Thursday, 15 February 2018
Treasury Laws Amendment (Banking Measures No. 1) Bill 2017; Second Reading
I rise to speak on the Treasury Laws Amendment (Banking Measures No. 1) Bill 2017. Labor supports this bill, which does a number of useful things. It provides further reform across the banking and financial sector. Of course, further reform is absolutely critical for the culture within this sector, and I note, before I talk in more detail about the bill, that it was for 601 days that Labor called for a royal commission into the financial sector, which we did because we recognised that there was a need for something substantial to be done to reform this sector to meet community expectations. That has now kicked off this week, and for anybody who might be looking at a copy of this speech, public submissions are now open online at www.financialservices.royalcommission.gov.au. It is very important that members of the public participate in this, particularly those who have a story to tell about how they've been treated by our big banks.
Before I proceed, let's review some of the facts about the Australian banking industry. Some of this information comes from the background paper that was prepared by the royal commission. We know that there are 147 ADIs operating in Australia, and that those ADIs hold $4.6 trillion in assets. Three-quarters of that figure is held by the big banks. I'm just underscoring the importance of this sector for the Australian economy. The big banks earned a profit margin of 36.4 per cent in the June quarter 2017. The big banks' net profit after tax in the June quarter was $7.8 billion. Other domestic banks earned a profit margin of 24.7 per cent, and total net profit after tax in the June quarter was $831 million. The financial and insurance services sector is the largest contributor to real industry gross value added in Australia—around nine per cent in the September quarter 2017. The mining and manufacturing industry is six per cent, for comparison's sake. All of this information, as I say, comes from the background paper prepared for the royal commission.
Publicly available data broadly indicates that the big banks in Australia may be more profitable than some international counterparts—for example, those in Canada and the UK. As at November 2017, there were over 16 million credit and charge card accounts, with total balances of $52.2 billion. So, this is an industry that warrants a lot of scrutiny and there is a need for continual oversight of this industry.
This bill expands APRA's regulatory powers to include reserve powers that cover non-ADI lending, should practices or the size of the non-ADI lending sector pose a risk to financial stability in the future. There's no suggestion that there is a problem at the current time with the size of the non-ADI lending sector, but, at some point in the future, this may become an issue and, therefore, APRA should have powers to monitor in this area.
Non-bank lenders do play an important role in Australia. They encourage competition in the market and they are very much involved in lending to small business, which, of course, is an engine room for employment growth. Schedule 3 to the bill allows smaller ADIs—authorised deposit-taking institutions—to use the word 'bank' in their business name. I note that this is one of the changes that was very strongly supported by the Customer Owned Banking Association, and I will talk a little bit about that shortly. The change is designed to reflect public perception regarding the regulations and protections applicable to entities using the term 'bank'. Whereas ADIs are prudentially supervised by APRA, this has been extended and deposits covered by the Financial Claims Scheme are guaranteed. Labor welcomes the fact that small ADIs, including many credit unions, will now have the right to call themselves banks if they choose to. Previously, the term 'bank' could only be applied to institutions that held more than $50 million in tier 1 capital.
I will digress briefly to mention that I am a big fan of the cooperatives and mutuals sector. I indicated that the Customer Owned Banking Association is a supporter of these changes and I do think it is extremely important that the mutuals are placed in a position where they can compete with the major banks. Their business model is one which, in my view, promotes more ethical treatment of customers. It's a situation where profits go back to members rather than return to shareholders, and we avoid the situation of the imperative for massive returns to shareholders, which drives the gouging and mistreatment of customers. I think the cooperatives and mutuals sector has a lot to offer the market and a lot to offer consumers. It's just interesting to note that, when it comes to cooperatives and mutuals, a lot of people are not aware of the prevalence of those.
For my own part, I'm a member of ME Bank, which is a mutual bank, I'm a member of Australian Unity Health Insurance and I'm also a member of the RACQ. These are very well known institutions. A lot of people don't know that they are actually mutuals, that they are customer owned and that they perform a very important role providing diversity and providing competition to the big banks.
I also want to give a plug, while I'm here, to the need for work to be done to enhance the mutuals sector, particularly in the banking area. I want to revisit some of the recommendations that were made by the Senate Economics References Committee on this issue, and I do welcome the fact that the government has picked up a number of the recommendations from that committee. Again, it's so important to the health of the financial services sector that we have this sort of healthy competition. Among the recommendations we looked at in the cooperatives and mutuals inquiry was for the Commonwealth to work with states and territories to develop a program of supports to encourage the establishment of new cooperatives and mutual enterprises. We recommended that a mutual enterprise be explicitly defined in the Corporations Act and its associated regulations. We also recommended that the cooperative and mutual sector be considered when the government is preparing a regulatory impact statement that accompanies new regulatory policies. We also recommended that the Commonwealth government liaise with state and territory counterparts to ensure that the regulatory burden for small and medium-sized cooperative and mutual enterprises aligns with the needs of these organisations to ensure they're not disadvantaged relative to companies of a similar size, because we know, and we've heard from a number of inquiries, that the regulatory burden is, in fact, a competitive advantage to some of the bigger corporations. We also talked about the Commonwealth and state governments supporting the formalisation of some of the innovative and market based approaches to raising capital for small and medium-sized cooperatives and mutual enterprises in the form of advice and information as they become available.
Importantly, we wanted APRA to set a target date for the outcome of discussions with the cooperative and mutual sector on issues of capital-raising and to bring those discussions to a timely conclusion. We also recommended, very importantly, that the Commonwealth examine proposals to amend the Corporations Act to provide cooperative and mutual enterprises with a mechanism to enable them access to a broader range of capital-raising and investment opportunities. This is a necessary vital reform. Unfortunately, we see a situation where a lot of cooperatives and mutuals, where they currently want to expand, see the only option going forward to de-mutualise. That's unfortunate. It sees a loss to the cooperative and mutual sector and is, I think, to the disadvantage and to the detriment of consumers, and I would certainly welcome movement in that area.
While I'm talking about this, I also wanted to just commend the work that the RACQ has done in merging with the QT Mutual Bank in 2016 and then, in September of last year, launching RACQ Bank, which is going to be an important player. RACQ is a very trusted organisation. As I've said, it's a cooperative owned by its members, and there are more than 1.6 million members. This now establishes one of Queensland's last remaining mutual banks. As I said earlier, the profits from the bank will be reinvested back into the RACQ ecosystem for the benefit of the RACQ members. That's a positive story. This, I think, underlines the fact we need to do more to support the cooperatives and mutuals sector. Its ability to call itself a bank followed from that merger in 2016 with QT Mutual Bank.
Turning to other aspects of the bill, schedule 5 of the bill amends the credit act to introduce a number of reforms to improve consumer outcomes under credit card contracts by tightening responsible lending obligations and prohibiting credit card providers from offering unsolicited credit limit increases—part of the reckless and irresponsible behaviour that we've seen in the past. It also simplifies the calculation of interest charges and requires credit card contracts to allow consumers to reduce credit limits and terminate credit card contracts, including the ability to do it online.
As at November 2017, there were 16.7 million credit and charge card accounts in Australia, with total balances, as I said earlier, of $52.2 billion. While credit card debt comprises a small percentage of the banks' overall assets, it can have a significant impact on household finances. These days, most consumers have some form of credit or store credit card, and many of these cards have hidden fees or charges. We have seen balance transfer schemes becoming more prevalent in the industry. Consumers do deserve the best protection we can give them from fee-gouging and shoddy bank practices.
Labor do, in fact, welcome the reforms that we are debating today. In fact, we actually came up with them first. I go back to the 2015 committee report findings of the Senate Economics References Committee, of which I am the chair. We released a report into the Australian credit card market. That report came up with a table of recommendations—I won't go through all of those quite significant recommendations. I note that the government did indicate its support for a large number of those, and it responded, promising reform, in May of 2016. But, as with many other things, it dragged its feet and has, for the last almost two years, been running a protection racket for the big banks.
In the meantime, the Khoury review of the Code of Banking Practice, for the Australian Bankers' Association, recommended that banks voluntarily make changes to credit card practices for a fairer system for consumers. But the banks refused the recommendations to stop unsolicited credit card increase offers and to stop the tricky credit card interest charging practices, and they also refused to clearly commit to simple, online cancellation of credit cards. I think these are very telling responses from the Bankers' Association which show that they have been unwilling to grasp the nettle and go about the job of reforming their own practices. Because of the Prime Minister's inaction and the banks' reluctance, consumers will have to wait until 2019 for these long-overdue protections to take effect.
We're seeing a recurring theme here from the financial sector and the Turnbull government: review something, vaguely promise action and then hope that the issue goes away. Labor refuses to let these issues go away. That's why, after 601 days, the Prime Minister has been dragged, kicking and screaming, by Labor into having the royal commission.
Labor fought for this inquiry because banks were ripping off consumers with credit cards through hidden charging, high interest rates, high annual fees, expensive rewards programs, exorbitant late payment fees and inappropriate lending practices. Customers were being taken for a ride here, while the banks made—and are still making—millions in credit card profits. While the government has dilly-dallied on these laws to protect consumers with credit cards, OECD data shows that Australia is in the top five countries for personal debt. I refer to an article that has appeared in the Gladstone Observer to that effect. This particular article, by Tim McIntyre of the Gladstone Observer on 12 February, showed this concerning statistic. The article had a comment from Wealth Within chief analyst Dale Gillham, who said that the debt levels were a concern. He went on to say:
We are stuck on a debt treadmill and many of us don't know how to get off … Identify you have a problem with debt, cut back on non-essential spending … and funnel the cash freed up into paying down your bad debt.
As a society, we do have an issue with this. Let's hope that some of these improvements in credit card changes will assist.
In terms of Labor's record, we introduced the National Consumer Credit Protection Act 2009, which was the first single-standard and nationally consistent regime for consumer credit regulation and oversight in the country. We gave ASIC regulatory powers to oversee consumer credit, including home loans and credit cards. I want to give a shout out to Wayne Swan, who did fantastic work on credit card reform as Treasurer. These measures that he introduced began in July 2012. I won't go through the details of those, but I just want to take a minute to wish Wayne all the best for the next phase of his life. We all remember that he was voted world's best Treasurer in 2011. He's made an enormous contribution to our country, and I'm sure that he will be missed in this place.
So just further in terms of Labor's achievements, we looked into the Future of Financial Advice reforms, or FoFA, which came about in the wake of the Storm Financial, Trio Capital and Westpoint collapses. We had a Parliamentary Joint Committee on Corporations and Financial Services inquiry in 2011-12. Reforms included financial advice providers legally being required to act in the best interests of their clients, eliminating kickbacks to financial advisors. Unfortunately, these were fought by the coalition. They voted against FoFA in the House, they voted against FoFA in the Senate and they tried to undermine its function when they came to government. But thanks to Labor taking up the fight on the finance front, FoFA lived on. As a result, ASIC uncovered in 2016 that customers were paying fees for financial advice that was never provided. There were more than 300,000 customers affected by this. In conclusion, this change cannot come soon enough, though the royal commission will deliver the real change in practice and culture.