Banks in the firing line: Government adopts Coleman Report recommendations

The 2017 Budget has a whole bunch of measures to regulate and tax the banking and financial sector. Altogether they are (in the words of the Treasurer) nothing less than “an overhaul of financial system.”

A summary of the banking and financial services reforms announced in the Budget can be found here. In coming weeks we plan to examine the various items in more detail, but a good place to start is the Government’s response to the Coleman Report.

You may recall the Review of the Four Major Banks conducted last year by the House of Representatives Standing Committee on Economics. The Committee is chaired by Mr David Coleman (ironically, the Member for Banks), so the report of the review is referred to as the Coleman Report.

The Coleman Report was tabled on 24 November 2016 following a series of public committee hearings with interrogations of the CEOs of the four major banks. The report included a grab bag of recommendations, which we examined in detail in a briefing paper that you can download here. The Government chose Budget night to announce its response to the recommendations. The Treasurer seemed pleased to report that only one of the Coleman Report recommendations had not been accepted, but the Government has made some changes to the original recommendations in its response.

Dispute resolution

The Coleman Report recommended a single, industry funded Banking and Financial Sector Tribunal to replace the ombudsman schemes (FOS and the CIO) and the Superannuation Complaints Tribunal. The Government has agreed to this recommendation.

The recommendation for a single dispute scheme was also made by another inquiry – it’s hard to keep track of them all – established in May 2016 to review the financial system’s external dispute resolution and complaints framework. This review (known as the Ramsay Review after its chair, Ian Ramsay) delivered its final report in April, and the Government also announced its response to the Ramsay Review recommendations on Budget night, summarised here.

The Government has decided to name the new body the Australian Financial Complaints Authority (AFCA) rather than the Banking and Financial Sector Tribunal proposed by the Coleman Report. Do names matter? It is curious why the Government has called this body an “authority” rather than a “tribunal”. A “tribunal” sounds more like a judicial body, while an “authority” sounds more like an administrative body.  The AFCA will be overseen by ASIC.

The “one stop shop” is to be established by 1 July 2018 and there will be consultation on an exposure draft of legislation relating to its establishment and operation.

Breach reporting and conduct of senior executives

The Coleman Report proposed that Australian financial services licensees should have to publicly report significant breaches, including the names of senior executives involved.

In relation to naming and shaming senior executives, the Government will instead introduce a “Banking Executive Accountability” regime. Details are sketchy at this stage but involve authorised deposit-taking institutions (ADIs) having to notify the Australian Prudential Regulation Authority (APRA) before appointing directors and senior executives. These officers will then have to be registered with APRA, and APRA must be provided with a map of the roles and responsibilities of senior executives.

According to the Treasurer, there will be “additional expectations” established about how banks and senior executives conduct business “consistent with good prudential outcomes.” This sounds like APRA guidance or standards to be developed on corporate conduct by ADIs.

APRA is to be given new powers to impose massive civil penalties for ADIs that do not meet these “additional expectations”.  The maximum civil penalties will be $200 million for larger ADIs and $50 million for smaller ADIs.

APRA will also be authorised to penalise ADIs if they do not appropriately monitor the suitability of their executives to hold senior positions, and will be empowered to remove and disqualify senior executives from all types of APRA regulated institutions.

ADI executive remuneration is also to be Government controlled. At least 40% of variable remuneration such as bonuses will have to be deferred for four years (this will be 60% for some executives such as the CEO), and APRA will be able to require ADIs to adjust their remuneration policies if it believes they are “producing inappropriate outcomes”.

On breach reporting more generally, the Government has noted the ASIC enforcement review will be developing options to improve the breach reporting framework. We reported on this review’s proposals for self-reporting of breaches here.

Improving competition

The Government agrees with the Coleman Report recommendation to review competition in the banking sector. It has asked the Productivity Commission to undertake a review, which will begin on 1 July 2017, and is giving more money to the Australian Competition and Consumer Commission to establish a dedicated unit that will undertake regular in-depth inquiries into financial system competition issues.

Open banking and account switching

The Coleman Report recommended that deposit product providers be forced to provide open access to customer and small business data by July 2018. The Government has agreed in principle to introduce an “open banking regime” in Australia. First there will be an independent review to determine the most appropriate model. Once the New Payments Platform is operating, the Government will consider whether additional account switching tools are required.

New bank entrants

In line with recommendations in the Coleman Report to improve competition, the Government has agreed to relax the current 15% ownership cap for banks and supports a phased approach for bank licensing for new and innovative banking entrants. It will also allow ADIs with less than $50 million in capital to use the term “bank”, a change that could see many of the remaining non-bank ADIs (credit unions and building societies) become banks over the next few years.

Collection of data on IDR schemes

A proposal in the Coleman Report that financial services licensees be required to report data to ASIC on their internal dispute resolution (IDR) schemes has been adopted. The Government will give additional powers to ASIC to enforce this information gathering requirement.

Annual public reporting for the wealth management industry

The Government has agreed in principle to the Coleman Report recommendation that ASIC establish an annual public reporting regime for the wealth management industry. The ASIC enforcement review taskforce is consulting on this proposal.

Review of risk management frameworks

The one recommendation of the Coleman Report which the Government did not agree to adopt was a proposal that the major banks be required to engage an independent third party review of their risk management frameworks. The Government believes that the existing review requirements in APRA prudential standard CPS 220 should be sufficient.

Concluding thoughts

The Coleman Report was a report of a Parliamentary committee rather than independent “experts”, and its recommendations have a very political flavour. In adopting most of its recommendations, the Government clearly sees political advantage in making regulatory reforms to banking and financial services. While a few of the recommendations offer the prospect of increased competition in the market, other recommendations are about increasing regulation and the power of regulators. The “Banking Executive Accountability” scheme in particular is a highly intrusive reform where it seems that a government agency could end up screening appointments to senior roles and directing how executives are paid.

Patrick Dwyer and Kathleen Harris
Legal Directors