Increased Competition Scrutiny in the Financial Services Sector by the ACCC

The role of the ACCC in the financial services sector has grown since the last time we explored its involvement back in 2012.

Review of the Financial Services Sector

Productivity Commission’s Inquiry into Competition in the Australian Financial System

The 2018 Productivity Commission’s Inquiry Report into Competition in the Australian Financial System (PC Report) looked into the state of competition in the Australian financial services industry; and uncovered that Australia’s financial system is dominated by large players – with four major banks dominating the retail banking sector, four major insurers dominating the general insurance sector, and with some of these same institutions featuring prominently in funds and wealth management.  These major banks hold over 75% of market share in loans to small businesses, housing loans, personal deposits and issuing credit cards; whilst general insurers hold over 80% of the market share for lenders mortgage insurance, reinsurance and travel insurance.  With only a few players holding such large market share, it is no surprise that these major institutions have the ability to exercise market power over their competitors and consumers.  The state of competition can largely be attributed to persistent opaque pricing, conflicted advice and remuneration arrangements, layers of public policy and regulatory requirements that support larger incumbents, and a lack of accessible information inducing unaware customers to maintain loyalty to unsuitable products.  The PC Report found that these factors contribute to the limited price competition for many financial products, a lack of genuine product variety and low rates of switching financial service providers – inevitably constraining competition in the Australian financial markets and generating poorer consumer outcomes.

ACCC’s strengthened mandate to oversee competitions issues in the financial sector

As a result of these findings, and in an attempt to promote greater competition in the financial market structures, it was part of the Productivity Commission’s recommendation to appoint a “competition champion.”[1]  The government saw that the ACCC was the most natural fit in addressing the gaps in the regulatory architecture relating to the lack of consideration of competitive outcomes in the financial market.  This came shortly after the Treasurer announced in the 2017/2018 Budget that the ACCC is to establish a Financial Services Unit (FSU) to undertake regular inquiries into specific financial competition issues. With its increasing mandate from the Government, there has been a gradual, but undoubtedly stronger focus and greater scrutiny, of competition issues by the ACCC in the sector throughout the years.

Its commitment to advocating for greater competition in the financial services sector, and ultimately its work towards a more ‘open banking’ regime, can be seen by the myriad of market studies ACCC has conducted throughout the years in the financial services sector.

From 9 May 2017 to 30 June 2018, the ACCC conducted an inquiry into the mortgage price decisions of ANZ, Commonwealth Bank, NAB and Westpac.  As set out in the ACCC’s report, the regulator found that competition in mortgage pricing was limited by the four major banks’ opaque and synchronised approach to pricing.  APRA’s benchmark at the time (which ceased from 1 January 2019), which required all Authorised Deposit Institutions (ADIs) to restrict growth in interest-only mortgages to 30% of total new residential lending, contributed to a “common understanding” in the approach to pricing in which all four major banks increased interest rates for interest-only residential mortgages during this period.  As a result of these findings, the ACCC bolstered the Productivity Commission’s recommendation to develop an online calculator to help customers compare rates – encouraging borrowers to regularly review their mortgage products and shop around.  Furthermore, it encouraged the introduction of the Consumer Data Right (CDR) which came into effect for the big four banks since 1 February 2020 (see below).

ACCC also conducted an inquiry into the foreign currency conversion services from 2018 to 2019.  Though the report found that new non-bank entrants were delivering better consumer outcomes, it also found that there was more scope to improve competition by reducing barriers to entry for non-bank suppliers of international money transfers (IMTs).  On this note, the ACCC recommended various measures to be mandated to encourage better presentation of prices, such as displaying foreign cash prices on rate boards and disclosure of international transaction fees.

More recently, in 2020, the ACCC conducted an inquiry into home loan prices.  The report found that many borrowers with older home loans continue to pay significantly higher interests rates (compared to borrowers with newer home loans); rather than seeking to switch to a lower rate from an existing lender or switching to a new lender.  The ACCC considers this to detract from price competition in the home loan market and adversely affects customers.  It recommended lenders to provide an annual prompt to borrowers with older variable rate loans to look at potentially switching lenders and to provide borrowers with an easily accessible standardised form to discharge their home loan when switching.

The ACCC continues to prioritise its work in conducting market studies or inquiries.  Its continued regulatory commitment to the financial services sector is noted in the 2020 ACCC Compliance and Enforcement Priorities Conference, where Rod Sims emphasised the importance of undertaking market studies, especially in the financial services sector, to provide the regulator with a better understanding of the complex issues, and in advocating for greater competition in this area.

Other reviews

On 11 September 2019, the Senate established a Select Committee on Financial Technology (FinTech) and Regulatory Technology (RegTech) to inquire and report on matters relating to Fintech and RegTech, any barriers to the uptake of new technologies and the effectiveness of current initiatives in promoting the Fintech and RegTech start-ups.

As of 2020, the Treasury is also conducting a review of the Australian Payments System.

As a result of the damning findings in the Royal Hayne Commission, it is unsurprising that the financial services sector is currently under intense scrutiny and review.

Increased Competition Scrutiny

More recently in January of this year, ACCC has warned big banks that the regulator will closely scrutinise takeovers of fintech companies – arguing that acquiring fintech companies, which the ACCC see as likely forms of challenge against the big four banks, could stifle competition and deny customers of future benefits from innovation.  The ACCC chair, Rod Sims, stressed that it would not necessarily block all such deals, but that the regulator is likely to look more favourably on acquisitions of fintech companies by second-tier banks.  The ACCC emphasised its concerns at the prospect of the big four banks ultimately picking off potential fintech rivals and the ability of merger laws to address such a situation.

Enforcement and compliance

ACCC’s intention to tackle the “cosy oligopoly” of the big four banks has been made clear by Rod Sims, who stated that for there to be greater competition in the sector, there must be a sense of “threat” to compel better conduct from these financial institutions.  The “threat” that the ACCC is referring to is tougher penalties, as the regulator made it known that they believe this is the most effective deterrence and way of ensuring compliance with competition and consumer laws.

The ACCC’s more punitive and harder stance in dealing with competition issues can be seen in its increasing readiness to bring matters in the financial services industry to court.  Most notably, the ongoing case against Citigroup, Deutsche Bank and ANZ brought by the Commonwealth Director of Public Prosecutions and ACCC alleging that these investments banks had engaged in cartel arrangements in relation to how excess shares were to be dealt with.  The consequences of finding individuals guilty of a criminal cartel conduct is up to 10 years in jail and/or fines up to $420,000 per offence; whereas institutions face fines of up to $10 million per offence.  The ACCC has made it known that its aim of having the cartelists jailed to improve deterrence will still be pursued.

Regulatory Developments

Consumer Data Right

The Consumer Data Right (CDR), or ‘Open Banking’  was introduced to give consumers the right to product data and to share financial information with unaffiliated third parties, which would allow customers to compare and switch between financial products more easily.  We are in the middle of a phased introduction of Open Banking that began on 1 July, 2019 and will end on 1 February, 2022 when full data transfer for consumers will be available irrespective of the bank or the type of accounts.  The phases are staged depending on whether the bank is one of the four major banks or ‘other banks’, and also by reference to type of account or loans, which are broken into Phase 1 accounts, Phase 2 accounts and Phase 3 accounts.

In summary, from 1 February 2020, the four major banks have had an obligation to share certain product data when requested by a customer; whilst this obligation kicked in for non-major banks on 1 July 2020.  From 1 November 2020 onwards, the four major banks have an additional obligation to provide accredited third parties with home loan, personal loan and mortgage offset accounts.  From 1 Feb, 2021 the major banks have been required to provide account and transaction data on business finance, investment loans, lines of credit overdrafts and a range of other accounts.

‘Open Banking’ is intended to promote competition and innovation in the financial services sector by providing customers the right to share their data, enabling them to search for a better deal, keep track of their banking and to switch products/services more easily.

Despite its recent formalisation, the Rules are still subject to change and will be constantly updated.  It is to be expected that the ACCC will continue to hold ongoing consultations with regard to the implications of the CDR for various affected stakeholders.

Unfair contract terms

Furthermore, 2021 is a big year for reforms to the unfair contract terms laws, introducing penalties for using an unfair term and expanding the definition of “small business contract” so that the laws apply to a greater number of contracts.

What actions should you take in light of increased competition scrutiny?

In the environment of increased competition scrutiny and in light of a rapidly changing regulatory landscape, some of the actions you could consider taking are:

• ensuring you have in place a comprehensive company-wide competition law compliance program in place;
• carrying out periodic competition law audits or spot-checks; and
• contributing to the many inquiries that the Government or the regulator are currently undertaking so that you have an opportunity to shape policies in the financial services sector.

Would you like to know more?

Authors: Annabelle Chai (previously a Lawyer at Holley Nethercote) and Grant Holley (Partner)

[1] Productivity Commission, Competition in the Australian Financial System (29 June 2018), Productivity Commission Inquiry Report <https://www.pc.gov.au/inquiries/completed/financial-system/report/financial-system.pdf>.