Non-bank lenders working on a common union for investors

Treasurer Josh Frydenberg told this column on Thursday the government was engaging with policymakers in Europe on the topic. Picture: AFP

The non-bank lending sector is working with the federal government to seek exemptions to European Union reforms, that risk rendering many investors there unable to participate in buying Australian securitised loans.

It’s the latest blow to non-banks domestically, given many are reeling from fierce competition from deposit taking institutions that are accessing the Reserve Bank’s term funding facility at a rate of just 10 basis points. Small non-bank lenders have argued that exposes a sharp differential in key parts of mortgage funding costs.

While that dynamic doesn’t look set to change in coming months, the proposed EU securitisation reforms are causing another headache via unintended consequences that would exclude some classes of investors there buying Australian residential mortgage backed securities. They are effectively just local home loans packaged up as bonds and sold to investors.

Securitisation markets are a key funding source for non-banks.

So the EU’s potential reforms have sparked high-level representations — across the diplomatic and political spectrum — to make the case that Australia should not be caught by the proposed changes.

The reforms are problematic because Australia is deemed as being a jurisdiction which has not abolished what the EU considers a “harmful tax regime”. That centres on Australia’s offshore banking unit (OBU) regime, which facilitates a concessional tax rate of 10 per cent rather than the typical prevailing rate of 30 per cent.

The federal government had committed to amend or abolish the OBU regime, but the process was plagued by delays and has yet to occur.

Also, what doesn’t bode well for Australia is that the proposed EU reforms put a red flag on countries that have strategic deficiencies in their anti-money laundering and counter terrorist financing regimes. For Australia, the fact that real estate agents and conveyancers and lawyers are not caught by our framework won’t be viewed favourably.

The securitisation industry is hopeful that a compromise can be reached, that sees Australia at least in part carved out of the reform framework. As it stands, if the changes were to be legislated, certain EU investors would risk breaching their due diligence requirements if they sought to participate in buying Australian securitisation issuance.

Treasurer Josh Frydenberg told this column on Thursday the government was engaging with policymakers in Europe on the topic.

“The government understands the importance of the securitisation market as a source of funding for smaller lenders, which are a valuable source of competition and innovation in the Australian financial system,” he said.

“It is important to note that the proposed changes are still subject to deliberations by European politicians.

“The government continues to engage with our European counterparts.”

The UK — due to Brexit — won’t be caught up in the EU reform process and therefore investors there are not bound by the changes, if they come into effect.

The domestic securitisation industry has been quick to mobilise its efforts on the EU reform topic, largely via the Australian Securitisation Forum. The issue will come to a head in coming weeks.

Resolution on AMP

AMP’s travails over the past 12 months have led to several mandate losses for the 172-year old wealth group, and with uncertainty over the future ownership of the capital division lingering, the risk of further losses remain very real.

One party conducting a broad assessment of its mandates with AMP and its real estate, infrastructure and equities division, is said to be Resolution Life.

AMP last year completed the $3bn sale of its life insurance unit to Sir Clive Cowdery’s Resolution, after a protracted auction process that was slowed down by a host of regulatory and other required approvals.

The deal saw about $29.5bn in assets under management move in AMP’s mid-year 2020 accounts, from the category of being internally managed to externally managed. That followed the sale of AMP Life to Resolution, which became effective June 30, but the wealth group stayed on as the primary investment manager.

Resolution is now understood to be undertaking a sweeping review of mandates across its local portfolios, as part of a broad assessment of how it wants the funds managed into the future.

That includes revisiting topics of asset allocation into active versus passive funds, how much it should plough into alternative asset classes and the benefits of using offshore managers compared to local ones.

It’s a thorough process, expected to take some months, but AMP’s executives will be sweating on it. The process may see AMP retain the bulk of the investment management work, but conversely there is risk that it loses some of the pie.

The ongoing ownership deliberations around AMP’s capital division are also top of mind for Resolution as it figures out how to move forward on the investment management side of its local business.

The Debra Hazelton-led AMP board remains in talks regarding a sale of part, or all, of AMP Capital to US group Ares Management, after the suitor walked away from a $6bn-plus bid for the entire company.

Resolution has some transitional service agreements in place with AMP up until June next year, and there are customary notice periods that are invoked if managers are changed. Either way, it will be interesting to see how the situation plays out.

The re-cut life insurance sale transaction included a cash payment of $2.5bn to AMP and the wealth company taking a $500m — or 20 per cent — ­equity interest in Resolution Life Australia.