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Thoughts on the Royal Commission’s final recommendations
With just some hints in its interim report – some stronger than others – as to what its recommendations may be, the Royal Commission into banking, insurance and superannuation will next focus on bank oversight at its November hearings. This will prompt the whole industry to discuss the likely options and the challenges and opportunities they may present.
There were about 200 policy-based questions posed in the interim report’s section on “issues that have been raised” during the hearings so far.
In her comment piece in the Sydney Morning Herald over last weekend, economics writer Jessica Irvine distilled the major likely themes as: vertical integration, mortgage broker commissions, grandfathered commissions and executive remuneration.
For the public at large, executive remuneration will get a lot of attention but for the superannuation, funds management and financial planning sectors of the industry vertical integration and the implications of any recommendations will draw most attention. Insurance brokers and mortgage brokers pose other questions.
Commissioner Kenneth Hayne says that “structural regulation of banking activities is not novel” and that other countries have ring-fenced banks from ownership of other businesses. Here is our view on possible implications for the various participants.
Fund managers
The trend for banks to buy or start funds management businesses goes way back, before the start of the modern era of superannuation in the mid-1980s. And the trend for them to divest or shut them down also goes a fair way back, at least to the 1990s.
The former Bankers Trust’s then managing director Rob Ferguson posed the question at an industry conference in the late 1980s whether ownership of both manufacturing and distribution was a good thing for either the institution or its customers. He thought it wasn’t, although BT went down that path.
Under Westpac’s ownership the bank gradually divested itself of manufacturing with its IPO of what is now Pendal Group Ltd. It also announced last week that it would exit its boutique incubator business Ascalon. The bank has kept the distribution arm, split between wealth management and platforms.
Commonwealth this announced plans to IPO subsidiary Colonial First State’s asset management arm, Global Asset Management, and subsequently said this could include wealth management, and presumably platforms.
NAB got out of manufacturing in the 1990s, but with purchase of MLC re-entered it and then expanded with its own boutique incubator. MLC in turn divested its inhouse fund management to concentrate solely on multi-manager management.
ANZ outsourced its manufacturing, initially to Russell Investments, in the 1990s but developed a strong name in distribution.
So, the point is the banks and industry as a whole probably won’t mind if this sector is forced to be separate from distribution. Linking the two through ownership hasn’t really worked.
Wealth Management
Developed along similar lines as old-fashioned private banking, but for a bigger range of customers, wealth management usually blends inhouse and outsourced product supply. Of course it doesn’t have to.
UBS a couple of years outsourced its whole wealth management business, including 70-80 advisors, in a management buyout now known as Crestone. It has maintained its highest net worth customers though through private banking.
One suspects the banks and other large institutions would prefer to hold onto wealth management, with better regulation over the sale of inhouse product through adequate disclosure or perhaps the separation of advice from product supply. If it is made too difficult to sell their own plain vanilla products, such as cash products, then they may not be bothered with wealth management.
It is clear in Commissioner Hayne’s view, their main aim with wealth management is to sell these alternative investment products to traditional banking customers. While increased scale should in theory enable lower costs, which could be passed on to the consumer, in practice the consumer has not been better off from the process, he noted.
Advice
This is where the rubber hits the road. It’s usually advisors, in one guise or the other, that cause most of the trouble. It’s the advisors who represent the core of ‘distribution’. In the event of forced separation, it’s what happens to the advisors which will have most impact on the funds management industry.
According to key commentators in the IFA space, there has already been an increasing trend for advisors to either get their own licenses or leave the large institutional networks for smaller non-institutional ones. There is also a trend away from managed funds and the use of big platforms because of the growing use of managed accounts for advised investors.
Fund managers would probably greet the opening up of the advice market market by creating more IFAs with the ability to make their own investment recommendations beyond a restrictive approved product list. They will just have to put on some more business development managers.
Super funds
The industry funds have come out of the hearings so far without any damage to speak of. It looks like, in a competitive landscape, they will improve their market share no matter what happens.
The only criticisms have been questions asked over whether mergers have not gone ahead because of the personal interests of some trustees and whether marketing costs to assist scale through natural growth have been wisely spent.
The criticism of marketing expenditure does not make sense if the funds are being actively encouraged by all and sundry, including the regulator, to increase their scale through mergers. And even if you don’t think mergers are always a good thing, as many people do, it’s not really up to a royal commission to decide what works and what doesn’t in attracting new members.
– G.B.
