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Building an accountable and competitive banking system

All Australians rely on the banking and financial system. The financial system is the backbone of the economy and plays an essential role in promoting economic growth.

It must operate at the highest standards and meet the needs and expectations of Australian consumers and businesses. It also needs to be easier for new financial businesses to enter the market to give consumers more choice, better prices, and access to new products and services.

The Turnbull Government is today announcing an overhaul of the financial system and bringing forward a comprehensive package of reforms to strengthen accountability and competition.

The Government will legislate for a new Banking Executive Accountability Regime that will ensure banks and their executives are held accountable when they fail to meet expectations.

The Government will legislate for a one-stop shop to deal with all financial disputes, including superannuation disputes, substantially improving outcomes for individuals and businesses that have disputes with their banks or other financial firms.

The Government is taking action to increase competition in the financial system. More competition will improve consumer choices and drive down costs.

Barriers to innovation in financial services will be broken down to allow more choice and more cost-effective and targeted financial services for individuals and businesses.

The Government is also acting to ensure that Australia’s largest banks make an appropriate contribution to the Australian community through legislating for a major bank levy.

These measures address recommendations of the House of Representatives Standing Committee on Economics’ Review of the four major banks (the Coleman Report) aimed at enhancing the accountability of banks and increasing competition in the financial system. The Government response to the Coleman Report, in which only one recommendation has not been accepted, is at Attachment A.

These measures build on the Government’s already extensive financial sector reform agenda.

The Government will legislate a new Banking Executive Accountability Regime with three key components:
 Registration: prior to appointing senior executives and directors, authorised deposit-taking institutions (ADIs) will need to advise the Australian Prudential Regulation Authority (APRA). Uponappointment, these people must be registered with APRA and a map of the role and responsibilities of the ADI’s senior executives provided to the regulator;

 New powers and penalties: additional expectations will be established for how banks and their executives conduct their business consistent with good prudential outcomes, with a new civil penalty enforced by APRA for ADIs that fail to meet those expectations; stronger powers will also be given to APRA to remove and disqualify senior executives and directors from all APRA-regulated institutions; and

 The civil penalty will be a maximum of $200 million for larger ADIs and $50 million for smaller ADIs.

 APRA will also be able to impose penalties if ADIs do not appropriately monitor the suitability of their executives to hold senior positions.

 Remuneration: a requirement for a minimum of 40 per cent of an ADI executive’s variable remuneration – and 60 per cent for certain executives such as the CEO – to be deferred for a minimum period of four years to ensure executives are more accountable; and stronger powers for APRA to require ADIs to review and adjust their remuneration policies when APRA believes such policies are producing inappropriate outcomes.

These measures will mean executives will be more accountable, will be subject to greater scrutiny and there will be increased consequences for when executives and banks do not meet expectations.

APRA will be provided with $4.2 million over four years to implement the measures and $1 million per annum for a fund to enforce breaches of the new civil penalty provisions where banks fail to meet expected standards.

The Banking Executive Accountability Regime complements the work of the Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce established by the Turnbull Government in October 2016. That taskforce is examining the breach reporting regime and the adequacy of ASIC’s regulatory tools and powers. The Taskforce will report in September 2017.

Dispute Resolution
The Government is radically overhauling how financial disputes are dealt with in Australia and has accepted all 11 recommendations of the Ramsay Review (see Attachment B). The Government will create a new dispute resolution framework with a one-stop shop — the Australian Financial Complaints Authority (AFCA) — to ensure that consumers and small business have access to free, fast and binding dispute resolution.

AFCA will deal with all financial disputes, including superannuation disputes, reducing consumer confusion and the unnecessary duplication of costs that are a feature of the current multi-scheme framework.

All financial firms, including superannuation funds, that deal with consumers will be required by law to be members of AFCA. AFCA will be governed by an independent board, with an independent chair and equal numbers of directors with industry and consumer backgrounds, and be funded by industry.

AFCA will be able to hear disputes of a higher value so that more consumers and small businesses can access external dispute resolution and can access fair compensation, if they have wrongfully suffered a loss.

ASIC will be provided with stronger powers to oversee this new one-stop shop and to require financial firms, including superannuation funds, to report on their internal dispute resolution activity. To support this, the Government will provide $4.3 million to ASIC over four years from 2017-18, including capital of $0.9 million in 2017-18.

The Ramsay Review will report on the merits and potential design of a compensation scheme of last resort and the issues involved in providing access to redress for past disputes in the second half of this year.

The Government is opening the door to new banking entrants and new financial products and services.

This will mean more choice and cheaper and better options for consumers.

The Government will introduce an open banking regime that will increase access to banking product and consumer data by consumers and third parties, if the consumer consents. This will empower consumers to seek out banking products better suited to their needs and create further opportunities for innovative business models in banking that enhance competition.

The Government will commission an independent review to recommend the best approach to implement the open banking regime in Australia to report by the end of 2017.

The Government will act to reduce regulatory barriers to entry for new and innovative entrants to the banking system. For those entrants the Government will relax the legislative 15 per cent ownership cap, whether through the existing ministerial discretion or legislative change. The prohibition on the term ‘bank’ by ADIs with less than $50 million in capital will also be lifted by legislation to allow them and other ADIs to benefit from the reputational advantages of the term.
The Government is also supportive of a phased approach to licensing banks and welcomes APRA’s review of prudential licensing arrangements and consideration of such approaches.

The Government has tasked the Productivity Commission (PC) to commence a review on 1 July 2017 of the state of competition in the financial system.

To complement the review by the PC, the Australian Competition and Consumer Commission will receive $13.2 million over four years to establish a dedicated unit to undertake regular in-depth inquiries into specific financial system competition issues.

The Government is positioning Australia to be a global FinTech centre.

We will legislate to establish an enhanced regulatory sandbox to facilitate more innovation, promote greater competition and increase choice for Australian consumers. This world-leading regulatory sandbox will allow businesses to test for a period of 24 months a wide range of new financial products and services, allowing businesses to evaluate the commercial viability of new concepts without a licence but subject to meeting minimum consumer protection obligations.

The Government has today released draft legislation to extend the crowd-sourced equity funding (CSEF) framework to proprietary companies. This will open up new funding for business ideas that may struggle to attract funding from traditional sources. Shareholders will be protected by the higher governance and reporting obligations that CSEF proprietary companies will need to meet. Draft legislation for public consultation is available at:

The Government is removing the double taxation of digital currency. From 1 July 2017 purchases of digital currency (such as Bitcoin) will no longer be subject to the GST, just like money. This delivers on the Government’s commitment to remove obstacles to the growth of the Fin Tech industry.

Consistent with the PC’s report on Data Availability and Use, the Government will legislate a mandatory comprehensive credit reporting regime if credit providers are not reporting at least 40 per cent of their data by the end of 2017. Credit markets will operate more efficiently and effectively if credit providers have access to sufficient and reliable data about borrowers to inform decisions about who to lend to and on what terms. The Government tabled the PC’s report this week to coincide with the 2017-18 Budget.

Major bank levy
From 1 July 2017, the Government will impose a major bank levy on Australia’s largest banks. The levy will raise around $6.2 billion over four years, net of interactions with other taxes.

This represents a fair additional contribution from our major banks and will assist with budget repair.

The levy will apply to all ADIs with licensed entity liabilities of at least $100 billion. To ensure that only banks that are large relative to the economy continue to be liable to pay the levy, the $100 billion threshold will be indexed to grow in line with nominal Gross Domestic Product.

The levy will be calculated quarterly as 0.015 per cent of an ADI’s licensed entity liabilities, excluding Additional Tier 1 capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme. Liabilities subject to the levy will, for example, include: corporate bonds; commercial paper; certificates of deposit; and Tier 2 capital instruments.

The levy is similar to measures imposed in other advanced countries and will complement prudential reforms being implemented by the Government and APRA to improve financial system resilience, including:

• setting bank capital levels such that they are ‘unquestionably strong’;
• strengthening APRA’s crisis management powers; and
• ensuring banks have appropriate loss-absorbing capacity.

By reducing Australia’s largest banks’ funding cost advantages, the levy will also contribute to a more level playing field for smaller banks and non-bank competitors.
The Government has asked the Australian Competition and Consumer Commission (ACCC) to undertake a residential mortgage pricing inquiry until 30 June 2018.

Credit card reforms

To protect consumers from poor practices in the credit card market, the Government will:
• require that affordability assessments be based on a consumer’s ability to repay the credit limit within a reasonable period;
• prohibit unsolicited offers of credit limit increases;
• simplify how interest is calculated; and
• require online options to cancel cards or to reduce credit limits.

This delivers the first phase of reforms outlined in the Government’s response to the Senate Inquiry into the credit card market. The reforms will substantially reduce the incidence of consumers being granted excessive credit limits and building up unsustainable debts across multiple credit cards. It will put an end to the overly complex and unfair way in which interest is calculated on credit cards.

Collectively, these measures will help prevent the debt cycle that many Australians find themselves in with credit cards.

Additional measures
The Government will provide APRA with $28.6 million over four years from 2017-18 to respond to significant developments in the financial system and increasing community expectations for improvements in risk culture and corporate governance.

The funding will also provide the means for APRA to update its infrastructure and tools to reflect changing technology and business trends.

The Government will also provide APRA with $2.6 million over four years from 2017-18 to allow APRA to exercise new powers over the provision of credit by lenders that are outside the traditional banking sector. The Government will also make it clear that APRA has the ability to use geographically-based restrictions on the provision of credit where APRA considers it appropriate. This will ensure that APRA can respond flexibly to financial and housing market developments that pose a risk to financial stability.

To improve the financial capability of Australians, the Government will provide ASIC with $16 million over four years to expand its financial literacy program and develop a new National Financial Literacy Strategy.

In line with the Government’s commitment that the cost of regulation is borne by those entities that create the need for it, the funding of the measures in this package for APRA, ASIC and the ACCC will be offset by increases in supervisory levies.