Greg Medcraft plan to fund SMEs with super investment

And what makes the ASIC chairman’s plan, revealed at the ADC Leadership retreat at Hayman, so powerful is that it is exactly what the federal government wants to achieve — better returns on interest-bearing deposits, much greater loan and equity funding for small enterprises (which are required if we are to avoid a massive rise in unemployment) and a reduction in government pension costs. But not all in the banking, stock exchange and superannuation industries will necessarily welcome the plan.

Medcraft confirms what few others admit to, that banking in Australia is becoming too costly for many areas of its operations. Most of the banks have plans to slash their costs over five to 10 years. In today’s world of disruptive technologies they may not have that time. The chiefs of prosperous family businesses in Hayman say they are planning to go to Chinese banks if funding is restricted or too costly in Australia.

There is nothing new in the Medcraft plan, transferring bank loans to a securitisation fund financed by superannuation funds, including self-managed funds. But Medcraft wants it to take place on a major scale and be a key part of increased small and medium business funding. Of course investing in such a fund will carry a greater risk than bank deposits, but it also carries greater reward.

The key is that the bank would manage the loans and take part of the risk. But it would not be burdened with current costs, including capital costs, for the funding. (Of course, on the negative side, it was badly managed funds in the US housing sector that helped trigger the global financial crisis)

On Medcraft’s second board/equity proposal, when asked about a small miner raising money, he explained that the regulations being administered by ASIC made money raising very hard. Much simpler rules were required for small enterprise listing on a second board … And that is what Medcraft is advocating.

And to underline the attraction of investing in smaller enterprises, an investment manager of a large family-linked fund said he found prices of listed securities too high so he was investing in family or other private businesses. There is greater risk but, as we have seen overseas, big gains are being made in new or developing businesses.

Small businesses are the employment engine rooms for the nation and the government has discovered that if small enterprises become more confident it not only transforms political support but also economic activity. In fairness to the banking sector, Westpac, and probably other banks too, supported the government’s small enterprise incentives with increased unsecured lending.

When it comes to superannuation there are only two majors providing lifetime indexed annuities: Commonwealth Bank and Challenger. The CBA’s product is seen as expensive. What is needed, among others, is for major providers to set up annuities backed by investments in property. The government could issue some form of guarantee for the first $500,000 investment because these annuities slash pension costs. We might offer considerable incentives for people to take up these annuities.

Most of the Treasury’s costing of super conveniently forgets the reduction to government pensions. The Medcraft plan would force a proper examination of the real cost of superannuation.

The ADC Leadership retreat is conducted under the Chatham House rule. Medcraft went outside that rule to be quoted. My guess is he picked up an important wind shift in Canberra or at least wants to create one.

[“source-theaustralian.com.au”]

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