APRA taken to task for continuing anti-hybrid stance

The Australian Prudential Regulation Authority (APRA) has been warned that eliminating hybrid securities will force investors seeking income into other products that carry more risk and charge fees.

The Stockbrokers and Investment Advisers Association (SIAA) has taken the regulator to task for persisting with the view that hybrid securities pose a risk for domestic retail investors.

Responding to an APRA discussion paper around proposed changes to its prudential framework, the SIAA described as unfortunate the fact that the regulator continues to repeat assumptions that Australia is an international outlier.

The SIAA said its member firms reported that investors who seek income, particularly those in retirement, are prepared to take credit risk by moving down the capital structures of financially strong and well managed institutions and acquire hybrids for income streams.

“Investors make these investments in knowledge of the features — including the risks — of hybrids. An advantage of acquiring hybrids on issuance is that investors are not charged fees,” it said.

“The bond market is not available to those unable to invest the minimum amount of $500,000, making hybrids a more accessible way to achieve income. There is almost a complete absence of corporate debt available to retail investors in Australia. The Australian corporate bond market remains undeveloped and small compared to other comparable countries and the currently regulatory settings are impacting retail investor access to quality fixed income investment opportunities – a vital asset class for Australia’s ageing population.”

“Eliminating hybrid securities will force investors seeking income into other products that carry more risk and charge fees. By way of example, yield-seeking investors may turn to private debt funds which lack the transparency of listed investments,” the SIAA said.

“The government is on record as noting that five million Australians are either retiring or approaching retirement. We are of the view that it would imprudent policy to shut an increasing cohort of investors seeking income out of hybrids resulting in them investing in products that carry more risk and charge fees,” it said.