Taking Stock / Rebutting the bankers
Last week, we explained how the bankers are trying to fool the Knesset with suggestions about "consulting with the customers" before implementing the Bachar reform of the banks and capital market. Today, we will address the bankers' main claim - that the reform simply moves the over-concentration of power from the banks to the insurance companies. That, at least, is what Bank Leumi chairman Eitan Raff said to the Knesset Finance Committee last Tuesday.
Two comments before we get to the point:
1. The claim that clients should be consulted is demagoguery that sends most financial market people into fits of laughter. But the claim about migrating the power is the bankers' first attempt to attack the reform on a professional basis.
2. We are glad Raff admits there is a problem of over-concentration of power in the banking system, and that he is concerned about it traveling from the banks to the insurance companies.
With that, Raff is evidently agreeing with First International Bank manager David Granot, a former management member at Bank Leumi. Last week, he told TheMarker in an interview that the over-concentration of power, based on the giant size of the market shares of Hapoalim and Leumi - 60-70 percent - precludes competition over households. Without regulatory intervention, Granot suggested, the situation could not be changed.
Now let's move onto the substance of Raff's argument. He and the bankers claim that allowing the insurance companies to buy the banks' provident and mutual fund holdings merely transfers the power and conflicts of interest from the banks to the insurance companies.
Raff makes a point
He's right about one thing. It would have been better for independent brokerages, Israeli and foreign, to buy the provident and mutual funds. Israel's insurance companies have an organizational culture much like the banks - contempt for customers, bad service, zero proper disclosure and enormous profits that depend on weak, cringing regulators at worst, and on the ignorance of their customers.
It would have been better for most of the provident and mutual funds the banks must sell to pass over to new investment companies, local or otherwise. The Finance Ministry would do well to create incentives for that to happen.
But the argument that the over-concentration of power is merely shifting is flawed, for two reasons.
It is misleading because there is no parallel whatsoever to the power banks Hapoalim and Leumi wield in the capital, banking and financial markets. The proposed law specifically limits the insurance companies' holdings of provident and mutual funds to 15 percent. In any case, power will become more diffused - and significantly so.
But the biggest attempt to mislead is to bundle the insurance companies, the brokerages and the banks together. No element in Israel's marketplace has the kind of power over customers that banks Hapoalim and Leumi have.
Say it in English
Normal everyday conversation itself tells the whole story. How many times have you heard somebody say, "I'd love to but my bank manager wouldn't like it," or "No, I don't want to, but my bank manager does." How many times a month does your average Israeli mention his bank manager? How many times do your friends mention Moshe or Hedva or Malka or Yevgeny at the bank? How many times do you get courteous phone calls asking just when you mean to close your overdraft (at worst) or pitching some new financial instrument (at best)?
The bank is central to the life of most Israeli citizens, especially people of the middle and lower classes. That is where their salaries go; the banks handle their loans and mortgages and credit cards and guarantees, their standing orders and payment of bills in general, and their investments; the bank is also usually the one advising which investments to make - dollar, shekel, euro, stocks, mutual funds, pension fund, severance funds, savings, securities. It all goes via the bank, and as often as not, at the bank's own initiative.
Israelis have no parallel relations with any other institution. They have no such dialogue with their insurance company or broker and probably never will have.
That argument about power shifting away from the banks is utterly specious. Insurance companies or brokerages will never have the kind of power to maneuver, control or manipulate clients that the banks have.
If Raff and the bankers are genuinely concerned about the fate of their customers doomed to receive service from insurance companies, they should suggest the Bachar legislators add an element sorely missing from the recommendations - IRA, namely, Individual Retirement Accounts.
Under current tax law, the government requires savers to manage their retirement savings in pension funds, which are entitled to change their terms retroactively, or at insurance companies, which have a poor record of performance and charge sky-high management fees; nor can a saver choose to change ships in mid-journey.
The solution would be legislation to allow each customer to extract his money from the insurance company or pension fund at any given time, and manage it himself.
You don't need to be an expert on investment management. You could put the money into a mutual fund or any other investment channel you choose. What matters is that the investments, the risks and the fees are under your total control; you aren't shackled by tax rules to managers who take advantage of your captive status to provide bad, but expensive, service.
In other words, even after the Bachar reforms, much work remains to be done to improve the situation of the Israeli investor and saver. But without the ax blows of the Bachar reform to do the preliminary work, nothing will ever happen.