Equity Trustees: Seven years after Lehman – are we on the verge of another crisis?

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By Harvey Kalman*

 Seven years after Lehman Brothers filing for bankruptcy (September 15 2008) are we on the verge of another global crisis?  If so, unlike seven years ago, this time we would be right to call it a Global Financial Crisis (GFC).

In my experience the term GFC is generally only used in Australia.  The rest of the world refers to it as “Pre and Post Lehman” or the “Credit Crisis”.

But what we have we learned from it is yet to be fully determined. If we are at the door of a true GFC we will find out very soon.

What happened seven years ago was really more of a “North Atlantic Credit Crisis”.  The collapse of Lehman Brothers affected other financial institutions in New York (and the American economy) and ultimately exposed malpractices as well as systemic flaws. The virus then spread across the Atlantic to hit the London financial centre and the rest of Europe, exposing the same systemic failures and flaws.  These flaws were found in other countries, including Australia.

Any American and European Credit Crisis will always create nervousness in other economies.  All organisations that relied on credit had problems as supply dried up.

Nevertheless, the credit crisis that followed the Lehman collapse had a weaker impact in Asian countries than in the USA, the UK and European countries like Greece and Spain.

The then strong Chinese economy cushioned the impact here. Indeed, the Australian economy escaped pretty much unscathed because of its mining boom, fuelled by China.  This time we will not be helped by the Chinese economy, which instead will likely contribute to any crisis.

Agreed, there was a loss of confidence by Australian investors following the 2008 credit crisis, together with financial collapses, but most of the organisations that went under were probably living on borrowed time anyway.  Any credit squeeze or general loss of investor confidence for any reason would have brought them undone.

The fallout is still with us; we have skittish markets and nervous investors.

The focus on the financial services sector and the loss of investor confidence that followed the Lehman collapse did bring some benefits to Australian investors.  These include the ongoing reforms that are still happening in our financial services sector giving greater investor protection.

Light was shed in a number of dark corners of the sector and showed up a number of poor practices.  Greater transparency has developed, with some reluctance, and the sector overall is stronger than it was before the Lehman collapse. Investors’ interests are also better served. 

Seven years on there are more controls over the way collective investment product suppliers operate, although it is arguable whether these have gone far enough.  In my view a case in point is smaller asset managers that operate a responsible entity where the separation of function is difficult. The regulations are not yet strong enough in this area. 

Another area of concern in funds management is that Australian Financial Services Licences  (AFSLs) do not differentiate between issuers of simple products and those that issue complex products – such as long/short equity funds with gearing and leveraging.  Any crisis that impacts on equity markets may well expose these shortcomings to the cost of investors.

Financial planning has been greatly reformed in the last seven years, but not always willingly.

These reforms continue and there is increasing talk about how it is now a profession.  In many respects this is true, especially compared to where it was seven years ago, but it still has further to go before it has all the trappings of professionalism.

Acting in the interest of clients is the necessary beginning for a profession, but acceptable standards of qualification are also needed, together with visible signs of trust and reputation.  One test would be that financial planning is a qualification that automatically allows planners, by virtue of their profession, to sign statutory documents in the same way as lawyers and accountants.

As to the question of whether the sector has learned enough, there is no real answer yet.  We won’t know until the next crisis unfolds whether we missed the opportunity to improve in all respects.

While it is impossible to legislate against greed, after the unprecedented focus on the financial services sector’s shortcomings, it would be a terrible indictment of it, our legislators and our regulators, if we are again facing the same sort of problems that emerged with the Lehman Brothers’ collapse. 

*Harvey H Kalman is Executive General Manager Corporate Trustees Services at Equity Trustees Limited, a publicly listed company on the ASX founded in 1888.  It provides a range of financial services to corporate and private clients. The views expressed in this article are personal and not those of Equity Trustees; provided as information and opinion only and not intended as advice.

For more information contact:
Harvey Kalman
Executive General Manager, Corporate Trustee Services
03 8623 5301