Regulators have important surveillance role during coronavirus

  • By Lisa Carroll

A new survey by CFA Institute reveals most Australian respondents have very strong views on what regulators should do during the COVID-19 pandemic, with most thinking market surveillance is very important along with compliance activity. 

At the same time, most think the pandemic will prevail for some time, depressing economic activity.

Among the most concerning findings of the survey of CFA Institute members is that most Australian respondents, or 51 per cent, believe that the COVID-19 crisis could trigger unethical behaviour from finance and investment professionals, as opportunities to gain in crisis conditions present themselves.

Notably, the survey revealed that almost all Australian respondents (98 per cent) thought the regulator should educate the public about the risks of investor fraud while 81 per cent thought it should focus on market surveillance and compliance and enforcement activity, compared to 82 per cent globally. 

At the same time, 82 per cent of Australian respondents believe that companies that receive emergency support during the crisis should not pay dividends, compensate executives with bonuses or conduct share buybacks, compared to 75 per cent globally. 

Those findings support action taken in early April by governments and regulators worldwide, including in Australia, to limit the distribution of capital to shareholders. 

The Australian Prudential Regulation Authority (APRA) recently asked banks to cap dividend payout ratios at 50 per cent of earnings for the remainder of the calendar year, though that is a softening of APRA's April direction to banks to "defer" or "materially reduce" the payments.

The survey of the global membership of CFA Institute was extensive - 13,278 members working in financial services (banking and asset management) responded, with 251 Australians participating. The survey results are contained in CFA Institute report, Is the Coronavirus Rocking the Foundations of Capital Markets.

On the shape of a potential economic recovery, 45 per cent of Australian respondents expect a medium-term ‘hockey stick’ shaped recovery, with some stagnation expected for the next two to three years until signs of recovery are visible.  

...as financial markets and economies are hit by the COVID-19 crisis, all participants in the banking and financial services industry need to ensure that they do not prioritise their personal financial interests ahead of those of the investing public or their companies or adopt illegal practices. 

Most respondents are conservative on recovery expectations as compared to some global banking CEOs, who have appeared more optimistic.  In Australia, the Commonwealth Bank CEO Matt Comyn noted some early signs pointing to an economic recovery, backed up in June by a survey by the bank on household spending2.  

While a quick recovery is not seen, it is worth pointing out that only 4 per cent of respondents are prophesying long-term economic stagnation, similar to what economist Nouriel Roubini has been alluding to, that is, the lost decade of the 2020s. 

So, all is not bleak, though things may get worse before they get better for the economy and employment.

While it is too early to predict the longer-term effects on employment, 44 per cent of Australian respondents see no change in their firm’s hiring plans, compared to 54 per cent globally, and 45 per cent report a hiring freeze, (36 per cent globally), with only 10 per cent reporting downsizing in Australia (13 per cent globally). 

Within local shores, the big banks have not yet announced job cuts in response to the COVID-19 pandemic. 

That contrasts to Europe where HSBC Holdings plans to eliminate as many as 35,000 positions and Deutsche Bank has recently announced plans to recommence cutting its workforce by another 12,000 over the next 30 months3.  

Standard Chartered is also beginning a new round of job cuts.

But as economic growth stalls, some respondents are predicting large-scale bankruptcies (42 per cent of Australian respondents) and an acceleration of automation to reduce costs (24 per cent). 

Further consolidation was expected by some Australian respondents (36 per cent), as well a potential reduction in the globalisation of financial markets and investment flows (38 per cent).

Turning back to ethics, as financial markets and economies are hit by the COVID-19 crisis, all participants in the banking and financial services industry need to ensure that they do not prioritise their personal financial interests ahead of those of the investing public or their companies or adopt illegal practices. 

This is something regulators will need to monitor closely as the pandemic leads to stressed market conditions.

Lisa Carroll is the CEO of CFA Societies of Australia

 

1These examples include Goldman Sachs chief strategist Peter Oppenheimer at the end of February commenting on the temporary nature of the impact and see ex-CEO Lloyd Blankfein in early March on the sound economic fundamentals in the United States. 
2 https://www.commbank.com.au/guidance/newsroom/household-spending-intentions-series-may-202006.html; https://www.smh.com.au/politics/federal/cba-boss-sees-nascent-signs-of-post-pandemic-recovery-20200510-p54rjx.html
3  https://www.bloomberg.com/news/articles/2020-06-17/europe-s-big-banks-back-to-cutting-jobs-after-coronavirus-pause