Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy after the Australian Securities and Investments Commission (ASIC) ban?
Commonwealth Bank of Australia or CBA is Australia’s largest bank, with commanding market share of the mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.
ASIC uses the ban-hammer on CBA
ASIC is forcing Commonwealth Financial Planning (CFP) to stop charging or receiving ongoing service fees from its customers. The CBA Financial Planning division is also not to enter into any new ongoing service arrangements with its customers. This is just hours before the release of the Royal Commission report.
By 31 January 2019 CFP was meant to provide a final report by Ernst & Young about if CFP had taken reasonable steps to remediate customers for the fees for no service scandal, and on the adequacy of CFP’s systems, processes and controls. CFP was also meant to provide an attestation from a CBA accountable person about the same issues.
However, the EY report (issued on 31 January 2019), identified there were still concerns about CFP’s remediation program and there was still a heavy reliance on manual controls which have a higher risk of failure due to human error or being overridden.
The written update from CBA’s accountable person did not meet ASIC’s requirements for an acceptable attestation.
Therefore, until CFP can satisfy it has resolved all of the outstanding issues, ASIC will not allow CBA to charge fees to customers. CFP is transitioning to a service model where customers are only charged fees after the services have been provided.
Is the CBA share price a buy?
The CBA share price is up more than 0.5% so far today, despite this ASIC news and Labor leader Mr Shorten saying he will keep the banks accountable. Leaders of the two largest political parties have agreed in principle to implement all of the recommendations.
From the customer point of view, the recommendations are likely needed. However, the banks may see their profits permanently hurt by the recommendations, although it should lead to a better system.
Commonwealth Bank has a fully franked dividend yield of 6.1% which seems attractive when it’s hard to find a high level of income from safe places like term deposits. But if CBA’s earnings fall then the dividend could decline as well. I’m not looking to buy shares of CBA right now.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
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