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Commonwealth Bank of Australia shares are falling on a Royal Commission roasting

The new Commonwealth Bank of Australia (ASX: CBA) chief executive, Matt Comyn, is facing a baptism of fire with CBA executives being grilled at the Royal Commission this week over the conduct of its financial planning and advice units.

Comyn only landed the top job after the prior CEO left under a cloud over failings to report breaches of anti-money laundering laws to the relevant regulator AUSTRAC, among a host of other issues.

This week AMP Limited (ASX: AMP) has already come under fire and today CBA is facing questions over the fees it charges clients to use its financial advice and investment platforms that market in-house and external investment products such as managed funds.

Colonial First State as the advice arm of CBA offers a large amount of investment options for financial advisers charging fees to help their clients plan for retirement by investing their superannuation and other cash balances.

Regulation of the financial advice industry in Australia was supposed to have been comprehensively reformed to protect consumers in 2012 via The Future of Financial Advice reformshowever the legislation was heavily watered down after industry protests and the mess is now being cleaned up by unencumbered lawyers at the Royal Commission.

For investors in banks like CBA, Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) the question is will the fallout be sufficiently bad to knock profits, dividends and share prices?

One outcome is that the banks will face rising legal, compliance, operational risk, reporting and restructuring costs. However, this is a headwind unlikely to move the needle on a bank like CBA that just delivered a half-year profit of $4.8 billion.

Moreover, it seems banks like CBA and Westpac are intent on radical restructures partly in response to operational problems associated with advice businesses, or the capital intensive nature of their asset management arms.

Recently CBA announced plans to sell its Colonial First State Asset Management arm, while Westpac has been selling its remaining stake in BT Investment Management Ltd (ASX: BTT).

During the Royal Commission big bank shares are unlikely to find many powerful buyers over the short term.

More serious headwinds include toughening regulatory capital requirements and the potential for Australia’s residential property market to fall now that the RBA has openly signalled its next move in lending rates is likely to be higher.

The politicians’ plan to cushion the blow of rising home loan borrowing rates to homeowners was to have APRA as the prudential regulator ease back on lending restrictions to property investors, although given the growing regulatory firestorm now facing the banks over lending practices and the bankers’ resentment over their political roasting it may not be enough to prevent a notable pullback in inflated property prices.

As I’ve written many times over the past 18 months I expect big bank shares to track sideways on flat profits over the medium term, with little reason to buy unless you’re a conservative investor seeking income.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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