In a proposed reform to credit unions, building societies and online lenders, the federal government is planning to loosen restrictions on which institutions can call can themselves a bank. The move is set to undercut the power of the Big Four Banks, increase competition, and give more options to borrowers.
The changes are intended to put smaller authorised deposit-taking institutions (ADIs), such as credit unions, on a level playing field with the big banks. Currently, the status of ‘bank’ is only available to institutions with $50 million or more in capital, such as Westpac, NAB, ANZ and Commonwealth Bank.
These smaller institutions claim that the term ‘bank’ helps build trust with consumers and explains what they do more concisely – banking. The Customer Owned Banking Association welcomes the chance for small ADIs to be redefined as banks, with CEO Mark Degotardi stating “The historic restriction on use of the term ‘bank’ by ADIs with more than $50 million in capital is out-of-date and no longer relevant… we welcome the government’s move to level the playing field.”
All ADIs trading in Australia are regulated in the same way, but this isn’t often communicated to the public. Whether an ADI is called a credit union, home loan lender, or bank, they are subject to regulations from the Australian Prudential Regulation Authority (APRA). The change in terminology is forecast to improve the way smaller institutions are perceived so they can attract more business.
Federal Treasurer Scott Morrison assured Australians that all ADIs are subject to scrutiny by the APRA. The Treasurer also intends to maintain the integrity of the ‘bank’ title, stating that “…the legislation will reinforce APRA’s discretion over whether or not to permit the use of ‘bank’, ensuring that community expectations around the application of the term are maintained.”
The government hopes that the changes will increase consumer confidence in small lenders. Entrepreneurial ventures such as financial technology businesses and online start-ups will also have a better chance at securing a foothold in the market.
Increased options for borrowers may result in better deals on mortgage rates and deposits, though this remains to be seen, as the legislation is still undergoing the drafting process. Similar legislation in the UK prompted big banks to match cheaper mortgages from the increased competition.
Only time will tell if the legislation will have a significant impact on home loan borrowers.