Nicola Willis & Andrew Bayly set sights on Kiwibank, open banking, the Reserve Bank & mortgage brokers in response to Commerce Commission competition study

Finance Minister Nicola Willis and Commerce and Consumer Affairs Minister Andrew Bayly say they will act on all 14 recommendations in the Commerce Commission’s final report into competition for personal banking services.

Their response includes Willis asking Treasury to work with Kiwibank’s parent company, Kiwi Group Capital, to provide advice before the end of 2024 on options for raising new capital, including from KiwiSaver funds, New Zealand investment funds and investment from regular New Zealanders.

This comes as the Commission recommends the Government, as Kiwibank's owner, considers what's necessary to make Kiwibank a disruptive competitor to ANZ, ASB, BNZ and Westpac, including how to provide it with access to more capital.

"I share the Commerce Commission’s vision for a stronger, more disruptive Kiwibank. I want it to have the growth capital it needs to become a ‘maverick’ that exerts real competitive pressure on the big four," Willis says.

"Kiwibank is currently focused on its own digital transformation and so I would expect that any capital raising wouldn't occur until 2026 at the earliest."

The Commission also wants industry and the Government to ensure open banking is fully operational by June 2026. Willis and Bayly note the Government is progressing the Customer and Product Data Bill and will consult on a designation for banks, detailing how they must comply with new data sharing requirements.

"The Government expects the banking designation will enable open banking to be operational well before June 2026. Industry has committed to start implementing open banking, starting this year with the four major banks," Willis and Bayly say.

"We agree with the Commission that open banking has the greatest potential to promote ongoing disruptive competition in the medium to long-term and are committed to facilitating its uptake as quickly as possible," adds Bayly.

Willis notes another set of Commission recommendations relates to Reserve Bank policies and decisions, concluding the Reserve Bank can and should place greater emphasis on competition. 

"I agree and I intend to issue a new Financial Policy Remit this year to make clear the Government’s expectation that the Reserve Bank, in its policies and actions, supports a more competitive banking sector," she says.

The response from Willis and Bayly says they support the market study finding that the Reserve Bank should review its settings for standardised risk weights taking into account impacts on competition, as well as the restrictions on the ability of some entities to market themselves as a bank.

The Commission's calling for "more granular standardised risk weightings" for home loans, setting 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.

Big bank profits 3% of GDP

Willis says the Organisation of Economic Co-operation and Development (OECD) noted this year New Zealand is characterised by a limited number of large firms and often faces weak competitive pressures to innovate, seek efficiency and provide better services and lower prices to consumers.

"It [the OECD] has noted that in 2022 the recorded combined profits of the big four banks amounted to around 3% of our Gross Domestic Product. That is more than the electricity market, supermarket and construction sector combined. Seen in this light, the Government's reforms to drive banking competition are an absolutely critical part of our economic growth programme," she says.

"Our government is committed to delivering a more competitive banking sector so that New Zealanders can get a better deal. We do not intend to put this report on a shelf somewhere."

Willis says the Commerce Commission has proven what has been long-suspected, that NZ’s banking sector is uncompetitive, and Kiwis are not being well served by a highly profitable, two-tier oligopoly.

"Today’s report calls-out the market behaviour of New Zealand’s big four banks: they are highly profitable compared with international peers, they lack innovation and do not aggressively compete for customers."

"Instead, ‘competition’ between them resembles a cosy pillow fight, with profit margins coming first and everyday Kiwis coming second," she adds.

"As a result, New Zealand bank customers are getting a raw deal: they face higher prices, fewer choices, and poorer service, even when compared to customers of the same parent banks in Australia."

"This is not good enough. Our government will inject some genuine competition into the market for the benefit of all New Zealanders, and will respond with urgency to all 14 of the report’s recommendations," Willis says.

'Our Reserve Bank is particularly conservative'

In terms of the Reserve Bank Willis notes while its task of maintaining financial stability is "critically important," its settings are conservative by international standards.

"The judgment this report essentially makes is we've got the balance too far in favour of financial stability [over competition] such that it's making it almost impossible for new entrants. What the OECD and others have observed is that actually relative to other regimes, our Reserve Bank is particularly conservative. And that is partly because of the guidelines government has given it. And so we have to look at those guidelines and understand how that might alter its decision making," says Willis.

"I agree with this report. We've let the balance go so far that in fact we're promoting financial stability at the cost of competition. And that's led to a situation which has made the oligopoly at the top incredibly cosy. It's made it almost impossible for new entrants to compete in this market and that is a disservice to New Zealanders. So in that balance, I don't think we've got it quite right now and we owe it to Kiwis to have another look."

Mortgage brokers in sights

Bayly notes the Commission found mortgage advisers are aligned with the banks and often only put forward one home loan offer to their clients.

"I will be encouraging the Financial Markets Authority to pull every lever they can to ensure mortgage advisers are transparent about who they act for and what commission structures are in place," he says.

'Our government won't be cowered by the big four banks'

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.

Willis suggested she's looking forward to the big bank bosses appearing before parliamentary select committees.

"My view is that New Zealanders expect banks to provide fair, competitive, good services and we view banks as playing a crucial role in the productivity of our economy, of our livelihoods, of jobs and incomes. And so when banks go in front to the select committee inquiry, I think New Zealanders will expect them to outline how they meet those expectations," she says.

"The bank lobby may be strong, but democracy is stronger and our government won't be cowed by the big four banks."

RBNZ considering widening the use of the term ‘bank'

For its part, the Reserve Bank says it welcomes the Commission's work on personal banking studies.

"Healthy competition between banks has an important role in supporting an efficient, inclusive, and dynamic financial system. We are considering the report’s findings, as well as the Government’s initial response," Reserve Bank Deputy Governor Christian Hawkesby says.

"We note that the Commission recommends the Reserve Bank places a greater emphasis on competition in specific upcoming decisions. Under the new Deposit Takers Act (DTA), we must have regard to competition in undertaking regulatory functions. We have recently published our proportionality framework, that ensures our standards are tailored to the size and nature of different deposit takers."

"We are consulting on graduated minimum capital requirements across groups of deposit takers, and potentially reducing the minimum (dollar amount) of capital required for new entrants. We are also considering widening the use of the term ‘bank'."

"We strongly support the report’s recommendations on open banking," says Hawkesby.

And in comments attributed to its Chairman Neil Quigley, the Reserve Bank says it welcomes Willis' review of the prudential regulator's Financial Policy Remit.

"The Remit is an important tool for the Minister to specify matters the Government considers the Reserve Bank should have regard to in achieving its financial stability objective and performing its functions as a prudential regulator and supervisor," Quigley says.

Roger Beaumont, Chief Executive of bank lobby group the New Zealand Banking Association, says the Commission took a "well-informed and considered approach" to the market study, providing useful insights into the banking sector.

"We’re particularly pleased to see the Commission’s focus on the regulatory environment in which our banks operate, and how that impacts further competition in the sector. We look forward to seeing how the government and regulators respond to the Commission’s recommendations. We support quality regulation that makes banking easier for consumers," says Beaumont.

"There are also matters for the banks and the wider financial services industry to consider. We will assess which initiatives could involve an industry approach, and which ones banks will need to address individually."

There's more detail on the Government's planned responses to the Commission's recommendations here. And there's more on the Commission's final report here.