Steven Joyce column: Competition v compliance - New Zealand’s safety-first approach is hurting us

Increasing regulations for industries like supermarkets can make it harder for new players to enter. Photo / Sylvie Whinray

OPINION

There is a fascinating passive-aggressive duel playing out right now between two of our most independent-minded economic regulators, the Commerce Commission and the Reserve Bank. While as a sports match it may not draw the crowd of a top-of-the-table clash between say, the Blues and the Hurricanes, it’s a great illustration of the internal conflicts wrapped up in our Kiwi psyche. These conflicts are important, as they arguably limit our growth and prosperity.

The commission has been doing a market study into the banking industry, to work out whether there is enough competition to drive down interest margins and encourage innovation, which benefits us as consumers. The short answer, according to the commission, is there isn’t, and it’s hard to argue with that conclusion. Our four big banks are fat and happy. They make good margins and great profits, and there is no likelihood of new arrivals upsetting the cosy oligopoly that exists. So far quelle surprise.

It’s the reasoning for why this situation exists that draws the ire of the Reserve Bank. The Commerce Commission lays the blame quite squarely at the foot of the mountain of regulation in the banking sector. Regulation which it believes creates a competitive moat around the big four.

And it likely does. One of the stark revelations from the ComCom’s analysis is that a large bank can hold 15 per cent less capital of its own behind each loan it makes than a small bank must. That puts small banks at an immediate disadvantage to the large ones, as the capital their shareholders provide is effectively regulated to make a lower return. Who would invest in a small bank?

But it’s not just that requirement. There is a mountain of other regulation across the banking sector, designed variously to protect the stability of the system, protect consumers from banks, and protect the country from money launderers.

The latter, which was introduced during our time in government, has had the unintended consequence of making it very difficult to switch banks because of the hoops you now have to jump through at the new bank to meet the anti-money laundering requirements. They are so laborious most people can’t be bothered. Some of us worried about the impact of those rules at the time, but they’ve become a much bigger monster than even I expected.

The net effect of all this is that banks are now just giant utilities, like the power company, or Chorus, regulated to within an inch of their lives. Boards of directors spend days each month on compliance, which leaves bugger all time for anything else.

The Reserve Bank (RBNZ) counters that its regulations are necessary to protect the stability of the banking system and prevent bank collapses, the absence of which we would likely agree is a good thing. The Commerce Commission argues that it’s all been taken too far and the benefits of competition have been underweighted in the RBNZ’s decision-making, and the decisions of the other regulators. That too wouldn’t be a surprise, because as Kiwis we are highly susceptible to the “bigger is better and safer” argument, where any risk is too much risk.

We often support monopoly provision in goods and services, on the grounds of fairness, efficiency and consumer safety. We do it in education and health for example, despite evidence of poor outcomes, limited innovation and long queues for some services. We merged the polytechs with little opposition and predictable outcomes, and now and then some bright spark proposes the same for universities.

We allowed Fonterra to be created, with its near-monopoly over milk collection, and have since been on a long journey of dissatisfaction with its performance, up until quite recent times. We have permitted Fletchers to dominate the building supply industry.

Some seriously entertained the Labour Party’s NZ Power policy 10 years ago, with its desire to return electricity provision to the old state-run monopoly, and there are even those who think the provision of food is too important to be left to the private sector, and if it is, it should be highly regulated.

And yet, we rightly hate it when we are overcharged for something, or when we are faced with a lack of customer focus or innovation. The problem is our instinctive solution takes us in the opposite direction of where we want to head. We seek to regulate the offending industry even more (grocery ombudsman anyone?), the effect of which is to increase the regulatory moat and make it even harder for new entrants to come into a market.

Technology provides a huge opportunity to competitively disrupt established industries, but we often react so slowly the opportunity is lost. The Reserve Bank’s progress in allowing new entrants in the fintech industry which would help shake up banking is both glacial and highly top-down. Ride-hailing apps like Uber and Ola have facilitated better service and more competitive prices in the taxi industry, but now plenty of people want to remove the independent contractor status of drivers, which is one of the reasons for that industry’s growth.

The Commerce Commission itself does not have an unblemished record in promoting competition. There are too many examples in recent times where the commission has allowed mergers which have reduced competition in the New Zealand market at the expense of consumers.

Think the merger of ANZ with National Bank. Or the tie-up of Z and Caltex in the business of selling vehicle fuel. The supermarket duopoly we enjoy today would never have been created if back in the day the ComCom hadn’t waved through a merger between Progressive Enterprises (Foodtown) and Countdown/Woolworths. All three industries have been subjected to market studies in recent times for fear of insufficient competition, a sure case of shutting the door after the horse has bolted.

Competition is nearly always the best way to regulate markets and ensure that consumers win. It is a powerful force for improved asset allocation and driving prices down, it drives productivity improvements and is a massive spur for innovation. It is a hugely positive economic force.

Too often we downplay it here because “New Zealand is small”, or “you need scale”, or people might not want to run businesses here, or because it’s inefficient, or allegedly unfriendly to the people that work in the industry. Or it’s just not that important.

Yet without it we become a slow-moving cost-plus economy where only those already winning win. Does that sound familiar at all?

In this case, I hope the Commerce Commission prevails. And I hope it gets more active in promoting actual competition. If we want to get out of our current economic ills then a focus on encouraging new entrants and increasing competition will surely help.

Steven Joyce is a former National Party Minister of Finance and Minister of Transport. He is director at Joyce Advisory, and the author of the recently published book on his time in office, On the Record.