• Catalyst for change post Hayne: recommendations of the Hayne Royal Commission will be a catalyst for longer term change - including M&A opportunities 
• Significant drivers creating transformation– Hayne and other factors will bring transformational change to the financial services sector
• Challenging market conditions to trigger strategic reviews- despite current solid fundamentals, market conditions will remain challenging, creating triggers for financial institutions to undertake strategic reviews
• M&A as a tool for growth - Competitive factors, regulatory costs, simplification of business offerings and lack of scale spurring management/boards to consider M&A as a potential tool for timely addressing of industry issues.

The MinterEllison M&A Outlook: Australian Financial Services – Towards 2030 Report investigates a number of important factors that are likely to reshape financial services into the future. These include key regulatory, governance, cultural, technological, and competition factors - and, not least of all - the unprecedented economic environment in which financial institutions are now operating.

Victoria Allen, M&A Partner at MinterEllison said M&A was now a mainstream pathway boards are utilising to address the post-Hayne competitive pressures faced by financial institutions.

"Whilst the short term impact from some of the changes discussed in the report are more foreseeable than the longer term impacts, it is the longer term impacts that are likely to be the ones to create the greatest need for M&A,” said Ms Allen. “We believe the financial services landscape over the next ten years will change much more rapidly than it has in the past decade. Despite the potentially overwhelming nature of these changes, it is critical that financial institutions remain across the rapid transformation within the industry. M&A is a tool that can quickly shift that landscape in a positive direction; it’s at the core of responding to digital and data delivery in financial institutions – as well as the many other drivers.”

 Ms Allen said the MinterEllison Report also showed that, despite solid fundamentals, market conditions were shifting rapidly. She noted this was occurring against a backdrop of heightened economic tensions.

“Complex regulatory and competitive factors will create additional pressures on financial services institutions already experiencing the double whammy of post-Hayne regulatory impacts and divestment pressures,” said Ms Allen.

On that theme, MinterEllison points to:

• the government’s Financial Services Royal Commission (FSRC) recommendation implementation roadmap
• the introduction of the Banking Executive Accountability Regime (BEAR)
• the impact of Open Data legislation
• ongoing Productivity Commission enquiries
• changes to banking capital requirements
• increasing exertion of enforcement power by regulators.

“These drivers are causing Australian financial services institutions to increasingly question their own business models,” said Ms Allen. “Hence, there will be an increased onus on boards and management to assist in this transformation process in a timely fashion – divestment is one lens; acquisition and investment in existing and new areas of business is another.”

Short-term outlook – streamlining operations via M&A

Recent strategic reviews and M&A activity have been predominately driven by institutions seeking to pre-empt and mitigate any additional compliance and fallout from the FSRC.

MinterEllison’s Report argues that the sheer size, complexity and poor legacy systems within Australia’s larger financial institutions contributed significantly to the issues highlighted in the FSRC; the solution required to fix such inherent issues is not easy and will require significant costs and management time. In the short term, the Financial Services sector’s ongoing response to the FSRC Final Report - together with new regulatory and compliance regimes - are likely to bring further scrutiny, behavioural and structural change to the sector.

"We believe that larger financial service institutions will continue to look for opportunities to streamline their operations and potentially consider the sale of non-core operations,” said Ms Allen. “In addition they will seek to resolve their own legacy IT issues by maintaining an open attitude towards external assistance and potential FinTech partnering. We also believe that the sector fundamentals remain attractive to overseas participants looking to enter the Australian market.”

Towards 2030 – M&A to reshape the financial services sector

A number of longer-term changes will see the Financial Services sector look fundamentally different by 2030. It is here that Victoria Allen says we see the greatest opportunities and need for M&A.

“We are seeing a perfect storm in the sector: on the one hand, increased regulatory pressures and competition including divestment of wealth management businesses by the banks; on the other, unprecedented opportunity in digital and data where we are seeing financial services effectively entering digital banking via acquisition and investment. We only expect to see that grow in 2020 so that by 2030, we will be in a brave new world of digital banking,” she said.

Reflecting on the underlying change drivers for the next decade, Rahoul Chowdry, Head of Financial Services Industry Group at MinterEllison said that the low interest rate environment, and regulatory risk, were key in the current environment but were also bringing future disruption. In addition he said a much more intense customer focus was throwing up innovation opportunities.

“We note a number of positive developments in remediation and an increasing customer focus in financial services,” Mr Chowdry said. “We also see banks of the future as evolving through partnerships, acquisitions, and joint-ventures. There will be an increased onus on boards and management to assist in this transformation process in a timely fashion – divestment is one lens; acquisition and investment in existing and new areas of business is another.”

He reiterated the message that significant regulatory change was upon us and that it was important to understand that these were driven not only by new regulations, but also from the stronger enforcement of existing regulations.

"Pressure is coming from digital-savvy customers who expect their bank to provide the same transformative experience they receive from Uber in the transport industry, or from Amazon in the retail industry. A failure to improve in-house efficiencies and deliver customised and rich experiences for customers opens the door for more innovative and agile fintech businesses and tech giants to deliver the desired experience, disrupt traditional financial offerings,” said Mr Chowdry.

Victoria Allen added, " M&A due diligence processes may become more onerous, including in relation to culture and compatibility. Increased governance considerations may also slow M&A processes. Remuneration changes are unlikely to drive M&A activity – yet all these factors will be important qualitative considerations in how a deal is structured".

Outlook - “Seize the Day” as Financial Services landscape transforms

“Overall, the prospects for growth, particularly for the larger financial service players in the Australian landscape, look to be challenging. Economic and demographic changes including lower inflation, interest rates and economic growth, high levels of household debt and growing life expectancy are all combining at the same time,” said Mr Chowdry. “Yet Australian business is seizing the disruptive challenge and harnessing the opportunity to respond and change – especially to the voice of customers.”

Victoria Allen agreed but issued a caution noting that many companies were still grappling to address the fall in the long-term cost of capital and challenges in the industry.

“Transformation including divestment and the search for acquisitions to build capacity in growth areas like digital banking and customer experience mean this is an opportune moment in time for M&A,” she said. “Our message is to seize the day as boards seek to understand factors influencing both short and long term decision. The time to see M&A as a strategic driver for success in financial services toward 2030 is now.”