Fixed costs put undue pressure on smaller lenders, and may stymie growth and innovation
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Smaller banking institutions could unfairly lose from any one-size-fits-all regulation that may arise from the royal commission, a new report from global accounting firm Grant Thornton claims.
In “A case for proportionate regulation”, the firm found that the fixed costs of regulation place a heavier burden on smaller institutions. This would limit growth opportunities and also lead to a downstream impact on consumers.
“Regulation should be tailored to the size, complexity and risk profile of an institution. In particular, when considering future conduct regulation in light of the outcomes of the Royal Commission, understanding how the needs of a customer are prioritised by an ADI is key,” said the report.
It stressed that customer-owned banks maintain a “considerably different” business model compared to big banks, as the former typically return 100% of profits to members in the form of reinvestment back into their local communities or as better rates and reduced fees. This leaves little wiggle room for reapportioning or taking on additional resources to comply with additional regulation as the bigger banks can do.
“This report shows that regulatory costs have a real impact on challenger banks and therefore on competition and consumer choice,” Customer Owned Banking Association CEO Mike Lawrence said. “Banking must be strongly regulated but excessive regulatory costs harm competition and consumers ultimately pay the price.”
The report also warned that one-size-fits-all regulation might come with fixed costs that cannot be deferred, which may stymie growth and innovation among small banks.
According to Darren Scammell, Financial Services Leader – Victoria for Grant Thornton Australia, the royal commission will have implications for how risk to the consumer is minimised in the banking sector, which may likely be through regulation and additional resources, such as a Principal Integrity Officer.
“However, the level of risk isn’t the same across the sector, nor are the resources to carry the burden of additional regulation and requirements. For instance, we know of one credit union that hasn’t foreclosed on even one mortgage in more than 40 years. Compare this to one of the big banks which could have upwards of 900,000 mortgages on its books. The risk is disproportionate, and the regulation to safeguard consumers should be proportionate to reflect this,” he added.
