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17 Apr 2018 (AFR) – Regulators turned a blind eye to ‘inherent conflict’ for two decades

[COMMENT: This news article talks about the now infamous ‘fee for no service’ that was recently brought to light by the banking royal commission, but also includes a good history of the banks’ purchases of wealth management businesses over recent years.]

(17 April 2018, AFR, p26, by Karen Maley)

‘In the late 1990s, it was impossible to talk to the chief executives of the big four banks without hearing of their lofty dreams to transform their institutions into financial supermarkets – a one-stop shop for all the banking, insurance and superannuation products their customers could possibly desire. And the bosses of the big four were prepared to dig deep to achieve their “allfinanz” ambitions. David Murray, then head of Commonwealth Bank, set the ball rolling…’

<snipped…>

‘It didn’t take too long for the cracks to start emerging. Particularly for CBA and NAB which had timed their acquisitions to coincide perfectly with the top of the bull market for both equities and wealth management. But all four banks discovered that their pipe dreams of generating large revenue streams by manufacturing their own investment products in-house, and then using their extensive branch networks to sell them to their customers, were extremely difficult to translate into reality. Faced with disappointing earnings streams, the banks had to find other ways to squeeze sufficient profits out of their funds management businesses to justify the lofty price tags that had been paid. Especially if they were to continue to reward shareholders with lavish dividends.’

‘As Peter Kell, deputy chair of Australian Securities and Investment Commission (ASIC), pointed out on Monday at the banking royal commision, one way was to charge customers for annual reviews of their investment strategies, without actually delivering the service. This practice – known as “fee for no service” – only came to light when ANZ reported a breach in 2013. Kell testified that eight financial service firms, including the big four banks and AMP, were automatically deducting money from their clients’ investment accounts for annual reviews which were never conducted.’

‘Typically, the amount charged for these reviews was around $2000 a year, although some customers with large balances were paying up to $20,000 annually. How could such shoddy behaviour be so ubiquitous?’

Read the FULL story at AFR.com (might need AFR login access, or try: AFR.com/trial)

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