Every day, ordinary Australians rely on the Australian financial system. It is essential to many of the biggest decisions Australians make in their lives, whether that's borrowing for a house, saving for retirement or investing for their family's future wellbeing.
The financial system is also crucial in many other respects of our day-to-day lives, whether that's buying a coffee, paying our bills or running a small business.
This makes the financial system unique. Australia has many vital economic sectors, but few are so unavoidable and critical to the lives of everyday Australians.
The stability of our financial system is also central to the successful operation of the Australian economy, and a key strength.
That is why it is crucial that the government ensures that the Australian people get the high-quality, safe and secure financial system they deserve.
So, what does the government expect of our financial system?
We expect not only a system that is unquestionably strong but also one that operates with the utmost integrity and is unquestionably accountable. Given the social licence under which the banks operate, we expect a system which is prudently managed, serving the interests of the customers who use the system and the wellbeing of their community.
We expect the system to be robustly competitive, driving prices down and fostering innovative new product offerings. We expect a system that is overseen by world-class regulators which have all the necessary tools at their disposal to execute the mandate they've been given.
Over recent years, the system has not always met these expectations. Time and time again we've seen scandals demonstrate that some in the system are more invested in their own interests than those of their customers and the community they are supposed to serve.
Now, Australians are fair-minded, and they're sensible. Businesses are supposed to make a profit; that's the point. Indeed, many Australians are shareholders in our financial sector institutions and share in the benefits of their profits and success; that's the point. A profitable, well-capitalised financial industry is in the interests of the Australian community and our economy.
But where these objectives are pursued at the expense of the integrity or stability of our financial system, then the broader national and community interests are not being advanced. Too often, Australians have not been given a fair go by some in the financial system. What's worse, the actions of some are damaging the reputation of the system as a whole and the work done by so many thousands who work in the banking system, doing the right thing for the right reasons.
So, what should a responsible government do in these circumstances?
Well, it takes action.
And that is precisely what the Turnbull government is doing—taking action now on our banking and financial system.
We have increased the power and resources of ASIC to deal with malfeasance in the sector. That's done.
We have introduced the Major Bank Levy, legislated through this place, which ensures that our largest banks pay their fair share, in recognition of the advantaged and protected position they hold in our financial system.
We have banned excessive surcharges on credit card transactions, delivering real savings on Australians' everyday transactions.
We have introduced a new alternative way to handle complaints and disputes so there can be fairer avenues to have issues resolved that are more affordable.
We have instituted, through the House of Representatives Standing Committee on Economics, an inquiry that regularly looks into the Australian banking and financial system, including how the major banks balance the needs of borrowers, savers, shareholders and the wider community. And I commend the member for Banks for his outstanding work as the chair of that committee, as well as the members of that committee.
The bills I introduce today build on all of these actions that the Turnbull government is taking. They represent a seismic change in the accountability of our banking system and the executives who run it.
These measures represent world's best practice.
The measures in this package—not just in the bill that I introduce specifically here but in the bills that will follow—will enhance the integrity, stability, resilience and competitiveness of the financial system.
The package I introduce today includes measures that will comprehensively overhaul APRA's powers, including powers to impose consequences under the Banking Executive Accountability Regime, enhanced APRA crisis management powers, and new rule-making and data collection powers for APRA over non-bank lenders.
Together, they represent the most significant overhaul of APRA's powers since its creation by the Howard government.
Financial markets cannot operate efficiently unless participants have confidence in the stability and integrity of the system—and this package gives reason to have that confidence.
The package will also increase the competitiveness of the banking system by opening doors to innovative new entrants and levelling the playing field by opening access to the term 'bank' to all licensed banking businesses.
Competition and innovation are the keys to improving the customer experience for all Australians. Alongside this measure, the government has also encouraged APRA to enhance its licensing processes and APRA has now rolled out a new licensing regime that will encourage innovative new entrants into our banking system, creating more competition. Building on this strong start, the government will have more to say about competition in the financial sector in coming months.
Finally, the package builds on our reforms to the consumer credit card experience by introducing a measure which will improve competition in the credit card market and help prevent vulnerable consumers from building up excessive credit card debt.
I will now turn to the Bank Executive Accountability Regime, also known as the BEAR.
Earlier, I explained why the financial system is so integral to the wellbeing of the Australian people. Banks occupy a particularly central and privileged role within that system.
Given the critical roles banks play within the community, bank directors and executives need to be held to an especially high standard of accountability.
What makes banks so special?
First, it is virtually impossible for Australians to go about their daily lives without a bank account. It's how we get paid, and increasingly, how we make payments. We can choose which bank we want to bank with, but it is very difficult not to bank at all. Given Australians are locked into dealing with banks, it is appropriate that bank executives are held to a higher standard by the community.
Second, banks benefit from an extraordinarily privileged regulatory environment that advantages them, particularly the larger banks. Virtually all depositors in Australian banks are protected by a government guarantee, known as the 'Financial Claims Scheme' or FCS. This makes it much easier for banks to attract depositors, because depositors know that their money will be protected if anything goes wrong. To understand how significant an advantage this is, consider what an equivalent would look like for the car industry—it would be like providing a free warranty on new cars.
Third, banks are fundamentally important to financial stability, and financial stability is fundamentally important to Australia's economic wellbeing. History has shown that crises that begin in banking rarely end there—they infect the entire economy. Our Australian banking system performed extremely well during the global financial crisis as a result of good stewardship, which I would commend, and the forward-thinking regulation by the then Treasurer, Mr Costello, in advance of that crisis. The government is once again taking a proactive approach in ensuring that the regulatory framework continues to protect the financial wellbeing of the Australian community and the economy more generally.
Banking executives share responsibility for the stewardship of the Australian economy and they make decisions that impact upon the lives of ordinary Australians who have no choice other than to engage with the system they help run. As a consequence, the community reasonably expects higher standards of accountability and integrity of banking directors and executives.
The BEAR ensures that where these community expectations are not met, appropriate consequences will follow. It makes clear individual accountabilities so that it is clear where the buck stops in decision making and responsibility.
I'll now turn to some of the provisions of the bill.
Schedule 1 to the bill imposes new heightened accountability obligations on banks, as authorised deposit-taking institutions, or ADIs, and their accountable persons. The definition of accountable persons will encompass both a prescribed and principles based approach and will capture the most senior directors and executives within authorised deposit-taking institution groups; that is, those who influence the overall conduct and culture of the group.
ADIs will be required to register their accountable persons with APRA and clearly allocate responsibilities to accountable persons via accountability statements and accountability maps. These steps will provide clarity of responsibilities and ensure that APRA has greater visibility of the most senior persons in ADI groups in order to more easily assign accountability should there be a breach of the BEAR obligations.
To support these new accountability obligations, the bill increases consequences for ADIs and accountable persons who do not meet their obligations.
ADIs will be required to defer minimum amounts of their accountable persons' variable remuneration for a period of four years. The amount to be deferred will vary with the size of the ADI, so that smaller ADIs will not be disproportionately impacted in their ability to attract senior talent. Mandating deferral of variable remuneration, combined with provisions in the bill that remuneration policies will include provisions for reductions in variable remuneration where an accountable person fails to comply with their accountability obligations, will increase incentives for these people to focus on the long-term outcomes of their decisions.
The bill also provides APRA with enhanced disqualification powers. APRA will be able to disqualify an accountable person directly, without needing to apply to the Federal Court. Importantly, given the significance of such a decision for an individual's career and livelihood, accountable persons will be able to seek merits review and judicial review of APRA's decisions, which is appropriate. These new powers will ensure APRA can more easily respond where an accountable person has failed to comply with their accountability obligations, while ensuring appropriate external oversight.
For ADIs, the bill introduces substantial new civil penalties, of up to $210 million for large ADIs, $52.5 million for medium-sized ADIs and $10.5 million for small ADIs, where an institution breaches any requirements of the BEAR that relate to prudential matters.
Finally, schedule 2 of the bill includes a number of provisions that provide APRA with the power to examine witnesses. These provisions broadly replicate existing powers that APRA has in relation to other institutions, including in the superannuation sector. While these powers will apply to the Banking Act generally, they will support APRA's enforcement of the BEAR.
The BEAR will commence on 1 July 2018, with transitional arrangements for certain elements of the regime.
The 2017-18 budget provided APRA with $4.2 million over four years to implement the BEAR. A further $1 million per year will be provided to APRA to enforce breaches. This funding will be offset by corresponding increases in the financial institutions supervisory levies.
I want to particularly thank the Treasury for the excellent work they have done in working with me and my office as we have sought over the course of this year to prepare these measures, which were announced in the budget. In so doing, I acknowledge the Treasury secretary, Mr Fraser, as well as the deputy secretary, Mr Lonsdale, and the entire team for the outstanding work they have done at a fast pace. They have understood the importance of this issue—getting it right but ensuring that this accountability regime can be put in place and ensuring that the government is in a position to take action now. I commend them on the professionalism of their work and the way they have gone about it. Full details of the measure are contained in the explanatory memorandum.