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Cuffelinks Edition 292

  •   8 February 2019
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Why not litigate?

Even the harshest critics of Kenneth Hayne's Final Report must acknowledge a major success: the evidence presented was so egregious that the regulators must have the resources and fearlessness to do their job properly. As recently as the last Budget, the Government cut ASIC's funding by $41 million a year over four years, and Labor made similar moves in the past. Now they're falling over themselves to show who is toughest on crime. Hayne's enduring legacy will be measured by the future tenacity and success of regulators. He says on page 424:

"In the end, the critical question whenever ASIC is considering any contravention of the law must be the question ASIC now accepts must be asked: ‘Why not litigate?’".

Some readers have criticised me for my restrained support of the Commission's work, one calling me 'an apologist for the banks'. It's ironic. I lost a major bank consulting assignment for writing a whistleblower book in 2001. I'll never forget the Group Treasurer calling me into his office and saying, "I agree with what you've written, but you can't stay here."

So let's hear the response to the Final Report from a few leading voices. The journalist most influential in establishing the Royal Commission, Adele Ferguson, wrote in the SMH:

"For those Australians hoping for structural separation of the banks, an overhaul of the regulators or heads on sticks, Royal Commissioner Kenneth Hayne's verdict would have been disappointing. There was little blood and gore. It was more like a soft landing ... Customers were ripped off but the regulators had little or no appetite to use the tools at their disposal, preferring instead to do cosy deals with those they were meant to police. Despite this, Hayne is giving them more powers and more work and has faith they will now actually do their job."

Alan Kohler wrote of Commissioner Hayne in The Australian:

“His decision to not call for the separation of product and advice is both inexplicable and egregious. Another significant failure is that he has nothing to say about percentage fees and the high cost of financial advice. In fact, he seems to applaud it.”

And Jonathan Mott of UBS said:

"The much anticipated release of the Royal Commission Final Report was disappointing, in our view. There was much discussion around misconduct within the banks and the need to change culture; however, the final recommendations fell well short of market expectations … most of the cultural change will be self-enforced. Without powerful recommendations, we are concerned that ensuring lasting cultural change over the years may be difficult."

On another positive, Hayne should be applauded for avoiding more complicated legislation. He wants to "reduce exceptions and carve outs" to "simplify(ing) the law so that its intent is met". His six principles should guide everyone in any industry:

  • Obey the law
  • Do not mislead or deceive
  • Act fairly
  • Provide services that are fit for purpose
  • Deliver services with reasonable care and skill
  • When acting for another, act in the best interests of that other.

Noel Whittaker highlights a section of the Royal Commission he believes is flawed. My prediction is Recommendation 1.3 will not be adopted in full by either the Government or Labor. It says:

"The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending."

Let's move on. This is an amazing chart of US price changes in the last 20 years. It shows that individual companies and people are affected differently by inflation, as we all have unique expenses and costs. Overall inflation in this period was 56%, but hospital services were up over 200%, with education close behind, while electronic goods, clothing and cars were vastly more affordable, rising less than wages. Little wonder a high cost country like Australia has moved more into services and less into manufacturing, facing this competition


Also in this week's edition, Will Gormly shows that Listed Investment Companies (LICs) trading at a discount should not be considered a bargain as they may never return to par, while Chris Meyer explains Active ETFs and their unique identity in our listed product range.

Graeme Colley reminds SMSF trustees of five common mistakes that could be costly to make, and Lawrence Lam suggests investors should develop the mindset of a founder when looking for the best companies. He offers a few examples of his favourites.

Further comments on the Royal Commission are welcome, or anything else in Have Your Say.

This week's White Paper from Fidante Partners is called 'Hype cycle: is it too soon to buy', including evidence retail investors have stepped back from equities but institutions are buying. 

Graham Hand, Managing Editor

For a PDF version of this week’s newsletter articles, click here.

 

  •   8 February 2019
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