GOUMENIS When we are asked to recommend a service provider the current backdrop leaves us very limited in what we can suggest. Like any market or sector, competition keeps everyone on their toes. From a client’s perspective, anything that forces a provider to look at how they can improve their business model should be a good thing.

HOFMAN I echo this point. We very much like to be able to recommend a range of service providers so an issuer can select the most appropriate one.

HOWARD Some clients still are not aware of the full range of service providers, though. In an environment where one service provider has such a significant share, in many ways the power to shape the market lies with this provider. It is rare to find an industry where even two players are quite so dominant. It is only as more choice emerges that people think to seek out better quality.

CONNELL I believe questions would be asked around competitiveness if this level of concentration risk was to exist in any other industry.

SMITH The seed has been planted and conversations are taking place. The problem is the market is a monopoly – but it’s not a monopoly because of regulation. It is a monopoly because somehow it evolved this way.

HOWARD It’s important to emphasise that the market wasn’t regulated this way and there isn’t a particular party or event that is to blame. Consolidation following the financial crisis and a lack of expansion afterwards caused the market to become increasingly concentrated, and it has only been in the last 3-4 years that other service providers have started to set up.

GOUMENIS There is a level of complacency from clients, though, and it is easier to stay with your current service provider than it is to switch.

HOWARD That’s right. Unless the current provider is providing a terrible service there’s very little impetus to switch.

CONNELL We are some of the competition and we need to work hard to continue to educate the market, our stakeholders and investors, to make the case that there are valid alternatives.

CONNELL From recent experience working in Asia, the Australian market is unusual in the sense that it has developed to a position where there are only a few players overall and one with a very large market share.

HOWARD It hasn’t always been this way, and 10-15 years ago there were many more providers of trustee services in Australia. However, there has been substantial consolidation of services to the extent that up to around 12-18 months ago the market was effectively operating as a monopoly. Since this time, we have seen some new service providers come into the space. This is a very welcome development indeed for AET.

CONNELL The Australian landscape is very different from Hong Kong and Singapore, where in addition to some regional players there are four main bank trust and agency teams that between them hold the majority of market share. Wholesale-trustee business is distributed mainly between these four players.

SMITH This conversation is particularly timely given the findings of the Productivity Commission’s recent draft report on competition in the Australian financial system. The paper noted a lack of competition in certain financial-services sectors and pointed out the many associated problems with such a situation.

GOUMENIS I don’t believe people fully appreciate the risk that having only a single trustee firm agreeing to act as standby servicer poses. If a second global financial crisis was to occur, I find it difficult to imagine how such a role could be serviced by our market in its current form. This should be an issue that investors in particular are aware of.

HOFMAN It was quite difficult to navigate the trustee landscape during the financial crisis because we were dealing with unprecedented events.

HOWARD This is particularly noteworthy if one considers the volume that could come to market very suddenly. If it’s just one or two issues that suffer it’s probably manageable. But not if it’s a large number at the same time.

GOUMENIS This could even be the case for just one of the Australian major banks’ internal securitisations. Some of these transactions are very large indeed – we are talking about billions of dollars.

CONNELL The Australian Competition and Consumer Commission (ACCC) examined the corporate-trustee market in 2013 and concluded that it was and would remain competitive. The market for vanilla corporate-trust products is probably more liberalised. But many believe this is now less so for securitisation and structured-lending services, for example.

WHITE My understanding is the basis for the ACCC’s decision was a lack of feedback from wider market participants that concentration risk in the trustee market was a concern. Without this the ACCC had no reason to believe there was an issue.

SMITH On this point, I get the sense issuers are starting to pick up on the risk. We are regularly approached by issuers that are becoming concerned, or their boards are concerned, about one entity playing three or four roles within a transaction.

WHITE The lack of competitive tension in the marketplace is real. While new entrants are bringing about competition, a significant number of transactions still don’t even cross our desks.

CONNELL If one compares fiduciary services with any other professional-services industry there is a clear anomaly. There are around four or five expert securitisation law firms in Australia and six or seven accountancy firms. In fact, there are always more than one or two players in any area that requires specialist financial expertise. There is no reason why our industry should be any different.

HOFMAN On this point, it is also important to consider the growth in our industry in recent years, including the increased membership of the Australian Securitisation Forum (ASF) and the fact that we have welcomed greater diversity of industry participants to our market.

SMITH I think the way the trustee market has developed in Australia has made it such that in some cases the central role – in other words the fiduciary duty – of the trustee is at risk of being lost.

CONNELL The market needs a choice of experienced, qualified, expert fiduciaries and it is incumbent on us to promote the message that this is not a commoditised business to stakeholders, issuers, investors and rating agencies. It is in no-one’s best interest for the market to lack competition.

SMITH The Eticore business was established 20 months ago. At that time, we had no intention of offering full servicing capabilities or Reserve Bank of Australia reporting, but we added these additional services in response to requests from market participants.

CONNELL We are a new entrant into the corporate-trust space for debt-capital-markets deals. Most of the market participants we have engaged with over the last six months have emphasised how important it is to have more choice in the market. This is because choice – and therefore competition – drives high-quality offerings and benefits clients.

GOUMENIS Based on what I’m hearing from clients, and picking up on the point that Belinda Smith makes, it seems that newer entrants into the market are looking for the full breadth of service. They want to outsource functions such as the trust-manager and servicer roles and are looking for solutions that package these with traditional trustee services.

SMITH They are also very focused on delivery method. It is challenging being a new and smaller player but there are also advantages. Being small and nimble enables us to deliver the bespoke services our clients request, such as electronic signatures and encrypted portals to replace traditional email.

HOWARD It is not easy but it is possible. It is costly and complicated to change the trustee manager or servicer even in the simplest securitisation structure, and the stakeholders are not inclined to change suppliers unless there is a fundamental issue with the current provider.

CONNELL There is another issue related to this point. In European and Asian markets there are several corporate-trustee options. There is a real choice such that if there is an issue with one trustee another can step in. It is in everyone’s best interests for the market to have four or five strong players, as evidenced in similar corporate-trust industries throughout the world.

HOFMAN The rise of fintech provides a clear opportunity set in my view. Our industry is changing rapidly with more fintech firms in the market. From an ASF perspective, a lot of the increase in memberships has come from interesting and new types of fintech companies. We are seeing new and innovative structures, and more asset-backed securities issuance generally, as a result.

GOUMENIS My view is that engagement with investors is key to changing the current landscape. Without investors the issuers cannot deliver their transactions, so issuers will be incentivised to address any concerns investors have on this front.

SMITH That’s right. We need to implore investors to think not just about the impracticalities of having a monopolistic market but the risk associated with doing so.

HOWARD The perception that investors – or rating agencies or other stakeholders – have based on the current shape of the market is not correct. The monopolistic environment shouldn’t – but arguably does – imply that one institution has more substance than any of the firms sat around this table. Convincing people of the contrary is key.

GOUMENIS The trustees have a significant task around education. I hear offshore investors and their credit teams asking questions about the trustee environment in Australia. What generally isn’t forthcoming is the fact that there is a new competitive landscape emerging – and it can significantly slow down transactions when the message, and the full picture, isn’t clear.

HOFMAN It is fair to say new entrants face a significant challenge in growing their market share, given the backdrop. However, this isn’t insurmountable. The fact that each trustee around the table has identified its own niche skills and value proposition means they have an opportunity to focus on their strengths and grow their market share from there.

WHITE It is interesting to note that while our market has evolved to its current status, just across the Tasman Sea the New Zealand market has developed into one of the more diverse corporate-trust sectors one might see.

SMITH Within any structure, there might be four or more roles to fill and as things stand different subsidiaries of the same entity can take each of these positions. This introduces an unnecessarily risky element to the transaction, so investors and other secured creditors should be thinking about the extent of this risk across their portfolios.

CONNELL From a default management perspective, I would generally caution against the security trustee being a different entity from, for example, the note or bond trustee.

GOUMENIS If a client has more than one corporate trustee this could also create problems from the perspective of moving assets between trusts. For example, one would need both sets of trustees to be involved just to move assets from a warehouse into a term facility.

SMITH But in a monopolistic market the market leader has the ability to influence pricing and service quality and it will price a bundle package accordingly. This makes it less attractive and more difficult for clients to move the roles they can elsewhere, even if they are unhappy with their current provider.

HOWARD Cost is also a factor. Naturally having two different service providers is generally going to be more expensive than one. This is a cost the issuer will see as coming out of its margin and hence will try to minimise. It is easy to see how the market has landed the way it has when you look at it from this angle.

GOUMENIS The limitation clause takes a more standard form in offshore markets compared with Australia, where a lack of consistency has caused issues in transactions. For a number of years, the only real alternative in the Australian market consistently ran into issues because its limitation clause was different. To the extent there can be consistency it makes it easier for clients to switch between trustees.

SMITH Having standardised terms would make it easier for clients to transition between trustees, which would help the market significantly. The limitation clause is a very good example of this – because in a divided market the major player sets the standard and everything else becomes nonstandard.

HOFMAN It very much depends on the individual trustee, but offshore transactions seem to undergo a more streamlined process.

CONNELL For the trust and agency teams that are part of arranging banks this injects an element of commercial discipline, in the sense that the arranger desk has visibility over what the trust and agency desk is doing.

CONNELL This week’s volatility certainly is a mind-focuser. It has been more than 11 years since yields on US Treasuries went southwards and downturns tend to happen every 10-15 years. During the financial crisis, no-one really focused on the fact that a correction was due.

HOWARD Not to be ‘Chicken Little’ about it but now is the time to inject some reality into the conversations we’re having to make sure all stakeholders know that if something goes wrong they need to have confidence in the various parties to a transaction. They need to believe all parties are robust, knowledgeable and can act accordingly.

WHITE What one needs in a situation like this is a trustee that is proactive – not one that buries its head in the sand.

GOUMENIS We have exactly the same types of conversations with our clients. Clients never think their transaction is going to fail but it’s our job to work out how and if it could, and to document accordingly.