The Experts

Andrew Main
+ About Andrew Main

About Andrew Main

Andrew Main has spent 35 years in journalism and stockbroking, which took him from Perth to Sydney, Paris and London. He was Business Editor of The Australian between 2007 and 2009.

He was a joint winner of the Gold Walkley Award, Australia's top journalism prize, in 2003 for a series of articles on errant stockbroker Rene Rivkin's Swiss bank accounts and he has published two books, one on the collapse of HIH insurance and the other a biography of Rivkin. He had a regular spot on ABC 702 for five years in Sydney explaining the mysteries of finance to a mid-morning audience.

More recently, he has also been a regular commentator on Sky Business

The Hayne Report – another wet lettuce?

Thursday, February 07, 2019

Yesterday’s kick in the prices of our major bank shares suggests that our major financial institutions didn’t get quite the flogging by the Hayne Royal Commission that some people were expecting.

But it’s all about perspective. Westpac was always going to be the winner (up more than 7%  or $1.80 when I looked) because it was the one bank of the Big Four that didn’t cop a negative recommendation from Commissioner Ken Hayne.

It’s also the only one that’s still vertically integrated via its BT offshoot, and that got a free pass.

But they’ve all been tentpegged downwards for months and yesterday it was rather a matter of discovering as the dust clears that they’re all still in business, chastened but relatively unchained.

The Madame Defarge set (remember the lady who knitted while the guillotine did its brisk work?) will inevitably have been saddened to see an absence of accused names but I wrote two weeks ago that something like that might happen.

There is very much method in the Commissioner’s thoroughly un-mad decision not to name names: he’s handed that investigation to ASIC.

Seldom if ever has a regulator been under such a spotlight as ASIC is going to be now, having been told by the Commissioner in his report that “ASIC should adopt an approach to enforcement that takes as its starting point the question of whether a court should determine the consequences of a contravention.” 

He backed that by adding that the regulator’s previous “wet lettuce” approach to punishing breaches of the law should definitely go out to the worm farm.

More formally but very emphatically, he noted that the infringement notices so beloved of ASIC in times past “will rarely be appropriate for provisions that require an evaluative judgment and…will rarely be an appropriate enforcement tool where the infringing party is a large corporation.’’

So you could say he’s handed ASIC a list of putative baddies and told the regulator to damn well get on with it.

Indeed he’s decided to reinforce ASIC in various ways, giving it formal priority over prudential regulator APRA in issues of enforcement, and made it clear to whoever is in government in Canberra after the forthcoming Federal election that ASIC has to be properly resourced.

There’s talk of the Government being up for another $1 billion a year but seeing as how the banks and other institutions are now expected to shell out around $7 billion to wronged customers by way of compensation, that’s maybe a low cost solution. What a shame it’s the taxpayer who may find themselves on the hook.

He’s asked for the creation of a three person committee to oversee the “twin peaks “ of ASIC and APRA, which could be punchy if they hire the right people.

Just taking a helicopter view of what he’s done, he’s pretty much focused on the cultural stuff he warned about in his interim report late last year.

I bow here to Simon Longstaff, executive director of the St James Ethics Centre, who said in a speech last week that it’s important to note that people who work in the big banks don’t start out as villains, but the culture can very much turn them that way. 

“Having worked with people in financial services for so long, I can say that this is not an industry that is populated by monsters, by wicked individuals with the proverbial black moustache that they are twiddling as they think about ‘how can I do something terrible today?’”

“These are invariably good people who have been led by a series of institutional arrangements to do bad things,” he said.

So Mr Longstaff’s firmly on the culture page as well.

That’s the underlying point, and that’s why the Commissioner was so keen to talk about why he was hopeful that the managements of Westpac, CBA and ANZ were going to do what they promise and change the culture of their operations to put the customer back at centre stage as they go about rebuilding the public’s trust.

And why he dropped a bucket on NAB chair Ken Henry and CEO Andrew Thorburn. When a judge says he is “not confident” of something, as in “I am not confident as I would wish to be that the lessons of the past have been learned” in the case of NAB, he’s basically saying he doesn’t believe them.

That’s a bit like the judge saying of some case “I preferred the evidence of witness A” having listened to the obfuscations and evasions of witness B. In this case, there are three witness As and one Witness B, being NAB. They call such phrases “neutral terms”.

Did Ken Henry think he could outstare Rowena Orr SC, counsel assisting, or score points by treating her like a cheeky minion? Before he sat in the witness box, almost every media report about her cross examinations had already made it clear she is very sharp and in rolling his eyes, giving smart answers and sighing, Henry must have either ignored them, or decided he could do better.  There goes another directorial career.

Kenneth Hayne is what lawyers ought to be but often aren’t. In this Royal Commission he wanted to know why something has happened, offered a carefully worded conclusion about why he thought it has, and has now handed it over to someone else to clear up the wreckage.

Given the cruel time constraints he has had to endure in this Commission, it was about the only thing he could do.

That means he has had to over-simplify in a few places. His suggestion about Mortgage Brokers that they should be paid by the borrower rather than the lender is logical but it’s always a risk when a borrower or investor is told to pay upfront for the service they are getting.

The risk is that the borrower will go direct to a bank rather than a mortgage broker, or that the investor seeking advice will seek a cheaper and probably lower quality level of advice.

But Hayne’s desire for clarity and comprehensibility can’t be criticised. He wants to see transparency in the way financial services are provided, particularly when there’s an intermediary involved since the user of the service might not know which canoe (as the Commissioner put it) the provider of the service is standing in.

That’s not a particularly hilarious analogy but it’s comprehensible. We all know it’s hard enough standing in one canoe without trying to stand in two.

Transparency and clarity are worth a great deal and if in time it turns out that the way people are being asked to pay for financial services has driven them away, then the rules can always change.

At least now we have been given enough sunlight to have disinfected the problem.


Don’t expect miracles

Thursday, January 24, 2019

With Australia’s top bankers and insurers sitting around nervously wondering if their heads are going to finish up on poles, and indignant borrowers and policyholders hoping for exactly the same outcome, it’s worth parsing the tealeaves a bit to see what Commissioner Kenneth Hayne’s Royal Commission is actually going to come up with in its final report.

A basic word of advice here is, don’t expect miracles.

It’s due to lob on Governor General Sir Peter Cosgrove’s desk by February 1,  which is a seriously tight timeframe, for a start.

It was only commissioned on December 14 of 2017, or just over a year ago, and of course the hearings proper didn’t get going until February of last year.

Just to remind you of what a massive remit it has, its official title is the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Which means, he’s been given less than a year to clean the Augean stables of our financial system. It’s worth remembering that the Royal Commission into Institutional Responses to Child Sexual Abuse was established as far back as January 2013 and it provided its final report in December of 2017, very nearly five years later.

That’s not to say Commissioner Hayne’s report will be Once Over Lightly: it won’t.

He made it abundantly clear in his interim report that he believed regulators ASIC and APRA had failed to use the many legal powers at their disposal, to crack down on some of the egregious things that institutions were doing, such as taking money from people for non existent services. 

(It was a stroke of genius, by the way, on his part, to require the institutions to provide a list of their sins. A big part of the scandalous material aired at the Commission came straight out of the documents provided by the banks and insurers and each time counsel assisting Rowena Orr SC blew up some minion after saying “let me take you to a document”, she was reading from a document or email provided by the institution, and on which the poor sap had not been properly briefed).

APRA’s defence to the Commissioner’s inquiries was basically that it was responsible for making sure the institutions didn’t collapse financially, and they certainly didn’t, but in his interim report he pointed out that not once did APRA actually take an institution to court. That doesn’t sound like a ringing endorsement.

Particularly when APRA’s charter goes significantly beyond merely being the prudential regulator. Its own website says that it is “an independent statutory authority that supervises institutions across banking, insurance and superannuation” as well as promoting financial system stability in Australia. It’s interesting that the Commission’s remit covers almost exactly those three types of financial services organisation.

All of which suggests the Commissioner will demand a review of which “twin peaks” regulator looks at which breaches. That is a long way from Heads on Poles but it’s very relevant.

In his Interim report in September, the Commissioner was however quick to whack down any suggestion of making kneejerk changes to the law, so we won’t be seeing any general raves about rewriting Australia’s federal legislation.

“Passing some new law to say again, ‘do not do that’ would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?” the Commissioner asked rhetorically. 

Where most pundits expect action in the wake of the February report will be in a new emphasis by ASIC (and presumably APRA) on using the courts to exact much more swingeing fines and concessions from the financial miscreants.

That’s certainly been the impression given by the Commissioner, who in his interim report poured scorn on the “wet lettuce” punishments levied by ASIC on miscreants, by way of negotiated settlements.

“When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done,” he wrote.

He said ASIC “rarely went to court to seek public denunciation of and punishment for misconduct,” and then dropped that bucket on APRA for its failure to use the courts.

“Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct.

“Infringement notices imposed penalties that were immaterial for the large banks,’ he stated, adding that any so called ‘community benefit payment’ imposed was far less than the penalty that ASIC could properly have asked a court to impose.

That sort of colourful summary will most likely be at the core of what the Commissioner is likely to call for. Much as he would like to, he cannot lay charges against anyone but he can recommend both civil and criminal action against individuals and organisations. The former is the issue he’s already been sceptical about, making it clear he thinks negotiated civil outcomes don’t have the desired punitive effect, so he may lean towards specific criminal charges…which means courts.

There are two areas where there may be unintended consequences of his report. 

The first, which is no one’s fault, is that the certain criticism of the banks will cause them to pull up the lending drawbridge further than they have already pulled it. That’s been heavily canvassed by commentators but let’s remember that when the banks ease up on lending, they don’t make so much money. There’s an argument that the market will sort that issue out, if not in the short term, then certainly in the long term.

The other comes back to Regulators and the courts. Senior people at ASIC still wince at the mention of the Jodee Rich case, which blew up in ASIC’s face in 2009 and cost it an estimated $40 million in time, effort and legals. In simple terms, ASIC took a short cut using an expert for two different purposes, and Justice Robert Austin threw ASIC’s civil case out.

Old hands will remember that Mr Rich was a founder of telco One.Tel that collapsed in May of 2001, eight years previously, so you can see how much ASIC resources were spent on that particular fiasco.

That’s not to say ASIC will lose many future cases that badly, but it won’t win them all either.  That’s the unenviable debate many ASIC people are going to have in the washup of the Commission, which is sure to push for more use of the court system. The political pressure to punish individuals and organisations at a higher level than previously will be enormous.

We may see more villains getting pelted in the stocks, but it probably won’t be cheap, which is where the Government’s Department of Treasury  comes in. Unless the regulators are given enough financial resources to launch more cases  and inevitably lose a few, not a lot is going to happen.  And the Commissioner knows that, which suggests he may push for more financial resources. Given how erratic the flow of Government support for regulators has been in recent years, that might represent serious progress.


Three investing rules for 2019

Thursday, January 10, 2019

Rule 1

Don’t panic. More money has been lost by investors doing nervous selling  in a volatile market than was ever lost by holding on until markets recovered. The problem isn’t so much the selling as leaving the investor the difficult decision about when to get back into the market.

One noted commentator announced during the GFC in 2008 that he’d sold half his portfolio but I don’t remember reading him saying at some succeeding point  that now was the time to get back in. That’s a much harder decision because in some less volatile potential “buy” situations the market is either falling, in which case you tend to stand on the sidelines, or it’s climbing and you start to think you have missed out.

The ASX200 index bottomed out in February 2009 at 3344.5 points and while it’s had a lacklustre recovery over the last decade, it has lifted by more than 70%, quite independently of the dividends paid over the period.

It didn’t help in 2012 when the legendary bond market guru, Bill Gross of Pimco, announced that “the cult of the equity is dying”.

What he meant was that it was no longer correct to assume equities should trade at a lower yield than bonds because their income can grow over time, unlike that income from bonds. In other words, he was saying investors shouldn’t expect share prices and in particular p/e ratios to run as high as they had previously, but that nuance got a bit lost in the excitement.

Equities are still here.

Rule 2

Ignore all cold calls. Just this week The Australian noted that around $200 million a year is extracted from Australian investors by scammers and taken offshore. Almost every scam starts with a cold call and “boiler room” style scams run out of places like Manila are as rife as ever.

You’d think we would learn, in which case what about the Queensland financial adviser who sent most of his life savings to Lagos in Nigeria after getting one of those letters explaining he would get a massive fee for warehousing someone’s ill gotten gains? That was as long as he handed over his bank details, which he did. I like to think his folly at least took him out of the industry.

There’s a very simple test. Anyone spruiking retail financial products requires an Australian Financial Services Licence (AFSL). I got a call in 2018 from a mid- Atlantic male voice offering US shares. I told him I was a journalist and asked him whether his organisation had an AFSL, which dampened his ardour a bit. The best he could manage was “I think so” in a small voice, which told me all I needed to know. Regulator ASIC keeps open registers of all the organisations and individuals covered by AFSLs. Any spruiker who can’t quote a licence type and number to you is breaking the law.

I’d also marvel at why these people push these dodgy stocks, many of them not properly listed in the US but for instance traded on a “by appointment” basis. That’s another way of saying they are very illiquid and if you want to sell some, you have to track down a buyer yourself.

Of course, the spruikers have got the first half of the trade covered, because they find buyers by spruiking. That’s why they do it: they are not interested in how the hapless Australian buyer plans to sell the stock.

If you DO want to invest in US shares, it’s perfectly possible to do so nowadays off your own bat out of Australia if you have a trading account with a broker or as the official title has it, Market Participant. The costs are nothing like as high as they were, and such a course is entirely safe.

And if you think investing in only one stock is a bit narrow, you can buy an Exchange Traded Fund (ETF) that will give you a wider spread of stocks at what’s probably a lower cost.

Rule 3

Balance a sense of engagement with a distrust of “noise”.

During the Banking Royal Commission, one retirement saver had a panic attack and rang up his Superannuation Fund manager asking to close his account and put him into “one of those Industry Funds”. Certainly the Industry funds came out of the Commission looking better than the Retail funds but the panicking investor had failed to note he was actually in an industry fund already.

You’d have to say he was less engaged than he should have been. Very few savers can make a life’s work out of planning their retirement but it’s important to have a reasonable idea of what’s going on, most particularly if you are in a Self Managed Super Fund (SMSF). I personally find the phrase “self managed” a slight misnomer as most members should at least have an adviser as well as an accountant.

And if you react to every market rumour or investment offering, it’s very unlikely you will outperform. You are just reacting to the loudest noise, which is up there with reading Donald Trump’s tweets in terms of having a promising future.

It might be a big call to suggest you do your own research, but there’s nothing wrong with finding an advisory business or newsletter that you might “test drive” for a while before committing serious funds. There are more of them around every day and the better ones have a good bead on the needs and knowledge of their target retail investor audience.


Why don’t people ask more questions?

Thursday, January 03, 2019

If you are still thinking that bank boards are a repository of wisdom and omniscience rivalling only the jailers who used Jeremy Bentham’s Panopticon, it might clear the air a bit if I tell you a story that two reliable sources swear is true.

(Visitors to Port Arthur will know that the surveillance system was designed to allow the jailers to keep an eye on the lags unobserved. At Port Arthur the chapel went even further by ensuring the prisoners couldn’t see each other, either. I make no claims of any other parallel between a penitentiary and a bank.)

Not long after the giant former rugby forward Cameron Clyne took over as chief executive at National Australia Bank in 2009, he was having a conventional work conversation with the bank’s then chairman, Michael Chaney.

It was a Thursday afternoon in Melbourne and Clyne started to glance at his watch with the unmistakable air of a man who had a plane to catch.

Chaney caught the drift and asked him where he was headed.

“I’m going home,” said the big bloke.

Chaney, a Perth boy who spends large chunks of his life in the air and for whom one Eastern States city must sometimes merge into another, was nevertheless a bit nonplussed.

Clyne explained that because his family lived in Sydney, he was in a habit of commuting to Melbourne for the first four days of the working week and then working out of NAB’s Sydney office on the fifth day.

This appeared to be a surprise to Chaney, who with his board had been intimately involved in hiring Clyne and who by then had already been chair of the Bank for more than four years, since 2005.

“You never told me,” said Chaney, a bit shocked at the revelation his Melbourne based bank’s CEO was not actually a Melbourne-based person.

“You never asked me,” was the big man’s four word reply.

What I am trying to convey here is that boards and senior management don’t always operate in glorious lockstep, and that cockup can often trump conspiracy when it comes to information not getting to where it ought to go.

In this case, it’s clear that in appointing Clyne, not one board member thought to ask him where he lived.

Does that have anything to do with the Hayne Royal Commission? Yes.

It’s the best example I have yet seen, innocent enough as it is, of directors neglecting to ask relevant questions.

And as you can see from the Royal Commission, it’s absolutely not alone.

I won’t for a moment try to suggest to you that, for instance, charging clients for non existent advice is an issue of miscommunication rather than wilful negligence, any more than charging dead people is for the same non existent service.

But I will say that such episodes follow the failure of directors to ask difficult and penetrating questions and to keep asking them until they are satisfied.

Commissioner Hayne was absolutely right to home in on culture within the big institutions, be they banks or AMP.

The Commissioner knows that there’s plenty of legislation already on the statute books to cover off on directors’ duties.

The problem, as the rest of us out there in the real world know, is that organisations seem to keep forgetting that when directors fail to ask rigorous questions, the scope for disaster builds and keeps building.

They will lay themselves open to a charge of either knowing and failing to act, or failing to ask the right questions in the first place. Negligence or ignorance, basically.

Here’s another example.

Many years ago in Melbourne there was a very long established (1902) steel stockholding and merchant company called Gollin and Co. In the early 1970s one of the shareholders heard there might be trouble and when he bumped into one of the directors, asked whether that was correct.

“How would I know? I’m only a director” was the lapidary reply and the shareholder did the logical thing and sold his holding as soon as he could. The shareholder reasonably concluded that the right questions were not being asked and not long afterwards, in 1976, Gollin indeed collapsed.

Back in them ‘thar’ days, being a company director was a sinecure offered to old mates of existing directors, several of whom may well have had a sense of fair play but who were often either too far from the company, in terms of understanding it, or too close to those old mates who had appointed them, to do his job in a frank and fearless way. I write “his” because until recently almost all directors were white males.

We now know, well after we should have done, that female directors tend not to be tied by the same loyalties.

The role of the board has always been to look after strategy while the management looks after the day to day running of the company. In Gollin’s case, that clearly didn’t happen and the only obvious difference between it and our reputation-battered banks is that the latter are a great deal bigger and more complicated.

But the same underlying concepts still apply.

I look forward to Commissioner Hayne’s final report, which will make much of senior management’s obligation to be straight with their boards, and of course the boards’ obligation to start asking relevant questions.

Who knows, they might even find out which city their CEO lives in.


Quit the ‘sorry’, just do your job

Friday, November 23, 2018

It’s hard to know which of Australia’s supposedly “twin peaks” corporate regulators is going to get a bigger towelling from Royal Commissioner Ken Hayne, but it’s pretty clear that the chairs of both ASIC and APRA will not be looking forward to the current round of hearings.

They are all about “what do you plan to do to stop this happening again?” now that counsel assisting Rowena Orr SC has basically said she doesn’t want any more apologies, she wants action plans.

ASIC chair James Shipton will be first cab off the rank on Thursday in the Sydney hearings, which run until the end of this week, after which they revert to Melbourne and APRA’s Stephen Byres will make his appearance down there.

In his interim report, Commissioner Hayne castigated ASIC for not taking on enough big fish in court, following that up with a withering comment that APRA hadn’t actually initiated any court actions at all in the period under discussion.

It’s instructive to see what the two organisations have been doing in recent weeks, from which they might hope to soften the likely blows.

Earlier this week, ASIC initiated a civil penalty action against Tennis Australia, the sort of mysterious organisation that you probably didn’t even know was in ASIC’s purview. 

The case has been in the public domain since January and relates to the granting of the domestic tennis rights to the Seven Network for five years from 2013, without a competitive tender process. Former Tennis Australia directors Harold Mitchell and Stephen Healy are the figures in the frame, although the worst that can happen is for someone to be disqualified from acting as a director.

However it arrives at an opportune time for the regulator, given Harold Mitchell’s high profile and the fact that most newspapers devote more space to sport than to most other endeavours.

The other high-profile case involving ASIC is a bit more complicated. Justice Nye Perram of the Federal Court recently declined to ratify a $35 million settlement payable by Westpac Bank to ASIC as a consequence of Westpac admitting it had broached the responsible lending rules by not checking on borrowers’ financial outgoings.

It’s not clear whether Westpac thought the penalty was on the lighter side and hoped that it would now go away, but the judge concluded Westpac and ASIC had failed to find common ground about what, if anything, Westpac had done wrong. 

In these Federal Court cases, it’s basically a case of the two sides bringing an agreed deal to the judge, who then checks to see if proper process has been followed. Until the judge gives it the tick, the deal has no legal validity.

The fact that Justice Perram threw out the settlement means that ASIC will now have to litigate the case in the Federal Court, or agree to a new settlement, or appeal the case to a higher court, or just plain drop it.

All of which is a reminder that going to court is expensive and can sometimes blow up in the regulator’s face.

APRA, meanwhile, has pulled an old dodge in sending the Commission a glorified “mea culpa” document talking about what it plans to do to make the world a better place. 

That’s before Wayne Byres has to face questions along the same lines.

I won’t send you to sleep with a full shopping list of promises but the “mea culpa” is motherhood stuff about how APRA is planning on “Reviewing its enforcement strategy and related internal procedures and governance, including the potential to give greater weight to the strategic use of formal enforcement powers.” 

That appears to mean they’re going to use the powers they already have.

APRA also says it’s looking at “Deepening its supervisory approach, including focusing on clear accountability, making more regular use of external resources to provide assurance over entities’ practices, and bringing to bear wider sources of information such as reported breaches and customer disputes”.

Which means doing its supervisory job, and in particular following up on reports of breaches and customer disputes. In other words, see above: doing its job.

The best thing for APRA is that from my understanding, that regulator doesn’t want to have its powers increased, and if anything reduced.

In simple terms, APRA wants to focus on its original role of being a prudential regulator and not have to look, for instance, at the knotty issue of bankers’ pay.

What is making the greybeards smile is that APRA pulled that dodge in 2001 after it realized it had almost entirely dropped the ball over insurer HIH. 

Realising it was in for a smacking over having decided to appoint an inspector to HIH on the very day it collapsed, 15 March 2001, APRA subsequently called in a well credentialled Canadian regulator, John Palmer, to write an independent report on APRA’s performance.

Palmer’s report was scathing and correct but APRA may have been hoping it would shield APRA management from too much official wrath when the HIH Royal Commission took a look at its performance..

It didn’t. APRA senior management ended up walking the plank and the whole organisation was reconstructed under a three person board, of whom John Laker was the best known. 

To APRA’s quiet delight, the Royal Commission has been making much of another report, which APRA commissioned on the culture at CBA. The very damning report, commissioned in 2017 and delivered in April of this year, was co-authored by John Laker.

That’s the good news. Unfortunately for APRA he and co-authors Jillian Broadbent and Graeme Samuel were specifically hired for their independence, so it can’t really be called an APRA triumph at all.


Are our big banks in a financial jam?

Thursday, November 08, 2018

Westpac’s microscopically higher full-year result this week rounds out the major banks’ reporting and, while they’re all fessing up to major fallout from the Royal Commission and the increasing costs of their funding, it’s not been so disastrous for the banks in general and Westpac in particular, once you pick through the numbers.

You can almost hear the sighs of relief when the bank’s bean counters were able to announce a cash net operating profit of $8.07 billion, just a cigarette paper ahead of the 2016-7 year number of $8.06 billion.

Statutory profit lifted by more than 1% to $8.095 billion, while cash earnings dropped 1%. The reported 13% return on equity (ROE) came out at the bottom end of Westpac’s target range.

Far be it from me to suggest they were raiding hollow logs, but everyone knows there’s a degree of flexibility built into those piles of numbers that carry so many zeroes behind them.

That makes Westpac the only big bank this year to come out ahead of its 2106-7 year results.

Not only that, but it ended up winning the “my remediation bill is smaller than yours” competition.

There had been a slight wobble last week when it revealed the remediation bill would be $281 million, rather than a previously announced $235 million, but that came up looking shiny, compared with NAB’s $360 million, ANZ’s $421 million and CBA’s eye watering $1.1 billion, announced back on August 8 when our biggest bank reported on its June 30 numbers.

Bear in mind that CBA had to pay a $700 million civil penalty to settle that money laundering case involving the supposedly clever “Intelligent ATMs”.

My spies tell me that Westpac also started using Intelligent ATMs just after CBA did but instead of allowing a maximum limit per deposit of $20,000, as CBA did in breach of the Austrac $10,000 per transaction reporting requirements. Westpac decided to play safe and limit deposits to a maximum of $10,000.

Conclusion? Westpac’s management dodged a very nasty bullet on that one. By not being the first mover, as CBA was, and by hanging back on the deposit limit, Westpac came up smelling of roses.

Think about it from the money launderer’s point of view. Let’s say you have $100,000 in cash to launder. Would you have preferred to do five deposits at a CBA machine, or 10 deposits at a Westpac machine? I rest my case.

Mr Hartzer is not surprisingly making a virtue of caution, noting that the $281 million set aside for remediation may not be the end of the blowback from the Royal Commission.

“We’re committed to running our business in a way that meets standards from customers and the community and we’ll continue to look to improve things,” he said, saying a lot and not much.

But then he added, “I’d like to say we’re largely through it but it is possible there may be other issues.”

Most of the commentary on the banks has been understandably bleak, given that house prices are moving south, wages are static, the cost of funds has moved up and there are still items of toilet furniture dropping from the sky.

But let’s just have a look at that $281 million, nasty as it is, in perspective.

It represents 3.4% of Westpac’s net profit number for one financial year, and in this instance we know the remediation covers a number of previous years, so you could easily argue it costs the bank less than 1% of net profit per year. In revenue terms, it’s a rounding error.

Even if Westpac has to keep paying out the same amount again in the future, it’s not a serious issue.

That’s not to play down what’s happened in the advice world, particularly as Westpac is the only big bank that wants to hold on to its main wealth business, in this case, BT Financial.

A statement accompanying the result reads: “The royal commission has been a valuable and rigorous process.’’

“The stories and examples of poor behaviour affecting customers that have come to light are confronting and have understandably impacted the public’s trust in the industry.”

The irony that many observers may not have spotted is that the big banks wanted out of advice because, quite apart from the reputational grief, they couldn’t generate a Return on Equity (ROE) from their wealth business that was as good as the 15 per cent plus they were getting from their conventional lending business.

And now their overall ROE has come down, in Westpac’s case to 13%.

And it’s one of the better ones. Some toilers at KPMG have run an analysis of all the bank results and found the average ROE among the big banks is now 12.5%, a worrying 134 basis points or 1.34% below the previous equivalent numbers.

The KPMG report notes that the big banks’ cash profit after tax from continuing operations was down 5.5% overall, year on year, at $29.5 billion.

That is a very big headline number but wait for this. Their net interest margin, that critical measure of the cost of “money in” versus the earnings of “money out”, fell by only one basis point, or 1% of 1%.

There are a few more numbers in the report that indicate that our banking system isn’t exactly on the ropes.

One is that the big banks’ net interest income grew by 2.2% to $62.7 billion for the full year, hugely offsetting the 3.7% drop in non-interest income to $22.4 billion.

That means their core business, lending, did very nicely thank you, despite the highly publicised removal of some fees, such as ATM fees.

Oh, and bad and doubtful debts? Their aggregate charge for bad and doubtful debts actually came down by $702 million to $3.3 billion, a drop of 17%.

While there are lots of reasons to talk about reputational damage in the banking sector, don’t let yourselves be carried away by any thought that the industry is in any kind of financial jam. It isn’t.


Midnight oil

Friday, October 26, 2018

So the price of petrol in Australia is at a 10-year high at $1.59 a litre.

That looks like bad news and there’s a fair bit of it about in the oil sector at the moment.

The man running Saudi Arabia appears to have taken to sawing up dissidents, and the man running the US is trying to reimpose sanctions on another major oil producer, Iran.

Just to cheer you up, Saudi and Iran are respectively the second and fifth biggest oil producers in the world, in a descending order that starts Russia, Saudi, the US, Iraq and Iran.  Pick your stable regime there. 

But there is some good news about.

First of all, if petrol’s at a 10-year high, it means we’ve been there already and survived. Not only that, but once you adjust for the effects of around 21%  inflation over those 10 years, it’s a very different story.

That’s scant consolation to people who have long commutes or drive long distances per year, but it puts the price rise into perspective.

However, the immediate future doesn’t look all that rosy.

As the International Energy Agency put it in a recent report:  “expensive energy is back, with oil, gas and coal trading at multi-year highs.”

Brent crude is just under $US80 a barrel, which is, of course, round about $113 in our sagging currency, so don’t expect the refiners to start discounting any time soon.

What about supply and demand?

The agency states that for the time being global supply is just ahead of demand at about 100.2 million barrels of oil a day against demand of 100.1, but that’s assuming constant output by the original producers’ cartel, OPEC.

And you would have to be a cockeyed optimist to think that countries like Iran and Saudi Arabia will be able to keep supply steady, given the political ructions looming in those countries and others.

US sanctions against Iran for what Donald Trump says are breaches of the Iran nuclear agreement are due to come into force on November 4, although there’s still a chance that Iran will still be able to export some of its 3 million barrel a day production to other nations, such as China, after that date.

The Agency says the global oil market is “adequately supplied for now”, thanks to an overall increase in supply since May of around 1.4 million barrels a day, thanks mostly to Saudi Arabian exports, but then throws a dark cloud over the immediate future.

“With Iran’s exports likely to fall by significantly more than the 800,000 barrels a day seen so far, and the ever present threat of supply disruptions in Libya and a collapse in Venezuela, we cannot be complacent and the market is clearly signalling its concerns that more supply might be needed.”

Thanks for that, but we did ask.

Of course, the improving circumstances of consumers in places like China have given global oil demand a significant shove along in recent years, and that’s not going to go away any time soon.

The Chinese National Bureau of Statistics states that Chinese apparent demand for oil has risen from around 10.5 million barrels a day in 2015 to more than 13 million barrels today in late 2018. It’s not much of a domestic producer.

It’s easy to doubt official Chinese statistics but they’d have absolutely no reason to overstate what’s a fairly nervous-making trend.

The biggest factor in increasing oil output in recent years has been the US fracking boom, which has kicked US production up from 5 million barrels a day in 2008 to about 10.7 million now, a startling increase of more than 100%.

However, and there are lots of ‘howevers’ here, the US is now bumping up against  full capacity in terms of production and according  to the Energy Information Administration in the US, the US economy consumes approximately 20 million barrels of oil every day. It’s using almost twice as much as it’s producing. 

Conclusion: producers are currently able to keep up with demand but don’t assume that will continue. 

What about the bigger picture, and all those predictions we used to get around 10 years ago about the world running out of oil?

Clearly it hasn’t, yet. As Saudi Oil Minister Sheikh Yamani memorably noted in 1974, the Stone Age did not end for want of stone, and the oil age should go the same way. Let’s hope he was right.

A very good report has just come out from Edinburgh-based energy consultancy  Wood Mackenzie indicating that in the next 20 years the rise of electric vehicles will see oil demand finally peak.

Entitled “Thinking global energy transitions: the what, if, how and when”, it notes that while the move to electric vehicles is well behind the move to  renewable energy for static electric power generation, it will catch up by 2035.

It states that by the end of this year, there will be a mere five million electric vehicles on the world’s roads, versus a vehicle stock of 1.2 billion cars.

It says however that by 2035, 20% of global electric power will be provided by wind and solar, and 20 per cent of road miles travelled will be by electric powered cars, trucks, buses and bikes.

“By 2040, oil demand displaced from electric vehicles will have doubled to almost 6 million barrels per day,” it states, on the basis of a 3 million barrel a day saving by 2035.

Wood Mac analyst Prajit Ghosh makes it clear that there are lots of moving parts to consider in looking so far forward, but he notes the transition might be even quicker depending on increased cost competitiveness on renewables and technological breakthroughs in batteries and storage.

What I found particularly interesting in the nine-page report was that there was almost no mention of climate change in it .

I assume that was not because the authors were choosing to ignore it: rather, that they assumed the move to address global climate change was a given, an agreed position.

Nor, incidentally, was there much mention of government intervention. Clearly, these analysts are assuming that the market will resolve most energy dilemmas once governments set sensible policies.

Now there’s a thought. Let’s hope some of the fans in Australia of Tony Abbott’s  Monash Forum, which wants our government to build at least one new coal-fired power station, despite the fact that going solar would be cheaper, have a close look at the report.


When is an independent report truly independent?

Thursday, October 11, 2018

That’s an issue that The Banking Royal Commission’s going to have to deal with, despite the fact that it seems to come up time and again in every serious examination of our financial services industry.

What we have had to get used to over the years is an elaborate game of pass the parcel in which the controversial contents of the parcel, i.e. a supposedly independent report, gets progressively diluted until it’s worthless.

This was the case when lawyers Clayton Utz produced an independent report for AMP about charging dead people for financial advice , and when Ernst & Young did a report for Allianz Insurance over the insurer’s compliance shortcomings.

This is all about big organisations diving behind the respectability of the likes of a big law firm or the Big Four accounting firms to write a report for them.

It’s worth noting, by the way, that former ACCC boss Graeme Samuel this week said he thought it should be up to the big institutions to have the bottle to do their own in house investigations, so they knew how the jam had occurred.

The reason I believe you can spread the guilt around is that the first draft of a report is usually pretty damn good. These professional firms, at that early point in the saga, are on the side of the angels.

They are producing a report that in the trade is known as Capital “I” Independent.

Accountants and the like have taken to using the Capital I to announce to the world that they believe that the person or team putting out the report is wholly independent and perceived as such.

Whereas the “little i” tag is used in circumstances where a major accounting  firm might be earning big fees for doing other work for the same client, in which case few observers would be prepared to believe the report was totally independent.

You can devise all sorts of criticisms of these professional firms in terms of cartel pricing , conflicts of interest and straight out mercenary behaviour. 

I note that my friend and former colleague Neil Chenoweth at the Australian Financial Review two days ago suggested the Big Four may face tax promoter penalties from the ATO for marketing tax schemes of the sort enjoyed by miner Glencore.

And I have on my desk a toe-crushing tome published earlier this year in the UK called “Bean Counters: The Triumph of the Accountants and how they Broke Capitalism” by a Private Eye journalist called Richard Brooks that will give you all the ammunition you require, and more.

Where the genuine independence disappears is when the professionals deliver the draft and it gets thrown back at them for correction, amendment and generally grovelling surrender.

 I’m going to swim against the tide here and say the villainy resides mostly with the outfit which commissioned the report, in these instances AMP and Allianz.

There’s a slim grey area here in which it’s fair for the commissioning organisation to have the right to correct errors of fact, but in every case discussed here the outfit paying the report-writing piper has gone much further and absolutely turned out to have called the tune.

In the very well canvassed case of AMP and Clayton Utz, more than two dozen changes were made, at AMP’s request, to a report whose independence the Royal Commission has quite rightly queried.

That may be old news but we got another example more recently to show quite how pernicious the tactic can be, as shown last week by the publication by the Commission of documents relating to how insurer Allianz treated EY over the latter’s inquiry into how Allianz managed to leave misleading information on its travel insurance website for most of the period from 2013 to 2018.

And it was pretty much one way traffic. The initial report on September 25 last year stated that six areas of Allianz’s compliance processes were still “evolving” while only four were at the desired level of being “established”.

But by the time the report was finally accepted some six weeks later on November 2 the score had changed to seven of them being “established” and only three classified as “evolving”. That’s code for “being fixed in a hurry”.

In between times, as one senior EY executive put it to another after the nth request for a change to the wording of their report, “this feedback process is never ending”.

And most pointedly, another internal EY email discussed the fact that staff were having to take information on trust from Allianz executives in circumstances where nothing had been written down. That doesn’t sound remotely like an error of fact at all, given that there don’t seem to have been any provable facts involved. That sounds like arguing with Donald Trump.

On October 16 of that year, halfway through the arm wrestle of the “feedback process” Roberto Fitzgerald of EY emailed his colleague James Brigham to say:

“Let's find a way to thematically deal with the 'were we advised' stuff – i.e. Allianz could not demonstrate - maybe an upfront observation theme that it's high trust and not written down?”

They were talking about how to explain in their final supposedly in-depth report that they had had to take information on trust because it wasn’t written down. Which is what they ended up doing. 

So where’s this going to take us? It would be wondrous if the commissioning organisations would damn well leave the reports alone. 

OK, you say, that’s another law you’re calling for, and I don’t want to do that. 

But how about devising a standard form of words to be provided by the report writers if they are satisfied that their work has not been tampered with?

And if it’s not there, or if there’s another form of words they can use to say it has, that would be immensely useful to the reader of the report.

And most relevantly, it might start to restore public trust in the process. At the moment it’s just a way for supposedly professional firms to make a quid and hope that no one notices the ethical convolutions they’ve gone through to get paid. 

That’s no use to anybody- most particularly to the long term reputations of the firms doing the paying.

Does anybody feel like trusting AMP or Allianz statements at the moment? I think not.


Is AMP a buy yet?

Friday, September 28, 2018

Speculating on whether AMP Ltd is a buy yet is a sport for the truly brave, akin perhaps to seeing how many press-ups you can do before you sag face first onto the floor.

Perhaps it’s better to just sit in a chair until the urge passes. But that’s the whole point: if everyone else is treating AMP as an exercise in self flagellation it might actually present a buying opportunity. Might, I said.

Let’s look at a few cons and pros, in that order.

The insurer has had its reputation drop lower even than the banks, due mostly to a cover-up of the fact that it had been charging dead people for financial advice.

That emerged back in April, shortly before the exits of CEO Craig Meller and chair Catherine Brenner.

Yes, lower than the banks. This is Australia’s biggest and oldest life insurance company, established as a mutual in 1849 and demutualised in 1998.

AMP policyholders suddenly became shareholders in the looming float of the company, and that’s where the trouble really started.

We can now see that demutualisation broke the golden thread between policyholders and management. In a mutual organisation, like a Co-Op, profits flow back to a central pool and dividends are paid out only after the directors decide there’s enough money in the kitty to pay out on all likely claims.

Demutualising an organisation pushes the dividend payout expectation up the ladder and of course, if you are a shareholder and not a policyholder, you are going to be very happy with that.

But where does the policyholder sit in all of this? Lower down the ladder, is the very simple answer.  And we haven’t even mentioned the financial advice clients, for whom the mutual issue isn’t relevant but who have clearly been treated as badly as policyholders in some cases. 

That said, moaning about the negative consequences of demutualisation all those years ago is a bit like bewailing the outcome of the Brexit referendum in the UK. 

It happened, whether we like it or not, and the board of AMP now has to deal with the consequences by devising a structure that lifts the retail (insurance and or advice) client back up the ladder again, and that will not be easy. Not that AMP management have a choice: anything short of putting the client first and foremost will leave the group at its current level of reputation.

There’s a serious question mark over the grandfathering of commissions, of course, made worse by the fact that there are lots of semi retired advisers whose only reason to go into the office is to keep qualifying for the commission stream.

That’s no way to run a company.

What about a positive or two? I’d suggest that the two nasty episodes of charging dead people, firstly for financial advice and secondly for life cover, are a failure of systems and not deliberate actions. You know how it is with direct debit payments of any description: their default position is that they keep being extracted from the relevant account unless someone specifically overrides them.

Dying creates the particular problem that the person doing the paying is no longer around to sound the alarm, and clearly AMP’s systems were not up to the task. 

It’s also true that when a person dies, their family is so damn busy sorting out their funeral, estate and affairs that they don’t always sound the alarm either. That will have to be fixed, and fast.

I should add, as if it’s not obvious, that the Banking Royal Commission’s interim report is due to be delivered this Sunday and it would be an optimistic investor who took the view that Commissioner Hayne is going to be any kinder to AMP than has been the Court of Public Opinion.

The horribly long gap, in both “zombie” cases, between the problem being discovered and dealt with by AMP management, never mind honestly reported, will almost certainly be a focus of his commentary. 

AMP’s reputation has been smashed but there are other positive factors to play with, if not just yet.

One, Chairman David Murray is a sound choice. He came in at almost zero notice post Catherine Brenner’s exit.  He’s forgotten more about Australia’s financial System than most people will ever learn, having conducted a well-regarded inquiry into it back in 2014. 

The biggest complaint against him seems to be that he still supports the vertically integrated model for banks, but that’s not so much of an issue in a life company. 

And acting CEO Mike Wilkins is going to be at the very least a safe pair of hands until the newly appointed CEO Francesco de Ferrari takes over in December.

Wilkins is a general insurer by background rather than a life insurer but he has a very solid pedigree in having steered Promina and then IAG from 1999 through to 2015.

IAG has been relatively unscathed by the Commission, with the exception of subsidiary Swann Insurance which specialised in a variety of “add on” insurance provided to finance clients of car dealers.  Clients who bought unnecessary or poor value insurance are now being compensated, but the whiff of scandal is a modest one compared with some of the pungent ordure elsewhere.

And for a moment on Monday it looked as though APRA chairman Wayne Byres was complimenting AMP.

He said in a speech that “Right now it seems inconceivable that any of Australia’s big banks or major insurers might not exist at some future point.”

But even that had a smack down in it.

“The same was no doubt once said about dominant companies such as Remington typewriters, Kodak, or Blockbuster Video.”

So, is AMP a buy? Not until it clearly puts the policyholder and the financial advisory client back at the top of the pile where he or she belongs. But for now,  it’s nothing more than a scary punt.


Should Bill Shorten take away tax rebates for retirees?

Wednesday, September 12, 2018

Good news for franked dividend fans: not only is it attractive for retirement savers in Australia to lift their asset allocation to Australian dividend paying equities, as you would expect, but it’s actually sound practice, according to Dr Geoff Warren and colleagues at the Australian National University.

Dr Warren is no fusty academic: he spent years as a strategist with investment bank Ord Minnett in the days when it was an institutional broking house and before it was taken over by JP Morgan.

He and colleagues Drs Adam Butt and Gaurav Khemka at the College of Business and Economics at ANU have run some serious numbers, which indicate that imputation credits could add the equivalent of between 5% and 6% extra to holders’ spending power during retirement.

Their report is entitled What Dividend Imputation Means For Retirement Savers.

They also conclude that “Access to imputation credits has the equivalent effect of increasing balances at age 65 by around 8% or 9%, or lifting risk-free returns over the course of retirement to the order of 0.6% to 0.8% per annum.”

So, how much percentage allocation to Australian equities do they think the extra bang from imputation justifies?

For instance, they reckon that a theoretical retiree aged 65 with $500,000 socked away without the benefits of imputation should ideally be allocating 26% of their account to Australian equities, 33% to global equities and 41% to fixed income.

But imputation changes everything.

“When imputation credits are included in the analysis, the portfolio breakdown comes out at 46% in Australian equities, 15% in world equities and 39% in fixed income,” says their report.

In other words, imputation means it’s worth a near-doubling of domestic equity exposure from 26% to 46%.

The reason why this happens relates to the relatively high correlation between domestic and overseas equities, which is around 0.6. Domestic and overseas equities are really just two different forms of equity exposure. 

“Switching from world equities to Australian equities to capture imputation credits adds a meaningful amount to expected returns without increasing risk substantially,” they conclude as a result.

As a former colleague of Dr Warren, I felt able to bail him up on the knotty issue of whether Opposition Leader Bill Shorten is right or wrong to propose an end to the existing tax policy which currently allows retirees with no taxable earnings and a good franked dividend stream to get an actual cash refund from the ATO.

The research notes that the proposal will make a difference of between 1.3% and 1.4% a year from the Australian market overall for those retirees who can no longer claim the tax refund created by imputation.

“That is a significant number,” they state, putting it in context by comparing that with the expected long run equity market return of between 7% and 8%.

“It is no wonder this policy is the subject of heated discussion,” the researchers state, without jumping down strongly on either side of the fence.

So, what does Dr Warren really think?

Stating quickly that he’s providing a view of his own, he admits to being in two minds about the existing refund system.

“There is an equity issue in that most of the benefits of the refund system go to richer people,” he says.

“But at the same time it is just one of group of policies aimed at helping retirees become self-funded ,” he says.

He notes Treasury’s competing interests: one being to maximise the number of retirees who are not going to be dependent on the Age Pension, the other being not to give so much away in subsidies to the growing army of retirees that the government ends up significantly out of pocket.

“What is clear is that the early beneficiaries are the richer retirees, but as the time goes on, there will be many more less affluent but still self funded retirees looking to capture whatever benefits are available,” he says.

“Is the ALP proposal designed to “soak the rich” or is it a reasonable policy?” he asks rhetorically.

“The other point made by defenders of the status quo is that if you’re a zero tax-payer and the company paying the franked dividend has already paid tax, then a tax refund is just is a way of maintaining your tax status.”

The research he has done with his colleagues points up the fact, much stressed by the ALP, that self funded retirees do still end up costing the government money.

“After accounting for the offset of the Age Pension, we estimate that the total net cost per individual over their retirement phase is about $30,000 for retirees with a balance of $100,000, and around $80,000 for those with a $500,000 balance (in 2017-8 dollars.”

“While this may seem relatively ‘expensive’, it also offers social benefits,” they note. 

Like what?

Looking at the big picture of the Australian economy, the researchers highlight the fact that depending on the savers’ and retirees’ habits, the extra money thrown off by the imputation system during retirement reduces the need to save for retirement, and hence allows the saver to contribute less to super and hence spend more during the accumulation phase on the way to retirement.

“That helps to address the issue of adequacy and reduces the need for a higher superannuation guarantee levy,” they say, thus spearing two hot potatoes in one go.

“A further implication is that the home bias encouraged by imputation credits might make equity funding more readily available to Australian companies.”

“Removal of full access to imputation credits in retirement could unwind the benefits mentioned above and would undoubtedly solicit significant political backlash from retirees.”

My conclusion? This research proves that dividend franking will be hard for politicians to take away, and explains and even justifies the home bias towards Australian equities. But there’s a “two bob each way” debate looming over the political issue of refunds for low tax payers about which you will be hearing a lot more as we move to the next Federal election that must be held by mid-2019. 

Given that self funded retirees are getting very fed up indeed with the rules changing against them long after they have set up their plans for retirement, you can rely on the debate being a noisy one. 

Particularly since most of the pundits have the ALP winning the next federal election by a solid margin!



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