Conflicted AMP on a countdown to oblivion

For much of its 169 years, the AMP has been the most trusted financial institution. This week that trust was shattered.

The AMP is the second-oldest major financial institution operating in Australia. Only Westpac goes back further. But for much of its 169 years, the AMP has been easily the most trusted of all the financial institutions.

This week that trust was shattered and shattered irretrievably; and, indeed, the institution itself might now be in a countdown to oblivion.

Even if it can survive the blizzard of investigation and far more onerous and pervasive regulation that it now faces, along with who knows how many (and how punitive) class actions, the most fundamental message is that the AMP really doesn’t have a viable business model in the world of the 21st century.

Now if truth be known it probably hasn’t had such a business model for some time — not since cross-subsidisation and opaque returns could no longer be sustained in the public investment and savings markets, and particularly not in the same investment package.

It was able to plough on through that reality courtesy of a portfolio of factors, which started with high investment returns (that’s generally, not AMP-specific) that were able to blur if not exactly bury the bad or just inefficient investment advice and practices.

We also had conflicted but not necessarily wrong or loss-inducing advice (the off-white); conflicted and loss-inducing advice (the blackish grey); and outright rip-offs (the full black).

In 2018 — even before the royal commission and what will now very clearly flow from it in terms of far more intrusive and proscriptive regulation, to say nothing of punitive risk-sapping punishment, as politicians scramble to claim parentage of it — all those profit “supports” were already fading.

In simple terms the ‘‘bancassurance’’ or bank-plus-wealth-business operating model is dead. Arguably it should have been stillborn; arguably, the banks’ push deep into financial advice, funds management and the spectrum of insurance products was always misconceived.

The seductive lure of a greater ‘‘share of wallet’’ could only work by precisely the ‘‘synergy’’ which required conflicted and overcharged services — precisely at the point of time (post-2000) when a whole series of monumental secular shifts were bearing down on financial service prices and even more on margins.

This acted as a diabolic driver, sending banks even more feverishly in pursuit of “synergy”: a catch-all word for conflicts, whether recognised or even intended, whether immediate or latent, and which has now blown up so spectacularly and with such potentially devastating consequences for brands, for franchises and for future profitability.

The four big banks have been pulling back from wealth. They have, though, indicated differing desires to hang on to sectors — on the not necessarily wrong belief that in 2018 going forward a bank still has to have both the IP and the actual delivery of financial services beyond just deposits, lending and transactional services.

That, to put it bluntly, the operating ability to take a greater ‘‘share of wallet’’ is actually in the best interests of bank customers, as well as of the bank.

Whether or not that’s true, they should forget it; they have to get out of all non-bank financial services. The conflicts are just not justifiable; and especially not in retrospect, as we are seeing with the RC.

Even more pointedly, the returns are just not good enough. The banks have to return to a banking future.

In 2018, banking can be quite complicated but at core it is borrowing at X and lending at X-plus. And getting the right balance with risk: a good bank must have bad loans; the best bank just has fewer bad loans.

A ‘‘pure’’ banking future might have its challenges; it will require different strategic and operational mindsets; but it will deliver the clarity banks precisely need to meet the profit-sapping if not also core business-destroying digital disrupters.

That clarity might also come in handy if — as? — the property cycle turns. It’s been just too easy to make money in property lending. Perhaps even bankers need to relearn the lesson that property doesn’t always go up in value; are there indeed any frontline bankers today who lived through 1990?

The four big banks can go back to banking; the fifth pillar, the AMP, can’t. It has to make investment advice and investment management ‘‘work’’ in their own terms and in the context of much greater, more punitive and more intrusive regulation.

I would suggest it no longer has (if indeed it ever did) the skills to make it work without the ‘‘synergy’’ of conflicts. And that’s even without accounting what it’s about to get. Plus both its parts and the overall package will be like a wounded whale in a pod of killer whales tearing it to pieces.

The rest of us should be careful at getting what we wish for. Removal of conflicts in the financial services space — even the off-white versions, not the dark grey or black ones — cannot but mean paying specific fees for each service component.

In an ideal world, competition would both drive those fees lower and drive out the under- or poor performers. Needless to say we do not and never will live in an ideal world: the consequence will be to make financial services more expensive but no better.

We also need to be very, very circumspect about the coming greater regulation and red tape. There is as much and as important a regulation risk-reward trade-off as an investment risk-reward one.

This is why business must be proactive in both the regulation debate and minimising the need for regulation by adopting structures and practices that do not allow the conflicts, far less the rip-offs in the first place.

We should all want profitable banks. The only thing worse than a bank that makes too much profit is a bank that doesn’t make enough.

The first two weeks of the RC were interesting theatre. These latest two weeks are a fortnight that will change the world of banking. It can be for the better.