Change within the banking and financial sector is not on its way.
It's already here and it's now.
As a Government we haven't been waiting or delaying our action.
The disruptive forces of technology, the arrival of nimble new players, the evolution of data use, and the empowerment of the customer are combining to upend traditional banking products, services and transactions the world over.
The use of artificial intelligence and access to real-time data and analytics. The growth of peer-to-peer lenders that bypass traditional lenders. The use of blockchain technology, distributed ledgers and RegTech. The personalisation of services.
The pace of change has been so profound, regulations have timed out, regulatory authorities have often been caught on the back foot, as innovation ploughs headlong into traditional systems and old mindsets.
Large institutions and banks have been forced to react and invest in order to protect their dominant market positions, under the threat of emerging game-changers and entrepreneurs accustomed to risk. Innovate or face diminishing returns.
We believe this change is not only welcome, but overdue.
The Turnbull Government has long embraced Australia's financial future and prepared for it, legislating a comprehensive array of reforms to make our banking and finance sector stronger, fairer, more accountable, and more competitive.
These regulatory reforms were not merely about keeping pace with the rapid change occurring in this space across the globe, but were designed to put us a step ahead of the pack.
Yet without impacting upon stability of our banking and finance system.
Of course we are not alone in pursuing these vital, sector-wide reforms. I have admired what the UK authorities set in train after the calamity the Global Financial Crisis wrecked on its economy and its financial system.
And we have since been aligning our interests and ideals in this space; swapping notes, sharing ideas, and ensuring our mechanisms are similarly targeted.
For me this has involved direct engagement with both Chancellors Osborne and Hammond, Governor Carney, the FCA, other relevant agencies, banks themselves, FinTech pioneers and other key operators and innovators on the UK scene.
Our responses to everything from bank misconduct and the need for greater accountability of executives, right through to the greater use of data, and the championing of FinTechs has been lock-step.
Our Banking Executive Accountability Regime drew its inspiration from the Senior Managers and Certification Regime employed in the UK - both squarely aimed at bringing individual responsibility and accountability to the governance of our banks.
Across both regimes, the consequences for executives and their banks for not meeting community standards will now be costly to the banks bottom line and to their individual careers. They are now individually and personally accountable.
This is what the public now expects. And that is what the Turnbull Government is delivering.
Continuing this theme of collaboration, in March we signed a FinTech Bridge to provide new opportunities for Australian FinTechs to grow by accessing a UK market where innovative companies are clearly thriving. And of course offer the same invitation to UK FinTechs to spread their wings into the Asia-Pacific via Australia.
UK FinTechs last year generated £7 billion in revenue, raised £1.3 billion of investment and employed over 61,000 people. The opportunities for our FinTechs to engage with this sector are enormous.
The first quarterly meeting under the FinTech Bridge at government-to-government level was held this week which successfully brought together officials from Treasury, ASIC, Austrade and their UK counterparts.
And I look forward to seeing the significant outcomes from these deepening ties between the Australian and UK Governments, regulatory agencies, trade and investment authorities and industry bodies, further cementing the positions of Australia and the UK as leading global FinTech centres.
But for all the success of these reforms so far, the one that matters most in the minds of customers is will I get a better deal?
Regulation has importantly played a pivotal role in making our banking and financial system stronger, in a prudential sense. This has always been the prudential regulators job, and I have nothing but praise for the work of APRA and Wayne Byers to this end.
But this hasn't necessarily made the customer any stronger. It is fair to say, nor was it likely it wasn't designed to. This does not reflect poorly on regulators, but the regulations and goals we task them to deliver and perform against.
Too often we, the customers, have also become complicit in allowing the deck to be stacked against us. You can guarantee it, the more passive a customer is, the worse deal they are going to get.
I believe that real market power needs to be put back in the hands of the customer.
Power to change their circumstances. Power to get a better deal on their mortgage, on their credit card, on their business loan. Power to change the system. Power to control their own data and reap the value of its use, rather than those who have been using it for decades, or even more recently through the most ad a fed digital business models, for their own advantage and not yours.
This is what the Turnbull Government is committed to as a matter of conviction and principle. That is why we are doing what we are doing.
And we the customers have a role to play in this. Customers must stop being passengers and bystanders in their own cause.
I am passionate about giving customers more power, that is what makes markets more competitive. This is as true for banking as it is for electricity, gas, water insurance, superannuation, telcos and the list goes on.
But there is no one more committed to looking after your interest than you. You can't take yourself out of the game, and listen to those who want to infantilize you by promising a cotton wool regulatory system, with nanny-like regulators, that rather than awakening and empowering your consumer power, will rock you off to sleep.
Beware those promising to protect you. Not only do they usually fail, not only do they cruelly and falsely raise your hopes with vain promises of being shielded or being compensated only to disappoint you. But by convincing you to stand down and leave it to them or others, because they think they know what's better for you than you, they are only making you more vulnerable, not less. They are disarming the best weapon you have to get the best deal, you.
While the Government can create an environment that gives you better tools to make an informed decision, it is only you as a customer who can actually make that decision. And it is you who lives with the outcomes.
It's the bacon and egg principle, the chicken is involved but the pig is committed.
To further this cause, today I am releasing the Productivity Commission's final report into Competition in the Australian Financial System.
This report complements the draft ACCC inquiry into residential mortgage pricing which is due to be finalised in November, and the Financial System Inquiry that has now been substantially implemented.
Today I want to pick up some of the themes touched on in the report and highlight what the Turnbull Government is doing to put power in the hands of the customer.
Firstly, ensuring customers get the information they need to make informed choices is both critical to a competitive market and critical for customers to get a better deal.
And we are not just talking about more disclosure - we need better disclosure.
Banking and financial regulation has had a dulling effect on customers.
The customer has become disengaged from the process and the detail, evidenced by the fact that half of Australia's banking customers still bank with their first-ever bank. Only one in three customers have thought about switching banks in the last two years.
That inertia, similar to what we have seen with households and their electricity and gas providers and super funds, is placing the clamps on genuine competition in the financial sector. And the big players know it.
Complexity and inertia is their friend.
The evidence from the Productivity Commission is that customers are not in a position where they are armed with the right information to make the right decisions for them.
They aren't in possession of the detail that accurately shows what kind of deal or discount they are receiving, and are therefore unable to compare precisely with other products in the market or what other customers in their circumstances are getting.
But you also must question whether customers are really seeking it out. Or are they just expecting it to rock up at their door. "It's someone else's job to ensure that I know all these things".
But don't forget those who benefit from keeping you on a bad deal are depending on you not asking the question or you relying on someone else to ask it for you. But the person most responsible for asking that question and getting that information is you. And again it is you that lives with the consequences.
As a Government we believe in personal responsibility, in fact we are counting on it. For the system to be fair and effective it depends on customers understanding, accepting and acting on that responsibility.
That said, after having enlisted you in your own interest, as the Government it's our job to ensure you can get access to all the things you need to make the right decisions for you.
There is no genuine transparency around product and pricing, and whether done implicitly or not, the industry has created these complexities, often aided by regulation designed to protect the regulator rather than the customer, that do nothing for the customer but leave them in the dark and more dependent upon advice, or that just makes them walk away and say it's all too hard.
The solution is certainly not more products.
Already customers can choose from almost 4000 different residential property loans and more than 250 different credit cards.
It is an absolute information overload of products that sound similar and appear to cost similarly - or as the PC describes: "a blizzard of barely differentiated products''.
Why switch when everything else seems the same.
This encyclopaedia of similar products, combined with the lack of transparency around pricing, opens up the door for financial institutions to exploit customer loyalty.
Too often it's the loyal customers that are left to foot the bill through higher premiums and higher interest rates when financial institutions offer temporary discounts to lure in new customers.
For example, the PC reports that more than 15 per cent of existing home loan customers are paying the average variable rate on their home loan. Typically, a new home loan customer can undercut that rate by around 0.4 percentage points.
The price of loyalty? Between $66 to $87 per month on the average home loan balance.
In its Residential mortgage price inquiry, the ACCC found banks had a tailored approach to discounting - offering larger discounts to borrowers who were likely to consider switching, while offering smaller discounts to more loyal customers.
The solution is the empowerment of the customer; reactivating them in their own cause, giving them better information, giving them access to their own data, and giving them the chance to go out and get a better deal.
We are now less than 12 months away from the phased introduction of Open Banking in this country - a monumental step towards giving power back to the customer.
Power in the form of your own data.
This is the revolution coming to banking customers courtesy of the Consumer Data Right the Turnbull Government set in train in the 2017-18 Budget in which banking is the first industry to adopt it:
- Rival banks and lenders offering you competitive deals that knock your current deal out of the park.
- Products tailored to your needs and circumstances with intuitive interfaces.
- The customisation of services; you getting to play an active role in defining and determining what the future of banking is. Co-creators, if you will.
- Real-time budgeting, investment and financial advice through live chat, including robo advice.
- Personalised e-commerce apps that cover a full suite of payment options, including peer-to-peer lending.
All because you have been armed with your own data.
This shifts the paradigm - financial institutions no longer setting the rules and demanding customers adhere to their purposes, but customers making the demands, setting the rules and forcing banks to react.
Or watch as a new player seizes that opportunity.
Open Banking will be a game-changer.
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.
Earlier this year I handed down the Open Banking report undertaken by Scott Farrell, which looked at the best way to put an Open Banking framework in place in Australia.
It was so informative, Cabinet has adopted all of the report's 50 recommendations, which not only mapped out the practicalities of the model and how it would generate competition and help customers, but also the requirements to build strong safeguards that protect customers' privacy and give Australians confidence in the system.
Importantly, the report stated the following: "markets work most efficiently when customers are informed (and) there is transparency in pricing and in the quality of available products and services."
Implementing Open Banking is part of the broader Consumer Data Right we are committing to legislation, that has the potential to see customer-driven data sharing being extended to energy and telecommunications.
Secondly, to put more power in the hands of the customer, we need more players, more innovators, and a level field upon which to play.
As is the case in the UK, our banking and insurance markets are dominated by a handful of players - four banks that own more than 75 per cent of the market for loans, personal deposits and credit cards; four insurance giants that have in excess of 80 per cent share of the market for lenders mortgage insurance and travel insurance.
An entrenched, dominant market position.
But that doesn't mean competition is weak as a result. It is the exploitation of that power that has the potential to constrain competition and deliver a poor outcome to customers.
The PC notes that because of the unique and dominant position the major banks have in the market, they have been able to insulate themselves from competition and largely bat away major economic shocks like the GFC without taking a significant hit to their profits.
But they go further.
"There is evidence that they have sustained prices above competitive levels, offered inferior quality products to some groups of customers, subsumed much of the broker industry and taken action that would inhibit the expansion of smaller competitors in some markets. All are indicators of the use of market power to the detriment of customers,'' the report claims.
We need our banks strong, stable and profitable. They provide a foundation for our economy, the opportunity, jobs, essential services and incomes that depend on a strong economy.
But we also need to ensure that competition isn't being constrained and the customers aren't getting the raw end of the stick.
It is not merely the size and established presence that gives our four big banks market dominance. They benefit from perceptions of government support that in effect lower their funding costs; they benefit from having lower operating costs and more sources of funding; and they benefit from integrating their myriad of services, allowing them to bundle and cross-subsidise.
The answer begins, but certainly doesn't end, with more players in the market. It is about creating a level playing field so competition can thrive.
Which is why our Government passed legislation this year to lift the prohibition on the use of the word 'bank'. Previously, only ADIs with more than $50 million in capital could call themselves a bank.
This vital change opened the door for 58 ADIs in Australia to call themselves a bank, and thereby boosting their market appeal and their ability to secure cheaper funds.
The Government has also established a pathway for new entrants to be licensed as an ADI.
When similar changes were introduced in the UK in 2013, more than 60 new 'challenger' banks piled into the market, offering rates that undercut the major lenders, and a seamless customer experience that was clearly a cut above.
Lenders like Monzo, Tandem and Starling, who billed themselves as 'mobile first', and forced the major banks to not only slash their interest rates and product pricing, but change the way they deal with their customers.
The game had changed.
It is our job to create and foster an environment where these exciting FinTech firms can thrive and compete on fairer terms with the big lenders, and can forge their own path.
This includes ensuring that Fintechs can get access to capital at a competitive rate from Australian investors and superannuation funds and not have to go overseas. It is also means ensuring that the national payments platform can reach its potential by ensuring that it can be accessed by all market participants and enhances competition, as recommended by the PC today.
We have been methodically positioning Australia to springboard and join the UK at the forefront of FinTech development and adoption around the world and especially here in the Asia-Pacific, leading the world in payment innovations, RegTech and blockchain.
We are implementing an enhanced regulatory sandbox that will give entrepreneurs and innovators a safe way of testing and developing ideas in a controlled environment, without the immediate hassles around the costs of licensing.
We have established an equity crowdfunding regime, allowing unlisted public companies to raise up to $5 million each year directly from retail investors; putting flight to those bright ideas. And we have legislation currently before the parliament to extend this to proprietary companies.
We have introduced legislation in the Senate to enable Comprehensive Credit Reporting, giving lenders access to a full set of data that will enable them to better assess the credit risk of customers.
This is all in addition to our tax incentives for angel investors, the launch of the National Payments Platform that gives customers real-time transactions, both peer-to-peer and to businesses, all through your mobile phone, and the work we are doing to develop digital identities.
All measures aimed squarely at ramping up our FinTech capabilities, for the betterment and empowerment of the customer.
And finally, even empowered customers should have a reliable safety net.
To be protected from the misconduct and predatory behaviour that has dogged our banks and institutions.
To be protected from banking and financial products that make customers feel like they are being exploited and ripped off.
ASIC has been particularly active in this space, exposing add-on insurance products that fail to provide adequate protection, or provide consumers with claims that are a tiny share of what they had paid in premiums.
For example, consumers on average receive back in claims between 83-98 cents in every dollar of premiums paid for car insurance, falling as low as 42c for home insurance.
For add-on insurance sold by car dealers - insurance that customers have not sought and rarely need - they receive back a paltry 9c.
Last year we acted swiftly to protect vulnerable Australians from some of the predatory behaviour we were seeing in the credit card market that were entrenching borrowers in a cycle of debt.
Under those changes, credit card affordability assessments will be done on a customer's ability to repay the full credit limit within a reasonable period, not just the minimum repayment.
There will be no more unsolicited offers of credit limit increases, and customers will be able to cancel their card electronically.
In addition to our Banking Executive Accountability Regime, we are also expanding ASIC's powers and penalties. The reforms made to the penalties represent the most significant increases to the maximum civil penalties, in some instances, in more than 20 years.
The Government will continue to look for opportunities to build on the existing framework to ensure customers trust the financial system.
For example, the concept of a Principal Integrity Officer that is mentioned in the PC Report is an interesting one that we will give very serious consideration. It has potentially far greater application than recommended and can work in well with the BEAR regime.
These roles are effectively already being performed in banks reporting through to the Chair of Audit and Risk Committees. But as we have seen in the Laker Report into CBA, where the Board drops the ball, what happens then?
I do find the Chief Pilot analogy convincing. A statutory obligation to pick up the phone direct to the regulators to an assigned senior executive within the bank with these responsibilities, spelled out in the accountability map as part of the BEAR, is a very worthy idea.
But as with all the recommendations in the PC report we will look carefully at them, consult, and consider our response in concert with any further matters coming forward, in particular from the Royal Commission. And I note this report had already been shared with Royal Commission.
Now of course governments can't solve everything in this space, and nor should it be our sole responsibility.
I have already spoken of the role customers have to play.
But the banks made this mess for themselves and are increasingly demonstrating that they must play their role in cleaning up their own shop.
In the new Banking Code of Practice, approved by ASIC only this week, we have a genuine path forward for banks to earn back the community's trust and act in the interest of the customers.
It is a significant step the banks are taking to alter their behaviour. And it enhances responsible lending practices, increased transparency of their products and greater protection of their customers.
The changes will bring tangible benefits to customers.
For example, pressure will be taken off customers, with sales of add-on insurance being deferred for at least four days when a customer applies for a credit card or loan, and banks will be forced to give their customers a list of direct debits and recurring payments to make it easier for them to switch banks.
And for the first time, the code will apply to small businesses that have under $3 million total credit exposure. Under the Code, allowable non-monetary default clauses have been slashed and for those that remain, there are tight restrictions on their use. So as long as small businesses are doing the right thing and making repayments, they will spared from default.
And importantly, the Code forms part of the contract with the customer.
I welcome the new code and I congratulate the industry for being proactive in addressing genuine concerns from their customers.
It is encouraging that the banks are starting to listen to the public and are looking to lift their game when it comes to how they behave and treat their customers.
I have seen other similar examples of this in recent weeks, including NAB making changes to its approach to rural lending.
Ultimately, as I said before, the banks have got themselves into this mess and they are the ones that have to get themselves out of it.
While they have a long way to go, the new code is a step in the right direction.
Putting more power in the hands of the customer.