Commerce Commission’s New Market Study Powers Face First Major Test in Banking Sector

The Commerce Commission is deploying its strengthened market study powers for the first time with a comprehensive investigation into New Zealand’s banking sector, following legislative changes that significantly expanded the regulator’s enforcement capabilities. The study represents a critical test of whether the new regulatory framework can effectively address market concentration issues that have persisted for decades.

At a glance

• Commerce Commission launches first major market study under enhanced powers granted by Commerce Amendment Act 2021
• Investigation targets banking sector concentration with ANZ, ASB, BNZ and Westpac controlling 87% of residential lending
• New powers include ability to compel information disclosure and impose interim remedies during investigations
• Study carries potential penalties of up to $10 million for non-compliance with information requests
• Results expected by March 2027 with binding recommendations possible for structural reforms

Enhanced Regulatory Framework

The Commerce Commission’s market study powers were substantially strengthened under the Commerce Amendment Act 2021, which came into full effect in August 2022. The legislation introduced several key mechanisms:

• Compulsory information gathering: Section 98A now permits the Commission to require any person to supply information, documents, or evidence relevant to market studies
• Penalty regime: Non-compliance with information requests carries maximum penalties of $500,000 for individuals and $10 million for companies under Section 103A
• Interim measures: Section 98B allows the Commission to recommend interim remedies to prevent further harm during investigations
• Binding recommendations: Under Section 51, the Commission can issue binding recommendations to government for regulatory intervention

Banking Sector Investigation Scope

The current banking market study encompasses several critical areas of competition concern:

• Residential lending concentration: Examination of how the major four banks maintain their 87% market share despite challenger bank entry
• Switching barriers: Analysis of account portability, loyalty programs, and information asymmetries that limit customer mobility
• Pricing transparency: Investigation into standard variable rate differentials and discount rate structures across institutions
• Technology and innovation: Assessment of whether incumbent advantages in digital banking infrastructure create competitive barriers

According to Commerce Commission documentation, the study will examine whether current market conditions promote long-term benefit for consumers through competitive pricing and service innovation.

Legal Framework and Thresholds

The market study operates under Part 3A of the Commerce Act 1986, with specific procedural requirements:

• Duration limits: Studies must be completed within 24 months under Section 98H, with possible 6-month extensions
• Public consultation: Minimum 60-day consultation periods required for preliminary findings under Section 98F
• Evidence standards: Information requests must meet materiality thresholds defined in Commerce Act Regulations 2022
• Appeal rights: Affected parties can challenge information requests through High Court judicial review within 20 working days

Previous Regulatory Attempts

This investigation follows several unsuccessful attempts to address banking sector competition:

• 2006 Finance and Expenditure Committee inquiry: Recommended open banking standards but implementation stalled due to industry resistance
• 2019 Commerce Commission preliminary study: Identified competition concerns but lacked enforcement powers to compel comprehensive data
• Reserve Bank prudential reviews: Focused on financial stability rather than competition dynamics, limiting scope for structural remedies

Industry Response and Compliance

The banking sector’s initial response has highlighted tensions between regulatory compliance and commercial confidentiality:

• ANZ and Westpac: Challenged the scope of customer data requests through preliminary legal proceedings, citing privacy law conflicts
• ASB and BNZ: Requested confidentiality orders for pricing algorithms and risk assessment models under Section 98G
• Challenger banks: Kiwibank, TSB, and Heartland Bank have broadly supported the investigation while raising concerns about compliance costs

The Commission has indicated it will use its full enforcement powers, including seeking High Court orders for non-compliance, if banks fail to provide requested information by specified deadlines.

Potential Regulatory Outcomes

Based on the Commission’s preliminary scope document, several regulatory interventions are under consideration:

• Structural remedies: Potential divestiture requirements or restrictions on acquisition activity
• Conduct regulations: Mandatory account switching protocols and standardised pricing disclosure requirements
• Technology mandates: Open banking implementation with API standardisation requirements
• Capital allocation rules: Restrictions on cross-subsidisation between retail and commercial banking divisions

Impact

The banking market study represents a watershed moment for New Zealand’s competition regulation framework. Success in securing meaningful structural reforms could establish precedent for similar investigations in telecommunications, supermarket retail, and building supplies sectors where market concentration concerns persist. However, the Commission faces significant challenges in balancing regulatory intervention with maintaining financial sector stability and international competitiveness.

For businesses operating in concentrated markets, the study demonstrates the Commerce Commission’s enhanced willingness and capability to pursue structural remedies rather than relying solely on conduct-based solutions. Companies should prepare for more intensive regulatory scrutiny and ensure compliance frameworks can handle comprehensive information requests within tight statutory timeframes.

The study’s outcome will likely influence government policy on competition law reform and determine whether New Zealand adopts more aggressive market intervention approaches similar to those emerging in Australia and the European Union.