A short presentation on regulatory burden and its impact on the wealth management sector in Australia.

1. Regulatory burden and its
impact on the Insurance and
Wealth Management sector in
Australia – An Exploratory Study
Dr Shantha P Yahanpath
Adjunct Professor, S P Jain School of Global Management, Sydney
Visiting Lecturer, Sydney Business School, University of Wollongong
Shan P Yahanpath
Research Analyst, Agape International, Sydney
Master of International Business and Master of Business Administration
(MBA) Graduate, Sydney Business School, University of Wollongong
1

2. Presentation
• Introduction
• Literature evaluation
• Methodology
• Qualitative and quantitative
• Time period 1995 - 2015
• Data – qual/quant - Bloomberg, Morningstar
• Profit, expense, regulatory expenses, return on
shareholder funds, wealth management
expenses
• Limitations – structural shifts
• Discussion
• Concluding comments
2

3. Introduction
• Insurance sector important
• Wealth Management (WM) and Insurance
sector has been M&A targets
• Major banking legislation (Basel III) impacts on
WM and Insurance
• After GFC, need for overarching regulation
• Fragmented financial services – structural shifts
• Gathered quant/qual information
• Commercially sensitive - Why?
http://www.moneymanagement.com.au/news/fi
nancial-planning/why-nab-and-westpac-are-
right-wealth-management
3

4. Research and media announcements
‘The review authored by Adjunct Lecturer in
Finance at the Sydney Business School —
University of Wollongong and founder of
management consultancy Agape International,
Shantha Yahanpath, has examined the
profitability of the major banks and the influence
of their wealth management divisions and has
concluded that their returns have probably fallen
below shareholder expectations.”
4

5. Literature Review
• IMF Working Paper (Elliott et al 2012) highlights
regulation reform is essential
• Australian Securities and Investments
Commission (ASIC) endeavor to use
international regulation as a basis for their
regulation (Armour, 2015)
• ASIC has a role to make regulation more
appropriate for Australia as it takes action on
an increasing number of firms (Butler and
Wilkins, 2014)
5

6. Literature Review
• Australian banks are “too big to get sick”-
strong uptake of capital buffers (Rose and
Eyers, 2015)
• Failure to report breaches of conduct (Yeates,
2015)
• WM has been seen as one of the most
attractive sectors, also key in attracting and
maintaining Retail Banking clients (Deloitte,
2015)
• Importance of adapting to digital revolution
(McDonough, 2013)
• GFC strong catalyst for new regulation
impacting on WM and insurance (Oracle, 2010)
6

7. Methodology and Research
Questions
Triangulation - due to limitations in quantitative data
Has there been a significant impact of regulatory burden
on the performance and stability of the Wealth
Management and Insurance business?
How has the banking regulations such as Basel III
impacted on the bank-owned wealth management
and insurance divisions?
7

8. Methodology and Research Questions
How have regulatory bodies APRA and ASIC adapted to
international banking regulation? What are the specific
impacts of regulation on the Wealth management and
Insurance sectors?
How can we use the commercial experience in the
Australian financial services industry gained over decades to
identify the potential drag on profit? What do the banking
executives think?
How can we interpret the qualitative information? What can
we learn from the financial performance and other
indicators of the major financial services firms?
What are the steps necessary to move forward towards an
overarching regulatory framework that focusses on
regulating the insurance and wealth management sectors
within the wider financial services sector?
8

9. Risks of banking vs insurance
and wealth management
• Drivers of banking = capital and funding
• Drivers of insurance and WM = capital and risk
• Key problem- total ownership and integration of
WM
• Insurance funded by upfront premiums
• We look at WM and insurance sectors as
follows:
1. Fully owned and integrated into banking
2. partially owned and bound by strategic
alliance
3. Standalone with limited banking exposure
9

10. Impact of Basel III
• Direct impact of Basel III on insurance and WM
is limited but capital constraints …
• Basel III represents a “raising of the bar” for risk
management practices
• In previous paper , we concluded that the
foray into WM may not have been beneficial
for shareholders at least in short-term
• Adverse impact of regulatory pressures in the
short-term
10

11. Regulatory Burden
• Australian financial services subjected to
stringent regulation
• Administered by ASIC and APRA
• Regulation has weathered GFC effects
• However, the new regulations are merely in
addition to the existing
• Enforceable undertakings have been costly
with little benefit
• Some WM and insurance business subject to
international banking regulation
11

12. Regulatory Burden
• Enforceable undertakings have been costly
with little benefit
• Some WM and insurance business subject to
international banking regulation
• Increasing domestic regulation source of
pressure for Australian WM and insurance
• Led to selling of insurance divisions, such as
MLC selling insurance arm to Nippon Life
12

13. Insights from qualitative analysis
• We discussed regulation’s effects with senior
managers in WM and insurance
• All feel that regulation has adversely affected
profits
• Bank-owned insurance and WM felt heavy
regulatory burden
• Disproportionate attention from regulators due
to staff misconduct
13

14. Concluding comments
• Regulation- adversely affected the
insurance and WM sectors
• In some cases the impact has been short-
term and in others long-term
• Banks sold their insurance operations- hard
to cope with the regulatory burden
• Banks- reducing their exposure to wealth
management
• Senior executives- confirmed management
of legacy products was a challenge
14

15. Concluding comments
Survey results show:
• 78% of senior executives favour protecting
the customers with a strong regulatory
framework
• Most feel regulations have a short term
adverse effect but believe they will benefit
insurance and WM in the long term
• While Australian Securities and Investment
Commission (ASIC)- considered to be doing
a good job, industry also feels that they
need further government funding
• Divided opinion on parliamentary inquiry
into financial services- 36.17% in favour,
36.17% believe ASIC is sufficient
15