A1
Final Submission to the
Productivity Commission’s
Inquiry into Competition in the
Australian Financial System
20 MARCH 2018
This document should be read in conjunction with the
Commonwealth Bank of Australia’s Initial Submission
(dated 15 September 2017)
| CommBank of Australia |
1
This page intentionally
left blank
| CommBank of Australia |
2
Contents
Executive summary ........................................................................................................................................................... 5
Chapter 1: Industry context ............................................................................................................................................. 9
1.1 Competition and regulation in the Australian financial system are healthy ................................... 9
1.2 Australia’s economic prosperity relies on a strong and stable financial system .......................... 17
1.3 The performance of the industry reflects the operating context ..................................................... 25
Chapter 2: Balancing competition and stability for economic prosperity ....................................................... 29
2.1 Change in regulators' roles and responsibilities .................................................................................. 29
2.2 Balancing macro-prudential regulation ................................................................................................... 33
2.3 Balancing non-macro-prudential regulation ......................................................................................... 37
2.4 Access to data and switching ..................................................................................................................... 41
Chapter 3. Examining industry practices for better customer outcomes ........................................................ 47
3.1 An effective and efficient payments system ......................................................................................... 47
3.2 Improving customer choice and outcomes in residential home lending ....................................... 51
3.3 Improving customer choice and outcomes in insurance .................................................................... 61
3.4 Improving customer choice and outcomes in financial advice ........................................................ 65
Cross reference of Draft Recommendations ........................................................................................................... 69
Cross reference of Draft Findings ............................................................................................................................... 70
Cross reference of Information Requests .................................................................................................................. 71
Glossary ..............................................................................................................................................................................72
| CommBank of Australia |
3
This page intentionally
left blank
| CommBank of Australia |
4
Executive summary
The Commonwealth Bank of Australia (CommBank) welcomes the Productivity Commission’s
(Commission) Inquiry into Competition in the Australian Financial System (Inquiry) on behalf of the
Australian Government (Government) and the Inquiry’s Draft Report (Draft Report).
CommBank believes a highly competitive banking system that is stable, fair, efficient and safe through
the economic cycle is good for customers, shareholders and the Australian economy. It is working hard
to create a better, stronger bank that focuses on customers’ wellbeing, leads on operational standards
and compliance, drives industry innovation, and contributes to communities and the economy in ways
that reflect its size and heritage.
CommBank also believes it is important to deliver a highly competitive proposition to customers whilst
ensuring responsible management of Australia’s largest financial institution.
Over the last decade, the level of competition in the Australian financial system has increased.
Innovations and regulatory changes have enabled new entrants and smaller competitors to compete
effectively, including relative to Australia’s four largest banks (collectively referred to as Australia’s
Major Banks).
For example, there is a long term declining market share trend for Australia’s Major Banks collectively
in home loan approvals and furthermore, there is significant volatility in underlying month on month
market share movements between competitors which highlights vigorous levels of competition.
Despite Australia being a relatively small economy, Australian financial services customers have access
to world-leading propositions with high levels of choice, innovation, accessibility and service quality.
Nonetheless, CommBank recognises that there will always be opportunities for the industry to
continue improving customer outcomes.
The intensity of competition in the Australian financial system is on par with other advanced
economies
1
and the industry is also highly productive by comparison
2
. These competitive dynamics
have delivered high customer satisfaction levels, reflected in the long term trend of increasing
customer satisfaction that has risen to over 80%
3
. It is also important to note that there is a decreasing
trend in customer dissatisfaction which is now less than 5%. CommBank is continually striving to better
understand the needs of all customers’ views, in particular by focusing on the individual concerns of
dissatisfied customers.
Australia has enjoyed over 26 years of uninterrupted economic growth
4
. This is globally
unprecedented. Given the procyclical nature of banking, it has naturally led to strong performance for
Australian banks. This has flowed through to support the broader economy; almost 80% of Australian
1 Bullock, M., 2017, Big banks and financial stability, delivered 21 July, www.rba.gov.au/speeches/2017/sp-ag-2017-07-21.html.
2 Boston Consulting Group, 2016, Retail Banking Excellence Benchmark (Australia’s Major Banks have lower operating expenses
per customer compared to the global median).
3 Roy Morgan Research, Retail MFI Customer Satisfaction, Australian population 14 years+, 6 month rolling average to January
2018. Includes ANZ, CommBank excluding Bankwest, NAB and WBC excluding St George Bank. Satisfaction includes percent
“very satisfied” or “fairly satisfied” with relationship with MFI and Dissatisfaction includes percent “very dissatisfied” or “fairly
dissatisfied” with relationship with MFI.
4 OECD, Main Economic Indicators Publication, available from OECD. Stat online: http://stats.oecd.org
| CommBank of Australia |
5
banks’ profits are returned to shareholders as dividends
5
and Australia’s Major Banks are amongst the
nation’s largest taxpayers
6
.
CommBank reiterates the importance of maintaining the stability and resilience of the Australian
financial system as the primary aim of policy, whilst also ensuring customers are protected and
competition is promoted for the benefit of customers. Systemic failures in banking typically result in
catastrophic fiscal and socio-economic outcomes, as recently demonstrated by the impact of the
Global Financial Crisis (GFC) on many advanced economies.
Financial system strength and stability, including perceptions of strength and stability, are particularly
important given the Australian financial system’s strong reliance on offshore wholesale funding in
supporting economic growth. To put this in perspective, Australia’s Major Banks alone raised almost
$100bn of long term wholesale funding in offshore markets in FY17
7
. During this period CommBank
raised $27bn offshore in long term wholesale funding, and renewed approximately $32bn offshore in
short term wholesale funding on average each month. The reliance of the Australian economy on the
strong credit ratings of Australia’s Major Banks and their ability to access offshore markets at scale was
critical in enabling CommBank to provide $135bn in new lending to Australian customers during this
period.
At some point in the future, Australia is likely to experience a recession. Australia’s regulatory settings
must ensure that the financial system has the strength and stability to absorb losses and support
economic recovery in this event. Whilst Australia’s financial system was not as impacted by the GFC as
many others, the factors that helped protect Australia’s economy then (such as persistent demand for
commodity exports and interest rates that were sufficiently high to enable expansionary monetary
policy) are unlikely to exist, at least to the same extent, entering into the next downturn.
CommBank believes that Australia’s regulatory framework is robust, comprehensive and appropriately
balanced to promote innovation and competition, protect customers, and maintain the stability and
resilience of the Australian financial system. Indeed, in November 2017 the international ratings
agency S&P Global Ratings said that the existing laws and regulations governing Australia's banks are
amongst the strongest in the world
8
.
Any regulation designed to stimulate competition should give consideration to “through the cycle”
implications, in particular the potential risks to customer protection, market integrity and/or financial
system stability in the event of an economic downturn or period of economic volatility. CommBank
continues to stress this view.
Whilst CommBank accepts many of the Draft Findings in the Draft Report, it rejects several of them
and in particular those relating to the state of competition in the financial system, consumers’ ability to
apply competition pressure, implications of oligopolistic market structure, perceptions of ‘too big to
fail’ and the Four Pillars policy. In CommBank’s view the conclusions drawn in these Draft Findings do
not give an appropriate and balanced assessment of the range of considerations that are relevant to
each of the respective topics.
5 ABA, https://www.banksbelongtoyou.com.au/
6 ATO, 2015-16 Report of Entity Tax Information, available online at:
https://data.gov.au/dataset/corporate-transparency
7 Australia’s Major Banks’ annual reports. Note: CommBank has a 30 Jun-17 year end. WBC, NAB and ANZ have a 30 Sep-17 year
end.
8 S&P, refer to AFR’s article “Australian banks the best regulated in the world: S&P” (29/11/2017)
| CommBank of Australia |
6
CommBank supports in principle or is unopposed to the majority of the Commission’s Draft
Recommendations. However, CommBank does not support the Commission’s Draft Recommendations
with regard to three matters:
The proposal to abolish interchange fees. The payments system is critical infrastructure for the
nation. Investment is necessary to provide security, stability and continuous innovation. There have
been successive reforms that have aimed to optimise interchange. Australia’s interchange fees are low
by global standards. There should be no further changes to these regulations until the Reserve Bank of
Australia (RBA) has had the opportunity to evaluate the effects of the most recent reforms introduced
last year.
The proposal for the Australian Prudential Regulation Authority (APRA) to develop an online tool
to report median interest rates on home loans. CommBank’s concern is this will likely have a number
of significant unintended consequences. Mortgage pricing is determined by a number of factors,
including a risk assessment of individual customers and external factors such as wholesale funding
costs. Publishing historical median interest rates without the relevant personal context is likely to
mislead customers and distort the decisions of lenders.
The proposal related to a duty of care for mortgage aggregators and brokers. CommBank supports
recommendations that aim to protect customers and puts their interests first. However CommBank
does not support the recommendation as currently expressed, as it applies only to aggregators owned
by lenders. This would cause confusion for consumers as different brokers would have different service
level obligations, and creates an unnecessarily uneven playing field for industry participants. Further, it
would be important to ensure that any duty of care obligations allow for brokers to consider price
together with the full range of product features that may be of value to customers, for example
physical branch networks, access to digital banking, product flexibility (redraw, offset, etc.).
CommBank looks forward to working constructively with the Commission, the Government and
regulators to address important design considerations to promote competition, protect customers and
maintain the stability and resilience of the Australian financial system.
| CommBank of Australia |
7
This page intentionally
left blank
| CommBank of Australia |
8
Chapter 1: Industry context
1.1 Competition and regulation in the Australian financial system are healthy
Key Points
• A highly competitive banking system that is stable, fair, efficient and safe through the
economic cycle is good for customers, shareholders and the Australian economy.
• There is vigorous competition between banks, demonstrated by high levels of customer
satisfaction, material monthly volatility in market share of flows; high levels of investment in
innovation; and high spend on marketing.
• Barriers to entry and expansion are low and falling and there is ongoing entry of new players
across all parts of the value chain.
• Australian banks are among the most efficient banks in the world, having a lower cost-to-
income ratio, lower cost-to-asset ratio and lower operating expenses per customer than in
most comparable countries.
• ROEs in banking are comparable to other industries in Australia, and lower in many
instances.
• Australia’s regulatory framework is superior to most mature markets and CommBank
supports the clear division of accountability between the RBA, APRA and the Australian
Securities and Investments Commission (ASIC) to ensure system stability, prudential
supervision, and customer protection and competition respectively. CommBank also
supports the role of the Council of Financial Regulators (CFR) to balance these objectives to
ensure Australia’s economic prosperity and the financial wellbeing of customers.
• In addition, CommBank supports the role and mandate of the Australian Competition and
Consumer Commission’s (ACCC) new Financial Services Unit.
Summary of Response to Draft Recommendations
• CommBank is unopposed to
Draft Recommendation 7.2 (Building an evidence base on
integration
).
Summary of Response to Draft Findings
• CommBank accepts
Draft Finding 2.1 (Key features of workable competition in the
financial system).
A highly competitive banking system that is stable, fair, efficient and safe through the economic cycle
is good for customers, shareholders and the Australian economy.
CommBank accepts
Draft Finding 2.1 (Key features of workable competition in the financial
system).
CommBank supports the Commission’s assessment of key features of workable competition and
believe these already exist in the Australian financial system today or, as in the case of Open Banking,
| CommBank of Australia |
9
will be implemented shortly. These features and how they apply to the Australian financial system are
discussed in detail throughout this submission.
CommBank supports competition and the ability for all Australians to choose a financial institution
which best suits their needs. CommBank has supported the industry's advancements in enhancing the
customer switching experience, while spearheading a number of initiatives to support customers to
switch banks easily.
As a result of vigorous competition for customers, customer satisfaction is high, and has been
increasing (refer Figure 1). As the figure shows, this has corresponded with declining customer
dissatisfaction.
For example, from 2002 to 2018, the proportion of respondents in Roy Morgan’s Retail Main Financial
Institution (“MFI”) Customer Satisfaction survey who said they were “Very Satisfied” or “Fairly
Satisfied” with their MFI has increased from 61.2% to 81.1%, with the proportion of dissatisfied
respondents decreasing from 16.0% to 4.6%.
Similarly, in the seven years to January 2018, the proportion of business customers satisfied with their
MFI increased by 2.7 percentage points (from 76.5% to 79.2%) with the proportion of dissatisfied
customers decreasing by 2.9 percentage points (from 13.5% to 10.6%)
9
.
CommBank is continually striving to better understand the needs of all customers’ views, in particular
by focusing on the individual concerns of dissatisfied customers.
Figure 1: Retail MFI customer satisfaction for Australia’s Major Banks
10
9 DBM Business Financial Services Monitor, Jan 2018, Satisfaction with MFI, percentage of respondents who scored 0-4 and
6-10. Selected MFIs comprise only of ANZ, NAB, WBC, and CommBank excluding Bankwest, and Regional Banks including
Bendigo Bank, Bank of Queensland, Suncorp
10 Roy Morgan Research, Retail MFI Customer Satisfaction, Australian population 14 years+, 6 month rolling average to January
2018. Includes ANZ, CommBank excluding Bankwest, NAB and WBC excluding St, George Group. Satisfaction includes percent
“very satisfied” or “fairly satisfied” with relationship with MFI and Dissatisfaction includes percent “very dissatisfied” or “fairly
dissatisfied” with relationship with MFI
2007
0
100%
60
40
80
20
20082001 2002 2003 2005 20062004 201320102009 2012 2014 201720162011 20182015
Very Dissatisfied’ or ’Fairly Dissatisfied’Very Satisfied’ or ’Fairly Satisfied’
| CommBank of Australia |
10
High levels of technological innovation are a key indicator of a highly competitive banking system. In
addition to the world-leading digital banking solutions offered by Australian banks and the many other
leading innovations by Australian banks, such as Lock, Block and Limit or Cardless Cash (refer to
CommBank’s initial submission to the Inquiry (Initial Submission) for detail), Australian customers
have also benefited from global firsts in system innovation. Some world leading system innovations
include BPAY, which was launched in 1997 as a single bill payment service across the industry, PEXA,
the world's first digital settlement platform enabling digital registration and lodgement of property
titles and real-time financial settlement, and the New Payments Platform (NPP), one of the world’s
first real time payments settlement platforms.
Further evidence of vigorous competition in the Australian financial system is the direct marketing
spend per customer of Australia’s Major Banks which is on par with global peers
11
, and the substantial
investment made each year by participants to maintain and improve their businesses. CommBank
alone has invested over $1.2bn per annum on average over the last five years to improve and maintain
its franchise.
The intensity of competition is also further evidenced by trends in the market shares of Australia’s
Major Banks in home loans. In this context it is important to recognise that (a) there is a long term
declining market share trend for Australia’s Major Banks; and (b) there is significant volatility in
underlying month on month market share movements between competitors.
As noted by APRA in its initial submission to the Inquiry “In some cases, particularly for residential
mortgage lending, the four major banks have lost market share to smaller entities. […] the four major
banks’ share of mortgage approvals peaked at 86.3% in March 2009. By June 2017 this share had
fallen to 76.9%, reflecting a gradual but consistent downward trend”. This downward trend has since
continued and the share of mortgage approvals of Australia’s Major Banks was 74.0% in December
2017 (refer Figure 2 below).
11 Boston Consulting Group, 2016, Retail Banking Excellence Benchmark, Australia’s Major Banks median spend compared to
global median spend
| CommBank of Australia |
11
Figure 2: Market share of residential mortgage loans approved – Australia’s Major Banks (%)
12
Notwithstanding the long term declining market share trend for Australia’s Major Banks in key
products, of greater significance is the significant volatility in underlying month on month market
share movements between competitors. CommBank’s share of residential mortgage loans approved
varies significantly month on month, demonstrating intense competition to win customers (refer
Figure 3 below).
Figure 3: CommBank’s share of residential mortgage loans approved – percentage point change
month-to-month
13
12 APRA, Quarterly Authorised Deposit-taking Institution Property Exposures -December 2017 (released 13 March 2018)
www.apra.gov.au/adi/Publications/Pages/Quarterly-ADI-Property-Exposures-statistics.aspx
13 ABS for market data (5609 / 5671, November 2017), CommBank data
73%
74%
75%
76%
77%
78%
79%
80%
81%
82%
83%
84%
85%
86%
87%
Jan-15Jul-13 Jul-14Jul-12 Jan-18Jan-13 Jul-17Jul-15 Jan-17Jul-16Jan-16Jan-14Jul-09 Jan-11Jan-10 Jan-12Jul-10Jan-09 Jul-11
| CommBank of Australia |
12
New market entrants and emerging business models have contributed to today’s highly competitive
financial services sector with numerous, diverse providers. In addition to Australia’s Major Banks,
customers can choose to meet their financial service needs through regional banks, credit unions and
mutuals, non-bank lenders, non-financial consumer brands (for example, Qantas, Coles) as well as a
growing range of global technology businesses (for example, PayPal, AliPay) and FinTechs.
In addition there is growing fragmentation of value chains and new entrants are building scale
businesses in areas such as payments and home loan distribution.
The intensity of competition in Australia’s financial system is also evidenced through the focus that
Australian banks have had on being highly productive.
Australian banks are among the most efficient banks in the world, having a lower cost-to-income ratio,
lower cost-to-asset ratio and lower operating expenses per customer
14
than in most comparable
countries (refer Figures 4 and 5). This reflects ongoing investment in technology which boosts
productivity as well as improving customer service levels and outcomes.
Figure 4: Large banks’ cost-to-income ratios (%)
15
14 Boston Consulting Group, 2016, Retail Banking Excellence Benchmark (Australia’s Major Banks have lower operating
expenses per customer compared to the global median)
15 Bullock, M., 2017, Big banks and financial stability, delivered 21 July, available online:
https://www.rba.gov.au/speeches/2017/sp-ag-2017-07-21.html (underlying source of graph: RBA; S&P Global Market Intelligence)
Market share of the five largest banks
79.1
69.3
61.2
61.0
45.0
Canada UKEuro area USAAustralia
| CommBank of Australia |
13
Figure 5: Banks’ cost-to-asset ratios (%)
16
As noted in CommBank’s Initial Submission, Australian banks have generally outperformed global
peers as the Australian economy has performed strongly, against a backdrop of global volatility and
off-shore banks operating in challenging economic conditions. Despite this, it is worth noting that the
ROE of the Australian banking industry is below the weighted average of ASX200 companies (refer
Figure 6).
Figure 6: ROE across industry sectors in Australia (%)
17
16 Cost-to-Assets calculated as sum of Total Non-Interest Expenses divided by sum of Total Assets for Primary Banks in each
country (Diversified Financials excluded). S&P Capital IQ, PwC Analysis
17 Credit Suisse
1.8
1.7
1.6
1.5
1.5
1.4
1.2
1.1
Italy USASpain CanadaUKGermanyNetherlandsAustralia
7.8
8.8
8.9
11.5
12.1
13.8
13.8
14.3
15.2
15.6
17.1
17.4
19.6
21.8
23.2
24.6
35.9
Health care
Information Technology
Telecoms
Utilities
Banks
Insurance
REITs
Energy
Materials
Staples
ASX 200
Retailing
Consumer Discretionary
Financials
Industrials
Media
Metals & Mining
Industry median
excluding banks 15.2%
| CommBank of Australia |
14
Australia’s regulatory framework is superior to most mature markets. CommBank supports the clear
division of accountability between the RBA, APRA and ASIC to ensure system stability, prudential
supervision and customer protection respectively. CommBank also supports the role of the CFR to
balance these objectives to ensure Australia’s economic prosperity and the financial wellbeing of
customers. The strength of this system has contributed greatly to the prosperity of the country as was
evidenced by the strength of the Australian banks relative to banks in the USA, UK and other European
countries when the GFC occurred. Unlike Australia, banking systems in those countries had been more
highly deregulated to drive competition which led to unfavourable competitive activity and ultimately
facilitated the GFC.
The strength of Australia’s financial system regulation was recognised externally in November 2017 by
the CEO of Standard & Poor’s who noted that the regulations governing Australia's banks are amongst
the strongest in the world
18
.
Notwithstanding this, there have been a number of financial system policy developments in recent
years, including new capital adequacy requirements for Authorised Deposit-taking Institutions (ADIs),
the extension of APRA’s powers with respect to provision of credit by non-ADI lenders, the
development of a phased licensing approach for ADIs, ASIC’s regulatory ‘sandbox’ and Future of
Financial Advice (FOFA).
‘Competition vs regulation’ in the financial services industry and the role of capital have been debated
across the globe. The Basel III and accounting standard reforms were a sweeping set of reforms
designed to prevent bailing out of banks by governments and their taxpayers in the event of financial
crises like the GFC.
In this regard, APRA’s Chairman, Wayne Byres has often referred to the ‘regulatory pendulum’. In his
speech titled “Achieving a stable and competitive financial system”, he mentioned the positive mutual
reinforcement of competition and stability, rather than the opposition
19
:
“To borrow a phrase, we don’t want ‘the stability of a graveyard’. But we have all seen
instances of excessive, or reckless, competition too. Eliminating the excess, and finding the
optimum level of both, is a matter of careful balance. And, if we get the balance right, they
will be mutually reinforcing: competition will support stability, and stability will support a
competitive environment.” […] “Much of the policy debate over recent years has been cast in
terms of a trade-off between stability and competition in the financial system. We have never
seen it that way, and were pleased that the FSI reached the same conclusion. Good regulatory
settings can deliver financially strong competitors, creating both financial stability and a
dynamic and innovative marketplace for financial services.”
CommBank reiterates that over the last decade, the level of competition in the Australian financial
system has increased, as innovations in technology and changes to regulation have enabled new
entrants and smaller competitors to compete effectively. Despite Australia being a relatively small
economy, Australian financial services customers have access to world-leading propositions with high
levels of choice, innovation, accessibility and service quality. Nonetheless, CommBank recognises that
there will always be opportunities for the industry to continue improving customer outcomes.
18 S&P, refer to AFR’s article “Australian banks the best regulated in the world: S&P” (29/11/2017)
19 Wayne Byres, “Achieving a stable and competitive financial system”, AFR Banking & Wealth Summit, Sydney, 29 April 2015
| CommBank of Australia |
15
The intensity of competition in the Australian financial system is on par with other advanced
economies and the industry is also highly productive by comparison. These competitive dynamics have
delivered high customer satisfaction levels. CommBank supports measures that promote vigorous
competition and is unopposed to
Draft Recommendation 7.2 (Building an evidence base on
integration)
.
| CommBank of Australia |
16
1.2 Australia’s economic prosperity relies on a strong and stable financial system
Key Points
• Economies of scale are a primary driver of the profitability of Australia’s Major Banks relative
to other Australian banks.
• Although Australia’s Major Banks experience a lower cost of funding, the relativity between
their cost of funding and that of other Australian banks has been contracting over time.
• The sophistication in risk systems from banks investing to attain internal ratings-based (IRB)
accreditation provides a benefit for financial system stability, investors and deposit holders.
• The structure of Australia’s financial system in terms of market concentration is similar to
other countries which are comparable to Australia.
• Australia’s reliance on offshore funding to fund the current account deficit means that
Australia needs large, strong banks with good credit ratings to access global wholesale
funding markets at scale.
• Systemic failures stemming from weakened prudential regulation / absence of
“unquestionably strong” banks typically result in catastrophic fiscal and socio-economic
outcomes.
Summary of Response to Draft Findings
• CommBank rejects
Draft Finding 5.1 (Cost of funds for different size banks
).
• CommBank rejects
Draft Finding 3.1 (The major banks’ oligopoly power)
.
• CommBank accepts
Draft Finding 4.1 (A consolidation in banking).
• CommBank rejects
Draft Finding 16.1 (Ratings agencies exacerbate the perception of ‘too
big to fail’)
.
• CommBank rejects
Draft Finding 16.2 (The Four Pillars policy is redundant
).
A primary driver of profitability of Australia’s Major Banks compared to other Australian banks is
economies of scale. As outlined later in this chapter, Australia’s reliance on offshore funding means
that Australia needs large, strong banks with good credit ratings to access global wholesale funding
markets at scale.
CommBank rejects
Draft Finding 5.1 (Cost of funds for different size banks
). It is important that
Australian banks are profitable and that they have a positive outlook when competing for the lowest
cost, and potentially scarce, funding. Australia’s Major Banks have traditionally experienced a lower
cost of funding compared to the other Australian banks. The lower cost of funding is function of the
following key factors:
• Strong credit ratings (a function of diversity of income, scale of operations, confidence of
investors, history of successful execution of business strategy, prudent liquidity, funding and
capital management, and external conditions such as system stability);
• Ability to access diverse sources of funds, including international capital markets; and
• Competitive deposit pricing.
| CommBank of Australia |
17
However, it should be noted that whilst Australia’s Major Banks experience a lower level cost of
funding, the relativity between Australia’s Major Banks and the other Australian banks cost of funding
has been contracting since the shock of the GFC (refer Figure 7).
Figure 7: Banks’ Debt Funding Costs
20
In general, Australia’s Major Banks proportionally hold less capital for the same assets compared to the
smaller banks. This capital efficiency is partly due to the fact that Australia’s Major Banks (and
Macquarie Bank, as well as ING Bank (Australia) from 1 April 2018) are permitted to use the IRB
approach to credit risk to determine their capital requirements. The IRB approach allows banks to use
their own internal assessment of risk to determine the risk-weighting for loans and is a more risk
sensitive measure than the standardised approach that is used by the smaller banks. The resultant
impact of this is that Australia’s Major Banks have been able to operate with a proportionally lower
level of capital (refer Figure 8).
Figure 8: Australian Banks’ Profitability and Leverage
21
20 APRA, RBA. Quarterly, by type. *Selected non-major banks.
21 APRA. Leverage Ratio denotes Tier 1 capital as a share of total assets. Break in March 2008 due to the introduction of Basel II;
break in March 2013 due to introduction of Basel III.
Major banks
Other Australian Banks*
Major banks
Other Australian Banks*
| CommBank of Australia |
18
The IRB approach is available to all banks but in order to use it, a bank must be accredited by APRA. To
obtain accreditation, a bank must demonstrate that its internal models can produce reliable, risk-
sensitive, and comparable estimates of the capital required at the predetermined soundness
standards. Significant investments have been made and are required on an on-going basis for
Australia’s Major Banks to achieve and maintain their IRB accreditation.
The reduced capital required by the IRB accreditation is regarded as a strong incentive for banks to
continue increasing the sophistication of risk systems. Such sophistication in risk systems provides a
benefit for institutional financial stability, investors and deposit holders.
However, the relative benefit from IRB accreditation has reduced in recent years given the recent
regulatory changes imposed by APRA have required Australia’s Major Banks to materially increase
their capital levels
22
. In addition, ING Bank (Australia) received IRB accreditation from APRA on 19
March 2018
23
, and CommBank understands that several other non-IRB accredited banks are currently
going through the accreditation process with APRA.
CommBank rejects
Draft Finding 3.1 (The major banks’ oligopoly power)
and would note that
concentration with a given market is not, per se, an indication of the degree of competition in a
market.
Notwithstanding this, concentration levels in Australia are comparable to other relevant countries,
particularly when compared to the size of the economy. As the RBA has noted, Australia is by no
means unique when it comes to the concentration of the banking sector. Among advanced economies,
the market share of Australia’s largest five banks is comparable to that of the Netherlands, Sweden
and Canada
24
. By global standards, the level of concentration is consistent with the size of the
population (refer Figure 9).
22 APRA, 2017, Information Paper: Strengthening banking system resilience – establishing unquestionably strong capital ratios,
available online at:
www.apra.gov.au/adi/Documents/Unquestionably%20Strong%20Information%20Paper.pdf
23 APRA announcement 19 March 2018
24 RBA, “Big Banks and Financial Stability”, July 2017, https://www.rba.gov.au/speeches/2017/sp-ag-2017-07-21.html
| CommBank of Australia |
19
Figure 9: Relationship between financial system concentration and population size
25
In addition, Australian consumers have a similar number of banking relationships as consumers in peer
markets, even in markets which have a significantly higher number of banks (refer Figure 10).
Figure 10: Number of Banking Relationships per consumer
26
CommBank accepts
Draft Finding 4.1 (A consolidation in banking)
however would note that
although the GFC led to a significant rationalisation of ADIs, with the number declining by 80 over the
10 years to 2016
27
, much of this change was a result of credit unions and building societies merging
and/or becoming banks. This corresponded with a rise in the number of banks, with banks now the
most common type of ADI.
If Australia’s banks (particularly Australia’s Major Banks) were to operate at a lower level of
profitability, this could negatively affect their credit ratings as profitability and capital generation is one
of the key factors considered by rating agencies in their assessment of credit ratings. A lower credit
25 The World Bank, 2016, https://data.worldbank.org/indicator/SP.POP.TOTL /
26 McKinsey, 2016, Retail Banking Consumer Survey; Australia Personal Financial Services Survey 2014
27 APRA, Quarterly Authorised Deposit-taking Institution performance, available online at:
www.apra.gov.au/adi/Publications/Pages/adi-quarterly-performance-statistics.aspx
0.1 1.0
10.0
75
25
100
50
Canada
France
UK
US
Japan
Italy
Germany
Sweden
Netherlands
Australia
Spain
Market share of
the largest five banks (%)
Share of
world population (%)
(log scale)
2.1
2.0
1.9
Australia Core EuropeCanada and USA
| CommBank of Australia |
20
rating would result in either an increase in the cost of funding and/or a reduction in the level of capital
imported into the Australian economy by banks.
This is an important consideration for Australia because the contribution of banks to facilitating private
sector growth in the economy is higher than most other mature markets
28
. To put this in context,
Australia’s Major Banks alone raised almost $100bn of long term wholesale funding in offshore
markets in FY17
29
. During this period, to enable it to provide $135bn in new lending to Australian
customers, CommBank raised $27bn offshore in long term wholesale funding and renewed
approximately $32bn offshore in short term wholesale funding on average each month.
This ability to access offshore markets at scale and to fund Australia’s current account deficit, both in
normal and stressed macro-economic conditions, is critical to the prosperity of the Australian
economy. This takes on greater importance as regulators increase focus on net stable funding ratios.
It is also critical that Australia’s Major Banks are sufficiently profitable in order to generate capital
(through retained earnings) to absorb losses. A consequence of insufficient profitability is lower
organic capital generation, which in turn results in a possible constraint on the growth of balance
sheets and limits the ability to absorb losses.
To bring this to point to life, industry Loan Impairment Expenses (LIE) are currently at historical lows
which is reflective of this point in the economic cycle. If all other things remained equal and
CommBank’s LIE was to increase to a level experienced by the UK banks during the GFC, it would likely
result in a negative Return on Equity (ROE) for CommBank
30
.
Systemic failures stemming from weakened prudential regulation or the absence of “unquestionably
strong” banks typically result in catastrophic fiscal and socio-economic outcomes, as recently
demonstrated by the impact of the GFC on many advanced economies. While bank bail-outs by
governments represent a direct fiscal cost, disruption of the banking sector typically also results in
indirect costs such as a reduction in the availability of credit to consumers and businesses and
weakening demand in the economy
31
. As banking crises may not occur in isolation, it is difficult to
separate indirect costs attributable to bank failure from the impact of economic conditions that
resulted in bank failure, for example a reduction in export demand. Regardless, the size of such costs
may be considerable compared to the direct bail-out costs (refer Figure 11).
28 Bank for International Settlements, June 2017, Database: Credit to the non-financial sector, available online at:
www.bis.org/statistics/totcredit.htm
29 Australian Major Banks’ annual reports. Note: CommBank has a Jun-17 year end. WBC, NAB and ANZ have a Sep-17 year end.
30 High level internal estimate based on LIE levels experienced in UK market during GFC (UK FY09 Peak average 258 bps)
31 Frontier Economics
| CommBank of Australia |
21
Figure 11: Direct and indirect costs of banking crises during the GFC
32
Banking failures in the Republic of Ireland and the Netherlands resulted in large direct fiscal costs,
owing to the cost of government support for failing banks, in addition to substantial increases in public
debt and output loss that may be attributed to the bank failures (and the GFC in general). The
systemic failures in the USA and UK also resulted in significant direct and indirect costs to these
economies.
CommBank rejects
Draft Finding 16.1 (Ratings agencies exacerbate the perception of ‘too big to
fail’)
. Australia’s Major Banks have an advantage in accessing capital markets by virtue of their credit
ratings relative to smaller banks. This reflects the fundamental characteristics, such as size, ability to
manage risk and balance sheet strength, and the probability of Government support in times of stress.
General Government support for the whole banking industry is important, and is critical in periods of
stress. It is worth noting that there is a difference between an implicit Government guarantee for
particular banks and general Government support for all banks. As demonstrated during the GFC, the
Government provided support to all banks.
Governments and central banks have long been recognised as lenders of last resort to the banking
sector. Guaranteeing the debt of banks to enable them continued access to capital markets is an
indirect way of fulfilling this role, and the precise nature of the guarantee does not need to be
determined until the time it is needed, when the risk can be better judged. While ratings agencies each
hold similar expectations of Government support, they differ in their assessment of the associated
ratings uplift from the expected support. The views of ratings agencies and capital markets persist
despite the absence of direct policies or statements from the Government on the matter. However, the
Government’s conduct in the wake of the GFC demonstrated that it has an appetite to support all
banks.
Quantifying the extent of any funding advantage from the uplift in credit ratings is complex
33
. The size
of a bank can affect perceptions of its creditworthiness but size is also part of the ratings agencies’
belief that Government support will be provided in a crisis. The RBA indicates that the funding
advantage rises and falls over time. For example, the funding advantage for Australia’s Major Banks
32 Laeven and Valencia, “Systemic Banking Crises Database: An Update”, International Monetary Fund Working Paper 12/163,
2012
33 RBA – implicit guarantee for banks, available online at: https://www.rba.gov.au/information/foi/disclosure-log/pdf/151609.pdf
0%
20%
40%
60%
80%
100%
120%
United States United Kingdom Netherlands
Ireland
% of pre-crisis GDP
Fiscal costs (direct)
Increase in public debt (indirect)
Output loss (indirect)
| CommBank of Australia |
22
was estimated to have fallen to around 10 basis points in late 2014 (a time of relative stability for
financial markets and the financial system) whereas there are estimates of a 120 basis point advantage
in 2009 (a time of heightened instability for financial markets and the financial system).
CommBank acknowledges that the funding advantage for Domestic Systemically Important Banks
(versus smaller banks) can become material in times of heightened instability for financial markets.
However, from a competition perspective it is not wise to attempt to nullify advantages that derive
from good business practices and fundamental differences in risk to the stability of the financial
system.
If the Government is to address the effects of a perceived "implicit guarantee" for Australia's Major
Banks, the best way to minimise the impact would be to continue to increase the resilience of the
financial system, as recommended by the Financial System Inquiry (FSI).
CommBank rejects
Draft Finding 16.2 (The Four Pillars policy is redundant
). As indicated in
CommBank’s FSI response, it continues to support the Four Pillars policy, which operates to prevent a
merger between any of the large banks, reflecting a decision by the Government to prevent further
consolidation in the market.
| CommBank of Australia |
23
This page intentionally
left blank
| CommBank of Australia |
24
1.3 The performance of the industry reflects the operating context
Key Points
• Australia’s unprecedented period of economic prosperity has underpinned the strong
performance of the Australian financial system relative to the UK, USA and Europe.
• Australia will experience a recession at some point in the future and this will have a negative
impact on the profitability of Australia’s banks and test the resilience of Australia’s financial
system.
• While Australia’s Major Banks have better economies of scale than other Australian banks,
the difference in ROE has been steadily declining since the GFC.
• Any evaluation of the state of competition must recognise the complex nature of
interdependencies that govern the economics, stability, and safety of the financial system.
Summary of Response to Draft Findings
• CommBank rejects Draft Finding II.1 (State of competition in the financial system).
When compared to international peers in the USA, UK and Europe since the GFC, Australia’s banks
have been relatively more profitable, partly reflecting the unprecedented period of uninterrupted
economic growth in Australia and the continued strength of the housing sector in Australia.
One of the drivers of Australia’s outperformance is the simpler asset mix of the Australian banks.
Returns for Australian and Canadian banks, which have comparatively simple structures, or lower
exposure to trading and institutional banking, have been higher than most other jurisdictions since the
crisis
34
.
The GFC severely damaged major economies across the world, yet Australia proved resilient. Despite
higher unemployment and slow economic growth, Australia did not suffer a large financial crisis. There
were several reasons for the resilience of the Australian economy during the GFC. The RBA typically
refers to the following
35
:
• Australian banks had limited exposure to the USA housing market and USA banks;
• Australian banks had pursued limited high risk / subprime lending in Australia;
• The resource boom, including exports to China whose economy rebounded quickly from the
GFC; and
• Policy response: the RBA lowered the cash rate substantially, and the Government undertook
expansionary policy while providing support for deposits and bonds issues by the banking
sector.
At some point in the future, Australia will experience a recession. When this happens, Australia’s
regulatory settings must ensure that the financial system has the strength and stability to absorb
losses and support economic recovery. Whilst Australia’s financial system was not as impacted by the
34 RBA, initial submission, page 11
35 https://www.rba.gov.au/education/resources/explainers/pdf/the-global-financial-crisis.pdf?v=2018-03-15-20-14-42
| CommBank of Australia |
25
GFC as many other countries’ financial systems, the factors that helped protect Australia’s economy
then (such as persistent demand for commodity exports and interest rates that were sufficiently high
to enable expansionary monetary policy) are unlikely to exist, at least to the same extent, entering into
the next downturn.
As a result of the financial system shock created by the GFC, the ROE of Australia’s Major Banks was
higher than other Australian banks for a period of time however, this gap has narrowed significantly
over the period and is now approximately 4% (refer Figure 12). This has been primarily due to an
increase in capital requirements for Australia’s Major Banks and, as credit spreads for the non-major
banks have decreased over time, an improvement in the Net Interest Margin (NIM) of the other
Australian banks.
Figure 12: ROE gap - Majors vs. other Australian-owned Banks
36
As APRA has pointed out in its initial submission to the Inquiry, average ADI ROE for the 12 months to
30 June 2017 was 11.7%, below the 10 year average of 13.4% (which itself has declined in recent years).
This should be considered in the context of Australia’s unprecedented period of economic prosperity
and industry LIE being at historically low levels. As noted earlier, if all other things remained equal and
CommBank’s LIE was to increase to a level experienced by the UK banks during the GFC, it would likely
result in a negative ROE for CommBank.
In response to the Commission’s assertions presented during the Inquiry’s public hearings that the
NIM of Australia’s Major Banks has remained stable for several years, and that “major banks have the
ability to pass on cost increases and set prices that maintain high levels of profitability”, CommBank
notes the following for consideration:
• The NIMs of Australia’s Major Banks has been trending down consistently for over 20 years
(refer Figure 13).
• NIM measures only a subset of profitability. A more comprehensive measure of profitability is
ROE as this accounts for NIM and all other costs and incomes, for example, operating
expenses, LIE, other (non-interest) income, etc. One example of this is the relative decline in
36 APRA Quarterly Authorised Deposit-taking Institution Performance, December 2017 (released 13 March 2018)
-9%
-6%
-3%
0%
3%
6%
9%
12%
15%
18%
Mar
2008
Sep
2008
Mar
2009
Sep
2009
Mar
2010
Sep
2010
Mar
2011
Sep
2011
Mar
2012
Sep
2012
Mar
2013
Sep
2013
Mar
2014
Sep
2014
Mar
2015
Sep
2015
Mar
2016
Sep
2016
Mar
2017
Sep
2017
ROE gap - Majors vs. other Australian-owned Banks
Linear (ROE gap - Majors vs. other Australian-owned Banks)
Linear trend
| CommBank of Australia |
26
fees which have benefited customers in recent years that would not be reflected in NIM (refer
Figure 14).
• As noted earlier, industry ROEs, particularly the ROEs of Australia’s Major Banks, have declined
in recent years. This fall in profitability is evidence that Australia’s Major Banks cannot simply
“pass on cost increases and set prices that maintain high levels of profitability” and that
competition is vigorous.
• Cost of funding is not determined only by the RBA’s Official Cash Rate. Whilst there is some
correlation, off-shore funding markets also have a significant influence on cost of funding.
Figure 15 shows the cost of funding spread for CommBank and how this is not highly
correlated to the RBA’s Official Cash Rate. This chart also shows how CommBank’s spread has
declined since the GFC.
• Larger banks benefit from the economies of scale in operating costs and funding costs and
thus, all other things being equal, one would expect Australia’s Major Banks to be more
profitable than the other Australian banks in an effective and competitive market.
Figure 13: Australia’s Major Banks’ Net Interest Margin
37
37 RBA, Bank financial reports, domestic, half yearly. From 2006 data on IFRS basis; prior years on AGAAP. Excludes St George
Bank and Bankwest prior to the first half of 2009.
| CommBank of Australia |
27
Figure 14: Banking Fees in Australia
38
Figure 15: CommBank’s funding costs vs RBA Cash Rate
39
An evaluation of the state of competition in the industry must recognise the complex
interdependencies between all the considerations raised in this chapter. On balance, CommBank
rejects
Draft Finding II.1 (State of competition in the financial system)
.
38 RBA, June 2017, Domestic banking fee income, available online at:
https://www.rba.gov.au/publications/bulletin/2017/jun/pdf/bu-0617-4-banking-fees-in-australia.pdf. Adjusted for breaks in series
in 2002 due to a change in banks’ reporting; financial-year average assets and deposits have been used.
39 RBA, Cash Rate available online at:
https://www.rba.gov.au/statistics/cash-rate/
Deposit fee income
Other non-deposit fee income
Lending fee income
0%
1%
2%
3%
4%
5%
6%
7%
8%
Interest revenue from assets
Interest expense from liabilities
Dec 04 Dec 06 Dec 08 Dec 10 Dec 12 Dec 14 Dec 16
RBA Cash Rate
FY05:
Spread = 2.08%
1H18:
Spread =
1.92%
Dec 17
| CommBank of Australia |
28
Chapter 2: Balancing competition and stability for
economic prosperity
2.1 Change in regulators' roles and responsibilities
Key Points
• Australia has a robust regulatory framework.
• Financial system stability should be a primary aim of policy, whilst also ensuring customers
are protected, and promoting competition. Design of regulation must be guided by “through
the cycle” implications.
• CommBank supports in principle the need for a regulator to be mindful of competition
outcomes and notes the Minister for Revenue and Financial Services’ announcement of
ASIC’s new competition mandate (19 March 2018).
Summary of Response to Draft Recommendations
• CommBank supports in principle
Draft Recommendation 15.1 (Statements of expectations
for regulators)
.
• CommBank supports in principle
Draft Recommendation 17.1 (New competition functions
for a regulator)
, however urges caution and further consultation with regulators in relation
to a number of features of the proposal.
• CommBank supports in principle
Draft Recommendation 17.2 (Transparency of regulatory
decision making)
, but urges caution and has concerns regarding the delays to regulatory
decisions and/or confidentiality considerations.
• CommBank supports in principle
Draft Recommendation 17.3 (Robust and transparent
analysis of macro-prudential policies)
, but urges caution and has concerns regarding the
delays to regulatory decisions and/or confidentiality considerations.
Summary of Response to Draft Findings
• CommBank notes
Draft Finding 2.2 (Competition and stability must co-exist).
• CommBank rejects
Draft Finding 6.1 (Cost of APRA interventions on home loans
).
• CommBank notes
Draft Finding 15.1 (APRA not well placed to consider competition in the
financial system)
. CommBank notes that the Commission's draft report proposes the CFR to
assess the competition related implications of regulation. As a member of CFR, APRA would
be involved in this process.
CommBank supports the current regulatory framework and believes that it is robust, comprehensive
and appropriately balanced to promote competition, preserve financial system stability and protect
customers. Indeed, in November last year the international ratings agency S&P Global Ratings said
| CommBank of Australia |
29
that the existing laws and regulations governing Australia's banks are the amongst strongest in the
world
40
.
CommBank reiterates Recommendation 4 of its Initial Submission that any regulation designed to
stimulate competition should give consideration to “through the cycle” implications, in particular the
potential risks to customer protection, market integrity and/or financial system stability in the event of
an economic downturn or period of economic volatility.
CommBank also takes this opportunity to reiterate the importance of maintaining financial system
stability as the primary aim of policy, whilst also ensuring customers are protected and competition is
promoted for the benefit of customers. Systemic failures have led to materially adverse outcomes for
the broader economy in other countries such as Ireland and the UK, with broad fiscal and socio-
economic impacts.
As such, CommBank notes
Draft Finding 2.2 (Competition and stability must co-exist)
, but notes
that financial system stability, and the perception thereof, should remain of primary importance for
policy and supervision in financial services. Where there is a conflict or any doubt between financial
stability and other considerations such as competition, it is critical that stability should prevail in those
circumstances.
CommBank supports in principle
Draft Recommendation 15.1 (Statements of expectations for
regulators)
. As stated in its submission to the FSI, CommBank has already supported the use of these
statements to establish principles or boundaries around which regulation is formed. CommBank also
notes that the Minister for Revenue and Financial Services announced that the Government has settled
on the new statement of expectations for ASIC (19 March 2018).
CommBank believes a regulator’s statement of expectations should ensure that future regulation
should be guided by its “through the cycle” implications. CommBank also supports Statements of
Intent to be published by regulators as a matter of good practice (however further consideration
should be given to the proposed three month time period). CommBank supports in principle the need
for regulators to provide in their annual reports the actions they are taking in line with Statements of
Intent. However, CommBank also recognises that there might be some specific decisions / actions
taken by regulators that might need to remain confidential for an extended period of time. CommBank
believes that regulators are in a better position to comment on such circumstances.
CommBank supports in principle
Draft Recommendation 17.1 (New competition functions for a
regulator)
.
As noted above, CommBank supports in principle the recommendation that regulator
Statements of Expectations are updated and Statements of Intent are published by regulators.
CommBank supports in principle the need for regulators to be more mindful of competition outcomes.
However, CommBank urges caution and further consultation with the regulators in relation to the
following proposal raised by the Commission: “[including] transparent analysis of competition impacts
to be tabled in advance of measures proposed by regulators” - some regulatory decisions need to be
made quickly in order to preserve financial stability, consumer outcomes or market integrity. Examples
could include recovery and resolution interventions, bailouts, and short selling prohibitions.
CommBank also does not support the creation of any significant regulatory uncertainty where industry
may be required to immediately respond to regulatory measures only to subsequently be asked to
unwind this response after a competitive assessment requiring transparency (such as in Draft
40 S&P, refer to AFR’s article “Australian banks the best regulated in the world: S&P” (29/11/2017)
| CommBank of Australia |
30
Recommendation 17.2) over all regulatory decisions. As mentioned above, CommBank recognises that
there might be some specific decisions / actions taken by regulators that might need to remain
confidential and for an extended period of time.
CommBank supports in principle
Draft Recommendation 17.2 (Transparency of regulatory decision
making)
, but urges caution. Indeed, some additional transparency around the CFR’s deliberations and
decision making process would provide industry with useful insights into regulators’ expectations and
intentions. However, as noted above, CommBank has concerns regarding the delays to regulatory
decisions and/or confidentiality considerations. CommBank believes that its regulators are in a better
position to provide a more comprehensive view on the specific considerations of such challenges.
CommBank supports in principle
Draft Recommendation 17.3 (Robust and transparent analysis of
macro-prudential policies)
. However, CommBank would welcome clarity as to which prudential
regulatory decisions / actions the Commission considers to be potential areas of ‘macro-prudential
policies’ and thereby subject to the Commission’s proposal to ensure ‘robust and transparent analysis’.
As stated above, CommBank has some concerns regarding delays to regulatory decisions and/or
confidentiality considerations. For example, the future requirement to review a decision annually and
publicly may result in the regulators taking a slower approach to their decision making in situations
where a swifter approach is necessary.
Provided this concern is addressed, CommBank welcomes
Draft Recommendation 17.3
(
Robust and
transparent analysis of macro-prudential policies)
in principle. More generally, it is important that
APRA continues to clearly articulate the intent of proposed macro-prudential policies, consults widely
and evaluates the outcomes.
CommBank rejects
Draft Finding 6.1 (Cost of APRA interventions on home loans
) (i.e. assertion that
“competition between lenders was restricted, and there was limited competitive variation in lenders’
responses to the regulatory intervention). These changes were made to help meet CommBank’s
regulatory requirements, specifically APRA's requirement that interest only lending not be more than
30% of total new business. CommBank’s first step in response to the APRA limit was to change its
lending policies and to reduce discretionary discounts on new interest only lending. CommBank
reduced these to the lowest level possible, while leaving its headline rates unchanged. Subsequently,
CommBank’s competitors announced increases in their headline interest only rates. Consequently,
CommBank’s interest only product was the cheapest of all of Australia’s Major Banks. If this situation
had continued, CommBank anticipated breaching the APRA cap as CommBank would have attracted
more volume. Because CommBank had already reduced its discretionary discounts, the only option left
was to change its headline interest only rates to avoid breaching the APRA 30% limit. As the headline
rate is the same 'reference rate' for both new and existing customers, raising CommBank’s headline
rate impacted both new and existing customers.
CommBank notes
Draft Finding 15.1 (APRA not well placed to consider competition in the financial
system)
. CommBank notes that the Commission's draft report proposes the CFR to assess the
competition related implications of regulation. As a member of CFR, APRA would be involved in this
process.
| CommBank of Australia |
31
Response to Information Requests
Information Request 17.1 Which regulator should advance competition in the financial system?
• CommBank notes the Minister for Revenue and Financial Services’ announcement of ASIC’s
new competition mandate (19 March 2018).
| CommBank of Australia |
32
2.2 Balancing macro-prudential regulation
Key Points
• CommBank is supportive of more finely calibrating the risk weights to better reflect the risk
inherent to specific segments, as long as these calibrations are in line with the Basel
Framework and are appropriate in the context of the Australian financial system.
• There is currently a level playing field for all ADIs as the IRB approach is currently available
to all banks, subject to demonstrated ability to meet the appropriate risk evaluation
standards set by APRA.
• Removing the incentive for banks to attain IRB accreditation could result in less sensitive risk
measurement and poor pricing outcomes for customers.
Summary of Response to Draft Recommendations
• CommBank is unopposed to
Draft Recommendation 7.1 (A proportionate approach to
risks non-ADIs pose)
.
• CommBank supports in principle
Draft Recommendation 9.1 (Standardised risk weightings
for SME lending)
.
• CommBank supports in principle
Draft Recommendation 16.1 (Review standardised risk
weights for residential mortgages)
.
Summary of Response to Draft Findings
• CommBank accepts
Draft Finding 7.2 (New rules costly for non-ADIs)
.
Risk weights
Australia’s Major Banks, Macquarie Bank and ING Bank (Australia) (from 1 April 2018) have had their
IRB models approved by APRA, allowing them to utilise a greater degree of granularity in risk weights
than ADIs using the standardised approach. While it is true that risk weights for IRB residential
mortgage lending are lower than that of standardised ADIs, it is also true that IRB risk lending for
riskier IRB lending (such as unsecured personal loans) require higher risk weights than that of
standardised ADIs.
CommBank's view is that there is currently a level playing field for all ADIs. The IRB approach is
currently available to all banks, subject to accreditation by APRA i.e. a bank must demonstrate that the
bank's internal models can produce reliable, risk-sensitive, and comparable estimates of the capital
required at the predetermined soundness standards.
This incentivises all ADIs to invest in these capabilities as it provides ADIs a greater risk-sensitivity and
in general allows these ADIs to operate with a more efficient capital structure.
Australia’s Major Banks have made, and continue to make, significant investments on an on-going
basis to achieve and maintain their IRB accreditation. Removing the incentive for banks to use the IRB
approach could result in reduced risk measurement and poor risk and price outcomes for all
stakeholders (including customers).
| CommBank of Australia |
33
On 14 February 2018, APRA released a discussion paper on its proposed revisions to the existing capital
framework. The papers include revisions to the capital framework resulting from the Basel Committee
finalising the Basel III reforms (also referred to as 'Basel IV') in December 2017, and also includes
proposals to address the systemic concentration of bank portfolios in residential mortgage lending by
seeking to target higher risk residential mortgage lending (for example investment and interest only
loans).
In general, the proposed revisions to the standardised approach are intended to provide a more risk-
sensitive approach. One of the changes that is proposed by APRA is a revision to the current risk-
weighting applied to mortgages calculated on a standardised approach, where there is more granular
risk-weighting for mortgages with a Loan to Value Ratio (LVR) <80% (current framework applies a flat
35% risk-weighting).
The review also contains a proposal to introduce a risk-weighted asset floor for banks using internal
models of at least 72.5% of standardised risk-weighted assets. The capital floor will limit the variation
in capital requirements between banks that are IRB accredited and those utilising the standardised
approach.
CommBank is in favour of more finely calibrating risk weights to better reflect the risk inherent to
specific segments, as long as these calibrations are in line with the Basel Committee’s minimum risk
weight and credit conversion factor recommendations. As such, CommBank supports in principle
Draft
Recommendation 9.1 (Standardised risk weightings for SME lending)
and
Draft Recommendation
16.1 (Review standardised risk weights for residential mortgages)
. In APRA’s discussion paper
“Revisions to the Capital framework for ADIs” dated 14 February 2018, it is noted that different
treatments than those recommended by the Basel Committee are being proposed for SME lending not
secured by property. I.e. APRA is proposing a 85% risk weight instead of the Basel Committees
recommended 75% risk weight. In addition, it is noted that different risk weights are being proposed
that take into account LVR, if a loan meets APRA’s operational requirements and/or if loan is owner
occupied and principal and interest; or not. This appears to meet the Commission’s requirements.
Warehouse lending
It should be noted that CommBank provides mortgage warehouses to a range of predominantly non-
ADI mortgage lenders. As such, CommBank is unopposed to
Draft Recommendation 7.1 (A
proportionate approach to risks non-ADIs pose)
. CommBank notes the suggestion to review the
scope of APRA’s Prudential Standard APS 120 Securitisation (APS 120). CommBank believes that any
such assessment should consider the risk-sensitivity of underlying assets and counterparties, and not
lead to ADIs artificially being considered more risky than non-ADIs. CommBank notes that the recent
changes to APS 120 not only impact the cost of warehouse provision, but also the cost of mortgage
securitisation more broadly.
As a result, CommBank accepts
Draft Finding 7.2 (New rules costly for non-ADIs)
.
| CommBank of Australia |
34
Response to Information Requests
Information Request 16.1 Where can IRB accreditation processes be improved?
• IRB modelling would be assisted by allowing more flexible modelling and simpler reporting
approaches. The challenge for many banks is historical data, and the expertise to support the
risk modelling. In APRA’s discussion paper “Revisions to the Capital framework for ADIs”
dated 14 February 2018, it is noted that a different / simpler approach for small ADIs is being
proposed. ADIs and Australian Banking Association (ABA) should work with APRA to
determine the best approach available to achieve part or full IRB accreditation.
Information Request 7.1 How will prudential standard APS 120 affect you?
• APS 120 amended regulatory capital risk weights across all securitisation exposures:
warehouses, term securitisations, hedging & support facilities. The regulatory capital
allocation under APS 120 applies equally to standard and advanced ADIs for all securitisation
exposures whether originated by ADIs or non- ADIs. Foreign banks, which are not bound by
APS 120 are actively competing to provide securitisation financing in the Australian market.
Global neutrality on securitisation risk weights would provide for more balanced competition
between Australian and foreign warehouse providers.
• The impact of costs due to APS 120 changes for standard ADIs and non-ADIs varies and is
difficult to quantify. Each warehouse provided by CommBank was assessed and the outcome
was negotiated with each client having regard to client requirements, market conditions,
funding costs, changes in general capital requirements and changes in APS 120. Different
warehouses were priced and restructured in different ways reflecting these different factors.
In some instances warehouse pricing reduced because clients provided or sourced additional
credit support, however the cost of the additional credit support is unknown to CommBank
so the overall impact is difficult to quantify. In some instances warehouse pricing increased
but this was driven by the multiple factors outlined and it is difficult to quantify the change
solely due to APS 120.
• CommBank was able to reach mutually agreeable outcomes for all warehouses and some
non-ADI clients have requested increased warehouse limits.
• The Commission is also seeking estimates of the costs of obtaining similar levels of finance
to that obtained through warehousing, such as through commercial loans in retail markets.
• Securitisation pools assets to obtain a rating / credit quality uplift from the underlying
individual asset and originator. Pricing on any securitisation facility is dependent on the risk
profile of the asset, transaction structure, risk profile of the securitisation tranche, volume,
tenor and capability of transaction parties. Securitisation provides for cost effective funding
across a range of assets and issuer types. In many cases, particularly for unrated, or lower
rated entities, the volume, pricing and tenor of securitisation facilities could not be matched
in un-securitised format via other funding channels.
| CommBank of Australia |
35
This page intentionally
left blank
| CommBank of Australia |
36
2.3 Balancing non-macro-prudential regulation
Key Points
• Before further regulatory intervention is considered, recent policy changes should be given
time to work.
• CommBank supports recent regulatory initiatives and reforms that lower hurdles for
innovation in the financial system insofar as they continue to ensure financial system
stability and the protection of customers.
• FinTechs and global technology companies are already successfully becoming part of
everyday experiences in a range of customer relationships.
Summary of Response to Draft Recommendations
• CommBank supports in principle Draft Recommendation
4.1 (Reducing regulatory barriers
to entry and expansion)
but before further regulatory intervention is considered, recent
policy changes should be given time to work.
• CommBank supports in principle
Draft Recommendation 10.2 (Making the ePayments
code mandatory)
.
• CommBank supports in principle
Draft Recommendation 10.1 (Review regulation of
purchased payment facilities).
Summary of Response to Draft Findings
• CommBank rejects
Draft Finding 4.3 (Most FinTechs are focusing on less regulated
services)
.
• CommBank rejects
Draft Finding 4.4 (FinTech collaboration and competition)
.
• CommBank rejects
Draft Finding 4.2 (Foreign banks remain predominantly niche
operators).
CommBank supports in principle the Commission’s draft recommendations related to balancing non-
macro-prudential regulation.
Reducing regulatory barriers to entry and expansion
CommBank takes this opportunity to reiterate Recommendation 3 of its Initial Submission that the
anticipated impact of the breadth of statutory and regulatory changes currently being planned or
implemented be carefully assessed when considering any further regulatory interventions.
In this context, as a leader in financial services innovation, CommBank supports recent regulatory
initiatives and reforms that lower hurdles for innovation in the financial system insofar as they
continue to ensure financial system stability and the protection of customers. As noted in CommBank’s
Initial Submission, the Government has announced a package of changes including: relaxing the 15%
ownership cap for new market entrants; removing the prohibition on the use of the word “bank” by
entities with less than $50m in Common Equity Tier 1 (CET1) capital; and introducing a phased
approach to the bank licensing process.
| CommBank of Australia |
37
It should also be noted that increased ‘RegTech’ developments in the market, aimed at reducing the
reporting burden through better approaches to data gathering, are ultimately lowering barriers for new
entrants. CommBank supports these developments and has participated in ASIC’s RegTech Liaison
Forum meetings.
As such, CommBank supports in principle
Draft Recommendation 4.1 (Reducing regulatory barriers
to entry and expansion)
but before further regulatory intervention is considered, recent policy
changes should be given time to work. Specifically, if further regulatory intervention is being
considered to achieve competition aims in the sector, then CommBank recommends that before
deciding on the need for this, recent policy changes noted above should be given time to work.
ePayments code and purchased payment facilities
CommBank supports in principle
Draft Recommendation 10.2 (Making the ePayments code
mandatory)
. The ePayments code, while currently voluntary, is contractually enforceable for those
institutions that subscribe to it. CommBank has been a subscriber for a long time. CommBank
welcomes a level playing field; CommBank’s customers need to have confidence in all the parties with
whom they deal; as well as helping to preserve confidence in the broader payments system (including
consumer protection, transaction security and financial crime implications).
CommBank also supports in principle
Draft Recommendation 10.1 (Review regulation of purchased
payment facilities)
. CommBank is supportive of a graduated licence framework for purchased
payment facilities (PPFs) – and the review of PPF regulation. Any PPF providers that facilitate
payments should provide the same level of protection for customers as other participants do. They
should be required to meet KYC / AML, fraud, financial crime and risk management expectations to
protect consumers and maintain integrity of, and confidence in, payment systems.
FinTechs and foreign banks
Regarding non-macro prudential barriers to entry and expansion for alternative players, CommBank
has mentioned in its Initial Submission, that the Australian FinTech industry has seen record
investment of $656m in 2016, up from $185m and $461m in 2015 and 2014 respectively
41
. CommBank
believes that low competition hurdles in the financial system have encouraged new entrants. The
number of Sydney-based FinTechs has grown from under 100 in 2014 to 579 in 2017, employing more
than 10,000 staff
42
. In addition to FinTechs, a number of global technology organisations and other
large organisations have entered the financial system in recent years. Australia’s banks have pro-
actively partnered with new market entrants. New entrants provide talent and innovative ideas while
established banks offer mature processes as well as access to distribution channels.
As such, CommBank rejects
Draft Finding 4.3 (Most FinTechs are focusing on less regulated
services)
. Indeed, the context for this finding is that perceived barriers to entry are preventing
FinTechs 'graduating' from niche players to genuine competitors. CommBank's view is that this is not a
fair characterisation. FinTechs are focussed on niche segments and understand that there is a major
step up to assume prudential obligations and broader duties of being a bank. FinTechs and global
technology companies are already successfully becoming part of the everyday experiences in a range
41 KPMG, 2017, US$656m invested in Australia’s FinTech sector in 2016, available online at:
https://home.kpmg.com/au/en/home/media/press-releases/2017/02/FinTech-pulse-q4-2016-23-feb-2017.html
42 KPMG and The Committee for Sydney, 2017, Scaling the FinTech opportunity for Sydney and Australia, available online at:
https://home.kpmg.com/au/en/home/insights/2017/08/scaling-FinTech-opportunity-sydney-australia.html
| CommBank of Australia |
38
of customer relationships. CommBank supports occasions where constructive intermediation drives
positive customer outcomes.
Similarly, CommBank rejects
Draft Finding 4.4 (FinTech collaboration and competition)
. CommBank
notes that FinTechs are successfully providing alternatives to traditional banking products, for example
AfterPay and Prospa. Many of those offerings are enabled through partnerships between FinTechs and
large partners as demonstrated by the award for best FinTech / bank partnership received by
CommBank and OnDeck in 2016. As per above, the challenge for FinTechs is to undertake the
‘graduation’ in organisational and system maturity to grow in scale.
With regard to foreign banks more specifically, CommBank rejects
Draft Finding 4.2 (Foreign banks
remain predominantly niche operators)
on the basis that the finding is too generalised and doesn’t
recognise the difference in market segments and parts of the value chain where foreign banks are not
niche operators. For example, foreign banks are not niche operators in online deposits, as highlighted
by RBA in its initial submission to the Commission: “The entry of new banks following the Wallis
Inquiry resulted in an intensification of competition in deposit markets, notably through foreign banks
competing for the provision of online deposits”. In addition, foreign banks are not niche operators in
the business and institutional banking sectors, as highlighted by RBA in its initial submission to the
Commission: “There has recently been strong competition for large business lending as a
consequence of the entry of new foreign banks and expansion in activity by some existing foreign
banks”; “Over the past few years, the spread on large business lending has declined as competition
has emerged from foreign banks”.
Response to Information Requests
Information Request 4.1 Should ASIC’s regulatory sandbox be extended?
• In its last submission to this Inquiry CommBank noted that ASIC’s regulatory sandbox has
only been provided to FinTech competitors, in contrast to markets like Singapore where
sandboxes are available to all financial market participants. CommBank believes that the
regulatory sandbox should be accessible for all market participants, to encourage further
innovation and collaboration between existing participants and new market entrants.
• CommBank also notes that last year Treasury consulted on an enhanced regulatory sandbox.
CommBank contributed to, and supports, the ABA’s submission to Treasury in this regard.
Information Request 10.1 How should liability for unauthorised transactions be shared?
• CommBank believes the general principle that the “negligent” party should carry liability.
• This is frequently an ambiguous area and consistency and improved clarity would be useful
for market participants.
• A liability framework under the ePayments Code already exists but needs review to, among
other things, consider Open Banking recommendations.
• It is premature to consider relying on an Open Banking policy in relation to access or
unauthorised transactions. Not only is the detail of that policy / framework yet to be settled,
not all unauthorised transactions are related to Open Banking inspired sharing. However,
Open Banking needs to be considered in any ePayments Code review.
| CommBank of Australia |
39
This page intentionally
left blank
| CommBank of Australia |
40
2.4 Access to data and switching
Key Points
• CommBank is supportive of an Open Banking model that puts customers in control, and lifts
competition and security in the industry.
• In the face of ever-increasing cyber threats, Australians need to understand the importance
of keeping their data safe and private; Open Banking cannot diminish the protection and
privacy customers enjoy today.
• CommBank is supportive of the customer-centric and security-first industry solution
proposed by the ABA and more recently by Treasury, and CommBank is implementing the
first phase this year.
Summary of Response to Draft Recommendations
• CommBank supports in principle
Draft Recommendation 13.1 (Data access to enable
switching)
.
• CommBank is unopposed to
Draft Recommendation 10.5 (Access regime for the New
Payments Platform)
. CommBank notes that the NPP has not yet fully launched.
Summary of Response to Draft Findings
• CommBank rejects
Draft Finding III.1 (Consumers’ capacity to put competitive pressure
on providers is often limited)
.
• CommBank accepts
Draft Finding 13.2 (Tick and Flick has not been effective)
.
• CommBank accepts
Draft Finding 10.1 (The New Payments Platform could do more to
ease customer switching).
Switching
Evidence shows that Australians are taking advantage of a competitive market and are shopping
around: three million people switched banks over the last three years and of those two-thirds (68%)
found that switching was an easy process
43
.
For transaction accounts, it is estimated that switching occurs at a rate of 8% to 10% per annum in the
Australian market. This is a comparable rate compared to some European countries with more formal
switching mechanisms
44
.
With customer satisfaction across the Australian banking industry at historically high levels and the
choice available to consumers around switching products such as home loans, credit cards and term
deposits, it should be noted that there is less incentive for consumers to move their transaction
account.
43 Galaxy Research, February 2017
44 Treasury, “Banking: Cost effective switching arrangements”, 2011, available online at:
http://banking.treasury.gov.au/content/reports/switching/downloads/switchingarrangements_aug2011.pdf
| CommBank of Australia |
41
CommBank fully supports competition and the ability for all Australians to choose a financial
institution which best suits their needs. It has fully supported the industry's advancements in
enhancing the customer switching experience, while spearheading a number of initiatives to support
customers to switch banks easily.
CommBank hosts a wealth of information on its website to enable customers to switch easily. This
includes instructions on what to do, a list of popular billers' contact details to save customers searching
for them, template letters that can be downloaded to advise of direct debit changes and a "Notice of
Variation of Account Details" authority form to automate the switch of recurring payments to the
customer’s new provider.
CommBank further enables consumer choice in switching to other financial institutions via same day
closure for transaction and savings accounts, and immediate credit card closure (including via online
channels with zero dollar balance and no pending transactions).
Future industry initiatives will continue to enhance the switching process, including:
• Open Banking (see further details below) framework currently being reviewed by Treasury, will
empower consumers with increased control over their financial information and provide
greater transparency regarding price and service offerings of different providers.
• NPP (see further details below) will introduce more flexibility regarding payment options.
While it has not been designed for account switching it has potential to support the process as
it will ultimately empower consumers to link different accounts to a number of unique personal
PayIDs.
• ABA is incorporating a number of additional obligations into the new Code of Banking Practice
to facilitate convenient switching. It is also collaborating with card Schemes to help banks
facilitate requests to cancel recurring payment transactions on their cards.
• Implementation of Comprehensive Credit Reporting by July 2018 will further bolster choice by
allowing lenders to offer competitive interest rates using a holistic servicing assessment which
will facilitate borrowers switching between lenders.
For the above reasons, CommBank rejects
Draft Finding III.1 (Consumers’ capacity to put
competitive pressure on providers is often limited)
.
Tick and Flick
CommBank accepts
Draft Finding 13.2 (Tick and Flick has not been effective)
. It is worth noting that
the current switching process is reasonably convenient and low friction. For example a customer can
establish a cash transaction account with an alternative institution within minutes, and notify third
parties of new account details within an hour.
CommBank is committed to continuing to review and improve the switching process so that it can
support customers' financial choices. For example, CommBank introduced ‘click to close’ (where
customers can cancel their card online) on credit cards in August 2017.
Open Banking
CommBank supports the Government’s intention to introduce a regime of open data and
comprehensive credit reporting in banking and recommends appropriate measures be put in place to
protect customers’ privacy and security and uphold the stability of the financial system. Importantly,
CommBank is very supportive of an Open Banking model that puts customers in control, and lifts
competition and security in the industry.
| CommBank of Australia |
42
It should be noted that in the face of ever-increasing cyber threats, Australians need to understand the
importance of keeping their data safe and private. Open Banking cannot diminish the protection and
privacy customers enjoy today.
Furthermore, CommBank has considered Treasury’s Final Report into the implementation of Open
Banking. CommBank is very supportive of the customer-centric and security-first principles outlined in
Treasury’s Final Report. Specifically, elements of the model that CommBank supports are:
• Customers are empowered to access their data and send it to accredited companies.
• The framework is supported by risk-based accreditation to assure consumer confidence.
• Privacy and security remain key criteria in system design.
• The framework deals with liability reasonably, and participants are not required to cover each
other’s breaches.
• Government has the option to use this world-leading model across other industries such as
telco, energy and health.
A particular element of the proposed system that CommBank supports is the principle of reciprocity.
CommBank agrees with Treasury’s recommendation that participants in the data sharing system that
seek access to data should also be in a position to share an equivalent data set when instructed by
consumers. This reciprocity is vital to enabling a data-driven economy and to maintain the healthy
levels of innovation in banking but also other sectors.
CommBank’s view is that implementation should commence with ‘simple’ banking products to test
feasibility and also ensure there are no unforeseen adverse impacts.
It is also important that Australia learns from the UK operating model rather than duplicating elements
of it that would not work for the Australian market and could potentially result in exposing Australian
consumers. CommBank will be discussing these items constructively with Government and Industry.
As a result of the above, CommBank supports in principle
Draft Recommendation 13.1 (Data access
to enable switching)
.
New Payments Platform
CommBank is unopposed to
Draft Recommendation 10.5 (Access regime for the New Payments
Platform)
. However, it should be noted that the NPP has not yet fully launched. It is likely to be
detrimental if regulation was implemented at this stage, before it is understood through actual
experience, whether there is a need for regulatory intervention, and what the consequences (intended
and unintended) are likely to be.
NPP Australia (NPPA) is already working with a wide range of potential new entrants in the overlay
services space, and with players who could directly connect to the infrastructure. The Draft Report
correctly sets out a range of graduated access levels including Participant (of which there are a few
variants), Connected Institution, and Overlay Service Provider (OSP). The access criteria for each are
clear and transparent, and available to any potential applicant in the NPP Regulations and also in
material on CommBank’s website.
In relation to fees, this information is available either on NPPA’s website in the case of Overlay Service
Providers (OSPs), or under NDA. Importantly, the presumption enshrined in the regulations is in favour
of admission where the eligibility criteria are satisfied. NPPA is confident that the governance
arrangements in place – including RBA representation on the board, and two independent directors
| CommBank of Australia |
43
(one of whom is the chair), will enable it to manage any conflict of interests which might arise. The
Draft Report notes, and NPPA recognises, the powers of the RBA to designate the system and impose
an access regime in the event of market failure. CommBank believes an assessment of the adequacy of
NPP access is premature and if considered in the future, should adhere to the principle of a fair and
commercial return for the NPP’s investors.
It is also worth mentioning that the NPP will introduce more flexibility regarding payment options -
while it has not been designed for account switching it has potential to support the process as it will
ultimately empower consumers to link different accounts to a number of unique personal PayIDs.
Consequently, over time, as the NPP scales and matures, CommBank accepts
Draft Finding 10.1 (The
New Payments Platform could do more to ease customer switching)
.
Response to Information Requests
Information Request 13.1 To what extent does holding multiple accounts reduce or enable
switching?
• Approximately 5% of CommBank’s core everyday transaction accounts are in a dormant
state, i.e. no activity on the account in the prior 6 months.
• It can be assumed that a large share of dormant accounts is correlated to customers
switching providers or products.
• In relation to the distribution of product holdings across the Australian population,
CommBank’s distribution of product holdings across its consumer customers is shown in
Table 1.
Table 1: Average number of products held by retail customers - CommBank
45
45 Roy Morgan Research, average number of products per customer. CommBank “Any Financial Relationship” Customers 18+,
Banking and Finance products per Banking and Finance customer at CommBank. 6 month rolling average to January 2018.
CommBank excludes Bankwest
CBA Group
average number of products per customer
August 2017 -
January 2018
Total
3.09
Savings and Transaction account
1.46
Term Deposits
0.05
Total Accounts
1.51
Work Super
0.10
Personal Super
0.01
Total Super
0.11
Managed funds incl. CMT
0.02
Major cards
0.88
Total Cards
0.88
Home loan
0.19
Personal Lending
0.05
Total Loans
0.24
Total Insurance
0.33
| CommBank of Australia |
44
Response to Information Requests
Information Request 13.3 What red tape barriers to switching persist?
• CommBank supports competition and the ability for all Australians to choose a financial
institution which best suits their needs. It has fully supported the industry's advancements in
enhancing the customer switching experience, while spearheading a number of initiatives to
support customers to switch banks easily.
• However, given the perception that switching banks is not easy, clearly more can be done at
an industry level to educate consumers about the process; and CommBank is committed to
continuing to invest to enable switching to be more convenient.
• With customer satisfaction across the Australian banking industry at historically high levels
and the choice available to consumers around switching products such as home loans, credit
cards and term deposits, it should be noted that there is less incentive for consumers to
move their transaction account.
• Whilst it is often perceived that the hurdle to switching is identifying and porting direct debit
and recurring payments, it is estimated switching of transaction accounts occurs at a rate of
8% to 10% per annum. When compared to advanced European countries with more formal
switching mechanisms in place, this is a comparable rate.
• Future industry initiatives will continue to enhance the switching process, including:
− Open Banking framework currently being reviewed by Treasury, will empower
consumers with increased control over their financial information and provide
greater transparency regarding the service offerings of different providers.
− NPP will introduce more flexibility regarding payment options. While it has not been
designed for account switching it has potential to support the process as it
empowers consumers to link a different account to their PayID.
− ABA is incorporating a number of additional obligations into the new Code of
Banking Practice to facilitate convenient switching. It is also collaborating with card
Schemes to help banks facilitate requests to cancel recurring payment transactions
on their cards.
− Implementation of Comprehensive Credit Reporting slated for July 2018 will further
bolster choice by allowing lenders to offer competitive interest rates using a holistic
servicing assessment which will facilitate borrowers switching between lenders.
| CommBank of Australia |
45
This page intentionally
left blank
| CommBank of Australia |
46
Chapter 3. Examining industry practices for better
customer outcomes
3.1 An effective and efficient payments system
Key Points
• There should be no further changes in interchange regulations until the effects of changes
recently introduced as a result of the RBA’s grassroots review of interchange are evaluated.
• Australia has one of the most innovative and secure payments systems in the world, as well
as one of the lowest interchange fee regimes globally.
• The payments system is a complex, high fixed cost system with multiple participants.
Interchange is a proven model globally for balancing the costs and benefits for various
participants.
• Interchange fees cover a number of system-wide costs and direct consumer benefits (in
particular fraud protection) and enable investment in innovation and efficiency in the
payment system.
• Banning interchange fees could undermine the economics of the system, and lead to a
reduction in system security and resilience, as well as reduce innovation and other direct
consumer benefits.
• CommBank is committed to providing customers with choice and flexibility when it comes to
how they want to pay.
• CommBank is currently assessing the implementation of additional capabilities to enable
merchant routing for contactless debit transactions and supports the industry working
together to ensure a high standard of customer experience and choice is maintained for both
merchants and cardholders.
• Cardholders should have the ability and right to over-ride any merchant routing decisions.
Summary of Response to Draft Recommendations
• CommBank does not support
Draft Recommendation 10.3 (Ban card interchange fees)
.
• CommBank supports in principle
Draft Recommendation 10.4 (Merchant choice of default
network routing).
Payments are the lifeblood of an economy. The payments system provides individuals, businesses and
institutions choice in how they transfer value, from individuals paying for purchases using ‘tap and go’
to institutions transferring large sums. It is critical to the economy and the everyday lives of Australians
that the payments system is reliable, safe and drives innovation for convenience and efficiency.
Interchange fees
There have been successive reforms concerning interchange over the last 15 years and many have had
unforeseen consequences. Interchange fees were reduced as recently as July 2017. CommBank
believes there should be no further changes in these regulations until the RBA has had the opportunity
| CommBank of Australia |
47
to evaluate the effects of the changes introduced in July 2017 following its grassroots review of
interchange.
Australia has one of the most innovative and secure payments systems in the world, as well as one of
the lowest interchange fee regimes in the world. For example, Australia leads the world in contactless
payment usage
46
and introduced PIN-only authorisation for credit card transactions in 2014. There is
some evidence that accepting cash can be more expensive to merchants than card payments.
Australia’s weighted average interchange on credit of 0.50% and cap of 0.80% is substantially lower
than other markets such as the USA which can be up to 3.25% + 10 cents (refer Table 2). Debit
interchange fees are regulated by the RBA and are low by international standards.
The higher rates of interchange in the USA enable higher investment in fraud protection and
innovation in payments systems, benefiting consumers and businesses.
Table 2: Interchange rates in comparable overseas markets
47
Country / Region
Regulation
Credit rates
Debit rates
Yes
Weighted average 0.50%,
cap of 0.80%
AUD$0.08, cap of $0.15 or
0.20%
Debit only
From 0.00% + USD0.65
To 3.25% + USD0.10
0.05% + USD0.21
Yes
0.30%
0.20%
Voluntary
From 1.00% to 2.06%
Contactless (<CAD25)
CAD0.05 - CAD0.07
From 0.00% + CAD0.02
to 1.00%
No
From 0.00% charities only
To 2.35% premium only
From 0.00% charities only
To 1.50% commercial
Contactless
NZD0.004 – NZD0.10
46 RFi Group, Global Payments Evaluation Study, 2015.
47 Mastercard, available online at Mastercard individual country websites.
| CommBank of Australia |
48
Surcharging of card payments is regulated through the RBA and enforced through the ACCC.
The payments system is a complex, high fixed cost system with multiple participants who each benefit
in different ways. Interchange is a proven model globally for balancing the costs and benefits of
various participants.
Interchange fees cover a number of system-wide costs and direct consumer benefits including:
• Card issuing costs (including replacements, damaged, emergency cards).
• Fraud losses (which in an EMV (PIN) environment are absorbed by issuers).
• Customer protection (dispute and chargeback rights).
• System costs (such as transaction processing, fraud monitoring, card personalisation,
AML/CTF/Sanction screening).
• Compliance costs.
• Enables global access to customer’s accounts through electronic means (both ecommerce and
POS).
• Innovation (for example contactless cards, mobile payments, lock, block & limit).
• Customer reward and loyalty benefits.
• Other consumer benefits such as insurance.
The direct impact to consumers of a proposed ban on interchange fees could undermine the
economics of the system, and lead to a reduction in system security and resilience, as well as reduce
innovation and other direct consumer benefits.
Consequently, CommBank does not support
Draft Recommendation 10.3 (Ban card interchange
fees)
.
Routing of merchant transactions
CommBank is committed to providing customers with choice and flexibility when it comes to how they
want to pay. For example, despite merchant terminals defaulting ‘Tap & Pay’ debit card transactions to
Visa rails, consumers have the choice of selecting EFTPOS if they wish.
Competition within the domestic acceptance market is vigorous with all major banks, local and
international acceptance providers participating and competing for market share. Domestic
interchange fees are published and easily accessible by merchants for both Visa and Mastercard.
When setting up their acquiring facilities with their acceptance partner, a merchant will select the
pricing arrangements that best suits their business needs.
Many acceptance providers in the market offer variations of an ‘interchange plus’ pricing structure
where the underlying interchange of a card transaction is passed directly through to the merchant.
This pricing structure is therefore completely transparent to the merchant with respect to interchange
costs. In the typical ‘interchange plus’ merchant acquiring arrangement, the interchange fee at point of
sale will depend upon 1) which Scheme card the customer selects to use, 2) value of transaction, 3)
what type of merchant it is and if it qualifies for Strategic Merchant Rates
48
, 4) if the customer choses
48 Strategic Merchant Rates are rates available to typically large volume merchants (or merchant groups) that meet certain
qualifying criteria deemed to be strategic to the Scheme.
| CommBank of Australia |
49
to use commercial, premium or standard card which may have different benefits, and 5) whether it is a
domestic issued or overseas issued card. Thus the uncontrollable aspect of interchange for a merchant
is the type of card presented by the consumer, which may have an adverse cost impact to the
merchant depending on the card.
This was a key finding of the FSI and was subsequently addressed by Reserve Banking regulation
which came into effect 1 July 2017 where interchange was capped domestically at 0.80% for domestic
credit cards and 0.20% or 15 cents for domestic debit cards.
The complexity of customer choice can make it challenging for merchants to know the exact cost of
accepting the specific card payment. Increasingly smaller merchants can avoid such uncertainty
through fixed fee arrangements (whereby card variability risk is taken on by the acquiring bank).
EFTPOS only recently began supporting contactless transactions, whereas the Schemes have
supported them for over a decade. Hence, routing debit transactions to the lowest cost path has only
recently become an option.
CommBank supports in principle
Draft Recommendation 10.4 (Merchant choice of default network
routing)
.
The industry needs to ensure the benefits and services cardholders receive through different Schemes
are not compromised should merchants choose to route transactions through a particular payment
network. Cardholders should therefore also have the ability and right to over-ride any merchant routing
decisions.
CommBank is currently assessing the implementation of additional capabilities to enable merchant
routing for contactless debit transactions and supports the industry working together to ensure a high
standard of customer experience and choice is maintained for both merchants and cardholders.
Response to Information Requests
• No information requests are made in relation to this topic.
| CommBank of Australia |
50
3.2 Improving customer choice and outcomes in residential home lending
Key Points
• Mortgage brokers play an important role in the industry and help customers with one of the
most important financial decisions they make in their lives.
• CommBank uses brokers and a proprietary lending network as each provides a distinct value
proposition to large proportions of customers.
• The share of retail home loans that CommBank receives from its owned aggregator (Aussie
Home Loans) is typically lower than the share that CommBank receives from other
independent brokers.
• Contrary to the finding of the Commission, ASIC has found that broker customers pay
interest rates that are no better, and in some cases worse, than those customers who are
served by proprietary channels.
• CommBank has been a major contributor to industry efforts to improve customer outcomes
in mortgage broking, including through changes to its own broker accreditation programme
focused on ensuring brokers deliver positive customer outcomes.
• The ASIC and ABA Retail Banking Remuneration (Sedgwick) reviews on broker remuneration
have proposed that a range of other remuneration arrangements be considered, some of
which propose moving away from trailing commissions. CommBank supported these reviews
and is open to further discussing ways to address the concerns identified in these reviews.
• Home loan pricing is influenced by various factors such as loan terms and customer
characteristics such as risk. Hence customer level pricing is personalised and also accounts
for the prevailing conditions at the time of application.
• Customers already have access to personalised price transparency through lenders, brokers
and online tools.
• The Commission’s proposed price reporting tool may harm price competition and innovation,
mislead customers and may result in reluctance by market participants to offer loans to
customer with risk higher than the median.
• Lenders Mortgage Insurance (LMI) currently allows customers with low or no deposit to
secure credit, allowing them to purchase a home sooner.
• CommBank passes through the cost of the LMI premium to consumers from its insurance
providers. CommBank does not charge a margin or fees above this premium.
• LMI does not fully compensate for the additional risk associated with providing loans to
higher LVR customers, hence the residual additional risk is compensated for through higher
interest rates.
• Implementing LMI refunds could result in a more costly product. Borrowers should be able to
choose between the current ‘non-refundable’ premium product and the more flexible
alternative suggested by the Commission.
| CommBank of Australia |
51
Summary of Response to Draft Recommendations
• CommBank does not support
Draft Recommendation 8.1 (Duty of care obligations for
lender-owned aggregators)
, unless it is applied to all brokers at the same time.
• CommBank supports in principle
Draft Recommendation 8.2 (Mortgage broker disclosure
requirements).
• CommBank is unopposed to
Draft Recommendation 8.3 (Collection of home loan interest
data)
but questions the value of the activity.
• CommBank does not support
Draft Recommendation 8.4 (Interest rate transparency for
home loans)
.
• CommBank is unopposed to
Draft Recommendation 8.5 (Lenders mortgage insurance
refund)
.
Summary of Response to Draft Findings
• CommBank notes
Draft Finding 8.2 (Cost of home loans through brokers vs branches)
.
• CommBank rejects
Draft Finding 8.1 (Interest rates from brokers vs other channels)
.
• CommBank rejects
Draft Finding 13.1 (Mortgage broker commission structures weaken
consumer switching).
• CommBank rejects
Draft Finding 8.3 (If you have a high loan to value ratio, you are
probably paying for it twice over).
3.2.1 Mortgage brokers play an important part in providing customer choice
Mortgage brokers play an important role in the industry and help customers with what is one of the
most important decisions they will make in their financial lives. Brokers offer a valuable service
proposition, including offering a range of products from different providers.
CommBank’s involvement in the broking industry
CommBank uses brokers and a proprietary lending network as each provides a distinct value
proposition to large proportions of customers.
Each of these channels has costs which are specific to that channel. CommBank does not allocate
branch costs to individual interaction or transaction categories, such as writing a home loan.
CommBank notes
Draft Finding 8.2 (Cost of home loans through brokers vs branches)
.
CommBank is proud to own leading mortgage aggregator Aussie Home Loans (AHL).
Consistent with the broking value proposition of independence, CommBank loans are provided as a
part of a panel of loans, with the broker determining the most suitable loan for each customer. Most
loans originated through AHL go to CommBank’s competitors.
The share of retail home loans that CommBank receives from AHL is in fact typically lower than the
share that CommBank receives from other independent brokers. For example from the latest available
data (September 2017) CommBank received an average share of 16.9% of approvals via the top ten
broker headgroups, versus 16.1% of approvals via AHL.
| CommBank of Australia |
52
AHL also sells its own branded products which are wholesale funded by Macquarie Bank and
CommBank. Several other banks also provide wholesale funding arrangements for other brokers
irrespective of whether the broker is owned by those banks.
Customer outcomes in broker channels
Contrary to the finding of the Commission, ASIC has found that broker customers pay interest rates
that are no better, and in some cases worse, than those customers who are served by proprietary
channels. ASIC's findings suggested higher interest rates, larger loan sizes, more interest only loans,
and higher leverage. Although these outcomes may be appropriate for many customers, their net
effect is that overall broker customers may take longer to repay loans, and incur more interest, than
those served by proprietary lenders. Hence, CommBank rejects
Draft Finding 8.1 (Interest rates from
brokers vs other channels)
.
CommBank believes the vast majority of brokers do the right thing and want to help their customers.
CommBank has been a major contributor to industry efforts to improve customer outcomes in
mortgage broking, including through changes to its own broker accreditation programme focused on
ensuring brokers deliver positive customer outcomes.
Commissions
As in other financial services products, a combination of upfront and trailing commissions has been
used to balance the upfront and ongoing costs of establishing and maintaining a customer
relationship. Upfront commissions are paid to compensate brokers for the work associated with the
home loan application and to reflect the value to the bank of a new home loan customer. Trail
commission payments are made to compensate brokers for the ongoing costs associated with
servicing and maintaining home loans.
Brokers are able to freely move customers between financial institutions, should this be in the best
interests of customers. Should brokers switch a customer between institutions they are typically paid a
'new' upfront commission (which can offset any commission clawback if the switch has occurred within
2 years of initial funding).
The ASIC and ABA (Sedgwick) reviews on broker remuneration have proposed that a range of other
remuneration arrangements be considered, some of which propose moving away from trailing
commissions. CommBank supported these reviews and is open to further discussing ways to address
the concerns identified in these reviews.
CommBank rejects
Draft Finding 13.1 (Mortgage broker commission structures weaken consumer
switching)
.
Improving customer outcomes and choice
CommBank supports actions that help customers better understand the service that brokers provide,
and the ownership and remuneration arrangements that may influence how that service is performed.
CommBank recognises the potential customer benefits of the Commission's proposal to implement
new duty of care obligations for brokers, however CommBank does not support
Draft
Recommendation 8.1 (Duty of care obligations
for lender-owned aggregators)
, unless it is applied
to all brokers at the same time to avoid confusion for consumers and maintain an even playing field for
industry participants.
| CommBank of Australia |
53
It would be important to ensure that any duty of care obligations allow for brokers to consider price
together with the full range of product features that may be of value to customers, for example
physical branch networks, access to digital banking, product flexibility (redraw, offset, etc.).
CommBank notes the Commission's view that "there is a strong in-principle case for a similar duty of
care to be applied to all brokers." CommBank considers that, should the Commission choose to
proceed with these recommendations, additional obligations should be applied universally to all
brokers at the same time. Different regimes for brokers based on ownership would cause significant
and unnecessary confusion for consumers in selecting a broker and what they can expect from the
service.
Given brokers are able to move freely between lenders (and other aggregators), partial
implementation would risk allowing some brokers to easily avoid additional obligations.
Delaying universal implementation has no practical value when the eventual disclosure and duty of
care obligations are to be universal and it leaves unaddressed conflicts of interest that might arise
through the sale of white-labelled products by brokers. CommBank agrees with the Commission that,
as demonstrated by direct evidence from brokers, white-labelled products represent apparent conflicts
of interests today and hence may warrant attention.
CommBank supports greater disclosure requirements, if they are universal. Customers should have all
the information that helps them make the right decision for them, and this includes understanding
what might – in some cases – influence recommendations. This information should be presented in a
way that is not confusing, and at the right time (as early in the broker interaction as possible).
Consequently CommBank supports in principle
Draft Recommendation 8.2 (Mortgage broker
disclosure requirements)
.
| CommBank of Australia |
54
Response to Information Requests
Information Request 8.1 How should new duty of care obligations for lender-owned aggregators
be implemented?
• CommBank believes a number of new duty of care arrangements are potentially workable, if
they are applied to all brokers. However it would be important to ensure that any duty of care
obligations allow for brokers to consider price together with the full range of product
features that may be of value to customers, for example physical branch networks, access to
digital banking, product flexibility (redraw, offset, etc.).
• CommBank is available to work with the appropriate bodies to develop detailed
requirements.
Information Request 8.2 Should consumers pay broker fees for service?
• CommBank is open to dialogue regarding the structure of broker commissions.
− CommBank believes that brokers could continue to offer their services to customers
if consumers were to pay for their services directly.
− However, CommBank notes that the ASIC review on broker remuneration and the
ABA (Sedgwick) Review both identified other changes as more important
mechanisms to improve customer outcomes in the broker channel. For example, the
ABA review recommended moving to alternative commission structures that are not
directly linked to loan size.
− Based on these inquiries, CommBank’s view is that changes to the level and structure
of commissions (and other forms of fees) may be as or more important in
influencing customer outcomes than whether these fees are paid directly or
indirectly by consumers.
• CommBank also notes that experience in the financial advice sector suggests changes of this
kind require universal application to ensure they deliver the maximum benefit to customer
outcomes.
Information Request 13.2 Is there a rationale for the structure of mortgage broker commissions?
• As in other financial services products, a combination of upfront and trailing commissions
has been used to balance the upfront and ongoing costs of establishing and maintaining a
customer relationship.
• Upfront commissions are paid to compensate brokers for the work associated with the home
loan application and to reflect the value to the bank of a new home loan customer. Trail
commission payments are made to compensate brokers for the ongoing costs associated
with servicing and maintaining home loans.
• The ASIC and ABA (Sedgwick) reviews on broker remuneration have proposed that a range
of other remuneration arrangements are considered, some of which propose moving away
from trailing commissions.
• CommBank supported these reviews and would be happy to further discuss ways to address
the concerns identified in these reviews.
| CommBank of Australia |
55
3.2.2 Transparency in home loan interest rates
The interest rate consumers pay for home loans have significant implications for the overall cost of a
loan, and hence consumers’ financial wellbeing. Increased sophistication in the collection and analysis
of data on financial markets, property securities and customer characteristics has moved home lending
pricing away from ‘one size fits all’ to a more sophisticated assessment of factors such as risk.
Like many other banks, CommBank has made significant investments to improve the way in which it
prices its home loans and in the home buying experience for customers. The intent of this investment
has been to reach the best possible balance between prudential requirements, responsible lending,
and commercial value. Customer research proves that home loan prices are a major driver of customer
choice and satisfaction, so improvements in this area are important to the home lending business.
The result of this investment is that home loan pricing now reflects more a more granular assessment
of risk including security value and characteristics; availability of a deposit; prior credit behaviour;
ability to service the loan; and loan characteristics including loan-to-value ratio (LVR). Therefore, home
lending prices reflect the relative risk and return of the proposed loan compared with a standardised
benchmark.
Transparency already exists in the market
Price comparisons that reflect this sophistication are already readily available to customers, and these
comparisons are becoming easier to obtain.
As the Commission’s data shows, most customers already know (or quickly learn) that banks’ standard
variable rates are indicative benchmarks, not prices typically paid by customers.
Actual offer prices, suitable for accurate like-for-like comparisons can be quickly obtained by
consumers today. In CommBank’s proprietary channel, automated pricing tools can quickly provide
close-to-final customised prices. Either with a broker’s assistance or independently, customers can
obtain additional actual offers from other institutions with similar speed. Comparison websites and
emerging digital brokers offer automated comparison services based on some (although not all)
relevant borrower characteristics.
Ease of obtaining actual offers is also increasing. Many institutions are aware that the ability to quickly
offer a price that is close to final is important to customers’ choice of lender, and are investing to
improve this capability.
CommBank prices new and historical loans in similar ways, however the price offered reflects the
characteristics of the borrower, the loan and the underlying market conditions at the time the loan was
funded. Loans are assessed based on the characteristics of the applicants and the loan, while the
pricing available also reflects underlying funding costs and market conditions. Differences between
newer and older customers can occur because this assessment happens at different times. The
underlying cost components of providing home loans move over time, as does the profile of written
business, impacting the rates that can be offered, for example:
• The costs of funding loans depends on prevailing market conditions at the time a loan is
written.
• The bank must secure long-term funding for a loan at the time it is written, having secured this
funding the costs are ‘fixed’ even if market conditions change. Hence a ‘historical’ loan may
have very different costs associated with it, when compared to a new loan (for example loans
written during the GFC (which had high funding costs) versus now).
| CommBank of Australia |
56
• Property values have generally risen, contributing to an increase in average loan sizes which
are subject to higher discount tiers.
• Changes in risk appetite have reduced the share of total lending that is in the higher LVR
brackets (>80%), higher LVR loans typically receive lower discounts.
Proposed changes to improve informed choice by consumers
CommBank is very supportive of initiatives that make it easier for customers to get the information
required to help them make better financial decisions. CommBank supports efforts to ensure that
customers are fully informed about the interest rate associated with their home loans, as well as other
fees and charges, and other ‘non-price’ components of a home loan offer.
Proposals to provide more information on historical interest rates need to be carefully evaluated to
make sure they don’t mislead customers and lead to unintended lender behaviour. It is CommBank’s
view that the Commission’s online median price proposal is more likely to create poor competitive
outcomes than appeal to customers, even before taking into account the additional effort and
complexity to be managed by financial institutions and consumers alike.
Consumer appeal may be limited due to the required complexity of using and interpreting outcomes:
• The Commission’s data shows large variations of actual prices from medians within simple
customer segments. Consequently, many customer characteristics will be needed to obtain
prices that can be relied upon for comparison, complicating use and interpretation of the tool.
• To be useful and representative, information needs be collected and presented in a granular
format with inputs such as LVR, loan size, loan type, repayment type and product. For more
advanced institutions rates are also influenced by detailed modelling of customer risk,
behaviour, and cost of funding. This will be onerous for customers to complete akin to a full
application and if not collected at a granular level will have a very broad rate range which will
not be beneficial to customers.
• Because loan risk assessments typically rely on personal information – including salaries and
other loans – meaningful results will require the submission of this usually confidential
information to ASIC.
• The proposed tool is already duplicated and – as actual not theoretical offers are obtained –
surpassed by traditional mortgage brokers, and increasingly by digital brokers, at similar levels
of convenience.
• Because ASIC’s tool can only ever deliver indicative prices, efforts to use this tool will inevitably
be duplicative to the process of obtaining actual offers.
By contrast the tool will be a new and valuable source of intelligence on competitor pricing strategies,
with the potential outcome of greater price alignment:
• For the tool to be useful, it will need to publicly provide granular information on pricing
approaches, revealing pricing models which constitute commercially sensitive intellectual
property.
• This represents a consequential risk of allowing prices to become more aligned across the
industry.
• This could happen, for example, by dulling incentives for emerging players with less
sophisticated pricing models to invest in these models. Instead these players would simply be
able to closely match rates of major players. For example, an emerging player targeting higher
| CommBank of Australia |
57
risk customers would no longer need to develop a new pricing technique but instead simply
price to the median price revealed by the tool.
Further, to the extent that the tool is relied on by borrowers, lenders may become reluctant to offer
loans to borrowers whose risk profile is higher than the median in any particular category.
Alternatively, price information provided at a high level runs the risk of misleading customers who have
different risk or security characteristics to the median, and therefore mean that they cannot receive the
price quoted.
It is important to note that this information already exists in the market for fixed and basic products.
The rates advertised by banks and numerous comparison websites are closely aligned to end rates that
customers receive.
As a result of these considerations, CommBank does not support
Draft Recommendation 8.4
(Interest rate transparency for home loans)
. Consequently, whilst unopposed to
Draft
Recommendation 8.3 (Collection of home loan interest data)
, CommBank questions the value of the
collection activity.
If this initiative proceeds, it will be important to ensure that it does not contravene laws regarding
collusive or anti-competitive conduct. For example, the ACCC has previously taken action against
providers of information on fuel industry pricing on the basis that these arrangements can facilitate
collusive conduct. Given the time taken to negotiate loans, and the frequency of material funding cost
changes, even recent retrospective data risks raising similar concerns in home lending.
3.2.3 Improving customer outcomes in Lenders Mortgage Insurance
LMI is a product designed to improve access to the home lending market for a higher risk segment of
customers (i.e. those with less than a 20% deposit). LMI currently allows customers with low or no
deposit to secure credit, allowing these customers to purchase a home sooner. Failure to offer LMI
would require an increase in interest rates or (alternatively) make extension of credit difficult or (in
some cases) impossible.
LMI premiums are a specific charge to compensate for a single risk – that of outright default. LMI is
currently made available to a portfolio of similar customers through pooling of risk by insurers. This
approach means premiums account for expected average loan characteristics.
CommBank passes through the cost of this premium to customers from its insurance providers.
CommBank does not charge a margin or fees above this premium. The current products provided by
CommBank’s insurers are not priced on loan term, but rather on the risk associated with accepting
loans that fit within certain loan parameters (LVR, loan type, etc.). CommBank takes consideration to
ensure that the LMI rate and the offering that goes with it, along with the mortgage product, are
competitive in the marketplace.
Under the terms of CommBank's LMI products, its insurers do not provide refunds for customers who
refinance or payout their loan. Where CommBank's insurers provide refunds for some customers on
compassionate grounds, for example when an adverse change in personal circumstances requires an
unplanned property sale, CommBank provides these refunds to customers. CommBank rejects the
Commission’s inference that its insurers provide refunds to customers which CommBank does not
subsequently make available.
| CommBank of Australia |
58
It is important to note that LMI protects the bank against losses associated with a customer who has
defaulted on their loan. LMI does not however fully compensate the bank for the costs associated with
providing loans to higher LVR customers (for example higher capital costs, collection costs associated
with customers who go into arrears by subsequently recommence repayments).
CommBank rejects
Draft Finding 8.3 (If you have a high loan to value ratio, you are probably
paying for it twice over)
, particularly the assertion that CommBank seeks to recover in the interest
rate risks protected against through LMI. LMI does not fully compensate for the additional risk
associated with providing loans to higher LVR customers, hence the residual additional risk is
compensated for through higher interest rates. Notwithstanding the above, as the Commission has
noted in its draft report, “the difference is small, at 0.00066% of the average interest rate for all
borrowers”.
With respect to
Draft Recommendation 8.5 (Lenders mortgage insurance refund)
, CommBank notes
that this recommendation implies replacement of the current LMI product design with a potentially
more expensive option which could restrict access to home financing for some customers – a new type
of LMI. Prices would need to reflect the cost of providing additional flexibility, resulting in higher up
front premiums. Customers who repay their loan over longer time periods - even across multiple banks
- may pay more relative to the current product. To the extent these additional costs impact loan
serviceability, this would compromise access to credit for some customers.
CommBank is unopposed to
Draft Recommendation 8.5 (Lenders mortgage insurance refund)
. If
the recommendation were implemented, CommBank would welcome a discussion about what specific
product design would be most compatible with the Commission’s objectives, while limiting adverse
impacts on the availability of credit or on costs to customers. In particular, CommBank proposes that
borrowers be able to choose between the current ‘non-refundable’ premium product and the more
flexible alternative suggested by the Commission.
One alternative model put forward has been to factor the cost of LMI directly into the interest rate
charged. This would be detrimental to customers as total premiums paid by customers would increase.
For example, it would drive significantly higher transaction, processing, monitoring and control costs
due to the complexity of calculating, deducting, passing on and reconciling individual monthly
payments. Charging LMI through higher interest as part of the repayment will also mean that
customers who go into arrears, default or claim will stop payment premiums before the full cost is
recovered. Again this would result in higher monthly premiums which are disproportionately borne by
those who continue to service their loans.
Response to Information Requests
Information Request 8.3 Are Changes Needed To Lenders Mortgage Insurance?
• CommBank rejects
Draft Finding 8.3
, particularly the assertion that CommBank seeks to
recover in interest rate risks protected against through LMI, hence does not consider
Information Request 8.3 requires a response.
| CommBank of Australia |
59
This page intentionally
left blank
| CommBank of Australia |
60
3.3 Improving customer choice and outcomes in insurance
Key Points
• The insurance market has witnessed new entrants to Australia in recent years, with the rise
of challenger brands, innovation in products and new solutions for customers.
• CommBank supports making it simpler and easier for customers to make informed choices
in relation to their insurance arrangements.
• CommBank does not offer add-on style insurance sold through car yards.
• Following a review of consumer credit insurance products, CommBank recently announced
the decision to end sales of its Credit Card Plus and Personal Loan Protection products as it
found it was difficult to achieve the right balance between simplicity and accessibility on the
one hand, and limiting the product to the right group of target customers on the other hand.
• CommBank believes it is important that customers consider risks that can occur at various
points in life, therefore it is appropriate to invite customers to consider if they want to reduce
their risk via insurance, when they are taking on more responsibilities, for example
purchasing a home.
Summary of Response to Draft Recommendations
• CommBank is unopposed to
Draft Recommendation 11.1. (Past pricing information on
insurance renewal notices)
however recommends that the implementation be carefully
considered to minimise confusion for consumers.
• CommBank supports in principle
Draft Recommendation 11.2 (Transparency on
underwriting)
.
• CommBank supports in principle
Draft Recommendation 14.1 (Deferred sales model for
add-on insurance)
.
• CommBank supports in principle
Draft Recommendation 11.3 (Phase out stamp duties
levied by the states and some of the territories)
.
Summary of Response to Draft Findings
• CommBank accepts
Draft Finding 11.2 (Consolidation of General Insurers)
.
• CommBank accepts
Draft Finding 11.1 (Market power in general insurance provision).
General Insurance
In the process of securing and enhancing the financial wellbeing of its customers, CommBank believes
it is important to be able to help those customers protect their home, their possessions, and their
motor vehicles. CommBank’s general insurance business (under the CommInsure brand) helps protect
the financial wellbeing of more than 1 million policyholders.
The insurance market has witnessed new entrants to Australia in recent years, with the rise of
challenger brands, innovation in products and new solutions for customers.
| CommBank of Australia |
61
Representations to the Senate Economics Committee Inquiry into General Insurance noted that
‘Australia's general insurance industry is highly competitive, contending that the large number of
participants in the market and recent entry of challenger brands are evidence of this fact’.
APRA data shows there was 96 insurers licensed to conduct general insurance business as at 30
September 2017, of which 86 were direct insurers and 10 reinsurers. APRA also noted that “The
personal lines market continues to display healthy competition. Incumbents have maintained a
competitive position in all classes of business, while coming under increasing pressure from challenger
brands (such as Auto and General, Youi and Hollard), which continue to grow their market share”.
As the Commission has noted, the sector is however relatively concentrated amongst a number of
large insurers.
CommBank accepts
Draft Finding 11.1 (Market power in general insurance provision)
and accepts
Draft Finding 11.2 (Consolidation of General Insurers)
.
CommBank supports making it simpler and easier for customers to make informed choices in relation
to their insurance arrangements.
CommBank supports in principle
Draft Recommendation 11.2 (Transparency on underwriting)
.
CommBank is also unopposed to
Draft Recommendation 11.1. (Past pricing information on
insurance renewal notices)
however CommBank recommends that the implementation be carefully
considered to minimise confusion for consumers.
Add-on insurance
CommBank does not offer add-on style insurance sold through “car yards”. Following a review of
consumer credit insurance products, CommBank recently announced the decision to end sales of its
current Credit Card Plus and Personal Loan Protection products as it found it was difficult to achieve
the right balance between simplicity and accessibility on the one hand, and limiting the product to the
right group of target customers on the other hand.
CommBank is working with AIA, a leading global insurer which is acquiring the CommInsure life
insurance business from CommBank, to deliver new and innovative protection solutions for its
customers, so that an important need can be met. These new solutions will build upon the recent
improvements to product design and sales processes that have been developed by ASIC and the
industry to improve customer outcomes.
CommBank believes it is important that customers consider risks that can occur at various points in
life, therefore it is appropriate to invite customers to consider if they want to reduce their risk via
insurance, when they're taking on more responsibilities for example when buying a new home.
Recognising some of the issues identified in the add-on insurance sold through “car yards”,
CommBank supports in principle
Draft Recommendation 14.1 (Deferred sales model for add-on
insurance
). CommBank supports a deferred sales model for consumer credit insurance in face to face
and phone based sales channels as is being introduced through the updated Banking Code of Practice.
This reform should be given time to commence to allow further assessment of how this model impacts
on consumers.
Stamp Duty
As the Commission has noted, stamp duties on insurance are particularly inefficient taxes because of
their narrow base, the distortions to insurance prices, and reduction in insurance affordability. They
| CommBank of Australia |
62
create an incentive to not insure. Consequently, CommBank supports in principle
Draft
Recommendation 11.3 (Phase out stamp duties levied by the states and some of the territories)
.
CommBank encourages government to work with the states and territories that levy stamp duties on
insurance to promptly progress this recommendation.
Response to Information Requests
• No information requests are made in relation to this topic.
| CommBank of Australia |
63
This page intentionally
left blank
| CommBank of Australia |
64
3.4 Improving customer choice and outcomes in financial advice
Key Points
• CommBank supports the proposal to rename General Advice and the intent to increase
access to advice and the safe delivery of information or guidance to customers. In relation to
the proposal to rename General Advice, CommBank encourages any proposed changes to be
considered in a broad context so that potential unintended consequences are fully
understood and mitigated.
• Post-FOFA there remains a lack of clarity relating to the distinction between Personal Advice
and General Advice, and the uncertainty around providing limited or single issue scoped
advice under the best interests duty. This raises a risk that changes may further reduce the
ability to have simple conversations with customers about their financial needs.
• CommBank supports the inclusion of credit as an option for licensed financial advisers as it
can help facilitate clients and their adviser's engaging in conversations on a broader range of
financial needs, and on topics which naturally complement each other (for example debt
management and savings).
• Broadening the scope of products financial advisers provide advice on would have practical
implementation implications, for example additional training requirements, cost of changes
to documentation and processes. These should be carefully considered.
Summary of Response to Draft Recommendations
• CommBank supports in principle
Draft Recommendation 12.1 (Rename General Advice to
improve customer understanding)
.
Summary of Response to Draft Findings
• CommBank notes
Draft Finding 7.1 (Consolidation in asset management and financial
advice).
Competition in wealth management
CommBank is committed to helping customers meet their wealth and retirement needs through the
most appropriate channel. When it comes to delivering good customer outcomes, it is incumbent on
all players to innovate and develop the best product and service offering.
The FSI undertook a thorough review of the financial services industry, including competition. The FSI
specifically examined whether the recent trend of vertical integration is reducing competitive
pressures, but did not conclude that regulatory intervention was necessary. It did, however, recognise a
need to increase standards around financial product design and distribution and increase ASIC’s
powers over products and in regulation and draft legislation for this proposal is currently under
consultation. It also acknowledged that the Australian financial system has matured, and robust FOFA
legislation affords real consumer protection, including the best interests’ duty and prohibitions on the
payment of conflicted remuneration.
In relation to competition in superannuation and investments, it is important to distinguish between
platforms and products. The platform is the administration vehicle which facilitates efficient access to
| CommBank of Australia |
65
the underlying investment products (or investment “options”). Platforms can be in-house or external,
and some entities own more than one platform (for example, CommBank owns the FirstChoice and
FirstWrap platforms). Platforms compete for financial advisers, as well as on products offered.
CommBank’s financial advice licensees include multiple platforms and insurance providers on their
Approved Product Lists (APLs). Of the investment options on the platforms which are owned by
CommBank, less than 40% of the total options available are in-house products.
CommBank’s financial advice business is required to comply with the Financial Services Council Life
Insurance Approved Product List Standard which requires a licensee to hold a minimum number of life
insurance products (three) on the APL and provide various disclosures to this effect. There is also an
extensive off-APL process. Under this process financial advisers can recommend products/platforms
not listed on the APL where they deem this to be in the best interests of clients.
Vertical integration can provide significant customer benefits by offering a wide range of financial
products and services at each stage of their lives, with scale and scope benefits providing more choice,
competitive pricing, and innovative technology.
Some industry stakeholders and commentators have presented vertical integration to be a feature only
present in banking-owned wealth businesses, however, vertical integration is a common feature
throughout financial services in Australia, and not unique to conglomerate banking businesses.
As the Commission has itself observed, the market continues to evolve. Some banks are exiting
elements of their wealth management operations. In comparison, some industry superannuation funds
are seeking to harness the benefits of vertical integration by internalising their asset management and
developing financial advice. Some funds also own banking operations.
CommBank notes
Draft Finding 7.1 (Consolidation in asset management and financial advice)
.
Proposal to rename General Advice
One of FOFA’s key objectives was to increase access to advice for all Australians. Following the
introduction of the FOFA reforms the cost of delivering quality advice remains high. This has
challenged the industry’s ability to increase access to advice.
CommBank supports the general proposition to increase access to advice and the safe delivery of
information or guidance to customers. CommBank supports in principle
Draft Recommendation 12.1
(Rename General Advice to improve customer understanding)
, however encourages any proposed
changes to be considered in a broad context so that potential unintended consequences are fully
understood and mitigated. CommBank is available to work with the appropriate bodies in this process.
CommBank believes it will be important for sufficient consumer testing to take place to ensure the
new name for General Advice has real meaning to the broader community.
There is the potential for unintended consequences if access to advice is not given primary
consideration. In exploring changes to the naming of General Advice, policymakers should be careful
to ensure access to simple, single issue advice and general guidance to customers on financial matters
improves, or at the very least is not reduced as a result. It would be a poor public policy outcome to
permit the delivery of factual information or full-scale Personal Advice only.
Consideration should be given to the relative benefit of any new name, vis-a-vis the cost and effort that
would be required in helping Australians understand the practical meaning and the significant cost in
training and documentation changes required on the part of institutions and individual advisers. Costs
| CommBank of Australia |
66
could be reduced by ensuring adequate transition timeframes by incorporating changes as part of
planned update cycles.
CommBank would welcome more legal certainty between personal and General Advice (that is, where
customer conversations begin to enter the realm of Personal Advice), including where advice is given
on single or a more limited set of issues at the customer’s request.
CommBank’s preference is for greater scope and certainty around what is possible under General
Advice and in delivering limited or single issue advice.
Proposal to extend scope of financial advice to include some credit products
CommBank appreciates the intent of proposals which aim to increase competition in the way
consumers receive advice about lending products, for example through alternatives to mortgage
brokers. Presently, only a very small number of advisers who provide financial advice under
CommBank’s licences are both financial advisers and are also authorised to provide credit advice
through a credit licensee.
CommBank supports the inclusion of credit as an option for licensed advisers as it can help facilitate
clients and their advisers engaging in conversations on a broader range of financial needs, and on
topics which naturally complement each other (for example debt management and savings).
Such a change would inevitably result in the need for integrated businesses such as CommBank to
invest additional resources to implement this measure, relating to additional training, the updating or
addition of customer documentation, costs for research relating to product selection, system updates
or access changes to provide more information to advisers, and the need to prepare additional
distribution agreements. Overall, however, depending on how the change is implemented (for example
consolidating licence obligations) there may be long term regulatory cost savings.
Currently a client-adviser conversation flow can be affected by a hesitation by the adviser not to delve
into any realm of credit that at times may be critical in managing cash flow or finding funding sources
(for example using reverse mortgages as an approach to unlock liquidity) for the client.
Any new rules in this area should continue to recognise differences in the way recommendations
relating to credit products are regulated compared with other (wealth related) products and services.
It will be important that Government and industry work closely together to develop the details of this
proposal as it develops to ensure any unintended consequences are avoided. CommBank is available
to work with the appropriate bodies to develop detailed requirements.
| CommBank of Australia |
67
Response to Information Requests
Information Request 12.1 Should the scope of financial advice be increased to include some
credit products?
• As discussed above, CommBank supports the inclusion of credit as an option for licensed
advisers as it can help facilitate clients and their adviser's engaging in conversations on a
broader range of financial needs, and on topics which naturally complement each other (for
example debt management and savings).
Information Request 12.2 Should General Advice be renamed to avoid customer confusion?
• As discussed above, CommBank supports the intent of the Commission’s recommendation to
rename General Advice to improve customer understanding, however encourages any
changes through the consideration of this proposal to avoid unintended consequences that
could be detrimental to consumers accessing advice and guidance to meet their needs.
| CommBank of Australia |
68
Cross reference of Draft Recommendations
Draft Recommendations
CommBank’s
response
Page #
DR 4.1 Reducing regulatory barriers to entry and expansion
Supports in principle
38
DR 7.1 A proportionate approach to risks non-ADIs pose
Unopposed
34
DR 7.2 Building an evidence base on integration
Unopposed
16
DR 8.1 Duty of care obligations for lender-owned aggregators
Does not support
53
DR 8.2 Mortgage broker disclosure requirements
Supports in principle
54
DR 8.3 Collection of home loan interest rate data
Unopposed
58
DR 8.4 Interest rate transparency for home loans
Does not support
58
DR 8.5 Lenders mortgage insurance refund
Unopposed
59
DR 9.1 Standardised risk weightings for SME lending
Supports in principle
34
DR 10.1 Review regulation of purchased payment facilities
Supports in principle
38
DR 10.2 Making the ePayments code mandatory
Supports in principle
38
DR 10.3 Ban card interchange fees
Does not support
49
DR 10.4 Merchant choice of default network routing
Supports in principle
50
DR 10.5 Access regime for the new payments platform
Unopposed
43
DR 11.1 Comparative pricing information on insurance renewal
notices
Unopposed
62
DR 11.2 Transparency on insurance underwriting
Supports in principle
62
DR 11.3 Phase out distortionary insurance taxes
Supports in principle
63
DR 12.1 Rename General Advice to improve consumer
understanding
Supports in principle
66
DR 13.1 Data access to enable switching
Supports in principle
43
DR 14.1 Deferred sales model for add-on insurance
Supports in principle
62
DR 15.1 Statements of expectations for regulators
Supports in principle
30
DR 16.1 Review standardised risk weights for residential
mortgages
Supports in principle
34
DR 17.1 New competition functions for a regulator
Supports in principle
30
DR 17.2 Transparency of regulatory decision making
Supports in principle
31
DR 17.3 Robust and transparent analysis of macro-prudential
policies
Supports in principle
31
| CommBank of Australia |
69
Cross reference of Draft Findings
Draft Findings
CommBank’s
response
Page #
DF 2.1 Key Features of workable competition in the Financial system
Accept
9
DF 2.2 Competition and stability must co-exist
Note
30
DF II.1 State of competition in the financial system
Reject
28
DF III.1 Consumers capacity to put competition pressure on providers
is often limited
Reject
42
DF 3.1 The major banks oligopoly power
Reject
19
DF 4.1 A Consolidation in Banking
Accept
20
DF 4.2 Foreign banks remain predominantly niche operators
Reject
39
DF 4.3 Most FinTechs are focusing on less regulated services
Reject
38
DF 4.4 FinTech collaboration and competition
Reject
39
DF 5.1 Cost of funds for different size banks
Reject
17
DF 6.1 Cost of APRA interventions on home loans
Reject
31
DF 7.1 Consolidation in asset management and financial advice
Note
66
DF 7.2 New rules costly for non-ADIs
Accept
34
DF 8.1 Interest rates from brokers vs other channels
Reject
53
DF 8.2 Cost of home loans through brokers vs branches
Note
52
DF 8.3 If you have a high loan to value ratio, you are probably paying
for it twice over
Reject
59
DF 10.1 The new payments platform could do more to ease customer
switching
Accept
44
DF 11.1 Market power in general insurance provision
Accept
62
DF 11.2 Consolidation of general insurers
Accept
62
DF 13.1 Mortgage broker commission structures weaken consumer
switching
Reject
53
DF 13.2 Tick and flick has not been effective
Accept
42
DF 15.1 APRA not well placed to consider competition in the financial
system
Note
31
DF 16.1 Ratings agencies exacerbate the perception of ‘too big to fail’
Reject
22
DF 16.2 The four pillars policy is redundant
Reject
23
| CommBank of Australia |
70
Cross reference of Information Requests
Information Requests
Page #
IR 4.1 Should ASIC’s regulatory sandbox be extended?
39
IR 7.1 How will prudential standard APS 120 affect you?
35
IR 8.1 How should new duty of care obligations for lender-owned aggregators be
implemented?
55
IR 8.2 Should consumers pay broker fees for service?
55
IR 8.3 Are changes needed to lenders mortgage insurance?
59
IR 10.1 How should liability for unauthorised transactions be shared?
39
IR 12.1 Potential to increase the scope of financial advice to include some credit
products
68
IR 12.2 Renaming General Advice and merits of further changes
68
IR 13.1 To what extent does holding multiple accounts reduce or enable switching?
44
IR 13.3 What red tape barriers to switching persist?
55
IR 13.2 Is there a rationale for the structure of mortgage broker commissions?
45
IR 16.1 Where can IRB accreditation processes be improved?
35
IR 17.1 Which regulator should advance competition in the financial system?
32
| CommBank of Australia |
71
Glossary
ABA
Australian Banking Association
ACCC
Australian Competition and Consumer Commission
ADI
Authorised Deposit-taking Institutions
AHL
Aussie Home Loans
AIA
AIA Australia
APL
Approved Product List
AML
Anti-Money Laundering
ANZ
Australia and New Zealand Banking Group
APRA
Australian Prudential Regulation Authority
APS 120
Prudential Standard APS 120 Securitisation
ASIC
Australian Securities & Investments Commission
Australia's
Major Banks
Australia’s four largest banks: ANZ, CommBank, NAB, WBC
Basel III
Set of reform measures developed by the Basel Committee on Banking
Supervision
BMO
Bank of Montreal
BoA
Bank of America
BPAY
Electronic bill payment system
CEO
Chief Executive Officer
CET1
Common Equity Tier 1
CFR
Council of Financial Regulators
CIBC
Canadian Imperial Bank of Commerce
Citi
Citibank
CMA
Competition and Markets Authority (UK based)
CommBank
Commonwealth Bank of Australia’s Australian operations (unless otherwise
specified)
Consumer
Retail banking customer
Core Europe
UK, Germany, France and Belgium
CTF
Counter Terrorism Financing
EFTPOS
Electronic Funds Transfer Point of Sale
EMV
Europay, Mastercard, Visa
FCA
Financial Conduct Authority (UK based)
FinTech
Financial technology; or start-ups / SMEs innovating within financial technology
FOFA
Future of Financial Advice
FSI
Financial System Inquiry
FY
Financial Year
GFC
Global Financial Crisis
Government
The Government of Australia
HSBC
Hong Kong and Shanghai Banking Corporation Limited
IRB
Internal ratings-based
JPM
J.P. Morgan
KYC
Know your customer
LIE
Loan Impairment Expense
| CommBank of Australia |
72
LMI
Lenders Mortgage Insurance
LVR
Loan to Value Ratio
MFI
Main Financial Institution
NAB
National Australia Bank
NDA
Non-Disclosure Agreement
NIM
Net Interest Margin
NPP
New Payments Platform
NPPA
NPP Australia, the company that oversees the build and operation of the New
Payments Platform
OECD
Organisation of Economic Cooperation and Development
OSP
Overlap Service Provider
PEXA
Property Exchange Australia Ltd
PIN
Personal Identification Number
PNC
PNC Financial Services
POS
Point of Sale
PPF
Purchased Payment Facility
RBA
Reserve Bank of Australia
RBC
Royal Bank of Canada
RBS
Royal Bank of Scotland
RegTech
Regulatory technology
ROE
Return on equity
Schemes
Payment networks such as Mastercard and Visa
Sedgwick
Review into product sales commissions and product based payments in retail
banking in Australia which was conducted by Mr Stephen Sedgwick
SME
Small to medium-sized enterprise
StanChart
Standard Chartered Bank
TD
Toronto-Dominion Bank
Treasury
The Treasury of Australia
UK
United Kingdom
USA
United States of America
WBC
Westpac Banking Corporation
| CommBank of Australia |
73