1.3 Vertical integration

The Wallis Inquiry reflected the prevailing conditions of deregulation and globalisation, which produced a sense that financial markets would displace banks from their core functions and cause financial service providers to specialise and disaggregate.[1] It expected that this rise in competition would eliminate mispricing of financial products and services, create efficiencies in the system and ultimately produce lower costs for consumers.[2] The RBA has said that the Wallis Inquiry underestimated banks’ capacity to expand and acquire businesses along their supply chains.[3]

From the time of the Wallis Inquiry, banks’ accumulation of wealth management businesses accelerated. During the late 1990s and early 2000s, each of the major banks acquired or merged with a fund manager.

  • In 2000, CBA acquired Colonial Mutual Life Assurance Ltd,[4] which conducted life and other insurance businesses, and a funds management business.
  • In 2000, NAB acquired the financial services businesses of Lend Lease, including MLC Holdings Ltd.[5]
  • In 2002, ANZ entered joint venture arrangements with ING Group in respect of wealth management and life insurance businesses in Australia and New Zealand,[6] and later acquired the full business.
  • In 1999, Westpac founded Magnitude Group Pty Ltd. In 2002, Westpac acquired all of BT Financial Group’s asset accumulation businesses.[7] And in 2008, as part of its merger with St George Bank Ltd, Westpac acquired St George’s financial advice business, which included employed advisers as well as Securitor Financial Group Ltd.

The vertical integration of product manufacture with product sale and financial advice is a ‘one stop shop’ vision in which retail customers’ investment needs can be provided alongside traditional banking facilities such as loan and deposit services. Vertical integration has seen the acquisition by entities of a number, or all, of the steps in supply of financial products to consumers, starting with designing and creating the product, providing asset management services and investment platforms, and engaging in distribution to customers by way of financial advice or sales.[8]

From the perspective of banks, vertical integration always promised the benefit of cross-selling opportunities (the opportunities for cross-selling financial products to existing and new customers).[9] Vertical integration also promises the virtue of efficiency, which is then passed on to consumers in the form of lower costs and greater access to financial advice.[10] Customers may also enjoy the simplicity of dealing with just one institution.[11] However the internal efficiency of the ‘one stop shop’ does not necessarily produce efficiency in outcomes for customers. The ‘one stop shop’ model creates a bias towards promoting the owner’s products above others, even where they may not be ideal for the consumer.[12]

By the time of the Final Report of the Financial System Inquiry in 2014 (the Murray Inquiry), the ‘one stop shop’ model was well established in the market. The Murray Inquiry report observed that the high concentration of and steadily increasing vertical integration in some sectors had the potential to limit the benefits of competition in the future.[13] While the report did not express a view as to the merits of vertical integration, the Murray Inquiry recommended ways in which to make ownership and alignment more transparent.[14] It did, however, note that the Global Financial Crisis (GFC) had exposed ‘significant numbers of Australian consumers holding financial products that did not suit their needs and circumstances’ and that there were ‘significant problems relat[ing] to shortcomings in disclosure and financial advice’.[15]

[1]RBA, Submission to the Financial System Inquiry, March 2014, 14.

[2]See Wallis Inquiry, Final Report, Ch 4.

[3]RBA, Submission to the Financial System Inquiry, March 2014, 14.

[4]CBA, ‘Intention to Merge with Colonial’ (ASX Announcement, 10 March 2000).

[5]Lend Lease, ‘LLC Ann: Sale of MLC Businesses to NAB Uncon Settlement 30/6’ (ASX Announcement, 27 June 2000).

[6]ANZ, ‘ANZ & ING Complete Funds Management and Life Insurance JV’ (ASX Announcement, 30 April 2002).

[7]Westpac, ‘Westpac Completes BT Financial Group Transaction’ (ASX Announcement, 31 October 2002).

[8]See generally Productivity Commission, Report 89, 29 June 2018, ch 9.

[9]See, eg, Theodore Golat, ‘Banks’ Wealth Management Activities in Australia’, Reserve Bank Bulletin (2016) September Quarter, 53, 546.

[10]See Transcript, Michael Wilkins, 28 November 2018, 7242. Mr Wilkins said that vertical integration provides a number of advantages, particularly in respect of ‘affordability of advice’, in that ‘the administration of advice networks can have its fixed costs spread over a broader cost base’. See also Productivity Commission, Report 89, 29 June 2018, 249–50.

[11]See Transcript, Brian Hartzer, 21 November 2018, 6832. Mr Hartzer considered that Westpac owning advice licensees, and being able to provide financial advice, was part of Westpac providing systems that ‘make it convenient for people to manage their banking and their investments all in one place’, which would ‘help make [Westpac] a more attractive bank for people to be with’.

[12]Productivity Commission, Report 89, 29 June 2018, 85, quoting Choice, Competition in the Australian Financial System: Submission to the Productivity Commission, September 2017, 30; ASIC, Report 562, 1 January 2018, 16.

[13]Murray Inquiry, Final Report, 255–6.

[14]Murray Inquiry, Final Report, 271–2.

[15]Murray Inquiry, Final Report, 27.