Wednesday, September 24, 2014

RBA warns property investment is "unbalanced" and that speculation raises risk of price falls

The Reserve Bank has warned that investment in Australia property is becoming unbalanced and that speculation increases the potential for the current stellar prices to fall.

In its latest Financial Stability Review, the RBA says recent house price growth in Sydney and Melbourne has encouraged more lending and construction activity by investors.

But the central bank has signalled that the boom in rising prices could unravel if there is "a significant reassessment of risk" lead to a "sharp reprising of assets".

The RBA cites revised expectations for monetary policy - in other words, rate rises sooner than expected - that could derail investors overburdened with debt.

The RBA says "additional speculative demand" could amplify the property price cycle with a subsequent fall in prices hurting household wealth and spending.

"The apparent use of interest only loans for both owners and occupies and investors might also be consistent with increasingly speculative motives behind current housing demand."

And in a stark warning, the Review signals that the dynamics of a fall in asset prices would not only hurt those who fuelled to the speculation.

"The households most effected by the declines in wealth would not necessarily be those who contributed to the heightened activity."

While not directly suggesting the need for tighter lending standards through macroprudential regulation, the RBA said recent measures announced by the Australian Prudential Regulation Authority (APRA) "should promote stronger risk management by lenders".

The RBA says it is now discussing what it calls "additional steps" that might be taken to reinforce sound lending practices to property investors.

The Review has also raised concerns about Australia's commercial property sector which has also been the focus of strong demand from both domestic and foreign investors.

The RBA warns: "any significant reversal of demand could expose the market to a sharp repricing."

The RBA gives Australia's financial system a tick, saying it is underpinned by the strong performance of the banking system.

It says while some households have taken on more debt, lower interest rates for now allow them to service the debt load.

Follow Peter Ryan on Twitter @peter_f_ryan

A third of Australian listed companies risk financial catastrophe, CPA Australia warns

A report out today on the health of Australia's listed companies says nearly a third are confronting the risk of a financial catastrophe.

Analysis of almost 16,000 annual reports by the professional accounting body CPA Australia, shows there are more alarm bells ringing now than during the depths of the global financial crisis in early 2009.

Listen to my extended interview with CPA Australia chief executive Alex Malley from this morning's edition of AM on ABC Radio.

The research, conducted between 2005 and 2013, says the red-flagged companies are exposed to the dual risks of end of the mining investment boom and an unexpected slowdown in China.

The CPA study is based on the snowballing of "going concern" warnings from auditors which are used to flag "significant uncertainty" in a company's ability to survive.

CPA Australia chief executive Alex Malley says the findings are a sobering reality check that many Australian companies are fragile.

"We've been talking about the potential impacts of the slow-down in China, the strength of the Australian dollar and the effects of the tapering mining boom on the economy for some time," Mr Malley said.

"Now, this report, compiled based on virtually all companies listed on the ASX, shows these economic factors are being felt across the market and are putting almost a third of ASX listed companies at risk of 
financial catastrophe.

"It really begs the question how our economy would be placed were we to face another shock like the GFC?" 

According to the research, the "going concern" warnings has risen significantly in the energy and mining sectors with more than 40 percent of companies feared to be at risk in 2013.

The report comes as evidence mounts that China's economy is slowing faster than expected and that the official growth target of 7.5 percent might not be achieved this year.

Australian miners are exposed with the iron ore price now at a fresh five year low of US$79.80 per tonne.

However, the CPA report says non-mining sectors sych as consumer staples, industrials, healthcare and utilities are also facing concerns about their financial health and how they would fare in another global shock.

Tuesday, September 23, 2014

White flag goes up from big end of town - independent regulation of financial advisers needed now

The peak body representing the financial services industry has admitted that an independent external regulator is needed to stamp out unethical and at times unlawful behaviour.

In the face of worsening image problem after a string of financial planning scandals, the Financial Services Council (FSC) has recommended that the federal government establish a statutory body to regulate professional standards within the industry.

The Council's chief executive John Brogden acknowledges the recommendation reflects the deepening public distrust of financial advisers and the low qualifications to enter the industry.

"The reality is that public trust is so low, public expectations are so low, yet public demand for advice is so high that we have to acknowledge that self regulation has failed and we need to go to government and independent regulation," Mr Brogden told the ABC.

"At the moment the standards are far too low - everybody agrees with that. We've seen lots of different suggestions as to how they might be improved. We've decided to go right over the top of all of those and call for the creation of a standalone independent statutory body."

"Self regulation is no longer a credible option for establishing higher standards."

The surprise recommendation to the parliamentary joint committee into adviser competency and the Murray Review into the financial system is being seen as the financial planning industry putting up the white flag in a hostile consumer and government environment.

The FSC paper calls for the creation of the Advice Competency Standards Board (ACSB) which would regulate professional standards and the education of financial advisers.

While the FSC does not specify educational standards, it says the Board should determine minimum qualifications which could include a single national exam for potential advisers,

John Brogden acknowledges that higher regulated standards could hurt veteran planners who have been in business for decades especially if they don't already possess a university degree.

"I feel very sorry for good professional advisors who have always acted ethically, have very happy clients, have always acted in the best interests of their clients who have been dragged down by bad advisers," Mr Brogden said.

"For them I feel very sad that their reputations have been tarnished."

Mr Brogden says the Board should be funded by the financial planning industry but have an independent chair and directors.