Why the PwC of old is long gone and investors are worse for it

PwC, which in its heyday was called PricewaterhouseCoopers, still has some of the finest accounting and analytical minds in Australia, but the tax affair appears to be impacting its work in some areas.

Its senior partners have allowed the firm’s name to be attached to a recommendation which threatens a huge chunk of 60 per cent of the stocks listed on the ASX. But the threat is not mentioned in the published PwC report.

The recommendations which come from the PwC report put Australia’s capital market in a different position to any developed country — apart from Taiwan. Again, no mention is made of the overseas strategies in the published report.

It would never have happened in the past, and the current senior partners clearly have work to do too.

The subject at issue is the difficult question of what level of wealth entitles a person to be called a “wholesale investor” and able to subscribe to listed or unlisted securities without restriction, plus the likely impact on markets if this is changed.

Under the current rules, a person can be a wholesale investor if they have net assets of more than $2.5m, including the family home or an income for two years at or above $250,000. This figure has not changed for many years, and the rise in the value of the family home has greatly expanded the number of people who are eligible to be “wholesale” investors.

Quite properly, Assistant Treasurer and Financial Services Minister Stephen Jones asked the Financial Services Council, ASIC and Treasury to make recommendations.

Given around 1400 listed Australian companies — around 60 per cent of the companies listed on the ASX — rely on “wholesale investors” and we have a small but growing sophisticated venture capital market, Jones would have expected all three bodies to incorporate in their recommendations a study of what was happening in today’s capital markets both here and overseas.

To establish context, at the weekend the assistant Minister for Competition, Charities and Treasury Andrew Leigh, writing in The Australian, correctly pointed out all Australians benefit from healthy competition, but there has been an increasing trend both in Australia and overseas for developing companies to be snapped up by the majors, therefore reducing competition.

It is likely his colleague Stephen Jones has a similar view.

But, if the emerging enterprises Jones and Leigh need to drive competition are to develop rather than be acquired by majors, then those companies must have access to capital. Without capital, they simply won’t exist or will have to sell to the majors.

Financial Services Minister Stephen Jones, Senator Nita Green and Finance Minister Katy Gallagher at an insurance industry roundtable in Cairns. Picture: Supplied

As things now stand, the provision of capital in Australia is dominated by large institutions, who have set up a monopolistic body which calls itself the FSC.

All monopolies like to keep their power, but Jones was correct in asking them to put forward a point of view, but neither he nor Leigh should not have been surprised by the capital monopolists wanting to snuff out rival capital providers.

The council recommends increasing the net asset test from $2.5m to $5m, including the family home and grandfathering changes to avoid the reclassification of existing investors.

Grandfathering would of course delay impact on the companies Leigh and Jones want to foster, but would not reduce this impact in the end.

The fact the FSC would put forward recommendations which destroy companies Jones and Leigh want to encourage means the lessons of the bank inquiry, and the bad practices uncovered within, have yet to sink in to many of our institutions.

Nevertheless, there will be many legitimate different views on this difficult subject.

In my view, we need to split listed and unlisted investment markets. As things now stand, any Australian — irrespective of wealth or income — can buy shares on the ASX without restriction. And it is as it should be.

But bizarrely we declare when a listed company wants to raise money, those who are not classified as “wholesale investors” have severe restrictions placed on them.

When the issue is over, they can resume buying shares and often hand institutions a quick profit. This gives members of the FSC a huge advantage which, understandably, they want to retain.

But, such restrictions make no sense and are not in the national interest. We have very good ASX rules, but there is one weakness: corporate reports are designed for institutions, and ordinary Australians have to work hard to understand them. Plus, institutions are given secret tips on what is ahead.

What’s exciting is in recent months some 90 Australian companies — or more than six per cent of the 1400 vulnerable ASX listed companies — have already signed up to the low cost InvestorHub reporting system devised by Ben Williamson and Rhys Davies.

The InvestorHub system uses modern technology to enhance (not change) existing reporting. Stunningly, a number of large listed companies are also looking to break the institutional monopoly on their registers and are examining the system.

Clearly, there is greater risk to investors without the protection of ASX rules and listing. Nevertheless, our private equity market appears to be operating well and there have been very few scandals, although from time to time emerging companies fail.

Accordingly, there is no rush, but Jones needs to commission a study of what is actually taking place in our emerging private equity market. Australia would also benefit from a proper study of what other countries are doing with their wholesale investor classifications in the venture capital area.

That’s what the PricewaterhouseCoopers of old would have done.