Industry groups say Government’s banking reform package is a good start, but more work needed

Federal Treasurer Wayne Swan’s banking reform package has received a cautious welcome from most business groups, with most saying that while measures to improve competition in the banking sector are positive, more work needs to be done in this area.

While much of the attention has been focused on the Government’s decision to ban exit fees on new mortgages sold after July 2011, the banking and business communities are more interested about the Government’s attempts to boost competition in the banking sector.

(A full explanation of the Government’s reform package can be seen in this special SmartCompany Q&A.)

However, Council of Small Business of Australia executive director Peter Strong has expressed concerns that the plight of small business borrowers may be forgotten in the rush to support mortgage holders and consumers.

“Congratulations [to the Government] because this is the biggest review into the finance sector that we’ve had in 20 years. It puts the big banks on notice and we can’t condemn that,” Strong says.

“But everything I’ve read is about the consumer… From a small business point of view, the reforms may take the focus away from us a bit more, which isn’t what we want.”

Paul Drum, head of investment and business policy at CPA Australia, agrees. While his organisation is supportive of the package and acknowledges some of the support for mortgage holders will indirectly flow through to help SMEs, Drum says more could have been done for the sector.

“The Treasurer has said it’s not a silver bullet, but it certainly is more than a paintball,” Drum says.

“It’s disappointing that there is so much focus on mortgages and not on small businesses. At the end of the day, mortgages are not a big driver of the economy.”

For example, while the Government will move to ensure new home borrowers are given a fact sheet on how their mortgage works, Drum says this would also be a positive step for business loans, where the fine details can create issues for borrowers down the track.

Similarly, Drum says the Government should have taken the opportunity to examine and look at abolishing exit fees on business loans, which get less press than mortgage exit fees but are just as big a problem for SMEs.

“I think that is an opportunity there that has been missed.”

Yesterday, Treasurer Wayne Swan was quick to hit back at suggestions there was nothing in the package for smaller business, and said SMEs would benefit from the Government’s measures to improve the competitive position of small lenders.

“Generally making the market more competitive is just as important for someone who has that dream of owning a small business as it is for someone who wants to buy a home.”

Central to this is the Government’s strategies for making more wholesale funds available to smaller lenders, such as pumping another $4 billion into the residential mortgage backed securities market and allowing banks, credit unions and building societies to issue covered bonds.

Louise Petschler, chief of the industry group representing mutuals, Abacus, welcomed the measures to improve the competitiveness of smaller lenders, although she warned more will need to be done.

“Credit unions and building societies are the alternative to the big banks and we’re being asked to turbo-boost competition – that’s a challenge we relish,” she said.

“To complete the competition picture it is critical that we push access wholesale funding markets. The Government’s initiatives in this package are a positive start and we will work with the Government on these, but more work is needed.”

The Australian Bankers Association, which has argued against most reform proposals put forward by the Opposition and the Greens, has also supported moves to bolster the wholesale funds market.

“A number of these announcements will enhance competition further, particularly those which assist the funding arrangements of Australia’s smaller banks. The industry has consistently argued that the best way to assist competition is to strengthen and diversify the funding of our banking system,” ABA chief Steven Münchenberg said in a statement.

One area the Government has not immediately tackled is the Greens’ proposal to make personal bank accounts completely portable. Instead, Swan will engage former Reserve Bank chief Bernie Fraser to conduct a feasibility study into the idea.

COSBOA’s Peter Strong says the study is welcome, but he wants to see regular progress reports to ensure the study stays on track.

However, the Bankers Association remains opposed to the suggestion.

“Account portability, if not properly considered and implemented, could have major cost implications for smaller lenders, hurting their competitiveness.”