Banks bail out of wealth management

Back in November 2014, in one of a long line of Abbott government disasters, an unorthodox Senate coalition combined to inflict a major defeat on the big banks.

Labor’s Sam Dastyari managed to knock together the votes to disallow the regulations that in effect repealed Labor’s Future of Financial Advice laws. The FOFA laws were strongly opposed by the major banks because they undermined the basic business model of the dinosaur end of the financial advice industry and retail superannuation: conflicted remuneration and exploiting consumer disengagement to hoover up billions in fees.

The government had tried to sneak through the repeal of FOFA via regulation rather than legislation, and their tactic came badly undone nearly a year after it was unveiled: Jacqui Lambie, Ricky Muir, Nick Xenophon, Labor and the Greens combined to overturn the repeal.

In retrospect, that now seems a major turning point not just for the banks but for even the Coalition’s attitude toward the financial sector, which has, by degrees, shifted to a position that even Labor would have blanched at back then.

Now, the big banks are abandoning their wealth management businesses and add-ons like life insurance, which were great for financial planners but, as the Comminsure tragedy demonstrated, could inflict huge blackeyes on the banks’ reputation. Yesterday the embattled Commonwealth Bank announced not only the sale of the much-loathed Comminsure, but that it is considering the sale or float of the country’s biggest privately-owned fund manager and its $219 billion in assets.

Rivals Westpac, ANZ and NAB have already sold similar assets. Westpac has sold out of its stake in the BT investment management business; NAB which has sold 80% of its insurance and fund management arm, MLC, and ANZ, which has sold legacy assets from Mike Smith’s ill-advised Asia strategy, is on the verge of a decision on the sale of its wealth business. The days of a financial group being all things to as many customers as possible — and selling as many products as possible to those customers — are over.

There’ll be no shortage of potential buyers a big Japanese insurer bought the 80% of NAB’s MLC business, and now AIA (the old Asian business of US insurer, AIG, which was sold because the parent had to be rescued in the GFC) has popped up to take Comminsure (the brand is being retained, despite the fact that its value must be dubious at best) for $3.8 billion and a 20 year distribution deal and associated fee income. AIA will become the biggest insurer in Australia and NZ as a result, though CBA isn’t selling its general insurance operations.

Driving this divestment across the industry is a combination of bad publicity from the long list of bank scandals, belatedly increased regulatory oversight from the previously sleepy watchdog ASIC and low income and losses from the personal insurance area, such as income support. This is an area that has damaged the AMP in particular in the past three years and forced it to bring in re-insurers such as Munich Re and Berkshire Hathaway to soak up some of the pain. All this over time will help reduce the size of the banks as targets for upset investors, customers and regulators — not to mention politicians in Canberra. And there will also be safety in numbers with more companies (foreigners) in the local market adding to competition and providing extra targets.

But what’s also been important has been the demand by regulators led by APRA and the Reserve Bank for banks to hold more capital as part of the “unquestionably strong” philosophy arising from the Murray Inquiry (and, internationally, Basel III). The irony is, Murray’s review strongly defended the vertically integrated ‘bancassurance’ model he created as CEO of the CBA, but the incompetence of the banks’ management and board, plus pressure from regulators, has blasted that model apart, leaving Murray on the wrong side of history.

APRA and the RBA have forced the banks to hold more capital against their rising level of home mortgages, and more capital generally. Rather than raise that new capital solely from shareholders, the banks have looked at their businesses and decided that their wealth management/insurance operations are marginal to the business of lending money to customers, and can provide a handy slab of capital. This has all happened with little regard to the views of politicians. Since the high water mark of FOFA repeal, the Coalition have gone from faithful servants of the banks to (somewhat) harsh taskmasters, with the $6.2 billion bank levy, regular parliamentary committee appearances and a much-vaunted crackdown on bank executives. But Canberra hasn’t played a significant role in what has become a major divestment of wealth management and insurance assets.

Earlier this week, the ACCC weighed in expressing doubts about the four pillars scheme, which prohibits mergers among the big four banks. Don’t hold your breath waiting for politicians to abandon what has become one of the bipartisan shibboleths of finance industry policy in Australia. And if it ever changes, the big four banks will have long since quit their vertically integrated financial models and returned to concentrating on being lenders and financiers.