New capital notes offerings in Australia are excluding retail shareholders from bank hybrid rollovers unless they qualify as 'sophisticated' or wholesale investors under recent Federal legislation provisions.
The legislation introduced targeted and principles-based Design and Distribution Obligations concerning financial products. These obligations mandate that issuers and distributors maintain an adequate product governance framework to ensure that products are directed at the appropriate individuals.
In October 2021, these new Design and Distribution Obligations (DDO) came into effect. These reforms compel firms to design financial products that cater to consumer needs and distribute them in a more targeted manner.
As part of these obligations, issuers must inform ASIC of any significant dealings (excluding certain transactions) in a financial product that is not aligned with the product’s target market determination (TMD).
In essence, product issuers and distributors must ensure that financial products are only distributed to those for whom they are suitable.
ANZ and CBA have been the first major banks to respond to this legislation with their ANZ Capital 7 Notes and PERLS 14 offerings, respectively. They are adopting a highly conservative approach to the Design and Distribution Obligations (DDO).
In February, ANZ communicated to its hybrid holders that if they are not 'sophisticated' or wholesale investors, they would be unable to participate in the $1.31 billion ANZ Capital 7 Notes offer.
ANZ stated: “Participation in the Offer, including the Reinvestment Offer, is restricted to clients of syndicate brokers who are either wholesale investors or retail investors within the target market for the ANZ Capital Notes 7, who have received personal advice from a licensed professional adviser, in accordance with the new Design and Distribution Obligations (DDO) legislation implemented in October 2021.”
The implication for existing security holders is that their holdings will be redeemed unless they qualify as Wholesale Investors.
Bank hybrids have long been a popular investment for Australian retail shareholders, often complementing portfolios of shares paying high franked dividends and term deposits. However, these changes mean that potentially tens of thousands of existing hybrid investors will have their holdings compulsorily redeemed. Ironically, while these investors will miss out on brokerage-free allocations, they will still be able to purchase the securities in secondary trading on the ASX.
