Smaller lenders are concerned they could be squeezed out by escalating regulatory costs as a result of the royal commission, according to a survey by Grant Thornton.
The vast majority of bankers outside the big four, at 92 per cent, when surveyed expect that the task of managing regulatory risk will increase.
The study found 88 per cent of respondents expect their compliance budget to rise and around 77 per cent expected time spent liaising with regulators to increase.
The study titled ‘A Case for Proportionate Regulation: The Cost of Compliance’, examined Customer Owned Banking Associaiton (COBA) members which collectively hold the largest deposit pool and home-lending book outside the big four banks.
The independent audit and financial advisory firm interviewed top executives from 26 banks and mutuals with asset sizes ranging from more than $5 billion to less than $1 billion.
Mike Lawrence, chief executive, COBA, said decision-makers should recognise that if the same regulatory proposal is applied to all approved deposit institutions, then the economies of scale could potentially result in costs outweighing benefits for smaller banks.
“This report underscores the dangers of a broad brush approach to banking regulation,” Mr Lawrence said.
“It also highlights other unintended consequences that we have been telling the government and opposition about in no uncertain terms such as stifled innovation, regional branch closures and reduced investment in the community.”
Grant Thornton noted the cost of compliance is steadily increasing with each additional regulation or requirement.
“The baseline cost of doing business and meeting the minimum requirements is not proportionate to the size and complexity of Australian entities and it seems as more regulation is added, the more the smaller entities will be squeezed out,” the report said.
“The implications of this are far reaching and will have a profound impact on Australian consumers.”
The survey showed that responsible lending requirements was ranked as the most burdensome area of compliance. Participants indicated concern with the increasing depth of information required before they can lend to customers.
“This is the first time data of this kind has been compiled for the Australian banking sector that looks beyond the big four,” Madeleine Mattera, Grant Thornton’s national head of financial services said.
“Smaller and customer-owned banking institutions already shoulder a larger share of the regulation and compliance burden compared to both their asset and actual size.”
The report added that while the big four were the key parties involved in misconduct identified in the commission, the main effect will not be felt by them, but rather by the smaller and customer owned entities.
“The result could be that mutuals simply have to turn away many more customers who then end up in the arms of less regulated lenders, such as shadow banks,” Mr Lawrence said.
The study includes a number of recommendations including considering banks’ size, risk profile and complexity when imposing regulation and allowing more possibilities for exemptions from reporting risk factors that are unrelated to a firm’s business model.
Grant Thornton added cumulative regulatory cost burden should be considered in policy design, regulation should be reviewed and refined rather than added to and consultation between regulators should be increased when implementing changes.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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