Rising fear over disproportionate cost of banking regulation

An independent survey of Australian bank executives has found growing concern about the disproportionate cost of regulatory compliance as decision-makers try to rebuild public trust in response to the Hayne Royal Commission.

Grant Thornton’s findings and recommendations are based on a survey of Customer Owned Banking Association (COBA) members which collectively hold the largest deposit pool and home-lending book outside the Big Four banks. The independent audit and financial advisory firm interviewed top executives from 26 banks and mutuals with asset sizes ranging from more than $5 billion to less than $1 billion.

The report said smaller banks could be ‘squeezed out’, with profound implications for Australian consumers, if decision-makers forget that it was the Big Four who were ultimately responsible for the bad behaviour which led to the Hayne Royal Commission.

In its report, A Case for Proportionate Regulation: the cost of compliance, Grant Thornton said: “The cost of compliance is steadily increasing with each additional regulation or requirement. The baseline cost of doing business and meeting the minimum requirements is not proportionate to the size and complexity of Australian entities and it seems as more regulation is added, the more the smaller entities will be ‘squeezed’ out.”

“The implications of this are far reaching and will have a profound impact on Australian consumers,” the report noted.

Over the 12 months ahead, the survey found:

• 92% of respondents expected the task of managing regulatory risk to either increase or increase significantly
• 88% expected their compliance budget to either increase or increase significantly
• A total of 77% expected time spent liaising with regulators to either increase or increase significantly

Grant Thornton’s report warned that decision-makers should remember which institutions “were at the centre of the storm” when they consider how to respond to bad behaviour in the financial services industry.

“A key point is that if additional requirements are implemented to address the poor behaviour identified in the Royal Commission, the main effect will not be felt by the Big 4, but by the smaller and customer owned entities who were not the principal parties to the misconduct,” the report noted.

“Responsible lending” requirements were ranked as the most burdensome area of compliance.  Participants indicated concern with the increasing depth of information required before they can lend to customers.

“The result could be that mutuals simply have to turn away many more customers who then end up in the arms of less regulated lenders, such as shadow banks,” said Mike Lawrence, the Chief Executive of COBA.

Mr Lawrence said decision-makers should recognise that if the same regulatory proposal is applied to all approved deposit institutions, then the economies of scale could potentially result in costs outweighing benefits for smaller banks.

“This report underscores the dangers of a ‘broad brush’ approach to banking regulation. It also highlights other unintended consequences that we have been telling the Government and Opposition about in no uncertain terms such as stifled innovation, regional branch closures and reduced investment in the community,” Mr Lawrence said.

Key recommendations include:

• Positively consider ADI’s size, risk profile and complexity when imposing regulation and have it apportioned accordingly
• Allow more possibilities for exemptions from reporting on risk factors which are not related to an ADIs business model
• Ensure that the cumulative regulatory cost burden is considered at the regulatory policy design stage
• Avoid layering regulation. Review and refine rather than just adding more detail and complexity
• Increase consultation between regulators when implementing changes to avoid ambiguity and complexity

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Further enquiries, please contact:

Therese Raft
National Communications Manager
Grant Thornton Australia
T+61 2 8297 2724
E therese.raft@au.gt.com