Consolidation across the financial services sector
Organisations generally merge or acquire other organisations to increase their market share, buying power, product offerings, or specialist expertise, along with reducing costs and getting access to better services.
The financial services industry has seen increasing mergers over the last decade, particularly with superannuation fund mergers ramping up over the last number of years due to increasing pressure from the regulator. This has come off the back of increasing regulation requiring trustees to assess scale and determining that their scale isn’t a disadvantage to members.
Regulatory pressure has also been applied to the mutual banking sector over a number of years, given tight margins, increasing regulatory expectations and compliance costs.
Insurance transactions have been driven more so by financial pressures, with banking groups looking to improve returns to shareholders by divesting underperforming insurance and wealth management subsidiaries.
Recent and proposed mergers and acquisitions
Recent mergers and acquisitions across the superannuation, insurance and banking industries are highlighted below, with the timeline based on implementation dates. Whilst 2020 was a little quieter on the merger front given the global pandemic, it’s looking like 2021 will see momentum return and accelerate, with a number of mergers already in the pipeline.
[Please note that Hall Advisory has used publicly available information from organisations’ websites and news publications to source this information and as such we may have inadvertently omitted some mergers].
Superannuation sector consolidation
The pressure from APRA continues to rise for the superannuation sector and APRA is not accepting excuses and misconceptions. APRA feels that “many Trustees appear to over-estimate the degree of difficulty and expense involved in the process, and under-estimate the benefits”. 
Over the seven years to December 2019, the APRA-regulated superannuation industry more than doubled in assets, to over $2 trillion, whilst the number of funds has reduced by a third . By 31 December 2020, assets had increased to over $3 trillion .
APRA has noted recently “since 30 June 2020, there have been six mergers completed and we expect this momentum to continue. There are now 164 APRA-regulated funds, well down on the 279 funds that existed when the Stronger Super reforms were introduced in 2013. This consolidation has helped drive better governance, stronger performance and lower costs, although we still see plenty of scope for further consolidation and efficiency within the industry.” 
With APRA on a prudential mission to reduce the number of licensees and funds operating in the market, where appropriate, to reduce costs across the sector and improve member outcomes, the outlook for obtaining a new licence or acquire an interest in an existing licensee generally appears relatively bleak over the short-medium term. However, Vanguard has been working with APRA on its RSE licence application for a number of years and now hopes to receive its licence and commence trusteeship operations later in 2021. As an $8 trillion global funds management organisation with substantive resources at its disposal and the ability to quickly come up to scale by leveraging its existing brand and client base, and potential redirection of fund flows, they are a good test case for the regulator’s appetite for issuing further licenses.
Super merger FUM sizes
The recent and proposed soon-to-be mergers in the superannuation sector show that it isn’t just smaller funds trying to increase their scale. Larger funds are strategically merging with other larger funds, creating monolithic players in the market. The proposed QSuper and Sunsuper merger is expected to create one of the largest funds, at around $200bn in FUM.
Based on the escalating pace in super fund mergers, the increasing scale of major players and the impact of APRA’s members outcomes requirements, it is quite reasonable to expect that the industry may collapse to a small number of very large players and a handful of niche operators over the next 5-10 years. Some industry participants are currently viewing this as a possibility over the next 3-5 years.
Super merger structures
Usually, we see the merger of two organisations combining and either taking one’s name or rebranding the new merged entity. Another common approach is one organisation (usually the larger) merging with another organisation which sits as a division within them so both brands are retained (for example First State Super, now Aware Super, and VicSuper as a division within it).
However, we have seen a number of different approaches over the last year or so, as funds consider how else they can gain the benefits of a merger whilst retaining their own brand identities.
In 2019, we saw the joint venture of Catholic Super and Equipsuper, where both brands were maintained underneath a newly named Trustee. This way enables both funds to continue on but reap the benefits of efficiencies of scale and expected lower costs with a single Trustee.
In early 2021, Hostplus and Maritime Super announced a strategic asset pooling partnership, whereby Maritime Super will combine its investment assets into Hostplus’ Pooled Superannuation Trust (PST) to enable it to take advantage of the cost and scale benefits that come from a larger asset pool.
Insurance sector consolidation
A number of insurance sector transactions in recent years represent the completion of exits of banking institutions from the insurance and wealth sector. Increasing claims costs in the life insurance space and increasing regulatory expectations in the superannuation space have forced banking players to refocus on their core businesses and cease attempts to reap the benefits of their historical acquisitions and investments in wealth businesses. A number of historical Australian life insurance businesses are now owned by large Asia-based insurance and wealth management groups, including Dai-ichi Life, Nippon Life and AIA.
AMP is an unusual case, with the group selling off their crown jewel of AMP Life after 170 years in the Australian life insurance sector. AMP has also recently announced its plan to spin-off and list its private markets business, AMP Capital, through an IPO on the ASX, after an intended sale to US-based Ares Management fell through. AMP has suffered a significant fall from grace over recent years, as a result of revelations of poor conduct during the Royal Commission into Banking, Superannuation and Financial Services, and other reputational hits associated with sexual harassment and poor governance. Board and executive changes, and a raft of rectification projects, are in train to try to pivot the residual business towards its future state.
Banking sector consolidation
Consolidation in the banking sector has been more subdued until this year, with a small number of mergers between small mutual players taking place, presumably due to regulatory pressures and the desire to build scale in the best interests of members. This year however we have already seen the announcement of BOQ swooping in on the somewhat troubled ME Bank, to form WE Bank post consolidation, and a more substantive competitor to the major banks.
The pending acquisition of MyLife MyFinance by Challenger is unusual, with the annuities and wealth management specialist entering the banking sector after the recent exit of all major banks from the wealth sector. Challenger is looking to deploy its investment expertise and interest rate risk management capabilities in funding term deposits, rather than relying solely on a mortgage book, and diversify its product offerings and income streams.
The calendar year 2021 has also seen the exit of two neobanks, being fintech style direct banks that operate exclusively online without any form of branch network for face-to-face service. After a flurry of licensing activity in 2018 and 2019, Xinja has handed back its licence to APRA and transferred residual deposits without alternate instructions to NAB, after its business model came under pressure with the development of the asset base lagging well behind the establishment of the liability base. A sale of 86400, previously a neobank subsidiary of payments provider Cuscal, has also recently been agreed with NAB, with the 86400 offering to be consolidated with NAB’s existing digital offering in UBank.
To merge or not to merge
When considering whether a merger is the right one for your organisation, there are some key areas that need to be duly considered before, during and after a merger.
A merger must support your strategic objectives and also bring benefits to your members/customers. Choosing a merger partner with aligned values and principles is key to a successful merger.
When commencing the search for a merger partner an organisation should have a list of key criteria they are looking for in the merger partner and a view on what they want the future organisation to look like.
Your strategy will in part dictate the merger partner you look for. If you want to expand your market share you may look for an organisation offering the same type of products/services but in a different demographic. If you are a superannuation fund and you want to alleviate some pressure around scale you might look for a partner big enough to enable the merged organisation to benefit from economies of scale.
Similar strategic objectives and aligned values and principles will help in making the big decisions on the merged entity, such as who will be CEO; who will make up the Board; and what will the integrated organisational structure look like.
Culture influences behaviour and cultural alignment between potential merger partners is key to the success of the merger and the integrated organisation’s future. Whilst some culture clash is always to be expected, organisational culture and risk culture should be discussed early in the process and thoroughly considered in the due diligence process, with frequent communications to both organisations.
The importance of culture in achieving integration of the organisations can be highlighted by having a dedicated work stream in the change management program. This, along with a frequent communication strategy across both organisations, establishing the consolidated internal brand, is necessary to help bring everyone on board with the merger.
A merger needs organisation-wide support and efficient collaboration across both organisations, continuing into the integrated organisation.
If the business reorganisation and integration is not effectively managed and communicated, it may increase individual concerns around job stability/loss and cause rumours creating uncertainty. This will likely impact morale and shift the culture, affecting behaviours and workflow.
Each merger comes with its own set of individual risks and compliance obligations based on the nature of the entities involved and the intended structure of the merged entity, and they need to be identified and managed proactively. The risk and compliance teams from both organisations should be involved with all aspects of the merger to ensure compliance remains front of mind, and that all compliance obligations associated with the merger process itself are fulfilled.
Examples of regulatory requirements which may need to be considered and actioned include assessing the impact of the proposed merger on stakeholder interests, evaluating the tax implications, and ensuring the timeliness and efficacy of stakeholder disclosures, in addition to obtaining the necessary regulatory approvals. Timely and ongoing communications with all relevant regulators is also critical to avoiding any unnecessary compliance hurdles/delays or unintended breaches of regulatory obligations associated with the merger process.
Understanding the compliance requirements of your potential merger partner is also very important to ensure no requirements are missed in bedding down the compliance processes of the newly merged organisation.
Making the merger work
Mergers impact an entire organisation and its people. Ideally, there will be a dedicated project team and key SMEs assisting from relevant business units along with external service providers.
Mergers between peer organisations can take anywhere from 12 to 24 months to complete, whilst a large organisation taking in a smaller one could be completed in six to 12 months. This puts huge stress on the people of an organisation, particularly those balancing merger-related tasks with their BAU work.
If you’re thinking about undertaking a merger you should consider what external help you could use from suitable external experts, both during the due diligence phase and again during the merger implementation process.
How we can help
If you need external support to assist in a merger process, we’re here to help. Our services in relation to this include:
Merger due diligence assistance
Project risk management oversight
Process mapping and optimisation of business processes, practices and system configurations
Development and refinement of target operating models
Policy and process amalgamation and updating
Risk and compliance assistance
Regulatory stakeholder communications and relationship management
Post-merger organisational risk culture or board effectiveness assessments
Contact us for a confidential, no-obligation consultation to discuss how we can support you.
, , APRA INSIGHT Issue 2 2020; Myths and misconceptions should be no barrier to super consolidation
 The Response Paper, Consultation on APRA's Superannuation Data Transformation