ASIC alert on hybrid issues by banks

THE securities regulator is taking aim at the rush of hybrid share-and-debt issues by banks in recent weeks, amid concerns over the aggressive marketing of the instruments to retail investors.

By InvestSMART · 2 Mar 2012

By InvestSMART ·
2 Mar 2012

Comments

THE securities regulator is taking aim at the rush of hybrid share-and-debt issues by banks in recent weeks, amid concerns over the aggressive marketing of the instruments to retail investors.

The Australian Securities and Investments Commission is planning to meet stockbrokers, banks and bank-aligned financial planners in coming weeks to remind them they need to highlight how the investments come with underlying risks.

"ASIC has concerns that hybrids are being pushed on investors without adequate explanation of the risks, or without adequate explanation that they are deeply subordinated, or that payments can be suspended," ASIC commissioner Peter Kell told BusinessDay.

"We think retail investors too often see the household name and they see something as secure and reliable without looking at the underlying product and the risks associated with it." Mr Kell was speaking on the sidelines of the Melbourne Financial Services Symposium.

The comments follow a flurry of hybrid and subordinated debt issues by the big banks in recent weeks. Westpac has become the latest bank to increase its hybrid share offer to $1 billion.

The move followed similar issues by Commonwealth Bank's wealth management arm Colonial, while ANZ also sold a bigger-than-expected $1.5 billion debt issue to investors amid strong demand for the offer.

Hybrid shares pay a set interest rate which usually tracks the price of debt and, after a set period, convert into ordinary shares.

The focus on hybrids comes amid a broader crackdown by ASIC in the marketing of financial products.

Other areas being targeted by the regulator include debentures, agribusiness and infrastructure investments. "This is an area where we don't want to see a repeat of the episode of the past few years where people were putting their money into products where they thought were low risk, but it turned out to be much higher," Mr Kell said.

He said the fast-growing self-managed superannuation funds sector was particularly vulnerable to aggressive marketing.

For Westpac, the hybrid issue is a capital management tool to help top up its tier-1 capital. It consists mostly of common equity or ordinary shares but there is room for hybrid shares to make up the rest.

Hybrid securities are often a more palatable form of capital raising for existing bank shareholders as they do not dilute profit or dividends across ordinary shares.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What is ASIC’s alert about hybrid share and debt issues by banks?

ASIC has warned about a recent rush of bank hybrid share-and-debt issues and is meeting stockbrokers, banks and bank-aligned financial planners to remind them to highlight the investments’ underlying risks. Commissioner Peter Kell said ASIC is concerned hybrids are being pushed on investors without adequate explanation that they can be deeply subordinated or that payments can be suspended.

What are hybrid shares and how do bank hybrids work?

According to the article, hybrid shares pay a set interest rate that usually tracks the price of debt and, after a set period, can convert into ordinary shares. They combine features of both debt and equity, which is why they’re described as hybrid securities.

Which banks recently issued hybrids or subordinated debt mentioned in the article?

The article notes a flurry of activity: Westpac increased its hybrid share offer to $1 billion, ANZ sold a larger-than-expected $1.5 billion debt issue amid strong demand, and Commonwealth Bank’s wealth management arm, Colonial, also had a recent hybrid/subordinated issue.

Why is ASIC worried about the marketing of bank hybrids to retail investors?

ASIC says retail investors often see a household bank name and assume the product is secure without examining the underlying product and risks. The regulator is concerned hybrids are being marketed without clear explanation that they may be deeply subordinated or that interest or dividend payments can be suspended.

How do banks use hybrids as a capital management tool?

The article explains that banks, such as Westpac, use hybrid issues to help top up tier‑1 capital. Hybrids can be a more palatable way to raise capital for existing shareholders because they generally don’t dilute profits or dividends across ordinary shares.

Can payments on hybrid securities be suspended or are hybrids subordinated?

Yes. ASIC highlighted that hybrids can be deeply subordinated and that payments on those securities can be suspended. That subordinated status affects the level of risk compared with ordinary shares or senior debt.

What other financial products is ASIC targeting in its broader marketing crackdown?

Besides bank hybrids, the article says ASIC is focusing on the marketing of debentures, agribusiness products and infrastructure investments as part of a wider crackdown on aggressive financial product marketing.

What should everyday investors and SMSF trustees consider when offered bank hybrids?

The article advises caution: don’t rely solely on a bank’s household name, and look at the underlying product risks. Be aware of features such as subordination, the potential for suspended payments, and conversion terms into ordinary shares — all points ASIC wants brokers and planners to explain clearly to retail investors and vulnerable sectors like self-managed super funds.