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An analysis of fund flows indicates that distribution and advice have suffered a reputational hit in Australia following the country’s royal commission, which resulted in sweeping reforms for the financial sector.

Australia’s year-long Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry culminated in a report released last month that detailed widespread misconduct and set out a series of 76 reform recommendations.

Core issues addressed in the report included compensation schemes that solely reward sales and a lack of best interest standards.

The resulting reputational damage disproportionately affected distribution and retail advice, relative to not-for-profit industry funds, according to statistics from the Australian Prudential Regulation Authority.

For example, Australian wealth manager AMP’s superannuation product exhibited the country’s greatest fund outflows last year, while the greatest inflows went to industry fund AustralianSuper, the country’s largest superannuation and pension fund.

“AMP’s numbers, in particular, provide a useful illustration of just how badly this side of the industry had been hit,” said Cerulli Associates, a global research and consulting firm, in a release on Wednesday.

In fiscal 2017, AMP’s statutory net profit was $848 million; in 2018, it was a relatively meagre $28 million (all figures are AUS).

That stark difference is the result of advice remediation—money put aside to pay back people that the management firm shouldn’t have been charging in the first place, Cerulli said in the release.

As a result of lost profit, Cerulli noted that, while the royal commission didn’t change the vertical integration model that’s been dominant in Australian financial services, most of the country’s big four banks started to sell their life insurance and wealth management businesses well before the commission released its final report.

Despite the fallout for distributors and retailers, Australia remains attractive for managers and consultants, with $2.65 trillion in superannuation assets, Cerulli said.

“Super funds will still need to make exactly the same decisions about asset allocation, currency hedging and liquidity as they always did, and nothing in the royal commission is likely to make them choose any different underlying managers than they have done in the past,” Ken Yap, Cerulli’s managing director, Asia, said in the release.

Industry effects resulting from reforms aren’t easily comparable from country to country. In Canada, potential upcoming reform includes a ban on embedded commissions—already banned in Australia as a result of reforms introduced in 2012.

In its initial proposal to ban these fees, CSA said that specific industry impacts are shaped by local market participants, market structure and savings habits, as well as the scope of reforms, which are so far much narrower in Canada relative to Australia.

Forecasted pros and cons for the financial sector

After Australia’s royal commission report was published in February, major rating agencies weighed in on the expected impact of its recommendations, citing a potential rise in legal and regulatory risks for the sector, which could affect earnings.

For example, Moody’s Investors Service said in a report that “civil and criminal proceedings may well emerge” as a result of evidence brought to light during the commission.

This view is echoed by Fitch Ratings, which forecasted increased regulatory scrutiny of non-financial risks, as well as legal action to address identified shortcomings.

Further, it said any legal actions could negatively impact industry earnings, while also distracting management. “We will continue to monitor the potential impact on ratings as the extent to which the banks are confronted by legal action, compensation or other remediation requirements becomes clearer,” the rating agency said in a report.

Moody’s noted that, despite the big banks’ divestment of their insurance and wealth management businesses, “remediation and other costs related to the wealth management businesses are likely to drag on bank profits in 2019.”

At the same time, Moody’s expected that regulatory oversight of the financial sector would be beefed up, and that the sector could become more litigious. That’s because the commission recommended, for example, that the powers of the Australian Securities and Investments Commission be extended and that provisions within industry codes of conduct be legally enforceable.

According to Fitch, while Australia’s banking system will face short-term challenges as it tries to fix the weaknesses in culture and governance that are identified in the commission’s report, the financial system will be stronger in the long run.

Further, it said that the commission’s report is notable for what it doesn’t recommend, such as requiring that financial product manufacturing and distribution be separate or that lending laws be tightened. As such, the country’s highly concentrated banking system and its long-run profitability will be reserved, the Moody’s report said.

However, with a federal election looming in Australia, Fitch cautioned that both major political parties could call for reforms that go beyond what’s recommended by the royal commission, adding to the challenges facing the financial system.