Proposed reforms could help expose inherent conflicts in big bank model

27 November 2018

The big bank model in Australia suffers from an inherent conflict between the interests of customers and shareholders, which more people need to be aware of, Heritage Bank CEO Peter Lock said today.

Mr Lock was commenting after Assistant Minister for Treasury and Finance, Zed Seselja, yesterday released draft legislation that will make it easier for customer-owned financial institutions such as Heritage Bank to raise capital.

The proposed legislation will make changes to the Corporations Act that will allow mutual financial institutions to issue new capital instruments. It reflects the findings of the 2017 Hammond Review into reforms for the mutual sector. The reforms would enable Heritage to generate the greater levels of capital needed to fund investment in growth and expansion.

Mr Lock said the Hammond Review represented an important step forward in enabling the mutual sector to become a truly competitive fifth pillar in the Australian banking sector.

“At present, mutual organisations have huge potential to provide more meaningful competition to the dominance of listed banks, but their ability to do so is severely held back by the barriers they face in cost-effectively funding innovation and growth, “ Mr Lock said.

“This need not, and should not, be the case.  As the Hammond Review recommendations show, the regulatory and legislative changes needed to remove these barriers are clear, feasible and readily able to be enacted.”

Mr Lock said introducing these reforms and strengthening the mutual sector was even more important, given the shortcomings of the big bank model that had been exposed by the Royal Commission. 

“The banking Royal Commission has brought to light the stark difference in the operating models of the ASX-listed banks compared to the mutual sector,” he said

“Regardless of their rhetoric, the listed banks face an inherent conflict between the interests of their customers and the interests of their shareholders.

“At the end of the day, the listed model exists to serve their shareholders above all else, not customers.  The mutual model is the opposite – we exist only to serve our customers.

“By addressing the current barriers that constrain capital-raising by mutuals, the Hammond recommendations can encourage more Australian customers to enjoy the benefits of banking with a sector that lives the values of trust, transparency and doing the right thing by the customer.

“We’ve been crying out for a long time for action to address the barriers we face, and I applaud the bipartisan political support for moving forward on the Hammond Review recommendations.”