Ban banks from wealth management; Economist say banks should get out of wealth management and consumer protection should be improved

Ban banks from wealth management: economists

February 1, 2014

Clancy Yeates

Economists also see no role for banks in wealth management.

David Murray’s financial system inquiry should examine ways to beef up consumer protection and improve disclosure standards for retail investors, some of the country’s top economists say.

As part of BusinessDay’s economic survey, our panel of experts was asked to nominate what they thought should be the top recommendations of this year’s review of finance, to be led by Mr Murray, a former Commonwealth Bank boss.

While the economists put forward a broad range of views – and they didn’t agree on everything – one theme raised repeatedly was the need for measures to protect consumers from complex or inappropriate financial products.

There were also calls for banks to be banned from participating in wealth management – amid claims bank involvement in the sector is creating extra financial risk.

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Mark Crosby from Melbourne Business School said Mr Murray and his panel of experts should look at ”stronger consumer safeguards” covering areas such as currency trading and exchange-traded funds.

Bank of America Merrill Lynch economist Saul Eslake also said the inquiry should ”consider prohibiting the promotion of certain investment products to retail investors”. Mr Eslake added there should be simpler requirements for product disclosure statements – the complex documents companies must provide when selling financial products.

Stephen Anthony from Macroeconomics also called for improvement in product disclosure statements, which he said had become ”indecipherable” because regulators were arbitrarily enforcing some rules.

”A product disclosure statements regime allowing reference to standardised risks and a maximum length would be positive,” he said.

Mr Anthony also raised banks’ participation in the wealth management industry – which executives see as a key source of growth as the population ages.

Mr Anthony, a former Treasury official, said the government should not allow the Commonwealth Bank, Westpac, ANZ and NAB to continue operating their wealth businesses. ”This will sustain competition in the funds management industry and reduce systemic risk across financial markets,” he said.

Bill Mitchell from Charles Darwin University also called for tougher restrictions on what activities banks can engage in, but went further than Mr Anthony, saying they should be restricted to loans, deposits and payments services.

”Banks should be restricted to the facilitation of loans and not engage in any other commercial activity,” he said.

Jakob Madsen from Monash University was also concerned about household financial risk, and called for ”firm” regulation of the sector, including requiring home buyers to have deposits of 20 to 30 per cent to protect them from a property market slump.

”Australia’s resilience is not due to tough regulation of the financial sector but mostly due to good luck,” he said.

Alongside these concerns, however, several panel members warned against excessive regulation from the inquiry.

Mardi Dungey from University of Tasmania cautioned against moves to address housing affordability by regulating the mortgage market.

Commonwealth Bank’s Gareth Aird noted a global push for greater regulation in finance, but said Australia’s system had proven more resilient than those overseas.

”It is normal for regulation to be tightened following a financial crisis. But the right mix needs to be struck between financial regulation and efficiency,” he said.

Other issues raised by panel members included: infrastructure financing, competition, and the ”four pillars” policy that prevents mergers between the big four lenders.