With more banks deserting New Zealand, the consumer suffers

Thursday 12th December 2024

A wave of lenders leaving New Zealand has at least one industry expert warning that any planned reforms will be “too little, too late” to fix regulatory settings that miss the mark.

With the market concentrating into fewer banks and secondary financial services providers, General Capital’s managing director Brent King says competition is being stifled, with consumers potentially paying more than they should for financial services from a diminishing pool of providers.

“When competition is reduced, it’s customers who suffer while incumbents prosper. At the same time, innovation is reduced, meaning the customer doesn’t benefit from the latest advances in efficiency or new product development,” King says.

In early 2023, HSBC signalled the closure of its local retail banking operations. More recently, non-bank mortgage lenders Bluestone Home Loans and Resimac have indicated they are exiting New Zealand. In February, India’s Bank of Baroda was looking to sell its local operations, and Korea’s KB Kookmin in November said it too is shuttering its Kiwi subsidiary.

While the complete picture of why so many lenders are leaving is complex, King believes regulatory settings are a significant component of the problem. “There’s an obvious bottom line here, which is whatever is being done now isn’t working for the market. Lenders are leaving, and that puts the New Zealand public at a disadvantage.”

Tyranny comes in many forms, but financial services in the modern age easily overcome New Zealand’s historical one of distance, says King. In fact, he believes the country has things going for it which could – given the right regulatory environment and tax incentives – underpin a thriving financial services sector. “We should play to our advantages. We’re the first to get the day started, we’re broadly aligned with multiple Asian time zones and a good overlap with the American markets, and we have a stable political climate. We should be attracting financial service providers with these factors.”

But with quite the opposite happening, King points to the possibility of a tyranny of a different sort.

French philosopher Alexis de Tocqueville aptly described the risks of excessive regulation in 1840, writing that “the sovereign power… covers the surface of society with a network of small, complicated, minute, and uniform rules, which the most original minds… cannot break through; it does not break wills, but it softens… and directs them; it rarely forces action, but it constantly opposes your acting; it hinders, it represses, it enervates, it extinguishes, it stupefies”.

Any regulation favours incumbents at the expense of new market entrants, King says. “Big banks routinely deliver profits running into several billion dollars. They have entire departments of people handling regulatory compliance, and if new regulations emerge, they quickly allocate a team to handle it.”

Sheer scale means the relative cost of compliance, in other words, is significantly lower – while the pockets of the incumbent are significantly deeper. “In our case, we’re obliged to grow every year only to see that growth consumed in compliance costs.”

It isn’t only excessive regulation that worries King, but its uneven application to market participants by multiple agencies. The Commerce Commission is tasked with facilitating competition, yet he says its actions often have the opposite effect. Then there’s the Reserve Bank, which King says has an understandable but unhelpful (for competition) approach of making the provision of financial services safer for customers, at the expense of ease for operators. Far from advocating for the baby to be thrown out with the bathwater, he says that while regulations are necessary, balance is required – but absent. “Excessively protecting consumers, at some point, starts harming them through higher costs and reduced competition.”

Then, says King, some second-tier lenders are effectively tied to the banks, borrowing from them and marketing financial services on the strength of those loans, without attracting the same compliance costs. This further skews the market in favour of the incumbents.

King says having been faced with the overwhelming evidence of so many providers leaving New Zealand, the coalition Government has signalled its intention to take action. In January 2024, the Minister of Commerce and Consumer Affairs announced plans to reform aspects of New Zealand’s financial services regulation, aiming to streamline the landscape and remove unnecessary compliance costs.

However, while positive, this development has come too late for those which have left, or are planning to leave the market.

“Right now, the question is: what if we lose another one or two of the smaller banks? We need diversity of supply and with that, connections into the global finance world. We need, for example, strong financial ties with trading partners like India and Korea. And more than anything else, we need a strong, vibrant and competitive sector so customers enjoy choice, access to innovation, and – in these tough economic times – the possibility of lower prices for borrowings.”

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