Initial Submission to the Productivity Commission’s Inquiry into Competition in the Australian Financial System 15 September 2017 1 | Commonwealth Bank of Australia | This page intentionally left blank 2 | Commonwealth Bank of Australia | Contents Executive summary ........................................................................................................................... 5 Chapter 1: Healthy levels of competition across the Australian financial system ............ 7 Australian customers have access to world-leading financial service value propositions ........7 Australian banks are highly innovative ................................................................................................. 8 Industry concentration and structure is similar to comparable countries .................................. 10 There is a high degree of competition and customer choice .......................................................... 11 Customer satisfaction levels are high ................................................................................................... 16 The Australian financial system is productive .................................................................................... 17 Chapter 2: Strong, stable banks underpinning prosperity and sustainable growth ...... 19 Australia has enjoyed an unprecedented period of economic growth and stability................ 19 Pro-cyclicality has upheld strong performance in the Australian financial system................. 20 Prudent risk taking by Australian banks has supported financial system stability .................. 21 Large, stable banks enable the Australian economy to fund its current account deficit by accessing global capital markets at competitive rates .................................................................... 22 Australia’s Major Banks facilitate prosperity through universal access to banking ................ 24 Financial system instability can lead to materially adverse outcomes for the economy ...... 25 Chapter 3: Robust and evolving legal and regulatory framework ...................................... 27 The legal and regulatory framework in Australia is robust and promotes competition ........ 27 Competition hurdles in the financial system are low and appropriately balanced ................. 28 Other recently implemented or anticipated reforms will further improve competition and customer outcomes .................................................................................................................................. 37 Ad-hoc interventions put Australia’s financial system at risk ........................................................ 38 Uniform regulation for all financial system participants is important ........................................ 40 Protecting customers will be a regulatory challenge as the industry evolves .......................... 40 Glossary ............................................................................................................................................ 43 3 | Commonwealth Bank of Australia | This page intentionally left blank 4 | Commonwealth Bank of Australia | Executive summary The Commonwealth Bank of Australia (“Commonwealth Bank”) believes that the Australian financial system has achieved a very successful balance between the important benefits of competition, stability and regulation. Over the last decade, the level of competition in the Australian financial system has increased, as innovations in technology and changes to regulation have enabled new entrants and smaller competitors to compete effectively, including relative to Australia’s four largest banks (collectively referred to as “Australia’s Major Banks”). Despite Australia being a small economy, Australian customers have access to world-leading financial service value propositions with high levels of choice, innovation, accessibility and service quality. The intensity of competition in the Australian financial system is on par with other advanced economies and the industry is also highly productive by comparison. These competitive dynamics have delivered high customer satisfaction levels. The Australian economy has enjoyed an unprecedented period of growth. Given the pro-cyclical nature of financial system performance, the Australian financial system has maintained reasonable returns where returns of other financial systems have cyclically declined due to recessionary conditions in their respective economies. Consequently, the Australian financial system has remained stable and continued to invest in improving customer outcomes. This stands in contrast to peer economies such as the UK, USA and Euro area, where in each case the underlying integrity of the financial system has been under strain and similar investments to improve customer outcomes have not been made (for example, in some countries a sharp decline has been seen in the number of branches). Strong and stable competitors play a critical role in underpinning prosperity and sustainable growth in the Australian economy. They do this by enabling Australian consumers and businesses to access global capital at competitive rates, and by providing universal access to a broad range of banking services thus helping to secure and enhance the financial wellbeing of people, businesses and communities. Commonwealth Bank believes that a well-regulated financial system with unquestionably strong banks is critical to protect customers and to support the economy through times of economic prosperity and economic hardship. This is particularly important in Australia where access to global capital is required to fund the Australian current account which has been in deficit for over 40 years. Australia’s current legal and regulatory framework is appropriately balanced to promote customer outcomes through competition while ensuring that the financial system remains stable and customers are adequately protected. Commonwealth Bank recognises the potential benefits to customers of key reforms that are currently underway, most critically in relation to the sharing and use of customer data, and supports these reforms. In this respect, and in the context of rapid evolution of the financial services industry more broadly, Commonwealth Bank supports competition and reforms to ensure customers are protected, financial system stability is upheld, and regulation is uniformly applied to all participants. 5 | Commonwealth Bank of Australia | Recommendations Recommendation 1: Commonwealth Bank supports the Australian Government’s intention to introduce a regime of open data and comprehensive credit reporting in banking and recommends appropriate measures be put in place to protect customers’ privacy and security and uphold the stability of the financial system. Recommendation 2: The rise of the shadow banking sector, an outcome of non-uniform regulation in the financial system, puts the stability of the system and protection of customers at risk. Commonwealth Bank recommends that legislation and regulatory policy be updated to ensure they apply uniformly to all competitors participating in the financial system. Recommendation 3: Commonwealth Bank recommends that the anticipated impact of the breadth of statutory and regulatory changes currently being planned or implemented be carefully assessed when considering any further regulatory interventions. Recommendation 4: Commonwealth Bank recommends that any regulation designed to stimulate competition should give consideration to “through the cycle” implications, in particular the potential risks to customer protection and/or financial system stability in the event of an economic downturn or period of economic volatility. 6 | Commonwealth Bank of Australia | Chapter 1: Healthy levels of competition across the Australian financial system Summary Despite Australia being a small economy, Australian customers have access to world-leading financial service value propositions with high levels of choice, innovation, accessibility and service quality. The industry concentration and structure, including the presence of vertically integrated banks, is similar to comparable countries. Over the last decade, the level of competition and customer choice has increased, in part from new participants and partnerships entering the market. These competitive dynamics have delivered high customer satisfaction levels, as well as a highly productive system. Australian customers have access to world-leading financial service value propositions Australian customers enjoy world-leading levels of service and innovation. Australian banks have invested heavily to offer customers high levels of service and convenience in digital channels at the same time as continuing to invest in branch networks and contact centres. Australian consumers’ use of online and mobile channels for banking transactions is in the top quartile of banks across the globe: for example, the share of transactions that were mobile and online was 71 percent for Australia’s Major Banks’ compared to the global median of 36 percent and global best quartile of 54 percent1. Commonwealth Bank’s CommBank app has been voted as the highest ranked free financial app2 in Australia. In addition, Commonwealth Bank ranked 6th in Forrester's Global Mobile Banking Benchmark for functionality and usability3. Australian customers benefit by having access to among the highest number of branches per capita in the world (29 branches per 100,000 people, refer to Figure 1 4). Australia is surpassed by the USA (33