October 2018 – We have a sacrificial bonfire

Newsletter

The royal commission is proceeding pretty much as expected. We have a sacrificial bonfire. The big end of town has sung kumbaya and seen the light that greed is bad.

The government agencies have been given a kick in the pants for not taking on the big boys.

Mr Hayne has got it right in pushing for more streamlined regulation and actual enforcement. My concern remains that politicians will want to be seen as doing something to deal with the 24 hour news cycle and we end up receiving even more regulation.

There is enough regulation. The problem is that it is not enforced at the big end of town.

I would like to see the review continue to include all aspects of the financial services industry including non-banks like GPS.

The two areas I would particularly like reviewed for non-banks are:

1. Operations of wholesale Australian Financial Services License (AFSL) holders.

These licenses are easier to obtain and have far less investor protections than that provided to retail AFSL holders, like GPS. In particular, whether their “sophisticated” investors really hold such skills or have just signed a form. It should be made clear to such investors that they are signing away many of their rights.

2. Liquidity

There are still some liquid pooled funds operating that have a mismatch of investor redemption rights to loan maturity dates. Generally, they rely on bundling and selling mortgages to maintain liquidity. ASIC identified this as a major issue following the GFC. In my experience little has been done by ASIC to stop this practice, especially at the big end of town.

I was in Sydney last week doing some research so I can, as expected by GPS investors, stay ahead of the game.

It was all more of the same.

The lending market is contracting. Competition to GPS is contracting even more. Life is good for GPS and its investors as long as we stick to our game plan of limiting ourselves to organic growth of funds under management and improving deal quality.

While there is talk of family offices, super funds etc. entering the residential development market, it appears to be more in the $20 million-plus loan size market. This is outside the GPS niche market. It will continue to be heads down and working on tight loan management and selection of prudential loans for GPS.

Richard Woodhead – Managing Director

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