Minority Report by Labor Senators
Introduction
1.1
The strength of Australia's economy is the envy of the world. In recent
years it has consistently outperformed other major advanced economies—for
example, the Australian economy grew faster than every other major advanced
economy in the June 2012 quarter and over the year to June.[1]
According to the International Monetary Fund, since 2007 Australia has grown
from being the 15th largest economy to now being the 12th
largest.[2]
1.2
Similarly, the strength of Australia's banking system is also the envy
of other advanced economies. Quick and decisive action by the Labor Government
helped ensure that Australia's financial system was well‑placed to deal
with the turmoil resulting from the global financial crisis. The government has
continued to act to strengthen and improve how the banking sector operates,
particularly by implementing measures to increase competition in the sector and
by enacting the first national consumer credit law.
1.3
The committee's report provides a good overview of developments in how
banks source their funds and the costs of these funds. It also provides a
useful outline of the Basel III reforms to capital and liquidity requirements,
and highlights the careful and well-considered approach that the Australian
Prudential Regulation Authority (APRA) is taking to implementing these reforms.
The report also reflects the evidence received regarding lending practices
since the global financial crisis well, including the evidence regarding
Bankwest.
1.4
Labor senators, however, do not agree with all of the majority report's conclusions
and recommendations. The views of Labor senators on these recommendations, and
additional observations that Labor senators wish to make, are outlined below.
The need for an independent inquiry
1.5
Labor senators do not agree with the rest of the committee that an
independent inquiry into the sector is required at this time. The case for initiating
such an inquiry has not been made. The government has been undertaking
significant reform to the banking sector, such as its 2010 Competitive and
Sustainable Banking System package. Developing these reforms has
necessitated careful consideration of the sector and wide consultation. This is
something the government is continuing with; most recently it initiated a consultation
process on further improving the financial regulation framework by
strengthening APRA's crisis management powers.[3]
The implementation of Basel III by APRA has also clearly involved careful
consideration of the sector. Further, the sector has been subject to numerous
reviews in recent years which have facilitated debate about the sector and
informed policy development, such as the substantial inquiries that this
committee has conducted.
1.6
It is clear that the regulatory structure established after the Wallis Inquiry
has functioned well overall. The performance of Australia's banking regulators
during this period is also difficult to question. In particular, the
conservative approach to capital regulation that the Australian Prudential
Regulation Authority (APRA) has maintained over a number of years, backed up by
its robust supervisory activities, has undoubtedly served this country well.
The combination of these factors has helped ensure that our banking system and economy
emerged from the global financial crisis much stronger than most others.
1.7
Labor senators also note that the banks have been adapting to the
changing environment following the global financial crisis, such as the
implications the crisis has had for how they source their funds. The Governor
of the Reserve Bank of Australia recently observed that 'Australian banks have
had no difficulty accessing funding, including on an unsecured basis'.[4]
The Governor has also observed that the adjustments taking place following the
crisis will further strengthen the banking system and the Australian economy:
Some of the adjustments we have been seeing, as awkward as
they might seem, are actually strengthening resilience to possible future
shocks. Higher—more normal—rates of household saving, a more sober attitude
towards debt, a re-orientation of banks' funding, and a period of dwelling
prices not moving much, come into this category.[5]
1.8
The case has yet to be fully made that an independent inquiry would be
able to meaningfully contribute to these developments or other funding sustainability
and cost issues.
The cost of funds
1.9
The cost of bank funds is clearly an important issue that directly
impacts millions of Australians. As the committee's report observes, the cost
of funds sourced from international wholesale debt markets increased as a result
of the global financial crisis. During the crisis, the government acted
decisively by introducing wholesale funding and deposit guarantees to secure
Australia's financial system. This action supported the wider economy as it allowed
lending to continue with lower interest rates for borrowers.
1.10
Since then, Australian banks have been moving to more stable sources of
funds that have proven more expensive. This is an understandable response to the
crisis and also in line with the requirements of the upcoming Basel III liquidity
reforms. However, further to the government's actions during the height of the
crisis, the government has also implemented reforms to assist banks to secure
their funding needs in a way which enables the provision of reasonably priced
credit to households and small businesses. Legislation enacted in 2011 allowing
the issuance of covered bonds by Australian banks, credit unions and building
societies provides another way for financial institutions to access stable
funds. The government has also created a legal framework that enables retail
investors to participate in the market for Commonwealth Government Securities,
which will help develop a deep and liquid corporate bond market in Australia.
Competition
1.11
Competition in the banking sector will help ensure that pressure is
applied to the banks as they make their interest rate decisions. The government
is committed to boosting competition in the banking sector and has been acting
on this by implementing a number of key reforms. Labor senators believe it is
important to highlight the evidence received by the committee about the state
of competition in the sector.
1.12
As part of its 2010 Competitive and sustainable banking system
package, the government announced a range of measures that will empower
consumers to get a better deal and support smaller lenders to compete with the
big banks. Exit fees for new residential mortgages have been abolished, the disclosure
of borrowing costs has been improved and it is now easier to switch transaction
accounts. When asked in August 2012 whether the current state of competition is
impacting on the decisions of the major banks to follow the official cash rate,
the head of Treasury's Markets Group observed that 'the measures that the
government has introduced are biting':
... things we cannot get away from are the banning of exit
fees, the switching package, better disclosure, giving consumer sovereignty,
giving power back to the person to make their choice and follow the market. If
they do not like the mortgage rate they are paying or they are not getting a
good return on their deposits, they are in a much stronger position to transfer
to another bank or turn to a mutual.[6]
1.13
Another Treasury officer advised that the major banks have lost an
estimated $16.6 billion in home-lending business to smaller banks since the
reforms were announced, and the small banks have increased their residential
mortgage lending at twice the rate of the major banks.[7]
The officer added that the value of refinancing has increased by 28 per cent
since the government's reforms were introduced:
Across the board, we have got the value of refinancing
increased by 28 per cent since the reforms were introduced. We would not make
the claim that that is solely driven by the reforms. I think there are a number
of factors at work and that is a reasonable conclusion, but it shows that the
reforms are having some influence on competitive tension, especially between
the major banks as credit growth is slowing.[8]
1.14
A representative of Abacus-Australian Mutuals, the representative body for
credit unions, mutual building societies and friendly societies, stated:
There is no question that some of the government's efforts in
the financial claims scheme and in making that a permanent feature of the
landscape have been very beneficial. There is no question that other things in
consumer protection, bans on exit fees and changes to credit card and consumer
protection laws, have been very beneficial for Australian consumers. There has
been great support and multi-billion-dollar funding for certain sections of the
securitisation market to keep it afloat at various times during the GFC. These
have all been useful and important reforms.[9]
Basel III
1.15
Basel III is the major response of the international community to how
banks should be regulated and supervised. The global financial crisis
highlighted key weaknesses with the existing regulatory regime. Given the
interconnectedness of the international banking system, and the need for
Australian banks to obtain offshore funding, it is important that Australia
implements these reforms in a timely fashion.
1.16
Nonetheless, this inquiry facilitated a useful public discussion about
the implementation of these regulatory changes in Australia. Importantly, it
highlighted the considered and balanced approach taken by APRA to implementing
the reforms in Australia. It also demonstrated that the implementation of Basel
III is broadly supported by Australian financial institutions. The CEO of the
Australian Bankers' Association (ABA) stated that:
I actually think our government and particularly our
regulators, the Reserve Bank and APRA, have done a very good job in balancing
the influence on where the international regulation is going, to the extent
that they are able to do that, and its application here in Australia. By and
large, we have been accepting of the impact of those changes here in Australia.
We have reservations about the speed of those changes; APRA feels that it is important
to move quickly and we will no doubt continue to discuss and debate that with
them.[10]
1.17
Labor senators are confident that the approach taken by APRA in
implementing Basel III is appropriate. Australian banks are on target for
meeting the capital requirements introduced by Basel III. The implementation of
Basel III in the terms determined by APRA, including the proposed
timetable, will further support the view that Australia's banking system is one
of the safest in the world. APRA's approach to capital regulation and its
active supervision activities have served Australia well to date and it should
be commended for its work and engagement with the sector. Accordingly, Labor
senators do not consider that the prescriptive recommendations contained in the
committee's report regarding APRA's work (recommendations 3.1, 3.2 and 3.3) are
necessary.
Lending practices
1.18
Labor senators are sympathetic to the circumstances of borrowers who have
had difficult experiences with financial institutions following the crisis. For
lending to consumers generally, the government has implemented important
reforms to strengthen the position of borrowers in their dealings with banks
and other lenders. In particular, the government has developed and implemented
a national consumer credit law that protects consumers from predatory lenders,
targets unfair lending practices and establishes stronger standards for
financial institutions for their lending activities. This law includes
responsible lending obligations that require lenders and finance brokers to
make reasonable inquiries about the consumer's financial situation and their
requirements and objectives, as well as take reasonable steps to verify the
consumer's financial situation.
1.19
Responsible lending is particularly relevant to some of the evidence
received by the committee. There is evidence that the government's responsible lending
reforms have been effective in tightening lending standards. On low-doc loans,
a topic discussed at a number of hearings during this inquiry, a senior manager
at Westpac advised that low‑doc loans have now dropped to around two per
cent of their total applications:
Before the responsible-lending stuff, which got much more
aggressive and brought licensing into the brokerage side of the argument, which
was really important, it was probably running at about 10 per cent.[11]
1.20
The ABA also outlined the impact the responsible lending obligation has
had, as well as the case for low-doc loans to remain available as a product:
Senator WILLIAMS: I mean, if someone has a house worth $1
million, they go to the bank, they get a $400,000 loan, a few questions are
asked, it is approved, the bank takes security of the title of the house—just
low doc or no doc. Are they still out there in the system?
Mr Munchenberg: I am not aware of them in the terms that you
have just described. Low doc loans were very much aimed at those people who do
not have a regular income, who are self-employed or a contractor, and therefore
did not meet the traditional banking approach of identifying your income and
everything. I do not think that the scenario you have given me would be able to
exist, simply because we have responsible lending obligations. We have legal
obligations to make sure that you are in a position to manage the loan that we
are giving you.[12]
1.21
Labor senators do not consider that the majority report provides a full
picture of the regulation of low‑doc loans. While much criticism was
directed towards ASIC by certain witnesses, ASIC's role has not been fully
explained. The following statement by Mr Peter Kell, a Commissioner at ASIC, is
instructive:
Although ASIC was not the primary regulator of credit prior
to 1 July 2010, it did have concerns about aspects of the credit market including
the low doc loans and conduct by brokers prior to that time. ASIC published
reports and took actions prior to that time, most notably it published a report
on mortgage broking in 2005 and a report in 2008 called Protecting Wealth in
the Family Home, which identified concerns with the abuse of low doc lending
and associated misconduct by brokers. The government relied in part on both of
those reports, the issues set out and what had been found, to make its decision
that credit should be regulated nationally, that brokers should be regulated
including through licensing, that the responsible lending laws should be
introduced and that regulation should extend to investment loans for
residential properties. So ASIC has certainly been on the record very publicly
in its arguments for the need for better regulation in this area for some time.
That, as I said, helped drive the credit reforms which brought ASIC into play
as the primary credit regulator from 1 July 2010 ... Since ASIC became
the primary regulator of the low doc sector, which is in effect post-GFC, the
number of those loans in the market has substantially dropped. ASIC undertook a
review of some of the lending practices in the first six months of its taking
on this new jurisdiction with a focus on home loans promoted as low doc loans.
The review at that time, which was published in November 2011, found that
brokers were aware of, broadly speaking, responsible lending obligations and
were taking steps to comply at that early stage. But ASIC did identify some
areas for improving industry practice and understands a number of findings led
to changes within the industry.[13]
1.22
Labor senators do not accept that there is evidence before the committee
demonstrating that ASIC has not been active regarding low-doc loans. Labor
senators note the majority report's observation that ASIC has publicly called
for detailed evidence regarding these claims to be provided to it.
Aggrieved individuals should take up this invitation and ASIC should act if
these claims can be substantiated.
1.23
On the Bankwest issue, Labor senators acknowledge these are difficult
and emotional issues for the individuals involved and are sympathetic to the
experiences the borrowers have gone through. Nonetheless, we concur with the
report's observation that this committee is not a court and that past disputes
will need to be considered through the judicial process, either individually or
through a class action.
1.24
The role that government should play in commercial finance offered to
small businesses is a difficult issue. Treasury provided the committee with
some information about the well-established framework in place:
Generally, the law allows lenders and borrowers to enter
freely into agreements that they consider appropriate for their circumstances.
There are a number of legal protections for small business borrowers to ensure
that they are not subject to treatment that is generally considered unfair, and
that the process for lenders to exercise their contractual rights over secured
assets is appropriate.[14]
1.25
Treasury's evidence demonstrates that achieving the right balance is
clearly desirable. Further evidence from a Treasury official provided some
additional context for the Bankwest issue:
This may not be solace to people who feel aggrieved or who
feel that they were not given a fair shake. But there is a framework there for
them to be able to take action if they feel that, in terms of the current laws
of the land and in terms of what is fair and reasonable, that did not occur. We
have to face the reality that this a commercial contract between borrowers and
lenders. I suppose the thing that makes us consider this matter is that, to
some extent, you had an intervention—the GFC—that took a lot of people by
surprise. I could well imagine that borrowers, before the GFC, were planning
their business on the basis of what they had seen previously, and lenders were
planning their business on the basis of what had been up to then. It is not
surprising that some issues have been raised from this event.[15]
1.26
The recommendations of the committee about an industry-based code of
conduct for small business lending is a balanced response and may have merit.
It is important to ensure that any changes do not impact the ability of small
businesses to access reasonably priced credit. There are over 2.7 million
small businesses in Australia. While the global financial crisis presented a
range of significant challenges for all small businesses, concerns about access
to finance appears to have been a more prevalent issue for these businesses
overall.[16]
This is not to say that there may not be a case for further work in this area. Labor
senators note that the government is already considering whether reform of
small business lending is required as part of phase 2 of the National Credit
Reforms. Consultation has already been undertaken by Treasury on this issue. Accordingly,
Labor senators consider that the need for further action in this area is
already receiving appropriate consideration by the government.
Senator Mark
Bishop
Deputy Chair
Senator Doug
Cameron
Senator for New
South Wales
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