Tag Archives: Australian Securities and Investments Commission

04.18.16
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Questioning our values more use than a banking royal commission

The criticism of the behaviour of Australia’s financial services industry hit fever pitch in the past weeks with the Federal Opposition calling for a royal commission  into the sector and even the Prime Minister Malcolm Turnbull criticising the big four banks for damaging public trust.

A royal commission might give us all a chance to be outraged at the banks’ naughty behaviour but it would not reveal anything we didn’t already know, nor is it likely to examine the underlying societal value that is the root of the problematic culture.

Two recent forays by financial service regulators into considering the impact of culture on recurrent problems failed to do it, so why would a royal commission be different? That is, a dominant value demonstrated in Western capitalist cultures is the belief that, profit in business has value above all things. And maximizing the profit of a business is more important than the interests of any other stakeholders, including its customers. It is essentially alright to milk your customers for outrageous fees, unsuitable investment products and insurance products that are impossible to claim on, if you are adding to the bottom line for another ‘record profit year’ to report to the market.

Earlier this month, the banking regulator the Australian Prudential Regulatory Authority (APRA) warned that it had some concerns about the level of household debt in Australia and the Australian banks’ exposure to the mortgage market.  ABC’s 730 Report showed a revealing piece of footage of APRA chairman Wayne Byers testifying at last year’s Senate Estimates Committee that the regulator was “a bit surprised by how much the competitive pressures in the industry and the competitive dynamic in the industry had led people to do things that were, you know, really, in our view, lacking in common sense.”

The issue of lending money to secure market share, beyond a point that is a suitable risk for the lender and the borrower, is directly linked to the value of making a sales target to bolster the company’s profits. In a running bull market, the banks allowed their retail mortgage divisions to be focused on market share, and remuneration packages for sales employees will be geared to sales targets. Time and again, insufficient risk assessment of what that exposure is doing to the whole business is ignored or downplayed and the customers are allowed to borrow their way into a disaster.

Meanwhile, the funds management regulator, the Australian Securities and Investments Commission (ASIC) was also pondering the role of culture in driving conduct and conflicts of interests in fund management companies that both create and manage funds and sell them through financial advisory arms that they own. In ASIC’s Report 474: Culture, conduct, conflicts of interest in vertically integrated businesses in the fund management industry, released this March, ASIC pointed out that where a financial services company manufactured an investment product and owned the distribution chain through financial advisory services, there was a strong chance that sales representatives were pressured to sell the ‘own brand’ products, whether they were the most suitable for the customer or not. This feathers the nests of the sales representatives through salary incentives aligned with the organisation’s own profit maximisation strategy. The needs of the people paying for the service, the customers, are secondary. This is a mis-selling scandal waiting to happen.

By failing to consider the values that underpin our culture, we condemn ourselves to making the same mistakes over and over again. These mistakes erode our faith in the financial services sector that is crucial to a healthy economy.

Making a profit is a cornerstone of a healthy business sector, but endlessly pursuing record profits is a short road to poor ethical choices because it turns the focus away from the customers’ requirements and prioritizing a business’s own desires. Rather than just driving up the share prices of companies that make bumper profits, perhaps we should spend more time considering how the profits are made and punish the share price of companies that put their own interests above all others to get their pot of gold.

04.05.16
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The Panama Papers reveal the ugliest parts of a bigger transparency problem

The fascinating phrase ‘ultimate beneficial owner’ kept popping up in the coverage after the release of the so-called ‘Panama Papers’ this week. It referred to the masking of the true owners of assets under layers and layers of shell companies and nominee directors.

Tax agencies, legal authorities and fraud investigators have all decried how the web of shell companies camouflaged the ‘ultimate beneficial owners’ making it extremely difficult for these owners to be held accountable for how the assets were acquired, to pay the appropriate tax in the jurisdiction in which their money was earned or to understand their level of influence in the halls of power.

In the outrage at these unidentifiable ‘ultimate beneficial owners’ and the lawyers who help them to set up the structures , the importance of transparency of knowing who owns what, and who has influence was raised again and again.

But before we all get swept up in the outrage of it all, it is worth reflecting that the lack of transparency regarding ‘ultimate beneficial owners’ of any large company is rife throughout the financial system, so much so that it can be argued that it is accepted as the norm.

For example, as part of their commitment to transparency of ownership, Australia’s biggest companies list their top shareholders in their annual reports but a quick flick through these lists shows the laughable nature of this proposition. Most of the names on the list are nominee companies. The biggest ones are HSBC Custody Nominees (Australia) Ltd, JP Morgan Nominees Australia Ltd and National Nominees Ltd.

Australia is not alone; the nominee company system is widespread in the Western financial services sector. Nominee companies are custodian services that allow investments from a number of investors to be aggregated into one entity. According to the Australian Securities and Investments Commission (ASIC) they typically hold securities, arrange the banking of dividends and some form of consolidated reporting. They don’t engage with senior management or boards about how companies are run on behalf of their clients.

In fact, in submissions to a 2008 parliamentary committee inquiry on corporate governance, large listed companies raised the use of nominee companies as a key barrier to the effective engagement with its shareholders. The companies said the use of nominee entities also made finding the ultimate owners of shares difficult. This makes it very hard to align the long-term investment goals of superannuation funds and the short-term remuneration and performance goals of senior management and professional investors.

It makes it easier, however, for those investing to lose the connection between how and where their money is invested and the impact that has on the values reflected in our society.

If it is fair and reasonable that people hiding money in offshore companies should come clean about how they earned it, why they should minimise their tax to avoid funding the infrastructure of a civil society such as education, health and transport systems and what influence they wield, then it is also fair and reasonable that those of us who have a retirement fund know where that money is invested and its ultimate use.

The fund management industry’s use of nominee companies makes this incredibly difficult.

Creating barriers between ownership from investing helps us to disassociate ‘making a return on our investment’ from ‘how we are making a return on our investment’ and the impact that has on the values and culture underpinning our society.

Surely greater transparency across the whole of the financial system, not just the ugly, dark corners will benefit us as a society.

09.11.13
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Who owns what is as clear as mud

One of the great transparency furphies in the corporate world is that you can find out who are the top shareholders by looking in their annual reports. The problem is a flick through the annual reports of most of Australia’s largest companies you may think you are reading the same list over and over again.

Most of the names on the list are nominee companies. The biggest ones in Australia are HSBC Custody Nominees (Australia) Ltd, JP Morgan Nominees Australia Ltd and National Nominees Ltd.

Nominee companies are custodian services that allow investments from a number of investors to be aggregated into one entity. According to the Australian Securities and Investments Commission (ASIC) they typically hold securities, arrange the banking of dividends and some form of consolidated reporting. They don’t engage with senior management or boards about how companies are run on behalf of their clients.

In fact, large listed companies raised the use of nominee companies as a key barrier to engaging  institutional investors in submissions to the 2008 Parliamentary Joint Committee on Corporations and Financial Services inquiry into barriers to the effective engagement of shareholders on corporate governance. The companies said the use of nominee entities also made finding the ultimate owners of shares difficult. This makes it very hard to align the long-term investment goals of superannuation funds and the short-term remuneration and performance goals of senior management and professional investors.

The parliamentary committee also found that institutional investors, such as superannuation funds, made decisions about whether to engage with companies’ management and boards based primarily on the economic cost to them. Some found engagement to be a distraction from their stated primary role of generating investment returns. The use of nominee companies would provide a useful way of distancing themselves from the companies and, therefore, actual engagement.

So it appears institutional investors not only don’t canvas the opinions of the people that provide them the money to invest, they are not that interested in engaging with the companies they invest in either. If they do, they certainly don’t share it with their clients.