Transcript of Peter Harris's address to the Competition in Banking Conference

7/06/2018
Read the full address of Peter Harris, Chairman of the Productivity Commission, to the Competition in Banking Conference at Melbourne Business School.
 
Ian Harper: It is my very great pleasure to introduce Peter Harris, who is Chairman of the Productivity Commission.

Peter has a long and distinguished service record in the public sector, both in the Commonwealth and in the states. In fact, he was previously Secretary of the Commonwealth Department of Broadband Communications on the digital economy and served here in the Victorian government in various agencies responsible for sustainability and the environment, primary industries and public transport.

I hadn't realised before today that there is a common thread through our two keynote speakers and myself. As it turns out, we're all Queenslanders and Peter is a graduate of the University of Queensland, as I am. So, sorry about that but the maroons are really making a bit of a presence felt in Victoria today.

Peter, as I mentioned earlier on, is the Commissioner but he is responsible for producing his report on competition and banking. It's in a draft form and, as he was remarking to me earlier on and I had the same experience when I was doing the same productivity report – 'harbour reports' as they call it – on competition policy, that you get an awful lot of benefit from submissions to what you write in your draft report.

Apart from being a good way to find out which way the wind is blowing frankly, you'll often find out quite often that you've made mistakes or whatever. And I've always thought that it was a very strong tradition of being able to cement your views or the views of your panel in the public mind, and you are willing to change your mind when the facts change.

We certainly did that on the competition policy review, though it will remain to be seen what Peter and his colleagues will do with the Productivity Commission, but they've had the report out in draft form. He tells me that he's had a lot of responses, some of which have been along those lines – 'you've been wrong about this' or whatever – all of which makes for good public policy.

I'm delighted now to introduce Peter to you, to have him speak to the report and other issues he'd like to raise in the context of that. Would you please join me in welcoming Mr Peter Harris.

Peter Harris: It's a very interesting room. When Ian said I would be speaking to those of you who have registered for lunch, I thought 'oh god, half the room is going to disappear'. But clearly, there's a lot of people interested in lunch or interested in what I'm going to say – perhaps both.

So, the Murray Inquiry in 2014 to the Commonwealth government, as a successor to Wallace, gave us this task that we are now substantially through performing today.

In fact, 2014 was the season for reprises because it was the same time that Ian and his colleagues revisited the fields ploughed by Fred Helmer and his group in 1994.

And from Murray and Harper, came three recommendations for more in depth work for the Productivity Commission. Aside from competition from David Murray, Ian's report asked us to have a look at data and have a look at intellectual property.

And in all three cases, these high-level enquiries in our view were right to be sceptical of current policy.

One of our reports that came in response to Ian's recommendations is the use of data is done much better than the other attracting support from government, and you've been talking about it here today with open banking.

I'm a bit of a convert to the whole of the data question. So, when Kevin mentioned earlier that he's a bit of a luddite on the data issue, I probably approached it myself that way when I first was asked to go and do the job in Canberra on the broadband initiative of the federal government. 

You know, I'd just got a smartphone and I had to ask one of my daughters where the 'hello' button was. 

But I learned a lot in the course of the broadband project about what is likely to be the most significant, sustainable resource discovered in the 21st century, this thing called data and what we could do with it.

Now as to how it's likely to be applied, as Anna Bligh said this morning – who knows? Who knows how it's likely to be applied? But it is clearly capable of creating multi-billion-dollar disruptive businesses with not much more than that, just data, and the coordination of information that was previously hidden and known to each individual but now has been collected and put together and turned into actual businesses. 

That's Uber and AirBnB amongst other things, they're just big data repositories. And yet they're worth billions and – even if they flop – the point is the disruption is immense and substantially in consumer interests, which is why we're really grateful for Ian to be giving us the data report and which is why we designed what we call 'the comprehensive right'.

Which is not, in the sense of some of the comments that have been made this morning, not limited to the ability for a consumer to transfer or order the transfer of their data from one data holder to another. That is the most pro-competitive of the rights, but there are multiple rights inherent in our proposition for a comprehensive right for consumer over data. 

They include your right to know not only that you're able to trade in your data, where it is to be sent or have to be sent from one party or another. It's also for you to know what that data holder is doing trading your data. You should be informed about that and you should also be able to give permission that that should happen or not happen.

Now, what the government actually does as it implements what I'm still going to call a comprehensive right – because in the budget, they did announce they were going to go down this path – I don't know. The Productivity Commission, we don't get involved in the fine design of these things.

Nevertheless, it's clearly more than the data right that is being put together today with open banking. And indeed, the data itself that is first cab off the rank in terms of exchanging between financial institutions that are open banking will, in my view, improve over time. That is, it will be a down payment, it will be the initial kind of data that could be exchanged.

Somebody mentioned this morning the UK open banking experiment which is in front of ours by a year or two. They had to come back and have a second go at exactly what data is covered by this right. And I expect that will happen in Australia as well.

More importantly, it will probably happen in more industries than it's currently applied to in the UK.

You've already heard suggestions that it can cover telecommunications and electricity. These are classic areas where currently you do actually have some rights to see your data used potentially to get a better deal, but you have to do the downloading and the uploading and, at the end of it, you've got to use a comparison website where the incentives for the people putting together the website may or may not be incentivised so that they act in your interest.

So you can eliminate all of that step by simply having the right to tell your electricity provider to send your data to another electricity provider, where that electricity provider may offer you a better deal which you can ignore or not ignore. And the danger in you sending that data by comparison, say, with banking even is much, much less.

So it's a significant shift. It's not getting a lot of publicity. We'll see what happens when the draft legislation hits the parliament, but we think it's pretty significant and Ian gave us the gig, so good on you, Ian.

Intellectual property, this report didn’t get such an engagement from government and that's a bit of a pity but, you know, I think government will go back to intellectual property again, for exactly the same reason that data was so important. Intellectual property laws are otherwise an impediment to sharing data.

You can see the resistance, for anybody who tracked this, came from what I might call 'the old world of information' protected by intellectual property laws because it's a very valuable revenue stream to them. In effect, it's a monopoly right to exploit a certain set of information, but eventually intellectual property laws are going to have to become aligned with the better utilisation of data. There is really no denial of that. 

With a bit of wider vision, you can see that for everybody under 40 the ability to, as it were today, trade in your data – so offer data to another party in return for a service – is second nature. You can fill in whichever category you like but, whether it's Uber or whether it's Facebook, it doesn't really matter. It's second nature.

So resistance to the idea may be successful today or tomorrow or next year, but people will get it with intellectual property as well.

Switching now to the last of the three pieces of work we got out of the great reprisals of 2014 – that is competition in banking and finance. And as I said, David Murray was right to be sceptical.

What's surprising to those who read the headlines in our draft report – and it's possibly a limited number, we don't make people read the seven or eight hundred pages we publish, and we try very hard to get a better story out there to the journalists but sometimes it's easier than other times.

What's surprising is we haven't really bagged the big banks. A lot of people, I think, presume that when there's a series of inquiries and we're yet another inquiry, of course we'll stay safe and we'll join the mob with the torches and we'll charge the castle and call for its overthrow.

We didn't really do that in my view. And I say it because I always worry about how the report will be received when it’s in the public arena and we could be potentially criticised for that. We weren't, and that was good, but we really didn’t bag the big banks in my view.

Neither though did we get up on the battlements and wish we'd boiled the oil earlier as the mob was turning out. Maybe help out with raising the drawbridge. We didn't do that because, you know, we're the Productivity Commission. We come in and we look at it from zero. We don't look at it with anybody else's view in mind and, in fact, we offend quite a lot of people when we reject the received wisdom of a particular area. 

And we certainly did that in banking and certainly the official family in Canberra and Sydney and thereabouts probably do feel a little bit of chagrin that we did not accept the received wisdom of how things should work in banking.

It helps us because, we're not with the mob and we're not up on the battlements. We are the Productivity Commission. You can read it. You can just see very transparently how we got to our conclusions. You can decide for yourself whether you're right or wrong, and you'll always get that kind of service from us.

Our methods of applying and interrogating data are tremendously important to us. And resistance to sharing data in this inquiry was about as serious an issue as we have ever seen.

For the first time in our 20-year history as the Productivity Commission, we had to issue formal notices demanding data. We've never had to do it before.

Some of you might know the history of the Productivity Commission. We've engaged with a battle over 20 years with, say, the motor vehicle industry and the government subsidies and resource misallocation of a pretty serious knock-down drag-them-out kind. Yet we've never had to issue formal notices for data. But in this enquiry, we did. And soon enough, we may well have to do that in superannuation as well.

Now, this is deeply disappointing. I can understand that people have commercial sensitivities about data. But we're a pretty good organisation for not putting people, individual firms, in the frame. And you can see it with what we did with the data we did eventually get in our draft report.

No-one's commercial secret was exposed. And I think it's generally understood, even by the media, that to demand of us data that we have taken under confidentiality is something we will strongly resist simply because we won't get cooperation otherwise.

But it is a bit of a worry – and, as I said, it's arisen in superannuation as well – that some people think it's wise not to give the Productivity Commission the information. I can tell you that if we don't get it from you, we'll get it from somewhere else. We bought data. We've gone outside Australia to buy data – there's quite a good bit of data in this area held by foreigners – and we will get it from the regulators as well.

Even though we found with the regulators they too had a reluctance – not reluctant to share data with us, that's not fair. But they were certainly reluctant to see it published where they have understandings with people about how they will protect the data. And we respect that, but our job is to get the stuff out into the public arena where all of you can assess not just how well we did our job, but how sensible or otherwise are our solutions.

This was a big deal. It remains a big deal. 

Here's a shock. In our draft report, we found that the big banks have substantial market power.

Now, I know. It's not a shock. But we didn't find this as a matter for expressing outrage or offence. Our large banks are efficient by global standards and scale economies are a desirable thing.

The alternatives of a monopoly, or a system composed of cottage scale banks, would be undesirable on efficiency and system stability grounds amongst others. So, I ask why the shock? Why the big shock? It's time to get over this, even for the big banks, and admit it. You've got market power.

Public policy should be designed to manage that. Not because they'll always be misusing that market power, but because the potential for that is a very important question when on the other side of the table, as it were, there are individuals who are relatively speaking pretty powerless.

I think things get quite interesting when you decide how you might address a question of market power in an industry like this one because a fair chunk of that market power comes from the actions of regulators. And again, that's not a matter for outrage either because those regulators are doing what they're doing in our interests.

So, APRA [the Australian Prudential Regulation Authority] in its actions does offer the possibilities to financial institutions to exploit their market power. And as you can see from our draft report, we analyse that. We say it happened. People like to argue about it, but the numbers are the numbers. It quite clearly did happen. The only question is was it a deliberate act or wasn't it? I'll talk a little bit more later about this.

But when you're dealing with the fact that some of that market power comes from regulators, you've got to be pretty subtle about how you go about dealing with this. It's not just a question of saying, 'well, let's change the Competition and Consumer Act and outlaw some behaviour'. Hang on, that behaviour is lawful. Why? Because those regulators are delivering it under another set of laws. So you've got to be pretty subtle about these things.

We thought we were pretty subtle. That wasn't necessarily the assumption when we put the draft report to Canberra, but there you go. We think we have been subtle.

It's important as well to recognise that it's not just the actions of APRA that offer market power. It's also some of the language that is used. There is an public expression today in dealing with banking which says banks must be unquestionably strong.

Now, that does not communicate that banks must compete effectively in the interest of consumers. It's more than a slogan as well. So that must have an impact on regulators. 

Every time a politician says 'banks must be unquestionably strong', can you imagine what the regulator charged with balancing, say, competition and stability thinks of that statement?

It's a pretty powerful lever in its own right, that form of communication. But beyond that, a subset of our unquestionably strong banks enjoy, from other regulators and other regulation, five or six additional factors that provide market power – first, near immunity from takeover. 

You can guess that policy – I don't want to speak of it ever again as people get very attached to arguing about it – but near immunity from takeover exists. Next, limits on individual ownership, then declaration that they are domestically systemically important. 

Then a certainty of lower cost of capital relative to their smaller competitors, particularly where ratings agencies are involved in determining that pecking order. As well, consultation on macro-prudential intervention. And finally, public signalling to the market in general from the Reserve Bank about the direction of rates.

All of these are activities that come from regulators. All of them contribute to the existence and the potential use of market power.

So, my point in this is again not to express outrage over that, but to say when you're dealing with this potential use of market power in design work – which is what we're in the game for – it should influence your thinking. We're here to say 'what can you do about it?' You've got to recognise those things, and you're going to have to design subtly how to move between them.

If we talk honestly amongst ourselves about these things, we need to recognise that 'in total' means two things for competition. First, that we can never have a strong rivalrous market that might threaten the big four because regulators will step in.

Workable competition – not strongly rivalrous competition, the kind that raises serious risk – workable competition is a more realistic goal. 

And curiously, the second point – curiously – there is no party in the regulatory sphere that has competition as its first responsibility. No party, no regulator has this as its first responsibility.

You will recall from the draft report, that we analysed APRA's interventions in 2014, and in 2017, as they affected investor home loans. 

The consensus was it was right for them to intervene, so I'm not debating that.

Our focus has been rather on how well the intervention occurred and, in particular, was there a cost competition that will remain with us beyond any short-term rebalancing between risk with owner-occupiers and investors? And the answer we gave in the draft report is that there is unequivocally such a thing and it works like this.

First, the intervention specifically enabled competitors to act in concert and provided them with a reasonably high level of awareness of each other's inability to compete, which is a direct reduction in competition.

Then, there was opportunity for profit in this. If instead of price some non-price mechanism such valuation ratios had been used – as in other countries – this might have been different, but if price was to be used to achieve regulator's objective, there was opportunity for profit. Particularly because unlike a movement in the cash rate, banks' costs had not changed.

So when both future and past loans were repriced – even though the latter was not the ostensible target of the intervention – profit-taking occurred and it occurred by imposing a cost on consumers.

Second, we feel that this kind of intervention may be in danger of operating a one-way ratchet on prices, to the extent that the banks lift price in order to achieve macro-prudential outcomes.

There appears to be nothing in the regulator's toolbox to see such premiums fall back when the risk-taking passes. Rather, there is an assumption that if competition is present, prices will fall back.

But when we can readily see market power – which we've demonstrated, and most people will admit does exist – there's often nothing to offset that ratchet effect.

I hope in those last couple of comments you would have noted – but I will repeat it just to be sure – the word 'competition' appears many times in what I've said, in those two aspects of intervention.

We see this as a serious competition issue, not a marginal one. It's quite important. It's quite important in a context where market power does come from regulator's actions to see this reflected in the results of the review.

Now, the fact that there's no regulator tasked with competition as its first thought is what, in my view, should have genuinely shocked Canberra. I didn't know it before we started this work. I would have presumed somebody had it in their statement of objectives as their first priority.

ASIC [the Australian Securities and Investments Commission] doesn't even have competition in its objectives at all, nor does it yet have a statement of expectations to give it some refocus on this subject that Murray's enquiry recommended – although we've been told it's coming.

APRA has to have regard to it. Having regard to something is a standard legislative device in Australia and indeed in other countries' legal systems. Legislators undoubtedly feel better for having said it, but it can be satisfied by having a piece of paper – any piece of paper – that says 'we considered it'.

The administrative lawyers in this room, if there are indeed any, can explain that to those who would otherwise scratch your heads. But I know that – I worked in this area – that is the discharge of 'I had regard to'. It's a piece of paper.

The UK in 2012 decided that 'have regard to' was insufficient clarity for how to rate competitive market activity for its prudential regulator. Yet it didn’t do what we suggested in the draft report. Instead, it went the legislative route. We haven't chosen to go the legislative route.

The UK, let no one forget, had a much worse experience with the imbalance between prudential supervision and competition during the global financial crisis than we did, yet has still sought to at least add clarity to the importance of competition for people doing prudential interventions.

Of the other regulator entities that were and remain interested in this sphere, the RBA is undoubtedly interested in competition but a number of other considerations rate more highly for it, as we see every time the Bank or the Treasurer is asked to articulate the RBA's role.

Thus no one amongst these regulators that meet as the Council of Financial Regulators, no one amongst those has it as their primary responsibility. Or perhaps more fairly, everyone does something about this – but in accountability terms, when everyone is responsible, no one is responsible.

A presence somewhere in the regulatory structure that thinks first in the interests of consumers – and does so with the other regulators present – is the kind of opportunity that we saw in the draft report as being almost a no-brainer.

The logical place for this to happen is where regulators meet to discuss the scope for prudential intervention and that is the Council of Financial Regulators.

Now, aside from ASIC and the ACCC [Australian Competition and Consumer Commission], which are the two choices we put in the draft report, we did not consider the Treasury's role. And the Treasury, in a submission to us, has put up its hand for this gig. So we'll need to come to a view on that in the final report.

The final area where we can do better in competition in finance is not so much to focus on the regulators themselves, as in the quality and advice and information to consumers in how they might get a better deal, which is only in part a regulator's responsibility and where we had a number of recommendations on that in the draft report.

We're spending more time now trying to make those improvements practical improvements. And by 'practical', I mean ones where the consumer doesn't have to work harder in their own interests. Nothing will be less likely to be successful in a complicated world like finance than to ask consumers to do more. We have to make it easier for them to be an effective source of competitive power.

So, we will be trying our hand – not without trepidation, he says, taking a deep breath – at a renumeration structure for brokers that should be more consistent with the obligation to act in the customer's best interest. This is a dangerous intersection where customer and bank meet head on and brokers have their loyalties tested.

Now, our trepidation is because resistance is never more firmly entrenched than when both of two protagonists in a commercial context – like banks and brokers – cease their disputation with each other and jointly turn their efforts on us.

We think that's a probability. Our superannuation report last week got that kind of reception. As most observers noted, after scraping the cream off any bits they liked, both the industry funds and the retail funds declared our ideas were experimental or impractical. Straight out of the playbook of Sir Humphrey Appleby.

Selection to decide a set of recipients of default superannuation inflows is decidedly not experimental. Our neighbours across the Tasman do it now. Around the world, plenty of central savings funds – big corporate ones as well as public ones – tender for chunks of major savings inflows to be managed by one or more fund managers. They use the same kind of principles as we proposed in our draft report on superannuation. It's called governance. It's called past returns, their fees, and effective future strategies.

I mentioned past returns then, and I was staggered to see someone wrote in their news story – a financial journalist – that the Productivity Commission failed to recognise that past performance is no indication of future performance.

Gee, we saw Bernie Fraser in the ads and we know this. Past performance is no guarantee of future performance – it's a truth, of course. But if we were to take the hint, it means not only could we in Australia on behalf of people who are defaulting their superannuation contributions into a set of funds – not only couldn't we use that as a criteria, but logically then neither could anybody else.

So all those industry mandates that are going on right now for people who are deciding whose money goes where – all that should stop too, because you can't use past performance as an indicator of future performance. Of course you can, and of course it's not the sole way to go about these things. 

But we are going to have a go at trying to do this remuneration issue as well in the finance report, and you'll be able to judge when the final comes out how successful we are. 

Thank you very much.

The Competition in Banking Conference was hosted at Melbourne Business School in partnership with Bendigo and Adelaide Bank on June 6. Speakers included Mr Harris as well as Anna Bligh, CEO of the Australian Bankers Association.