The Experts

Andrew Main
Expert
+ 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

Doing away with mortgage broker commissions is “absolute rubbish”

Thursday, April 18, 2019

If ever any one individual was going to have a go at Commissioner Ken Hayne’s sceptical conclusions from his Royal Commission into the banks et cetera, it is former ASIC chairman Greg Medcraft.

Medcraft is now comfortably ensconced in the 16th arrondissement in Paris as a senior executive in the Organisation for Economic Co-operation and Development, the OECD, from which he can comfortably lob small fireworks back to Australia in defence of his tenure from 2008 to 2017, most of that as chairman of ASIC.

He chose a recent interview in the Australian Financial Review with Monash University’s Professor Justin O’Brien to launch his first salvo, saying Commissioner Hayne’s recommendation to do away with commissions for mortgage brokers was “absolute rubbish”.

There were two odd aspects to his making that particular claim. One is that the mortgage broker commission issue has already been by far the most highly criticised of all the 76 recommendations that Hayne made, so Medcraft has come late to a noisy party.

Two, that issue is one of the remotest of the areas where he might choose to defend his record. He knows a lot about mortgages, since he used to specialise in bundling them together in a process called securitisation, but during his tenure he left the subject of broker commissions relatively untouched, preferring to focus mainly on lenders’ failure to check borrowers’ living expenses.

You probably don’t need reminding that Commissioner Hayne’s final report took  ASIC firmly to task for preferring closed door negotiation to full body contact courtroom action. Maybe Professor O’Brien buried the lead to the story but I’d have thought Medcraft’s response to Hayne’s criticism might have got a bit more air time.

Medcraft said that the retired judge’s recommendation that ASIC should litigate more and use enforceable undertakings less would not necessarily create the deterrence that regulators want, because the wheels of justice spin slowly.

“You have to look at this holistically because it is no use giving the regulator more penalty powers if the courts are not equipped to deliver timely and effective results,” he said.

“If you spend five to seven years in the courts, people forget why you took the case on initially.”

He didn’t say it but the textbook example of this was the Jodee Rich case, in which the founder of failed telco One.Tel won a civil case that was initiated in 2001, had its first hearing in September 2004 and its final hearing in 2007. Justice Robert Austin threw the case out in November 2009.

One.Tel tragics certainly remembered the case, which reportedly cost ASIC more than $40 million including Rich’s costs, and Medcraft has a point. ASIC filed the case while he was still working for French BankSoc Gen in New York, so he basically inherited a running sore, which ASIC just had to keep financing until the case reached its painful conclusion.

It not only preceded his tenure but also that of the previous chairman, Tony D’Aliosio, who chaired ASIC from 2007 to 2011, and it even preceded the appointment of the chairman before that, Adelaide accountant Geoff Lucy, in 2004.

The prize may have to go to David Knott, who chaired ASIC from 2001 to August 2003, and launched the case in December 2001. That’s five chairmen ago!

At least ASIC, which is now chaired by recovering investment banker James Shipton, has been given $400 million in the Budget to take more legal action against the banks.

But to come back to Medcraft’s “absolute rubbish” view of abolishing commissions, he’s certainly put himself in the position of making the sharpest criticism yet of any recommendation made by the highly respected retired judge.

Medcraft’s line is that it would be anti-competitive to abolish the commissions, since it would leave potential borrowers to shop around for the best mortgage rate on their own account, most likely without advice. There are mortgages and mortgages, particularly when it comes to interest-only payments and honeymoon rates, so it’s probable that ordinary punters could come unstuck in some way.

Surely there has to be some middle ground between what the judge recommended and Medcraft’s position? Neither man is short of grey matter.

They’re not even arguing the same point, anyway.

Commissioner Hayne didn’t like commissions because they are paid to the broker by the lender, most usually a bank, without the borrower being informed.

His schtick is transparency and there hasn’t been a lot of that in the sector. He’s not bananas about intermediaries, either.

He suggested it would be more transparent if it was the borrower who paid the lender, rather than the broker paying the lender, on the reasonable basis (I assume) that nothing focuses the average person’s mind so much as being asked to pay a bill.

As I say, Medcraft doesn’t want to see the banks getting it all their own way in lending, and of course the mortgage brokers have been howling blue murder at the possible extinction of their business.

How about making it very clear to the borrower that the bank is paying a commission to the broker, or a one-off fee, or whatever it is, and identify what that fee is?  If necessary, levy a charge of some sort on the borrower, perhaps (yet another) establishment fee, so they pay attention?

Whatever the future holds for the mortgage broking industry, if the industry adds value, it deserves to survive, if under more of a spotlight than it has been used to.

Clearly, if the borrower discovers that the fee being paid is more than the saving on a new mortgage being established, they’ll be less ready to use the services of a broker.

While the relentless campaign to stamp out commissions, particularly trailing commissions, is going to keep going, we will still have people such as stock brokers and insurance brokers, I’m sure, but on one firm condition.

They absolutely have to add value, and the people paying commissions have to understand what those commissions are, and why they are paying them.

 

Has Wesfarmers boss, Rob Scott, seen something in Lynas that the rest of us haven’t?

Thursday, April 04, 2019

Wesfarmers’ unexpected bid for rare earths specialist producer Lynas Corp is the sort of wheeze that causes old financial journalists and analysts to spark up and start guessing about what’s really going on.

Wesfarmers CEO Rob Scott certainly shook the investment community last week by offering $1.5 billion for the trouble plagued Lynas, albeit very conditionally.

As Paul Rickard wrote so colourfully in Switzer Daily last week, “Is Wesfarmers a buy or has its MD had a brain explosion?

I won’t argue with Paul’s conclusion that Rob Scott’s company isn’t necessarily a buy at present, but I would suggest that Scott has seen something in Lynas that the rest of us haven’t.

One, he’s got a lot of spare cash to play with post the spinoff and market listing of Coles, and money is something Lynas has by comparison struggled to find, at least at the same rates of interest.

Lynas mines its rare earths at Mount Weld in WA but processes them in a purpose built $800 million facility at Kuantan in Malaysia, or tries to.

The big headache is that the Malaysian Government is unhappy about two sorts of waste that Lynas is producing, one being just over a million tonnes of what’s called neutralisation underflow residue (NUF), the other being less than half that amount, at 452,000 tonnes, of slightly radioactive water leached purification residue (WLP).

Most particularly, it’s given Lynas until September 2 to get the latter residue out of their country.

My erstwhile colleague Matthew Stevens, now at the AFR, says the estimate for taking the WLP gunk away and storing it somewhere sensible is $130 million.

And he notes that the current management of Lynas has said it may have to suspend production within six months, given that the September 2 deadline is “unachievable”.

It’s at this point that Rob Scott and Co have come along with a $2.25 a share bid described by the Lynas board as “highly conditional, indicative and non binding.” 

Scott could scarce but agree that it’s non binding, given that it’s contingent on Lynas retaining its licences “for a satisfactory period following completion of the transaction”, whatever that means, plus plus plus. He’s hedging his bets.

As are share market investors.  They marked down Wesfarmers shares from just over $35 pre the bid, to around $33 during the week, followed by a tepid bounce to $34.47 yesterday.

It’s never a surprise when a bidder’s stock loses a bit of altitude while analysts juggle numbers but it’s fair to say that on this occasion the prices of both bidder and biddee have underwhelmed.

Lynas shares initially kicked up from a pre-bid level of $1.55 to a high of $2.17, which is still eight cents below the bid, and are now bumping around that level.

Clearly the arbitrageurs, who hop into a stock that’s been bid for and hope to see a higher bid emerge, are keeping their powder pretty dry.

Rob Scott appears to be in no rush to do anything like that, pointing out in a note on Friday that the $2.25 a share offer assumes that the licensing drama can be satisfactorily resolved.

“Our proposal and the premium in the offer price assume a sustainable solution is delivered to overcome the current regulatory issues that have weighed on Lynas for many years and we look forward to hearing the company’s solution”, he said.

That’s a mite cheeky, since the Lynas crew clearly don’t have one.

But it got me thinking. It’s widely known that Chinese companies control around 80% of the world’s supplies of rare earths, and clearly Lynas has an open goal in front of it, if it can keep going. Rare earths are particularly important in magnets that have myriad high tech uses.

The Lynas board has said it’s not impressed by the bid, saying it had “concluded it will not engage with Wesfarmers” etcetera.

But what is Lynas doing in Malaysia anyway, and couldn’t it process the material elsewhere?

The key to the drama may well be that the relevant Malaysian authorities gave Lynas a 12-year tax holiday some six years ago when the plant was being planned.

Beware of Greeks bearing gifts, the Trojans used to say after the mishap with the wooden horse full of soldiers.  

So what about processing the material onshore?

As far as I understand it, it probably wouldn’t be practically feasible to process the rare earths on site at Mount Weld, which is about half way between Perth and the Northern Territory border.

Wesfarmers’ well established chemicals and explosives base is at Kwinana, just south of Perth.

Turning out fertiliser, explosives and industrial gases isn’t quite the same as processing rare earths but you get the drift: if anyone’s going to come along and try to turn Lynas round, Wesfarmers has a good claim to being the potential saviour. Western Australia’s not short of real estate and indeed Lynas originally planned to process the stuff at Northam, some 50km inland from Perth.

The $1.5 billion being put on the table is a bit dwarfed by the massive deleveraging delivered by the spinoff of Wesfarmers’ Coles holding, which dropped several billion dollars into Wesfarmers’ coffers last November.

In summary, Wesfarmers has been looking a bit tentative since scrapping its attempt to “bunningise” the Homebase empire in the UK.

That’s no excuse for wasting money closer to home, but you could make an argument that Wesfarmers has bought itself a call option in its Lynas bid that it will only exercise if the licensing cards fall the right way. And even if anything goes wrong thereafter, it does have a tentative Plan B in potentially processing the rare earths somewhere near Kwinana.

Conclusion: I’m not as pessimistic as Paul was but I can see there are a lot of moving parts in Rob Scott’s proposal. I’d only make a tentative dabble in Wesfarmers based on this new bid.

And Wesfarmers is unlikely to throw in a higher bid any time soon, so you can probably give Lynas a miss unless you are playing a long game and can make light of the current difficulties.

 

Which way is the price of petrol heading?

Thursday, March 21, 2019

For a while there late last year it looked as though the international oil price was high and heading higher, with the Paris based International Energy Agency announcing in October that “expensive energy is back”.

It’s dangerous to regard your local servo as a litmus test for global energy prices, but since then the price of unleaded petrol in Australia’s major cities has dropped by more than 20 cents from $1.59 to $1.38 a litre.

We’re back to only grumbling slightly about fuel prices. So what happened?

I’m as interested as anyone, having highlighted the high price of fuel for Switzer Daily on October 24 based on the fact that global oil supply was only just running ahead of demand at 100.2 million barrels a day against supply of 100.1 million barrels.

It now turns out that the US is heading for the status of being the second biggest exporter of oil in the world after Saudi Arabia, thanks to the shale revolution, according to the IEA’s hot-off-the-press  “Oil 2019 Analysis and forecast to 2024”.

The new report says that the US increased its liquids (as in oil) production in 2018  by a record 2.2 million barrels a day and that what’s more, the US will account for 70% of the increase in global production capacity between now and 2024.

“Towards the end of forecast, US gross exports will reach 9 million barrels per day,” says the new report, “overtaking Russia and catching up on Saudi Arabia.”

Clearly this is taking a more objective view than the research I saw late in 2018, which wouldn’t of course have been able to include a US production figure for the year.

Perhaps the development that wrong-footed the IEA the most in recent years has been that OPEC, the producer cartel assembled in 1974, is no longer the source of extra “swing” production to meet higher demand, while a raft of non-OPEC countries such as Norway, Brazil, Canada and most recently Guyana, will add another 2.6 million barrels of oil a day in the next five years. Add that total to the US production numbers and you get an increase of 6.1 million barrels a day, all from non-OPEC countries, by 2024.

The IEA was founded in 1974, by the way, to monitor the newfound strength of the traditional middle eastern oil producers, so you can see that the oil production boot appears to have changed feet.

Of that 6.1 million barrel increase, 70% or a whopping four million barrels a day will come from the US.

Back in October the IEA was assuming that most of the increase in US production would be eaten up by consumption, which is the biggest in the world at 20 million barrels a day, but its latest report estimates that by 2024 the US gross exports will come to 9 million barrels a day.

Because of different grades it also imports a lot of oil, particularly from Canada, so don’t confuse net with gross.

By comparison the old OPEC producer group includes current laggards like Iran and Venezuela which are actually going backwards because of sanctions. Net net, as they say, it means that OPEC’s effective production capacity is expected to actually drop by 0.4 million barrels a day by 2024.

You won’t need to take your shoes and socks off to see that global oil production  is expected overall to increase by 5.7 million barrels a day by the end of the five year forecast. That’s less than demand, as you will see.

Of course a lot can go wrong between now and then but that’s an increase of more than one million barrels a day, per year.

So what about demand?

If we’d been expecting demand to peak thanks for instance to the wholesale adoption of electric cars, we’ll be disappointed. The IEA understandably points to China and India as the source of much demand growth, noting that any reduction in industrial demand in those countries is more than made up for by increased consumer activity, i.e. cars.

The new report interestingly expects new oil demand to outstrip new supply by 7.1 million barrels a day versus 5.7 over the five year forecast period, but the monitoring group seems pretty sanguine about that imbalance.

You could be forgiven for thinking the IEA really doesn’t know what demand is going to look like, because it has to be harder to predict than supply. There are even more variables than with supply, which tends to be tailored to demand anyway. The best takeaway from that is to assume that petrol prices are much more likely to rise than fall by 2024.

We do know that the rise in demand for jet fuel, particularly in Asia, is going to join with extra demand for petrochemicals for plastics et cetera (remember them?) to push demand out further.

The global market for jet fuel is currently around 7.45 million barrels a day but that will reach more than 9.5 million barrels a day by 2040.

And electric cars? Sales are moving up but they still only represent a small percentage of sales overall, never mind the existing vehicle fleet.

Global sales of plug-in electric cars were estimated at 2.1% of new car sales in 2018, but once you include existing fleets the total ratio is about one plug-in electric car per 250 cars on the road.

Interestingly, China has the biggest stock of plug-in cars and light goods vehicles with over 2 million of them now on their roads, and that will of course rise.

Where’s Australia in all of this? Not only are we pretty much of a rounding error but we long ago ceased to be oil exporters, thanks to the gradual run down of Bass Strait reserves.

The latest set of numbers I could extract from Australia’s Department of Energy show that we’ve just dropped below production of 100 million barrels a YEAR to 98 million for the year to June 30 2018, versus for instance 161 million for the same period in 2010-11.

And that’s even including condensate, the liquid that comes up with natural gas. Take that out and the total drops by almost half.

Conclusion: we’re going to have to get used to being out on a limb as regards our oil needs. The only consoling thought I could find in the IEA report was its note that ongoing fuel efficiency is going to slow the global rate of growth in petrol demand to less than one per cent a year overall. But that will be dwarfed by petroleum use growth in developing countries, up two per cent a year.

 

Is our biggest coal miner’s cap on production pure self interest?

Thursday, March 07, 2019

After so much of a Punch and Judy biff-fest about electricity prices and climate change, it takes a fair bit to shake most of us out of our slightly jaded torpor. But one announcement two weeks ago certainly made me sit up and take notice.

That was Glencore’s announcement on February 20 that it was going to put a cap on its annual global coal production.

So what, you might think. Given that Glencore is now one of the biggest coal producers in the world, putting a cap on production might smack more of controlling the commodity price than making the world a cleaner place.

My take is that I’ve spent more than 40 years in journalism and stockbroking and I’ve never heard of a miner announcing it was going to limit production of anything.

In this case, it announced a limit of 145 million tonnes of coal production a year, in line with its current high output.

Oil sheikhs, yes: OPEC is forever trying to keep a lid on oil production, but coal is something quite new.

And what’s more, the arch capitalists at Swiss-based Glencore appear to be more progressive on this issue (lefty, if you like) than our own Federal Government.

“To deliver a strong investment case to our shareholders, we must invest in assets that will be resilient to regulatory, physical and operational risks related to climate change” a company statement said.

It also noted that the company would examine its relationships with trade associations to ensure those groups aligned with the Paris climate agreement, one of those organisations being the Minerals Council of Australia.

In other words, global investors have pressured Glencore into asking itself whether it wants to remain a member of the mining companies’ umbrella body in Australia. That’s quite a development. 

In contrast Resources Minister Senator Matt Canavan, who in a past life was an economist, announced that what Glencore had done “sounds like just basic self interest” since Glencore dominates the seaborne coal market.

What he seems to have dismissed is the fact that there’s a group of institutional investors calling themselves Climate Action 100+ who specifically want the big miners to limit coal production. And before you howl about bossy foreigners, our biggest institution Australian Super is part of that push.

That’s the new world we are in, which is so far from the “Monash forum” approach to coal espoused by the conservative end of the Liberal party that they might as well be on different planets. The big end of town (Australian Super holds assets worth $145 billion) is saying one thing and the Monash Forum quite another.  Not that we’ve heard a lot from the Forum lately.

You might remember that the Forum, which features Tony Abbott, Eric Abetz, Kevin Andrews and some 16 other MPs and Senators, takes the view that the best solution to rising power prices is to build a new coal-fired power station.

This is despite solid and growing evidence that it would be cheaper to build an equivalent capacity solar station.

The “two planets ” issue was further emphasised yesterday when a statement from the Federal Liberal candidate for the seat of Gilmore, Warren Mundine, predicted all kinds of economic disaster if we follow Labor’s plan to cut emissions by 45% by 2030. A 50% increase in electricity bills, the loss of 366,000 full-time jobs and a drop of $9,000 in the average full-time wage, it predicted.

At about the same time, my friend and former colleague Giles Parkinson’s RenewEconomy website said that a group of 28 Australian climate scientists , academics and industry veterans has slapped down energy minister Angus Taylor over his repeated declaration on Sunday’s ABC Insiders program that Australia’s emissions were “coming down”.

What’s happening is that per capita emissions are coming down (because our population is growing) but overall emissions are going up, but that’s not how he expressed it.

Australia is NOT on track to meet its 2030 emissions reduction target, they said, contradicting the Government and Taylor’s line that we will meet it “in a canter”.

They then threw in that even if we were on track, the target itself is woefully inadequate for what scientists say must be done.

That’s not so much a yawning gap as a Grand Canyon chasm between those two perspectives, and we are the pained spectators.

Meanwhile, what has unarguably happened in the most recent years is that Australia’s climate is changing at an accelerating rate, and for all the talk of climate change being a “Green/Labor hoax” as some diehards call it, the majority of the population now believes that Something Must Be Done.

Clearly, we have to start re-thinking the whole concept of thermal coal. Some 10 years ago, I visited Newcastle to do a feature article on our coal exports and came away suitably impressed at the millions of tonnes of the high quality black stuff lining up to go offshore from the Kooragang Island coal loader, our biggest coal export terminal.

Attitudes have changed, including mine, but in New South Wales we are still 80% reliant on thermal coal for electricity generation. That’s a pretty dire percentage, given that for instance in the UK they have cut the use of coal for electricity generation to zero.

However the Australian Energy Market Operator (AEMO) notes there is actually more solar and wind generating capacity currently proposed (at 11,555 megawatt hours) than there is existing installed coal generating capacity (at 10,160).

The national picture is even more marked. AEMO says there’s just over 23,000 megawatt hours of installed coal fired capacity but, if you add solar and wind together, there are no less than 38,000 megawatt hours of those two on the drawing board.

It’s not the Government doing that: it’s the market, but please note that those solar and wind capacity numbers are merely proposed, and not yet a reality. And yes, battery development needs to keep pace with solar and wind, to keep the lights on.

The Government is talking interstate interconnectors, such as the planned second cable from Tasmania, and of course Snowy 2.0, both of which would assist, although the Snowy 2.0 will cost several billion dollars and won’t be economic until we close more coal-fired capacity, apparently. 

No one said this was going to be easy, but it’s never been more important for our Federal leaders to tell us the truth about the transition we must sooner or later make to renewables.

 

Woolworths One, Coles Nil

Friday, February 22, 2019

Woolies, reporting on February 20, managed a 2.1% rise in net profit to $920 million in a result well buttressed by incremental gains across the board.

Coles’ equivalent number, reported on February 19, was a drop of 14% in reported net profit to $738 million.

Coles CEO Steve Cain did a Curate’s Egg analysis of the result by calling it “a solid outcome in a challenging retail environment.”

The Australian Financial Review called the Coles result a quasi-profit downgrade, which is a perfect example of how the same set of numbers can be interpreted in different ways.

Mr Cain said that Coles had achieved unprecedented earnings growth under Wesfarmers’ ownership, but now needed to reset its strategy to set the retailer up for sustainable long-term growth.

The AFR noted that Coles’ earnings had risen by 125% between 2009 and 2016 but had subsequently fallen over the last two years, with analysts forecasting a fall in EBIT (Earnings before Interest and Tax) for the full year to about $1.25 billion.

Coles’ reported EBIT for the first half was $733 million, down 5.8% on the supermarket group’s equivalent number for the second half of calendar 2018, and that’s before making one-off adjustments relating to improvements in the supply chain at Coles, which was only spun out of Wesfarmers in November of last year.

That EBIT number was despite sales revenue climbing 2.6% for the half to $20.8 billion. Clearly, the analysts expect further grief if they’re saying the company will only make just over $517 million in EBIT in the second half.

Mr Cain only took over the reins at Coles in September, so this is the perfect time for him to publish all the bad news in the hope that from now on he can afford to be more upbeat..

The Coles story seems to be that costs have been rising faster than sales, not helped by the impression that the Australian consumer had a crisis of confidence in the December quarter, although Woolies did not appear to have anything like the same problem..

Like-for-like sales at Woolies were up 2.7% in the second quarter compared, with Coles’s skinny improvement of only 1.3%.

Coles shareholders already knew before the results announcement that they weren’t going to get a dividend for the half, since the company was only formally spun out of parent Wesfarmers in November of last year. They will get a div from Wesfarmers, which will hopefully bring them some better news when it reports on Thursday.

The dividend will relate to the four and a half months of the December half year when Coles was still part of Wesfarmers, so don’t hold your breath for a bonanza.

The market didn’t like the Coles result much at all, marking the stock down more than 50 cents to $12.02 on Tuesday and a further 42.5 cents  to $11.65 in Wednesday morning trading, against the general market trend. The slide has continued and the last price I have is $11.45, which is more than 5% down on the day.

That values the company at $15.3 billion.

Wesfarmers originally paid $19.5 billion for Coles in 2008, shortly before the Global Financial Unpleasantness. That said, Kmart, Target and Officeworks were transferred to Wesfarmers during the demerger, so we’re not comparing like with like.

Woolworths shares were down $1.54 at $28.71 or just over 5% in the wake of its profit announcement which fell short of expectations, valuing the company at more than $37.5 billion.

A further complication in Coles’ reporting is that the retail chain has decided to calculate its earnings on what it calls the Retail Calendar rather than the Gregorian Calendar. Before you think they’ve been secretly chanting and wearing sackcloth robes, it’s just a longwinded way of eliminating the imbalance between half years that might say be 27 weeks in the first half and 25 weeks in the second half.

Among the other less thrilling pieces of news from the new Coles listing was that not only has the demerger cost the new company around $25 million in one-off costs to be absorbed this financial year, but it’s going to cost the company around $66 million in extra corporate costs per financial year to operate and report as a separate entity.

They include ASX listing costs, share registry, insurance and external audit fees, none of which look like reducing any time soon.

Meanwhile it didn’t help investors’ attitude to Coles on Tuesday when Woolworths announced they were going to charge shoppers an extra 10 cents a litre for milk and send the difference straight on to the dairy farmers.

Coles has yet to respond to what is a bit of a stunt but which is at least a modest reward for the poor old farmers, who have been deserting the industry in big numbers recently because they simply can’t make a decent living.

That’s thanks to the low prices they’ve been being paid following pressure by… Coles and Woolies.

 

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.

 

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