Despite facing criticism by the Royal Commission inquiry into financial misconduct for their vertical integration offering, the Big Four are steadfast in their conviction that it is best for customers.
In his interim report released earlier this year, Commissioner Kenneth Hayne said that a vertical integration policy could present conflicts. Banks could push certain financial products to benefit themselves rather than their customers.
This model is a ‘one-stop shop,’ according to Hayne, who added that vertical integration leads to ‘an incentive to promote the owner’s products above others, even where they may not be ideal for the consumer.’
Hayne believes that it is obvious why banks would prefer this method of operation, given that it presents the opportunity to cross-sell as much as possible. Vertical integration helped diversify the banks’ product offerings and allowed growth in new areas. However, the inquiry felt that with this model, sales would take priority over delivering a satisfactory level of service to consumers.
The inquiry revealed a host of questions around the existence of these mechanisms, including the provision of financial advice in a certain context – particularly around whether banks suggested and promoted products fairly and met the needs of the customer.
There were also strong allegations of these products having a higher charge than they would from another provider.
The banks responded by saying that vertical integration was still the best solution available, allowing customers to access everything that they need in one place, but they did concede that they could manage it better.
Commonwealth Bank of Australia (CBA) noted that ‘while conflicts of interest exist, these can be effectively managed.’
The bank warned against regulators and politicians stepping in to break up this type of financial model, saying that this could cause more problems than it would solve, particularly for customers.
CBA claimed that the problems unearthed by the Royal Commission were ‘not caused by that structure’ and said that there are many benefits to vertical integration, including it being ‘larger and better capitalized’ by default.
Its statement highlighted the ‘economies of scale that can benefit customers by reducing costs and also increasing investment in innovation and technology.’
CBA said that additional strengths provided by this mechanism include the ability to ride market volatility and offer the kind of stability that gives consumers confidence that their money is safe. The bank also clarified that its large size means that customers and regulators give more scrutiny to its dealings and that this is a positive factor.
During the inquiry over the last year, CBA has had to explain some of its compliance practices. The bank confirmed in October that it has set aside $850m, much of which will go to customers in the form of remediation and compensation.
National Bank of Australia (NAB) echoed similar thoughts as its rival, admitting that ‘we may not have got it right in the past.’ The bank was quick to point out that any issues could be improved through ‘conflicts management controls, policies and processes that are client-focused, known, understood and enforced.’
Westpac said that education and training are the way forward to giving financial advisers the confidence needed to tread tricky waters and avoid potential conflicts. ANZ said that it is difficult to fully disengage the process of vertical integration and that careful management is the best approach to take.