Australia has a complex regulatory system for financial services entities such as insurance companies, superannuation funds and other financial services providers. This article provides a high level summary of the main issues with purchasing financial services entities other than banks.
An Australian Financial Services Licence (AFSL) with an appropriate authorisation is required in order to carry on a financial services business in Australia. An AFSL holder can be authorised to provide financial product advice on certain financial products, deal in specified financial products, make a market for a financial product, operate a registered managed investment scheme, provide custodial or depository services and provide traditional trustee services to retail and/or wholesale clients.
AFSLs are issued and regulated by the Australian Securities and Investments Commission (ASIC). For example, a general insurance company selling to consumers will usually need an AFSL authorisation to issue and advise on general insurance products to retail clients. However, the general insurer will also be regulated by the Australian Prudential Regulation Authority (APRA).
APRA has prudential supervision over Australian life insurers, general insurers, superannuation (pension) funds and banks. Such entities are therefore often regulated by both APRA from a prudential perspective, and ASIC in relation to the entity's provision of financial services. Prudential regulation is about ensuring the integrity of the financial system, whereas the requirements around AFSL holders seeks to regulate their interaction with consumers.
Table One below indicates whether certain financial services entities are regulated by APRA, ASIC or both.
|Regulator||General insurance company||Life insurance company||Superannuation (pension) fund||Other AFSL holder eg. insurance broker/distributor, financial adviser, fund manager, managed investment scheme operator|
Types of takeovers
Takeovers can be by the acquisition of:
- shares; or
of the life insurance company, general insurance company, superannuation fund trustee, managed investment scheme (MIS) operator (who is the trustee of the MIS) or other AFSL holding company.
Issues with the takeover of insurance companies Main issues
Under the Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA), shareholdings of 15% or more in a general insurance or life insurance company must be approved by the Treasurer on the basis of a national interest test. APRA is generally delegated power by the Treasurer to make this decision.
The approval must be granted before the acquisition takes place, otherwise the Federal Court may make orders to unwind the acquisition. Conditions may be imposed on approvals under the FSSA.
Under the Insurance Acquisitions and Takeovers Act 1991 (Cth) (IATA), the entry into an arrangement for the acquisition of 15% or more of the total book value of the assets of a life or general insurance company or under which, a person with interests of 15% or more in the company, will have control over the appointment or actions of the directors, must be notified to the Treasurer. Approval must also be sought from the Treasurer to the proposed acquisition or arrangement. The Treasurer applies a public interest test. APRA is generally delegated power by the Treasurer to make this decision. Conditions may be imposed on approvals under IATA.
Under IATA, something is contrary to the public interest if it is:
- likely to adversely affect the prudential conduct of the insurance company;
- likely to result in an unsuitable person being in a position of influence over the company;
- likely to unduly concentrate economic power in the insurance industry or Australian financial system; or
- contrary to the national interest.
APRA regulates the operation of insurance companies, superannuation funds and banks as a whole ie. at the individual financial services entity level and also as a conglomerate group. APRA's reasoning is that many financial services groups have entities which are interdependent on each other ie. a threat to the stability of one entity, may impact on other members of the group due to the common ownership and group wide business practices. Consequently, before giving any consent to a takeover, APRA will also look at the financial services group to which the entity belongs, as well as the operation of the individual entity.
Later issues - consolidation
After acquiring an insurance company, purchasers may wish to merge the assets underlying the liabilities of policyholders, with those of the purchaser's existing insurance company. This is often done for economies of scale. The merger of these pools of assets is done under Part 9 of the Life Insurance Act 1995 (Cth) for life insurance companies, and Division 3A of the Insurance Act 1973 (Cth) for general insurance companies. It requires a Federal Court Order to approve the scheme to merge the assets. The court must have regard to the interests of the policy holders, amongst other things.
In Australia, superannuation is highly regulated. For public offer superannuation funds (which are those open to the general public), the trustee must be a body corporate with trustee directors.
It is usually a standard condition of a public offer superannuation fund trustee's licence (known as an "RSE Licence" and issued by APRA), that a change in control must be notified to APRA at least 14 days before the change occurs.
APRA can cancel an RSE licence if it has reason to believe the licensee will breach a licence condition, and therefore, it is implicit that APRA's approval to a takeover of a public offer superannuation fund must be obtained before the takeover occurs. APRA will also have regard to the impact that the takeover has on the conglomerate group (if any) of the vendor, and the purchaser.
Although ASIC's prior approval is not required (a notification of the change in control after the fact is all that is required), the purchaser will need to ensure that sufficiently skilled staff remain post merger, to enable the superannuation fund trustee to carry out its AFSL obligations, or this may endanger the continual holding of the AFSL.
Later issues - consolidation
If a purchaser has acquired the trustee of a superannuation fund, to provide better economies of scale, it may wish to consolidate its holdings and merge the new fund with the incumbent superannuation fund currently within the purchaser's group. This will not require the consent of the transferring fund members, if the members receive in the new fund, equivalent rights in respect of all the benefits which they had in the transferring fund. The trustees of the transferring and receiving fund must also agree that this is the case. The result will be one merged fund, with only one trustee.
Managed investment schemes
Managed investment scheme interests can be sold to retail clients or wholesale clients. If all interests are sold to wholesale clients, the scheme does not need to be registered with ASIC, and is not subject to the Corporations Act requirements for registered schemes. However, the trustee of such a "wholesale scheme" will still be obliged to obtain an AFSL to advise on and deal in interests in the scheme and its underlying assets.
In addition to these authorisations, the Trustee of a registered managed investment scheme (ie. one whose interests are sold to retail clients) will also need to be authorised under its AFSL to operate a registered managed investment scheme.
The trustee of a wholesale scheme may also be required to hold an AFSL authorisation to provide incidental custody services, which carries with it net tangible asset (NTA) holding requirements, the size of which depend on the size of the business.
The takeover of a managed investment scheme is simpler as it does not involve APRA, as APRA does not regulate managed investment schemes. No prior approval is required from ASIC, however, ASIC will need to be notified after the fact.
Such a takeover is usually done by acquiring the corporate trustee of the managed investment scheme (the trustee is known as a 'responsible entity" if the scheme interests are sold to retail clients).
The purchaser will need to ensure that sufficiently skilled staff remain with the trustee after the acquisition, to enable the trustee to continue to provide financial services for which it is authorised under its AFSL, otherwise this may endanger the trustee's ability to continue to hold the AFSL. The purchaser should also ensure that such a change of control does not impact on any service agreements which the trustee has with service providers (such as custodians and investment managers) to the trustee's detriment.
Other AFSL holders
For AFSL holders other than trustees of managed investment schemes and who are not APRA regulated, again, ASIC's prior approval of a change in control is not required, however ASIC will need to be notified after the fact.
It is easier to effect a share sale rather than an asset sale, of an AFSL holder. This is because the licence is in the name of the company itself. If only the assets of the business are transferred, the new corporate entity holding the assets will need to obtain its own AFSL, which can be time consuming and costly.
Once the share sale is effected, the AFSL holder needs to ensure it maintains adequate staff and resources (eg. Information technology resources, financial resources- these can include NTA or liquidity requirements, depending on types of AFSL authorisations) to continue to carry out its AFSL obligations.
Note that Foreign Investment Review Board (FIRB) approval under the Foreign Acquisitions and Takeovers Act 1975 (Cth) and regulations, may also be required for any acquisition of an Australian financial services company, if the purchaser is an overseas entity (refer to page 16 of Holding Redlich's guidebook "Doing Business in Australia" 2016). Where APRA approval is required, FIRB will often wait to determine APRA's position on the acquisition, before finalising its own decision.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.