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Banks begin to unwind vertical integration, but victims continue to fight

Georgia Wilkins

For 10 years, Raymond Kataryna's relationship with his bank was clear. He trusted his financial planner at the Commonwealth Bank to give him advice from time to time on how to manage his money.

But the relationship began to blur in the late 2000s. This was a time when Australia's big four banks were in the midst of a massive expansion, scooping up financial planning and insurance businesses as part of a process known as vertical integration.

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Bank tellers began spruiking financial products that were once the preserve of qualified advisors.

It was amid this spree that Mr Kataryna claimed he was given advice that cost him tens of thousands of dollars – money his family are now trying to claw back after his death last year. The bank, for the most part, defends its dealings with Mr Kataryna over several years.

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But it is yet another battle with a customer, like so many others, the big four banks have waged in recent times. They spent much of 2016 defending their business models after a wave of scandals involving the mistreatment of customers in their insurance and financial planning divisions.

Now there are signs that the banks are losing faith in the vertically integrated experiment, as they stare down further scrutiny by the regulators and diminishing returns in wealth products.

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Selling up

In October National Australia Bank finalised the sale of 80 per cent of its life insurance business to Japanese insurance giant, Nippon Life. The bank will retain ownership of 20 per cent of the business and start a partnership to distribute life insurance products through the bank's network. 

ANZ Bank has also flagged the sale of key parts of its wealth division and begun selling off several of its Asian wealth assets. The divestment plan includes the possible sale of the life insurance, financial advice and superannuation and investments businesses in Australia.

ANZ boss Shayne Elliott said the move reflected efforts to simplify the bank, and acknowledged the need to do more to "shift our culture".

"ANZ does not need to be a manufacturer of life and investment products," he said in November.

A report by KPMG says it is inevitable that the major banks will continue to downsize and potentially exit some markets altogether as they look to scale back their offerings and meet new capital requirements.

Regulators stirring

The corporate regulator has signalled it is cracking down on cross-selling by the banks and has raised specific concerns about their vertical integration model. It is concerned that the model creates conflicts of interest for bank staff, who have incentives to sell products created by the bank but are also expected to serve the interests of their clients.

The Australian Securities and Investments Commission revealed in November it had written to the major banks demanding they conduct audits on cross-selling, after the scandal engulfing United States lender Wells Fargo.

The Australian Bankers' Association and the Financial Services Council, the two main lobby groups that represent vertically-integrated lenders, declined to comment on the future of the vertical integration model, or discuss the state of cross-selling by tellers inside Australia's banks. 

A report into "bancassurance" – insurance sold through banks – by PwC has warned Australian banks will continue to face regulatory and political pressure even despite the reduced likelihood of a royal commission into the sector.

PwC partner Peter Burns says if the banks want to hold onto their vertically integrated model it will have to be in areas where they have a strong competitive advantage and meet customers' best interests. 

Returns questioned

"Margins are eroding and consumers are demanding more," he says.

"The ability to 'cross-subsidise' product manufacturing where there is no competitive advantage is not sustainable."

Bell Potter banking analyst TS Lim says that while political pressure is playing a part in the banks' unwinding of wealth assets, ultimately they are responding to financial pressures. 

"Manufacturing [wealth products] is intensive and a big drag on earnings," he says. 

"It's better to outsource the manufacturing and focus on distribution."

Mr Lim says it makes sense for the banks to continue to offload assets, but the pace of divestment will depend on the appetite of buyers.

Welcome move

It's a welcome shift for Mr Kataryna's brother Paul, who says his brother was devastated by the dispute with CBA.

"For a long time, this thing with the Commonwealth, it really got to him," he says.

"He was talking about it all the time."

Paul and Raymond's new advisor, Melinda Houghton, is helping pursue Raymond Kataryna's claim for $68,000 in compensation through CBA's Open Advice Review Program. 

CBA claims that for over 80 per cent of the customers who have had advice assessed through its internal program, the bank gave the appropriate advice for their circumstances. 

CBA has disputed parts of Mr Kataryna's case, in particular strongly denying a key part of the claim that he was given personal advice by a bank teller saying that is "completely incorrect". But it says it is working with Mr Kataryna's estate to try to resolve the case. 

"We are absolutely committed to reaching the right outcome for the customer and we are ready to meet with his appointed legal representative as soon as possible to bring this to a resolution," CBA's executive general manager of its advice review program, Leif Gamertsfelder says.

The Financial Ombudsman Service looked at Mr Kataryna's case in 2012 and found in favour of the bank due to insufficient evidence to support his claim. But CBA has since acknowledged some instances where Mr Kataryna likely received inappropriate advice – ironically it appears at times where he had been happy with the service and not an alleged incident with the teller about which he was so outraged.

Still Houghton says Mr Kataryna's case highlights the risks to consumers of vertical integration.

"Obviously in this case there is a clear confusion about whether he was getting advice or not," she says. 

Paul, who has taken over Mr Kataryna's job as full-time carer for their other critically-ill brother, has urged CBA to resolve his brother's case as soon as possible.

"They should admit their wrongdoings and make things right by their customers so they can get on with their lives," he says.

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