Will the rise in shareholder lawsuits affect your investments?

Will the rise in shareholder lawsuits affect your investments?

Alex Burke

You’ve likely noticed the spike in reports about shareholder class actions against major financial institutions recently, and it shouldn’t come as any surprise as to why this is occurring.

It isn’t just that the press is paying more attention to these cases due to the Royal Commission, though – this type of class action is both relatively new in Australia and definitely on the rise. A report from law firm Allens noted that the first shareholder class action was launched in 1999, and a further 50 had been commenced as at February 2017. There’s a clear upward track in the number of these actions, and although most don’t end up making it to trial, the costs involved in responding are tangible and substantial.

And given that you’re likely invested in one (or many) of these companies, it’s worth paying attention.

A cost of doing business?

If you look at the annual reports of listed finance companies – including wealth businesses – they can often exclude non-recurring litigation expenses from pro forma financial statements, with a view to portraying a “truer” picture of a company’s valuation. If these class actions continue their steady rise, though, it may be fairer to describe such expenses as recurring.

Should that occur, litigation could come to be perceived as a “cost of doing business” in finance – this is compounded by the Government’s proposed expansion of the Australian Securities and Investment Commission’s powers and general adjustments to legislation which would open the doors to civil action against any finance business that fails to comply with new disclosure and distribution rules.

Margin pressure

On a broader note, rising PI premiums and litigation expenses could put further pressure on the projected profit margins of many large Australian financial institutions. The effects of this would be twofold: first, it follows that this would reduce the overall valuation of the largest contributor to Australia’s economy.

Second, of the $1.6 trillion in superannuation money monitored in the Australian Prudential Regulation Authority’s quarterly super performance statistics, 23% was invested in Australian shares as at March 2018. For the roughly $700 billion invested in SMSFs, ATO data shows about 29% was invested in Australian shares at the same period.

If one breaks down the ASX All Ordinaries Index, financials are by far the largest sector at the time of writing, occupying 29.9% – materials comes in second at 16.6%.

It stands to reason, then, that a substantial proportion of Australia’s retirement funds are invested in companies exposed to the above concerns, which could potentially lead to pressure on super savings.

Is it time to start looking at how your retirement funds may be affected? It may be too early to tell, but it’s worth discussing the issue with your financial adviser.

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