Holding out for Hayne report — an investor’s guide

Investors should be more protected after the Hayne report butthey must also navigate a changed landscape.

The fact that the Morrison government pencilled the release of the Hayne report to be “post-market” should be evidence enough as to just how ­potent it will be for all sharemarket investors.

Every new year presents a fresh set of opportunities and challenges for investors, but rarely has political and legal change loomed so large over local investment conditions with the forthcoming Hayne inquiry report due on Monday.

We should not try to guess at this stage what Kenneth Hayne will actually deliver. The plan is that the government retains the report over the weekend in order to review what should be a shopping list of recommendations. Then when the ASX trading session ends at 4pm AEDT on Monday it will be released to the public.

The fact that the Morrison government pencilled the release to be “post-market” should be evidence enough as to just how ­potent this report will be for all sharemarket investors.

After this milestone document is digested and the government responds, consumers should be better protected and financial service executives may increasingly face not just penalties but jail time.

Indeed, if the Hayne report delivers even half of what is expected, financial services will never be the same again.

For investors, the perspective is different — yes there is the desire for greater protection but also the need to navigate these changes to make decent returns.

Everything is on the table with this report — your rights and protections as an investor, your access to superannuation, the standard of your insurance, not to mention the immediate outlook for any investments you may have on the market.

Here’s what to watch out for.

● New rules that could stop banks running wealth services. The bank most exposed here is Westpac, which alone among the big four has remained committed to wealth management while its rivals have been selling or seeking to spin off their wealth divisions. Stocks in the spotlight: ANZ, CBA, NAB and Westpac.

● Financial advice reforms. The elimination of the disgraceful “grandfathered commissions” that rolled on endlessly in the wake of major reforms in 2014 is surely a given. But Hayne will almost certainly tighten regulation of both qualification and operation of financial advice practices. Hopefully, he will rid the system of so-called “tied planners”. Stocks in spotlight: banks, insurers, IOOF.

● Moves to eliminate the worst-performing funds in superannuation. This would be a win for all investors. Alternatively, a move to have a “best in show” default menu for workers would be a mixed blessing that might ultimately stamp out competitive energy in the sector. Stocks in spotlight: again, the big four banks and major insurers stand to lose most if this comes to pass.

● New regulations that will bring insurers directly into mainstream regulation. Bizarrely, the insurance business has major “carve-outs” that allow it to run a self-regulation regime outside mainstream regulation. Hopefully, this will change. Stocks in spotlight: AMP, IAG and QBE.

● Reform of commission system among mortgage brokers. A flat fee for mortgage broking would rewrite the relationship between banks and their product sellers. It would reduce the attraction of mortgage-broking stocks and claw back power to bank stocks. Stocks in spotlight: CBA, Mortgage Choice.

● Outlawing of cold-calling of online financial services. New companies designed to exploit current conditions would be hit immediately if this change gets up.

Indeed, the report will have consequences well beyond the best known financial stocks. Among an assorted list that will also be in the news we might see Challenger, IOOF, Bendigo and Adelaide Bank and Bank of Queensland.

On the other hand, a “lighter touch” than expected from Hayne will almost certainly prompt a “relief rally” among these stocks.

Big bank stocks in particular could move higher if the report seeks to change the game by targeting tighter execution of existing laws and tougher fines. The report may also make recommendations on bank remuneration.

Any — or all — of these possible changes would give us better banks but they would not change the fundamental investment proposal from some of our most important stocks.

Under this scenario the major banks would face enlarged compliance costs but their situation as a de facto oligopoly with legal and government protection at the heart of our market would allow them to regain favour with local and overseas investors.

With banks selling on around 11 times earnings and offering yields of close to 7 per cent, such an outcome may immediately trigger bargain hunting.