M&A – financial services outlook
The Financial Services sector was a key driver of M&A activity in 2018. This has continued into 2019 and shows no sign of slowing, fuelled in particular by changes to the regulatory capital rules issued by the Reserve Bank of New Zealand’s (RBNZ) and a continued focus on conduct issues from both the RBNZ and the Financial Markets Authority (FMA). In addition, new legislation revising the domestic financial adviser regime will come into force in June 2020, potentially prompting further strategic change.
Regulatory Capital changes
In December 2018 the RBNZ launched a consultation on revised regulatory capital rules for banks incorporated in New Zealand. Amongst the key headline changes proposed were:
- increasing the required level of CET1 capital to 17% (up from 5%)
- introducing an additional 1% capital requirement for domestically significant banks (D-SIBs);
- removing the ability of eligible banks to use internal models for risk weighting of certain assets; and
- eliminating AT1 instruments as qualifying capital for most CET1
If implemented in this form, the additional capital requirements for domestic banks will be significant, particularly for the traditional Big Four banks . We expect this to lead to rationing of capital and potential disposal (or even IPO) activity as banks seek to exit capital intensive product lines.
Triggered by the Australian Financial Services Commission, the RBNZ and FMA have carried out sector wide reviews into the conduct and culture of the banking and life insurance sectors respectively. These reviews, the responses of the financial institutions, and consequent changes in behaviour and structure will work their way through the industry in 2019. The government is currently consulting on a new conduct licensing regime which in turn will drive further change.