The effects of the Australian 2017 budget on banks

Summary

• The 2017 Australian Budget outlined policies that would be implemented for Australian banks
• The Australian Financial Complaints Authority (AFCA) is set to be established
• Senior executives associated with an Authorised Deposit taking Institution (ADIs) need to register and abide by standards set out by the Australian Prudent Regulation Authority (APRA)
• ACCC has has an increase in funding of $13.2 million to establish a permanent banking competition unit to oversee competition in the financial sector.
• A six-point levy on ADI with liabilities of at least $100 billion will be introduced starting July 1 2017 and ending 1 July 2021. Only five banks qualify for this levy.

Introduction
The 2017 Australian budget speech was delivered on the 9th of May 2017. In the speech, the federal government outlined policies that would be implemented for Australian banks. Primarily, the big four; ANZ, Weatpac, CBA, NAB as well as Macquarrie bank. This blog will be looking into each policy statement made in the 2017 budget in regards to banks.

The Australian Financial Complaints Authority (AFCA)

• Designed as a regulatory body to resolve disputes between consumers and financial institutions that are legally binding.
• All Australian financial service licensees will be required to be members.
• Will be established by 1 July 2018
• Compensation cap for consumer disputes will be $500,000, small business disputes will be $1 million and superannuation disputes will continue to have no cap.

Pros

• More efficient government body. The new body is a merger of the Financial Ombudsman Service (FOS), the Credit and Investment Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT).
• Will have an independent board, with members from different industries and funded by industry (it is not too sure how this will be funded by industry)
• Claims can be processed faster. A body that specialists can use resources more efficiently and productively when needed for the volume of claims it will handle.

Cons

• Concerns over the regulatory body favoring big financial institutions over small financial institutions. Andy Semple, quoted by James Eyers from the Financial Times, says the regulatory body will tailor its processors to large financial institutions as it is designed to deal with large amounts of complaints.
• This may lead to small financial institution's professional indemnity policy premiums being increased if the above is true. This would mean there would have to be at least a six month history of the AFCA ruling heavily in favor of consumers over small financial institutions, regardless of if the body is stacks in favor or not of large financial institutions.
• More transparency is required into the processing power of claims the body will have, how board members will be chosen, and the factors to prevent board members siding with a certain party. Having claims in the system for too long can decrease investment confidence in a financial institution if a financial institution has too many complaints filed against it, either justly or unjustly.

Banking Executive Accountability Regime

• Authorized deposit taking institutions (ADIs) will need to notify the Australian Prudent Regulation Authority (APRA) prior to appointing a new senior executive. ADIs will then need to submit a "map" of the roles and responsibilities the senior executive job entails to the APRA. The new executive will also need to register with APRA.
• New executives registered with the APRA must 'conduct their business consistent with good prudential outcomes'.
• If registered APRA senior executives do not meet the above expectations, the APRA can
  -- Remove and disqualify senior executives and directors from all APRA-regulated institutions.
  -- Impose civil penalties capped at $200 million for large ADIs and $50 million for small ADIs.
  -- Impose penalties if ADIs do not appropriately monitor the suitability of their executives to hold senior positions.
• A requirement for a minimum of 40 per cent of an ADI executive’s variable remuneration – and 60 per cent for certain executives such as the CEO – to be deferred for a minimum period of four year. APRA will be given powers to adjust these remunerations if they are producing inappropriate outcomes.

Pros

• The deferral of payment for senor executives of a minimum 40% means senior executives need to make decisions that are in the long term interest of the company they are apart of. It is not sure if this will have its intended effect, since even if the company goes through a bad phase after four years, a senior executive will still be paid the amount that was deferred.
• Keeps senor executives accountable. Since most of these institutions are dealing with the population's savings, it is important to make sure executives are conducting themselves in their companies', and their saver's, best interest.
• Can help to establish trust between the voting population and ADIs. Yeates from the Sydney Morning Herald commented on a survey that found the community ranked banks as one of the lowest trusted institutions in Australia in mid-2016. If voters understand that ADIs are regulated and observed from doing any illogical or unnecessary activity, then the voting public may develop trust for these institutions. This can mean in the future government may be less willing to go after banks as a political tactic if they are trusted with the government and voting public.

Cons

• Adds a level of bureaucracy for hiring and monitoring senior executives. Banks are already heavily regulated in Australia by ASIC. This further inquiry into checks may be unnecessary as companies will always be looking for competent senior executives that will do what is in their ADI's best interests. Banks pay senior executives high salaries for two reasons; to get the best person into the job and money to deal with the stress of important decisions. As can be seen by Woolowrth's history from 2009 to 2015, a bad CEO can do a lot worse than just taking a high bonus.
• 'Conduct their business consistent with good prudential outcomes' is open to interpretation, since it may have a different limit between APRA and an ADI. Sometimes it may be necessary for certain ADIs to take high risk. What would happen if the bank is conducting itself properly according to investors and depositors, but is unable to meet good prudential outcomes?
• May be a regulation on bank primarily for the purposes of political gain and to solve an issue that is not present. Senior executives are often elected to a position because they have the skills and knowledge to continue to build the company. It is in their best interest to have the company grow and to be a stable investment for not only savers but for investors. Stringent checks are already placed on current banking senior executives by ASIC and a bank's board of directors. The effectiveness of the APRA to stop any bad practices may be statistically insignificant in comparison to current checks and balances.

ACCC improvements to monitor banks

• Increase of $13.2 million to the ACCC to establish a permanent banking competition unit.

Pros

• Helps to prevent dishonest competition and allows for more transparency to regulators when necessary.
• The new unit will allow for ACCC to better identify financial institutions who do attempt or carry out dishonest conduct.

Cons

• May disadvantage growing or larger businesses as they are bigger targets for regulatory bodies.
• A degree of intrusion by the ACCC, that may be seen as unnecessary, can cause distrust between regulators and financial institutions.

Banking Levy

• A six-point levy on ADI with liabilities of at least $100 billion will be introduced starting July 1 2017 and ending 1 July 2021. There are only five banks that will qualify for this tax that have at least $100 billion of liabilities; NAZ, Westpac, NAB, CBA and Macquarrie.
• As each basis point is worth 0.01%, banks will be taxed an extra 0.06% of their revenue before tax over four years as of 1 July 2017. Since the levy is applied before tax, companies can claim the levy as a tax deduction.
• This levy will apply to corporate bonds, commercial papers, certificates of deposits and tier 2 capital instruments.
• This levy will not apply to tier 1 capital instruments, saver's deposits, businesses and other insured deposits.
• This levy is said to bring in $6.2 billion over four years. We assume the Department of Treasury has used historic data to forecast the banks profits on their current trend.
  *The rational for this levy is to make the banks pay their fare share and to funding for governments programs that require more funding, such as the National Disability Insurance Scheme (NDIS). This levy is similar to what banks paid in overseas countries such as the UK.

Pros

• This tax increases competition of smaller banks. The handicap of the bank levy on larger banks will allow for a more competitive environment for smaller banks to expand into. If the banks that are affected by this levy transfer the costs of the levy to borrowers, then smaller banks can offer loans cheaper than bigger banks. This can be especially good if there are multiple financial lenders with a healthy market share, preventing a situation where a single bank would be too big to fail.
• Allows for a stable financial government overtime. Investors can be hesitant if there are large budget deficits or if a government cannot meet its debt obligations. This can be especially telling if they are not able to fund one of their own projects. Improving government finances to a point where the government can show it can complete its project and meet its debt obligations whilst having a healthy pool of funds to undertake financial endeavors, can lure investors to Australia as they know it is overall a financially stable country, both fiscally and monetarily.
• This levy may help banks borrow money overseas cheaply in the long run. During the GFC in 2009, the Australian federal government implemented a guarantee to savings accounts for up to $250,000. This has currently remained in place, and the government has never charged banks for it in the past. The Australian federal treasurer Scott Morrison stated along the lines the levy imposed is essentially a charge for that guarantee. Since this guarantee on savings accounts is more solidified by the government's treasurer, it is possible for Australian banks to be seen as more stable and its bottom line customers protected by the government. Therefore, overseas financial institutions may lend money to Australian banks cheaper as a result. Therefore the levy may be a benefit in the long run towards these banks.

Cons

• The tax will be passed onto borrowers and investors. CBA, Westpac, ANZ and NAB have all mentioned to shareholders their after profits revenue would be reduced by $220 million for CBA, $240 million for Westpac, $240 million for ANZ and $245 million for NAB for the financial year starting 1 July 2017. NAB mentioned it could either increase borrowers rates or cut savers rates, and the other banks have mentioned following in this path also.
• Taxing profitable companies sets dangerous precedent. The Australian Banker's Association (ABA) released a report detailing how all four major banks are the only ones paying over $2 billion in tax. Given total tax revenue from the ASX 200 was $22.4 billion, the five banks being taxed contributed 56.11% (refer to Appendix 1) to that amount in 2016. Taxing companies that are doing well may stifle growth and government trust with financial institutions, when an institution needs to worry about being taxed if they are doing well compared to others.
• The tax will further shorten bank's small margins on loans. The bank levy is expected to hit profits before tax of CBA by 1.68%, Westpac by 2.25%, ANZ by 2.93% and NAB by 2.73%. Although this may not seem like much, the flow on effects will mean the banks's margin will decrease an already decreased margin. Most banks , even with profits of around $8 billion, will only be making around 5-10% if the revenue they used as profit, given the current interest rates.

Sources
Australia and New Zealand Banking Group 2016, 'Consolidated Financial Report', Australia and New Zealand Banking Group, pp. 12, retrieved 14 July 2017, http://shareholder.anz.com/sites/default/files/consolidated_financial_report_.pdf.

Australian Bankers' Association 2017, 'Taxes and other levies paid to governments in Australia by the banking industry', Australian Bankers' Association, retrieved 13 July 2017, http://www.bankers.asn.au/Media/Research-Papers.

Brown, J 2017, 'Budget 2017: New Australian Financial Complaints Authority', Consumer Action Law Center, retrieved 13 July 2017, http://consumeraction.org.au/budget-2017-new-australian-financial-complaints-authority/.

Commonwealth Bank 2016, 'Annual Report 2016', Commonwealth Bank, pp. 10, retrieved 14 July 2017, https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/2016-asx/2016_Annual_Report_to_Shareholders_15_August_2016.pdf.

Eyers, J 2017, 'Outvry over new financial complaints authority', Financial Times, retrieved 13 July 2017, http://www.afr.com/business/banking-and-finance/financial-services/outcry-over-new-financial-complaints-authority-20170523-gwaz8w.

Morrison, S 2017, 'Budget Speech', budget.gov.au, retrieved 13 July 2017, http://budget.gov.au/2017-18/content/speech/html/speech.htm.

National Australia Bank 2016, 'Annual Financial Report 2016', National Australia Bank, pp. 5, retrieved 14 July 2017, https://www.nab.com.au/content/dam/nabrwd/About-Us/shareholder%20centre/documents/2016-annual-financial-report.pdf

Westpac 2016, 'Full Year 2016 Financial Results', Westpac, pp. 4, retrieved 14 July 2017, https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/financial-information/FY16_ASX_Profit_Announcement.pdf.

Yeates, C 2016, 'Ethics Survey: Banking, media and big business in the nose', Sydney Morning Herald, retrieved 13 July 2017, http://www.smh.com.au/business/banking-and-finance/ethics-survey-banking-media-and-big-business-on-the-nose-20160719-gq9f5h.html.

Appendix

• Appendix 1: Calculation of the percentage of tax contributed of the five banks who qualify for the bank levy in the ASX 200 in 2016 (values taken from the Australian Bankers' Association).

1. $3,606m + $3,184m + $2,553m + $2,299m = $12,569m
2. ($12,569m/$22,400m) * 100 = 56.11%
   Note. This value does no coincide with the value of the entire banking sector as a whole in the ABA report. Calculated above is the tax contribution made by all five banks for the financial year ending June 2016. However, the report has put down all seven banks contributed 55.3% in tax for the financial year ending June 2016. This shows inconsistency in this report, and there is a possibility either the individual bank's tax contributions or the total of the seven banks tax contributions have not been calculated or recorded correctly by the ABA.

• Appendix 2: The effect of the bank levy on the bank profits using profit values from the financial year ending June 2016
  CBA: $220m/$13,062m * 100 = 1.68%
  Westpac: $240m/$10,644m * 100 = 2.25%
  ANZ: $240m/$8,178m * 100 = 2.93%
  NAB: $245m/$8,978m * 100 = 2.73%