Kane Leersen

Ask most people where they think wealth lives in Australia, and they’ll point to a capital city skyline, towering offices, corporate boardrooms, and slick branding have long defined the aesthetics of financial advice.

But scratch beneath the surface and you’ll find that some of the most complex wealth decisions being made today are happening far from the city. They’re unfolding in paddocks, workshops, warehouses, and family-run offices across regional towns – places where prosperity looks different but matters just as much.

For years, financial services have underestimated this. The industry has often assumed that depth of advice correlates with proximity to a postcode starting with a two or three. That sophistication lives in the east, and scale is found in high-rises. But that assumption has passed its use-by date.

Wealth in regional areas

Today, families and businesses in regional Australia are navigating intergenerational wealth transfers, strategic investment planning, estate complexities, and retirement transitions, and often without the level of guidance metro-based clients take for granted. Not because they don’t value advice, but because they’ve been told explicitly or implicitly—that the best advice lives elsewhere. It doesn’t. And it never did.

One of the most potent aspects of regional life is the sense of ownership and accountability. If you’re advising in a small town, you’re not just a professional—you’re a known quantity. You’ll see your client at the local supermarket or the footy on Saturday. There’s no hiding behind a brand. That visibility demands authenticity and care that’s hard to replicate. It can’t be bought, scaled, or outsourced.

Regions require relating

And yet, regional Australians are still portrayed as under-advised, under-serviced, or too complex to deal with. The truth is, they want someone who speaks their language—not just financially, but personally. Someone who understands that a good year can be undone by rain, that succession planning might involve land held for generations, and that retirement isn’t about luxury but rather it’s about legacy.

These clients aren’t looking for templated advice or big-firm polish. They’re looking for depth for advisers who take the time to understand the full picture: family, business, aspirations, fears. They want clarity and confidence when it counts.

The wealth in regional Australia is often “quiet wealth.” It doesn’t scream. It doesn’t seek attention. It certainly doesn’t say, “look at me.” But it’s real, substantial, and now, it’s in motion. The $3.5 trillion intergenerational wealth transfer expected by 2050 is well underway, and much of it is rooted in regional holdings, family farms, private businesses, rural properties. What’s needed isn’t just financial acumen, it’s local fluency.

This is also a conversation about talent. For too long, regional firms have been told that the best talent lives in the city, and anyone outside it is just making do. That’s simply not true.

Some of the best advice I’ve seen has come from professionals who chose to build their careers closer to home, people who value community, purpose, and work-life balance alongside technical excellence. With the right systems, training, and cultural support, regional wealth firms can and do deliver at the highest level.

And importantly, they do it without the ego that sometimes plagues the profession. The job isn’t about showing how smart you are, it’s about showing up consistently, especially when your clients need you most.

What do we do now, as an industry?

First, we flip the script. We stop framing regionalism as a limitation. It’s not. It’s an asset, and one that brings authenticity, resilience, and clarity of purpose to the work. We must stop thinking of it as “less than” and start recognising the leadership it represents.

Second, we invest in growing pathways for emerging advisers in the regions. That doesn’t mean parachuting in city-based advisers on rotation. It means building up regional voices, nurturing local talent, and creating training models that reflect the realities of regional life from compliance to succession planning, and the multi-generational dynamics that rarely feature in urban wealth conversations.

And finally, we start telling the right stories. Too often, success in financial services is measured by size or capital raised. But what about the family that navigated a succession handover without conflict? The woman who took over the books after her husband passed and now wants to grow the business for her children? The couple seeking peace of mind about their retirement income?

These are the real stories of prosperity in regional Australia. They’re not glamorous, but they’re deeply human. And they’re everywhere, if you care to look.

Financial advice should never have been limited by geography. Great advice is grounded in trust, clarity, and genuine care for the outcome. That exists in spades across regional Australia. The challenge now is for the rest of the industry to take notice and catch up.

Because prosperity isn’t postcode-bound. It never was.

By Kane Leersen,  Financial Adviser

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Jared Pohl

The most important asset that any funds management company has is usually their human capital. For most active fund managers, it’s the people that make the decisions about which companies to buy and if those people are to be successful, the appropriate culture needs to be in place.

The type of investment strategy you run, requires you to implement a specific type of culture.

Culture and strategy often work hand in hand, in that a fund manager’s strategic approach to managing money is likely to dictate its culture. How you build the culture and nurture it may, in turn, dictate how successful your strategy is.

It will also determine the people that you hire, and the structure of your teams.

Two ends of a spectrum

There are low skill high breadth strategies (HB), and high skill low breadth (LB) strategies. in the former you’re generally trying to capture statistical mispricings. In the latter, you’re trying to identify where the long term value of this company has not yet been realised.  The time horizon for each of these is very different.

HB strategies tend to focus on shorter-term investment horizons as mis-pricings usually correct themselves quicker than the LB strategies, where fundamental value needs to be created and realised, which doesn’t tend to show up in short term valuation multiples.

Each of these strategies requires a different team structure to be effective.

Considering portfolio management strategies on a spectrum, on one end there is the more hierarchical or vertical structure, where perhaps one or two key fund managers, supported by a team of analysts, are making the decisions about which companies to buy.

On the other end of the spectrum is a more collaborative approach, where all analysts are involved in discussions around potential companies to invest in and the underlying research of those companies.

These two different approaches will usually use different methods of incentivising employees which is likely to lead to different cultures within organisations.

In a flat structure you want to foster collaboration, teamwork and open dialogue which results in a collective remuneration approach. The culture for such a strategy needs to encourage ideas sharing with a focus on equality among analysts.

A flat structure can be better at mitigating confirmation bias among stock pickers. But for that to be the case the culture must facilitate discussion and collaboration, so all members get an equal say and the loudest voice in the room doesn’t drown out everyone else. It needs a respectful culture where everyone can present facts and debate them with each other, and it needs to be an environment where all employees feel psychologically safe enough to debate ideas and voice dissenting opinions.

This kind of culture doesn’t happen overnight, and an organisation’s management needs to have processes in place for collaboration to build and work. Trust is essential for a cooperative culture as all members of a team need to trust that their ideas will be heard and understood.

Team meetings and get-togethers obviously help with collaboration but so does showing vulnerability, especially by leaders, so everybody operates from a place of shared humanity.

Flat versus vertical

A flat structure like what we have at ECP Asset Management still has clear lines of accountability, and individuals that are responsible for certain areas of coverage. But the team also shares knowledge and information which then gets debated and refined. It is only once those discussions are had with the whole team that we move forward with a buying or selling a company.

Due to the nature of this process decisions to buy or sell companies take some time, and of course there is also the possibility that not everybody in the team is pulling their weight.

A hierarchical structure, in contrast, generally makes decisions much quicker as it is usually only the fund manager that determines whether to buy a stock. In those environments, you generally have a portfolio manager and then individual analysts that sit underneath with very defined roles. The investment analysts feed information and research to the portfolio manager, who makes the ultimate decision.

The hierarchical approach often comes with a star fund manager who are often extremely successful, but also, as recent high-profile controversies have shown, carry key person risk. The whole fund management company’s success is dependent on the fund manager’s star continuing to shine.

The culture in these organisations is not as cooperative and is usually more about everybody respecting and understanding their role is to support the main portfolio managers.

But there still needs to be appreciation of the role of all analysts even in a vertical culture as when analysts end up doing a significant portion of the work and are not being heard, or their views are not being represented in a portfolio, that leads to dissatisfaction and high turnover in teams.

And in a flat structure like ours, we recognise that it is equally important to be flexible, given the changing nature of markets, and to have independent oversight at a high level. Our board chair and chair of the investment committee, Manny Pohl, takes that role at ECP Asset Management and keeps the team on track.

The bottom line

Many of the star fund managers with a vertical approach to strategy have been very popular with investors who have benefited from their winning stock picking. It is also easy to follow a name, rather than a process you may not entirely understand.

However, a collaborative approach, supported by a collegiate culture, also has a lot to offer the investor if they can understand how cooperative decision making can overcome confirmation bias and lead to solid long-term outcomes.

By Jared Pohl, partner

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Cameron O’Sullivan

DASH Technology Group (DASH) has published a thought piece, Digital Advice: Redefining Accessibility, Affordability, and Scale in Financial Advice, which delves into the true nature of digital advice and its misconceptions. It aims to build trust amongst advisers by addressing the key themes facing practices today: boosting profitability, managing the intergenerational wealth transfer, engaging ‘unserviceable’ clients, the rising cost to serve, and how this solution could revolutionise financial planning.

DASH believes there is still some confusion on what the spectrum of digital advice is, with some still viewing digital advice as the robo-advice of years past. DASH believes advice falls into three omni channels: client-only digital tools, ideal for simple, self-directed advice scenarios; hybrid advice, advisers use advanced digital tools during appointments, enabling faster, more consistent advice delivery; traditional comprehensive advice, for complex client needs requiring deep technical and strategic expertise.

A key difference between earlier robo-advice models and today’s digital advice solutions is the way advisers are integrated into the process. While robo-advice was primarily designed to automate simple portfolio investments, modern digital advice tools provide a broader and more flexible framework. Digital advice solutions use advanced algorithms to deliver quality strategy advice and seamlessly connect clients to an adviser when needed – whether that’s because the client chooses to engage directly with an adviser, or because the complexity of the advice requires professional expertise.

Cameron O’Sullivan, Head of Digital Advice at DASH, shares, “Robo-advice has historically been limited to simple portfolio investments. By contrast, digital advice leverages advanced algorithms to deliver high-quality strategy advice and triage effectively to an adviser when needed.”

O’Sullivan says the most misunderstood opportunity for digital advice tools is in the area of adviser driven tools, where common advice topics can be condensed into a series of interactive screens the adviser and client can go through together, allowing a much exploration of the client’s options, and the likely benefits of each option they could take.  These tools will allow most businesses to do 50-to-80 per cent of their common SOAs in under an hour, with half of that time even being done while sitting with the client, if desired.

“Digital advice is transforming retirement planning by making it simple, accessible, and intuitive. It shows clients exactly how much income they can afford in retirement, helps them identify what’s needed to achieve their goals, and provides tailored suggestions to close any gaps. By removing the complexity of decision-making, customers don’t need deep financial knowledge to navigate confusing contribution choices. The solution integrates seamlessly into statements, websites, and educational tools, ensuring easy access at every stage. With a more intuitive and user-friendly experience than traditional advice, it not only simplifies the journey but also provides a clear pathway into full comprehensive advice when needed.”

DASH believes its singular advice engine, underpinned by advanced algorithms and designed with adviser integration in mind, combined with a unified engine capable of powering digital, hybrid, and comprehensive advice experiences on one platform, is the solution.

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Lou Celi

As AI innovation enters the agentic AI era, ThoughtLab, a leading global research firm, has launched a landmark study with top firms providing services to the wealth and asset management industry, including FNZ, Grant Thornton, ServiceNow, Amazon Web Services (AWS), London Stock Exchange Group, and Publics Sapient. The research will explore how the latest advances in AI and other transformative technologies will reshape the investment sector.

The new research initiative —The AI-Powered Investment Firm: How Wealth and Asset Management Providers Will Transform Their Businesses Through AI — will deliver a first-of-its-kind actionable roadmap for succeeding in the next age of AI. It will be backed by rigorous analysis, expert insights, best practice use cases, and hard performance data. The study will provide financial services executives with an evidence-based guide for driving business transformation and performance through AI and related technologies, such as end-to-end platforms.

It will show how firms can use AI-enabled digital solutions across their value chains to create personalised customer experiences, build employee and advisor productivity, minimise risks and fraud, generate cost efficiencies, close the advice gap, and ultimately drive new levels of profitability and growth. As part of the initiative, the research team will develop the first industry-specific AI-maturity model for wealth and asset management firms, which can be used to benchmark and optimise AI performance.

“AI will give industry executives the tools to navigate profound shifts already transforming the investment landscape, including an $80 trillion-plus wealth transfer to a new digital generation with high demands for personalisation, product democratisation, new business and service models, and reduced fees,” said Lou Celi, ThoughtLab’s CEO and program director. “Our pioneering research will provide wealth and asset management executives with the decision support they need to propel true strategic change through AI and other groundbreaking technologies.”

A look into the industry’s AI-driven future

This comprehensive research program is being spearheaded by ThoughtLab and FNZ, the global wealth management platform, as well as Grant Thornton, a professional services provider; ServiceNow, an industry leader in AI-enabled enterprise software; AWS, a top-tier provider of cloud computing services and AI technologies; Publicis Sapient, a prominent digital business transformation company; LESG, a global supplier of financial markets data and infrastructure, and Wireside Communications, an award-winning, independent public relations agency. It will be rolled out with the collaboration of a coalition of leading wealth and asset management firms, research institutions, and AI experts. The program includes:

• A global benchmarking survey of 500 financial institutions in 16 markets, across asset levels and types of business.
• Insights from an advisory board of executives from top wealth and asset management firms and industry experts from around the world.
• Analysis of the use of latest AI technologies, such as generative, agentic, and multimodal, in combination with adjacent technologies, such as modern IT platforms, blockchain, and data management systems.

In-depth interviews with executives from investment firms identified as leaders in AI transformation, as well as with AI specialists.
Rigorous benchmarking and maturity modelling of the AI-enabled strategies, practices, investments, and performance results of surveyed institutions.

The study will answer critical questions on the impact of AI on the wealth and asset management industry, including:

• How will AI transform investment firms over the next three years? In which ways will AI-powered firms operate differently than others? What will it mean for the future of work?
• What are the most effective AI use cases for investment firms across the front, middle, and back office? What performance returns are firms seeing from these initiatives?
• How can AI and related technologies support wealth advisory firms and asset management providers as hyper-personalized services become the norm across all wealth segments?
• How is the global AI regulatory landscape evolving, and what impact will it have on the ability of investment firms to innovate quickly and responsibly?
• What steps should investment firms take now to prepare for the next AI era? What does a successful roadmap to AI leadership look like?
• Which challenges are firms facing on their AI journeys, and how can they overcome them?

As part of this open research initiative, the study group will provide regular updates on the program to the global wealth and asset management community over the next three months, along with the latest analysis, views from industry practitioners, and useful data resources. The full study findings, actionable insights, and related decision-support tools will be released in the fourth quarter of 2025.

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Adnan Glinac

The government’s proposal to increase tax on high-balance super accounts creates an opportunity for young adults to revisit their savings approach for major life events.

The proposal will see earnings on super balances above $3 million taxed at 30 per cent rather than the concessional rate of 15 per cent.

A $3 million super balance threshold appears colossal considering the average retirement balance in 2025 is just $300,000 for women and $401,600 for men^[1]. Today, the new tax only impacts our wealthiest individuals. However, thanks to long-term inflation and bracket creep, 30 years from now we could see a much larger percentage of people with a superannuation balance of more than $3 million.

The government’s reliance on super tax revenue is a good reminder that most Australians—including younger generations —are overly reliant on super for their future.

It’s true that super’s historic low tax treatment has created a lack of competition for different savings products and has led to too much of the nation’s private savings being channelled into superannuation.

The result is that Big Super is now responsible for some $4 trillion in savings.

But what’s our plan for financing other costly life events that occur before we turn 65?

Every one of us —while not turning our backs on super—should be looking to diversify our savings approach to fund both retirement and other life events, such as buying a home, doing a renovation, starting a business, taking a holiday, or undertaking further study.

Consideration must be given to other vehicles that offer tax benefits, investment diversity and growth, while helping people worried about continual government interference with their super find other options.

Friendly Societies and mutuals are uniquely placed to step in and support Australians with tax-effective products such as investment bonds.

Today, investment bonds are offered by at least ten active friendly societies, managing almost $15 billion for more than a million Australians.

Their products are also subject to regulation—the Australian Prudential and Regulation Authority (APRA) supervises compliance to ensure they are fair and equitable for members and the Australian Securities and Investment Commission (ASIC) monitors disclosure and financial service licensing obligations under the Corporations Act 2001.

Investment bonds have some of the traits of both superannuation and managed funds: like super, bonds are tax paid. Earnings within the bond are taxed at the rate of 30% which is higher on face value than super, yet friendly societies can sometimes reduce tax payable using franking credits and other tax management strategies.

Like super, investors can choose a range of options from conservative investments through to Australian and international shares with index options available too.

If you hold the bond for at least ten years, withdrawals after this period are tax-free. And unlike super, they are not locked until preservation age or retirement, which means funds can be withdrawn at any time.

While there is never a guarantee about what Governments will do to investment bonds in the future, there have been no material changes to the legislation on investment bonds for more than 20 years.

The Government’s proposed tax on high super balances should be seen as an opportunity to review and diversify the savings of every Australian.

Superannuation plays a critical role in retirement planning—but there are other options to consider.

Friendly societies in Australia today blend historical community-minded principles with modern, tax effective, financial services.

We stand ready to help the many Australians who are now looking beyond their superannuation.

By Adnan Glinac, President of the Friendly Societies of Australia Industry Association and Executive General Manager of Australian Unity

———–

Notes:
[1] https://www.australiansuper.com/campaigns/average-balance-planners

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Alexander Euvrard

Self-licensing specialist My Dealer Services (MDS) has welcomed the prospect of industry change under the returned Labor Government but says potential dangers need to be managed beside positive potential regulatory developments.

Speaking at MDS’ inaugural One Day Event for its members at the Fullerton Hotel in Sydney yesterday, Director and Founder, Alexander Euvrard said that after waiting many years since the Hayne Royal Commission for meaningful change he was excited about the way decisions on DBFO and QAR reforms had the potential to lead to new business models and competitive offerings for advisers.

At the same time changing technology and specifically AI was having a seismic impact on the delivery of advice and the industry’s ability to provide, lower cost, tech-heavy advice models that could serve more clients – as well as the currently unadvised – and would enable clients to dictate how they want to be served through episodic advice.

Mr Euvrard said he believed the industry could avoid repeating the mistakes of the past if regulators put in place careful guard rails before allowing large superannuation funds to provide financial advice to members and the immediate challenge of increasing qualified adviser numbers was given the critical focus it deserved.

“We can’t ignore the potential role of, and the possible dangers within, industry super fund advice models over the next five years. I do want to say simple advice done well and accessed by Australians needing it is a game changer.

“These are people who largely do not fit into our business models but absolutely need the access to advice. For those that may be younger, having access to simple advice is actually going to benefit all of us as they will be exposed to the value it creates and be our clients of the future.

“However, allowing lesser qualified advisers to provide this advice at probably the most important time in a client’s life is dangerous and this is without mentioning the dangers of life income products and locking clients in,” Mr Euvrard said.

He added that the only way to increase numbers within the advice profession – now at an all-time low of around 15,000 – was to reduce the red tape around entry level education requirements and remove the policy brick wall that made it difficult for people with tertiary qualifications to transition to advice from any other industry.

“The biggest challenge facing advice practices that we see and hear about every day is the lack of advisers to help grow and support these businesses. It all comes back to making the profession attractive to new entrants and making it achievable to enter,” he said.

Apart from Mr Euvrard, the other event keynote speaker was AMP Deputy Chief Economist Diana Mousina. The event also included speakers from HUB24, Morningstar, Intelliflo, Cordis Asset Management, Financial Adviser Scale Squad, RetireMap, ASO Wealth, Peloton Partners, Briefcase and The Cyber Collective.

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Phil Osborne

Introducing a Thought Leadership Forum to its financial advisers in Sydney this month, Intelligent Planning managing director, Phil Osborne said that while the profession needs thought leading ideas, they should not be shaped exclusively by industry leaders.

‘We don’t think anyone has a monopoly on good ideas,’ he said. ‘You learn from people with years of experience, and we all benefit from that. But you also learn from people who might have less experience but who have a fresh take on the issues facing the industry.’

Mr Osborne believes genuine thought leadership comes from looking at current issues through a variety of lenses.

‘We want to make sure that we’re learning from advisers, the people who are actually out there at the coalface with clients,’ he said. ‘We don’t want to be just sitting up in an ivory tower directing traffic.’

Actively seeking input from advisers is one of the ways Intelligent Planning, a bespoke financial services licensing offer, is embedding a collegial culture.

‘We believe in allowing advice practices to be what advisers want them to be,’ Mr Osborne said. ‘Our role is to make sure they are compliant and accountable. Anyone can buy a suit off the rack, but it’s never going to be a custom fit. You go to a bespoke tailor for that. We believe it is similar with financial licensing offers.’

Mr Osborne said the Thought Leadership Forum demonstrates that Intelligent Planning meant what it said when it launched earlier this year, about listening to financial advisers.

‘We gathered a number of adviser thoughts on current issues from the forum which will not only help further inform our offer, but also help shape the profession,’ he said.

These include:

1. On qualifications and accreditation: soft skills are just as important
   While qualifications and accreditation are vital to being regarded by the public as professional, proficiency in ‘soft skills’ is equally important – not just from a business practice point of view but also in helping clients improve their financial literacy and better understand the work we do.
2. On technology: technology should not be driving advice practices
   As useful as technology is, an advice practice should never be driven by what a particular technology can, or more importantly can’t, do.
3. On professionalism: a professional reputation is earned
   Being a member of a profession isn’t enough. Gaining a reputation as a true professional, just like gaining respect, is something that is earned by actions.

‘We will be working with our advisers to implement these ideas, where they consider them important to their business,’ Mr Osborne said.

The Intelligent Planning licensing offer launched in January this year. Key elements of the offer include a flat licence pricing model, the ability for advisers to speak directly with an internal industry expert on a peer-to-peer basis and a culture of community.

Intelligent Planning also offers a part share in its business to the first wave of founding advisers. ‘This gives our first advisers a degree of ownership in the business, thereby guaranteeing their voices are heard,’ Mr Osborne said.

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Melissa Goodman

As part of its ongoing commitment to gender equality and financial empowerment, Viridian Financial Group Limited (‘VFGL’) proudly announces the launch of ‘Pave the Way’. This innovative program aims to revolutionise financial literacy and independence among women, addressing the significant gender gap in financial knowledge.​

A recent Allianz survey revealed concerning statistics, with twice as many Australian women (34%) exhibiting low financial literacy compared to men (16%). In response, Viridian Financial Group is taking proactive steps to bridge this gap with ‘Pave the Way’. Following a successful pilot program involving over 120 women, the company is now eager to expand its reach and impact, just after International Women’s Day on 8 March.

With the support of a dedicated group of VFGL female financial advisers, portfolio managers and team members the program offers participants a comprehensive curriculum covering essential financial topics for such as financial agreements, investment strategies, estate and retirement planning, and superannuation.

Melissa Goodman, Private Portfolio Manager in VFGL’s investment arm, Infinity Capital Solutions, founded the program and is eager to engage and reach more female customers.

“We are thrilled to officially launch and expand the ‘Pave the Way’ program. Through our initial workshops, we have seen firsthand the positive impact that financial education and empowerment can have on women’s lives,” stated Mrs. Goodman.

“As a wealth management business, we have the knowledge and skill set to make a difference to the women in our lives, whether they are our clients, colleagues, family, or friends. At VFGL, we’re focused on breaking down stereotypes that surround women and finance.

“Too often money is a taboo topic among females and Pave the Way offers a safe and constructive space for women to have an open dialogue with one another. From firsthand experiences, we discuss real life events that offers invaluable insights into wide range of financial scenarios including buying a home or changes in family dynamics. This allows us to communicate the importance of financial knowledge at all stages of life”

In addition to workshops with their clients, VFGL has forged strategic partnerships with other service providers in the industry to further support women in their financial journeys. These tailored workshops provide participants with access to additional resources, education, and networking events aimed at fostering a supportive and empowered community.’

Commenting on the expansion of the program, VFGL’s Joint Chief Executive Officer, Raamy Shahien, stated ” Our dedication to narrowing the advice gap remains paramount, ensuring accessible and impactful expert financial guidance for all Australians. We are enthusiastic about the opportunities ahead and steadfast in promoting financial literacy and empowering our clients.​

“Through our partnerships and the dedication of our team, we are confident that we can make a meaningful difference in the lives of women across Australia.”

Moving forward, Viridian Financial Group is committed to building on the success of the ‘Pave the Way’ program and continuing to empower women through financial education and support.

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In anticipation of this pivotal release, APRA has recently communicated its supervision and policy priorities for the upcoming six months to the industry. Among the paramount points delineated is the emphasis on stress testing within the banking sector. Specifically, APRA has articulated intentions to conduct a banking stress test in mid-2024, particularly targeting systemically important banks. The scope of this endeavour will be clarified early this year, with entities duly notified of their involvement.

Bolstering resilience in the banking sector

Reflecting on the trajectory of the banking sector, APRA underscores the imperative for entities to fortify their capacities to navigate periods of profound financial strain and, if necessary, to reconstruct their financial robustness. The turbulence that the international banking landscape witnessed in early 2023 serves as a poignant reminder of the indispensability of readiness to confront adverse scenarios. Accordingly, resilience-building and crisis management tools remain focal points in APRA’s agenda.

The crucial role of stress testing

Stress testing emerges as a pivotal analytical instrument, offering invaluable insights into the core risks and vulnerabilities inherent in specific entities and the broader financial system. Its forward-looking nature equips stakeholders with a proactive stance towards risk mitigation and strategic planning. Forward-looking preparedness of internal processes is a crucial element that should also be gained through stress tests. The ability to apply future expectations on credit risk development on the client level significantly improves risk recognition, stipulating early remedial action to lower future costs.

Reviewing the 2023 stress test: A testament to resilience

The resilience of major banks comes under the spotlight as they emerged unscathed from APRA’s stress tests. The simulated scenario, marked by a 10% unemployment rate, elevated inflation, and a notable decline in house prices, failed to breach the capital or liquidity buffers of major banks. The outcome was exceptionally robust, affirming the banking system’s resilience in navigating the early 2023 stress test cut-off period.

Nevertheless, certain weaknesses were recognised, even in 2023. Upon applying more comprehensive expenditure assumptions, the Reserve Bank of Australia (RBA) discovered that approximately one in eight borrowers were unable to meet their monthly expenses. Moreover, if the cash rate were to rise by half a percentage point to 4.6%, this proportion would increase to 16%, generating concerns within the banking sector.

Assessing the current credit risk landscape

Given the current economic climate, due to the prolonged impact of inflation (currently somewhat tamed) and rising interest rates, it is expected that retail customers may experience increased risks of default since their loans were funded, but certainly Stage 2 IFRS 9 classified loans will increase.

Looking at recent figures, the prevalence of at-risk loans, as classified under the International Financial Reporting Standard 9 (IFRS 9) accounting standards, has witnessed a notable surge.

Stage 2 loans, indicating a substantial increase in credit risk since initial recognition, have surged to 17.93% in the 12 months ended September 30, 2023, according to Australia’s four largest banks, alongside aggregate Stage 3 loans growing to 0.9% this year, underscoring the heightened vulnerabilities within the banking sector.

Australian banks have cautioned about these risks affecting consumers and the financial pressures faced by many Australians. With the potential emergence of downside risks due to rising interest rates, there’s a delayed impact on mortgage customers. However, the levels of hardship experienced are roughly half of those seen during the COVID-19 pandemic. Adequate economic growth, low unemployment rates, and changes in spending habits are expected to shield borrowers from the increasing interest burden as they transition from lower fixed rates to higher variable rates upon the expiration of fixed-rate mortgages.

IFRS 9: Enhancing the detection of significant credit risk increases

In response to the 2008 global financial crisis, the IFRS 9 was conceived to address the inadequacies in provisions by banks. Since its global implementation in 2018, IFRS 9 has been instrumental in augmenting the transparency of a bank’s performance and risk exposure. By enabling forward-looking provision levels, IFRS 9 fosters a more nuanced understanding of risk dynamics, empowering stakeholders to adopt proactive risk management strategies.

The benefits of the analytical IFRS 9 approach are not only recommended but demanded by regulators. The insights from the 2023 APRA Stress Test underscore the critical importance of customer-level considerations within banks’ risk management frameworks. As financial institutions navigate the complexities of the current economic landscape, it’s imperative for them to integrate borrower-level stress expectations seamlessly into their IFRS 9 processes, particularly through the implementation of Significant Increase in Credit Risk (SICR) Stage 2 requirements. This entails a proactive approach towards identifying significant changes in estimated default risk over the remaining expected life of financial instruments. Within the framework of IFRS 9, a Significant Increase event precipitates the calculation of Loss Allowance, set at a level equivalent to Lifetime Expected Credit Losses, instead of the previous estimate based on 12-month Expected Credit Losses.

Banks must anticipate and accommodate potential rises in credit risk, ensuring the inclusion of such customers within Stage 2 assessments. Incorporating customer-specific assumptions into transactional analyses is imperative, making the utilisation of analytical tools essential.

Anticipating the future

As we anticipate the unfolding of the 2024 stress test, the banking sector braces itself for an era characterised by heightened uncertainties and evolving risk landscapes. It is expected that in 2024 stress test banks will, for the most part, remain resilient, but an increase in credit risk will be notable.

Banks will need to consider the potential effects if some level of stress materialises, reinforced with current credit risk status, with this year potentially being characterised by an increase in banks credit risk costs. Banks must be prepared to identify customers with increased risk and create provisions alongside remedial actions to support customers as much as possible to mitigate further risk developments.

The integration of insights collected from stress testing into the IFRS 9, monitoring and collection processes will be crucial for enhancing the resilience of financial institutions, especially when faced with potential adverse scenarios.

With APRA’s steadfast commitment to elevating risk management standards and addressing vulnerabilities proactively, the banking sector is poised to navigate the complexities of the future with resilience and foresight.

By Sanjin Bogdan, Head of IFRS

The post Navigating the future: APRA’s roadmap for stress tests and cost of the credit risk appeared first on AdviserVoice.

Chris Donohoe

The Australian Securities and Investment Commission (ASIC) has signalled its intention to harmonise regulations with internationally accepted standards. The Legal Entity Identifier (LEI) is one element of those standards and, although not currently mandatory in Australia, it is now highly recommended for any legal entity or fund that holds global derivative positions.  Indeed they will be mandatory for certain transactions and compliance reporting from next year.

Until the LEI becomes mandatory in October 2024, ASIC allows the use of the SWIFT-related Bank Identification Code (BIC) or the ABN.

However the LEI is not a recent development. Most Australian banks, and banks worldwide, became early adopters of the LEI when mandatory OTC derivative reporting was introduced in 2012.

Since then, the LEI has been progressively implemented in OTC derivative reporting around the world and has also become a required identifier for many other global transactional and reporting activities.

When the LEI becomes the only identifier for Australian entities in OTC transaction processing and reporting in October next year Australia will be aligned with the UK, the EU, the USA, and other leading jurisdictions around the world.

The history of the LEI

As the G20 evaluated the origins of the global financial crisis, it realised one of the root causes was the difficulty in determining the counterparties in many of the very exotic derivative transactions. Risk management protocols that applied in other financial markets were not present in the OTC derivatives markets.

As part of its review, the G20 introduced the concept of a legal entity identifier (LEI) which would be used to identify counterparties in OTC derivative transactions and in a new global reporting framework. The LEI is a structured 20-digit alphanumerical code which works much like an ABN does domestically, but is recognised by jurisdictions around the world. ISIN codes are conceptually similar for financial products. Importantly, the LEI captures not only the entities participating in the transaction, but also the details of any parent entities and ultimate parent ownership. Who owns who, in other words.

The Global LEI Foundation (GLEIF) was then set up by the Financial Stability Board to implement the LEI system around the world. It controls the issuing and maintenance of the LEI codes through a global network of issuing organisations and it also facilitates searches of the stored, freely available LEI data, along with a number of data download and cross referencing (eg LEI & BIC codes) services. These searches can provide useful insights for businesses, governments, regulators, and others looking to confirm the accuracy of entity data and ownership relationships.

In the 15 years since the GFC, the occurrence of similar market disruptions has been minimal, indicating that LEIs and accompanying global reporting frameworks are doing a good job of reducing ambiguity, and minimising risk in global derivative markets.

As previously mentioned, the GLEIF has responsibility for developing and running the LEI regime. It does this through accredited issuers (Local Operating Units or LOUs) with jurisdictional client support and service provided by Registration Agents (RAs). RAs assist clients with the validation process that is necessary before an LOU can issue an LEI. APIR has a long history issuing APIR codes and ISINs in the Australian market, and it was a natural progression to extend its services and become a participant in the LEI system as many existing clients require an LEI as well as an APIR and ISIN. That process started in 2015 and today APIR supports close to 6000 LEIs.

Globally there are approximately 2,000,000 active LEIs, with the bulk of them operating in applications in Europe where the regime has been heavily embraced by the EU and the UK and in the United States where legislative reform initiated early uptake after the GFC.

Legislative change

The introduction of a mandatory LEI requirement in 2024 will likely impact smaller businesses and operators that are not financial services businesses, such as those that might only conduct derivative transactions infrequently. For example, a farmer purchasing a tractor from overseas would need a foreign exchange contract – which is a derivative contract – to lock in a price for the vehicle. They would need an LEI to facilitate that transaction but may not require the LEI again for some time.

Australia is probably situated in the middle of global LEI usage and application. Under the European regulations set out in Markets in Financial Instruments Directive 2014, commonly known as MiFID II, it is now required for any legal entity using exchange traded markets, like a stock exchange, to have a LEI. So that means any company that is buying or selling shares in Europe is required to have an LEI; this has contributed to the strong growth of LEIs in Europe (as well as legal entities in other jurisdictions that trade on European exchanges).

In Australia, in order to harmonise our regulations with international jurisdictions like the UK and the EU, ASIC may also need to clarify whether an entity’s LEI needs to be renewed every year. This is critical for ensuring data accuracy and currency just like it is for the APIR (and any) identification regime. And while many organisations consider an annual or multi year renewal of their LEIs to be best practice, renewal is not an explicit requirement in the current legislation. As the reach of the LEI continues to grow and impact smaller businesses, clarification in this area would be beneficial.

Extended use cases

Having proved useful in greatly assisting risk management in the derivative markets to date, the FSB is keen to explore the LEI useability case for all cross-border transactions.

The LEI could be used to accurately identify counter parties in many types of cross-border transactions as it currently does with derivative transactions, the LEI could then be included in regulatory reporting to provide a wealth of compliance information for governments and regulators.

The GLEIF has been working on a number of cross-border transaction pilot projects and the LEI is a part of the FSB’s G20-endorsed Roadmap for Enhancing Cross-Border Payments*. The key use cases the GLEIF has been exploring include: corporate invoice reconciliation; KYC and customer onboarding; account-to-account owner validation; and screening efficiency for watch lists and sanctions.

In a recent article, GLEIF head of business operations, Clare Rowley, outlined a proof-of-concept pilot with a Japanese consortium program that is working on developing entity-level trust services recognised by Japanese and European organisations. This pilot integrates the LEI into the eSeals used to verify the authenticity of e-invoices exchanged between Japanese and European organisations.

Rowley said the pilot enabled the authenticity of both the e-invoice document (via the eSeal) and the sending organisation (via their LEI, embedded in the eSeal credential), and the time of the document’s sealing to be confirmed simultaneously.

The FSB is currently working on promoting standardisation in the internationally recognised ISO 20022 messaging standards for financial industry messaging in the payments, securities, trade services, cards and foreign exchange business domains. The possible inclusion of the LEI as an identifier in the messaging is being considered. The process of reviewing ISO Standards take time, but it would make sense to include an existing internationally recognised identifier.

Website identification in the age of AI

As well, the GLEIF is exploring the use of LEIs in digital certificates, also known as identity certificates, which authenticate a company’s website’s digital identity. This would expand the use of LEIs exponentially, given the hundreds of millions of websites currently in existence. But it would be an increasingly useful tool in an age where misinformation and the line between what is real on the internet, and what is not, has become increasingly blurred.

The FSB and the GLEIF obviously see the LEI as a pillar for future identification across a myriad of international applications and transactions. As its use grows, we expect issuer competition to increase, and we fully support its use across the international payments system. Anything that makes this system safer, benefits us all.

By Chris Donohoe, CEO

The post Is the LEI the future of global transactions? Implications for Australian financial institutions appeared first on AdviserVoice.