Banks push to leave vertical integration on the table

Despite moving in the opposite direction for some time, Australia's banks want to leave the door ajar for a return to the much maligned vertical integration model.

As the Senate Standing Committees on Economics probe a Pauline Hanson bill looking to forcefully separate deposit taking banks from wealth management and investment banking, the Australian Banking Association (ABA) has weighed in, telling the committees Australia's banks should be able to return to the model in the future, should they wish to.

Despite Commissioner Kenneth Hayne specifically recommending against it, Hanson's bill would force Australia's banks to jettison the vertical integration model that allowed them to control the entire wealth stack: funds management, financial advice, superannuation and platforms.

In a submission to the inquiry, the ABA said it had significant concerns with the bill, and noted previous inquiries had already examined forced structural separation of Australia's financial institutions and found unsustainable market structures would be the likely outcome, leading to less competition.

However, Australia's banks have been increasing the focus on their core banking operations, and the vertical integration model has all but been put out to pasture.

Just last month, Westpac - which until then was the only big four bank still wholly committed to wealth management - decided to exit personal advice, bringing BT Financial Group in-house and selling a number of financial advisers to Viridian Advisory.

"ABA members have different strategies in relation to the range of services they offer and the extent of vertical integration in their business," the ABA noted.

"Some members are taking steps to simplify their businesses and sell or demerge some of their vertically integrated structures."

But the ABA wants Australia's banks to be able to bring the model back to life when the time is right, and said it should be up to banks to decide whether or not to vertically integrate their wealth and banking operations.

"Banks should retain the flexibility to determine these strategies in the future," the ABA said.

The ABA also echoed the thoughts of Hayne in his final report, and said it remained unclear that the benefits of structural separation would outweigh the costs.

At the time, Hayne said forcing the separation of financial products and financial advice "would be a very large step to take" despite the benefits to be gained in removing the vertical integration model's inherent conflicts.

"I cannot say that the benefits of requiring separation would outweigh the costs, and the Productivity Commission concluded that 'forced structural separation is not likely to prove an effective regulatory response to competition concerns in the financial system,'" Hayne said.

The association noted vertical integration could provide customers with benefits in its own right, such as cheaper prices by achieving economics of scale, and the convenience of only needing to maintain a relationship with one financial institution.

Read more: ABAKenneth HaynePauline HansonAustralian Banking AssociationBT Financial GroupProductivity CommissionViridian AdvisoryWestpac
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