Summary

Businesses can expect to see continued focus on competition scrutiny in the financial services industry throughout 2018. This is an area of increasing investigation by regulatory authorities, including the ACCC, which continues to expand its oversight of the sector.

ACCC Views on Competition in the Financial Services Sector 

The Productivity Commission released its draft report into competition in the financial services sector in February 2018. The report states that competition has taken a back seat in favour of financial stability due to Australian Prudential Regulation Authority ("APRA") regulatory actions and the overlapping and conflicting responsibilities of regulators. The ACCC agrees that there is a need for greater competition advocacy and has stated that it is willing to work more closely with APRA, the Australian Securities and Investments Commission ("ASIC"), and the Reserve Bank ("RBA") to achieve this outcome. The ACCC believes that it is well placed to pick up the shortfall in the current regulatory regime.

The ACCC has also provided support for the government's open banking system, where the ACCC will adopt a role as dual regulator with the Office of the Australian Information Centre. The ACCC perceives open banking to be necessary to increase competition as it provides customers with more scope to compare competing offers, more easily move their business, and make more informed choices. 

Where is the ACCC Devoting its Resources? 

Following the federal government's 2017/18 financial year budget, the ACCC established the Financial Services Unit ("FSU"). This unit comprises 12 staff members and in-house legal professionals who undertake inquiries into competition in the Australian financial services sector. The current focus of the unit is the Residential Mortgage Price Inquiry, which has an interim report due imminently and a final report coming in June 2018. The ACCC has stated that from July 2018, the unit will commence market studies work and focus on key areas identified in the Productivity Commission Draft Report, including regulatory measures affecting the ability of smaller banks to compete, consumer switching, and the barriers to entry into the market. 

The ACCC also continues to devote resources to cartel behaviours with its 2016/17 annual report and 2018 priorities, both of which emphasize the importance of these prosecutions to the ACCC's work. Comments made by the general manager of the specialised enforcement unit in the Senate Estimates hearing in March 2018 also indicate that there are similar investigations concerning collusion in the foreign exchange markets underway. These investigations are separate to the investigations of the FSU.

As well as the focus on cartel behaviour, the influence of the ACCC in the financial services sector can be expected to increase with its identification of the industry as one area of focus in its 2018 priorities. The ACCC intends to use the FSU in order to increase its investigative role regarding competition issues.

Potential for Even Greater Influence 

As a part of its Draft Report, the Productivity Commission ("Commission") recognised the strength of the current financial services sector regulatory framework but criticised the absence of a specific competition regulator. The Commission therefore proposed the introduction of a new "competition champion" specific to the industry suggesting that either the ACCC or ASIC may adopt the role. 

In its media release in response to the Draft Report, the ACCC recognised that the appointment is a choice of the government and supported the Commission's draft recommendation. The ACCC also proposed closer consultation with the champion if it were to be ASIC. In addition, the media release explains that the responsibilities proposed by the Commission for the competition champion significantly align with the current mandate of the FSU. The ACCC then discusses the scope of the FSU and its increased focus on promoting competition in the financial services sector.

The possibility of the ACCC gaining a more active role in the financial services sector could dramatically alter the industry. The ACCC has purported to place its focus on barriers to entry and the regulatory measures that make it difficult for smaller banks to compete. If the ACCC were to be appointed the competition champion, it appears likely that the financial services landscape would move away from the current oligopolistic structure. However, the Draft Report seems to place greater emphasis on ASIC as the correct regulator, citing both the substantial legislative change and the need for the ACCC to divert a large proportion of its resources to the sector at the price of neglecting other areas as significant barriers to it being chosen.

Lessons

The ACCC's response to the Productivity Commission's Draft Report regarding competition in the financial services sector serves to highlight that the competition watchdog, along with ASIC, have both commenced more active roles in the regulation of this sector. The comments made by ACCC's representatives have indicated that regulation will not be confined to ASIC investigations or the operation of the FSU, but will also include ongoing investigations concerning collusion in foreign exchange markets.

For small businesses in the financial services sector, the ACCC's diversion of resources towards this industry presents opportunities as the focus will be on regulatory measures affecting the ability of smaller banks to compete, the difficulty of consumer switching, and barriers to entry. However, for all financial services sector businesses, the ACCC's reach beyond the scope of ASIC creates no immunity, highlighting the need for all participants in the market to review company practice to ensure compliance with competition laws.