The Commonwealth Bank will sever ties with its scandal-prone wealth management arm in a dramatic attempt to insulate the banking giant from fallout from the royal commission into misconduct in financial services.
As banks face fierce scrutiny over their wealth businesses after a string of scandals, CBA on Monday announced plans to create a new sharemarket-listed company to house its superannuation, financial advice, funds management and mortgage broking businesses that produce $500 million-a-year in profits.
The demerger comes after the royal commission has detailed serious flaws in financial advice, sharpening the debate over whether banks should be forced to sell out of the sector which has become a drag on industry's reputation and bottom line.
Mortgage brokers including CBA's Aussie Home Loans – which it plans to include in the new business – are also bracing for a shake-up amid concerns their reliance on commissions from banks creates a sales culture and causes consumers to take on excessive housing debt.
CBA chief executive Matt Comyn said the bank aimed to become "simpler", adding it would also consider offloading its remaining insurance operations after selling out of life insurance last year.
Mr Comyn said the move to hive off various parts of CBA, including Colonial First State, was influenced by "continuing shifts in the external environment and community expectations, and addresses the concerns regarding banks owning wealth management businesses."
Macquarie analsysts estimated the new company, to be known as CFS Group, would be worth between $6.5 and $10 billion, making it one of the biggest wealth firms in Australia.
The spin-off is the latest sign of banks quitting the wealth management sector, which has failed to deliver the big returns banks hoped for in the early 2000s, while also suffering from a string of scandals.
Shaw and Partners analyst Brett Le Mesurier said CBA's wealth business had been the source of many of the scandals at the bank in recent years, and the spin-off appeared to be aimed at dealing with this risk to its reputation.
"I think it's a problem of cauterising an earnings and reputational problem for the bank," Mr Le Mesurier said.
“First CBA had a problem with life insurance (which they sold). Then the royal commission highlighted the problem with conflicted advice which is being at least partially solved though the spin-off of the wealth management business.”
They are cleaning the place up
Brett Le Mesurier
Selling Aussie Home Loans appeared to be aimed at "removing any hint" of conflicts from the bank, Mr Le Mesurier said. "They are cleaning the place up," he said.
Royal commission hearings in April found, among other problems, that CBA's financial advice business had charged some clients fees after they had died. This was part of an industry-wide scandal known as "fees for no service," which was the ultimate trigger of a boardroom crisis at AMP.
The royal commission, which resumed hearings on Brisbane on Monday, focusing on lending to farmers, is due to deliver its draft report to the government in September.
There have been predictions the commission may lead to further restrictions on the commissions received by financial advice businesses, and growing compliance costs for banks.
White Funds Management managing director Angus Gluskie said CBA's demerger would create "separation" between the core bank and its investment management activities. This could help to "insulate" the bank from the problems of reputation created in the wealth arm and potential reccomendations in this area from the royal commission.
"It creates a bit of distance, and starts to do a bit of what they [the royal commission] are after," Mr Gluskie said.
Mr Gluskie also said the decision was an acknowledgement that "the whole financial advice area is going to be complex and sorting it out will go on for years".
The demerger will unwind several high-profile acquisitions by CBA over the last two decades, in particular the $9 billion purchase of Colonial First State under former chief David Murray, who is now chairman of AMP.
CBA will continue to employ the 460 salaried financial advisers who work in its Commonwealth Financial Planning arm, it said, while selling its Financial Wisdom and Count Financial businesses.
With ANZ Bank and National Australia Bank also having announced plans to sell their superannuation and financial advice businesses, Westpac is the only big four bank that says it remains committed to owning a wealth management business.
Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.
Morning & Afternoon Newsletter