Institutions Baulk At 'be A Bank' Offer

The Age

Thursday October 30, 2008

VANESSA O'SHAUGHNESSY and RUTH WILLIAMS

MAJOR players in Australia's wealth management industry have rejected the Government's suggestion that frozen mortgage funds become banks, saying this will not help tens of thousands of retirees to access almost $14billion in savings.

Even those fund operators who cautiously welcomed the news were seeking more clarity about how it might work.

The Government was unable to say how many funds it expected would take up the suggestion, despite arguing that an almost 10% boost in funding to Australia's prudential regulator this year alone was designed in part to cater for an anticipated rise in bank applications.

Ministers, including Treasurer Wayne Swan, said some were considering such a move. The Government was also working on other courses of action in conjunction with the industry, Mr Swan said on radio.

AXA Asia Pacific, which suspended redemptions on its Australian Monthly Income Fund last week, said: "AXA does not see becoming an authorised deposit-taking institution as a solution to this issue for our customers."

Melbourne-based investment mutual Australian Unity, which has suspended two funds, said the offer was nothing new. "Any organisation could have chosen to do that last week or the week before," said head of investments David Bryant. "So the fact that people haven't gone down that path, I think, suggests something."

A spokeswoman for Challenger, which runs the frozen Challenger Howard Mortgage Fund, said the process would be lengthy and complex, and would require unit-holder approval. "This is an industry-wide issue," she said. "A large part of our business is already APRA regulated, we have a good relationship with APRA and would be seeking to get some clarity from them."

Some observed that becoming a bank - an authorised deposit-taking institution - would involve a fundamental change in business model.

The industry's representative group, the Investment and Financial Services Association, spent last week in lengthy consultations with the Government.

Chief executive Richard Gilbert said IFSA would welcome further detail on Prime Minister Kevin Rudd's proposal.

"We will liaise with Government so that IFSA member companies can make a decision which is in the interests of (all parties)," he said.

Lawyers said that becoming an ADI would involve substantial work on the part of mortgage funds, including raising funds to comply with APRA's capital requirements. An ADI is required to have at least $50 million in tier-one capital, or shareholder equity.

"Becoming an ADI is a fairly substantial regulatory hurdle to overcome, and it would depend on how the mortgage funds, or cash management trusts, are currently organised as to how much extra work they would need to do," said Clayton Utz partner Mark Sneddon.

Fund managers suspended withdrawals from mortgage funds last week after a sharp rise in applications to withdraw money. It was an unintended consequence of the Government's guarantee of bank deposits, announced on October 12, which did not cover mortgage funds and other market-linked instruments - as defined by Mr Rudd - such as cash management trusts.

On Tuesday, Mr Rudd said he would substantially boost the funding of Australia's regulators, including the Australian Prudential Regulation Authority, to help them cope with the fallout from the world financial crisis.

Mr Rudd said APRA's funding boost would enable it to respond to applications from institutions wanting to become banks, and get access to the guarantee. He said the Government would not put taxpayer dollars at risk supporting institutions that were not open, transparent and accountable.

A partner at Clayton Utz Steven Klimt said APRA models had been created for institutions that did not fit existing ADI guidelines - namely, specialist credit card institutions and providers of purchased payment facilities.

He said such an approach would mean all mortgage funds would have to comply. "The way the Banking Act is currently structured, if you are carrying on a banking business you have to be an ADI."

A spokesman for APRA said the existing authorisation guidelines for Australian deposit-taking institutions would not be altered.

APRA has approved four ADI applications in the past year - all branches of foreign banks. It would not say how many applications it had received.

The Australian Office of Financial Management has allocated $1 billion under the Government's $8 billion initiative to promote competition in the mortgage market.

The Government will invest up to $500 billion in residential mortgage-backed securities from mortgage provider FirstMac, with ANZ, HSBC and Macquarie Group as joint lead managers. It will invest the same amount with Members Equity Bank, with Westpac and Credit Suisse as lead managers.

© 2008 The Age

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