House of Representatives

Second Reading Speech

Mr MORRISON (Cook-Treasurer)

I move:

That this bill be now read a second time.

Over the life of this government, we have consistently demonstrated our commitment to building a financial sector that is unquestionably strong, unquestionably accountable, and unquestionably competitive.

This bill takes the next step on this path and delivers on the promises that we made in the 2017-18 budget to ensure that our regulatory architecture keeps pace with changes that are occurring in the financial environment. It includes two measures relating to financial sector ownership restrictions and bank licensing that will work together to make this critically important sector of our economy more contestable, more innovative, and improve overall choices and outcomes for customers in the banking and financial system.

We are building on the changes that we've already made:

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the major bank levy, which is already ensuring that our largest banks pay their fair share. This is a measure brought in by the Turnbull government. No previous government who has talked about or even hinted at issues regarding the major banks did this. This was done by the Turnbull government to make sure that those major banks paid their fair share. That is already law. It is already occurring;

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relaxing restrictions on the use of the term 'bank';

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the introduction of crowdsourced equity funding - along with other aspects of the government's innovation strategy - that are already increasing entrepreneurs' access to finance; and

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the announcement in the 2018-19 budget of the introduction of open banking which will have the potential to transform - and, indeed, I believe will - the competitive landscape in financial services and the way in which Australians interact with the banking system.

Today's bill significantly reduces barriers to entry that are preventing the innovation that our financial system needs, while still prioritising the safety of customers and the broader financial system.

In particular, and consistent with the draft recommendations of the Productivity Commission's review into competition in the financial sector:

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Schedule 1 to this bill relaxes ownership restrictions in the Financial Sector (Shareholdings) Act 1998for all financial sector companies - banks as well as life and general insurance providers - and creates a new simplified approval path for new and recent entrants with concentrated ownership; and

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Schedule 2 amends the Banking Act 1959 to support the operation of APRA's restricted authorised deposit institution licensing framework.

I will now provide some detail on these reforms.

Under the Financial Sector (Shareholdings) Act, no individual can hold greater than 15 per cent of a financial sector company without being subject to approval under a national interest test.

This is an important mechanism to ensure, among other factors, that prudentially regulated institutions have access to sufficient financial resources during times of stress and that their owners have the capabilities necessary to fulfil their responsibilities.

However, as identified by the House of Representatives Economics Committee in its first review of the four major banks - and I commend the member for Banks, the chair of the committee at that time and now the assistant minister, for his leadership on these issues - the criteria against which a national interest determination is made are not transparent, they found, and this can have unintended consequences, particularly for start-ups.

The government believes the broadness of a national interest test is warranted when assessing significant transactions under the Financial Sector (Shareholdings) Act. However, the government agrees with the view that it is less justifiable when considering ownership of small institutions when they are just starting out, given that due to their size they pose limited risks to financial stability or a large numbers of customers. This is particularly true given that:

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start-ups are more likely to have a concentrated ownership structure as a normal part of the business life cycle and thereby require Financial Sector (Shareholdings) Act approval; and

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uncertainty about obtaining Financial Sector (Shareholdings) Act approval is limiting start-ups access to the finance they need to grow, given the perceived risk of an investment becoming 'stranded' should approval against 'national interest' not be granted.

This is unacceptable as an outcome, and this bill will now seek to fix it in two ways.

Firstly, the ownership threshold beyond which Financial Sector (Shareholdings) Act approval will be required for all financial sector companies will be increased from 15 to 20 per cent, in line with the threshold that exists in the Foreign Acquisitions and Takeovers Act 1975. There is no policy rationale for this discrepancy. Making the two acts consistent will simplify investment in the financial sector and remove a significant regulatory hurdle for institutions where owners are seeking to hold 15 to 20 per cent of available shares.

Secondly, we will introduce a streamlined Financial Sector (Shareholdings) Act approval path for small domestically incorporated financial sector companies - that is, banks and life insurance companies with less than $200 million in assets and general insurance companies with less than $50 million in assets - that are seeking a prudential licence for the first time or have been licenced for fewer than five years.

Under this model, qualifying institutions will not be assessed against the national interest framework. Instead, as long as the firms' owners are 'fit and proper' and the firm itself undergoes regular reviews of its ownership structure and provides relevant information to APRA each year, Financial Sector (Shareholdings) Actapproval will be granted.

To ensure, however, that new entrants receiving approval under this framework do not receive a competitive advantage relative to existing firms, or grow so large that their ownership structure begins to pose risks to consumers, once such firms grow beyond the relevant asset threshold their owners will be required to either:

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divest their holdings such that no one holds more than 20 per cent of the institution within two years; or

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apply for regular Financial Sector (Shareholdings) Act approval subject to the existing national interest test within three months.

Together, these two elements of the bill will ensure:

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that the perceived risk of an investment getting stranded in a start-up is dramatically reduced, stimulating investment; and

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that start-ups have a number of years to test their business in a lighter-touch regulatory environment, before having to comply with the same rules as everyone else, preserving competitive neutrality and system resilience.

While schedule 1 to this bill makes significant inroads to cut red tape in relation to new businesses' ownership structure, the government recognises that the power of this change on its own is limited. Even with a Financial Sector (Shareholdings) Act approval in hand, start-ups need to obtain an APRA licence and be ready to comply with a range of prudential requirements covering everything from financial resources to corporate governance and remuneration policies from the day that they start operations.

Meeting these requirements is a central part of Australia's regulatory architecture, and APRA's prudent approach to managing financial sector risks was key to Australia's relative success during the global financial crisis. As such, this is not a structure that any government would want to undermine. However, where there are opportunities to reduce barriers to entry without increasing risks, we support them being investigated.

That is why the government fully endorses APRA's new restricted authorised deposit institution licensing framework. This will be similar to the United Kingdom's model, which, since 2014, has seen more than 10 new banks commence operations - compared to only one start-up bank in Australia in the last decade.

Under APRA's approach, start-up banks will be able to obtain a restricted licence for up to two-years, or a time specified by APRA. During this time they will be subject to a limited suite of prudential requirements and strict caps on the size of their business, granting them the opportunity to prove their business model and attract the funding they need to successfully compete in the longer term. After two years, successful licences will transition to meet the full framework.

Building on our reforms in the Financial Sector (Shareholdings) Act, schedule 2 to this bill therefore makes a number of technical amendments to the Banking Act to support this new licensing approach. In particular, the bill grants APRA the power to:

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impose a 'time limited' condition on banking licences where institutions are seeking a restricted authorised deposit institution licence; and

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remove such licences - without a merits review - when the licence holder is found to be noncompliant with their regulatory requirements or not able to develop sufficient resources to acquire a full unrestricted banking licence.

While the revocation of a licence without the possibility of a merits review is a significant step, it is a necessary protection when banks are being allowed to operate at lower regulatory requirements and a bank's continued operations during an appeal process would pose unacceptable risks to customers. It is also necessary, more broadly, to protect the reputation of all 'restricted authorised deposit institutions' at a time when they are trying to build their businesses and attract customers.

Under this approach, natural justice would still be provided to time-limited licensees, with APRA required to provide notice of its intent to revoke a licence in writing and allow the licensee to make submissions in its defence. This adequately balances the need for licenced institutions to have their rights protected against those protections required by the broader community. It will also have no impact on existing banks or new banks that acquire a full banking licence.

To conclude, this bill is yet another example of the government's commitment to creating more competition in the financial sector, which ultimately leads to better outcomes for customers and a stronger economy. This two-pronged approach to simplifying the process of setting up a new financial institution - relaxing both ownership restrictions and licensing rules for new entrants - will support investment and drive the kind of robust competition necessary to create better, cheaper products for all Australians that rely on our banking and financial system.

This is another example of the Turnbull government getting on with doing what is needed in our banking and financial system to ensure that it is unquestionably strong, unquestionably accountable and robustly and unquestionably uncompetitive. These are the changes that need to be made to ensure that Australians can rely on a banking and financial system that underpins the strength of our economy. This goes again to the government's plan for a stronger economy, upon which all other things rely - jobs, wages, investment, essential services, keeping Australians safe, bringing the budget back into balance, the government living within its means. All of this depends on a stronger economy, and the banking and financial system that we continue to build and strengthen, to these ends, is what underpins the Turnbull government's commitments, whether on Medicare, the Pharmaceutical Benefits Scheme or keeping Australians safe and ensuring the protection of Australians all around the country.

Debate adjourned.