The Customer Owned Banking Association last night called on federal Treasurer Josh Frydenberg to snuff out controversial moves by his department to hike regulatory levies on credit unions and mutual banks next year. Bureaucrats from within Treasury's financial system division have unveiled a new levy regime which, if implemented, will increase the annual regulatory levies of credit unions by 29 per cent and deliver a 6 per cent saving on the same taxes paid by the four major banks. Treasury expects to collect $230 million in regulatory levies from the financial services sector next year - an increase of $22.6 million or 10.6 per cent. However, the department's decision to force credit unions and small ADIs to cough up the extra funding looks almost entirely at odds with its own arguments for having to haul in more industry funding. In a discussion paper published on its website this week, Treasury attempts to justify the reworked funding arrangements on the grounds that regulators such as APRA will incur more costs implementing the recommendations of the Hayne royal commission. While few would question that embedding Commissioner Hayne's reforms in Australia's regulatory architecture will require APRA to gather more resources and expertise, it seems completely wrong-headed for Treasury boffins to then conclude they should provide levy relief to the major banks. Most of Hayne's recommendations in relation to banking are squarely directed at correcting misconduct and cultural defects within the major banks, rather than customer-owned institutions. Not a single credit union or mutual bank was spotlighted by Hayne in his final report for misconduct or failing to meet community standards. Treasury's overhaul of the industry funding arrangements has the real appearance of actually rewarding the four major banks for failing Australian consumers. The release of the new funding model mystified and riled COBA chief executive Mike Lawrence who is now agitating for Frydenberg to bury the proposal. "I urge the Treasurer to intervene and rule out these grossly unfair increases in APRA levies on COBA member banking institutions," he said. "Regulator industry levies should be set with sensitivity to the cost burden on smaller banking institutions and with more weighting given to the systemic importance and market power of major banks." Lawrence believes the levy hikes earmarked for small and medium sized deposit takers mean they would effectively end up covering the bill for the transgressions of the major banks. "This makes no sense at all given it was the misconduct of the major banks that has prompted the need to increase resourcing for APRA," he said. "Customer owned banking institutions have not engaged in the misconduct examined by the Royal Commission but now face being forced to 'pay the price'. "These proposals send a very confusing signal about the Government's intention to hold the major banks accountable for their conduct." Under Treasury's proposal around 50 customer-owned ADIs face steep rises in the levies they will