Additional APRA approvals may be required in some cases (e.g. if the transaction involves a reduction in capital or a restructure of statutory funds or approved benefit funds).
Legislation requiring APRA approval – overview of current requirements
Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA)
What it does: The FSSA places a 20% threshold on the ownership of a 'financial sector company' (ie ADIs, insurers and their holding companies). The purpose of the FSSA is to prevent excessive concentration of ownership that could pose systemic risks.
The ownership threshold is determined by reference to the person's 'stake' in the company (ie essentially the percentage of their voting power). A person's stake includes the interests of the person's associates (which includes companies the person owns or is owned by (with a stake of 20% or more) and also associates of associates).
Relevance in M&A: Any acquisition that would result in a person or group exceeding the 20% threshold requires prior approval. In addition, an application for authorisation under the Insurance Act or registration under the Life Act as an insurer or a non-operating holding company (NOHC) may be contingent on both FSSA and IATA (see below) approval.
APRA's role: Approval can be obtained from the Treasurer to exceed the threshold. In practice, the Treasurer has delegated decision-making authority under the FSSA to APRA. Applications for approval must demonstrate that the proposed shareholding is in the national interest. This test involves proving that the acquisition will be beneficial rather than merely proving that it will not be detrimental. If the relevant financial sector company is new or recently established and satisfies a prescribed asset test, the application for approval must also demonstrate that the applicant is a fit and proper person to hold a stake in the company of more than 20%.
There is no exception for related entities and so, internal restructures of ADIs and insurers may also be subject to the FSSA approval process.
Insurance Acquisitions and Takeovers Act 1991 (Cth) (IATA)
What it does: The purpose of the IATA is to protect the public interest in several ways, including ensuring the affairs of Australian insurers are carried out in a prudential manner, preventing persons who are not fit and proper from being in a position of influence over APRA-authorised insurers and preventing the undue concentration of economic power in the Australian insurance industry and wider financial system.
Relevance in M&A: A person must not carry out a 'trigger proposal' until the Treasurer has received notice of the proposal and given a go-ahead decision under IATA. Most commonly, IATA approval is required in relation to the transfer of an insurance business. As with the FSSA, in practice, we understand the Treasurer has delegated decision-making responsibility under the IATA to APRA.
At a high level, a 'trigger proposal' is a proposal to:
- undertake a non-arm's length acquisition, leasing, letting, hiring or granting of the rights to use assets of an APRA-authorised insurer;
- undertake certain acquisitions of interests, rights and benefits from an APRA-authorised insurer in relation to its policies; or
- enter into an agreement in respect of, or alter a constituent document of, an APRA-authorised insurer which will cause an entity whose control interest in the insurer is 15% or more to have the power to:
- require, whether formally or informally, one or more Australian directors to act in accordance with the entity's directions, wishes or instructions; or
- appoint or remove one or more directors of the APRA-authorised insurer.
APRA's role: If APRA (as the Treasurer's delegate) has no objection to a trigger proposal, it can make a go-ahead decision (which can be subject to conditions). To give a go-ahead decision, APRA must be satisfied that the approval would not be 'contrary to the public interest'. This involves consideration of whether the proposal is (in summary):
- likely to adversely affect the prudential conduct of the affairs of the company;
- contrary to the national interest;
- likely to unduly concentrate economic power in the Australian life insurance industry; or
- likely to result in a person who is not 'fit and proper' to be in a position of influence over the company.
The Treasurer has a suite of enforcement powers available under the IATA, including the ability to make permanent restraining orders and divestment orders. Contravention of such orders constitutes offences punishable by up to two years' imprisonment. The Treasurer can also apply to the Federal Court to enforce the Treasurer's orders.
Financial Sector (Transfer and Restructure) Act 1999 (Cth) (Transfer Act)
What it does: The Transfer Act provides a mechanism for the total or partial transfer of business or restructure of an ADI or life insurer, including:
- voluntary transfers (at the instigation of the relevant parties); and
- compulsory transfers (at the instigation of APRA (eg if an entity is in distress, has contravened specified legislation or is being investigated by APRA)).
The Transfer Act also provides a mechanism for the restructure of an ADI or insurer under Part 5.1 of the Corporations Act 2001 (Cth) (Corporations Act) to facilitate the introduction of a NOHC.
Relevance in M&A: The Transfer Act is a familiar mechanism for the voluntary transfer of a banking or insurance business between entities. It is most commonly used to effect the transfer of an ADI business (including mutuals), or the transfer of smaller life insurance businesses (where APRA is comfortable that the more involved transfer mechanism under the Life Insurance Act is not warranted). A more in-depth consideration of the Transfer Act in the context of voluntary mutual mergers is available in our previous insight. The Transfer Act can also be used for internal group restructures.
APRA's role: With respect to a voluntary transfer, an application must be made to APRA to permit the transfer and, if specified criteria are met, APRA must approve the application and issue a certificate stating that the transfer is to take effect. These criteria include that APRA considers the transfer should be approved having regard to the interests of:
- the depositors or policy owners (as applicable) of the transferring body;
- the depositors or policy owners (as applicable) of the receiving body; and
- the financial sector as a whole.
In considering whether to approve the transfer, APRA must consult with ASIC, the ACCC and the Commissioner of Taxation and may consult with any person APRA considers should be consulted.
The Transfer Act also requires that the transfer of business be 'adequately adopted'. The Financial Sector (Business Transfer and Group Restructure) determination No. 2 of 2017 (Transfer Rules) prescribes the ways in which a transfer may be adopted by or on behalf of a body or its members. These include approval by special resolution of the members and approval by resolution of the board, however the Transfer Rules indicate that member approval is likely to be required in relation to most transfers of business. In particular, the Transfer Rules note that APRA is 'unlikely to be satisfied' that board approval will adequately take into account the interest of members of the transferring and receiving bodies unless special circumstances are present (although APRA will consider each matter on its merits). To the extent there are different classes of members, it may be necessary to hold meetings of different classes to approve the transfer.
When the certificate of transfer comes into effect:
- all the assets and liabilities the subject of the transfer become those of the receiving body without any other transfer, conveyance or assignment; and
- the duties, obligations and immunities, rights and privileges applying to the transferring body apply to the receiving body.
Banking Act 1959 (Cth) (Banking Act)
What it does: A domestic ADI must obtain consent from the Treasurer prior to:
- entering into an arrangement or agreement for:
- any sale or disposal of its business (by amalgamation or otherwise); or
- the carrying on of business in partnership with another ADI; or
- effecting a reconstruction of the ADI (which includes a demutualisation).
Any such transaction entered into without the Treasurer's consent is void and of no effect.
A foreign ADI must give the Treasurer reasonable notice in writing of any proposal to:
- enter into an arrangement or agreement for:
- any sale or disposal of its business (by amalgamation or otherwise); or
- the carrying on of business in partnership with another ADI; or
- effect a reconstruction of the ADI (which includes a demutualisation),
Failure to comply with these obligations may result in a fine.
Relevance in M&A: A transfer or sale of the business of an ADI (whether arm's length or intragroup) or demutualisation will require Treasurer's approval.
Treasurer's / APRA's role: In determining whether to provide consent (which cannot be unreasonably withheld), the Treasurer must consider the national interest. It is open to the Treasurer to impose conditions on any consent and the Treasurer is permitted to delegate their powers to APRA, an officer of the Department or, in the case of a demutualisation, ASIC.
Insurance Act 1973 (Cth) (Insurance Act) and Life Insurance Act 1995 (Cth) (Life Act)
What it does: Division 3A of the Insurance Act and Part 9 of the Life Act each provide a mechanism for the transfer of all or any part of the insurance business of a general insurer or life insurer respectively by way of a scheme approved by the Federal Court. These provisions prohibit the transfer of all or any part of such businesses by any other mechanism other than the Transfer Act (see above).
Relevance in M&A: Statutory insurance portfolio transfers are the mechanism for effecting the transfer of an insurance business between parties on an arm's length basis, unless APRA is willing to approve the use of the Transfer Act (typically for smaller businesses, see above). The mechanism can also be used for internal restructures.
APRA's role: The process involves satisfying both APRA and the Federal Court that there will be no detriment to the interests of policyholders / policy owners (as the case may be) affected by the transfer.
The steps involved in both types of schemes are substantively similar, although both types of schemes are subject to slightly different requirements. While general insurers must comply with the requirements of APRA Prudential Standard GPS 410 (Transfer and Amalgamation of Insurance Business for General Insurers), the equivalent requirements for a life insurance scheme are set out in the Life Insurance Regulations 1995 (Cth).
Both types of schemes involve a pre-application phase involving (in broad terms):
- due diligence on the transferring business (including policies, policyholders / policy owners, material contracts etc). It is important that an appropriate level of due diligence be undertaken so there is a clear understanding of the business to be transferred (including whether there are any aspects of the business (e.g. IP) that may not constitute 'insurance business' and, therefore not capable of transfer under the scheme) and to identify and manage any legal and commercial issues with key contractual counterparties that might arise in connection with the proposed scheme. An assessment also needs to be undertaken of the quality and reliability of the contact information for transferring policyholders / policy owners, in particular;
- the preparation of scheme documents (which includes the scheme, a scheme summary approved by APRA and a notice of intention) and the transfer agreement which is often necessary to effect the transfer of non-insurance business (e.g. associated business contracts and business assets);
- the preparation of an actuarial report (in most schemes, the appointed actuary of each of the transferring insurer and the receiving insurer will prepare a report and the parties will typically jointly engage an independent actuary to prepare an independent report on the scheme);
- APRA approval of the draft scheme documents (including, in particular, the draft scheme summary and notice of intention). APRA will generally also provide written confirmation that it does not object to the scheme; and
- IATA approval (see above).
The next phase involves a court application and scheme notification phase which includes:
- lodging the Federal Court application and supporting documents;
- a dispensation hearing to seek orders to dispense with the requirement to give an approved summary of the scheme to every affected policyholder / policy owner (as the case may be). Typically, the parties seek complete dispensation from this requirement, subject to compliance with certain conditions (including, for example, that a scheme summary be given to every transferring policyholder / policy owner for whom the transferring insurer has current contact details and that the parties undertake a broader notification program to draw attention to the scheme);
- publishing a notice of intention to conduct the scheme;
- sending the scheme summary to affected policyholders / policy owners by post or email (subject to any dispensation orders that have been granted);
- undertaking the agreed notification program. While the particulars of the notification program are specific to each portfolio transfer, the statutory notification requirements vary slightly across general and life schemes; and
- a Federal Court hearing to confirm the scheme and grant appropriate orders.
The Federal Court has a broad discretion whether to confirm a scheme and there are no specific criteria that the Federal Court must apply in considering whether to confirm a scheme. The Court will consider any matter that might be relevant, including the terms of the scheme itself, the financial condition of the transferring insurer, the change in financial security to be experienced by the affected policyholders / policy owners, any change in the management of the claims handling culture and any change in policy terms or benefits. Ultimately, the Federal Court's primary concern is to ensure that the interests of policyholders / policy owners are protected.
Once a scheme is confirmed by the Federal Court in accordance with the Insurance Act or Life Act (as the case may be) it becomes binding on all persons and it has effect despite anything in the constitution of any body corporate affected by the scheme. There is no need to obtain individual policy owner / policyholder consent or a contractual novation of insurance policies from the transferring insurer to the receiving insurer (although it has become common and prudent practice to obtain reinsurer consent). The scheme essentially results in a statutory novation of the portfolio the subject of the transfer and associated matters.
Schemes of this kind typically take 9-12 months and involve extensive and ongoing engagement with APRA.
Navigating the regulatory landscape for financial sector M&A in Australia requires careful planning and strategic engagement with, potentially, multiple regulators. Transactions involving ADIs and insurers require careful consideration of the various legislative and regulatory regimes that could be triggered.
Our specialist financial services M&A and regulatory teams can work with you to determine the optimum transaction structure and navigate the various legislative and regulatory hurdles that may apply to support you in the achievement of your commercial and strategic objectives.
