The 2017 regulatory reform agenda is off to a roaring start as the Government hurtles out of the blocks with its mandatory data breach notification laws. In its quest to make our banks 'unquestionably strong', APRA isn't far behind - announcing it won't wait for the Basel Committee's latest capital requirements. So, what does the regulatory reform agenda mean for banks in 20171?
The Chairman's speech at the A50 Australian Economic Forum left us in no doubt that APRA's banking focus for 2017 is squarely on capital and home loans2.
The "unquestionably strong" mantra continues with the implementation of the first recommendation of the Financial System Inquiry Report – published some three years ago. While it is yet to be seen how the cost of this additional capital is borne between customers and shareholders, it will undoubtedly put upward pressure on lending rates.
Against a back drop of rising interest rates, the Government is seeking ways of enhancing housing affordability. This is even more pressing, given a possible deterioration in the employment market amid major automotive industry shutdowns and the forecast construction-cycle downturn. Banks can expect to be modelling some extreme housing and home loan scenarios to see if they are indeed 'unquestionably strong'. As the largest asset class on the industry's balance sheet, it's no surprise that APRA announced that its main regulatory focus for 2017 will be on home loans.3.
A year ago, the final report into Small Amount Credit Contract Laws was released. ASIC will be tasked with implementing the new regulatory framework as the Government looks to implement some or all of the 24 recommendations from the report. While not directly impacting the banking sector, the changes will significantly disrupt the payday lending and consumer leasing market, as margins are impacted. This may create opportunities for innovative banks to enter this arena.
One recommendation focusses on the practice of payday lenders requesting and using a bank customer's internet banking login details. Payday lenders must review a customer's previous 90-day bank statements. To do this efficiently, they seek to do this electronically. The recommendation focusses on ensuring the ePayment Code protections are retained to support this practice. Banks will need to consider how they respond to ASIC's requests in this regard in light of the Government's current consideration of the UK data access regime it has imposed on British banks.
As observed in our article, Mandatory data breach notification: how will the new laws in Australia impact your banking business?, the Privacy Commissioner will be embarking on establishing the data breach reporting regime. Banks will need to update their data breach response plans and roll out these new requirements across their businesses.
SENATE ECONOMICS REFERENCE COMMITTEE
In November last year, the Senate referred an inquiry into the regulatory framework for the protection of consumers to the Senate Economics Committee. The definition of consumers includes small business in the banking, insurance and financial services sector (including managed investment schemes). With a report due by late 2018, the inquiry will focus on the impact on victims and the community of misconduct, remuneration structures and organisational cultures. Special attention will be reserved for the avenues open to consumers to seek redress.
The New Payment Platform (NPP) is due to go live in late 2017. Ushering in 24/7 real-time payments will have a significant impact on treasury, risk and compliance areas within banks, in addition to the operational teams that are building and implementing the products which the NPP will support.
Anti-money laundering, sanction screening and fraud risks will need to be assessed and incorporated into the bank's risk and compliance frameworks. Business Continuity and Disaster Recovery Plans will need to be updated. Instantaneous back office settlement of transactions will add a new dimension to treasury management, particularly if the NPP succeeds in taking significant volumes from existing payment streams.
The ability to quickly and seamlessly transfer cleared funds will have flow-on impacts to the way banks and business settle some existing transactions as buyers can hold onto funds longer and transact digitally at the point of purchase without the need for bank cheques or similar instruments.
One benefit of the NPP is that it may reduce the size of current overnight interbank exposures (counterparty risk) that exist in 'next day settlement' payment systems. The introduction of multi-intraday settlements into BECS had such an effect.
KHOURY REVIEW OF THE CODE OF BANKING PRACTICE AND THE SMALL BUSINESS LOANS INQUIRY
The report on the Code of Banking Practice review undertaken by Phil Khoury was released on 20 February 2017. It contains 99 recommendations which will need to be considered for implementation. An analysis of this report appears in our article, Code of Banking Practice: The Khoury Report.
In considering the report, it is likely that the industry will also consider the:
- 15 recommendations contained in the Small Business Loans Inquiry Report issued by the Small Business and Family Enterprise Ombudsman in late 2016;
- current Better Banking initiatives of the ABA;
- Sedgewick review into remuneration and incentives;
- Ramsey Review into the external dispute resolution schemes;
- Proposed credit card reforms proposed by Treasury that flowed from the Senate Economics References Committee Report: Interest rates and informed choice in the Australian Credit Card Market (December 2015);
- Scheduled review of the Privacy (Credit Reporting) Code due this year;
- Recent ABA guidelines such as Financial Abuse and Family and Domestic Violence;
- Establishment of a Customer Advocate role within the bank; and
- Report on the future role of the Code Compliance Monitoring Committee that is currently being prepared by Mr Khoury
A YEAR OF ACTION AND OPPORTUNITY
If 2016 was the year of inquiry, then 2017 should be the year of action.
The ABA has committed to finalising the new Code of Banking Practice this year. This does not mean banks have to wait until the ink is dry to begin implementing many of the Khoury and other recommendations and initiatives flowing from the 2016 reform agenda described above. Indeed, if banks are to silence the calls for more inquiries, they should not only be implementing these recommendations but also promoting the changes and benefits to the community in order to restore trust. This would go a long way to demonstrating that the time or need for a Royal Commission has long passed.
If the NPP is well-priced, it could provide banks with an exciting opportunity to jump ahead of the fintech companies in payments. All the recent talk in payments has focussed on digital wallets and technology companies taking payments away from banks. 2017 could be the year that banks finally take the initiative in payments back from the Apples and Googles of this world.
Providing banks embrace the challenges of reform and technology, then 2017 could well be a year in which the foundations are laid for a more modern, inclusive and ultimately more successful banking industry.
1 A discussion of the rising reform agenda for the wealth management industry (a large part of which lies in the banking sector) is beyond the scope of this article.
2 Speech by Wayne Byres, Chairman APRA, to the A50 Australian Economic Forum, Sydney 10 February 2017.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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