Broad reforms to build on the strength of our financial system

The Gillard Government is introducing methodical reforms to give all Australians a fairer go in the banking system, and to build on the strength and stability our action secured during the global financial crisis and the measures we’ve already taken to promote competition.

The Government acted quickly and decisively during the global financial crisis by introducing the bank guarantees to secure Australia’s financial system and support access to credit. Without this action, our banks would have lent less and interest rates for borrowers would have been higher. This would have led to lower economic growth and higher unemployment in Australia.

Governor Stevens of the RBA said actions like those taken by the Government maintained ‘public confidence in the security of the banking system’ and ‘helped to stabilise what could have been a catastrophic loss of confidence in the global financial system’. The International Monetary Fund and the Organisation for Economic Co-operation and Development also recognised the stability of Australia’s financial system, secured by the Government’s decisive action.

However, Australia was not immune from the impacts of the global financial crisis — it did hit our smaller lenders particularly hard, creating big challenges for banking competition. The Government’s bank guarantees secured the competitive foundations of our banking sector by ensuring the continued ability of our smaller lenders to make home loans and small business loans, but the global financial crisis made it much harder for them to access funding markets on economic terms to compete with the big banks.

These challenges can’t be solved overnight — there is no silver bullet here — but the Gillard Government will keep working hard to support banking competition. The Government is strongly committed to making the banking system work for families, not against them.

Competition is the best way to keep prices in our economy lower over time. Smaller lenders can play a vital role in the banking sector — they can compete vigorously with the big banks by offering cheaper interest rates on loans. This puts pressure on the big banks to keep their interest rates to borrowers lower over time so that they don’t lose customers.

The Government has already brought in a range of measures that have been critical in boosting competition in the banking sector, including:

  • Our bank guarantees, which supported deposit funding for smaller lenders and enabled non-major banks to borrow some $65 billion in wholesale funding during a period when global funding markets were severely dislocated.
  • Our $16 billion investment in high-quality, AAA‑rated residential mortgage backed securities, which has been critical in supporting this important funding market which many smaller lenders rely heavily on to make home loans and small business loans.
  • A national consumer credit law for the first time in 100 years — uniform consumer protection across all states and territories.
  • Tough new laws to crack down on unfair mortgage exit fees — to ensure that customers can walk down the road and get a better deal without being gouged by an unfair penalty fee — with lenders restricted to acting on a ‘cost recovery basis’.
  • Strong reforms to get a better deal for all Australians with credit cards — so they don’t get caught out paying more interest than they have to or incurring fees they shouldn’t.
  • Promoting a more level playing field for smaller foreign lenders by phasing down interest withholding tax to boost their capacity to access cheaper funding from overseas parents.
  • Strengthening deposit funding for smaller lenders and retail corporate bond issuance through a 50 per cent tax discount being phased up to the first $1,000 of interest income.
  • Mandated a new direct debit and credit listing service to make it easier for customers to switch from one institution to another.
  • Established a consumer complaints hotline (1300 300 630) as a first contact point for consumer complaints about basic banking products.

These banking competition reforms complement the Government’s action to reflect legitimate community concern about excessive pay packets for bank CEOs by bringing in tough new laws to give shareholders a bigger say on executive salaries and make sure those salaries are linked to long-term performance.

The Government introduced legislation last year to crack down on excessive ‘golden handshakes’ to directors and executives, by ensuring termination benefits exceeding one year’s average base salary are subject to shareholder approval, down from the previous threshold of seven times a CEO’s annual remuneration.

In addition, the Financial Stability Board has already endorsed Australia’s framework for ensuring financial sector pay packets don’t reward risky behaviours which maximise short-term profits at the expense of long‑term stability.

The Government is now finalising draft legislation, for introduction early next year, to implement the Productivity Commission’s ‘two-strike’ rule which allows shareholders to spill a company’s board if it fails to listen to their concerns on remuneration after being warned once.

The budget impacts of the measures in this announcement are expected to be modest, and will be accounted for in the 2011-12 Budget. The Government is fully committed to its strict fiscal strategy and returning the budget to surplus in 2012-13, well ahead of any major advanced economy.