Two weeks to change banks

The Northern Star - - HOLIDAY PUZZLES - TERRY MCCRANN

HERE we go again: two more weeks of pub­licly, ap­pro­pri­ately and nec­es­sar­ily, lac­er­at­ing nam­ing and sham­ing? Or verg­ing on gra­tu­itous bank bash­ing?

The an­swer you might pro­vide will largely de­pend on your point of view and your spe­cific point of ref­er­ence – your per­sonal in­ter­sec­tion with a banker or fi­nan­cial ad­viser.

But in the big­ger pic­ture, the next two weeks should pro­vide the big four banks with a very loud wake-up call and also some very clear strate­gic di­rec­tion.

The next two weeks will be on a com­pletely dif­fer­ent plane to last month’s lac­er­at­ing royal com­mis­sion fo­cus on mis­con­duct by banks and other fi­nan­cial in­sti­tu­tions.

That ze­roed in on con­sumer lend­ing. That’s ab­so­lute bank­ing core; it’s what banks don’t just ‘do’ as part of a port­fo­lio of ser­vices; with­out it the banks wouldn’t ex­ist.

The banks can’t just walk away from it if it’s shown to be ‘too hard’; they have to get it ‘right’. So in this ab­so­lutely ba­sic sense, what the RC has ex­posed and what it will say in its re­ports is an ‘in­struc­tion man­ual for banks’.

That’s ‘in­struc­tion’ in two sub­tly dif­fer­ent but im­por­tant senses: you will do it as we de­mand, and this is the way you will do it.

This fort­night is very dif­fer­ent: it’s about some­thing – fi­nan­cial ad­vice – that banks do not have to do and ar­guably should never have got into do­ing.

The prac­ti­cal re­al­ity – and what is clearly the RC fo­cus – is whether bad prac­tices were in­sti­tu­tion­alised and/or ex­cused or over­looked; and then how timely, ap­pro­pri­ate and rec­ti­fy­ing was the bank’s re­sponse.

No, my point is that banks should never have done ‘fi­nan­cial ad­vice’ at all; or at least, they should not have done it (and broader fi­nan­cial ser­vices and man­age­ment) as per­va­sively and ag­gres­sively as they did.

If the banks – the hu­man be­ings that com­prise their boards of di­rec­tors, se­nior ex­ec­u­tive teams, and in par­tic­u­lar the CEO – are smart, they will re­ceive just one ‘in­struc­tion’: get out of fi­nan­cial ad­vice and the pro­vi­sion of non-bank fi­nan­cial ser­vices and prod­ucts.

It’s es­sen­tially and ir­re­versibly a ‘no-win’ sit­u­a­tion. The whole ba­sis for be­ing in fi­nan­cial ad­vice and as­so­ci­ated ser­vices is to gen­er­ate a con­flict of in­ter­est.

A bank can­not ‘cleanly’ gen­er­ate an ap­pro­pri­ate re­turn from fi­nan­cial ad­vice and as­so­ci­ated fi­nan­cial ser­vices like it does with core bank­ing – bor­row­ing at ‘X’ and lend­ing at ‘X-plus’.

It all seemed so dif­fer­ent back in the 1990s when banks started their ag­gres­sive push into what was ini­tially called ‘funds man­age­ment’ and be­came known as ‘wealth’ – as a cack-handed at­tempt at brand­ing.

While the idea of hav­ing a teller try to sell some­one a $300,000 home loan when they came to the win­dow to de­posit or with­draw $200 was al­ways pretty silly, at least it stayed within the bank­ing frame. Try­ing to get that teller to ini­ti­ate a whole ad­vi­sory re­la­tion­ship was fraught with chal­lenge; and even more fun­da­men­tally, it has never re­ally worked on the most ba­sic met­ric: gen­er­at­ing a good enough profit.

And that’s be­fore you fac­tor in re­me­di­a­tion costs and brand dam­age – even if that mis­con­duct is dra­mat­i­cally overblown – it was ac­tu­ally fairly mar­ginal when you con­sider the num­ber of cus­tomers and dol­lars.

The banks have started pulling back from ‘wealth’. The next two weeks is just go­ing to con­firm that.

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