Funding gap forces regulator to pick and choose its cases

The ASIC chairman, Greg Medcraft, has not allayed concerns the regulator is off the pace, with his speech on Friday addressing the backstage role it has played in separate bribery investigations that have embroiled the Reserve Bank and one of Australia's biggest listed groups, Leighton.

The ASIC chairman, Greg Medcraft, has not allayed concerns the regulator is off the pace, with his speech on Friday addressing the backstage role it has played in separate bribery investigations that have embroiled the Reserve Bank and one of Australia's biggest listed groups, Leighton.

Bribery of foreign officials was an offence under the Commonwealth Criminal Code and was always investigated by the Australian Federal Police, he said, and a parallel investigation by ASIC into civil breaches would "ordinarily" occur only after the AFP's case was closed, to ensure it was not contaminated.

Parallel investigations were possible, but ASIC would want to see strong prospects of a win, he said, adding that the six-year statute of limitations on civil actions was also a factor.

ASIC has run joint investigations with the police in the past, however. One such inquiry into AWB Ltd resulted in it being the agency that pressed charges, and a similar investigation into the Reserve Bank affair could have paid dividends.

The police began investigating the RBA affiliates in May 2009 after Fairfax Media's first report, and laid charges over alleged corrupt foreign payments between 1999 and 2005. It did not ask ASIC to investigate possible breaches of directors' duties until January last year, and the six-year statute of limitations was a factor in ASIC's decision to drop its investigation three months later.

A joint investigation that began in May 2009 might have produced a different outcome.

The structural issue, however, is that ASIC is under-funded, and as a result, configured passively.

It has become a regulatory dumping ground in recent years, absorbing new responsibilities including credit markets, superannuation, insurance and sharemarket disclosure, and taking over state-based registries.

Its budget has not expanded at the same pace, and its role as the keeper of corporate records diverts management's time away from its more important function as the companies and markets supervisor, as occurred for example when ASIC's creation of a national business names register became a logistical nightmare.

Tight funding has caused it to evolve into what the International Monetary Fund calls a "desk-top" regulator - one that has limited capacity to operate in the field. It cannot be as proactive as it should be, and uses cost-benefit equations to quarantine cases it might otherwise pursue.

Complaints that ASIC is slow to respond to information it is given about possible breaches of the law it polices flow from this structural problem. ASIC needs to be rid of its clerical work on registries, and be more active. That means it also needs to be better resourced. It will be worth the price.

Westpac joins the party

As the global financial crisis peaked in October 2008, Commonwealth Bank paid $2.5 billion or 0.8 times net asset value for HBOS' Australian operation, Bankwest, a fire-sale deal that became only marginally less lucrative when CBA subsequently injected $400 million to cover bad debts in the Bankwest portfolio.

ANZ agreed to pay RBS $US550 million or 1.1 times book value for an Asian banking franchise in 2009, and Westpac has now agreed to pay Britain-based Lloyds $1.45 billion or 1.22 times book value for three businesses - an equipment finance unit that is split two-thirds/one-third between small business and larger companies, a motor vehicle finance book that is dominated by consumer vehicle loans, and a corporate loan portfolio that has already been cleaned up by Lloyds to make it more attractive. To put those prices in perspective, Westpac trades about three times book value.

National Australia Bank is the odd one out. Instead of buying up as overseas banks quit Australia, it is saddled with a British banking network. It would retreat to its home market if it could, but has not a found a buyer.

The deal swings $8.4 billion of gross assets onto Westpac's balance sheet at a time when loan demand is sluggish. Credit expanded by just 3.4 per cent in Australia in the year to August, and managed that only because home lending volumes rose 4.7 per cent. Personal lending rose 0.9 per cent, and business credit increased 1.4 per cent.

Westpac had risk-weighted assets of $307 billion as of June 30 and will easily digest the deal, assuming Australian Competition and Consumer Commission chairman Rod Sims approves it.

Westpac is buying a $2.9 billion equipment leasing portfolio, and the other three big banks and GE are in the market. NAB and GE are estimated to have markets shares of about 20 per cent, ANZ, CBA and Westpac have shares of about 12 per cent, and Lloyds has about 5 per cent. There should be no competition implications there.

Westpac's acquisition of Lloyds' $1.16 billion corporate loan portfolio should also be waved through. It is a drop in the $740 billion national corporate lending bucket.

Sims will however look closely at Westpac's purchase of $700 million of car dealer finance for vehicles on dealer lots, and $3.2 billion of personal car finance that is sold through the dealerships.

ANZ's Esanda is the biggest dealer financier. Westpac is also in the market, but if enough dealers are funding their cars using general corporate facilities, competition concerns fade.

Lloyds' $3.2 billion personal car finance acquisition is more vulnerable. Loans to car buyers are made through the dealerships on behalf of Westpac and other lenders, and Westpac accounts for about 23 per cent of the supply. Lloyds has a 20 per cent share, so the merged total is more than 40 per cent and in ASIC roadblock territory.

The question again, however, is whether other borrowing options exist. One estimate on Friday was that about three-quarters of the finance for car buyers comes from elsewhere - as personal loans for example, or through car company-financiers. If so, Westpac's share of the total retail car finance market after the Lloyds acquisition will be about 11 per cent, not enough to cause the ACCC problems.

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