10 Mar 2009

Sidelining the ACCC? New exemption for compulsory transfers of distressed banking businesses

by David Ball, Michael Corrigan

There has been recent debate in Australia and elsewhere about the role of competition regulators when decisions have to be made urgently about the survival of some firms hit by the financial crisis; In this context, laws have been recently passed in Australia to provide that the normal merger clearance rules and powers of the ACCC no longer apply to transfers ordered by the Australian Prudential Regulation Authority, or to disposals by a statutory manager it appoints. In practice, the exemptions are only likely to be used where the continued viability of a bank is under imminent threat.

As part of its initial response to the global financial crisis in October 2008, the Commonwealth Government made amendments to banking law in Australia to ensure that, if necessary, disposals of distressed banking assets can occur rapidly without the need for Australian Competition and Consumer Commission review.

These amendments ensure that the Australian Prudential Regulation Authority's (APRA) ability to move quickly in order to safeguard the stability of the Australian financial system, and the interests of deposit holders, is not compromised by section 50 of the Trade Practices Act 1974 (TPA).

Where these new provisions apply to a proposed transaction, the ACCC's role is limited to being consulted by APRA. In all other circumstances, the ACCC retains its powers to review proposed transactions and to intervene under section 50 if it sees fit.

In practice, these new exemptions from section 50 are only likely to be available where the stability of the Australian financial system, or the interests of depositors, will be jeopardised if the transfer or disposal does not take place - that is, where there is an imminent threat of an Authorised Deposit-taking Institution (ADI) failing.

Of course, in considering whether to seek to rely on these new exemptions in order to circumvent the need for ACCC approval of a particular transaction, businesses in the banking industry will also need to be mindful of the broader commercial and regulatory consequences of APRA intervention of this kind.

Under these new provisions, section 50 of the TPA no longer applies to:

  • compulsory transfers of business from one ADI to another under Part 4 of the Financial Sector (Business Transfer and Group Restructure) Act 1999;
  • the acquisition of assets in a sale or disposal of the whole or part of the business of an ADI by an ADI statutory manager (appointed by APRA) who is in control of the ADI's business under the Banking Act 1959;
  • the acquisition of shares in an ADI as a direct result of the issue or sale of shares, or a right to acquire shares, by the ADI statutory manager.

Importantly, the prerequisites for a compulsory transfer and for the appointment of an ADI statutory manager are quite stringent. In general, they will only be satisfied where:

  • the ADI is likely to be unable to meet its contractual or other obligations (including its payment obligations) or, in the case of a compulsory transfer, is in breach of the Banking Act or has already had an ADI statutory manager or prudential investigator appointed to it;
  • APRA is satisfied that the transfer, or the appointment of the ADI statutory manager, is appropriate in the interests of deposit-holders and of the Australian financial sector as a whole.

These requirements are cumulative in the case of a compulsory transfer, and are alternatives in the case of the appointment of an ADI statutory manager.

Additionally, a compulsory transfer requires either the consent of the Commonwealth Treasurer or a waiver by the Treasurer of the need for that consent.

In other contexts, the ACCC will apply normal competition rules - one of which includes the existing "failing company" principle, that if a firm is destined to exit the market or fail, in the absence of the proposed sale to a competitor, that likely outcome is relevant to the Commission's assessment of the impact of the sale on competition in markets in the future, "with and without" the transaction under review.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.