Columnists Australia

Business/Robbery etc

29 November 2014

9:00 AM

29 November 2014

9:00 AM

Millions of Australian investors can now sleep safely in their beds knowing that in November 2014 Jacqui Lambie and Ricky Muir saved them from….the big bad bogeyman?

When these two financially illiterate Senators reneged on the deal they had done with the government to support its FoFA regulations in exchange for including their (unnecessary) ‘consumer safeguards’ clauses, it meant a return to the excessive red-tape, expense and pro-union-affiliated industry superannuation fund law of the Gillard days

The attempt to find an appropriate compromise between the need to provide adequate protection to consumers without imposing unreasonable costs and controls on the financial advice industry, were defeated in the Senate by their two votes. Significantly, the financially literate independents, Senators Leyonhjelm and Day, voted with the government.

Its defeat represented the triumph of populism (and an effective campaign to submerge Labor/union self-interest) as the government’s measures were characterised as a ‘watering down’ of consumer protection in response to ‘pressure from the banks and the big end of town’.

And with so much evidence of crooked deals where investors had been robbed of their life savings by dishonest advisers, anything that could be made to look like protecting these shonky operators has become a political no-go zone. Labor Senator Sam Dastyari successfully based his case on the regulations being ‘some kind of protection racket for a small number of crooks, criminals and con-men’ who had given the financial advice industry a bad name. He naturally ignored the Law Council’s strong support of the government’s change to the catch-all ‘best interests’ of clients clause, which has now reverted to being ‘unworkable’.

And Lambie based her ill-informed opposition on the evidence of victims of the Timbercorp fraud, even though there is no substantive difference in this case between the Abbott’s regulations and those of the Gillard government – neither of which existed at the time, anyway.

So there is little prospect of Tony Abbott swimming against the populist tide by seeking an early resurrection of its generally sensible approach, even though it is self-evident that not one consumer is better protected by the reversion to the Gillard laws – which impose extra costs of close to $200 million that will ultimately have to be paid for by people seeking advice. Which means fewer will – and pay the heavier price of being ill-informed.

The major problem with legislative attempts to protect investors is that any intervention is likely to provide a false sense of security in an area where bad advice is inevitable; legislation against self-interested (conflicted) bad advice runs the risk of adding more red tape and expense rather than increasing consumer protection. The government had the balance right, but the politics wrong.

The four pillars of the Australian banking system are suffering from slight subsidence, with the share prices of each down about four dollars. Principal reason for a reversal of years of the fashionable pursuit of bank shares’ high effective dividend yields is that change is on the way. The banks now have significant exposure to the ‘overheated’ mortgage market – contributing to record profit growth which is due to diminish. Also, the increased minimum capital ratios (at some cost to bank profitability) that will result from November’s Financial Systems Inquiry report are aimed at reducing the risk of taxpayer support in the event of another global crisis.

Now a Macquarie Bank analyst has come up with the killer blow. For about six to eight months after bank CEOs announce their departure, detailed research has shown that bank stocks ‘underperform’ the market by about 10%. This year, the changing of the guard at NAB brought an 8% underperformance, and ANZ could be next as the seven-year tenure of Mike Smith could be nearing its end. But the immediate target is Westpac, with CEO Gail Kelly departing next February and Macquarie forecasting a 10% share price disadvantage. So the changed direction of the Gail looks like the ill-wind that blows no Westpac shareholders any good.

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