At the crossroads
The real problem for Australia's financial services industry is not disruption, competing in a world of digital ecosystems or a lack of innovation, but the simple fact that many of our largest players live and work in a parallel universe to the one inhabited by their customers.
At one of Australia's big banks, the communications staff regularly edit the press clippings that go to the executive team to take out anything that may reflect badly on their ability to shape the news. Other financial services companies are simply too big for the top executive or the board to know what's going on until they see it on the front page.
In January, acting ASIC chairman Peter Kell reported that some of Australia's biggest insurance companies, including IAG, Suncorp, Allianz and QBE, worked with car dealers to sell car buyers add-on insurance, such as tyre and rim, sickness, asset protection and extended warranty insurance, that provided little or no value. Kell said that from 2013 to 2015, Australians paid $1.6 billion in premiums and received just 9c in the dollar back. "Where did the money go?" he asked. About half went back to the companies and the insurers paid the dealers $602 million in commissions.
"We also had identified the related car-yard practice of so-called 'flex commissions' (where) the finance companies not only allowed car dealers to decide what rate of interest to set for the loan, they financially incentivised dealers to charge customers a higher interest rate," Kell said.
Despite commenting to the media, Suncorp ("We are a trusted financial services partner") doesn't mention the episode on its website.
Allianz said in a media release: "As part of an analysis of our motor vehicle add-on insurance products, we have identified some policyholders who purchased cover which may not have been suited to their circumstances and others that did not notify us to cancel their cover. Based on these assessments, we expect to refund approximately $45.6 million."
The real issue for the future of the financial services industry is growing government intervention. This follows public unhappiness expressed through the media and at a local electorate level. The bottom line is that government regulation is an act of distrust.
If things stay the same, the future for traditional financial services companies is clear: more consolidation, more regulation, governments responding to populism in limiting their ability to operate, power shifting to institutional investors, more managerialism and even less innovation, an even stronger focus on short-termism and limited productivity growth. And then there's disruption.