Australia’s Big Banks Have Stranglehold on Consumers, Government Says

SYDNEY — Australia’s four biggest banks have used their dominant position to exploit customers, deliver inferior products, charge exorbitant fees and block competition, according to a new government report calling for more competition and integrity in the industry.

The report, released Friday by the Productivity Commission, found that Australia’s four largest banks control more than 75 percent of the country’s lending, deposit and credit card businesses. The insurance industry is even more concentrated, leading the country’s biggest financial players into habits of abuse and complacency, the report said.

“Power needs to be put back in the hands of the customer,” the country’s treasurer, Scott Morrison, said Friday in remarks introducing the report. “Too often, we have also become willing participants in a game where the deck is stacked against us.”

The report calls for more transparency to empower consumers and urges regulators and banks to prioritize competition, not just stability.

The recommendations, however, represent a market-based tweak rather than a major overhaul, and many legal and financial experts questioned whether the government’s approach would be sufficient to restore public trust.

“I suspect we’re going to end up with no major change,” said Cameron Murray, an economist at the University of Queensland and an author of a book on Australian banking, “Game of Mates.” “We can’t address it — this banking cartel — by imagining there’s some arrangement where it’s not a cartel and that some sort of free-market competition will occur.”

The country’s financial sector and government have won praise for their stability, especially after weathering the global financial crisis of 2008. But Australia’s banks have also maintained some of the largest profit margins in the world.

And now, after 26 years without a recession in the country, with pressure for growth intensifying as the real estate market cools, the banking industry’s everyday practices — along with incidents of malfeasance — have prompted intense outrage and demands for change.

Hearings in Parliament that began in December have identified patterns of systemic abuse by banks, insurance and other financial firms — including, in some cases, charging fees to dead people.

Banks and other major financial institutions were also found to have charged customers for financial advice when they knew it would not be given; to have forged documents; and to have repeatedly failed to verify customers’ living expenses before lending them money.

They also sold insurance to people they knew could not afford it and lied to industry regulators, who have generally been too weak to do much about it, according to the parliamentary findings and experts.

The cavalier behavior, experts say, is a byproduct of the dominance of Australia’s biggest banks.

Australia established a policy of prioritizing the country’s four largest homegrown banks with a so-called four-pillars policy, which was instituted in 1990 to prevent any merger between Australia’s major banks: National Australia Bank; the Commonwealth Bank, which was owned by the government until 1996; Australia and New Zealand Banking Group, otherwise known as ANZ; and Westpac.

The banking business evolved with all four growing together. They operated with a heavy reliance on mortgages and on neighborhood branches, experts say, making it harder for international players to break in.

Regulators have long complained about lacking the resources to police the banks, even as they grew and developed a vast array of products that were often hard to differentiate or understand.

“There is evidence that they have sustained prices above competitive levels, offered inferior quality products to some groups of customers (particularly those customers unlikely to change providers), subsumed much of the broker industry and taken action that would inhibit the expansion of smaller competitors in some markets,” the report said. “All are indicators of the use of market power to the detriment of consumers.”

Morrison put it more bluntly.

“Banks have made this mess for themselves," he said. "They should play a key role in cleaning shop.”

Morrison warned that change had already arrived and would be accelerating.

A new Banking Code of Practice, approved this week, compels banks to provide customers with easier-to-read contracts. But Morrison hinted that more might need to be done.

He said the commission’s recommendation for banks to create an “integrity officer” to monitor mortgage brokers was “an interesting idea” that could have broader application.

He also noted that the banking sector would soon have to embrace transparency for its customers.

By July, all the major banks will have to give customers access to their own credit, debit card, deposit and transaction data so they have control over sharing it with competitors looking to offer them better deals for banking.

Other financial information, like mortgage information, will follow.

“The solution is the empowerment of the customer,” Morrison said. “Giving them better information, giving them access to their own data, and giving them the chance to go out and get a better deal.” The changes are also part of an effort to open up the banking sector to new competitors, including online startups. This year, the government passed legislation to ease restrictions on use of the word “bank,” which had been allowed only for financial institutions with more than 50 million Australian dollars, or about $37 million, in capital.

That change has led to at least 58 new entrants, Morrison said.

But some experts and former officials question whether increased transparency and encouraging competition would check the banks’ behavior.

Former regulators in Australia argue that the banking laws and enforcement mechanisms still do not include the kinds of financial penalties that would alter behavior. The only way to make the big banks and other financial players behave is with the realistic threat of punishment and large penalties, according to one former official now working in the industry, who spoke on the condition of anonymity out of fear of retribution. Experts with experience in Australian banking and finance agree. The country, they note, is still too cozy in its culture when it comes to who manages and regulates finance, and nothing in the current plan seeks to significantly change that.

“We need to think about how to construct regulatory institutions that have an incentive to enforce the rules we create,” said Murray, the “Game of Mates” author. “We’ve got to think about how we structure those organizations better, and how we source expertise.”

He added: “Perhaps it’s better to source expertise abroad, from people who are familiar with banking systems in Asia or Europe and who can come down here and have no trouble cracking down on ANZ or Westpac because they’re not mates.”