When the Australian Prudential Regulation Authority (APRA) described feedback about a new proposal to phase out bank hybrid securities as “generally supportive”, it clearly was not thinking about institutional investors Geoff Wilson or Christopher Joye.
Wilson, the veteran fund manager whose opposition to a Labor Party proposal to change the treatment of franking credits helped torpedo the party’s chance of winning the 2019 national election, was blunt in an opinion piece.
“APRA’s decision to abolish bank hybrids defies logic and is an attack on Australian retail investors and the franking credit system,” the Wilson Asset Management (WAM) founder thundered in this Australian Financial Review (AFR) newspaper article.
The regulator’s proposal in December 2024 to erase a A$40 billion (US$28 billion)-plus market announced has forced investors to find alternative investments to replace securities that will go the way of the securities dinosaurs.
However, opposition to the plan did not have the same political significance as the franking credits controversy, with Labor sweeping to power with a large majority in the election held in May 2025.
Although the plan to eliminate Additional Tier 1 (AT1) capital instruments does not come into effect until 2032, Wilson concedes there is no chance of it being abandoned.
Proof of that is the fact WAM created its own investment product to replace these hybrids: the WAM Income Maximiser (ASX: WMX), which aims to provide monthly franked dividends and capital growth to shareholders.
Phase-out criticised
Joye, the founder of Coolabah Capital Investments, accused the prudential regulator of “trying to blow up the hybrid market” only months before the announcement of the phase-out.
“This bureaucratic overreach will destroy a huge franked income sector beloved by self-managed super fund investors and retirees,” he wrote in this AFR article.
When APRA announced the decision, it said the move would simplify and improve the effectiveness of bank capital in a crisis, emphasising it followed an extensive consultation process and careful consideration of the potential options.
The AT1, also known as hybrid bonds, would be replaced mainly with cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress.
APRA positioned it as one of a number of changes introduced in response to “banking turmoil” in 2023, when some U.S. and European banks failed or required rescue with Government intervention.
This was a clear reference to the collapse of Credit Suisse when the value of its hybrid securities was written off, and it had to be rescued in a forced merger with rival Swiss bank UBS in March 2023, which allowed shareholders to receive some payment.
It reversed the typical loss hierarchy in which hybrids rank above equity and triggered lawsuits and market turmoil.
Wilson, however, rejected the Credit Suisse example as a valid justification for the AT1 removal, saying it was the result of “an issue specific clause” and pointed out there was no history of Australian banks collapsing.
Joye was more direct, writing in the AFR article that the decision was “motivated by the fact that APRA has lost the stomach to oversee a banking crisis that involves automatically converting listed hybrids into bank shares”.
“APRA is now putting its interests ahead of the depositors and taxpayers it is legislated to protect,” he wrote in this piece.
A senior financial planner called the decision “silly”, saying the public understood the risks of hybrids and phasing them out forced them to buy ordinary equities at a time when the Australian share market was at a record high.
“So they are taking on more risk for less return,” he told Azzet.
He agreed with Joye that APRA wrongly considered these securities to be a “ticking time bomb” and was trying to avoid responsibility for “cleaning up”.
“His view and our view was it was unlikely there was going to be a mess, the planner said.
“At the end of the day the regulator can write rules and regulations. The trouble is honest people abide by them but the crooks never abide by them.”
But Sonas Wealth financial planner and self-managed super fund (SMSF) specialist Liam Shorte had sympathy for the regulator’s position, saying APRA had become worried about the volume of hybrids being sold to “mums and dads” who saw them as akin to term deposits when in fact they carried more risk.
“My feeling was the Government stepped in and was trying to protect people and not make people responsible for their own decisions. The whole world has got to the stage where if anything goes wrong, people are looking for someone to blame,” he said.
APRA acknowledged concerns raised about impacts, including investors losing access to AT1 as an investable product, but said AT1 did not effectively do what it was intended to do: absorb losses while the bank is a going concern and support resolution.
“While Australia’s banks are unquestionably strong, overseas experience has shown AT1 doesn’t operate as intended during a crisis due to the complexity of using it, the potential for legal challenges and the risk of causing contagion,” APRA Chair John Lonsdale said in a media release.
Finding replacements
Lonsec Manager Fixed Income Michael Elsworth said the phase-out of hybrid securities had created a challenge for investors accustomed to the income and franking credits generated by these securities.
He said hybrid securities carried greater credit risk than typical corporate bonds due to their subordinated status and tail risk, including potential conversion to equity and material capital losses.
“There has been no shortage of replacement assets offered up by market participants,” Elsworth said in this article.
He nominated government, corporate and high-yield bonds, offshore bank and corporate hybrids, subordinated debt and managed funds.
Wilson said retirees and those with SMSFs would pay the greatest price by pushing them up the risk curve.
If forced to divert their hybrid investment towards bank equities in search of a comparable yield, they will be taking on more risk.
At the time of his opinion piece on 18 December 2024, he saw it as the wrong time in the valuation cycle because the banking sector was trading at all-time high valuations.
It has eased since then.
“If APRA genuinely wanted to de-risk the system for retail investors, they need to allow retail investors to move up the capital debt structure into senior debt or subordinated debt,” Wilson wrote.
In its submission, WAM objects to the proposed phase-out of retail access to bank hybrids due to their important role in retail investors' portfolios and banks’ capital structures.
It said retail investors represented around 20% to 25% of the $40 billion plus bank and insurance ASX listed hybrid market, held mainly through self-managed super funds (SMSFs).
“Hybrids are very popular with Australian retail investors, as they offer higher-yielding franked income streams with both debt and equity characteristics,” WAM wrote.
“The removal of these securities from the retail investors' investment universe deprives their investment portfolio of diversification benefits with respect to risk and returns.
“It would also reduce valuable franked income streams, especially for retirees and those in SMSFs."
Phasing out access to bank hybrid securities will result in the exclusion of retail investors from an important Australian fixed-income type product because they do not have access to wholesale, unlisted, subordinated debt.
If the changes push investors towards higher risk options, they can buy equity or debt as a replacement, which offers a different risk profile.
“Removal of such options could force investors to move up the risk curve, eg, towards retail dominated bank equities that are generally riskier than bank hybrids,” according to WAM.
The senior planner said when the decision was announced, a lot of money went into the Perpetual Credit Income Trust (ASX: PCI), Betashares’ Australian Bank Senior Floating Rate Bond ETF (ASX: QPON) and Betashares’ Active Australian Hybrids Fund (ASX: HBRD).
But he was more concerned about a recent increase in Facebook advertisements offering bills of exchange as investments that were outside the Securities Act and could be offered without a financial licence.
Younger people may be attracted to them because they realised they could not afford to buy a home and were inclined to “punt”.
“That’s a worry. The advertising is schmick. It’s very nice and it’s always couched as a substitute to a term deposit,” he said.
Macquarie Asset Management’s Head of Exchange Traded Funds (ETFs), Blair Hannon, said fixed income ETFs and bond funds were emerging as potential replacements for hybrids.
“Over time, ETFs have become a way to access bonds, which were otherwise difficult for retail investors," he said in an interview in August 2025.
He said investors in hybrids could be confident the banks would repay them because APRA expected it.
“That capital will flow into cash first. From there, people might consider term deposits, cash at call, or other cash products. Bonds are another option, though again, accessibility is an issue unless you use ETFs or managed funds,” Hannon said.
