Australia's wealth industry has become a "vertically integrated place" since the 1990s – something that is set to continue under the "previous government's regulatory program, intended or not", says Tria Investment Partners managing partner Andrew Baker in the latest Trialogue.
While vertical integration is not explicitly raised in the terms of reference (TOR) of the Financial System Inquiry, there is still plenty of scope for its examination, he said.
Section 1.3 of the inquiry's TOR points to the "current cost, quality, safety and availability of financial services, products and capital for all end users"; section 2.1 points to a "balancing of competition, innovation and efficiency, with stability and consumer protection"; and section 3.3 references "changes in the way Australia sources and distributes capital, including intermediation of savings through banks".
"On this view, it would be surprising if vertical integration didn’t get a run, for example, in the context of concentrations of financial risk in the system," said Mr Baker.
Radical responses to the issue could get an airing, he said – including the structural separation of different parts of the value chain.
"Past Financial System Inquiries have resulted in significant reforms, and it’s likely that this government will be looking to put its stamp in the financial services industry as well," said Mr Baker.
"The for-profit players will be watching warily of threats to their business models emerging from this direction," he said.
Vertically integrated players would also do well to examine their own business models, which are not as "all-conquering" as they might appear from the outside looking in, said Mr Baker.
"For example, it’s not uncommon to find similar activities being performed in different divisions of vertically integrated businesses," he said.
Because the various parts of big institutions work in silos, there are often "right hand/left hand" situations where one part of the business has a "diametrically opposed" view to another, said Mr Baker.
"Where that extends to investment views, for example, it’s a compliance disaster in the making," he said.
In addition, for all of the vertically integrated model's economic power, human nature dictates people don't like collaborating with other divisions, said Mr Baker.
"For the vertically integrated, while the [Murray Inquiry] looms large, 2014 will also benefit from increased attention to organisational behaviour, and how to best balance the power of the model with the human tendency to resist its imposition," he said.
