In 18 months, 20,000 investors have blown most of $1 billion in just three high-yield debenture scandals: Westpoint, Fincorp and Australian Capital Reserve. It’s a safe bet that billions more will be lost in similar schemes.
There’s another $34 billion at stake, nearly a quarter of which is in the highest risk “unlisted and unrated” category, according to ASIC’s new boss, Tony D’Aloisio, in one of his statements to the Senate Estimates Committee yesterday.
Tony is sounding rather hairy-chested about his new responsibilities. Asked why it had taken three collapses for the commission to get serious about Westpoint-style schemes, he responded: “The simple answer is that I wasn’t there.”
His problem is now two-fold: he is there, so the Bart Simpson defence won’t work again; having identified the grenade and promising to pull its pin, he has to find a way to minimise damage when it explodes. Falling on it won’t be enough.
One of the essential problems ASIC has had to deal with in Fincorp and ACR is that stopping their fund-raising almost guarantees their failure. Clamping down hard on the issuers of the other $8 billion or so in very high-risk debentures might well see some fail that otherwise would muddle through. But not taking action means ASIC ends up being blamed anyway.
Having allowed this dubious sub-class of investment to flourish in the first place, ASIC can’t win. D’Aloisio gave the Senate Estimates Committee a three-point plan to tackle the highest-risk sector and, no doubt, it’s a cunning plan, too.
Unfortunately it won’t prevent fools being parted from their money. The naïve punters who hand over their savings to dubious operators do so because they see, hear and read enticing and secure-sounding advertisements for the products promising very nice returns and/or they’re tipped into the things by “financial advisers” copping big commissions for their trouble.
These investors don’t read the detail of ASIC’s commendable Fido web site. The watchdog’s worthy warnings aren’t heard but the siren calls of product advertisements are. The professionals know how to target “granny hour” on radio and make a punt look safe when it’s completely without security.
The only way ASIC has a chance is by adding a clear and loud rider to every ad for every dangerous product: “This is actually a very high-risk investment with little security to speak of, so there’s a fair chance you could lose your money.”
But I don’t think ASIC is quite up to that. And the property developers behind most of these schemes wouldn’t let them anyway.
Furthermore, there are plenty of other dangerous products ticking away. In a Eureka Report interview, Standard and Poors’ Simon Ibbetson identifies low-doc and no-doc loan providers as another source of high-risk investments.
I have an advertisement by one such outfit aimed at mortgage brokers, offering them up-front commission of 1.4% to flog their product, a loan not restricted by mortgage insurance of third-party credit approvals. They’ll lend for just about any sort of property – residential, rural, construction, whatever. And rates start at 9.25 %.
Sound a little risky? In my humble opinion, yes. And they’re raising the funds to lend in this manner from the public. They don’t even fall into Tony’s “highest-risk” category.