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Wilson’s new inquiry: urgent investigation or political theatre
The Standing Committee on Economics is launching a new inquiry into big super. Not everybody is happy about it.
Compulsory viewing for many professionals and reporters, the Standing Committee on Economics is infamous for its hardball interrogations of Australia’s biggest institutional investors, and the announcement of a new inquiry will likely have some stakeholders tearing their hair out.
The “Inquiry into the implications of common ownership and capital concentration in Australia”, announced last Monday (August 2) looks to examine the competitive dynamics of Australia’s markets as mega-funds loom large over the fractured financial landscape.
The committee defines common ownership as “when a fund or collaborative funds simultaneously own shares in competing firms”. Liberal MP Tim Wilson, the committee’s chair, has attracted adulation and ire in equal measure for his role, and while he expects more criticism to be aimed at the new inquiry, he believes the issues it examines are “urgent”.
“We’re simply trying to look at the consequences that emerge from (common ownership), including the role of regulators and whether they have the powers they need to fulfill their functions,” Wilson told this masthead. “No doubt there will be some funds that will be critical. We welcome that criticism and they can substantiate their arguments to the committee,” he said.
“We’re having a genuine inquiry into the extent and nature of the problem, an inquiry that is supported by both government members and opposition members even though there’s traditionally been some diverse views on some of these issues. I’m quite relaxed about the criticism.”
Wilson points to data from the ACCC as one of the inception points for the new inquiry, with the regulator warning that common ownership of publicly listed companies presented a threat to competition at 10 per cent and the standing committee later finding that common ownership by some funds was already at that level, and “when operating collaboratively through proxy advisers amounted to, in some cases, up to 30 per cent.”
“Ultimately, we don’t want an environment where you have a small number of mega-funds who basically dictate the terms of how corporate Australia works, particularly because of the risk of a massive power imbalance that shuts out individual investor voices, and whether we need to adjust policy settings to make sure that capital markets remain open, people are able to participate, and we don’t have collusion and acts that undermine competition.”
When questioned on whether there have actually been acts of collusion, Wilson is less certain.
“We’ve already heard anecdotal evidence that some funds work collaboratively to deliver very good outcomes for themselves but suppress competition, including within the unlisted asset space. Whether that’s occurring or not, we’ll wait and see.”
One of the primary criticisms aimed at the new inquiry is that it would appear to misunderstand market dynamics and the way in which industry funds now deploy their capital. Martin Fahy, CEO of the Association of Superannuation Funds of Australia (ASFA), says that there has effectively been a power imbalance between retail and institutional investors for many years and that the new inquiry is unlikely to fix it.
“Individual investors have always been asymmetrically less powerful than even the smallest of investment managers,” Fahy told this masthead. “If individual investors have been on the receiving end of any kind of unfairness, it’s come as a result of the way underwriters engage in book building for recapitalisation.”
“That’s not a function of superannuation funds. That’s a function of the way equity capital markets work, and if the Treasurer wants to address that then he should direct himself to ASIC and the ASX.”
Keen observers of the Morrison Government’s recent regulatory efforts would also note that the inquiry’s terms of reference cover similar territory to that found in the proposed proxy advice reforms, which were met with confusion from Australia’s business and investment communities.
While a few stakeholders – notably the Business Council of Australia – have voiced concern about the power and influence of proxy advisers, the proposed reforms so far appear to be a solution in search of a problem, and the inquiry could well be the same.
“For the many decades prior to the emergence of large pension funds, managers and executives were free to run companies for their own benefit and despite the illusion of turning up at AGMs, retail investors were very often disadvantaged because they didn’t have any voting power,” Fahy says.
“The reality is that these superannuation funds have shown over the last three to five years their willingness to hold management accountable on not only results and shareholder value destruction, but wider issues like conduct and ESG.”
For his part, Wilson views any overlap as complementary.
“There will be some subject matter where there may be alignment, but we’re really trying to explore what the consequences are going to be for the formation of markets, ownership power, and how there’s going to be a redress in power imbalance,” Wilson says. “But also look at things like unlisted investments and the arrangements that exist between capital to make sure that there’s the best interests of competition and consumers.”
There is also the issue that the dynamic that the inquiry seeks to address is at least partly a consequence of regulatory reform and Your Future Your Super, which has accelerated industry consolidation and created more and more of the mega-funds that Wilson is concerned about. A “small number of mega-funds” is precisely what the Morrison Government argued for. At first the industry was too small and fragmented; now it’s too big and powerful.
“The concern here, paradoxically, is that as a result of government policy and regulators, we’re ending up with fewer, bigger and hopefully better superannuation funds,” Fahy says. “And now we have a situation here where the Treasurer seems to have some unfounded concerns, that there’s no empirical evidence to support, that there’s some problems associated with what they call common ownership.”
“It’s not clear what mischief this is designed to address, if any… I don’t think we’ll see any substantive changes in terms of policy responses. The reality is that the ACCC, ASX, ASIC, APRA all have – what by international standards are concerned – a full locker of powers and enforcement tools available to them.”
Whatever the case, the new inquiry will likely extend the already long and bloody superannuation wars. The committee and Wilson have in the past been criticised by superannuation stakeholders for approaching the matter from what they believe is partisan perspective, with some concerned about what they believe is a disproportionate focus on industry super funds. For his part, Wilson denies those criticisms have any weight.
“We question retail and industry funds about whether they’re doing the right thing… The problem I have is that we keep being told that there’s no issue with some funds because the Hayne royal commission didn’t find any, and then we found examples subsequently,” Wilson says.
“ASIC is now suing some funds, we had to shut down loopholes where funds had been deliberately and maliciously reactivating low balance inactive accounts to harvest them for fees and insurance premiums, so much so that we had to change the law. But we keep being told that there’s no issues. I treat all of them as though they have things to hide, and our job is to find them.”
