Mutual banks and credit unions are warning that widely anticipated re-regulation of the financial services sector could undermine their ability to compete against transgressive major banks.The Customer Owned Banking Association yesterday launched a national campaign aimed at minimising the regulatory fallout on mutuals of the imminent clampdown on banking industry.COBA CEO Mike Lawrence said new regulations should be targeted according to the size and risk profile of different banks to avoid unintended consequences."Regulatory costs have a real impact on challenger banks and therefore on competition and consumer choice," he said."Banking must be strongly regulated but excessive regulatory costs harm competition and consumers ultimately pay the price."We want to work with policy makers on a better approach and we will have more to say on that in coming days."Lawrence is worried that mutuals could be lumbered with new compliance requirements calibrated primarily to address operational failures and misconduct occurring at the major banks.A COBA-sponsored report prepared by Grant Thornton argues that the mutual sector could be "disproportionately" affected by such reforms even though none of the association's affiliates have been implicated in misconduct scandals highlighted by the Hayne royal commission.The report's author Darren Scammell argues that policy makers should avoid implementing a one-size-fits-all regulatory framework for banking institutions."The royal commission will have implications for how risk to the consumer is minimised in the banking sector - most likely through regulation and additional resources, such as a principal integrity officer," he said."However, the level of risk isn't the same across the sector, nor are the resources to carry the burden of additional regulation and requirements."Scammell highlighted the case of one credit union that had not foreclosed on a borrower in more than forty years, saying its risk of doing social harm was minimal compared to one of the major banks that had around 900,000 mortgages on its books."The risk is disproportionate, and the regulation to safeguard consumers should be proportionate to reflect this," he said.