Short presentation on regulatory impact on insurance and wealth management sector

1. Regulatory burden and its impact on the
Insurance and Wealth Management sector in
Australia
WEI Conference at the Harvard Faculty Club
Boston, MA, August 1-3, 2016
Dr Shantha P Yahanpath
Lecturer, Sydney Business School, University of
Wollongong
Shan P Yahanpath
Research Analyst, Agape International, Sydney
B.App.F. (Macquarie), MIB, MBA (Wollongong)
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2. Presentation
• Introduction
• Literature evaluation
• Methodology
• Qualitative and quantitative
• Time period 1995 - 2015
• Data – qual/quant - Bloomberg, Morningstar
• Risks of banking vs insurance and wealth
management
• Discussion
• Concluding comments
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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
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4. Literature Review
• IMF Working Paper (Elliott et al 2012) highlights
regulatory reform is essential
• Australian Securities and Investments Commission
(ASIC) endeavor to use international regulation as a
basis for their regulation (Armour, 2015)
• ASIC’s role is to make regulation more appropriate
for Australia as it takes action on an increasing
number of firms (Butler and Wilkins, 2014)
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5. 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 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)
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6. Methodology and Research Questions
• 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?
• 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?
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7. Methodology and Research Questions
• How has the banking regulations such as Basel III
impacted on the bank-owned Wealth
Management and Insurance divisions?
• 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?
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8. Methodology and Research Questions
• How can we interpret the qualitative
information? What can we learn from the
financial performance and other indicators of
the major financial services firms?
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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
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10. Impact of Basel III
• Direct impact of Basel III on Insurance and WM is
limited but capital constraints do have an impact
• Basel III represents a “raising of the bar” for risk
management practices
• In our 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
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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 frameworkamewor
• Enforceable undertakings have been costly with
little benefit
• Some WM and Insurance business subject to
international banking regulation
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12. Regulatory Burden
• Enforceable undertakings have been costly with
little benefit
• Some WM and Insurance business subject to
international banking regulation
• Increasing domestic regulation is a source of
pressure for Australian WM and insurance
• This led to selling of insurance divisions, such as MLC
selling insurance arm to Nippon Life
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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
• Disproportionate allocation of resources including
senior management time
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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
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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
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16. Concluding comments
• In summary it appears that even managers
in financial services feel that regulation is
good for the medium to long term
development of the sector.
• Regulation is bitter medicine but it is good
medicine to recover from the current
problems of the sector.
***End***
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