The financial services sector is in the midst of a reinvention driven by market consolidation and legislative reform. Leanne Mezrani finds out what the changes mean for banking & finance practices.

The Future of Financial Advice (FOFA) reforms officially arrived on 1 July. It took three years, two parliamentary inquiries, hundreds of submissions and thousands of pages of legislation.

After all that work, it seemed nothing could stand in FOFA’s way, not even last-minute lobbying from the industry and Coalition to postpone the legislation for another 12 months.

In March, the deputy chair of ASIC, Peter Kell, reminded an audience of financial planners that the new rules covering conflicted remuneration, fee disclosure and fiduciary duty aim to restore trust in an industry battered by scandals.

He blamed “problematic advice issues” that led to the collapse of Storm Financial, Trio Capital, Opes Prime and, more recently, Banksia, for dragging the profession’s reputation through the mud.

“We all need reform to improve the quality of advice and increase the level of professionalism,” he said.

Kell and champions of FOFA within the Labor Party will no doubt indulge in some mutual back-patting for meeting the 1 July deadline in spite of political deadlocks and leadership woes, but not everyone is celebrating.

Some critics have argued that FOFA is driving smaller players out of the market and surrendering more power to the Big Four banks, along with a few large independents such as IOOF and AMP. The proof, it seems, is in a string of mergers and acquisitions by these financial services behemoths over the past few years.

Coming together

Commonwealth Bank Australia paid $373 million for the planning group Count Financial in 2011; IOOF picked up advice providers Plan B and DKN Financial in little over a year; MLC, the wealth advisory division of NAB, acquired Meritum Financial and gained more than 110 financial advisors and $3.5 billion in funds under management; and, perhaps the grandest marriage of them all, AMP merged with AXA Asia-Pacific in 2011 after beating off a last-minute challenge from NAB.

As the bigger end of town expands, small independents are not the only ones moaning about the shrinking number of players in the market.

Mark Skinner, head of the banking & finance division at Gadens Lawyers, says that consolidation in the financial services sector has increased competition for legal work and forced many firms to up their game to retain clients.

“There are fewer players ... [which] has placed increased pressure on us all competing against our fellow lawyers,” he said, adding that the slowdown of the foreign banks has also intensified competition between firms.

But given that most of Gadens’ financial services work comes from the major banks, Skinner says he is not under the same competitive pressure as lawyers whose clients are disappearing into mergers.

He adds that the firm won’t discount its rates to retain or attract work, but it has agreed to accept the rates set by the banks, which are “below our A rate”.

“The ultimate reality is to always be productive and work within the [financial] constraints our clients have.”

AdventBalance is another firm that acts for the Big Four banks. It also boasts a range of global investment banks as clients.

John Knox, AdventBalance’s managing director (Asia), admits that his clients are cost sensitive. “A lot of them have headcount freezes and the thought of outsourcing all of that work to traditional law firms on expensive hourly rates is not attractive.”

The firm will not, however, reduce its daily rate to court clients keen to cut their external legal spend. Instead, it offers fixed-fee pricing and flexible contractual arrangements, which Knox claims speak to cost-conscious financial institutions.

“That’s what the industry is really after at the moment,” he adds.

Choosing alternatives

Nick Humphrey, the head of the corporate group at Sparke Helmore, agrees that alternative fee arrangements can tip the scales for clients who are weighing up their options for external legal counsel.

He reveals that 70 to 80 per cent of files in the firm’s corporate group, which includes the banking & finance practice, now have a non-traditional fee arrangement structure, “whether it is fixed price, pendulum billing (swings in fees tied to success or failure on a deal) or even more revolutionary things like profit sharing, royalties [or] fees for equity”.

“The old way of ‘here is my hourly rate of $1000 an hour, times the number of hours and the big team I put on it’ – those days are gone,” he says.

Herbert Smith Freehills and Corrs Chambers Westgarth also claim that they are proactively offering alternative fee arrangements to banking & finance clients.

Ditching traditional billing models is one reaction to the consolidation in the financial services market; another is optimism among M&A lawyers.

Four heavyweight M&A lawyers from Clayton Utz, Herbert Smith Freehills, Ashurst and Sparke Helmore, told a panel discussion in Sydney recently that, with energy and resources work drying up, financial services offers the best possible path to a recovery in Australia’s tanking M&A market.

M&A activity in the Asia-Pacific (excluding Japan) in the first quarter of this year was 23 per cent below the same period in 2012, according to Mergermarket. But Q2 has seen an uplift of 25.6 per cent on Q1, which is also a 1.2 per cent increase in deal activity compared to the same time last year.

Skinner says he can see potential for the financial services sector to boost M&A activity in the second half of 2013.

“Corporates are very cashed up at the moment,” he explains. “They haven’t been borrowing a lot in the last four or five years – in fact, corporates have been deleveraging, taking less debt – and so they’ve got equity and ability to borrow.

“The decision is whether or not the corporates like the market at the moment and have the confidence to go out and buy a major company.”

Investment banks and funds houses are doing their bit to drive a few more deals in the market, continues Skinner, but adds that their efforts are being hampered by the lack of “quality deals”.

Super men

So, as M&A teams look at the long term for a workflow boost, those with superannuation expertise have plenty on their plate advising clients on changes to Australia’s superannuation system that took effect on 1 July.

Among the changes are: a quarter-percent increase to the Superannuation Guarantee rate, which will eventually climb from nine to 12 per cent; the extension of compulsory employer super payments to workers aged over 70; allowing seniors to pump an extra $10,000 into super and receive a tax deduction for it, and requiring super funds and advisors to offer a basic level of financial advice for free.

Also in the mix of recent legislative changes is the introduction of MySuper, a low-cost default superannuation product that must be offered to employees who do not choose their own fund.

There are many more proposed reforms that won’t be legislated before the September election, including a proposal to tax income streams on pension assets above $100,000 at 15 per cent.

While the Government drip-feeds legislation to the industry, the head of Holding Redlich’s superannuation & funds management practice says her firm is enjoying a steady stream of advisory work.

Jenny Willcocks works predominantly with trustees on regulatory compliance, risk management, investments and insurance. She claims her practice has remained consistently busy as she helps clients navigate the recent reforms to superannuation.

“This process has been a nightmare for our clients and we are working with them to implement all of the changes necessary for them to comply,” she says.

Even though Willcocks does not expect the election will have any impact on her practice, she does point out that both the current Government and the Coalition are “incapable of leaving superannuation alone”.

“Only three things are certain: death, taxes and changes to superannuation legislation,” laughs Willcocks, admitting that while regular reform is not ideal for investors seeking a stable investment, it is “good for [legal] business”.

Similarly, while FOFA has been a compliance headache for financial advisors, Gadens has benefitted from the uptick in advisory work.

Skinner says there is also a considerable amount of legal work up for grabs now that the legislation has taken effect. He reveals that the firm is working with corporates, many with substantive in-house FOFA teams, to interpret the operational aspects of the law and help them roll out training of financial advisors.

“The big principles are all understood,” he says. “It’s very technical now, around what financial advisors can say, how to train them better, what’s the best option in a set of given circumstances ... we’re down to day-to-day training now and what that will look like.”

AdventBalance, on the other hand, is not interested in legal work arising out of FOFA. The firm’s partners are more interested in attracting compliance work out of derivatives reform, particularly in relation to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Banks are extremely nervous about the reforms that are coming down and how they’re going to manage that across the globe,” Knox says.

The over-the-counter (OTC) derivatives market is currently in the midst of sweeping regulatory reforms as the impact of the Dodd-Frank Act and Basel III commitments take effect. But work off the back of the legislation and regulatory framework is not a long-term cash cow for AdventBalance, admits Knox.

He explains that the firm, like many others, is shifting its focus from the US and Europe to Asia, where large projects and deals need finance. AdventBalance opened an office in Hong Kong in April, with its already-established Singapore office now boasting a 26-strong legal team.

Asia is on Gadens’ radar too. The firm recently opened an office in Singapore and the managing partner of that office is seeking out opportunities in Myanmar as well as other parts of central and southeast Asia, reveals Skinner.

“We have to be aware that we are a global economy, so if the Chinese government decides to allow a cutback on lending or decides to increase consumer spending or decides to pull the lever it does, it’s probably more important to us than if the Coalition or Labor wins the next election,” he says.

Gadens may be unconcerned with the federal election now, but it may change its tune if Joe Hockey follows through on an announcement in April that he would order an inquiry into the ‘four pillars’ banking regime if the Coalition takes power.

Treasurer Wayne Swan responded by urging bipartisan political support for the regime, which aims to support competition by preventing mergers between the Big Four banks.

But it has been argued that the policy, in fact, reduces competition because it doesn’t stop the Big Four from buying smaller competitors, and unfairly insulates them from takeover by likely predators.

Consolidation, in one form or another, appears to be inevitable for the financial services sector, which is the largest of the Australian economy and accounts for more than 10 per cent of the country’s gross domestic product.

Firms have already identified opportunities in the sector, whether for their M&A, banking & finance or superannuation practices. The question now is: what are they prepared to do to attract and retain work in a market that has fewer players and more cost-conscious clients?