging time. In that sense, the proposed reforms, which are currently at the consultative stage, are the epitome of that changing environment, but the question for us today is whether the reforms can make a difference, and also whether the proposed regulations may be transferrable – although that is obviously not a concern for the Australians.

Even though the Australian ‘Big Four’ banks had performed well since the Crisis, a review was still commissioned by the Government, to be conducted by the Standing Committee on Economics. That review, which is known as the ‘Coleman Report’ – named after the review’s Chair David Coleman MP – aimed to present several recommendations concerning the banking industry and, as is common since the Crisis, put consumers right at the very heart of their proceedings. The key aspects for the review were to put forward recommendations concerning a new tribunal system, affecting Executive’s remuneration packages, develop protections for the consumer in the financial arena, and also to develop more competition in the sector. In response to these calls, the Government has proposed to introduce the ‘Banking Executive Accountability Regime’ (BEAR) which is primarily concerned with the accountability-related proposals and forms the largest component of the proposed reforms. The most significant elements of the BEAR reform are that all Directors and Senior Executives would have to be registered with the Australian Prudential Regulation Authority (APRA), APRA will have more power to discipline and review the banks, the variable elements of senior banking officials will be deferred at a rate of 40% for Senior Executives and 60% for CEOs. The underlying sentiment of the BEAR reforms is that there must be increased transparency so, for example, the roles and expectations of each position within a large bank is now clearly identified so that, in the event of a failure, any divergence would be clear. However, there are a number of other reforms being put forward by the Australian Government.

Writing in May 2017, the Treasurer Scott Harrison MP declared that a number of elements were up for reform. With regards to the BEAR reforms, he announced that APRA would receive $4.2 million over four years to enforce the rules – this, admittedly, sounds nowhere near enough, but we will discuss this shortly -, that a one-stop shop for Dispute Resolution was to be set up, and that an initiative to encourage the development of a FinTech centre was to be introduced. Keeping with the banking industry, Harrison confirmed that would be pushing through measures to encourage competition, including altering the requirements for an institution to be called a ‘bank’, and that there would be the introduction of a levy on Banks, which he suggests will raise over $6 billion over four years. However, as mentioned above, the funding detailed by Harrison seems awfully limited for an endeavour so extensive and when we look at the proposed funding, it does not make for comfortable reading. For these grand regulatory endeavours, APRA will be afforded a total of $39.4 million over 4 years, whilst the Australian Competition and Consumer Commission will be given $13.2 million, and the Australian Securities and Investments Commission will be given $4.3 million over four years to supervise and establish the dispute resolution initiative, and $16 million to increase its ‘financial literacy’ program, which brings the total funding proposed by Harrison to just under $73 million over 4 years – this seems like a case of either under-funding or plans that are too ambitious.

Ultimately, the plans that have been proposed meet the recommendations of the Coleman Report and make for excellent headlines. However, the reality of situation may be a little different. Firstly, $73 million worth of funding does not sound like enough to regulate the banking industry in relation to these new regulations and to increase the protection of consumers. We have discussed financial literacy before in Financial Regulation Matters and one thing is for sure - $16 million will not cover what is needed, particularly for a country that has the population that Australia has. Secondly, and probably most importantly, it seems almost irrational to suggest that the largest banks will just accept these reforms – it is to be expected that large and concerted lobbying campaigns have already begun and will have had an effect before the legislators produce the final pieces of legislation. For this reason, it is likely that all of the reforms will not be introduced, or will at least be watered down, and also this is the reason that the reforms are unlikely to be transferrable. For our purposes, in terms of assessing the world of Financial Regulation, the influence held by large financial entities in countries like the U.S., the U.K., and the E.U. mean that reforms that seek to negatively affect the earning potential of financial elites are unlikely to be adopted in such a rudimentary form; regrettably, it is likely that these reforms will be lobbied against so vociferously that diluting them, or removing some of them altogether will be the likely outcome or, alternatively, the initiatives will be under-resourced so as to make them ineffectual. The development of the regulatory process in Australia, however, will make for a fascinating watch to see how it survives the gauntlet that stands in the way of all regulatory reforms in the modern day.

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