The Banking, Superannuation, and Financial Services Royal Commission

November 2018 | General

A lot of clients would have recently heard about the Royal Commission into the banking sector. While many may think this doesn’t affect them, as they don’t have a loan, or they don’t have dealings with a bank, this isn’t correct.

The Banking Sector affects the whole economy in a number of ways, including but not limited to:

  • As a superannuation investor – many funds own bank shares either directly (by holding CBA, Westpac, ANZ, NAB) or indirectly with managed funds, or Exchange Traded Funds which hold banks in their portfolio
  • As an investor in general – the big four banks make up over 20% of the ASX 200 by value, which means that their share price fluctuations have an effect on the share market in general
  • As an investor in property markets – the big four banks have the majority of the market share. Interest rates are being dictated to all investors by the banks, under the guise of increase cost of funds
  • As an investor in property markets – it is difficult to obtain funds for any rental or residential property investment
  • As a home owner, looking to upgrade your house – it is more difficult to obtain funds and meet the new lending requirements
  • As a developer of property – it is more difficult to obtain funds now
  • In the general economy – a number of projects cannot proceed or move ahead, which fuels demand for the following industries:
    • Construction
    • Mining
    • Mining Services
    • Services industry in general – most businesses need capital to invest to grow their businesses and the economy.

Below is an extract from a recent article that was written by Denise Locantro, our Associate Director, Wealth Accumulation and Wealth Protection, for our clients in our Premium Investment Portfolio Service Quarterly Review and Report.

On 28th September, Commissioner Kenneth Hayne handed down the interim findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The final report is scheduled for February 2019.

Hayne’s Interim Report has exposed questionable (at best) lending practices and conflicts of interest that arise from a vertically integrated model of financial advice.

The last two years have been tough for the banks and financial services companies that form a large portion of the ASX.

Currently, the banks and financial services companies are being priced by the market under the assumption that draconian legislation will be enacted. Such legislation is likely either to reduce the profitability of their core business or to force them to divest business units, to make their financial advice more independent.

For the banks, the recommendations expected are unlikely to change the actual demand for mortgages, but what it is likely to do is change the processes around getting a loan and make applications harder. These additional processes are likely to slow down credit growth in the near future and increase the costs of originating a loan.

This slowed growth and increasing costs will not damage the long-term profitability of the banks. Raising the bar for compliance towards the end of a long housing boom is not necessarily a bad outcome for shareholders, as it will reduce the level of bad debts in a downturn.

One of the more significant considerations for investors will be what the Commission actually recommends for vertically integrated wealth management businesses.

What is vertical integration in the financial services industry?

A very simple explanation is that vertical integration occurs when personal advice is provided to a retail client who is then channelled into investing in financial products manufactured by the same entity. For example, an AMP adviser recommends clients invest in AMP investment products and AMP platforms. Sometimes the Approved Product List (the list of investments from which an adviser must choose from) is weighted towards in-house products and sometimes higher fees can be paid to advisers for recommending those in-house products.

However, these types of interlinked remuneration strategies and conflicts of interest have been exposed to have not been managed appropriately.

We expect the final report to target the separation of the product provider from the product seller (that is, the separation of the adviser/advisory service from the product manufacturer/provider).

In the area of financial advice, recommendations around limiting vertical integration are likely to impact AMP to a much greater extent than the banks, who have either been divesting, or have plans underway, to divest their funds management and insurance divisions.

What about the shares?

The vortex of negativity is hitting bank stocks. We’ve had ANZ taking an earnings hit from the Royal Commission and CBA has announced $270m is remediation to customers of their wealth business.

Without sounding flippant, putting these numbers into perspective is always key from an investment standpoint. CBA will likely have revenue of ~$26b in FY19, booking a net profit of ~$10b.

While the Royal Commission has clearly raised some major issues within the banks and the headlines have been shocking, from an investment perspective, the numbers are manageable.

Next stop, the Aged Care Royal Commission.

Should you have any further enquiries, please don’t hesitate to contact us on (08) 9227 6300 or

Sign up to receive our latest Newsletter