Challenger's Jeremy Cooper
Challenger's Jeremy Cooper

The Hayne royal commission could recommend the dismantling of vertically integrated financial services businesses and impose tougher penalties for failing to put members first, industry experts say.

Ahead of the much-anticipated final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, due to be published on Monday, Challenger chair of retirement income Jeremy Cooper says structural separation for companies that both manufacture financial products and provide financial advice was a possibility.

“You might find [the royal commission] recommending that the one organisation can’t build products and provide advice,” he tells Investment Magazine.

Despite this, Cooper, who was chair of the 2009 Super System Review, acknowledged the difficulties surrounding any moves to prevent companies from running such a model.

“Resolving the structural conflicts has been much discussed,” he says. “[It is] easier to talk about it…pretty hard to do. Particularly since the model has been inherent in the system for a very long time.”

The royal commission laid bare a raft of bad behaviour at the big banks, many of which make use of vertically integrated models. The resultant reputational damage to retail superannuation funds’ brands has driven a stunning $3.3 billion in net outflows in the September 2018 quarter.

In handing down his 1000-page interim report in September, commissioner Kenneth Hayne did not make recommendations but asked 693 questions about how such bad behaviour in the financial services sector had happened and what could be done to prevent it from happening again.

He also asked if “structural changes [should] now be made”, considering the events the seven rounds of royal commission hearings uncovered.

Cooper says that even if the royal commission ultimately does not call for an end to vertically integrated businesses, it will definitely “deal with the topic”.

“Further, what politicians will make of [the royal commission’s recommendations] is another thing to be seen,” he says.

On the topic of whether banks should be “kicked out of superannuation” all together, Cooper says he does not expect this to happen.

Eva Scheerlinck, chief executive of the Australian Institute of Superannuation Trustees, says she does not expect the royal commission to seek to ban vertical integration outright.

Indeed, the unwinding of vertical integration has already begun with the major banks seeking to sell off parts of their under-fire wealth arms. Westpac remains the only hold out in keeping its wealth business.

Scheerlinck, who in September argued that retail banks should be stripped of their ability to offer a MySuper product, tells Investment Magazine she expects recommendations seeking to “clarify and strengthen those obligations and perhaps harsher penalties for a failure to meet the members’ best-interests test. There is also likely to be a focus on the need to prioritise the best interests of members in any merger talks.”

It is clear from the interim report released last September that commissioner Kenneth Hayne blames the regulators – APRA and ASIC – for not doing enough to stop wrongdoing.

“Existing laws do need to be better enforced and we expect that criticism of the way regulators have previously exercised their existing powers will be harsh,” Scheerlinck says.