Australia's CBA halts demerger amid mortgage broker uncertainty
* CBA stops work on wealth management and loan broker biz
* Bank to prioritise refunding wronged customers and fixing
* New company would be clouded by doubts -Credit Suisse
(Recasts, adds analyst quotes, context on election, background)
By Paulina Duran
SYDNEY, March 14 (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.
Australia's largest lender said that while it would
"ultimately" exit the business, it would instead prioritise
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
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
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
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
($1 = 1.4122 Australian dollars)
(Reporting by Paulina Duran in Sydney and Ambar Warrick in
Bengaluru; Editing by Lisa Shumaker and Stephen Coates)
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