There are four primary pieces of Commonwealth legislation concerning different aspects of common ownership and capital concentration, as highlighted in inquiry submissions—the Financial Sector (Shareholding) Act 1998, the Corporations Act 2001, the Competition and Consumer Act 2010, and the Foreign Acquisitions and Takeovers Act 1975.
The Financial Sector (Shareholding) Act 1998 (FSSA) provides the regulatory framework for shareholdings in Australia’s financial sector entities, including banks, general insurers, and life insurers and their holding companies. The FSSA limits individual shareholders and their associates to a maximum holding of 20 per cent of a financial sector entity. Treasury approval is required for holdings above this amount.
The FSSA framework is designed to limit the extent to which shareholders can exert control over individual institutions. It does not address concerns related to common ownership across multiple financial institutions.
The Corporations Act 2001 requires public disclosure by individual shareholders of holdings in listed entities at or above 5 per cent. Furthermore, acquisitions of 20 per cent or more of any listed entity is prohibited unless the shareholder in question formally pursues a takeover bid or scheme of arrangement. In addition, the Corporations Act 2001 codifies the common law requirement for company directors to exercise their powers in good faith and in the best interests of the company as a whole.
The Competition and Consumer Act 2010 prohibits anti-competitive conduct, including the misuse of market power and cartel behaviour, such as price fixing.
The Foreign Acquisitions and Takeovers Act 1975 empowers Treasury to approve or prohibit certain transactions in Australia by foreign persons, including those relating to land or media assets. Furthermore, this legislation creates a statutory requirement that notification be given of certain other actions.
The regulatory perspective
In support of the inquiry, the committee heard from three financial regulators with a direct stake in the common ownership question—the Australian Competition and Consumer Commission (ACCC), the Australian Prudential Regulation Authority (APRA), and the Australian Securities and Investments Commission (ASIC).
The committee made clear to the regulators its expectation that they be proactive in responding to common ownership to avoid the need to confront a larger issue in the future.
While the regulators noted that they had not to date seen evidence of any negative consequences associated with common ownership, each acknowledged the importance of monitoring the development of this phenomenon, and expressed support for further research into the implications that common ownership may have for the Australian economy.
Australian Competition and Consumer Commission
The ACCC is an independent statutory agency that promotes competition, fair trading, and product safety for the benefit of all consumers, businesses and the Australian community. The primary responsibilities of the ACCC are to enforce compliance with the competition, consumer protection, fair trading and product safety provisions of the Competition and Consumer Act 2010. Its Competition Enforcement and Financial Services Branch focuses specifically on competition issues within the financial services sector.
In its inquiry submission, the ACCC highlighted that the market concentration of certain industries in Australia, in conjunction with the growth of the funds management sector over the past decade, has given rise to the risk of an increase in the concentration of ownership of listed companies:
There is a risk that the ownership of Australian listed companies will become increasingly concentrated in the coming years and that there will be increasing levels of common ownership of competing companies. It is difficult to draw broad conclusions on how any such developments might affect competition within the Australian economy. That is because the effects will vary depending on the specific circumstances of the companies and sectors concerned.
The ACCC reassured the committee that it has closely monitored debate around, and research into, common ownership, and agreed that the issue deserves closer examination. The ACCC reiterated that there is little consensus emerging from research into the effects of common ownership on competition, though it did acknowledge that to date it has not identified any evidence of common ownership having an adverse effect upon competition in any market in Australia.
According to the ACCC, there are several factors that limit our understanding of institutional ownership in individual Australian listed companies—not least that ‘there is so much we don’t know.’ The fact that investors are only required to disclose their shareholdings if they and their associated entities have a relevant interest in at least 5 per cent of the voting shares in a company prohibits the development of a more comprehensive picture of common ownership.
Mechanisms of influence also need to be better understood. These include, for example, the question of ‘voice’—or how often senior wealth managers meet with company chief executives, and details around the nature of those discussions. As ACCC Chair Rod Sims observed:
I suspect it is not that often—if much at all—that people are aggressively leaning on companies in the one market in a public sort of way and exhorting them to do things. I think the bigger problem is senior wealth managers talking to CEOs. We know that they do that. If they have a common interest in a small number of competitors they might be seeking to send messages about industry profitability rather than a particular company which may soften competition between competitors.
While acknowledging this as a potential issue, the ACCC also recognised that fully understanding the operation of these mechanisms presents significant challenges. Using the banking sector as an example, it noted:
There is no doubt that, when you have a duopoly or oligopoly, you get […] accommodation [of interests]. How much of it is due to common ownership is hard to determine.
Our view on the commercial banks—you have four big banks, basically, 80 per cent of the market—is, yes, there is common ownership of them. Common ownership is there, around five or six per cent from a couple of fund managers. So how much influence that has versus just simply their obvious commercial strategy of not bothering to aggressively compete with each other, is where it gets complicated to know what is driving what.
Markets in which significant power is shared by a relatively small number of competitors present the greatest risk of manipulation by common owners. In acknowledging this point, the ACCC submitted that research focusing on such markets would likely provide the greatest insight into the impact of common ownership.
The ACCC pointed out that the primary elements of Australia’s consumer law associated with the phenomenon of common ownership are those dealing with collusion and mergers (sections 45 and 50 of the Competition and Consumer Act 2010 respectively). It acknowledged that there is some debate about current limitations associated with these statutory provisions. Regarding mergers, while some other nations have merger control laws that require entities contemplating such transactions to first seek and receive regulatory approval, in Australia there is no such requirement—the ACCC’s role in this domain is reactive. The fact that the ACCC does not receive information about such proposals in advance makes it difficult to enforce this aspect of Australia’s consumer law. In acknowledging this, the ACCC called for debate about this aspect of Section 50 ‘based on the concern that our economy is getting more and more concentrated and that that of course has negative effects.’
Overall, the ACCC expressed support for the committee’s view that the potential impact of common ownership needs to be placed in sharper focus.
Australian Prudential Regulation Authority
APRA is an independent statutory authority that supervises institutions operating in the banking, insurance and superannuation sectors. Under its enabling legislation, APRA is tasked with protecting the interests of depositors, policyholders and superannuation fund members. Ultimately it is APRA’s role to ensure that the financial interests of Australians are protected, and that the nation’s financial system is stable, competitive, and efficient.
In appearing before the committee, APRA noted that while each of Australia’s large ASX-listed banks and insurers has a relatively diverse ownership register, there is a level of common ownership among large asset managers. For instance, the largest two shareholders in each of the major banks hold approximately 5 to 6 per cent of the issued shares in each of those banks. Furthermore, this situation is largely mirrored within the insurance sector.
APRA reiterated that large financial institutions hold a significant proportion of the overall equity within the ASX. Furthermore, APRA acknowledged that there has been significant growth—both globally and in Australia—of large-scale asset managers employing both active and index-based investment strategies. As a consequence, and in light of the importance of these financial institutions to the ASX and the size of the asset managers operating in Australia, APRA asserted that some degree of common ownership is inevitable.
APRA drew attention to the power associated with the significant size of Australia’s superannuation sector. According to APRA, as the superannuation industry continues to grow, and an increasing number of superannuation funds merge in the process of industry consolidation, the importance of superannuation funds as investors in all types of assets will also likely grow.
APRA also agreed that large institutional shareholders clearly have a degree of influence over the companies they invest in. Balanced against this, however, APRA stated that it had not seen evidence that institutional shareholders would seek to pursue interests that are materially different from those of the broader shareholder base.
In response to APRA’s view that common ownership should not be regarded as a pressing issue at this point in time, the committee queried whether it might become an issue of concern in the future. APRA Chair Wayne Byres responded:
I wouldn't want to predict it as an issue of concern but I think it's worthy of being looked at and it's reasonable to be asking the questions and make sure there isn't an issue that's emerging.
The committee also asked APRA whether it was properly equipped to deal with issues of common ownership under the FSSA, particularly in relation to current regulatory thresholds. In response, APRA said that determining an appropriate threshold is a matter for the parliament.
Australian Securities and Investments Commission
ASIC is Australia’s integrated corporate, markets, financial services, and consumer credit regulator. It is an independent body, which carries out most of its work under the Corporations Act 2001.
ASIC’s role is primarily focused on the regulation of public companies that are either listed on an Australian exchange or have more than 50 members. ASIC ensures that the acquisition of control in a regulated entity occurs within the limits set by the Corporations Act 2001, which restrict a person and their associates from acquiring more than 20 per cent of a regulated entity. In instances where this limit is removed by the Treasury, for example in takeover bids or schemes of arrangement, ASIC will also oversee the conduct of these transactions.
In addition, ASIC is responsible for ensuring that investors are informed about those who are empowered to influence or control an entity. Shareholders are required to keep the market informed about their interests in a listed company. In listed public companies, beneficial ownership is disclosed publicly where a person (and their associates) gains a direct or indirect interest in 5 per cent or more of a listed public company (a ‘substantial holding’), and thereafter with each additional 1 per cent increment.
ASIC is also responsible for regulating participation in Australian markets. It supervises market intermediaries to ensure they are meeting their regulatory requirements, and monitors compliance by market operators with their obligations to operate in an orderly and transparent market. In relation to market investors, ASIC noted that there are a variety of obligations and prohibitions designed to ensure that trading is fair and efficient, including the prohibition of insider trading.
ASIC was careful to highlight that its role does not extend to adjudicating whether or not investment decisions are appropriate, even though it does play a significant part in regulating other aspects of investor conduct. For example, ASIC—in conjunction with APRA—regulates trustees of superannuation funds. In making investment decisions, superannuation funds trustees have a duty to act in the best financial interests of their members, but trustees have broad autonomy in determining their investment strategies.
Responding to the committee’s interest in whether the regulator was concerned about the risk of capital concentration or collaboration between corporate owners, ASIC stated that it had not seen anything that would be sufficient to give rise to general concern. ASIC does, however, continue to monitor debates pertaining to common ownership and capital concentration. When the committee queried whether investors with substantial shareholdings could through voting exert significant influence on publicly listed entities, ASIC noted that voting is excluded from its regulatory responsibilities.
Common ownership has the potential to undermine competition within the Australian economy. To prevent any such outcome, it is critical that Australia’s market regulators are proactive in understanding the risks associated with this phenomenon.
The committee recommends the introduction of an explicit legislative requirement for the Australian Competition and Consumer Commission (ACCC) to actively monitor the extent of common ownership in Australian markets, and that the ACCC also be empowered to take common ownership implications into account when assessing merger applications.