Vertical integration back on the agenda
It would be surprising if vertical integration was not addressed — if not fully investigated — in the upcoming Financial System Inquiry, according to managing partner of Tria Investment Partners, Andrew Baker.
In his monthly blog, Baker said now was the time to "make a fuss" as the inquiry could bring a critical focus to the issue.
While there was no mention of vertical integration in the draft terms of reference, there were a number of terms where the scope could allow for an examination, Baker said.
Those include:
- The current cost, quality, safety and availability of financial services, products and capital for all end users
- Balancing competition, innovation and efficiency, with stability and consumer protection, and
- Changes in the way Australia sources and distributes capital, including intermediation of savings through banks, NBFIs, insurance companies, superannuation funds and capital markets.
Radical responses such as structural separation could potentially get an airing, Baker said.
"Past financial system inquiries have resulted in significant reforms, and it's likely that this government will be looking to put its stamp in the financial services industry as well," he wrote.
"The for-profit players will be watching warily of threats to their business models emerging from this direction."
A closer look at vertically integrated models would not benefit just the independent sector — for which the financial services industry had become extremely tough — it could also be beneficial for players in this space.
The effectiveness of such model needs to be addressed, Baker wrote.
"To the outside world, vertically integrated competitors — especially the big retailers — look like an all-conquering army marching in step as they crush every independent in their path," he wrote.
"But take a closer look and it can look more like confusion, if not outright civil war."
While confusion arises around similar activities being performed in a number of different divisions, organisational behaviour is also strange, he added.
For all its economic power, many people working inside them [vertically integrated organisations] don't actually like working or collaborating with the other parts of the model, according to Baker.
"Financial planners resent being told which platforms they can or should use, as well as limited approved product lists; platform managers resent pressure to allocate assets to the in-house asset manager," he wrote.
"Equally, the asset managers feel they have to jump through even more hoops than external managers to compete."
Recommended for you
A financial advice firm has been penalised $11 million in the Federal Court for providing ‘cookie cutter advice’ to its clients and breaching conflicted remuneration rules.
Insignia Financial has experienced total quarterly net outflows of $1.8 billion as a result of client rebalancing, while its multi-asset flows halved from the prior quarter.
Prime Financial is looking to shed its “sleeping giant” reputation with larger M&A transactions going forward, having agreed to acquire research firm Lincoln Indicators.
An affiliate of Pinnacle Investment Management has expanded its reach with a London office as the fund manager seeks to grow its overseas distribution into the UK and Europe.
