Impending law to poise mutuals for faster growth

Competition in the Australian lending sector will heat up if the Treasury Laws Amendment (Mutual Entities) Bill 2018 gets the green light in Parliament, according to the chief executive of the Customer Owned Banking Association (COBA), Mike Lawrence, as it would allow the customer-owned banking sector to raise capital more easily and grow.

“This legislative overhaul is a fundamental endorsement of the customer-owned model and it will help boost competition in the banking sector and provide greater choice for consumers,” Mr Lawrence said.

The draft bill, which was recently released for public consultation, proposes to introduce a definition for a mutual entity as a company where each member has no more than one vote, to establish an enhanced disclosure regime for members to make more informed decisions, and to improve access to capital without the risk of demutualisation.

“These historic legislative reforms will provide greater access to regulatory capital and help ensure our members can grow more quickly and undertake important investments while remaining well capitalised,” the COBA chief executive said.

“With an enhanced capacity to write more loans and provide better-quality services to current and prospective members, our sector will be able to apply more competitive pressure in the banking market.”

Meanwhile, speaking at the COBA 2018 Convention in Melbourne this week, former chair of the Australian Competition and Consumer Commission (ACCC), Professor Graeme Samuel, said that the litany of abuses exposed through the financial services royal commission present an opportunity for the customer-owned banking sector, even saying that the sector is “in a pretty good place”.

He added that banks will have to restore customer trust moving forward, but he questioned whether they will take actions to do so for the long term.

A common viewpoint is that financial stakeholders are the main reason why the big banks’ ongoing relationship with certain businesses and their lending practices are deemed to be unethical, and that the first step to addressing the challenge is developing management practices that eliminate trade-offs between “doing well” and “doing good” while satisfying both financial and non-financial stakeholders.

“[Banks] all are now loudly proclaiming that they have been remiss in not putting their customers first. They are all promising to do so henceforth,” Mr Samuel said.

“But will they walk the walk? Will their institutional shareholders permit them to deviate from their perception of their primary remit, to increase the wealth of shareholders? How long will the shocking revelations of the royal commission remain at the forefront of their strategies for governance and cultural change?”

The former ACCC chair noted that the customer-owned banking sector “has different drivers, and thus a different foundation on which to base their culture”.

“If they take advantage of the opprobrium currently attached to the major banks, and structure their conduct around the ‘should we do it’ culture, they have a lot to gain from current events,” Mr Samuel said.

“They have the flexibility and motivation to not just talk about placing the customer first, but to actually walk the walk.”

Community-owned lenders such as Bank Australia, Community First Credit Union and Teachers Mutual Bank have guidelines on who they will, or will not, do business with, and promise their customers that their funds will be used to make positive social and environment contributions.

Mark Middleton, head of third-party distribution at Teachers Mutual Bank, previously told Mortgage Business’ sister title The Adviser that the bank’s pursuit of profits is never at the stake of the community, and that it ultimately puts profits back into the community.

Also speaking at the COBA 2018 Convention this week, Pat Brennan, the Australian Prudential Regulation Authority’s executive general manager of the policy and advice division, urged authorised deposit-taking institutions (ADIs) to ensure that they account for amendments to the Banking Executive Accountability Regime (BEAR) when implementing its measures.

The BEAR regime, which came into effect for the big four banks on 1 July 2018 and will come into effect for other ADIs on 1 July 2019, serves as an accountability framework, imposing higher standards of behaviour on banks and their senior executives and directors. APRA recently released a guidance paper outlining expectations regarding how ADIs can effectively implement the regime.

Mr Lawrence believes that, ultimately, it is competition that will be “the most powerful tool to bring about the changes in culture that the [royal commission] is clearly demonstrating as an urgent priority”.

According to COBA, the customer-owned banking sector has 4 million customers and $113 billion in assets.

[Related: BEAR regime not a ‘one-off exercise’: APRA]