New Government Banking Reforms Explained

The federal Government has just released new banking reforms, which aim to create three broad streams of change within Australia’s financial sector.

Actions within these streams of reform are intended to:

• improve consumer awareness and empower them to seek out a better deal within the banking system,
• support smaller lenders to become a ‘new pillar’ of competition and stability within the banking system, and 
• secure the long-term safety and sustainability of the financial system as a whole.

To better understand these changes and their legal implications please read the following Competitive and Sustainable Banking Summary Articles (each Stream is analysed and explained separately):

Stream One: Empower consumers to get a better deal

• Ban exit fees on new home loans

Exit fees for new home loans will be banned outright from 1 July 2011 under new changes to the National Credit Code.  This change aims to build on existing mortgage exit fee reforms within the Australian Consumer Law.  Furthermore, Australia’s credit regulator, ASIC, will have the power to pursue lenders that seek to ‘re-badge’ exit fees as any other type of fee, if it appears that fee is ‘unconscionable’ under the new National Credit Code.

• Introduce mandatory key facts sheet for new home loan customers

Mandatory one-page key facts sheets will be introduced for all mortgage lenders to provide potential borrowers with a clear explanation of all money payable over the life a loan and where a borrower can shop around if the loan is not competitive.  It is hoped that this will lead to more informed consumer choices through the empowerment of improved transparency and standardised terminology.  The intention is that consumers will be able to succinctly and easily compare various home loans directly against one another.

• Empower Australian Competition and Consumer Commission (ACCC) to prosecute anti-competitive price signalling

Amendments to the Trade Practices Act 1974 (whichwill from 1 January 2011 be renamed the Competition and Consumer Act 2010) aim to reign in anti-competitive behaviours.  The new laws proposed will prohibit lenders from signalling their intention in relation to interest rates to competitors through the media or investment community.  Private ‘tip offs’ will also be automatically prohibited under the proposal. Breaches will attract penalties of up to $10 million, 10 per cent of a business’s annual turnover or three times the benefit of the conduct (whichever is highest shall determine the penalty).

Stream Two: Support smaller lenders to compete with big banks

• Build a new pillar in the banking system by supporting the mutual sector

The combined competitive power of the mutual sector (including credit unions and building societies) is to be harnessed by the federal Government in an effort to build a ‘new pillar’ in the Australian banking system.  Through the Bank on a Better Deal awareness campaign and the new ‘Government Protected Deposits’ symbol being used throughout the banking system it is hoped that consumers will identify and support the mutuals sector.  Australian Prudential Regulation Authority (APRA) will continue to regulate and monitor credit unions and building societies, as it does banks, and permit some of them to call themselves ‘banks’.  APRA will review the guidelines for this process by March 2011.  The Treasury will also continue to aid and facilitate the mutual sector to develop aggregated structures to pool together to raise their own cheaper funding.

• Confirm Financial Claims Scheme as a permanent feature of financial system

In order to support the capacity of the mutual sector to access funds for cheaper loans in competition against the big banks the federal Government has confirmed it will make the Financial Claims Scheme a permanent feature of the Australian financial system. Providing certainty for Australian depositors, the guarantee of up to $1 million dollars aims to buffer the banking system from any potential crisis of confidence. The Government and the Council of Financial Regulators will review the $1 million cap and determine any subsequent changes to the level by October 2011.

• Introduce a third tranche of support for the Residential Mortgage-Backed Securities (RMBS) market

Rather than introducing a government guarantee of the RMBS market the Australian Office of Financial Management and the Treasury aim to support the market via direct investment in the RMBS.  The third tranche investment will be of a further $4 billion dollars to apply pressure on borrowing costs and aims to aid the RMBS market to again become a viable, competitive source of funding for small lenders.  The federal Government identifies that this injection of investment funds for the RMBS market is a key factor in strengthening the position of smaller lenders against the big banks, particularly in terms of cheaper home loans and cheaper rates.

• Accelerate development of bullet RMBS market for smaller lenders

 The federal Government will continue to work on accelerating smaller lender issuance of bullet RMBS as an alternative to traditional RMBS. The key feature of the bullet RMBS being that it provides investors with a single repayment of principal at maturity. The developments of the bullet RMBS market aim to not only provide smaller lenders cheaper funding in order for them to offer more competitive loans, but also supports the ongoing recovery of the securitisation markets more generally.

Stream Three: Secure the long-term safety and sustainability of our financial system

• Allow banks, credit unions and building societies to issue covered bonds

 The federal Government says it is serious about securing and investing within Australia’s banking system for its long-term safety and sustainability.  After much prior and ongoing consultation the Government believes that producing a deep liquid covered bond market in Australia will strengthen and diversify the system’s access to cheaper and more stable funding in both domestic and offshore wholesale capital markets. 

Covered bonds are essentially a financial instrument that represents both a direct claim on the bank that issues them, as well as a claim against a segregated pool of assets (via the bank, such as a defined pool of home loans).  APRA has refused to allow banks to issue covered bonds as they were inconsistent with laws relating to deposit holders within the Banking Act 1959.  Amendments to this Act will subsequently allow Authorised Deposit-taking Institutions to issue covered bonds.  A cap will be placed on the use of covered bonds, which in an example provided by the government may be ‘five percent on an issuer’s total Australian assets’.

Commentators suggest covered bonds will attract substantial investment from Australia’s superannuation funds in a way that has not previously occurred.

• Develop a deep and liquid corporate bond market

The federal Government proposes the facilitation of the Commonwealth Government Securities (CGS) on a securities exchange in Australia will encourage investors to diversify their savings into fixed-income products. Promotion of Australia as an attractive investment destination would in turn follow.

Treasury will finalise reforms aimed at reducing the red tape associated with issuing corporate bonds by 1 January 2011, the same date that the CGS will be able to trade.

For further information please contact us.
Hadyn Oriti
December 2010
P: +61 2 6583 0449
E: horiti@dohlaw.com.au