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Australia's CBA halts demerger amid mortgage broker uncertainty – Reuters


SYDNEY (Reuters) – Commonwealth Bank of Australia said on Thursday it had halted preparations for the planned demerger of its wealth management and mortgage broking businesses, amid regulatory uncertainty and unfinished work to compensate wronged clients.

FILE PHOTO: A Commonwealth Bank of Australia logo adorns the wall of a branch in Sydney, Australia, May 8, 2017. Picture taken May 8, 2017. REUTERS/David Gray

Australia’s largest lender said that while it would “ultimately” exit the business, it would instead prioritize refunding customers, remediating past “issues” and implementing some of the recommendations from a year-long misconduct inquiry.

The halt comes ahead of a federal election expected in May which has cast doubt over the mortgage-broking business model, with the Labor opposition vowing to cap most broker commissions and ban certain others to remove conflicts of interest.

“Demerging something that has volatility and uncertainty around key aspects of its (profit) doesn’t make for a quality listed company,” Credit Suisse banking analyst Jarrod Martin said.

CBA said last year it planned to demerge its funds management, wealth advisory and mortgage broking arms into a separately listed new company.

However, it unexpectedly sold its asset management arm – seen as the crown jewel of the proposed new delisted company – to Japan’s Mitsubishi UFJ Financial Group.

The remaining businesses operate in industries that have been hit by scandals and are subjected to more regulatory scrutiny, after the government-mandated inquiry found that brokers too often failed to act in customers’ best interests.

One of the inquiry’s core recommendations to prevent conflicts of interest was a ban on so-called trailing commissions, which banks pay to brokers over the life of a loan regardless of the outcome for customers. Instead, the inquiry said borrowers should pay brokers’ fees directly.

The conservative ruling coalition initially supported the ban but, in the face of heavy lobbying from the mortgage broking industry, said this week it would no longer seek to abolish trailing commissions.

Mortgage brokers have said a ban on such commissions would threaten their business models and hurt competition.

Credit Suisse’s Martin said the demerger halt was reasonable, given the “uncertainty around mortgage broker payments with different approaches from both the government and the opposition” and the mounting cost of refunding wronged customers.

CBA has disclosed a record A$1.4 billion ($991.3 million) in refunds and administration costs over the last five years as it tries to fix problems highlighted by the public inquiry.

The bank admitted last week there was still a lot of work to be done under its remedial plan to address the inquiry’s recommendations, including abolishing trailing commission payments to home loan brokers.

There also have been delays in fixing internal systems that resulted in customers paying fees for services they had not received.

Reporting by Paulina Duran in Sydney and Ambar Warrick in Bengaluru; Editing by Lisa Shumaker and Stephen Coates

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