Monday, April 30, 2018

Today by Paddy Manning

Banking on reform
Demands for change will be hard to resist


Like a burst dam wall, the revelations from the Hayne royal commission are forcing a fundamental rethink of how the financial services industry operates in this country. It’s not just getting financial planners or mortgage brokers under control. It’s not just separating the banks, significant as that is. It’s the whole gravy train that suddenly seems suspect, and while calls to nationalise banking seem outlandish, there is clearly a huge, pent-up anger at this industry, and the federal government will need to think seriously about where this royal commission is going. Feigning shock and cheering the downfall of wrong-doers can only last so long.

The depth of feeling is clear from the near-universal reaction to this morning’s confirmation that AMP chair Catherine Brenner has resigned. Everybody from the prime minister [$] down has welcomed the resignation, and nobody thinks that will be the end of it, at AMP or elsewhere. Veteran finance commentator for The Australian, Robert Gottliebsen, observes [$] that new AMP chair Mike Wilkins has a number of urgent tasks ahead of him. These include tackling the toxic board culture that culminated in the knifing of former chair Simon McKeon after an acrimonious internal review process, as reported [$] by Pamela Williams over the weekend. As he left, McKeon was said to have “articulated a series of points about culture”. We don’t know what those points were. But Gottliebsen writes: “I think it is highly unlikely that the AMP would have been in this position had McKeon remained chairman. It was a serious board mistake, which every AMP director at that time must live with.”

As Crikey’s Bernard Keane and Glenn Dyer write, AMP may be the fall guy for the big financial institutions right now but “there should be some very nervous directors at the banks when the next set of royal commission hearings roll around.” In the AFR, Adele Ferguson writes [$] of an “entire sector under the blowtorch and battling serious reputational damage”, concluding that “change is coming”.

Change will definitely come for intermediaries like financial planners, whose conflicted remuneration structures, such as trailing commissions, have enabled scams like fee-for-no-service for years and years. Crikey has launched this series on how financial advisers must change, adopting fee-for-service.

The AFR is reporting [$] that the banks are boosting controls over mortgage brokers amid growing regulatory and political pressure to tighten commission payments, and increasing transparency and responsibility to borrowers.

The break-up of the banks, and the end of the vertically integrated model is now discussed almost as a foregone conclusion after counsel assisting the royal commission, Rowena Orr, on Friday wound up two weeks of hearings by asking [$] whether it was necessary to “enforce the separation of products and advice”. That is no small undertaking.

More fundamentally, the ABC’s business editor, Ian Verrender, today writes that the banks have suddenly gone quiet after angling for an even larger share of the fee revenue from superannuation, by accessing the pool of MySuper default funds. In the past decade, some $230 billion has been siphoned off our total retirement savings pool of around $2.3 trillion. “It’s an extraordinary number and nothing short of a national scandal,” Verrender writes. In 2016 alone, total fees amounted to $31 billion, according to research house Rainmaker.

Surely we should not be piling even more money onto this gravy train. Over at Inside Story, the Grattan Institute’s Brendan Coates, John Daley and Trent Wiltshire take the occasion of the Hayne royal commission to re-evaluate the existing, bipartisan support for a gradual increase in compulsory superannuation contributions, from the existing 9.5 per cent to 12 per cent. They say that such a move will “reduce wages today, do little to boost the retirement incomes of many low-income workers, and cost the federal budget billions now and well into the future. If politicians really want to help low-income earners, the planned increases should be scrapped.”

At the beginning it seemed that the risks of this royal commission were fully priced in, and that the banks would skate through it. It would be a mistake to assume that the heat and fury in the media right now will necessarily lead to substantial or structural reform. Broker notes from Macquarie and Citi over the past few days suggest that the banks, all things considered, have been oversold in reaction to the news from the royal commission. Not every person who lost money on a dubious get-rich-quick scheme deserves compensation. Investment does involve risk. As a regulator told me once: “That’s what happens when you privatise the pension system.”

But the royal commission has already taken a political toll on the federal government by forcing embarrassing apologies over the tardy appointment and making it harder to argue for big business tax cuts; we haven’t even seen the beginnings of an admission that the wind back of Labor’s Future of Financial Advice reforms was misguided. At the more radical end of the NSW Greens, David Shoebridge has called for the Commonwealth Bank to be returned to public ownership, or for the creation of a new national bank, and some commentators, like Crikey’s Guy Rundle, agree [$]. How far will the anger at the banks go? The government is going to need to prepare a considered response.

since this morning

The AFR’s technology editor Paul Smith writes [$] that hysterical reactions to a needless essay by NBN chief Bill Morrow showed a public eager for a vindicating admission of failure.

ABC staff are being briefed today and unions consulted on a plan for up to 20 staff to lose their jobs [$] as the eight capital city newsrooms are reshaped to make them “fully fit for the modern media environment”.

The pill-testing trial at Groovin the Moo in Canberra has found some lethal and odd ingredients in what many festival-goers believed to be party drugs. A total of 85 substances were tested at the music festival over the weekend in an Australian first by Safety and Testing and Advisory Service at Festivals and Events (STA-SAFE).

in case you missed it

Prime Minister Malcolm Turnbull will push for a radical overhaul of the Australian curriculum after endorsing a blueprint by businessman David Gonski. The plan aims to fix the country’s lagging school system by assessing and rewarding personal progress, not just standard academic benchmarks.

The Victorian government will deliver [$] a healthy $1.4 billion budget surplus tomorrow with big pre-election spending planned on infrastructure, skills, health and education. The Andrews Labor government announced a $2.2 billion package to upgrade 13 arterial roads across the northern and south-eastern suburbs of Melbourne.

Energy retailer Alinta has made [$] a $1.2 billion bid for the Liddell power station in NSW in a move that will increase public pressure on AGL to either sell or reverse its controversial decision to shut down the coal-fired power station by 2022.

A group of Malaysians led by former legal minister Zaid Ibrahim has hired [$] Sydney law firm Levitt Robinson to pursue a class action in the Australian courts against ANZ over its role in the alleged pillaging of sovereign wealth fund 1MDB.

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Paddy Manning

Paddy Manning is contributing editor (politics) at The Monthly and has worked for the ABC, Fairfax, Crikey and The Australian. He is also the author of three books, including a recently updated unauthorised biography of Malcolm Turnbull, Born To Rule?


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