This is the first of a new format of the revived Bank Notes which Maddocks issued some time ago. Our intention is to comment upon current issues facing the economy that may impact the banking and finance sector. Bank Notes highlight the issues and provides commentary rather than delving into the complexity of the legal issues involved.

2014 - where are we heading?

Five months on from the 2013 federal election, an anticipated uplift in the national economy has failed to arrive, in fact, it has suddenly worsened.   

  • Both Holden and Toyota have followed Ford by announcing plans to cease vehicle manufacturing in Australia within the next few years. This decision will impact the manufacturing sector generally and particularly in Victoria and South Australia.
  • Qantas shares have slumped to their lowest level. The airline announced a $250 million first half loss together with shedding 5000 jobs. The airline has also requested federal government assistance to enable it to compete with financially backed sovereign airlines both domestically and globally.
  • The federal government has resisted requests from various sectors to offer financial bailout packages to businesses which are finding it tough, e.g. SPC Ardmona, Holden, Toyota and now Alcoa.
  • The Victorian Government has subsequently stepped up to provide funding assistance to SPC Ardmona, to supplement funding provided by its parent company, Coca Cola AMATIL, in order that the Company can upgrade its processing facilities and ultimately avoid closure.
  • The national debt ceiling has increased to $500 trillion.
  • The federal budget has gone from an estimated small surplus in mid-2013 to projected $40-50 billion deficit 12 months later.
  • The May 2014 federal budget will contain a lot of red ink with substantial reductions in federal government expenditure across the board.
  • The government federal tax revenues base has been substantially eroded and there is revived discussion as to broadening the tax base particularly GST to include financial services and food and to eliminate many other exemptions.
  • The Australian dollar has dropped from parity with the US dollar 12 months ago and according to the Reserve Bank of Australia (RBA) and market commentators, it has still further to fall between the range of 80 cents promoted by the IMF to 85 cents promoted by the RBA.
  • Unemployment has just jumped to the highest level in 10 years at 6 percent and according to some commentators does not adequately take into account a substantial fall in the participation rate.
  • The federal government is considering a $130 billion asset sale programme to pump prime the much needed infrastructure investment in Australia.
  • China's economy and several other South East Asian economies are slowing from their previous high growth levels which market commentators say will have an ongoing dampening effect on the ability of the Australian economy to get back into the predicted medium to long term growth phase of three to five percent per annum.
  • Further, some economists are predicting a drop in the housing prices of up to 20 percent in Sydney and Melbourne later this year.

Where is the Australian Economy heading this year?

The answer? Slowly and cautiously which impacts upon the banking industry generally due to lower demand for the provision of credit across both consumer and business lending and higher credit risk. Yet, despite all this seemingly pessimistic news, major Australian banks are on target to record even greater profitability which brings the four major Australian banks right up there with the best of them in terms of global bank profitability compared to their capital base.

It seems the economy will continue to gradually adjust to the slowing of the mining and resources boom and will have to redefine its objectives with an urgent need to address productivity issues and the high cost of doing business in Australia.

Legal issues

Financial services reform

The Financial Services Reform Act (2001) (Cth) (FSA) was a response to the financial enquiry known as the Wallis Report.

Since passing of the FSA regulations in the financial services industry have been made by subsequent governments, some of which have already implemented, others are planned.

Financial system enquiry

Prior to the recent Federal election, the current Government announced that it would conduct a new further enquiry into the Australian financial system which has yet to be established.

Recent legislation reform

The amendments to the Corporations Act commenced on 1 July 2012 containing a 12 month transition period so that it did not mandatorily commence until 1 July 2013.

Some aspects of this legalisation received a mixed response although the current government did indicate it would implement all recommendations from the report which are yet to be enacted. 

Credit reform

The reforms which have been implemented deal with provisions affecting reverse mortgages, short term and small amount of credit contracts, caps on costs for credit contracts and consumer leases. Phase two of the credit reforms were to deal with a number of matters including provision of credit to small businesses, credit provided for investment purposes and short term and indefinite term consumer leases. The legislation has yet to be passed by Parliament.


Although there have been a number of press statements released, no such legislation has been tabled yet, other than a Government spokesman indicating there will not be any unexpected or detrimental changes to the current superannuation system. 

Privacy Act

A further Privacy Amendment Act will commence on 12 March 2014.

The Privacy Amendment Act makes significant amendments to the former Privacy Act including a new set of Australian Privacy Principles and provisions dealing with credit reporting, together with a new credit reporting code of conduct.

Current market review

Maddocks actsfor both lenders and borrowers particularly in the corporate and property development sectors. We have noticed an ongoing subdued level of corporate lending as many corporations are attempting to reduce their debt exposure rather than taking on new debt for business acquisitions. Hence a very cautious approach to debt is being adopted in boardrooms across Australia. 

We are seeing renewed activity in the construction area particularly with boutique infill residential apartments for which there is a resurgence in demand. Recent figures from the Australian Bureau of Statistics indicate that the greatest level of new building approvals and construction funding is for the residential apartment market. This increased activity reflects a substantial reshaping and restructuring in the Australian residential market, especially for those who do not wish to live a long way out of capital cities.

We have also been involved in an interesting acquisition of distressed chocolate maker Ernest Hillier, by a UK based distressed asset buyer, highlighting that there is an appetite for quality consumer products businesses that have sound growth opportunities.  

We are also seeing a continuing trend which involves the resurgence of mezzanine and other preferred equity participants in the construction finance area. Previously the banks offering the senior position were not generally keen on being involved with mezzanine financiers, however due to the fact that they have scaled back their exposures, there is sufficient market competition to force them to reconsider their position in order for the continuity of funding of developments to continue to occur. Let's hope it continues.