22 Mar 2022
Just on a quarter of a century ago, the Wallis Financial System Inquiry, a major catalyst for the transformation of Australian financial services, introduced the concept of a “non-operating holding company”.
Stretching back half a millennium, banks have essentially taken in deposits, made loans and supported payments. Over that time a system of supervision, regulation and state support has evolved to protect the financial system and depositors.
“A non-operating holding company recognises the difference in kind, not just degree, between businesses with import for financial stability and those without.”
And it has made sense for financial institutions to essentially be regulated and governed in their entirety.
What Wallis recognised however – and this was a global trend – was that banking was becoming vastly more expansive, extending well beyond the traditional core of deposits, loans and payments, as it sought to better service customers and respond to competition.
The idea of a financial “supermarket” was emerging – literally at the time as supermarkets and banks were forming joint ventures around the world. Globally today, the concept is even more relevant even if the partners for banks have changed from retailers and telecommunications companies to fintechs, data management groups, start-ups and specialist technology organisations.
This myriad of company types partnering with banks is intended to better serve customers in a more efficient and innovative manner – but not all of them are prudentially relevant for financial stability. It therefore doesn’t make sense for them to be regulated as if they are.
Certainly, the combined business of taking deposits and making loans – banking – does need heightened regulatory structures. But a start-up investor business, such as ANZ’s 1835i, or a specialist mortgage market information group like Lendi, doesn’t. As an extreme example, under the current structure, if ANZ bought a soft drinks company it would be regulated as part of the financial institution and treated as prudentially integral to financial stability.
A non-operating holding company recognises the difference in kind, not just degree, between businesses with import for financial stability and those without.
Our intention at ANZ, if the proposal is approved by the government, regulators and investors, is to build this distinction into a structure which separates our core banking from the many partnerships, start-up investments, potential non-banking acquisitions and other elements of our growing financial ecosystem. ANZ would still be an Australian company listed on the ASX and the existing board would govern the new structure.
In essence, this is a logical continuation of the five-year long simplification project we have undertaken. It will allow us to be more flexible, more responsive and more precise with capital allocation. It will make growth, both organic and non-organic, more straightforward from a regulatory perspective and enables risk to be insulated.
The Wallis Inquiry was very accurate in this regard: “Rapid technological innovation and an evolving business environment with longer-term changes in customer needs and profiles are reshaping the financial system. The system will have a progressively greater array of participants, products and distribution channels which, in some cases, will expand beyond the traditional categories of banking, insurance and financial exchanges.”
The legal structure for non-operating holding companies we have today in Australia and which ANZ proposes to follow has evolved from that observation – and has already been adopted by some institutions in Australia including Macquarie Group (formerly Macquarie Bank) and Suncorp and internationally by Standard Chartered, Lloyds and Barclays.
To achieve the right balance between financial safety and flexibility it is necessary to achieve legal separation that quarantines assets and liabilities between various entities in a conglomerate group. A non-operating holding company acts as parent to a group of licensed and other financial or non-financial entities. Each operating entity is separately capitalised and the regulator must have the capacity to monitor the group as a whole, including intra-group activity.
Critically, there is no suggestion we are looking to avoid regulatory scrutiny or indulge in regulatory arbitrage. Nor are we pursuing this structure in an attempt to lighten our capital requirements. However, greater capital efficiency has proved an outcome elsewhere in financial services where non-operating holding companies have been adopted.
There are four key forms of approval required for ANZ:
To achieve our purpose and strategy, we believe we need a legal structure that gives ANZ flexibility to grow, acquire and partner with non-banking businesses outside of the Approved Deposit-taking Institution (ADI) group.
It’s an important factor in delivering on our growth strategy. Having assessed alternatives, we believe the optimal structure is this non-operating holding company. Over time, it would enable ANZ to establish and grow non-banking businesses in fit-for-purpose operating environments, to support the evolving needs of our customers and protect deposit-holders.
The reality is many of the businesses we want to partner with or even acquire to add to our ecosystem - and which do not undertake “banking” businesses - would be significantly inhibited and disadvantaged under a regulatory structure designed to protect depositors in ADIs.
Non-operating holding companies are commonplace overseas. In some countries the structure is referred to in different terms, such as ring-fencing requirements. But setting the names to one side, it is very common to see a non-operating holding company with different limbs of the company operating the banking and non-banking businesses.
Organisations including Morgan Stanley, Lloyds Bank, Barclays Bank and DBS have a non-operating holding company or non-operating holding company-like structure. As part of our work, we have benchmarked our proposed approach with those authorised by international regulators and we are squarely inside the framework of what is found internationally.
We firmly believe – and the overseas experience supports this – that adopting a holding company structure actually enhances transparency in a complex organisation, making it simpler for regulators and investors to understand the moving parts.
Moreover, since the financial crisis, much more attention has been paid to the role of organisations in system stability and again, in the case of a non-operating holding company, we would argue the structure would simplify the procedures for recovery and resolution if it became necessary.
And just as banking continues to evolve, a non-operating holding company structure would simplify and enhance our ability to evolve and compete in the emerging environment.
Ken Adams is Group General Counsel of ANZ
22 Mar 2022
09 Nov 2021