It was one last, neatly disguised tripwire for the banking sector. Commissioner Kenneth Hayne has thrown plans by Commonwealth Bank, National Australia Bank and ANZ to amputate their scandal-plagued financial planning divisions into disarray.
The banking royal commission shone a ruthless spotlight on the "fees-for-no-service" scandal, where the country's largest financial institutions – the big four banks and AMP – for years gouged fees from customers for financial advice that was never received. The combined remediation costs for AMP and the big banks could reach as high as $1 billion.
In response, three of the banks – CBA, ANZ and NAB – decided to quit the financial advice, funds management and superannuation game, leaving Westpac as the only big four bank committed to wealth management.
Grandfathered commissions targeted
But Commissioner Hayne has jeopardised the financial viability of the banks' financial advice businesses that CBA and NAB planned to market this year by recommending a ban on "grandfathered" commissions and the introduction of much tighter curbs on the fees charged by advisers.
At the same time, ANZ's $975 million sale of its OnePath superannuation business and its aligned dealer groups to IOOF has been thrown into doubt after IOOF came in for scathing criticism at the commission.
Analysts argue that Hayne's recommendations will weigh on the profitability of the financial advice industry. In particular, the ban on "grandfathered" commissions – which advisers continued to pocket from the superannuation and investment products they sold before July 2013 – is expected to wipe billions from the industry's revenue each year.
The big four and AMP have already capitulated to pressure and agreed to give up valuable grandfathered commissions, even though the Morrison government has banned the payments only from 2021.
At the same time, Hayne has boosted the costs these businesses incur with his recommendation that customers paying "ongoing" fees for advice must agree to renew these fees every year, with a written record of the services they are entitled to receive for those fees. Currently, clients must agree to the payment of these fees every two years.
He also recommended that customers be required to provide express written authority for the deduction of ongoing fees from their accounts, which will further reduce the fee income of financial planners because the bulk of bank customers ignore communications from their banks.
Hayne's recommendations diminish the attractiveness of the financial advice firms, complicating the task the banks face as they try to extricate themselves from these businesses.
Financial advice gets harder
Westpac chief executive Brian Hartzer struck a pessimistic tone about the industry when he appeared before the royal commission in November, saying that the economics of providing high-quality financial advice were "getting very difficult".
Even before the changes contained in Hayne's final report, Hartzer said "the standards of documentation, and proof, that we're now, as a general industry, expected to meet are very, very high, and so the cost of training, hindsighting, storing documents, auditing and the like is very, very high relative to the revenue associated with providing that advice".
When he was asked what was the financial proposition for Westpac shareholders in the bank continuing to have an advice function, Hartzer replied: "It's more challenged."
Hartzer also signalled that robo advice might provide a way for ordinary Australians to get affordable financial advice.
"There are a number of developments around the world in what's sometimes colloquially referred to as robo advice, which is where a customer essentially self-serves by putting in their information, taking tests around their risk appetite, their understanding of finance and then the system, based on what they've put in, says, 'Well, given what you've told us, here's what the system would suggest'.
"And then it's up to the customer to decide whether they want to go ahead with that. I think developments in that regard are going to become more available and be more scalable for ordinary people."
CBA chief executive Matt Comyn also highlighted the challenge of providing affordable financial advice for the bank's customers.
"We want to provide financial advice for customers. We are exploring which would be the best long-term model to provide financial advice and how to best do that," he told the commission.
"I would hope that there is a way to provide, if it's not advice, certainly guidance, education for everyday Australians. I don't envisage any economic model associated with that, but purely with the interests of helping people understand and make better decisions."
CBA well positioned
At this stage, analysts expect that both CBA and NAB will plough ahead with their plans to transform themselves into simpler organisations by offloading their strife-prone financial planning divisions.
But they point out that the value of these businesses is eroding fast. Retail super funds have suffered heavy funds outflows, as the evidence of the banks' misconduct has prompted people to switch tens of billions of super savings to the not-for-profit industry funds.
And the growing uncertainty is causing the self-employed financial planners working in these bank-owned financial advice businesses to become nervous and twitchy about their futures, and to look for alternative possibilities.
CBA is perhaps the best positioned of the banks, because it has already pocketed $4.1 billion from the sale of its giant funds management business – Colonial First State Global Asset Management – to a major Japanese bank, Mitsubishi UFJ Trust and Banking Corporation.
The sale of its funds management business means that CBA is now only offloading its Colonial First State superannuation and financial advice business, which has $138 billion in funds under advice, Aussie Home Loans, and advice businesses Count Financial and Financial Wisdom.
These businesses previously generated about $270 million in earnings each year, but this is likely to fall as a result of Commissioner Hayne's recommendations, which will squeeze earnings and push costs higher.
The deteriorating business outlook may not matter that much because CBA is spinning off the business as a demerger, rather than a trade sale or an IPO. That means that it will largely be left to determine the value of the business. All the same, the Sydney-based bank will be anxious that the new company has a viable business
model, because of the risk of reputational damage if the newly formed company fails to prosper.
NAB faces similar considerations as it ponders the $4 billion sale of its financial advice and wealth management business, MLC. But the Melbourne-based bank has signalled that it is looking at a range of options for spinning off the business, including a demerger, an IPO or a trade sale.
The business, which has 3300 staff, has assets under management of $196 billion and boasts Australia's largest retail super fund with funds under management of $78 billion.
Some analysts argue that if NAB wants to get the best possible price for the business, as well as achieving its goal of spinning off the business by the end of this year, it may have to follow the CBA's path and sell its huge funds management business to a financial institution, and then demerge the rest of the business.
Meanwhile, ANZ's planned sale of its wealth business to IOOF is in limbo after the Australian Prudential Regulation Authority announced it was taking Federal Court action to have five IOOF senior managers, including chief executive Chris Kelaher, disqualified from acting as superannuation trustees because they were not fit and proper persons.
The guardians of ANZ's superannuation business met in December but did not vote on whether the sale of the business to troubled wealth manager IOOF was in the best interests of its 1 million members.
A spokesman for ANZ said it was waiting for additional information from IOOF before it could make a full assessment. The trustees are not expected to vote until February or 16 months after the transaction was announced.
By Karen Maley
5 February 2019