Australian Banking Royal Commission Chasing Smoke...While the Fire Burns

Australian Prime Minster Malcolm Turnbull and Commonwealth Treasurer Scott Morrison have been facing a tsunami of evidence of their negligence with respect to defending the behavior of the banking sector prior to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.  Australians have been witnessing the gradual unraveling of the executive cover-ups in Australian banks and have seen the abject failure of the political and oversight agencies to whom banks were ostensibly accountable.  Opposition Leader Bill Shorten has wasted no time in painting the Royal Commission proceedings as evidence of the counterfeit leadership of the seated government.  But before he jumps on the bandwagon of “I told you so” he would be wise to consider a far more egregious failure that his Labor Party has ignored.  In his class warfare appeal to the working class Australian (as opposed to his vilification of the “rich” and the “elite”), he has entirely ignored the fact that Labor’s stalwart supporters have preyed on the financial ignorance of working class Australians and have delivered pathetic returns year in and year out abjectly failing the public’s fiduciary interests.  And Labor’s supporters are quite happy to point the accusatory finger at banks – an easy populist target – without considering their own complicity in a bigger act of negligence.

The following is excerpted from an open letter that I sent to Australian State and Federal Treasuries and oversight agencies over 1 year ago.  The letter was also shared with national and regional media outlets.  In short, I highlighted that fact that both Liberal and Labor are fighting over banking fees and commissions while the real heist is happening in the superannuation business.  I was told that “the public wouldn’t understand” or “there’s really no interest” in examining the dismal state of affairs in the superannuation business because Australians are basically content with year-on-year growth. 

In the February 21, 2017 Australian Prudential Regulation Authority (APRA) Quarterly MySuper Statistics, the regulated entities in Australia report their target asset allocation by investment product.  In this report, 199 MySuper products report exposure to international equities representing an average of 27% total asset allocation.  For both the single strategy and multi-strategy products, the net return to members in the reporting period was just over 2% (High of 5.04% for Aon’s MySuper High Growth; Low -2.07% for the State Public Sector Superannuation Scheme). 
 
The equivalent of 36% of the GDP of Australia is invested in Global Equities ($483b) according to the Association of Superannuation Funds of Australia (AFSA).  A considerable number of superannuation managers have reported returns on these equities at less than 10%.  During the same period, the CNBC IQ100 powered by M·CAM has demonstrated a performance exceeding 20%.  Much of the international equity exposure is accessed through consolidated products (Exchange Traded Funds (ETF) and mutual strategies).  Due to the absence of domestically managed and deployed investment products, Australia lost as much as $86 billion in returns that could have built the Australian economy while preserving fee income to the local economy in the past 12 months.  In the reporting period we have examined, we've identified losses (underperformance and opaque fees) over the past two years of nearly $130 billion (almost 10% of Australia's GDP).  This represents a taxable income loss as well as an undisclosed management fee revenue taxation loss.   In addition, it has been unable to attract funds under management to a domestic pension or superannuation management offering while New York, London and other markets are flooded beyond capacity. 

When I proposed that we repatriate management of funds to Australia (as a taxable enterprise in Australia), I was asked, “how many jobs would you create in doing this?”  That’s right, faced with the possibility of bringing $130 billion into the economy (10% of the GDP of the nation), the dismissal of the idea was based on the fact that this wouldn’t lead to sufficient job creation. 

I trust that a few Australians wake up to the fact that the Royal Commission on banking is a smokescreen for the real failure.  Australian Superannuation – an invention of the Labor Government – has built a culture of contempt.  Because citizens must allocate funds to managers for each dollar they earn, the managers have no fiduciary incentive to work for their clients’ best interest.  In conversations over the past 18 months, managers across Australia echo the phrase, “No one ever got fired for buying IBM.”  This is code for managers justifying mediocrity based on consensus behavior.  And the tragedy is that consensus means that Australians are losing money at the hands of managers who have no incentive to see them succeed. 

The Royal Commission is hearing evidence on egregious abuses of fees for sham or bad advice.  This is an important problem.  But the Royal Commission doesn’t have the courage to ask the real hard questions.  These are about the returns that did not come to Australian investors based on a culture of complacency that pervades the financial services industry in Australia.  And if the public is to be served, attention should be paid to the conflagration of complacency masked as “risk aversion” rather than the back-burn brush fires of fee abuses.  Both are damaging Australia but the real fire is being ignored.

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