It's gone very quiet as the Financial Services Royal Commission took a well-earned breather from the excitement and revelations of the past couple of weeks, with Round 3 of the Public Hearings not due to begin again until 21 May. However, in the background the AMP machine (minus CEO, Chair and Legal Counsel) has been busy producing their response, mainly denying or refuting the allegations levelled against them.

For those not wanting to wade through the full 27 pages and 101 points in AMP's submission, here's a 4 page Fact Sheet summarising their response.

In the meantime of course the public fallout has been dramatic, and in spite of AMP's response and denial, necessary. However, the outcomes - both in the short, medium and long term remain to be seen. Here's Hedge Clippings' quick take:

Short Term: 

• AMP's AGM next week will be a cracker!
• AMP's reputation has been irreparably damaged. How long, and what it will take to recover it, is anyone's guess.

Medium Term:

• Expect more divestment of Banks' wealth divisions (with the exception of "private wealth"). NAB has flagged the spin-off of MLC, ditto ANZ, with CBA examining disposal of Colonial.  However, this will only separate the banks from the platforms.  The Product Issuer, Platform and the Advisor network model will most likely remain in place but under new ownership.
• Expect an exodus of bank aligned (and AMP) advisors to truly independent groups to gain independence from their current restricted approved product lists.
• Expect Investors, faced with having to pay for advice, will avoid visiting a financial advisor even more than they do now, which while it will help some, will unfortunately not necessarily benefit their financial future.

Longer Term:

• Vertical Integration to come under pressure and possibly be abandoned. The big banks' and AMP's vertically aligned platforms are reportedly losing market share, while industry evidence suggests that only 20 to 25% of SMSF's and self-directed investors use them - either due to cost, or the fact they don't seek the services of a financial advisor.
• Bank culture itself may or may not change, but the headcount, and the pecking order, of their internal compliance departments almost certainly will.

Meanwhile it remains to be seen if the findings of the Royal Commission, when eventually handed down and pondered over by the authorities, and then argued over through the courts, will actually result in any successful prosecutions, particularly at senior or board level.

The Hayne Royal Commission Part II: How did this happen, and where's it going?

The revelations from Hayne's Royal Commission continues to reinforce the need for… the Hayne Royal Commission.

We incorrectly thought that the spotlight from the Royal Commission's peek into banking and the home loan sector was bad, but the exposure of the Financial Advice sector has probably surpassed it for the level and depth of systematic failure at every level of the industry.

How did this happen, and what will the outcome be? There'll be books written on it in the not too distant future, but here's one view:

Firstly, How did this happen?

It happened by stealth when in the early 1990's the banks decided they needed a "larger share of the customer's wallet" - a term used by NAB, but no doubt others, and coined from Wells Fargo Bank in the US.

Back then banks started buying stockbrokers;  NAB bought AC Goode, ANZ bought McCaughan Dyson, Westpac - which having narrowly avoided going to the wall - was a little slower buying Ord Minnett, while eventually the CBA, having been privatised, bought E*TRADE, introducing flat fee broking and spoiling the brokers' party of charging fees between .5 and 2.5% of each trade.

AMP and National Mutual, the two largest life insurance companies, each with a significant sales force paid on commission, decided to rename insurance salesmen and women as financial advisors. AMP became a listed company that had to compete for the consumer's wallet, and National Mutual became AXA, which from memory AMP consumed! Old habits die hard and the sales culture continued, with even greater spoils as reward.

Meanwhile in the mid '90's banks were also fighting Aussie Home Loans' "Aussie" John Symond and Wizard's Mark Bouris, each also with a strong sales culture. CBA bought out Aussie (if you can't beat them, don't join them, buy them!) while building societies which had competed with banks for the home loan and mortgage market, were by and large consumed in the wallet share exercise. NAB bought MLC, CBA - Colonial, Westpac - BT etc., etc.

Banking became a sales game, with trail commissions galore, and market share to play for.

And the practice of paying the big bonus!  One senior executive in front of the Royal Commission had his bonus clipped for his division's poor operational practices, reducing it by $60,000 to a mere $960,000! That must have damaged his local bottle shop's sale of Penfolds Grange!

Next, Where's it going?

Who knows, but it will change. 

For one, the vertical integration where a product issuer owns each of the product, the distribution channel, and the sales force, with scant transparency between the three, looks like it has been laid bare and will be dismantled one way or another - government regulation, consumer awareness, or a more competitive (probably online) model.

The structure of dealer groups, and blanket licensing of their employees - including the professional qualifications of those being able to use the term "advisor" will come into focus, as will having two organisations representing the industry while competing for members.

And today's revelations exposing the limitations under which ASIC operate and are able to prosecute wrongdoers will in due course provide the regulator with greater powers - either to investigate or prosecute.

And corporate ethics and responsibility? Someone, or some people, might be worried about taking a one way trip to the big house. They might have to rename the East Wing into something more representative. The Financial Services Wing maybe?

Meanwhile genuine and honest advisors - and there are many of them - will have to wear the reputational consequences of a system riddled by conflicts, and investors will need to understand that good advice is hard to find, and worth paying for.