Financial Services Royal Commission
Watching the Royal Commission live is as painfully engrossing as a slow motion train wreck. Banks breaching responsible lending rules was a common theme this week, with a failure to check borrower details, fraudulent conduct, reliance on false documents, ineffective monitoring, conflicts of interest, bribery, even paying gymnasiums and tailors to introduce loans. Remediation for bad consumer lending has reached $700 million.
The Commission revealed about 56% of mortgage loans originate through brokers, and therefore the banks have outsourced many checks and processes on their largest asset type (in the case of CBA, 64% of total lending). An unbelievable 90% of car purchases are financed with loans, often through the dealership. People are buying a depreciating asset with useless add-on insurance at high interest rates, and many will never pay off their debts for the sake of owning a fancy car.
The case studies show the Royal Commission will be a public relations disaster for the banks. It's hard to listen to the Commission and not expect the bank behaviour to be punished by the market, but it's easy to see why the legal fees will exceed $1 billion.
Mark your diaries for 16 April when the Commissioner turns his attention to wealth management and financial planning. It is streamed live here during hearings.
Loss of excess franking credits
Meanwhile, the new Labor Party policy to deny a cash refund for excess franking credits will reduce retirement income for thousands of SMSF trustees. According to Labor, about 90% of the amount of refunds accrue to SMSFs with 82% having balances over $1 million. We include two articles today, with Nicholas Stotz showing the impact at various tax rates. Ashley Owen says the current cash return on the broad ASX is 5.7% including 1.5% of franking, and a reduction to 4.2% is a 25% fall in income.
Consider this simple example. A $500,000 SMSF in pension phase holding only fully franked Australian shares earns dividends of 4.2%, or $21,000. The franking credit is 3/7ths or $9,000, currently paid as a refund. The SMSF has no other tax liabilities, and under the proposal, the SMSF trustee loses the $9,000 refund.
The extent to which superannuation and SMSFs inject new money into the ASX each year is shown below (Credit Suisse calculates new supply of shares will be only $13 billion this year), with about 45% of listed Australian equities owned by large super funds and SMSFs. Already, bond brokers are enjoying the prospect of this new policy, recommending clients switch to high yield bonds rather than holding shares which no longer recover franking for pensioners. The Labor policy is not a removal of dividend imputation, as credits can be applied against unfranked income to reduce tax, which is why others are pointing to investing in REITs and unlisted property.
Elsewhere in a packed edition, Don Ezra responds to Peter Thornhill's lively debate (70+ comments) on share investing in retirement, and we show why many advisers are not allowed to offer their best advice. In Part 2 on tax from Graham Horrocks, he runs the numbers on why companies should distribute earnings for greater super and pension tax efficiency.
Sir Michael Hintze of CQS is arguably the most successful Australian fund manager in London, and on a recent return here, he gave only two interviews, one to the AFR and one to Cuffelinks. We explore his views on managing investments and personal priorities.
Chris Cuffe recently spoke at the 'Women in Super' event and Susie Bell recorded some brief highlights, while Mark Ellem explains how a life insurance payout works in superannuation death benefits.
This week's White Paper from AMP Capital argues that autonomous vehicles are so far from happening that there should be no let-up in traditional infrastructure building.
Graham Hand, Managing Editor
Edition 244 | 16 Mar 2018 | Editorial | Newsletter