Commerce Commission already contacting NZ's big four banks as chairman warns market studies are 'no quick fix'

The Commerce Commission has already contacted New Zealand’s big banks as it starts working on a 14-month, “deeply-focused” personal banking competition analysis which will also look at bank profits.

On Tuesday the Government announced a market study into banking, after widespread concern about the NZ banking sector lagging in terms of industry developments such as open banking, and record bank profits.

Commerce Commission Chairman John Small said the 14-month timeframe was necessary for a comprehensive, robust study of the personal banking services available and the Commission “welcomed this assignment and is ready to get started”. 

Small said while the study was focused on the process of competition, it would look at some outcomes of that process, including bank profits. He said there were plenty of profit indicators available, and the Commission would focus on assessing them, and any potential interpretations.

New Zealand's banks' combined annual profit surged by more than $1 billion between October 2021 and September 2022 as margins rose, topping $7 billion for the first time. NZ bank’s return on equity is also higher than their Australian parents.

ANZ NZ, ASB, BNZ and Westpac NZ dominate banking in NZ, with a combined market share of 90.05%.

Flexible terms of reference

Small said the proposed terms of reference for the study had been drafted flexibly to allow consideration of a broad, “cross-portfolio” assessment of banks’ financial performance.

He said he wanted to emphasise how important the Commission’s preliminary issues paper which will outline the focus of the study, and the feedback to it, was.

This paper, which would likely be released in the next month, would set out the structure of the banking industry, the nature of competition and personal banking, the conditions of market entry and expansion, and consumer behaviours and preferences - and other areas “that might be explored”, Small said.

“It's the information that's shared following our preliminary issues paper being published that will help inform the full scope of the study and the areas we'll be looking at.”

Commerce Commission General Manager of Competition, Antonia Horrocks, said getting this feedback “was a key part of our process”. 

“We need to hear from the sector banks, large and small and non-bank participants. We also know there are different experiences of personal banking services across communities and demographics. And we need to hear from business, including SMEs, and consumers, about your experience of these personal banking products.”

The case for market studies

Small said its three market studies have already benefited NZ consumers, as he “reflected back” on the first studies into fuel, supermarkets and building supplies.

He said none of the markets the Commission had investigated had been scrutinised with “serious competition policy analysis” for 30 years.

The Commission was given market-study powers in 2018 after frustration with attempts to investigate fuel sector competition, Small said, where companies refused to give the regulator information.

Small said with the new power to compel information and undertake market investigations, the Commission was able to dig into the fuel sector and its analysis concluded wholesale competition was almost nonexistent.

He said the reporting and monitoring the Commission now did in fuel had found evidence the wholesale market had become more liquid, and its fuel team was providing “valuable information to consumers about retail price variation”. 

“Our work is not finished in this sector. There's still more to do in promoting competition. But the market study has already benefited consumers and it set us up to achieve further gains.”

Small said off the back of the Commission’s supermarket study Parliament was well-advanced “in passing groundbreaking legislation that will provide for a range of regulatory options and a grocery commissioner who will drive these reforms”.

And with its residential building supplies market study, Small said the Commission found that the regulatory system for certifying building work and by application of building products was limiting competition.

He said it was “fashionable in some quarters to denigrate the market studies programme, or aspects of it”. 

The chairman said sectoral reform analysis such as in market studies was inherently difficult, analysis needed formal legitimacy, the process needed to be impeccable, and political decision makers to be persuaded. 

“And even in the best-case scenario, it takes time to draft and consult on legislation and then for firms to respond to the new incentive structure … Our market studies aren't a quick fix. They're intended to take a detailed look at the sector. And if there are issues, proposed remedies that will bring about fundamental change with sustainable and enduring benefits.”

Small said competition was about ensuring as much as possible there was a level playing field for all market participants, including other businesses. 

“It's about the conditions for new entry and expansion and encouraging innovation. All that benefits consumers. But that sort of change doesn't happen overnight.”