Commonwealth Bank Shelves Spinoff of Troubled Wealth Unit

(Bloomberg) -- The fallout from Australia’s inquiry into misconduct in the financial industry continues to roil banks, with Commonwealth Bank of Australia shelving plans to spin off its scandal-plagued wealth management and mortgage-broking business.

The Sydney-based lender said Thursday it was suspending the spinoff to focus on implementing recommendations from the Royal Commission, refunding customers and fixing past issues.

For more insight into why the spinoff was delayed, click here

The move is the latest sign the inquiry’s findings are still rattling banks after Commissioner Kenneth Hayne released his recommendations last month. The report has left the fate of the mortgage-broking industry in question and spurred the resignation of National Australia Bank Ltd. Chief Executive Officer Andrew Thorburn and Chairman Ken Henry after their leadership was sharply criticized.

Commonwealth Bank shares fell 0.5 percent as of 11:51 a.m. in Sydney, and are little changed this year.

The spinoff of the businesses, which Morgan Stanley values at between A$2.1 billion to A$3.2 billion ($2.3 billion), had been planned for later this year, with executives already appointed. The size of the deal was trimmed after the bank last year sold its global asset management unit to Japan’s Mitsubishi UFJ Financial Group Inc. for A$4.13 billion.

Heavy Criticism

That left the remaining assets in the planned spinoff as mortgage-broker Aussie Home Loans, the financial advice business including Count Financial, and the Australian pension and investments platform known as Colonial First State. Those units came in for some of the heaviest criticism at the misconduct inquiry, particularly for charging customers for services that weren’t provided.

In one of the more notorious scandals unearthed by the inquiry, Commonwealth Bank had charged ongoing service fees to clients who had died.

Hayne assailed senior bank executives over the fees-for-no-service practice in his final report, saying it could lead to criminal charges, and urged the securities regulator to get tougher on wrongdoers and consider prosecution as its starting point rather than negotiated settlements.

Financial Toll

Commonwealth came in for renewed criticism just this week, with the Australian Securities & Investments Commission on Monday saying the big banks are taking too long to complete reviews into whether more customers have been charged fees for services they didn’t receive. In particular, ASIC said it wasn’t satisfied with some of Commonwealth Bank’s attempts to identify affected customers.

There has also been a financial toll on the bank. Commonwealth Bank said Thursday it has paid or provisioned A$610 million for customer refunds from providing poor advice and charging fees for no service. It is also spending A$650 million to improve its internal processes, and taken a further A$200 million indemnity provision for wealth-management related remediation issues and program costs.

Commonwealth Bank follows National Australia Bank, which in February delayed the planned sale of its MLC wealth management unit. Australia & New Zealand Banking Group Ltd.’s proposal to sell its pensions and investment business to IOOF Holdings Ltd. was thrown into doubt after legal action by the regulator, while Westpac Banking Corp. has pledged to keep its wealth operations.

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Peter Vercoe, Katrina Nicholas

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