The Commerce Commission has backed off its recommendation the Reserve Bank should level the regulatory capital requirements between the big four banks and smaller banks in the final report from its market study into personal banking services.
One of 16 recommendations from its draft report in March, Commission Chairman John Small described this as the most important recommendation in that report. The Reserve Bank, however, pushed back hard against it.
Gone from the final report is recommendation one from the draft report that; "The Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete."
The final report does, however, say the Reserve Bank should implement "more granular standardised risk weightings" for home loans, set minimum capital standards that encourage new competitors, and permit more entities to be a bank and provide banking services. Risk weightings are used to link the minimum amount of capital banks must hold, with the risk profile of the bank's lending activities.
The Commission is also highlighting the need for a stronger Kiwibank as a disruptor to the four major retail banks, and open banking as a potential "game-changer." Small had ranked these the second and third most important recommendations from the interim report.
"In the shorter-term, we see the capitalisation of Kiwibank providing the sector with the disruptive maverick that’s currently missing. Longer-term, it is through open banking," says Small.
"We’re also recommending changes that will put the power back in the hands of consumers, allowing them to more easily switch providers and access better prices and services."
"In practice, this means making it easier for mortgage advisers to present several quotes to their clients and making it more efficient for lenders to process applications quickly, so that consumers can truly test the market," says Small.
Earlier this month Finance Minister Nicola Willis raised the possibility of Kiwibank seeking outside capital to help it better compete with the big four banks; ANZ, ASB, BNZ and Westpac.
"If the Government supports the Commission’s recommendations, it will convene a steering group to accelerate progress towards open banking, with broad representation across banks, fintechs, government and consumer groups," the Commission says.
The Commission, meanwhile, says it's recommending the designation of the interbank payment network to Minister of Commerce and Consumer Affairs Andrew Bayly, giving it oversight of this network under the Retail Payment System Act.
"Delivery and adoption of new payment options on this network is essential to the success of open banking. Designation of the network will allow us to use our tools to actively drive competition and innovation in the retail payment system and enable the development of new, safe, low cost and accessible open banking payment solutions," Small says.
"The second is the Payments New Zealand authorisation to negotiate an accreditation and partnering framework, which we've also announced today and that we've approved with conditions. This authorization allows the joint negotiation of an accreditation framework and standard terms and conditions for partnering between banks and fintechs for the use of APIs [application programming interfaces] for payments. It's also an important part of getting us to open banking in an efficient way."
The Commission's market study, focusing on home loans and deposit accounts, was launched on June 20 last year by the previous Labour government. The new government has also launched a parliamentary select committee banking inquiry for which the terms of reference were released last week, with submissions due by September 25 as the year of bank probes gathers pace. The parliamentary inquiry will be broader, also looking into business and rural banking. One of its terms of reference is the Commission’s findings should be referenced where relevant.
Small describes the personal banking market as "a stable two tier oligopoly with no disruptive maverick and sporadic price competition on profitability."
The Commission's press release is below.
A stronger Kiwibank and open banking could shake up NZ banking sector
The Commerce Commission’s Final Report into competition in the personal banking sector points to the potential of a stronger Kiwibank as a disruptor to the four major retail banks, and open banking as a “game-changer”, unlocking competition and revolutionising choice for Kiwi consumers.
The Commission is recommending a raft of regulatory and structural changes to drive more competition for the benefit of Kiwi consumers – after the 14-month market study found “a stable, highly profitable, two-tier oligopoly with no disruptive maverick and a lack of obvious or aggressive price competition”.
Commission Chair, John Small, says the further work and consultation following the release of the Commission’s Draft Report in March this year, “has only served to reinforce our view that competition isn’t working as it should in this sector, and Kiwi consumers are missing out as a result”.
Dr Small says personal banking services are hugely important to New Zealanders and the broader economy – with almost every household having a bank account and debit card, nearly 60% having a credit card, and a residential mortgage market of around $340 billion.
“In a well-functioning market with strong competition, we’d expect to see more aggressive strategies to win customers from other banks.
“What we see in New Zealand is that the major banks have little strategic differentiation, and their growth targets focus on maintaining market share and protecting margins and profitability.”
Dr Small says this means they avoid significant competitive responses, “resulting in limited investment in innovation, muted competition and some demographics being poorly served currently”.
Recommendations to help “bake in disruption”
Dr Small says stimulating competition in personal banking services requires a “multi-faceted approach to ensure that it’s baked in."
The Commission’s recommendations to Government released in the Final Report today are designed to work together to support new entrants and expansion, reduce the regulatory barriers to competition, and empower consumers to get better prices and services.
“We believe that the best prospect for driving change in the sector will come over time from accelerating open banking and ensuring that the regulatory environment better supports competition.”
Dr Small says open banking could be a game-changer, giving thousands of underserved Kiwis access to financial services and revolutionising consumer choice.
“Industry-led progress to date on open banking has been far too slow – we need a unified approach from industry and Government and a clear timeline if the benefits are to be realised. And the Government needs to be an early adopter of open banking to build confidence and assist in developing a market.
“We also see a need for progressive regulation, where competition is given a higher weighting to ensure an appropriate balance between financial stability and competition.”
Dr Small says reducing barriers to entry and expansion is fundamental to a more competitive personal banking sector.
“In the shorter-term, we see the capitalisation of Kiwibank providing the sector with the disruptive maverick that’s currently missing. Longer-term, it is through open banking.
“We’re also recommending changes that will put the power back in the hands of consumers, allowing them to more easily switch providers and access better prices and services.”
In practice, he says this means making it easier for mortgage advisers to present several quotes to their clients and making it more efficient for lenders to process applications quickly, “so that consumers can truly test the market”.
Dr Small says, for some particular demographics, the Commission has made recommendations that seek to address systemic issues – such as access to basic bank accounts and the barriers to lending for housing on Māori freehold land.
The Commission’s recommendations are grouped into four interdependent areas that reflect the regulatory, behavioural and strategic impediments that make it difficult for new and existing providers to enter and expand in the market.
Summary of recommendations
Improving competition for personal banking services requires multi-faceted solutions and our recommendations are designed to work together to support new entry and expansion, to reduce the regulatory barriers to competition and to empower consumers to get better prices and services.
Capitalise Kiwibank
1. The Government, as Kiwibank’s owner, should consider what is necessary to make Kiwibank a disruptive competitor, including how to provide it with access to more capital. In the shorter term, capitalising Kiwibank appears to have the greatest potential to constrain the major banks and disrupt a market that is otherwise stable due to lack of competition.
Accelerate and co-ordinate progress on open banking
2. Industry and the Government should commit to ensuring open banking is fully operational by June 2026. In the medium to long-term, open banking has the greatest potential to promote ongoing disruptive competition for personal banking services. Commitment to ambitious milestones and coordinated work between industry and Government, particularly over the next 12 months, will bring early gains to consumers.
3. The Government should support open banking by being an early adopter, and taking an all-of-government approach to adopting payments enabled by open banking functionality. For example, by supporting new payment methods for taxes, welfare and Government services such as vehicle licensing. This will help build confidence in open banking and assist in developing a market for open banking-enabled products and services. Early adoption by Government will accelerate progress on open banking.
Ensure the regulatory environment better supports competition
4. The Reserve Bank should broaden the way it undertakes competition assessments under the Deposit Takers Act and place more focus on reducing barriers to entry and expansion in the banking sector. There is scope for the Reserve Bank to do this within its statutory framework while striking an appropriate balance between financial stability and competition.
5. The Reserve Bank should place greater emphasis on competition in specific upcoming decisions.
Competition would be improved if the Reserve Bank took upcoming opportunities to support competition in personal banking within its new regulatory framework by:
○ implementing more granular standardised risk weightings for home loans, and considering the merits of standardised risk weights specifically for lending for housing on Māori freehold land;
○ setting minimum capital standards that encourage new competitors;
○ permitting more entities to be a ‘bank’ and provide ‘banking services’;
○ widening access to ESAS accounts; and
○ reducing the risk rating of lending to housing co-operatives and community housing providers to lower, and more accurate, levels.
We also recommend the Government introduce an initial flat-rate rate levy for the Depositor Compensation Scheme.
6. The Government should ensure that existing legislation and future decisions do not unintentionally favour banks, particularly larger banks, over other providers.
The Government should review existing legislation that favours some providers (for example, registered banks) over others, particularly when prescribing where deposits must be held. The Government should also ensure future decisions are competitively neutral, even when made under urgency such as during a national emergency.
7. The Government should lessen barriers to switching home loan providers as part of Credit Contracts and Consumer Finance Act reforms. The Responsible Lending Code should set out guidance making it easier for consumers to switch to lenders who offer better terms, including in a rising interest rate environment.
8. The Government should prioritise competition concerns when reforming the AML/CFT regime. Reforms to the AML/CFT regime should identify and prioritise opportunities to promote competition and access to personal banking services.
Empower consumers
9. Industry should invest in making improvements to its switching service. The bank-owned Payments NZ service needs improvement, starting with greater promotion of the service and monitoring and reporting on service standards.
10. Home loan providers should present offers in a readily comparable manner, accounting specifically for the effective value of cash contributions. Industry should create a standard means of comparing home loan offers across all providers such as through a single effective interest rate that incorporates the effect of cash contributions over the clawback period to help consumers compare the cost of different loan offers.
11. Home loan providers should pro-rate all clawbacks for mortgage adviser commissions and bank cash contributions. Some clawback practices impose unjustifiable costs on consumers looking to switch lender. Competition would be promoted if consumers faced lower and more certain costs when switching home loan providers.
12. Mortgage advisers and banks should make changes to promote price competition and choice for home loans.
○ Banks’ processes need to improve to make it easier for mortgage advisers to submit multiple applications on behalf of their clients and more efficient for lenders to quickly process loan applications.
○ Banks should ensure that “conversion rate” targets for mortgage advisers (whereby a specific percentage of applications must be accepted) are not discouraging mortgage advisers from submitting qualifying home loan applications to multiple lenders as this reduces competition.
○ Advisers should highlight gaps in their panel to clients and identify any superior headline rates offered by providers outside of their panel.
○ Where possible, advisers should present at least three actual offers to their clients to ensure consumers are making informed choices.
As the financial advice regulatory regime develops, the Financial Markets Authority should take steps to ensure that the mortgage adviser channel fulfils its potential to provide suitable advice that promotes price competition and consumer choice.
13. Industry and the Government should prioritise reducing barriers to lending for housing on Māori freehold land. Lenders should support existing successful models for lending for housing on Māori freehold land, including by explicitly considering joining the Kāinga Whenua Loan Scheme. The Government should address the unjustified level of scrutiny on Māori land trusts as part of its AML/CFT reforms.
14. Industry should co-operate to make basic bank accounts widely available, including minimum standards, promotion among relevant population groups and ensuring frontline staff are appropriately trained and supported.
Stakeholder engagement
The Commission was directed to undertake a competition study into personal banking services by the Minister of Commerce and Consumer Affairs last June to examine how well competition is working and consider options for enhancing it for the long-term benefit of Kiwi consumers.
Dr Small says the Commission has analysed significant volumes of internal bank documents and engaged with a wide range of stakeholders during its study.
“This sector is hugely important to New Zealanders and the broader economy. We’re grateful to the sector – the major banks and the smaller banks, as well as non-bank participants and fintechs – and the communities and demographics who have taken the time to share their experiences with us. Our findings and the recommendations of the Market Study have been guided by the evidence and the feedback we’ve received over the last 14 months.”
Next steps
If the Government supports the Commission’s recommendations, it will convene a steering group to accelerate progress towards open banking, with broad representation across banks, fintechs, Government and consumer groups.
The Commission has recommended that the Minister of Commerce and Consumer Affairs designate the interbank payment network under the Retail Payment System Act. This would provide the Commission with regulatory backing to convene the steering group and accelerate progress.
The Commission has also approved Payments NZ’s application for authorisation to jointly negotiate an accreditation framework and standard terms and conditions for the partnering between banks and fintechs needed to implement open banking.
If the Government supports our recommendations, we will monitor industry progress and be ready to intervene if it is insufficient.
The full Final Report and recommendations, an abridged version and an executive summary are available on the Commerce Commission’s website.
Background
About market studies:
A market study, referred to as a ‘competition study’ in Part 3A of the Commerce Act, is an in-depth look at the factors affecting competition for particular goods or services, to determine how well competition is working and whether it could be improved.
By gathering and analysing information on an industry, the Commission can identify whether there are features preventing competition from working well, as well as considering how things might be improved for the long-term benefit of New Zealand consumers.
Outcomes of the Commission’s work may range from a ‘clean bill of health’ for the sector to recommendations for changes to enhance market performance. The Commission’s recommendations are non-binding, but the Government must respond to the findings within a reasonable period.
Below are the 16 recommendations from the Commission's draft report, issued in March.
List of draft recommendations
Improve the capital position of smaller providers and Kiwibank.
1. The Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete.
2. Kiwibank’s owner should consider what is necessary to make it a disruptive competitor, including how to provide it with access to more capital.
Accelerate progress on open banking
3. The Government should set clear deadlines and work with industry to ensure open banking is fully operational by June 2026.
4. The Government should reduce the barriers imposed by the Anti-Money Laundering and Countering Financing of Terrorism Act regime on banks working with fintechs.
Ensure the regulatory environment better supports competition
5. The Reserve Bank should use its new decision-making framework under the Deposit Takers (DT) Act to explicitly and transparently consider competitive effects.
6. The Reserve Bank should explicitly and transparently articulate how it is applying the purposes and principles of the DT Act to its Deposit Compensation Scheme levy advice.
7. The Reserve Bank should consider broadening access to Exchange Settlement Account System accounts.
8. The Government should amend the DT Act to allow the Reserve Bank to promote competition, rather than maintain competition.
9. The Government and policy makers should seek competitive neutrality across banks and other providers in their decision-making wherever possible.
10. The Credit Contracts and Consumer Finance Act should be competitively neutral with respect to home loan refinancing to make it easier for consumers to switch providers.
Empower consumers
11. Industry should create an enhanced switching service with appropriate Government oversight.
12. Home loan providers should present offers in a readily comparable manner.
13. Mortgage lenders should pro-rate all clawbacks for broker commissions and cash incentives.
14. The Financial Markets Authority should produce guidance and monitor mortgage advisors’ compliance with their duties under the Financial Markets Conduct Act.
15. Industry and Government should prioritise work to reduce the barriers to lending on Māori freehold land.
16. Industry and Government should prioritise ensuring widespread availability of basic bank accounts.
14 Comments
Look at where RBNZ exec come from, where they made their millions. Way too cosy. Do we expect them to suddenly reform now they're at the RBNZ and create monetary policy that's in the best interests of ordinary new zealanders? Or are they going to be loyal to their old mates who helped them get rich in the debt slavery empires?
Well said.
In '08, it was the banks that Obama bailed, not the poor who had been conned/wrung-out.
T'was ever thus in every Empire (every major collection of surplus energy, in other words). Christ - I suspect somewhere in the mix is a grain of historic origin - chucked the money-lenders out of the temple, for good reason.
But note there is no trace of their 'wealth'; just a denuded landscape. Rentier leverage is a short-run thing.
'...a stronger Kiwibank as a disruptor to the four major retail bank."
We had 'disruptor' banks - National Bank of New Zealand, Auckland Savings, Trust Bank to name a few. And what happened to them? Swallowed by The Big 4 - and 'we' allowed that to happen.
The New Zealand market is just too small for any disruptor to emerge. If it could, then JP Morgan Chase or Bank of America or even Wells Fargo would be here doing that job already. But we are in effect a quasi State of Australia; a country with a population the same size as their second-largest city, and so we have what we have - 'their' banks.
"We’re also recommending changes that will put the power back in the hands of consumers, allowing them to more easily switch providers and access better prices and services." Hmmmm...
Rationed markets are determined by the short- side principle: whichever quantity of demand or supply is smaller determines the outcome (as it is the smallest common denominator for transactions to take place; see Muellbauer & Portes, 1978). Disequilibrium and rationed markets create circumstances that immediately bring economics and politics together: the short side of any rationed market has allocation powers. In other words, the short side has the power to pick and choose with whom it is doing business and how resources are allocated, irrespective of the transaction price. In equilibrium, it is apparently neutral market forces that produce politically palliative outcomes. In disequilibrium, the reality of discrete and arbitrary decisions by allocators (read banks) becomes visible — allocators who can, if they wish, exploit their selection power to extract non-market benefits or ‘rents’...Link
... that would not be necessary if we embraced open banking , and allowed smaller players to emerge & thrive , and welcomed big banks from Asia & America ...
We are a nation beset by anti-competition : in banking , building products , education , healthcare , supermarkets , electricity providers ....
... the key to cheaper & better services for citizens is for the government to address these issues ... but Luxon's mob won't have a bar of it , so long as they're under the shadow of Key ...
Let's not forget: Why the banks just want our houses
A funny thing happened to business lending on the way from the GFC.
Australia’s banks turned into giant building societies, lending almost exclusively against residential property and rarely, if ever, making unsecured loans to businesses or people any more.
If someone asks for a business or personal loan these days, the banker asks for the house.
The result is that traditional small business lending has dried up, and with it business investment, while Australia has the highest ratio of household debt to GDP (134 per cent) in the world, since business owners have to borrow against their houses.
"The Government should reduce the barriers imposed by the Anti-Money Laundering and Countering Financing of Terrorism Act regime on banks working with fintechs." .... Really? ... Also will open banking make it easier for fraudsters to shift capital?Lets get real the Ozzies arent gonna relinquish market share without a fight trying to tank them in 26' seems farcical....a better plan might be to give them 30 years to pack up and exit or invest 49% into the locals if you want to stay.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.