OCT 09 2018
All Posts
OCT 09 2018
All Posts

The Royal Commission into Banking Misconduct

Posted by: Aaron Drew, Economist and Rutherford Rede Investment Committee Member in finance

In Australia the financial services industry is being rocked by the Royal Commission into its behaviour and practices. The Commission has found many concerning practices across wealth advice, insurance and banking - ranging from carelessness to outright fraud. Australian market regulators have been bruised too. Despite increasing compliance burdens and regulatory changes over the years industry practices remain poor, and they have been criticised for not pursuing tougher actions when firms have clearly breached their compliance obligations and duty of care to customers. Public confidence in the financial services industry has been shattered.[1] 

Here in New Zealand the problem has been described as one of ‘culture’ – senior management in Australia has encouraged a culture rewarding sales and profits at the expense of what the customer needs or should pay for the services rendered. Fiduciary obligations have been trumped by short-term business interests. However, across the ditch the view being taken is that no amount of well-meaning ‘cultural’ initiatives will fix the fundamental problem. It has been well-known for many years that the vertically integrated businesses within the financial services industry embed structural conflicts of interest that place advisers and staff in a continual dilemma. Do I serve what is my own and employers best interest, or my clients?  

For this reason, most of the big banks in Australia are removing the temptation by divesting themselves of their wealth and asset management divisions or shareholdings. ANZ Wealth (Australia) has been sold to IOOF, Commonwealth Bank (the parent of ASB) has announced it will sell its wealth-management and mortgage-broking businesses into a separate company called CFS Group, while National Australia Bank (the parent of BNZ) plans to sell its wealth management division, MLC. Westpac is the exception so far, holding on to BT Financial Group.

What does this mean for New Zealand? Banks in New Zealand have certainly been at pains to say they have a different culture.  However, clearly the same structural conflict of interest is present in our banking system. How often when you contact a bank do you get asked about your insurance and KiwiSaver arrangements? Bank’s private wealth offerings (such as DIMS portfolios) tend to be stuffed full of their own products, many of which are simple overlays on funds that can be obtained more cheaply by going direct to the underlying fund manager.  Where is the contestability? How can this be claimed to putting client interests first? 

Given the presence of the same underlying conflicts here it seems untenable for the industry to remain the same in New Zealand.  At the very least, we would expect to see more contestability and independence brought into the investment and advice processes that vertically integrated firms run. We would also hope to see a lifting of standards from mere compliance with FMA regulations, to higher fiduciary standards of practices and conduct. The experience in Australia clearly shows that regulatory compliance does not guarantee putting client’s interests first. We may also see the divestment option being taken to safeguard reputational risks, as has occurred in Australia.

In the meantime, investors should be aware that the waves from the Australian Commission will increasingly hit our shores. The opportunity is to select providers who are transparent across their fee structures and costs, who operate at a higher fiduciary standard, and who can demonstrate they put your interests first.

[1] A recent survey by Deloitte of over 1,000 Australian consumers found that around half do not trust their own financial service provider.   Trust has been eroded through lack of confidence in providers ethics, social responsibility, data security, and belief their interests will be put first.

KEY FACTS FROM AROUND THE GLOBE

The global economic environment remains robust despite the clear escalation in the Trump Administrations trade wars with other nations. New Zealand’s strong GDP release and increased business confidence (albeit still to low levels) has put a question mark on whether our economy is truly slowing down. Our long-term held view is that New Zealand is a supply constrained economy that is held back by infrastructure and other supply bottlenecks. Growth is not being held back by a lack of demand for our exports, or by weakness in domestic employment opportunities and household spending. As such, we were skeptical that the business confidence fall would translate to a fundamentally weaker growth picture. The key economic and social challenge for the Government remains the legacy of under-investment in our transport network and housing.

  • The trade war between the US and other nations intensified. The US imposed $200 billion tariffs on Chinese goods. China retaliated by placing $60 billion of tariffs on US exports into China.
  • EU officials rejected the “Chequers Plan” put forward by British Prime Minister Theresa May to progress Brexit negotiations.   This raises the risk the UK will crash out of the EU in March next year.
  • The Government’s Tax Working Group released its initial recommendations, including options for broadening taxes on capital gains and activities that degrade our natural environment.
  • The Australian Banking Royal Commission released its interim report, condemning greed in the financial sector and disregard of their customers best interests.

Economics

  • NZ GDP for the June quarter came in 4% (annualised), twice as strong as the RBNZ forecast. The increase was broad based, and the NZD jumped around 0.5 cents against the USD on the result.
  • NZ business confidence also rebounded. ANZ’s business confidence survey showed that a net 8% of firms expect their own activity to increase, compared to 4% in the previous month.
  • The US economic picture was also strong, with GDP for the June quarter coming in at 4.2%, the strongest reading in around 4 years. 

Markets

  • Markets were quiet over the month. Developed equity markets increased around 0.5%, whilst Emerging Markets fell 1%. The NZ share market also fell slightly in the month, with A2 Milk declining over 8%.
  • The NZ dollar ended the month flat against the US dollar and our major trading partners, despite the US Federal Reserve increasing US rates further. 
  • Petrol prices hit record highs in many parts of New Zealand, at over $2.50 per litre. Climbing international oil prices, a decline in the NZD, and the new fuel tax in Auckland, are all hitting home.

KEY FIGURES

October figures

The information contained in this report are provided for general information purposes only and do not constitute financial, legal, or tax advice, or take into account any person’s particular financial situation or goals. MyFiduciary Ltd. does not assume any responsibility for giving legal or other professional advice and disclaims any liability arising from the use of the information. If you require legal or other expert advice you should seek assistance from a professional adviser.

Tags: The World In Ten Minutes, Monthly Economic Roundup,

In Australia the financial services industry is being rocked by the Royal Commission into its behaviour and practices. The Commission has found many concerning practices across wealth advice, insurance and banking - ranging from carelessness to outright fraud. Australian market regulators have been bruised too. Despite increasing compliance burdens and regulatory changes over the years industry practices remain poor, and they have been criticised for not pursuing tougher actions when firms have clearly breached their compliance obligations and duty of care to customers. Public confidence in the financial services industry has been shattered.[1] 

Here in New Zealand the problem has been described as one of ‘culture’ – senior management in Australia has encouraged a culture rewarding sales and profits at the expense of what the customer needs or should pay for the services rendered. Fiduciary obligations have been trumped by short-term business interests. However, across the ditch the view being taken is that no amount of well-meaning ‘cultural’ initiatives will fix the fundamental problem. It has been well-known for many years that the vertically integrated businesses within the financial services industry embed structural conflicts of interest that place advisers and staff in a continual dilemma. Do I serve what is my own and employers best interest, or my clients?  

For this reason, most of the big banks in Australia are removing the temptation by divesting themselves of their wealth and asset management divisions or shareholdings. ANZ Wealth (Australia) has been sold to IOOF, Commonwealth Bank (the parent of ASB) has announced it will sell its wealth-management and mortgage-broking businesses into a separate company called CFS Group, while National Australia Bank (the parent of BNZ) plans to sell its wealth management division, MLC. Westpac is the exception so far, holding on to BT Financial Group.

What does this mean for New Zealand? Banks in New Zealand have certainly been at pains to say they have a different culture.  However, clearly the same structural conflict of interest is present in our banking system. How often when you contact a bank do you get asked about your insurance and KiwiSaver arrangements? Bank’s private wealth offerings (such as DIMS portfolios) tend to be stuffed full of their own products, many of which are simple overlays on funds that can be obtained more cheaply by going direct to the underlying fund manager.  Where is the contestability? How can this be claimed to putting client interests first? 

Given the presence of the same underlying conflicts here it seems untenable for the industry to remain the same in New Zealand.  At the very least, we would expect to see more contestability and independence brought into the investment and advice processes that vertically integrated firms run. We would also hope to see a lifting of standards from mere compliance with FMA regulations, to higher fiduciary standards of practices and conduct. The experience in Australia clearly shows that regulatory compliance does not guarantee putting client’s interests first. We may also see the divestment option being taken to safeguard reputational risks, as has occurred in Australia.

In the meantime, investors should be aware that the waves from the Australian Commission will increasingly hit our shores. The opportunity is to select providers who are transparent across their fee structures and costs, who operate at a higher fiduciary standard, and who can demonstrate they put your interests first.

[1] A recent survey by Deloitte of over 1,000 Australian consumers found that around half do not trust their own financial service provider.   Trust has been eroded through lack of confidence in providers ethics, social responsibility, data security, and belief their interests will be put first.

KEY FACTS FROM AROUND THE GLOBE

The global economic environment remains robust despite the clear escalation in the Trump Administrations trade wars with other nations. New Zealand’s strong GDP release and increased business confidence (albeit still to low levels) has put a question mark on whether our economy is truly slowing down. Our long-term held view is that New Zealand is a supply constrained economy that is held back by infrastructure and other supply bottlenecks. Growth is not being held back by a lack of demand for our exports, or by weakness in domestic employment opportunities and household spending. As such, we were skeptical that the business confidence fall would translate to a fundamentally weaker growth picture. The key economic and social challenge for the Government remains the legacy of under-investment in our transport network and housing.

  • The trade war between the US and other nations intensified. The US imposed $200 billion tariffs on Chinese goods. China retaliated by placing $60 billion of tariffs on US exports into China.
  • EU officials rejected the “Chequers Plan” put forward by British Prime Minister Theresa May to progress Brexit negotiations.   This raises the risk the UK will crash out of the EU in March next year.
  • The Government’s Tax Working Group released its initial recommendations, including options for broadening taxes on capital gains and activities that degrade our natural environment.
  • The Australian Banking Royal Commission released its interim report, condemning greed in the financial sector and disregard of their customers best interests.

Economics

  • NZ GDP for the June quarter came in 4% (annualised), twice as strong as the RBNZ forecast. The increase was broad based, and the NZD jumped around 0.5 cents against the USD on the result.
  • NZ business confidence also rebounded. ANZ’s business confidence survey showed that a net 8% of firms expect their own activity to increase, compared to 4% in the previous month.
  • The US economic picture was also strong, with GDP for the June quarter coming in at 4.2%, the strongest reading in around 4 years. 

Markets

  • Markets were quiet over the month. Developed equity markets increased around 0.5%, whilst Emerging Markets fell 1%. The NZ share market also fell slightly in the month, with A2 Milk declining over 8%.
  • The NZ dollar ended the month flat against the US dollar and our major trading partners, despite the US Federal Reserve increasing US rates further. 
  • Petrol prices hit record highs in many parts of New Zealand, at over $2.50 per litre. Climbing international oil prices, a decline in the NZD, and the new fuel tax in Auckland, are all hitting home.

KEY FIGURES

October figures

The information contained in this report are provided for general information purposes only and do not constitute financial, legal, or tax advice, or take into account any person’s particular financial situation or goals. MyFiduciary Ltd. does not assume any responsibility for giving legal or other professional advice and disclaims any liability arising from the use of the information. If you require legal or other expert advice you should seek assistance from a professional adviser.

Tags: The World In Ten Minutes, Monthly Economic Roundup,

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