Commerce Commission to probe retail banking competition

Tuesday, 20 June 2023

The Government has ordered the Commerce Commission to conduct a market study into competition in the retail banking sector.

Finance Minister Grant Robertson said: “There have been long-standing concerns that the market is not working well for New Zealanders. Banks have consistently made high profits over a number of years and their returns have outperformed their peers in other countries.”

The banking sector was dominated by a small number of “big players”, he said, with ANZ, Westpac, Bank of New Zealand and ASB accounting for about 85% of the mortgage and other lending market, and 90% of total bank deposits.

New Zealand lagged other countries such as Australia and the United Kingdom in doing a detailed analysis into banking services, he said.

“It’s four years too late, but it’s good it’s finally arrived,” said Sam Stubbs, founder of the Simplicity KiwiSaver scheme.

Bank profits have been under the spotlight this year, as some hit records, with data from KPMG in March showing banks had increased their margins to generate a record $7.15 billion in after-tax profits last year.

Robertson said the market study would lead to a “preliminary issues paper” being published by the Commerce Commission in August this year, with the market study being fully completed by 2024.

The preliminary report would set a clear signal of direction for the study, and might uncover discrete issues which the Government could take steps to resolve, ahead of the final report, Robertson said.

The study would focus on examining barriers to new competitors entering or expanding in the market, the introduction of innovative products and services, and consumers’ ability to switch between banks, he said.

The New Zealand Banking Association Te Rangapū Pēke chief executive Roger Beaumont said banks would engage constructively with the Commerce Commission.

“We believe the inquiry will ease any concerns in the community about competition and innovation in the banking industry,” he said. “We have a competitive banking sector, with 16 retail banks operating in New Zealand and easy bank switching.”

Stubbs was among the people calling in 2018 for New Zealand to have an Australian-style Royal Commission into banking.

Instead, the country got a much lighter joint “conduct review” of banks and insurers from the Reserve Bank Te Pūtea Matua and the Financial Markets Authority Te Mana Tātai Hokohoko.

The conduct review was a “once over lightly”, and not holding a deeper, properly-resourced banking inquiry in 2018 was a mistake, Stubbs said.

The conduct review, which was followed by conduct reviews of general insurers and life insurers, many of which were either bank-owned or closely aligned to banks, found widespread failures in the sectors.

It included chronic underinvestment in systems, significant overcharging of customers, and resulted in somewhere in the region of $150 million being paid to customers by banks and insurers.

Since the 2018 review spiralling house prices, and fattening bank margins, have seen household mortgage debt rise rapidly, swelling banking profits.

Of particular concern to Stubbs is why the New Zealand subsidiaries of Australian banks make higher profits per customer than over in Australia. Westpac, ANZ, ASB, and Bank of New Zealand are all owned by Australian banks.

“For some time now banks in New Zealand have been making more from an average New Zealand customer than their equivalent Australian. And the four most profitable companies in New Zealand are the big banks, which is unique in the OECD,” Stubbs said.

The Commerce Commission might also have to probe some aspects of the politics of competition in the banking sector, including political failure to force the pace on open banking.

“Has the industry deliberately delayed its introduction to inflate profits? And why hasn’t the Government passed open banking legislation similar to that already in place elsewhere in the OECD?”

Commerce and Consumer Affairs Minister Duncan Webb fronted the market study announcement with Robertson.

He said the Government was “getting on” with work on open banking.

This week would see the release of a draft bill to establish a consumer data right for consultation,Webb said.

Pressure has been building for months for a Commerce Commission market study, led by Tex Edwards, founder of Monopolywatch.

In March, Edwards, who was the founder of 2degrees which brought competition to the telecommunications markets, published a 21-point investigation plan for a Commerce Commission market study.

Every New Zealander was spending $2000 a year on profits for the banks, the anti-monopoly campaigner said at the time.

Banks here had four times the mortgage margins of their British counterparts, Edwards said.

National earlier called for a “short, sharp' inquiry into the sector instead of a commission probe, but that was rejected by the Government.

Deputy leader Nicola Willis said: “It’s disappointing that the Government has dragged its heels for so long on this. National called for a wide-ranging Parliamentary inquiry into banking competition more than three months ago.

“It’s a shame Labour has only got around to this just a few months out from the election,” she said.

ACT’s associate finance spokesperson Damien Smith said: “Before the Government embarks on another round of election year populism by attacking the private sector, it should ask how its last market study’s working out.

“Just as Labour publicly flogged the petrol companies in the election year of 2020, now it’s the banks’ turn to get a dose of election year populism. What will it achieve? Almost certainly nothing except more red tape and higher borrowing costs for New Zealanders.”