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Competition in the Australian financial system

Consultation paper

Released 06 / 07 / 2017

This paper outlines the broad scope of the inquiry and is intended to assist you in preparing a submission.

Initial submissions were due by 15 September 2017.

Download the consultation paper

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The Australian Government has asked the Productivity Commission to undertake an inquiry into competition in Australia’s financial system (attachment A – Inquiry Terms of Reference).

As stated in the terms of reference, this inquiry complements other work by the Commission, which will affect the financial system:

These inquiries add to the substantial number of reviews undertaken across government that have assessed competition and contestability in the financial system as a whole, as well as focused on specific parts of the system. These past inquiries and other policies and initiatives have led to the development and implementation of a broad range of potential reforms, and other actions that remain pending or still unaddressed. In undertaking this inquiry, the Commission will take stock of the existing reforms to assess what would constitute a coherent framework for the future operation of Australia’s financial system.

This inquiry is broad ranging, and will take a holistic view of the financial system — including products and services provided to households, small businesses and large corporations, as well as financial system infrastructure. To avoid overlap with other active reviews, this inquiry will consider superannuation and insurance products only in so far as they affect competition between banks and other financial service providers, including as part of vertically and horizontally integrated business models (figure 1).

Figure 1 Key segments of the financial system

This figure describes the key segments of the financial system, and the main activities in each segment. 
  Segments that are in scope for this inquiry include: 
  - Funds management and financial planning (including financial advice; funds and wealth management; asset management; portfolio and platform administration; custodian services)
  - Investment banking (including equity issuance and structuring; debt issuance and securitisation; non-exchange traded securities; market making / trading (equity, debt, currency); corporate advice; risk management)
  - Business banking (including credit (e.g. overdraft); equipment finance; trade finance; supply chain finance; agribusiness finance; transactions; merchant services; foreign exchange services; corporate money market)
  - Personal banking (including credit (e.g. home loans, credit cards); transactions; personal savings (e.g. term deposits))
  - Insurance (including policies that are sold as part of a vertically or horizontally integrated business model (e.g. mortgage insurance sold as part of a home loan package))
  - Financial market infrastructure (including for the payments system, online banking, securities and derivatives).
  Segments that are not in scope include:
  - Retirement savings, pensions and annuities
  - Other types of insurance not described above 
  - Support services (for example, accounting, actuarial and insolvency services)

Segments in grey are out of scope for this inquiry
Source: Adapted from Australian Financial Centre Forum (2009)

The financial system is evolving at a fast pace — new technologies are enabling providers to create different products and changing the ways customers interact with their financial service providers. Competition often spurs desirable innovation in business models. However, this inquiry will seek to establish whether there are barriers to competition through innovation, and — where innovation does occur — whether its benefits are directed towards consumers.

From the point of view of incumbent firms, competition requires them to continuously re-evaluate their product offering; as a result, previous reviews have found that competitive pressure has been increasing for some personal banking products. But the level of competition across different products and markets can vary substantially. For example, other inquiries indicated that the ability of some small businesses to access finance may be hampered by low levels of competition.

For new financial service providers looking to enter into a market, limited contestability and barriers to entry may curtail their ability to compete. Some regulation of new entrants — as well as existing firms — may be warranted to manage risks and ensure desirable outcomes for the community are maintained. Nonetheless, some regulators have taken innovative approaches to enable new entrants. Regulatory “sandboxes”, for example, allow some fintech companies to test innovative products with lower administrative burdens. But even apart from such specific arrangements, the regulatory structures faced by some market participants can be quite different to others offering similar products: payday lenders and issuers of credit cards can both lend money to individuals, but they do so facing different regulatory requirements.

For consumers, a competitive financial system should deliver products that fit individual needs, and are accessible and flexible. Competition is likely to be higher if consumers can easily switch between products and providers. The Commission’s recommendations in its Data Availability and Use report would, if implemented, make switching easier for consumers. And while there are other initiatives in the financial system (such as crowdfunding and numerous apps for mobile devices) intended to facilitate greater choice of financial products, the benefits to consumers — individuals or businesses — remain elusive in some areas.

Competition in the financial system should work in concert with stability and the smooth operation of financial markets. This is particularly the case in times of global uncertainty, given the interconnected nature of global financial markets. Faced with ongoing change, regulators are accountable to the community to ensure regulatory approaches remain fit for purpose, while not impeding competition unnecessarily. Some regulation may indeed limit competition, but it is essential to maintain community trust and confidence in the financial system, protect consumers’ rights and offer avenues to address grievances.

In conducting this inquiry, the Commission will examine competition across different products and markets. It will consider the outcomes that consumers (individuals and businesses) expect in their interactions with the financial system, including with providers, intermediaries and regulators, and whether these expectations are met. It will seek to establish what competition in Australia’s financial system should be like, and what challenges need to be overcome in order to achieve the benefits of competition in the future.

The Commission invited interested individuals and organisations to make a written submission addressing the issues raised in the terms of reference. Submissions were requested by 15 September 2017.