Financial Services Royal Commission - double backflip with a twist.

Finally facing the inevitable, both the banking sector and the Prime Minister came to the conclusion that having at least some semblance of control over the outcome was better than none. Certainly better than seeing a couple of government MPs crossing the floor with a proposal for a banking inquiry which would have been far more extensive than both the industry and the government would have liked. You could argue, as Andrew Main did on Peter Switzer's website earlier this week, that there was little point in having a Royal Commission when most people already know what the problem is. However, the political reality was that the problem was not going away, and the banks in particular would much prefer the process now under the current government, than in the future under a potential Labour government .

Hence the reference to the "least worst option" - facing the reality that fighting the inevitable was not working, and was certainly not improving the general perception of a government on the back foot. Backflips - even double ones with a twist - are preferable to outright defeat.

Royal Commissions are dangerous, so understandably the government has announced one with a limited number (13) of terms of reference, and only allowed 12 months and $75 million for the as yet unnamed members of the commission to return their findings. In reality given that it is now December, and the Christmas break is coming up, that probably means only 10 months, or a change in holiday arrangements for those involved.

However the government has scored at least a partial win (the twist) by broadly including any "financial services entity" and by capturing the superannuation industry specifically - and we would guess the industry superannuation sector in particular, which to a degree still restricts members' entitlement to freedom of choice, and has persistently refused to accept independent directors or trustees in line with the governance requirements that apply to listed corporations. Given the importance of the superannuation system to the future financial well-being of so many Australians, this surely is long overdue.

From "Hedge Clippings" point of view it will also be interesting to see if the vertical distribution structure of financial products (managed funds) through bank owned product issuers, platforms and financial advisors, also comes under the Commission's microscope.

Of course announcing an inquiry, or a Royal Commission for that matter, does not necessarily lead to an outcome. It's worth thinking back to the Rudd/Gillard Government's "Henry Review of Australia's Future Tax System" which was not only hobbled by not allowing it to consider either the GST, imposing tax and superannuation payments to retirees over 60 years of age, or already announced personal income tax changes. Ken Henry's report made 138 specific recommendations, many of which we suspect have either been quietly buried, or remain "under consideration".

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Australian Fund Monitors

ATTACHED FILESAFM Fund Review - October 2017 (pdf format)

The RBA is good, but not a good forecaster!

The superannuation ideas of the super-rich were heavily featured in today's media, and we can't disagree that Australia's super pool, the fourth largest in the world, (which is significant not only in itself, but particulary against the fact that Australia only has the 13^th largest economy) creates an extraordinary pool of capital which could benefit other sections of the economy.

While we wouldn't disagree that it could be used as a source of capital for Australian businesses, this in itself would create a number of issues regarding eligibility and security of the funds. Hedge Clippings has no doubt that these issues could be resolved, but we would still argue that the allocation of a portion of superannuation funds to much-needed infrastructure projects would make an even better fit.

One such reason is that the long-term funding requirements of infrastructure projects ideally meets the investment timeline of superannuation funds. Another is that a relatively steady income stream of around 5%, or cash +3% would be attractive to both the project and the superannuation fund, particularly that portion currently held as cash or in government bonds.

Finally, if there were to be approved infrastructure bonds, any superannuation fund, including the SMSF sector which makes up over 30% of the total, could invest an appropriate portion, possibly with a taxation carrot or stick attached. Given that the allocation of SMSF's to cash is reportedly high at around 25% or more, funding for Australia's much-needed infrastructure requirements could be met with a win/win/win outcome.

Elsewhere this week a speech by Philip Lowe, Governor of the Reserve Bank at the Australian Business Economists Annual Dinner caught our attention, and gave an insight into the difficult balancing act that the RBA has been facing. Entitled "Some Evolving Questions", and referring to a previous speech he had given in 2012 entitled "What Is Normal", the Governor admitted that the RBA is still searching to understand: What is normal?

However on the economic front things are anything but normal, with low unemployment and solid employment growth, an increase in the wage price index of only 2% over 12 months, and an increase in average earnings per hour barely above 1%. As a result consumer confidence is low, particularly given that the level of household debt to income ratio is forecast to top 200% within a year or so.

The RBA is keen to raise interest rates next year but is unlikely to be able to do so. Even a small increase will put further pressure on consumers who are already struggling, although businesses are continuing improve margins on the back of low rates and productivity and technology improvements. But most of all, as a result of high household debt levels, the already cooling property market would have difficulty with any rate increase without any increase in household incomes.

Finally, the RBA is currently forecasting consumption growth of 3% over 2018 and into 2019 but what is normal is that the RBA's forecasts are overly optimistic!  For the past seven years they seem to have been fixated by a forecast in consumption growth of around 3.5%, with actual consumption growth failing to achieve it on each occasion.

And while talking of "What is Normal", 10 years ago today Kevin Rudd took over as Prime Minister, the first of five we have had since then. Maybe the new "normal" is a revolving door at The Lodge?