Matt Comyn has launched his career as boss of the Commonwealth Bank of Australia with a bang, effectively splitting the nation’s biggest bank in two.
The new chief executive revealed on Monday he would be spinning off the bank’s wealth, financial advice, mortgage broking and superannuation businesses, in a surprise move that was clearly calculated to address the endless scandals embroiling the bank.
The spun-off business will become its own independent ASX-listed entity, CFS Group, with no formal or financial link to CBA.
On the face of it, this is huge news. It could lead to a much more transparent, less conflicted, more consumer-friendly financial services sector in Australia.
It will — on the face of it — mean there will be no more financial planners and mortgage brokers discreetly in the pay of the CBA, putting their customers’ money in expensive super funds and investment vehicles managed by CBA, primarily for CBA’s profit, not their customers’.
In short, the move appears to address in one fell swoop the blight of ‘vertical integration’ — although as yet CBA has not said whether or not it will have a special commercial relationship with CFS.
Vertical integration: what it is and why it’s bad
Vertical integration has been the business model favoured by all of the big four banks over the past couple of decades, and it works as follows.
One single bank offers every single financial product and service you can think of: deposit accounts, mortgages, credit cards, business loans, stock broking services, financial advice, mortgage broking, superannuation, investment funds, investment platforms, life insurance, general insurance, annuities, and so on.
The idea is that you never have to look outside your bank for your financial needs.
This model made sense to the bank because it maximised customer fees. But for the consumer, it has proved to be crawling with conflicts of interest — and the bad press from these scandals has become an intolerable headache for the banks.
These conflicts were most sensationally revealed in the royal commission hearings in March, which showed that the big banks and AMP were using their vertically integrated structure in a perfectly calculated way to rip off customers.
But they were also clearly, if less sensationally, revealed in a report by the corporate watchdog ASIC earlier this year.
Among many other damning findings, the Australian Securities and Investments Commission found bank-controlled financial advisers had a massive bias towards the products made by their bank regardless, apparently, of whether such products were in their clients’ best interests.
ASIC also found that 75% of advice on superannuation, which for most people is the single most important component of their savings, was non-compliant.
Alex Dunnin, head of research at financial services research company Rainmaker, told The New Daily the announcement was “huge”, taking the CBA back 20 years to the days when it was just a (very big) bank.
He said it was a direct attempt to put an end to the endless negative headlines.
“Carving up the integrated CBA wealth businesses so extensively may … be an implicit admission that it’s just not possible, or not possible without huge effort over a long time, to properly and transparently clean up the perceptions of conflicts of interest,” he said.
“And even if they could set up mechanisms to manage these, would they be at such a level that it would pass scrutiny of cross examination at a royal commission and keep them out of the newspaper headlines?”
However, he suggested the newly spun-off wealth business, CFS Group, may retain some sort of relationship with CBA.
CBA itself did not reveal if there would be a deal with the newly-independent CFS Group.
However, if CBA wanted to continue offering superannuation products integrated with its banking, it could follow the lead of ANZ and reach some deal with CFS to ‘white label’ its super products.
The demerger is subject to board, shareholder and regulatory approvals. If it receives these approvals, the demerger is expected to be completed some time next year.