Wayne Byres, Chair - House of Representatives Standing Committee on Economics, Canberra - Inquiry into Common Ownership and Capital Concentration.
Thank you for the invitation to appear today.
We should note at the outset that, whilst there are some points of intersection with APRA’s prudential role and supervisory activities in relation to the financial sector, the issues contained within the Inquiry’s Term of Reference are broad and extend well beyond our mandate. Nonetheless, the issues raised are important ones, and we welcome the Committee’s consideration of the issues and appreciate the opportunity to provide our perspective, from our position as prudential supervisor of Australia’s banking, insurance and superannuation industries.
With that context, I would like to make the following observations:
1. Regulatory limits on the ownership and control of financial sector firms
The existing regulatory framework that seeks to limit concentrations of ownership in financial sector companies is primarily found in the Financial Sector (Shareholding) Act 1998 (FSSA). The FSSA regulates shareholdings in "financial sector companies" (i.e. ADIs, general insurers and life insurers, and their holding companies). The key constraint imposed by the FSSA is that a person may not hold a stake in a financial sector company greater than 20 per cent, except with the approval of the Treasurer. The concept of a stake is calculated with reference to the voting power of the person, together with their “associates”.
Approval for stakes in excess of 20 per cent may be granted where it is judged to be in the national interest, including having regard to competition considerations. (An exemption to this exists where the person is a fit and proper person and the company concerned is new or recently established, with assets below a threshold amount: $200 million for ADIs and life insurers; $50 million for general insurers).
The FSSA was reviewed in 2019. At that time, the threshold for requiring approval was increased from 15 per cent to 20 per cent, and the ‘fit and proper pathway’ for new or recently licensed entities was introduced. These changes were introduced as part of a revised licensing framework designed to encourage new entrants and competition in the financial system.
By design, the FSSA is concerned with shareholdings in individual financial sector companies as opposed to concerns relating to common shareholding across financial institutions.
Changes in control of ADIs, general insurers and life insurers, and their holding companies have been regulated for many years1. In 2019, APRA was also given the power to approve changes of control of superannuation trustees2. However, there are some types of superannuation transactions that do not require direct regulatory approval, for example superannuation mergers that don’t involve trustee shareholder changes, or the retirement of a trustee and appointment of a new trustee. Nor are there control provisions for APRA in relation to the ownership of private health insurers.
2. Capital concentrations in ASX-listed banks and insurers
By virtue of the FSSA, each of large ASX-listed banks and insurers has an ownership register that is relatively diverse. There is, however, clearly a level of common ownership by some large asset managers. For instance, the largest two shareholders in each of the major banks hold roughly 5-6 per cent of the shares of each of those banks. In relation to insurers, there is more variation but broadly a comparable level of common ownership can be observed.
This reflects a number of factors. The significant market capitalisation of the large listed financial institutions means that they represent a material share of the market capitalisation of ASX and therefore its indices. There has also been significant growth – both globally and in Australia – of large-scale asset managers, employing both active and index-based investment strategies. Together, the importance of the financial institutions to the ASX, and the size of the asset managers managing Australian equity exposures, makes a degree of common ownership inevitable.
Large institutional shareholders clearly have a degree of influence over the companies they invest in. However, APRA has not to date seen evidence that they have sought to pursue interests that are materially different from those of the broader shareholder base. This may reflect the fact that many institutional investors are managing multiple mandates on behalf of disparate group of investors.
3. Growth in superannuation funds as institutional investors
Australian superannuation funds are, collectively, significant owners of listed and unlisted assets. As at June 2021, APRA-regulated superannuation funds held assets valued at almost $2.3 trillion. This includes $500 billion of Australian listed equities – roughly 20 per cent of the market capitalisation of the ASX. This percentage share has not shifted materially over the past 5 years, although given the consolidation of the superannuation sector the holdings are held in a smaller number of (on average, larger) funds.
As the size of the superannuation industry continues to grow, both in absolute terms as well as relative to Australian GDP, and an increasing number of large superannuation funds emerge from ongoing industry consolidation, the importance of superannuation funds as investors in all types of assets will likely grow.
4. Access to capital
From a prudential perspective, APRA takes a strong interest in the extent to which Australian financial institutions have access to new capital. This is essential to a sound and stable financial system, to the benefit of the broader Australian community.
On the whole, Australian and international equity investors have generally been supportive of Australian financial institutions seeking to raise new capital. During the COVID period, for example, a number of capital raisings were undertaken by Australian financial institutions (eg NAB, QBE, IAG, BoQ), which were well supported by institutional investors. In a number of cases, Australian superannuation funds were an important and material source of new capital, being some of the largest individual investors in the new capital raisings.
This experience mirrored the Global Financial Crisis, when the superannuation sector was an important source of new capital for the rest of the financial system (and the broader economy).
APRA would have concerns from a stability perspective if there were developments that meant that capital would become less accessible when needed, particularly in times of stress.
With those opening remarks, we are happy to take your questions.
1 The FSSA dates from 1998, however there was similar legislation preceding the formation of APRA.
2 Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Act 2019. Approval must be sought to hold a stake of more than 15 per cent in an RSE licensee.