One of the scandals that emerged during the Hayne banking royal commission was the effects of an intertwined financial services industry that saw bankers taking profits right along the chain of consumers’ financial transactions.

The big financial houses are what is known as vertically integrated. That means they are giant money skyscrapers, with the lower floors made up of bank deposits, superannuation contributions and insurance premiums. As you go up in the lift you pass areas like home lending, credit cards, consumer loans, financial planning, business lending and various types of investment.

Money goes in at the  bottom and then big finance clips the ticket all the way up, earning profits from depositors, borrowers and investors. It is a murky world full of conflicts of interest, where banks have incentives to make as much fee income as they can by keeping investors in the dark.

Some thought Commissioner Kenneth Hayne would put a stop to it to some degree, either keeping the big financiers out of superannuation or banning banks from financial planning.

Conflicts need to be avoided

“It’s a lost opportunity. The fact is than managing conflicts of interest is an oxymoron; they are not to be managed they are to be avoided,” said Andrew Schmulow, senior law lecturer at the University of Wollongong.

The commission uncovered myriad examples of the corrosive effects of vertical integration through fee-gouging on investments and superannuation, insurance and consumer lending.

In the run-up to the royal commission, three of the big four banks did actually reduce vertical integration by selling off their wealth management arms.

“As the commission loomed they started to identify their conflicts of interest and started to act,” said Vicky Comino, law lecturer at the University of Queensland.

“The Hayne royal commission didn’t outlaw vertical integration as I thought they might. And even the sales of wealth management arms by three of the big four did not result in the full separation,” Ms Comino said.

Wealth arms not amputated

The banks remain keen to distribute financial products to retail customers.

“For example, ANZ’s sale to IOOF [of its wealth management arm] includes a 20-year deal to make IOOF super and investment products available to its retail customers,” she said.

Even where the banks have sold off their wealth management arms, they still retain a stable of internal financial planners who can help direct clients to the investment funds the banks have manufactured and earn profits through running them, said Gerard Brody, CEO of the consumer Action Law Centre.

“Vertical integration contributes to the oligopoly of Australia’s major banks,” he said.

The price-gouging opportunities of vertical integration have been reduced over time with the banning of most trailing commissions on investment advice. The commission closed the door on that practice, saying that remaining grandfathered commissions should be scrapped.

Commissioner Hayne called for clarity in the investment chain by demanding that advisors advise clients of any conflicts of interests with a written statement “explaining simply and concisely why the adviser is not independent, impartial and unbiased”.

However, policy officer with the Combined Pensioners and Superannuants Association, Paul Versteege, was unimpressed by that.

“Having to hand a note to clients is just a cop out really.”

The commission should have gone further to cut vertical integration completely, he believes.

“It may have been hard to implement but that’s why we had a royal commission,” Mr Vesteege said.

“I really hope we can get Labor to commit to do something about vertical integration if it takes government,” Mr Versteege said.

Mr Brody said one positive development was the government’s commitment to get the Australian Competition and Consumer Commission to review vertical integration every five years.

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