Much ink will be spilt on the 2017 Federal Budget’s targeting of the big banks by way of a liabilities levy, however the sector may be subject to much greater structural reform by virtue of other measures introduced in the Budget to target dispute resolution, accountability and competition in the financial services sector. This update unpacks those various features of the Budget.
There are three streams to the Government’s Budget initiatives in financial services. These are dispute resolution reforms, increased bank accountability and measures to enhance competition in the financial services sector. In addition to these measures, there have been initiatives announced which specifically target the fintech sector and innovation in financial services (these are discussed in our fintech budget update).
Dispute resolution reforms
These changes have been in part driven by the recently released final report of the Ramsay review on external dispute resolution schemes. The central recommendation of the Ramsay review was the establishment of the Australian Financial Complaints Authority (AFCA) as the sole external dispute resolution scheme for the financial sector, replacing the Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. Licensed firms will be required to be a member of AFCA.
AFCA will be funded by industry with an independent chair and an equal number of directors drawn from industry and consumer backgrounds. It will commence on 1 July 2018, with the existing external dispute resolution bodies to continue to work through existing complaints until they are resolved.
Other key reforms which the Government has adopted from the Ramsay review include ASIC being provided with oversight powers over AFCA, including ASIC having the power to give a general direction to ensure AFCA complies with legislative and regulatory requirements. The Government will also introduce legislation requiring financial firms, presumably licensees, to report to ASIC on internal dispute resolution outcomes.
The Ramsay review envisaged that a body such as AFCA would have a broader mandate than only providing an external dispute resolution mechanism. Some key features of the Ramsay review likely to be adopted include:
- lodging complaints will be free;
- firms will be required to comply with AFCA determinations as a condition of membership. AFCA will report firms that fail to comply and AFCA will have power to expel firms that do not comply (causing a breach of licence conditions);
- AFCA will monitor, address and report systemic issues in the disputes which it adjudicates;
- panels will be used to resolve some disputes, such as complex disputes, with clarity for consumers as to when panels will be used; and
- AFCA will have a community engagement focus, aimed at raising awareness amongst consumers and financial firms.
The AFCA will also likely have an expanded jurisdiction compared to existing external dispute resolution services. This will feature:
- a monetary limit of $1 million (a 100% increase on the current limit) on the size of disputes AFCA may hear and a compensation cap of no less than $500,000 (a 62% increase on the current cap), with consultation on whether disputes relating to certain products (i.e. mortgages) should have a compensation cap of $1 million;
- small businesses to bring claims where the credit facility is of an amount up to $5 million (a 250% increase on the current limit) and a compensation cap of $1 million (a 224% increase on current limits); and
- no monetary limits and compensation caps for disputes about whether guarantees should be set aside when guarantees are made in relation to mortgages or other security relating to a person’s primary residence.
The Ramsay review recommended the unlimited jurisdiction for superannuation disputes be maintained. It should be noted that the Ramsay review is continuing and is considering the establishment, merits and design of a last resort compensation scheme, as well as the merits and issues involved in providing access to redress for past disputes. It will report in June 2017.
Increased bank accountability
These measures are focused on expanding the powers which the Australian Prudential Regulation Authority (APRA) will exercise and are targeted at bank executives. These measures include implementing a register of senior executives and directors of authorised deposit-taking institutions (ADIs), this register will:
- require ADIs to advise APRA before making a senior appointment and provide accountability maps of senior executives’ roles and responsibilities to enable greater scrutiny;
- result in a failure to meet expectations by a bank executive leading to the removal of the bank executive from the register and render those executives unable to apply for senior roles; and
- require ADIs to provide APRA with oversight of problems that emerge under their executives’ management.
APRA will also have stronger powers to remove and disqualify senior executives and directors from being employed in the institutions it regulates. These decisions can be appealed to the Administrative Appeals Tribunal.
The Government will introduce new accountability measures including establishing “expectations” on how ADIs, their executives and directors conduct business. These expectations will include requiring that ADIs conduct business with integrity, due skill, care and diligence and act in a prudent manner. Civil penalties for enforcement of these expectations will be significant, with large ADIs faced with civil penalties up to $200 million and smaller ADIs facing civil penalties up to $50 million. Penalties will also be able to be imposed on ADIs that do not appropriately monitor the suitability of executives to hold senior positions. APRA will receive a $1 million per annum fund dedicated to enforcing breaches of these civil penalty positions.
Finally, the Government will also intervene directly in the pay of bank executives. The Government will mandate that a minimum of 40% of an ADI executive’s variable remuneration (60% for certain senior executives such as the CEO) be deferred for a minimum period of four years. The Government intends this reform to place the focus of executives on the longer-term consequences of their decisions, which may take many years to materialise.
Measures to enhance competition
There are three limbs to the reforms to enhance competition contemplated by the Government. These limbs are:
- an open data inquiry: following the release of the Productivity Commission’s report recommending an open data regime, the Government has responded by announcing an inquiry to recommend the best approach to implement an open banking regime;
- Productivity Commission inquiry: the Productivity Commission will conduct an inquiry into the state of competition in the financial system, fulfilling a recommendation of the Murray Financial System Inquiry; and
- regular ACCC inquiries: the ACCC will be provided with $13.2 million over four years to establish a dedicated unit to undertake regular inquiries into financial system competition issues.