The traditionalbusiness of banking comprised lending, deposit-taking and theprovision of transaction services. Through the first half of thetwentieth century, banking was a regulated, local, low riskbusiness based on a customer’s credit worthiness and yieldedreturns based on interest.

Much has changed, butthe mid-century model persists in the popular consciousness. Bankadvertising draws heavily on this historical image. During the1950s, banking had little to do with funds management, where anentity pools and invests money on behalf of customers.

The funds managementsector was composed largely of superannuation and life insurance.For reasons discussed below, the reach of this sector was limiteduntil regulatory and financial conditions changed.

In the 1970s,Australia began to deregulate its financial markets. Restrictionson bank interest rates and liability structures were removed;foreign banking was made easier to access; the Australian dollarwas floated. The financial sector expanded. At the same time,growth in the size and liquidity of securities markets allowed morediverse financial products to develop.

The next criticalsteps were the expansion of superannuation, which shifted theresponsibility for and control of provision for retirement fromemployers into the hands of individuals. From 1983, successivechanges to the tax treatment of superannuation increased thecomplexity of superannuation but also established it as a vehiclefor compulsory saving. These developments included theincorporation of superannuation into employment awards in 1986 andlegislation in 1991 imposing tax penalties where employercontributions were not made.

With greater amountsof savings invested in superannuation funds, Australians now have afar higher exposure to capital markets and since the 1980sAustralians have increasingly seen a need for financial advice.

In 2000, CBA acquiredColonial Mutual Life Assurance Ltd, which conducted life and otherinsurance business, and a funds management business

In 2000, NAB acquiredthe financial services businesses of Lend Lease, including its MLCHoldings Ltd. advice, platform and superannuation and assetmanagement businesses.

In 2002, ANZ enteredjoint venture arrangements with ING Group in respect of wealthmanagement and life insurance businesses in Australia and NewZealand, and later acquired the full business.

In 1999, Westpacfounded Magnitude Group Pty Ltd. In 2008, as part of its mergerwith St George Bank Ltd, Westpac acquired St George’s financialadvice business, which included employed advisers as well asSecuritor Financial Group Ltd. In 2002, Westpac acquired all of BTFinancial Group’s asset accumulation businesses.

Scandals dating backto the GFC began to shed light on the conflicts and culture in thefinancial advice industry.

In their submissionsto the Commission, financial services entities acknowledged conductthat amounted to misconduct or conduct falling below communitystandards and expectations in connection with the provision offinancial advice.

Clients of financialadvisers or financial advice licensees being charged fees forservices not provided to them is now rightly recognised to havebeen a large and endemic problem in the industry.

Charging for doingwhat you do not do is dishonest. No-one needs legal advice to tellthem that.

https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-report-volume-1.pdf(Links to an external site.)Links to an external site.

1. What are the core traditional functions of commercial banks? (1mark)
2. How did banks generate profits prior to the 1980s, and what wastheir attitude to risk? (1 mark)
3. Identify two major changes which happened in the fundsmanagement sector of the Australian financial system between the1970s and the 1990s. (1 mark)
4. How did Australia’s big-4 banks respond to these changes? (1mark)
5. What is the main problem which arises as a result of providingfinancial advice and selling investment products in the sameorganisation? (1 mark)
6. Identify evidence of undesirable cultural change in the bankingand financial services sector of the economy in the above extract.(1 mark)
7. Identify and distinguish between the roles played in theAustralian banking system by APRA and ASIC. Which of these twoinstitutions appears to have been more heavily criticised by theRoyal Commission, and what is the main reason for this criticism?
8. What does it mean to say that the big-4 banks are ‘too big tofail’? Explain your answer clearly and concisely. (1 mark)
9. In what sense do the big-4 banks face a problem of moralhazard? (1 mark)