The Commerce Commission (the Commission) has published its final report into competition in the personal banking sector. The final report (which can be found here), sets out the Commission’s findings and recommendations regarding the personal banking sector following its 14 month market study. The report has elicited a swift reaction from the Government, which has announced that it will act on and respond "with urgency" to all 14 of the Commission’s recommendations (see media release here).

Who will this impact?

The Commission’s recommendations (if adopted) are likely to impact banks, fintechs, consumers and other stakeholders involved in the personal banking sector in New Zealand.

What were the Commission’s findings?

The Commission has concluded that, in its view, the New Zealand personal banking sector lacks competition due to the absence of a “maverick” provider. The Commission’s view is that New Zealand’s four largest banks amount to a “stable oligopoly”, there has been limited investment in innovation in the sector, and the market power of the major banks has resulted in sustained high levels of profitability.

The Commission considers the following factors are limiting competition in the sector:

• the competitive advantages of the major banks due to their large scale, scope and funding cost advantages, in addition to their established brand recognition;
• regulatory barriers to entry and expansion which disproportionately affect smaller providers; 
• barriers to consumer switching and engagement which result in significant customer inertia for personal banking services; 
• impediments to innovation by fintechs (the Commission considers fintechs are a potential source of disruptive innovation and competition in the sector); and
• mortgage advisers and banks not driving price competition for home loans.

What are the Commission’s recommendations?

Capitalise Kiwibank

The Commission notes that while Kiwibank currently imposes some constraint on the major banks, it currently lacks the capital backing to consistently drive stronger competition in the market and recommends that the Government, as Kiwibank’s owner, should consider what is necessary to make Kiwibank a "disruptive" competitor, including how to provide it with access to more capital.

Accelerate and co-ordinate progress on open banking

The Commission has recommended that industry and the Government commit to ambitious milestones to ensure open banking is fully operational by June 2026. It describes open banking as “a system in which consumers can make payments and instruct their banks to share their financial data such as account information and transaction data, with third-party providers such as fintechs or other banks.”

In practice, this aim will need to be supported by a combination of voluntary and mandatory measures applying to banks in the short, medium and longer term.

In terms of achieving what it can in the short term, the Commission has confirmed today that it has granted conditional authorisation for Payments NZ (owned by eight banks) to work with current and future API providers and third parties to develop and apply a partnering framework relating to the provision of API-enabled services to fintechs, such as payments and data sharing.

In the medium and longer term, the Commission has emphasised the importance of having regulatory backstops in place to ensure that certain minimum requirements are met to support the acceleration of open banking. Notably, it refers to:

• designating the interbank payment network under the Retail Payment System Act (intended to progress API access to bank payment systems for fintechs, particularly in the next 12 months) – the Commission has already recommended this to the Minister of Commerce and Consumer Affairs; and 
• designating banking data under the Customer and Product Data Bill (which has a longer timeline for implementation, probably reaching out well into 2025, having been introduced to Parliament only in May and with significant work still to come to define and determine the regulations and standards needed to fully implement it).

The Commission has also recommended:

• that it convene an Open Banking Steering Group within two months. It sees that this group would be tasked with agreeing a set of milestones, publishing a detailed plan, and helping coordinate across industry and Government, in relation to open banking being fully operational by June 2026;
• the Government be an early adopter of open banking, and take an all-of-government approach to adopting payments enabled by open banking, to help build confidence in open banking and develop the market for open banking-enabled products and services; and
• that home loan providers should present offers in a readily comparable manner and that industry should create a standard means of comparing home loan offers across all providers (such as through a single effective interest rate), which we observe would readily feed into the requirement for banks to provide certain product data to customers under the Customer and Product Data Bill (if enacted).

Finally, the Commission has noted that the verification of a consumer’s identity in a digital context will be fundamental to open banking, and that Digital Identity Services Trust Framework Act 2023 provides a legal framework to assist the development of trusted, people-centred digital identity services. Further work involving industry and Government is required in this area however.

Ensure the regulatory environment better supports competition

The Commission noted that a universal theme of its engagement with stakeholders throughout the market study was that regulation is the single most important factor constraining new entry and the ability of existing providers to expand and compete. The Commission has made a number of recommendations in its final report on how the Reserve Bank of New Zealand (RBNZ) and the Government can ensure the banking regulatory environment better supports competition.

The Commission has recommended that RBNZ should broaden the way it undertakes competition assessments under the Deposit Takers Act, place more focus on reducing barriers to entry and expansion in the banking sector, and place greater emphasis on competition in specific upcoming decisions which would include:

• Implementing more granular standardised risk weightings for home loans. 
• Setting minimum capital standards that encourage new competitors. 
• Permitting more entities to be a ‘bank’ and provide ‘banking services’. 
• Widening access to the Exchange Settlement Account system. 
• Reducing the risk rating of lending to housing co-operatives and community housing providers to lower, and ‘more accurate’ levels.

Some of these recommendations have changed slightly from the draft report. For example, the Commission initially recommended that the RBNZ review its prudential capital settings to ensure that they are competitively neutral. It was suggested by the Commission that this would involve the RBNZ reviewing the role and operation of the internal ratings-based (IRB) approach, which is currently only available to accredited banks for the calculation of their capital requirements. The RBNZ filed a detailed submission which strongly disagreed with this draft recommendation, and ultimately it was not carried through to the final report. Instead, the Commission has proposed that the RBNZ permits smaller operators to use a more granular standardised risk weighting for their loans which should reduce the capital they are required to hold.

The Commission has also made a number of recommendations as to how the Government can strengthen competition in the personal banking sector through its legislative decision-making and reforms. In particular, it has recommended that:

• The Government should ensure that existing legislation and future decisions do not unintentionally favour banks, particularly larger banks, over some other providers. This would include reviewing existing legislation to ensure that it is competitively neutral unless justified by other policy considerations and considering the effect on competition of all future decisions.
• The Government should lessen barriers to switching home loan providers as part of its Credit Contracts and Consumer Finance Act 2003 (CCCFA) reforms. Although recognising the importance of consumer protection, in the Commission’s view, the consumer credit regime overall has had unintended negative consequences for competition. The Commission considers the complexity and prescription in that regime has constrained automation and innovation in some areas. The report points to the additional regulatory hurdles when a consumer refinances a home loan with a different bank (rather than with the same bank) as an example of an unnecessary barrier to consumers switching providers.
• The Government should prioritise competition concerns when reforming the Anti-Money Laundering/Counter-Financing of Terrorism (AML/CFT) regime. The Commission notes that licensing fintechs under the AML/CFT regime may improve their access to banking services.

In relation to CCCFA reforms, the Ministry of Business, Innovation and Employment (MBIE) has recently held public consultation on a set of financial services reforms. The reforms to date have focussed on reducing the regulatory burden, but not specifically on strengthening competition. Given the separate Government announcement today regarding the Commission’s report it seems that the final report’s recommendations will be taken into account as part of the reforms going forward.

Empower consumers

The Commission's final report suggests the banking sector and Government can empower consumers to switch providers more easily. It recommends improving the industry’s bank account switching service, making basic accounts more accessible, enhancing home loan competition, and reducing barriers to lending on Māori freehold land.

What next?

The Government’s press release notes the Finance Minister intends to ask Treasury to engage with Kiwibank’s parent company on options for raising new capital and will issue a new Financial Policy Remit this year to make clear the Government’s expectation that the RBNZ, in its policies and actions, supports a more competitive banking sector. The Government has also stated that it is implementing ‘open banking’ and is on track to meet the Commission’s recommended timeline.

Aside from this, it is not immediately clear how (or when) other recommendations will be addressed by the Government.

The Government has also now formally published the terms of reference for its Select Committee inquiry into banking competition (available here). These terms note that the Committee should, where relevant, reference the findings in the Commission’s final report. The closing date for submissions on the Select Committee inquiry is 11:59pm on 25 September 2024.

If you have any questions regarding the final report and its recommendations or the Government’s Select Committee inquiry into banking competition, please contact one of our experts.