Banking royal commission: JPMorgan fears big job losses
The Australian 8:50pm May 14, 2018
Michael Roddan
There are renewed fears of economic fallout stemming from the royal commission into the banking sector, as regulators and the government look to overhaul the way fees are paid across the financial services sector.
A crackdown on financial advice — including killing off problematic trailing commissions that were grandfathered in 2013 — could end a significant money spinner for the largest banks and wealth managers as the fallout from the royal commission continues to build.
JPMorgan analyst Sally Auld said the financial sector could face a stunning crash in employment worse than the last financial crisis.
“The finance and real estate sectors now represent 12 per cent of GDP,” Ms Auld told investors. “Together, these sectors have been growing above their long-term trend, so some consolidation seems likely.
“Employment in these industries could contract by 8 per cent from peak to trough, about the same percentage decline seen at the height of the financial crisis.”
That adds to the already existing threat to more than 50,000 financial services jobs across Australia that are in the firing line as automation and technology accelerates through service companies over coming years.
Ms Auld said anywhere between 20,000 and 50,000 jobs could go if the industries shrank back to levels more consistent with the growth of the financial system.
Her remarks come on top of UBS warning of a “credit crunch” if banks are made to stick to more strict lending rules. Lending by the nation’s largest banks underpinned Australia’s housing price bubble and expansion in credit growth.
Last week the royal commission published a submission from the Australian Securities & Investments Commission, which called for financial advisers to be stripped of trailing commissions as soon as possible, and attacked the practice of charging ongoing fees for services it said were largely worthless.
Five years after charging new commissions was banned under Future of Financial Advice laws, trailing commissions were still a problem in the industry, the corporate watchdog said.
UBS analyst Kieren Chidgey said grandfathered commissions were still “a significant part” of a financial adviser’s salary. “ASIC’s views could indicate that more extensive reform is required,” Mr Chidgey said.
But, he said, if the commissions were banned it could wreak havoc on wealth managers’ business models. “This could materially impact advice economics, driving adviser departures, increasing legacy product churn and platform fee pressure,” Mr Chidgey said.
Meanwhile, global ratings agency Moody’s took a swipe at beleaguered wealth manager AMP, arguing its cash flows could continue to fall in the wake of its “governance failures”.
Moody’s senior credit officer Frank Mirenzi said the revelations in the royal commission about AMP vindicated the agency’s negative stance on the company’s credit rating.
AMP’s life insurance division has a Aa2 credit rating and Moody’s said the scandals drubbing the company’s reputation were creating additional pressures on its credit rating.
IBISWorld analyst Tommy Wu said revenue in the banking sector had already fallen more than $10 billion to $148bn over the past five years, due to regulatory imposts, and could fall further in the wake of Kenneth Hayne’s year-long inquiry into the banking and financial services sector.
Mr Wu said mortgage broker commissions could face the same future as life insurance commissions, which have been reduced and capped by government reforms.
Michael Rice, chief executive of actuarial firm Rice Warner, said the FoFA legislation was due for a revamp. Mr Rice said the royal commission had revealed that the transition to the customer-centric financial advice remuneration model “has not been a smooth one” and that “FoFA now needs a thorough review”.
“(The royal commission) has publicised an issue that has been percolating within the financial services industry for years, namely how to separate financial advice from recommendations of financial products,” he said.
AMP shares recently tumbled to a six-year low after last week’s overwhelming shareholder vote against its remuneration report and the likelihood of further brand damage from the fees-for-no-advice scandal. On Monday, AMP shares closed up 3.2 per cent at $3.85. However, the stock is about 30 per cent below its recent peak before the royal commission.
Macquarie analysts believe the wealth management division could suffer $35bn in outflows over the next five years, representing 27 per cent of its assets under management. The division’s margins could drop from 1 per cent to 81 basis points in 2023.