A new Grant Thornton report commissioned by the Customer Owned Banking Association (COBA) has made the case that extra regulation in the financial services sector must consider the diversity of the banking sector.
The report’s foreword, penned by Grant Thornton national head of financial services Madeleine Mattera, and Darren Scammell, head of financial services, Victoria, pointed out the volume of inquiries and reports (the royal commission, APRA’s report on CBA and the Productivity Commission’s report on Australia’s financial system) that had recently been conducted into the financial services sector.
“The long-term outcome of all this activity is also still relatively unknown, but it is highly anticipated to result in an increase in regulation across the Australian financial services industry,” the report said.
Extra regulation to cost smaller banks — and customers
Heightened levels of regulation would mean greater costs in terms of skills, people, time and technology needed to adjust to the new requirements.
“This cost is easily absorbed by larger ADIs — the big banks — but can put undue pressure on the smaller ADIs — such as customer-owned institutions — that strive to compete in an environment where the cost of compliance is already burdensome and the changing nature of technology continues to strain resources.”
The report argued that a “proportionate” approach to regulation, which took into consideration “prudential, conduct, industry, data and competition” aspects, was needed.
“Change is coming from all directions, and without due consideration and planning, it could have significant impact on smaller ADIs,” the COBA-commissioned report said.
“Regulation should be targeted to accommodate different ADIs by size, risk profile, complexity and business model which will allow ADIs to compete on a fairer playing ground.”
One of the recommendations of the Productivity Commission was that all ADIs appoint a principal integrity officer, an executive position whose “salary… would be well above the average wage”.
But smaller, resources-stretched ADIs, more than bigger institutions, would struggle to meet the wages of this officer, the report said.
“For the major banks with an average of 39,757 full-time employees, the appointment of another executive may not have a major impact, but for smaller ADIs, some with as little as 19 employees, this can have significant implications in terms of additional cost.
“Furthermore, sourcing an individual with the skills required in regional areas may be difficult.”
Avoid painting the sector with a broad brush, says report
“Proportionate” regulation would mean a more nuanced understanding of what differentiates various entities from one another.
“Merely dividing a group based on asset size is not enough; a deeper understanding of the business model and drivers is required in order to fully assess the viability, sustainability and vulnerabilities of the entity.”
For smaller ADIs, this meant considering the “absence of shareholder returns, lack of vertical integration, smaller range of products and services and the systemic impact they pose on the industry as whole”.
Customer-owned entities also tended to be more immersed within the communities they served, the report suggested, with profits often reinvested back into the organisation to benefit all members.
As such, “pure financial analysis” would not be enough to assess the importance of these ADIs.
“The contribution to communities in terms of employment in regional areas, charitable contributions, accessibility and often a unique and deep understanding of the community they serve is often overlooked.
“Customer-owned ADIs tend to have a more personalised level of customer service that many of their members value.”
The royal commission had highlighted various case studies that demonstrated major banks had not acted in the best interests of customers or according to community expectations.
“Yet, it may transpire that regulation resulting from the outcomes of the royal commission are applied using a ‘broad brush’, impacting all ADIs including those whose whole basis is already for the benefit of their customers,” the report said.
[Related: Bank CEO laments ‘unfair’ banking landscape]