FIN203: Four Pillars Policy in Australian Banking Industry Analysis

This report offers a comprehensive assessment of the Australian government's Four Pillars Policy in the banking industry. It begins by outlining the policy's history, the reasons behind its implementation, and its role in maintaining competition. The report then delves into the arguments both for and against the policy, drawing upon relevant empirical literature. A key component of the analysis involves evaluating the findings of the Royal Commission into misconduct in the banking, superannuation, and financial services industries, highlighting instances of misconduct and their implications. Based on this analysis, the report concludes with a recommendation regarding the future of the Four Pillars Policy, considering its impact on the financial sector and the need for regulatory adjustments. The report integrates findings from the Royal Commission, exploring its impact on the big four banks and the broader financial landscape, and assesses the policy's effectiveness in light of these developments.

Running head: ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS
POLICY IN THE BANKING INDUSTRY
Assessment of the Australian’s government four pillar policy in the banking idustry
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Author Note

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
Executive summary:
The report has been prepared to illustrate the reasons associated with the introduction of the
“Four pillars policy” of the Australian government and how does it service the economy of
Australia. In addition to this, the opinion on the policy has been presented by demonstrating
the arguments for and against the policy. Furthermore, the paper also discusses the outcomes
made by the Royal commission into the misconduct of the superannuation, banking and the
financial services industry. Based on the analysis of the outcomes made by the commission,
the recommendation on the abandoning or adoption of the policy by the Australian
government has been dome.

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
Table of Contents
1. Introduction:........................................................................................................................3
2. Research: Literature review................................................................................................3
2.1 Discussing the history, reasons for implementing and instituting the policy:.....................3
2.2 Evaluating the agreements with the four pillar policy:........................................................5
2.3 Determining the outcome of the Royal Commission into the misconduct of banking:.......6
3. Recommendation:...............................................................................................................8
4. Conclusion:.........................................................................................................................8
5. Reference list:...................................................................................................................10

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
1. Introduction:
The paper discusses about the four pillar policy introduced by then government of
Australia for maintaining competition in the banking industry of Australia by preventing the
four major banks operating in the country from merger or taking over and which are well
known as the Big four banks. These four major banks include Westpac, National bank of
Australia, Common wealth bank of Australia and Australian and New Zealand banking
group. For the intervention of the government in the domestic financial industry of Australia,
the four pillar policy is considered as the mainstay (Bell and Hindmoor 2019). It has been
argued that the policy is detrimental and counterproductive to the financial system of the
company as a whole. The discussion also incorporates the arguments presented by both
detractors and supporters of the policy by summarizing the relevant empirical literature on
the implementation of the policy along with discussion the misconduct of Royal commission
in the banking and the financial services industry.
2. Research: Literature review
2.1 Discussing the history, reasons for implementing and instituting the policy:
The empirical literature review demonstrates the reasons for instituting and
implementing the four pillar policy of the Australian government by presenting the arguments
for and against it. Four pillar policy is the informal policy introduced by the government of
Australia intended to maintain competition between the financial industries of Australia. The
institution of four policy was done by labor treasurer Paul Keating in 1990 for maintaining
the Australian banking market competitiveness. The Big four banks contributes to 76.1% of
the banking transactions in Australia and they comprised of 53.2% of the financial industry in
accordance with 2010 data. They are also responsible for controlling majority of retail funds

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
and estimate of all lending (Brown et al. 2019). The big four policy causes the
exemplification of special regulations as necessitated by the preponderance of the Big four
banks. The financial consolidations of Australia is purview by the Australian prudential
regulation authority and the Australian competition and consumer commission. The case to
case basis of whether the particular acquisition or merge is contrary to the interest of public
concerning healthy competition in the financial industry is determined by these agencies
(Salim et al. 2016). However, such purview is not validated for the major four banks as the
policy has merit an automated blanket and the policy do not derive from the existing
legislation and the existence is solely is at the Australian treasury request.
Despite the dominance of the policy in the treasurer department, the four pillar policy
of the Australian government has been challenged by the policymakers since the first day of
its inception. A complete repeal of the blanket ban on the big four banks consolidation was
advocated in the Wallis report of 1997. In addition to this, the participation of the Australia in
the negotiation for the ratification of TiSA has also threatened by the four pillar policy
(Charlene 2019).
The policy insulating the banks from fierce composition is dealt with the arguments
by the political pressure on the banks. It is opined by the Australian competition and
consumer commission that whether the policy rule is serving its original intent is dependent
upon the original school of thoughts. However, the final view on the issues concerning the
policy has not been provided by the commission. If the big four banks are getting any
advantage of the policy, then it is required to identify that the big banks are stopped from
gobbling up of the small rivals threatening their survival should be inquired. Furthermore, it
is opined by the ACCC that the policy prevents big four from competition is counter argued
as the idea is entrenched that the taxpayers would rescue it. In addition to prudential measure
and implicit guarantee, the impact of the policy is that the strong position of large banks is

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
entrenched in relevant market and their status of too big to fail is reinforced. The question
that is considered for further consideration is that whether the large banks are constrained by
the ability of small banks and new entrants. The reexamination of the four pillar policy has
not been proposed to be done by ACCC (Treasury.gov.au 2019).
Despite of the potential challenges associated with the four pillar policy, there do not
exist any evidence that would cause discarding of the policy. In fact, the support for the
policy has been doubled down by the government officials in relation to this long standing
policy. The political establishment expressing support for the policy, this is also strengthened
by the supports received from some political figures. It is also believed by the supporters of
the policy that they have greatly contributed to strengthen the financial sector of the country.
Moreover, it was argued by the former governor of Reserve bank of Australia that the
stabilization of competition between the four major banks due to the policy causes the
country to emerge virtually during the global financial crisis. Corroborates of IMF has also
viewed that the policy lessens the systematic risk inherent within the financial concentration
of Big four banks and allows for competitive stability in the financial market. Prudential
concern is another issue supporting the maintenance of the policy (abc.net.au 2019).
Furthermore, since the introduction of the policy, the Big four banks has opposed
except Common wealth bank of Australia. It is viewed by the personnel of the banks that the
Australian financial industry should abandon the policy and in the today’s digital market, it is
considered redundant and outdated and results in poor management technique by allowing
risks and is not compatible with the modern and globalized financial system (Yeates 2017).
2.2 Evaluating the agreements with the four pillar policy:
From the analysis of the empirical literature on the four pillar policy, it has been
found that there is a mixed view with some criticizing the policy and some other supporting

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
the policy. Amongst the policy makers, the policy has enjoyed widespread support in terms of
contribution to the financial system stability. Nevertheless, the assumptions basing the
opinion of opponents and supporters of the policy cannot be regarded as necessarily correct.
It is inferred that instead of the pre-merger components, consolidation can be potentially
efficient. Lastly, no clear relationship has been observed between the greater systemic
financial instability and the increased banking concentration addressed by the four pillar
policy decreasing competition and addressing it (Lovell 2017).
2.3 Determining the outcome of the Royal Commission into the misconduct of banking:
This section evaluates the outcome of the Royal commission 2018 into the
misconduct of banking, superannuation and the financial services industry and such
commission represented the culmination of one of the most public enquiries in the history of
Australia. It was investigated by the commission that whether any of the financial services
entities of Australia have been engaged in misconduct. The two main drivers that was
identified by the commission behind the misconduct was greed and dishonesty and that the
short term profit pursuit has been prioritized by compromising the basic honesty standards.
The initial observations and the findings about the financial service sector have been
categorized into financial advice, consumer lending, remote communities and agricultural
lending, small and medium enterprise and regulators and regulation (O'Brien 2019).
The interim report produced by the commission have found that there is a flaw in the
fundamental premise of the future of financial advice. It is also highlighted by the
commission that the partial or wholly failed customers nevertheless failed to achieve
satisfactory outcome when the outcome of Australian Financial Complaints Authority and
Financial Ombudsman Service. In the areas of remote communities and agricultural lending,
it was found that in relation to informal overdrafts, basic accounts and dishonor fees that in

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
certain circumstances such dishonors fees and overdraft arrangement were not suitable and it
was unnecessarily difficult to access the lower cost concerning basic accounts (Moradi and
Babacan 2015). Furthermore, attention has also been called by the commission for identifying
the inappropriate practices relating to the sales of particular insurance product.
It was found by the commission that AMP lied to their regulators along with the
Common wealth bank who charged fees from the clients who have died. There was some
issue with the financial advice given by the financial institutions as they perceived the selling
of the financial products and financial advice to their customer highly profitable. It was
published by the corporate regulators that such institutions is suffering from conflict of
interests and are vertically integrated. Moreover, it was found after reviewing 75% of the files
of customers that the quality of financial advice given by the largest financial institutions did
not comply with the best interest of their customers (Hayne 2018). This causes to deduce the
fact that when selling financial products and providing personal advice to the retail clients,
there exist an inherent interest conflict arising from the banks. A review commissioned over
the review of the remuneration practice of the Australian banks, it was recommended that
over such practices, a sharp break needs to be done with the past and the trust deficit in the
banking sector would be addressed using such recommendation. The examination on the
mortgage broking sector and consumer lending regarding the scale of misconduct has been
jaw dropping. Another event that sued Commonwealth bank because of counter terrorism
financing laws and money laundering (Sainsbury 2016).
This happened because through the intellectual deposit system, the bank was not able
to report about the worth of suspicious transactions
(financialservices.royalcommission.gov.au 2019). In light of the above identified outcomes
of the commission, the appalling behavior of the superannuation funds, major banks and
insurers has forensically picked. The performance of the fur major banks of the country has

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
resulted in letting the Australians downs many times. The outcome into the misconduct
by the Royal Commission have changed the major four banks in two ways and this is
accounted by selling off of the local wealth management and divesting from ill-judged
foreign institutions and retreating from overseas ventures (O'Brien 2019). All such outcomes
have caused the market to contract and have made it difficult for the big four banks to
maintain stellar profits. The aim of the four pillar policy ensures that the four major banks
would operate separately irrespective of what other consolidation is occurring in the retail
banking system. It was recommended by the Murray enquiry into the financial services to
retain the policy. However, the egregious misconduct uncovered by royal commission was
found to be little by such enquiry. This questioned the conclusion of existence of inadequate
competition in the banking system and the recent report by the productivity commission
rejected such conclusion and stated bluntly that the “policy of four pillar is a redundant
convention” (Ey.com 2019).
3. Recommendation:
The analysis of the outcomes of the Royal Commission on the misconduct of the
financial service industry and the banking sector has made the existence of the four pillar
policy redundant. It is recommended by reviewing the outcome that the government should
either amend or abandon the four pillar policy. Moreover, it is binding on part of government
to address the technologically driven and inevitably smaller of the banking system for the
economy’s long term stability. Since the implementation of this policy, there had been bad
commercial decisions going in the sector and the recent occurrence of some scandals was
attributed to the ineffectiveness of the four pillars. Therefore, it is recommended to the
government to abandon the four pillar policy as it is acting as an impediment to the market.

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
4. Conclusion:
The report prepared to conduct literature review on the implementation of the “Four
pillars policy” have been presented with the arguments both for and against the policy. The
objective of the policy to prevent the major four banks from merging or takeover is restricting
the growth of the market and do not have long run contribution to the stability of the
economy. Outlining of the outcomes of the Royal commission into the banking sector of
Australia, financial industry and superannuation have ascertained that the major banking
institutions have been involved in misconduct and restraining the growth of overall economy
and the policy has been found to be a redundant and abandoning the policy would not end the
competition as there are many players capable of doing more than what is being done by the
big four banks.

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
5. Reference list:
ABC News., 2019. Four pillars banking policy should be 'put in the cupboard': Productivity
Commission. [online] Available at: https://www.abc.net.au/news/2018-02-07/productivity-
commission-warns-four-pillars-banking-policy-ad-hoc/9402742 [Accessed 22 Sep. 2019].
Bell, S. and Hindmoor, A., 2019. Avoiding the Global Financial Crisis in Australia: A policy
success?. Successful Public Policy, p.279.
Brown, C.A., Davis, K.T. and Mayes, D.G., 2016. Regulatory change in Australia and New
Zealand following the global financial crisis. In The First Great Financial Crisis of the 21st
Century: A Retrospective (pp. 219-248).
Charlene Lee, M., 2019. Financial Services Royal Commission Interim Report. [online]
KPMG. Available at: https://home.kpmg/au/en/home/insights/2018/10/financial-services-
royal-commission-interim-report-overview.html [Accessed 22 Sep. 2019].
Ey.com., 2019. [online] Available at: https://www.ey.com/en_au/financial-services/how-the-
royal-commission-impacts-the-financial-services-industry [Accessed 22 Sep. 2019].
Financialservices.royalcommission.gov.au., 2019. Reports . [online] Available at:
https://financialservices.royalcommission.gov.au/Pages/reports.aspx [Accessed 22 Sep.
2019].
Hayne, D.M., 2018. Submission in response to the Interim Report of the Royal Commission
into Misconduct in the Banking, Superannuation and Financial Services Industry.
Lovell, H., 2017. Are policy failures mobile? An investigation of the Advanced Metering
Infrastructure Program in the State of Victoria, Australia. Environment and Planning A:
Economy and Space, 49(2), pp.314-331.

ASSESSEMENT OF AUSTRALIAN’S GOVERNMENT FOUR PILLARS POLICY IN
THE BANKING INDUSTRY
Lui, A., 2016. Financial stability and prudential regulation: a comparative approach to the
UK, US, Canada, Australia and Germany. Routledge.
Moradi-Motlagh, A. and Babacan, A., 2015. The impact of the global financial crisis on the
efficiency of Australian banks. Economic Modelling, 46, pp.397-406.
O'Brien, J., 2019. “Because They Could”: trust, integrity, and purpose in the regulation of
corporate governance in the aftermath of the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry. Law and Financial Markets
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Sainsbury, T., 2016. Do we need more economics in Australian economic
diplomacy?. Australian Journal of International Affairs, 70(6), pp.613-624.
Salim, R., Arjomandi, A. and Seufert, J.H., 2016. Does corporate governance affect
Australian banks' performance?. Journal of International Financial Markets, Institutions and
Money, 43, pp.113-125.
Samarkovski, L., Copp, R., Wiafe, O.K. and Freudenberg, B., 2017. The impact of tax on the
prospects of achieving target retirement wealth in Australian default superannuation
plans. Austl. Tax F., 32, p.225.
Swinbank, A. and Daugbjerg, C., 2017. The changed architecture of the EU’s agricultural
policy over four decades: trade policy implications for Australia. Australia, the European
Union and the New Trade Agenda, pp.77-95.