Heads in the sand

You would think that a parliamentary inquiry into one of your subsidiaries, a taxpayer-funded royal commission, consistent negative headlines and dwindling consumer trust would make a commercial organisation sit up and take notice.

But when you are Australia’s largest bank, the normal rules and market forces simply do not apply.

Today, the Commonwealth Bank of Australia has announced it will “demerge” its wealth management and mortgage assets, listing the Colonial First State, Count Financial, Financial Wisdom, CFS GAM and Aussie Home Loans businesses under the CFS banner.

The new CFS Group will create a “leading independent wealth management business”, said a statement from the bank to the ASX.

While the move is in some ways similar to those of its competitors, a few key differences suggest CBA has had its head in the sand.

First, the use of the word “independent” to describe a new vertically-integrated, listed wealth manager is not only tone-deaf but borderline illegal.

For whatever else it will be, the CFS Group will categorically not meet the definition for a financial services provider to describe itself as ‘independent’ set out in Section 923A of the Corporations Act.

Perhaps CBA simply meant it was “independent” of the current business, but given the level of drafting and compliance the bank’s public communications go through, this suggests they are not even aware of the sensitivity of the word and intense debate over its use in wealth management.

But I'm sure they have been very busy over at Harbour Street, and NAB made a similar mistake in its "demerger". 

So putting this relatively niche issue aside, there is a far bigger flaw with the announcement.

“Today’s announcement … responds to continuing shifts in the external environment and community expectations, and addresses concerns regarding banks owning wealth management businesses,” said CEO Matt Comyn in an accompanying statement.

His comments are a gross mischaracterisation of the criticism against vertical integration.

The problems uncovered by the royal commission and numerous inquiries such as the specific probes into CBA’s advice business have largely stemmed from poorly disclosed cross-subsidisation, that much is true.

But overwhelmingly the conflict emanates from fund managers and platform providers owning the wealth management piece.

The fact that the ultimate owner was a retail bank has been largely irrelevant, apart from a few dangerous cultural quirks it seemingly introduced, such as a focus on short-term sales and belief it was above the law.

Once again, it shows just how out of touch – and in the sand – the big banks are. They do not even understand the criticism levelled against them, as we saw with Marianne Perkovic’s incoherent testimony at the royal commission.

The move to demerge these business assets has not been a response to “continuing shifts in the external environment and community expectations”.

It is nothing more than a selfish decision to outsource the conflicts to someone else, kick the can down the road and make it someone else’s problem.

The conflict and potential consumer harm, however, remains, no thanks to the giant bank that used to harbour it.

Perhaps that is an entirely legitimate tactic for an organisation that has millions of shareholders, so the question will now come down to the new leadership of the demerged, if not independent, CFS Group.

Partly you have to feel for the individuals who will lead this new entity and now deal with the problem that CBA is now rubbing its hands of.

As analyst Steve Prendeville recently told ifa, the Colonial First State business itself is in good health and would likely have made a decent IPO prospect on its own two feet.

But coupling it with the advice businesses Financial Wisdom and Count Financial significantly reduces the attractiveness for investors, given the now-very-public conflicts of interest within the model and the legacy compliance issues such as enforceable undertakings with ASIC.

At least CBA had the decency to hold on to Commonwealth Financial Planning, its most troublesome advice subsidiary, but the other two are hardly clean operations.

Bells and whistles aside, the newly-touted CFS Group looks a lot like the very model that “community expectations” are now sceptical of: a one-stop shop for financial advice that is structurally tied to funds management, platform and mortgages.

Or as one ifa reader astutely – if unkindly – put it:

“All they're doing is creating a new AMP. We know how well the old AMP has done.”

Having said that, at least the new CFS Group will be exposed to market forces and competition once it is separated from its giant owner. Fighting for market share will invariably sharpen the focus on the consumer.

As Peter Costello told the FSC summit late last year, our banks are not really companies, they are “regulated assets”.

As for the bank itself, it has simply become slightly smaller.

But no doubt still too big to fail.