The Royal Commission inquiry into widespread misconduct across the financial sector has done more than just expose the Australian public and politicians to the problems underlying the sector, new figures reveal.
The inquiry has already helped result in the resignations of key executives and lead to compensation for consumers, and it has now wiped up to $12bn from the values of major financial investment companies across Australia.
With consumer trust severely damaged by some of the revelations, which include a host of mis-selling policies, refusals to act and potential allegations of criminal negligence, investors are also losing confidence in the financial sector.
The Royal Commission inquiry has fed into difficult operations already faced by these businesses, which now have a mountain to climb to persuade the public that their financial products have good value and are trustworthy in terms of being what they claim to be.
The inquiry is due to pass its interim report onto Prime Minister Scott Morrison’s administration this week as the government investigates suggestions that heavier regulation and tougher laws are necessary.
This expectation of clampdowns by regulators and the Australian government has sent some investors fleeing from the big banks as they anticipate a noticeable drop in share prices across the board.
While it seems that all major financial institutions are set to take a hit of some form, advice-led businesses should see the biggest reaction from their investors.
Since the inquiry launched in February 2018, wealth management company AMP has already seen its shares drop by a third of their original value, with nearly $6m wiped off their total market value.
Experts have also been acknowledging the key role that the inquiry has played in reducing IOOF’s value by $700m and Freedom Insurance’s value by a whopping 80% since the Royal Commission started compiling evidence of financial misconduct across the sector.
Although the big four banks in Australia had already found themselves struggling before the inquiry started, their losses have been much more pronounced amid increased scrutiny into some of their practices. While lending was already facing a slowdown in growth, the market has since shrunk further.
This has led three out of the four major mortgage lenders to deliver out-of-cycle rate hikes in the last month as they looked to claw back some of the profits ceded in the last year.
Shaw and Partners Analyst Brett Le Mesurier said that AMP suffered from a lack of diversification in its products, particularly because its offering was poor. The company relied on financial advisers under its name to continue pushing expensive products that did not match the service necessary to deliver expected profit margins.
Le Mesurier noted that the Royal Commission took AMP to task over what it thought was a conflict of interest in providing impartial financial advice for clients, as this did not match up with the targets that the company had in place. He suggested that had the public inquiry not have discovered these details, the AMP share price would have been higher by up to a quarter.
Regal Funds Management Portfolio Manager Omkar Joshi said that this posed a problem for vertical integration models. They suffered the most when something went wrong or a poor procedure took place, as they had not diversified their product range to handle increased scrutiny in their operations.