Government announces major market study into banking

New Zealand’s banking sector is next in line for a Commerce Commission market study.

The Government has directed the agency to investigate the competitiveness of the sector, dominated by four big Australian-owned banks – ANZ, ASB, BNZ and Westpac.

The Government wants the Commission to focus on personal banking services, including those “ordinarily acquired for personal, domestic or household use”.

Commerce and Consumer Affairs Minister Duncan Webb asked the Commission to publish a preliminary issues paper by the end of August this year (ahead of the October election), before releasing its full findings by August 22, 2024.

He said the issues paper should describe the industry structure and provide early indications on the nature of competition.

“It will set a clear signal of direction for the study and may uncover discrete issues which the Government could take steps to resolve, ahead of the final report,” he said.

Webb told the watchdog its study could consider: the structure of the industry, nature of competition, banks’ profitability, conditions for entry by potential competitors, and any impediments to new or innovative banking products or services being launched.

He also directed the Commission to look into any barriers consumers faced comparing bank offers or switching banks, including the extent to which products or services may be tied or bundled.

Finance Minister Grant Robertson said there were longstanding concerns the market was not working well for New Zealanders.

“Banks have consistently made high profits over a number of years and their returns have outperformed their peers in other countries,” he said.

Collectively, New Zealand’s banks’ profits after tax hit a record high of $1.9 billion in the September 2022 quarter. Thereafter they dropped off to $1.7b in the March 2023 quarter.

Robertson said the four big Australian-owned banks made up around 85 per cent of the mortgage and other lending market, and held a 90 per cent share of total bank deposits. Loans by smaller lenders were growing but small in comparison.

Asked at Parliament about the pre-election timing of the inquiry, he said: “I don’t indulge cynics.”

He said people had legitimate questions about bank profits, especially in light of high living costs.

“There has not been an in-depth look into competition issues in New Zealand’s banking for some time, and New Zealand lags other countries such as Australia and the UK into doing a detailed analysis into banking services,” Robertson said.

He would not rule out a future market study into the insurance sector but said available resources meant only one such study could be thoroughly conducted at a time.

New Zealand Banking Association chief executive Roger Beaumont believed the inquiry would ease any concerns in the community about competition and innovation in the banking industry.

“Our banks are transparent, and will engage constructively with the Commerce Commission,” he said.

“We have a competitive banking sector, with 16 retail banks operating in New Zealand.

“Switching banks is easy. Your new bank can arrange everything including transferring your funds from your old bank and setting up your recurring payments to your new accounts. This can be done within five working days, and you don’t even need to talk to your old bank.”

Beaumont said banks were highly regulated, well-capitalised, and profitable.

“That helps make them resilient, and with recent overseas bank failures we’ve seen why that’s important,” he added.

“In recent years we have seen bank teams tied up with significant regulatory requirements, limiting the ability to focus on new product development. We hope the Commerce Commission will look closely at the regulatory environment as part of its study.”

Beaumont said that because New Zealand banks were among the country’s biggest businesses, their profits looked big.

While banks’ net interest margins have soared recently, their return on assets and return on equity aren’t super high by historic standards.

Robertson said: “I want to be clear this study is not about bank conduct and culture. The Financial Markets Authority and Reserve Bank carried out an investigation in 2018 into this issue which has already resulted in a number of measures to protect consumers.”

Webb said the Government was also progressing open banking and establishing a consumer data rights regime by releasing a draft bill for consultation this week.

“This will set rules and regulations for providers to follow in handling and securing consumer data and make the sharing of that data safer, faster and easier,” he said.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.