Third Report On Banks Recommends Focus on IO Loan Pricing

Last Thursday, the House of Representatives Standing Committee on Economics released their third report on their Review of the Four Major Banks.  They highlight issues relating to IO Mortgage Pricing, Tap and Go Debt Payments, Comprehensive Credit and AUSTRAC Thresholds.

Looking back at the issues The Committee raised since inception in 2016, they have had a significant impact on the banks and again shows how the landscape is changing, outside of a Banking Royal Commission.  It also suggests The Commission will not necessarily deflect scrutiny!

Here are the key points from their report:

Since the House of Representatives Standing Committee on Economics commenced its inquiry into Australia’s four major banks in October 2016, the Government has announced significant reforms to the banking and financial sector to implement the committee’s recommendations.

The Treasurer requested that the House of Representatives Standing Committee on Economics undertake – as a permanent part of the
committee’s business – an inquiry into:

  • the performance and strength of Australia’s banking and financial system;
  • how broader economic, financial, and regulatory developments are affecting that system; and
  • how the major banks balance the needs of borrowers, savers, shareholders, and the wider community.

In November 2016, the committee published its first report, which followed the first round of hearings a year ago in October 2016. The report contained 10 recommendations to reform the banking sector, including calling for new legislation and other regulatory changes to improve the operation of the banking sector for Australian consumers. In a second report in April 2017, following hearings in March, the committee reaffirmed the 10 recommendations of its first report and made an additional recommendation in relation to non-monetary default clauses.

In the 2017 Budget, the Treasurer announced the Government would be broadly adopting nine of the committee’s 10 recommendations for banking sector reform. These recommendations include putting in place a one-stop shop for consumer complaints, the Australian Financial Complaints Authority (AFCA); a regulated Banking Executive Accountability Regime (BEAR); and, new powers and resources for the Australian Competition and Consumer Commission (ACCC) to investigate competition issues in the setting of interest rates. The government also adopted the committee’s recommendations in relation to establishing an open data regime and changing the regulatory requirement for bank start-ups in order to
encourage more competition in the sector.

The Committee’s Third Report makes the following recommendations to Government:

  • The committee is concerned by the increase in transaction costs merchants
    now face as a result of the shift to tap-and-go payments. These costs are
    ultimately borne by customers. If the banks do not act by 1 April 2018, regulatory action should be taken to ensure that merchants have the choice of how to process “tap and go” payments on dual network cards. At present merchants are forced to process these transactions through schemes such as Visa and MasterCard rather than eftpos. It is estimated that this forced processing costs merchants hundreds of millions of dollars in additional annual fees at present;
  • The Australian Competition and Consumer Commission, as a part of its inquiry into residential mortgage products, should assess the repricing of interest‐only mortgages that occurred in June 2017;
  • Despite many commitments by banks in the past to implement CCR, little
    progress has been made. The Government should introduce legislation to mandate the banks’ participation in Comprehensive Credit Reporting as soon as possible; and
  • The Attorney‐General should review the major banks’ threshold transaction reporting obligations in light of the issues identified in the Australian Transaction Reports and Analysis Centre’s (AUSTRAC) case against the Commonwealth Bank of Australia.

Interest Only Mortgage Loans

Specifically on the IO loan situation, while the banks’ media releases at the time indicated that the rate increases were primarily, or exclusively, due to APRA’s regulatory requirements, the banks stated under scrutiny that other factors contributed to the decision. In particular,banks acknowledged that the increased interest rates would improve their profitability. A key reason for such an improvement is that the major banks increased rates on both new and existing interest-only loans in June 2017. This is despite APRA’s interest-only measure only targeting new lending. As of 6 October 2017, analysts at CLSA estimated that the banks’ net interest margins increased by up to 12 bps following the rate increases announced in June and March.

The improvement in net interest margins is forecast to be so beneficial for Westpac that several analysts upgraded their outlook following the price announcements in June 2017.

The ACCC is currently conducting an inquiry into residential mortgage products. This inquiry was established to monitor price decisions following the introduction of the Major Bank Levy. As a part of this inquiry, the ACCC can compel the banks affected by the Major Bank Levy to explain any changes to interest rates in relation to residential mortgage products. The inquiry relates to prices charged until 30 June 2018.

The committee recommends that the ACCC analyse the banks’ internal documents to assess whether or not they are consistent with their statements in their June 2017 media releases and subsequent public commentary. In particular, the ACCC should analyse the banks’ decisions to increase interest rates on existing borrowers despite APRA’s measure only targeting new borrowers. Further, the ACCC should consider whether the banks’ public statements adequately distinguish between new and existing borrowers. The ACCC should consider whether the media statements suggest rates on existing interest-only mortgages rose as a direct consequence of APRA’s regulatory requirement. It will be important that the ACCC conducts granular analysis of the financial modelling of the banks. The ACCC will need to understand the true financial impact on the banks of APRA’s regulatory changes, and assess that impact against the public statements of the banks.

ACCC commences inquiry into digital platforms

The Federal Government has today formally directed the ACCC to commence an inquiry into digital platform providers such as Facebook and Google.

The ACCC’s inquiry will look at the effect that digital search engines, social media platforms and other digital content aggregation platforms are having on competition in media and advertising services markets.

“The ACCC goes into this inquiry with an open mind to and will study how digital platforms such as Facebook and Google operate to fully understand their influence in Australia,” ACCC Chairman Rod Sims said.

“We will examine whether platforms are exercising market power in commercial dealings to the detriment of consumers, media content creators and advertisers.”

“The ACCC will look closely at longer-term trends and the effect of technological change on competition in media and advertising,” Mr Sims said.

“We will also consider the impact of information asymmetry between digital platform providers and advertisers and consumers.”

Advertising expenditure in print newspapers has been in decline for a number of years. Recent ACCC merger reviews have shown that most advertisers are spending less on print newspapers and finding alternative ways of reaching target audiences, including through digital media.

“As the media sector evolves, there are growing concerns that digital platforms are affecting traditional media’s ability to fund the development of content,” Mr Sims said.

“Through our inquiry, the ACCC will look closely at the impact of digital platforms on the level of choice and quality of news and content being produced by Australian journalists.”

By holding an inquiry under Part VIIA of the Competition and Consumer Act (2010), the ACCC can use compulsory information gathering powers and hold hearings to assess the level of competition in a market.

“We are keen to hear the views of content creators, mainstream media outlets and smaller media operators, platform providers, advertisers, journalists, consumers and small business interest groups,” Mr Sims said.

The ACCC is expected to produce a preliminary report early December 2018, with a final report due early June 2019. Further information, including the terms of reference, is at


The ACCC will soon distribute an issues paper outlining matters relevant to the inquiry, and will be calling for public submissions. The ACCC will conduct public and private hearings next year and details will be released in due course.

ACCC and Fee Free ATM Services in Very Remote Areas

The ACCC has issued a draft determination proposing to grant re-authorisation to parties to provide fee free ATM services in very remote Indigenous communities for 10 years.

Under the arrangement, participating banks and ATM deployers provide fee-free ATM withdrawals and balance enquiries at up to 85 selected ATMs for customers of those banks. The ACCC previously authorised the arrangement in 2012 for five years, which expires in December.

“The arrangement co-ordinated by the Australian Bankers’ Association has resulted in significant public benefits over the past five years, which are likely to continue for the next ten years,” ACCC Commissioner Roger Featherston said.

People living in very remote Indigenous communities can often pay high levels of total ATM fees, due to frequent ATM usage and a lack of access to alternatives.

“High ATM usage and fees intensifies the financial and social disadvantage found in very remote communities. Enabling Indigenous people in these communities to have the same access to fee-free ATMs that other Australians enjoy in less remote parts of the country lessens this disadvantage,” Mr Featherston said.

The proposed conduct allows for additional banks and ATM deployers to be added to the arrangement.

The communities to benefit from this project are located across the Northern Territory, Queensland, South Australia and Western Australia. The full lists of ATM locations and participating banks are attached to the draft determination, available on the public register.

The ACCC is now seeking submissions on the draft determination by 16 November 2017 and expects to release its final determination in December 2017.

ACCC Electricity report details affordability, competition issues

We know from our surveys that many households are under intense pressure thanks to rising costings of living and flat wages. Higher electricity prices are one of the main causes.

Now the ACCC has published a preliminary report into the electricity market highlighting significant concerns about the operation of the National Electricity Market, which is leading to serious problems with affordability for consumers and businesses. They say residential prices have increased by 63 per cent on top of inflation since 2007-08. The main reason customers’ electricity bills have gone up is due to higher network costs. Higher wholesale costs during 2016-17 contributed to a smaller $167 increase in bills.

Consumers and businesses are faced with a multitude of complex offers that cannot be compared easily. Many of these issues arise from unnecessarily complex and confusing behaviour by electricity retailers.

This suggests the current Government focus on supply related issues is myopic, and this alone cannot solve the issues in the system, many of which are simply stemming from poor company behaviour.  And, by the way, this mirrors the issues in the UK, where similar behaviour also exists!

The Retail Electricity Pricing Inquiry preliminary report details the ACCC’s initial assessment of information it has gathered including documents and data from industry, consumers, businesses, representative groups and other government and non-government organisations.

The inquiry received over 150 submissions since it began in April. The ACCC heard directly from consumers, businesses and other stakeholders at public forums in Adelaide, Brisbane, Melbourne, Sydney, and Townsville.

“It’s no great secret that Australia has an electricity affordability problem. What’s clear from our report is that price increases over the past ten years are putting Australian businesses and consumers under unacceptable pressure,” ACCC Chairman Rod Sims said.

“Consumers have been faced with increasing pressures to their household budgets as electricity prices have skyrocketed in recent years. Residential prices have increased by 63 per cent on top of inflation since 2007-08.”

The main cause of higher customer bills was the significant increase in network costs for all states other than South Australia. In South Australia, generation costs represented the highest increase. There was a much larger increase in the effect of retail costs in Victoria than in other states. Retail margins increased significantly in NSW, but decreased in others.

“The main reason customers’ electricity bills have gone up is due to higher network costs, a fact which is not widely recognised. To a lesser extent, increasing green costs and retailer costs also contributed,” Mr Sims said.

“We estimate that higher wholesale costs during 2016-17 contributed to a $167 increase in bills. The wholesale (generation) market is highly concentrated and this is likely to be contributing to higher wholesale electricity prices,” Mr Sims said.

The ACCC estimates that in 2016-17, Queenslanders will be paying the most for their electricity, followed by South Australians and people living in NSW. Victorians will have the lowest electricity bills. This is due to a range of factors including usage patterns in various states, including the prevalence of gas usage in Victoria in particular.

The closure of large baseload coal generation plants has seen gas-powered generation becoming the marginal source of generation more frequently, particularly in South Australia. Higher gas prices have contributed to increasing electricity prices.

The ‘big three’ vertically integrated gentailers, AGL, Origin, and EnergyAustralia, continue to hold large retail market shares in most regions, and control in excess of 60 per cent of generation capacity in NSW, South Australia, and Victoria making it difficult for smaller retailers to compete.

The ACCC has heard many examples of the difficulties that consumers and small businesses face in engaging with the retail electricity market and the particular difficulties faced by vulnerable consumers.

“Consumers and businesses are faced with a multitude of complex offers that cannot be compared easily. There is little awareness of the tools available to help consumers make informed choices or seek assistance if they are struggling to pay their electricity bills,” Mr Sims said.

“Many of these issues arise from unnecessarily complex and confusing behaviour by electricity retailers, and in some cases this appears to be designed to circumvent existing regulation.”

“There is much ill-informed commentary about the drivers of Australia’s electricity affordability problem. The ACCC believes you cannot address the problem unless you have a clear idea about what caused it.”

“Armed with the clear findings on the causes of the problem, the ACCC will now focus on making recommendations that will improve electricity affordability across the National Electricity Market,” Mr Sims said.

Increased generation capacity (particularly from non-vertically integrated generators), preventing further consolidation of existing generation assets, and improving the availability and affordability of gas for gas fired generation, could all help to take the pressure off retail electricity bills.

The ACCC will also seek to identify ways to mitigate the effect of past decisions around network investments on retail electricity prices, noting that many past decisions  are ‘locked-in’ and will burden electricity users for many years to come.

The ACCC will consider steps that can be taken to reduce complexity and improve consumers’ ability to engage with the retail electricity market and switch suppliers.

“We will provide recommendations for reform in our final report, which will be provided to the Treasurer in June 2018,” Mr Sims said.

In part based on our findings, the Federal Government has already taken some steps towards improving electricity affordability, including obtaining commitments from some retailers to move consumers off high standing offers or expired benefit offers, and the proposed removal of limited merits review of AER decisions.

In addition, the ACCC’s preliminary report contains some recommendations that could be immediately implemented by governments:

  • Provide additional resourcing to the AER’s Energy Made Easy price comparison website as a tool to assist consumers in comparing energy offers
  • State and territory governments should review concessions policy to ensure that consumers are aware of their entitlements and that concessions are well targeted and structured to benefit those most in need.
  • Improvements to the AER’s ability to effectively investigate possible breaches of existing regulation, for example the power to require individuals to appear before it and give evidence. Consideration should also be given to the adequacy of existing infringement notices and civil pecuniary penalties to deter market participants from breaching existing regulations.



The ACCC’s preliminary findings are that, on average across the NEM, a 2015-16 residential bill was $1,524 (excluding GST). This average residential bill was made up of:

  • network costs (48 per cent)
  • wholesale costs (22 per cent)
  • environmental costs (7 per cent)
  • retail and other costs (16 per cent)
  • retail margins (8 per cent).

In real terms, average residential bills increased by around 30 per cent (on a dollars per customer basis) between 2007-08 and 2015-16. Average residential prices (as measured by cents per kWh measure) have increased by 47 per cent in real terms during the same period.

After considering wholesale price increases in 2016-17, the ACCC estimates that average bills in dollars per customer increased in real terms by 44 per cent since 2007-08, while prices in cents per kWh have increased in real terms by 63 per cent.

See report: Retail Electricity Pricing Inquiry preliminary report

For more information: Electricity supply prices inquiry

Card Surcharge Changes Started

ACCC says that from tomorrow, every business across Australia will be banned from charging customers excessive surcharges for using certain types of EFTPOS, Mastercard, Visa and American Express cards to make payments.

The excessive surcharging ban has applied to large businesses since September last year and now extends to all businesses that are either based in Australia or use an Australian bank. The ban does not affect businesses that choose not to apply a surcharge to payments.

The ban restricts the amount a business can charge customers for using an EFTPOS (debit and prepaid), MasterCard (credit, debit and prepaid), Visa (credit, debit and prepaid) and American Express cards issued by Australian banks.

Payment types that are not covered by the ban include BPAY, PayPal, Diners Club cards, American Express cards issued directly by American Express, cash and cheques.

“The good news for consumers is that businesses can now only surcharge what it actually costs them to process card payments, including bank fees and terminal costs. For example, if a business’s cost of acceptance for Visa Credit is 1.5 per cent, consumers can only be charged a surcharge of 1.5 per cent on payments made using a Visa credit card,” ACCC Deputy Chair Dr Michael Schaper said.

“Our message to business is that you are not allowed to add on any of your own internal costs when calculating what surcharge you will charge customers. The only costs businesses can include are external costs charged to you by your financial provider.”

If businesses want to set a single surcharge across multiple payment methods, the surcharge must be set at the level of the lowest cost method, not an average. For example, if a business’s cost of acceptance for Visa Debit is 1 per cent, for Visa Credit is 1.5 per cent, and for American Express is 2.5 per cent, the single surcharge would be 1 per cent as that is the lowest of all payment methods.

“Our advice for businesses wanting to set a single surcharge regardless of the type of card their customers use is it must be the lowest of all the payment methods. You can’t use an average of all payment methods or you will land yourself in trouble,” Dr Schaper said.

Businesses should have received merchant statements from their financial institutions in July setting out their cost of acceptance for each payment method.

The RBA indicated as a guide that the costs to merchants of accepting payment by debit cards is in the order of 0.5 per cent, by credit card 1-1.5 per cent and for American Express cards around 2-3 per cent. The ACCC has found that some merchants have incurred higher costs than these but any surcharge level imposed by merchants cannot be higher than the costs incurred by them for accepting that payment method.

“If businesses are unsure about their cost of acceptance, they should contact their financial institutions,” Dr Schaper said.

Beware high risk, no reward investment scams

A timely reminder from the ACCC.

The ACCC is warning the community to watch out for investment scammers who promise the world but leave their victims with broken dreams and empty bank accounts.

“In the first half of 2017, Australians have reported losing over $13 million to investment scams to the ACCC’s Scamwatch website, making it the most profitable of all the current scams. It is likely that losses are much higher as many victims do not report scams or contact other authorities,” ACCC Deputy Chair Delia Rickard said.

Men are almost twice as likely to be targeted by investment scams and lose significantly more money than women. People aged 45 to 64 most commonly fall victim.

“These scams typically start with a phone call out of the blue. The scammers are sophisticated, convincing and persistent, which is why we sadly see people lose large amounts of money to them. They are also delivered through unsolicited emails, online forums and social media,” Ms Rickard said.

“Scammers use high pressure tactics to sell you a financial opportunity that is ‘not to be missed’, involves high and quick returns for low risks, and needs to be acted on quickly or you will miss out.”

“Whatever your motive is for the investments you make, do your research and never invest money with someone who has contacted you out of the blue, no matter who they say they are, how much money they promise you or the urgency with which they’re trying to make you act. They seem too good to be true because they are,” Ms Rickard said.

Common investment scams:

  • Unsolicited phone calls & emails offering investment opportunities with high returns. They can involve multiple calls, with multiple people who speak in investment jargon and provide you with access to professional looking websites and documents. Your initial investment may seem to show promising results quickly but soon your money and the scammer disappear and you have lost everything.
  • Unsolicited calls from scammers offering to roll your superannuation funds into a self-managed fund that will help you reduce your tax and provide great investment opportunities. In reality they are just stealing your superannuation funds.
  • Binary options trading that involve predicting the movements of commodity, asset or index prices over a short time. If you agree they direct you to a website with a login, account details and a trading platform. They appear to put your money into the account and demonstrate a number of successful trades to encourage you to invest greater sums. Then your money begins to disappear and so too does the scammer.

Protect yourself:

  • Hang up or hit delete on all cold calls and emails offering unsolicited advice on investing.
  • Visit the Australian Securities and Investments Commission’s MoneySmart (link is external) website to check companies you shouldn’t deal with and ASIC’s professional registers to see if someone you are dealing with has an Australian Financial Services License.
  • Block the scammer on your social media accounts so they can’t contact your family and friends.
  • Conduct thorough research before making any investment.
  • Never commit to any investment at a seminar – always get independent financial advice.

Businesses lost an average of $10,000 to scams in 2016 – ACCC

Nearly 6000 businesses reported being targeted by scams in 2016 according to the Australian Competition and Consumer Commission’s Targeting Scams report, with losses totalling around $3.8 million, an increase of almost 31 per cent.

The highest losses were to computer hacking, fake investment schemes and buying and selling scams, according to reports made to Scamwatch over the past year.

“As recent events with the WannaCry ransomware scam demonstrates, businesses can be just as vulnerable to scams as anyone else in the community,” ACCC Deputy Chair Dr Michael Schaper said.

“Unfortunately ransomware scams like WannaCry targeting businesses are not uncommon – we’re seeing steep increases in scammers contacting businesses to swindle them out of their money with varying types of scams. Small businesses with fewer than 20 staff are in particular the most vulnerable to scammers and accounted for nearly 60 per cent of reported losses.”

“The vast majority (85 per cent) of scammers make contact with businesses via email or phone, so it’s important for any business to be aware that these scams are out there in the community and to scrutinise any requests they receive for payment or sensitive information,” Dr Schaper said.

Scamwatch reports the top three scams business should be aware of are:

  • Ransomware – these scams trick a victim into downloading a virus that infects computer systems and prevents user access until payment is made to unlock it. In 2016, reports indicate that there was an increase in ransomware emails to businesses, purportedly from legitimate companies such as Australia Post or a utility provider.
  • Business email compromise scams – these are a form of hacking scam that operate by the scammer obtaining access to a business’ email address. The scammer will then send an email (purportedly from senior management) to the business’ suppliers advising of new payment arrangements and requesting a wire transfer to the new account.
  • Investment scams – these scams are promoted as business opportunities (for example sports investment or stock broker scams, superannuation schemes or managed funds) and promise inflated returns but are, in reality, nothing more than a method used to drain a business of its funds.

“Attacks on businesses where scammers try to trick, deceive or manipulate businesses into sending money or divulging confidential information continue to increase in both frequency and sophistication,” Dr Schaper said.

“These scams often result in one-off losses that a business can recover from. However, hacking, malware and targeted phishing now present significant financial and reputational risks to business.”

Protect your business

There are practical steps all businesses can take to protect themselves from scams:

  • always scrutinise new requests for any payment and have a clearly defined process for verifying and paying accounts and invoices.
  • regularly back-up your computer’s data on a separate hard drive so this can be easily re-installed if your computer is infected by malware or ransomware.
  • ensure your computer has a firewall and up-to-date anti-virus and anti-spyware software

ACCC To Inquire Into Residential Mortgage Pricing

In the budget, the liabilities levy as we reported will create a 5% problem for the banks in terms of earnings, and as a result they will likely seek to recover these costs by repricing.

However the budget statement also said:

To facilitate the introduction of the levy, the Australian Competition and Consumer Commission (ACCC) will undertake a residential mortgage pricing inquiry until 30 June 2018.

As part of this inquiry, the ACCC will be able to require relevant ADIs to explain changes or proposed changes to residential mortgage pricing, including changes to fees, charges, or interest rates by those ADIs.

So something of a cat and mouse game, as lenders continue to adjust mortgage pricing thanks to changing capital weights, risks and funding.

Or you could look at it as a signal of market failure, insufficient competition requiring additional regulatory intervention. It is an acknowledgement of the market power of the big players!

The Free Market And Competition

Rod Sims, ACCC Chairman spoke at the Competition Law Conference 2017.

He argued that competition law and the work of the ACCC is essential to maintaining faith in Australia’s free market system. He also highlights that penalties actually imposed here in Australia are stunningly lower than those in other comparable jurisdictions.

It is an important time to be talking about competition. Competition law and policy are essential underpinnings of our free market economy. We are, however, in the midst of a crisis of faith in free markets which should, and I know does, worry us all. Today I want to make four points, as follows.

  • First, I will briefly outline the loss of faith in the free markets and why this should concern us all
  • Second, I will briefly discuss how some prominent economists have seen the role of competition policy and law in our market economy through time, and today
  • Third, I will explain why effective enforcement of the Competition and Consumer Act (CCA) is so important to people having faith in free markets, and
  • Fourth, I will suggest how we can improve the effectiveness of the CCA, particularly through higher penalties for competition law breaches.

Of specific interest was his comments on the low typical fines imposed on corporates, such that there may be little financial incentive to do the right thing.

The ACCC is very concerned that penalties imposed by Australian Courts in both competition and consumer cases historically have not been sufficiently high to deter contraventions, particularly in cases involving larger businesses.

On the consumer side, the ACCC strongly welcomes the current Australian Consumer Law Review. This review acknowledges that the maximum penalties for breaches of consumer law are inadequate. They are too low to provide a powerful deterrent effect, and this is particularly the case for breaches by large corporate players that are unlikely to be deterred by a maximum penalty of $1.1 million per contravention.

The ACL Review recommends that the ACL penalties be comparable to competition law penalties that also operate across the economy. There appears to be no policy reason for the maximum penalties under the ACL being lower than those available for breaches of competition laws.

As one example, we were pleased late last year when Nurofen maker, Reckitt Benckiser, had its penalty increased by the appeal court from $1.75 million to $6 million, after it was found that the original penalty could not be viewed as substantial or as achieving deterrence.

The Court held that the penalty imposed by the first instance judge of $1.75 million was “manifestly inadequate”, and that a penalty at that level “would reinforce a view that the price to be paid for the contraventions was an acceptable business strategy, and was no more than a cost of doing business.”

Perhaps had competition law penalties been available to the court we could have seen a penalty many times higher than the amount awarded to act as specific deterrents to large, multinational companies such as Reckitt Benckiser.

I suggest, although we have no way of knowing, that the vast majority of Australians would consider a $60 million penalty more appropriate as a specific deterrent for Reckitt Benckiser, which is a large multinational company.

Turning now to competition law, we have a very different story. The penalties available in Australia are broadly in line with international trends. However, penalties actually imposed here in Australia are stunningly lower than those in other comparable jurisdictions.

The key reason for this is that Australian competition law penalties were only brought into line with those overseas in 2009. From that date Australian courts now have been able to impose penalties of up to 10% of turnover where, as is usual, the benefits obtained from the illegal activity cannot be calculated.

For a company that, say, has an Australian turnover of $1 billion, the maximum penalty per contravention can now be $100 million, rather than $10 million as it was before this change was introduced in 2009.

While we are only now encountering cases where the relevant behavior occurred post 2009, the Parliament has clearly spoken. It now wants higher competition penalties as, I suspect, does the average Australian.

As with the Nurofen case in consumer law, the courts also seem to be focusing on the level of deterrence required. In his judgment on our proceedings against ANZ Bank and Macquarie Bank last December, Justice Wigney expressed reservations about the amount of the penalty that was by agreement jointly submitted to the court.

He said that the penalties were “at the very bottom of the range of agreed penalties” and that he would have ordered a much higher penalty had there been no agreed penalty. He also said:

“A very sizable penalty is plainly required to deter a financial institution of the size of ANZ from engaging in such conduct again. Equally, a very sizeable penalty is required to deter institutions in positions similar to ANZ who might be tempted to engage in similar contravening conduct”.

Clearly the size of the company does matter when having regard to the level of penalty required to achieve specific and general deterrence.

The ACCC has been for some time giving this issue careful thought. In particular we have had regard to the way in which other countries quantify their penalties in order to achieve deterrence.

In December 2016, for example, Australia participated in a Global Forum on competition hosted by the OECD. A key issue discussed was sanctions in competition cases. The research revealed that most other OECD jurisdictions, including the US, UK and the EU have very transparent methodologies for determining penalties.

In the United States, Europe and the UK the methodology used to determine penalties includes the calculation of a ‘base fine’. This is usually done by reference to a set percentage (between 10% and 30%) of the relevant turnover of the business being penalised. The turnover figure is often the turnover of the firm in the jurisdiction concerned but sometimes it is the relevant global turnover of the firm.

Commonly once the base fine is calculated, it is increased having regard to duration of the conduct and numbers of contraventions, and other aggravating factors. Mitigating factors are then applied which reduce the fine before a final figure is determined.

An important difference between our approach and that of other overseas jurisdictions is that our Courts do not start the exercise of determining penalties by calculating a base figure calculated by reference to turnover of the firm.

If the base penalty approach was applied in Australia, firms with smaller turnover might end up with similar fines to those currently imposed, but importantly firms with substantially larger turnovers would generally end up with much higher penalties.

As an example, Professor Caron Beaton-Wells of the University of Melbourne has used the USA methodology to calculate that in the Visy case, instead of the penalty of $33m imposed then by the Court, the starting figure would have been $212 million, with potential to increase above that level. Under the EC’s 2006 Guidelines, Visy’s base figure would have been even higher.

In the ACCC’s view, penalties imposed under the CCA need to be many times higher than they are now to have a sufficient deterrent effect on larger firms. The current ACL Review has recommended such higher penalties for consumer law breaches; and we, the ACCC, must work with the courts to give effect to Parliament’s clear intention of a step change in penalties for competition law breaches by larger companies.

Apple Pay may have won the battle but it may not win the war

From The Conversation.

The Australian Competition and Consumer Commission’s (ACCC) decision to deny some of Australia’s major banks the ability to collectively bargain with Apple and boycott Apple Pay, might have opened a whole new door for digital wallets in Australia.

The banks wanted to bargain with Apple for access to the Near-Field Communication controller in iPhones, enabling them to offer their own integrated digital wallets to iPhone customers. This would have been in competition with Apple’s digital wallet, but without using Apple Pay.

A digital wallet is essentially an app on a mobile phone that can provide some of the same functions as a physical purse or wallet. This includes making payments in-store and storing information such as loyalty program points.

In the example of Apple Pay, it used a digital wallet to allow customers to use their phones like “tap-and-go” bank cards. Mobile payments can also be made via wearable devices, such as the Apple Watch and various fitness devices.

Part of the ACCC’s rationale in deciding on the banks/Apple case was that, “digital wallets and mobile payments are in their infancy and subject to rapid change”. So the ACCC is uncertain as to how competition will develop in this space.

The Australian market for digital wallets

Recent research from the Reserve Bank of Australia (RBA) confirmed the use of mobile payments accounted for only around 1% of the number of point-of-sale transactions over the week of the survey, which was conducted in November 2016. By contrast, the same research revealed that the share of the number of payments made using credit and debit cards had increased to 52%, driven by the use of these payments cards for lower value transactions.

This has been facilitated by the rapid adoption of contactless payments by both consumers and merchants and according to the RBA’s research, in 2016 around one-third of all point-of-sale transactions were conducted using contactless cards.

According to the Australian Payments Clearing Association by 2016, 77% of Australians owned a smartphone and yet mobile payments at the point-of-sale remain relatively rare.

The very success of contactless payment cards in Australia means that consumers do not see what extra advantage there is in mobile payments. Tap-and-go is increasingly available for even relatively low value transactions at the point-of-sale. Financial institutions have been speedy to issue such cards to their customers and this is matched by merchant’s adoption of the terminals to facilitate these payments.

For mobile payments to become significantly more attractive than contactless card payments, it would require the wallets to have additional functionality to appeal to consumers. Examples of this include: the ability to use mobile payment devices on mass transit journeys, to hold loyalty program points, to verify identity and enabling person-to-person transactions.

This breakthrough in functionality for digital wallets could come from another direction, other than the current mobile payments options of Apple Pay, Android Pay and Samsung Pay. Indeed, China provides an alternative example of how digital wallets can be developed, that will in retrospect make the ACCC’s decision on Apple Pay, rather passe.

Tap-and-go payments are popular in Australia so digital wallets will have to offer more than contactless payments. David Crosling

Digital wallet companies expanding from China

According to Chinese government statistics, about 750 million Chinese had moved online by 2016, with 95% of them accessing the internet via their smartphones. China’s digital payments market was by then nearly 50 times greater than that in the United States.

This is partly explained by the lack of other viable alternatives in China for non-cash payments. Credit card penetration is low compared to other developed markets, debit cards are not contactless and hence require authentication at the point-of-sale.

China appears to have jumped directly from cash to mobile payments and hence missed the step into payment cards, particularly credit cards, to which the Chinese consumers appear to have a cultural aversion.

The use of digital wallets in China is being driven by the success of the so-called financial technology firms in China, particularly Alibaba and Tencent. These companies have a vast and protected domestic market at their disposal and an almost complete absence of data regulations.

These companies have been able to move on from offering just instant messaging platforms, to being payment providers via Alipay and WeChatPay, respectively. These apps on a smartphone allows consumers to scan a QR code from a merchants point-of-sale terminal or smartphone, to complete a transaction.

Person-to-person transfers can also be done through these apps. Chinese company Tencent’s WeChat was originally a social media platform, but it has now expanded to include payments services, music streaming, taxi booking, photo sharing and a news service, to name only a few functions.

Its over 800 million worldwide active users now have fewer and fewer reasons to leave its integrated full platform of services. WeChatPay is also increasingly accepted by bricks and mortar merchants in China.

And now WeChat is planning to expand its services into the UK and Europe and is also looking to enter markets in the United States and Southeast Asia. Part of the company’s planned expansion is driven by the ever-increasing flow of Chinese overseas tourists.

This flow was 120 million in 2015 and forecast to be 220 million by 2025. Australia is already a popular destination for Chinese tourists, many of whom will be users of WeChatPay.

Who is to say that Facebook and/or Amazon will not follow Tencent’s path into digital wallets? While Apple Pay may have won the battle against some of Australia’s banks, it may lose the war against the providers of digital wallets, such as Tencent and Alibaba.

Author: Steve Worthington, Adjunct Professor, Swinburne University of Technology