Minority Report by Senator Xenophon
Introduction
1.1
The inquiry into aspects of bank mergers was established to investigate
the economic, social and employment impacts of the recent mergers among
Australian banks, what measures are in place to ensure sufficient choice for
consumers, and whether section 50 of the Trade Practices Act 1974 is adequate
to prevent further concentration of the Australian banking sector.
1.2
Australia's big four banks, Commonwealth Bank, Westpac, ANZ and National
Australia Bank, dominate the Australian banking sector, holding 73 percent of
the national banking market.[1]
These major banks are a result of a series of bank mergers over the past 150
years, however there are concerns that any greater concentration of the sector,
especially as a result of acquisitions of second-tier banks by any of the Big
Four, will result with less consumer choice, reduced competition and job
losses.
Background
1.3
There are four main views about the motivations behind bank mergers;
that it improves the efficacy of banking; that it’s aimed at increasing market
power; that it enables banks to grow in size and share; and, also, corporate ego.
Interestingly, only one of the four intents of a merger appears
to be in the interests of customers.
In fact, the Finance Sector Union stated in its submission to
the Committee that “some bank mergers may be necessary to ensure that financial
institutions survive, however most major mergers appear to be motivated by
profit with no guarantee of any public benefits”[2].
1.4
Since the late 1990's, Australia’s banking systems has operated according
to the ‘four pillars policy’, which the Reserve Bank of Australia explains is:
"... an Australian Government policy
that there should be no fewer than four major banks to maintain appropriate
levels of competition in the banking sector."[3]
The reason four banking institutions is based on the
notion that a merger between any two of the four would likely be followed by a
merger of the other two which would result in an effective duopoly of the market.
1.5
However, the Finance Sector Union asserted in its submission to the
Committee its concerns of mergers between any of the four major banks and medium-sized
banks, which it believes has flow on effects, namely increased pressure for the
other big banks to also acquire ‘second tier’ banks.[4]
Indeed, the role of ‘second tier’ banks plays a crucial role
in ensuring competition in the banking sector.
In a paper authored by Garry Goddard and Greg Walker, Competition
Analysis of Bank Mergers in Australia, medium-sized banks were considered
to:
“...
be efficient, innovative, geographically focused, close to their customers and
sufficiently differentiated from the ‘look-a-like majors’ to provide an
incentive for the major banks to remain competitive.”[5]
1.6
Mergers can be considered by the Australian Competition and Consumer
Commission (ACCC) under a formal or informal process, however, to date, all
banking mergers considered by the ACCC have been under the informal process.[6]
“The
ACCC’s approach in assessing a merger is to compare the likely state of
competition in future with the merger (the factual) and the likely state of
competition in the absence of the merger occurring (the counterfactual).”[7]
In its capacity to review and make an assessment on
proposals of acquisition, the ACCC gives consideration
to section 50 of the Trade Practices Act, which states that:
-
A corporation must not directly or indirectly:
-
acquire shares in the capital of a body corporate; or
-
acquire any assets of a person;
if
the acquisition would have the effect, or be likely to have the effect, of
substantially lessening competition in a market.
And, in determining whether the acquisition would
have the effect, or be likely to have the effect, of substantially lessening
competition in a market, the following matters must be taken into account:
-
the actual and
potential level of import competition in the market;
-
the height of barriers
to entry to the market;
-
the level of concentration in the market;
-
the degree of
countervailing power in the market;
-
the likelihood that the acquisition would result in the acquirer being able to
significantly and sustainably increase prices or profit margins;
-
the extent to which substitutes are available in the market or are likely to be
available in the market;
-
the dynamic characteristics of the market, including growth, innovation and
product differentiation;
-
the likelihood that the acquisition would result in the removal from the market
of a vigorous and effective competitor; and,
-
the nature and extent of vertical integration in the market.
1.7
The Senate inquiry was spurred by the Westpac/St George Bank merger
which was approved by the Australian Competition and Consumer Commission (ACCC)
in December 2008 and also the Commonwealth Bank/BankWest merger announced
earlier in 2008.
In an interview with the Australian Financial Review,
ACCC Chairman, Mr Graeme Samuel admitted:
"... the ACCC had been "very
uncomfortable" last December when troubled British lender HBOS sold
BankWest to Commonwealth Bank of Australia. But the ACCC let it through after
being advised by the RBA and the Australian Prudential Regulation Authority
that the deal was necessary for the stability of the financial system."[8]
It was also deemed that "the proposed acquisition would
not be likely to have the effect of substantially lessening competition in any
relevant market"[9].
The economic, social and employment impacts of the recent mergers
1.8
However, one of the key disadvantages to a bank merger from a consumer's
perspective is that large banks have a tendency to lose touch with their
communities and customers, unlike their medium-sized counterparts.
In its submission to the Committee, consumer organisation, CHOICE,
stated that it has considered the impact of excessive market power held by the
banking oligopoly.
“We have formed the view that such
excessive market power risks the following outcomes:
-
Crowding out new
entrants;
-
Poor customer
service;
-
Poor employee
satisfaction;
-
Excessive fees
and interest rates;
-
Low rates of
customer switching;
-
Poor product
innovation;
-
Reduced access
to essential banking services; and,
-
Reduced
diversity in local areas.[10]
1.9
In its submission to the Committee, the Finance Sector Union called for
a broader 'public interest' test to be incorporated into section 50 of the
Trade Practices Act, to take into account these impacts.
"At present mergers assessed under
section 50 of the Trade Practices Act 1974 do not consider job losses, for
example; however the Finance Sector Union believes that they are a significant
consequence of any merger and should be included when considering any merger
for regulatory approval."[11]
However, this was contrasted by the Law Council of Australia's
introductory statement during the Senate Committee hearing that they:
“...
can see no economic or legal justification for the introduction of an
alternative regime for assessing bank mergers, or for the introduction of
differ way of measuring competition in the banking sector. Rather, the
Committees support the continued operation of the existing merger, prudential
and public benefit regulatory frameworks for the assessment of bank mergers.”[12]
1.10
Currently, there is room for the Treasurer to impose conditions on institutions
seeking to merge with another bank, to minimise the impact of a merger on the
community and employees, however it has been argued to the Committee that these
do not go far enough and are often not enforced.
The measures available to enforce conditions on future bank mergers
1.11
In approving the merger between Westpac and St George Bank, the
Treasurer imposed a number of conditions whereby, for three years, the merged
entity is required to:
-
Maintain (in
net terms) branches and ATMs;
-
Remove
foreign ATM fees for Westpac customers using St George ATMs and vice-versa;
-
Continue to
provide a comprehensive range of affordable banking products to low-income
consumers and others ... with special needs;
-
Retain all
Westpac and St George retail banking brands including Bank SA;
-
Maintain
dedicated management terms for St George and Westpac retail banking
distribution; and,
-
Retain a
corporate presence in Kogarah.[13]
In addition, the bank is required during the transition
period to maximise internal redeployment opportunities; assist staff made
redundant during the merger process and work with consumer advocates and
community stakeholders to minimise community concerns about the merger and
process and work with consumer advocates and community stakeholders to minimise
community concerns about the merger and its impact on customers and the
community, and address any concerns as sensitively and quickly as positively.
1.12
However, the ACCC in its submission to the Committee did concede that
“these conditions are not monitored or enforced by the ACCC”[14],
but stated that:
“If the undertaking is breached, the
ACCC may seek orders from the court directing compliance with the undertaking,
the giving up of any financial benefit gained from the breach, compensation for
any other loss or damage as a result of the breach, or any other appropriate
orders.”[15]
1.13
In response to the Westpac/St George merger conditions, the Brotherhood
of St Laurence, which represents those in the community living in poverty,
stated in its submission that it "is concerned about the lack of any
appropriate monitoring and enforcement of these conditions,”[16]
and the impact this would have on the community.
1.14
Indeed, it seems contrary to its intent that the Treasurer will impose
undertakings upon a merger but not ensure that these conditions are met.
Penalties do exist for breach of these conditions, such as "the giving up
of financial benefit gained from the breach, compensation for any other loss or
damage as a result of the breach or any other appropriate orders"[17],
but it has been recommended that more effective penalties should be introduced,
such as a forced de-merger of assets, to ensure the banking institutions abide
by the regulations set down.
The capacity for the ACCC to enforce divestiture in the banking sector
1.15
Currently, if the ACCC considers that an acquisition contravenes section
50 of the Trade Practices Act and the parties do not agree to modify or abandon
the acquisition, the ACCC can apply to the Federal Court for an injunction,
divestiture or penalties to remedy any competition issues.[18]
1.16
Divestiture can be sought either
-
By accepting
binding undertakings from the notifying party to divest the relevant asset or
business line within a specified period; or,
-
By applying
to the Federal Court pursuant to section 81 of the Trade Practices Act.[19]
However, according to the Law Council of Australia, “there is
no general divestiture power in the Trade Practices Act which would allow the
ACCC to seek divestment of assets or business lines by merging parties.
Consequently, the ACCC does not have the power to seek divestiture other than
in the context of a merger review.”[20]
1.17
As the national regulator for competition, fair trading and consumer
protection laws, it should be in the capacity of the ACCC to enforce
divestiture in the banking sector where contraventions of section 50 of the
Trade Practices Act have occurred.
1.18
While it may seem extreme, the penalties for breaches of merger
conditions must be strong to ensure banks don't benefit from the merger without
considering the impact the acquisition will have on the community.
1.19
Consumer organisation, CHOICE, also highlighted in its submission to the
Committee that:
“... mergers are not the only way in
which concentration and consequent harm to consumer welfare can occur. Creeping
acquisitions, failure of competitors, organic growth and potentially other
market developments can also result in excessive competition over time.”[21]
Consumer choice and competition
1.20
A national poll by McNair Ingenuity of 1000 people in response to the
Westpac/St George merger found that 75 percent believed that the merger would
mean less competition. It also found that 72 percent already think that there
is not enough competition between banks.[22]
1.21
The ACCC admitted in its submission that:
"In
some cases, however, mergers have anti-competitive effects. By altering the
structure of markets and the incentives for firms to behave in a competitive
manner, some mergers can result in significant consumer detriment.”[23]
1.22
Indeed, there are growing concerns that consumer choice as a result of
bank mergers is being increasingly limited to the four major banks.
Abacus-Australian Mutuals, the industry body for credit unions,
mutual building societies and friendly societies, stated in its submission:
“Consumer
choice is being squeezed in banking. Major banks have taken over the two
largest regional banks and there is speculation some of the remaining regional
banks are for sale.”[24]
This concern was also detailed by Associate Professor Frank
Zumbo from the University of New South Wales, who stated that:
“As
markets become more concentrated, the opportunities for either collusion or
parallel conduct with respect to pricing and related matters grow considerably.
Within this context, banking mergers, as with other mergers across the economy,
present a real and very serious risk to competition and consumers.”[25]
1.23
During the recent considerations of the Westpac/St George and
Commonwealth/BankWest mergers, CHOICE explained in its submission that it had
called one the ACCC to "undertake more thorough research into consumer's
experiences of and attitudes towards competition in the retail banking
sector"[26].
"Despite such requests being made,
the ACCC did not believe it was necessary or appropriate to conduct its own
research into the market."[27]
Off-shoring
1.24
Another growing community concern is the issue of off-shoring.
Increasingly, banks, and other sectors, are sending jobs overseas in order to
reduce costs.
In its submission to the Committee, the Finance Sector Union
gave examples of the ANZ, which shifted 1,100 software development and IT
positions to Bangalore in November 2005; Citigroup replacing the 150 jobs in
its Brisbane call centre with positions in Manila; NAB shifting 220 IT and
accounts processing positions to Bangalore in 2005 and 2006 and a further 500
jobs to India in 2008; St George shifting 100 jobs involving credit cards to
India in September 2006 and a further 30 in May 2007 and Westpac moving over
500 back office processing and retail administration jobs in India in September
2006.[28]
1.25
The Australian Bankers Association advised that it “estimates that
around 3,200 full-time employment positions have been impacted by services
being sourced offshore over the past few years, equivalent to about 2.4 percent
of the total workforce of ABA member banks.”[29]
1.26
But, as the Finance Sector Union of Australia argued in its submission:
“...
mergers and off-shoring in the finance sector are generally not in the public
interest and have often had detrimental outcomes such as:
-
Employment
losses;
-
Negative impacts
on communities;
-
Reduced
consumer choice and service; and,
-
Loss
of skills and investment in Australia.”[30]
1.27
Further to this, there remains a lack of consent by customers to have
confidential data held by persons other than the bank with whom the information
was provided.
When applying for a loan, information about one's salary,
debts, marital status, other banking arrangements, address, is provided, to
name a few. Sometimes even a Passport is required for verification or a
Driver's Licence.
Given the increase in off-shoring by banking institutions,
it is imperative that consumers are consulted on this and provide their written
consent to allow this to occur.
Conclusion
1.28
Bank mergers may come with corporate benefits, especially if it's as a
result of 'rescuing' a bank that may have otherwise had to close, however with
acquisitions comes a raft of other issues that must be considered to ensure
that Australia's banking system remains competitive and in the community's best
interests.
Recommendation
1
That
the Banking Act is amended to provide for an outright prohibition against any
merger between the four major banks, so as to ensure that the 'four pillar'
policy is given the force of law and can only be altered by Parliament.
Recommendation
2
That all bank merger requests be subject to a formal
process of approval by the ACCC.
Recommendation
3
That
section 50 of the Trade Practices Act incorporates a broader 'public interest'
test to include the impact of the merger on community access, costs and jobs, and
that there be extensive and transparent community consultation as part of the
approval process.
Recommendation 4
That
section 50 of the Trade Practices Act is amended to prohibit any merger or
acquisition that "materially" lessens competition.
Recommendation
5
That
conditions set down by the Treasurer in respect to mergers are monitored and
enforced and that breaches of these undertakings are subject to effective
penalties, including the acquiring company being forced to de-merge.
Further,
that the Trade Practices Act is amended to provide for a general divestiture
power whereby a Court can, on the application of the ACCC, order the break up
of companies (i) having substantial market share; and (ii) where either the
characteristics of the market prevent, restrict or distort competition; or the
companies have engaged in patterns of conduct that are detrimental to
competition and consumers.
Recommendation
6
That
the ACCC consider applying for a divestiture order pursuant to section 81 of
the Trade Practices Act in relation to both the Commonwealth Bank's acquisition
of BankWest and Westpac's acquisition of St George Bank.
Recommendation
7
That all
banks be required to seek written consent from customers to provide their
banking data and private information to a third-party off-shore company.
Nick Xenophon
Independent Senator for South Australia
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