Banking royal commission: Pressure to break up banks as Treasury, ASIC lash model
The Australian 12:00am May 11, 2018
Michael Roddan
The corporate watchdog and Treasury have laid out stinging criticisms of vertically integrated financial players in responses to the royal commission that raise the pressure to break up Australia’s largest banks.
Treasury told the royal commission into financial services that the second round of hearings had made it “clear” that poor culture and misaligned incentives were the “key cause” of misconduct, and said there were many benefits that could come from the major banks splitting up their financial advice and wealth management arms.
In a cache of submissions to commissioner Kenneth Hayne, and released last night, banks and regulators had been asked to justify the entangled cross-ownership of businesses and address issues such as conflicted remuneration for financial advisers, the shunting of customers into in-house products and the breakdown in compliance between parent companies and rogue financial subsidiaries.
“There should be no trade-off between long-term profitability and having a good culture and providing services of value to customers, where there is effective competition,” Treasury said.
It said the commission should investigate what the benefits were from breaking up the banks measured against a “status quo” model where the banks get to keep their wealth management arms with tougher rules to mitigate conflicts of interests.
Both ANZ and National Australia Bank are in the process of exiting their respective financial advice businesses and have already offloaded their life insurance operations.
Commonwealth Bank is exploring options to offload its Colonial funds management business and has also sold its life insurance business. However, Westpac chief executive Brian Hartzer this week said his bank was committed to keeping its BT Financial Group division.
“There are challenges in financial planning generally. We think those issues have been dealt with,” Mr Hartzer said. “We can do more on the compliance side.”
He said the bank was “constantly reviewing” its operations and was fixing issues where it found them.
In its submission, Treasury said rules requiring banks to do better at disclosing subsidiaries they owned to customers was likely to fall short of what was needed to clean up the industry. “While disclosure is an important regulatory tool, Treasury is not suggesting that the implementation of this reform is sufficient, in and of itself, to address conflicts of interests within integrated institutions,” it said.
Treasury also said that if banks were broken up, and the price of financial advice increased because the conglomerates could no longer cross-subsidise their businesses, consumers would be able to better gauge whether they actually needed advice.
“Conflicts of interest are also inherent in such business models and the true prices of products and services lack transparency,” Treasury said.
“By removing any cross-subsidisation of the advice business, through separation, the real cost of advice to a customer is likely to become more obvious and upfront.
“Consumers choosing not to seek advice, following a sensible assessment of the likely value of that advice, would not be a negative outcome.”
The Australian Securities & Investments Commission stopped short of calling for a break-up, but questioned whether benefits were being passed on to customers.
“While some customers may derive benefit from dealing with a vertically integrated financial institution, it may be important to assess whether these benefits are being realised in any given case,” ASIC said in its submission.
The watchdog questioned whether lower prices were actually passed on to customers, whether consumers were able to make informed choices, and whether companies acted in a way that “vindicated” the trust place in them.
However, ASIC noted vertically integrated businesses could create economies of scale, convenience and greater safety for consumers in the event things go wrong.
CBA said in its response “actual or perceived conflicts of interest can exist” in vertically integrated business, but that the business model “can create a beneficial connection between the customer and product”.
The bank said appropriate safeguards must be in place.
CBA said if large vertically integrated businesses were broken up, consumers would lose out on economies of scale, a large array of products and greater technological innovation.
National Australia Bank’s lawyers said financial advisers “can effectively manage the conflicts of interest associated with providing advice” and that it was not necessary to “enforce the separation of products and advice” as long as conflicts of interest were appropriately managed.
NAB said there was evidence that the bank already had the “tools” in place to manage conflicts, such as its research arm that recommends products at arm’s length from the bank.
Wealth manager AMP said vertically integrated firms offered cheaper products and greater convenience. It said customers “may also value the perceived safety of dealing with a large institution” that could both deliver the services and compensate them appropriately if required. “The key issue is not vertical integration per se, but that all conflicts of interests (conflicts exist in all models, whether vertically integrated or not) are appropriately managed.”
ANZ, which has sold its pensions and investments and life insurance businesses, said vertically integrated companies could still serve the interest of clients if conflicts were managed.
Westpac said vertically integrated groups were in the interests of clients “provided appropriate protections are maintained”.