Ability to issue MCIs

Why are we asking you to vote on MCIs?

Teachers Mutual Bank Limited has been in a strong financial position since it was established more than 50 years ago. As a result, we currently have no plans to issue MCIs. 

However, we think it’s important to take advantage of the opportunities these reforms present, which is why we need you to vote in favour of the necessary updates to our Constitution.

The proposed updates to the Constitution:

• legally confirm our ability to potentially issue MCIs at some stage in the future
• give our Board the authority to issue MCIs
• identify the rights and obligations of MCI holders.

Importantly, these amendments will not affect our mutual status now or in the future.

These updates to the Constitution are supported by the Members Committee for Teachers Mutual Bank Limited.

How will this benefit our Members?

The aim of MCIs is to level the playing field in the banking sector, making it easier for member-owned organisations such as ours to compete and grow while maintaining our mutual status.

If the Board decides that the Bank should issue MCIs, it will likely be so we can respond to changes in the industry for the benefit of our Members or to answer Member demand for new products or services. Importantly, we will have the option to raise equity without the need for demutualisation. Many other mutual organisations have had to demutualise to raise the capital they need to compete.

What are MCIs?

To support co-operatives, mutuals and member-owned organisations such as ours, the Federal Government initiated an investigation into legislative reforms that could be made to help the mutual sector be more competitive.

The Senate inquiry and independent review (known as the Hammond Review)¹  looked into the challenges member-based organisations face in raising capital and other issues. The conclusion was that member-owned organisations were not as readily able to raise capital as other organisations, and this affected their ability to grow, innovate and compete.

All entities need capital in order to grow their businesses. In the case of banks, this growth may include offering new products and providing more or better services. However, historically, mutual organisations have only been able to raise funds or capital by retaining profits.

Following the Hammond Review, the Commonwealth Government passed legislation in 2019²  that provides mutual entities another way to raise capital without affecting their mutual status – the Corporations Act now allows mutual entities to raise equity by issuing ‘mutual capital instruments’ (MCIs).

MCIs are a type of share which can be issued by mutuals who satisfy the new Corporations Act definition of “mutual entity”. Our mutual satisfies this definition, i.e. the Bank is a mutual entity under the Corporations Act. The option to issue MCIs provides us with greater flexibility to raise capital in the best interests of our member shareholders. But we need to update our Constitution to be able to issue these MCIs.

MCIs would be perpetual (i.e. they would have no maturity date), so they would be a form of permanent capital in a mutual entity like ours. A dividend would only be payable on an MCI if the directors decide to pay a dividend. Once issued, MCIs would be tradeable between investors assuming there is a market for them.

Is Teachers Mutual Bank Limited going to issue MCIs?

Teachers Mutual Bank Limited has no current plans to issue Mutual Capital Instruments, or MCIs.

The change to Teachers Mutual Bank Limited’s constitution to permit issuance of MCIs will give the bank the flexibility to issue MCIs should it be necessary or desirable.

Any decision to issue MCIs would need to be approved by the Board of Directors, who would need to determine that this decision was in the best interests of the bank and its members.

Any issuance of MCIs would also be subject to obtaining the necessary regulatory approvals. At that time, should MCIs be issued, it will be the decision of the Board of Directors to determine the terms of issue for those MCIs.

How will MCIs benefit the Bank – and me?

The ability to issue MCIs is an important and positive step for mutual entities like ours.

The conditions within the banking industry can change quickly and responding to these changes can require a significant amount of capital.

If the Board of Directors decides that the Bank should issue MCIs, it will likely be so we can respond to changes in the industry for the benefit of our Members or to answer Member demand for new products or services.

Importantly, we will have the option to raise equity (instead of debt) without affecting our member-status.

As mutual organisations have been restricted in how we could raise funds or capital, our ability to grow and compete has been inhibited. Many other mutual organisations have demutualised to raise the capital they need to compete.

The aim of MCIs is to avoid this and level the playing field in the banking sector, making it easier for member-owned organisations such as ours to compete and grow while maintaining our mutual status.

Why do we need to update the Constitution and why now?

We’re committed to ensuring that no updates to the Constitution affect the Bank’s mutual status now or in the years ahead. These amendments will not affect the Bank’s mutual status.

For the Bank to compete effectively and ensure our sustainability in the years ahead, our first step will be to amend our Constitution to bring it into line with the new legislation and become an “MCI mutual entity”.

Essentially, we will add a statement into the Constitution confirming our ability to potentially issue MCIs at some stage in the future, and that the Board has the authority to issue MCIs. Other provisions required to be included to satisfy the Corporations Act and APRA requirements are also proposed to be included. These provisions are the same as the provisions which many other mutual entities have already included in their Constitutions since the MCI legislation was introduced in early 2019.

Is Teachers Mutual Bank de-mutualising?

No. Firstly and most importantly, Teachers Mutual Bank Limited will remain a mutual bank. As a mutual entity, the updates to Teachers Mutual Bank Limited’s constitution do not change the bank’s mutual status. They will permit the organisation to continue to invest, innovate, grow and compete, while maintaining its mutuality.

Will holders of MCIs be member shareholders of Teachers Mutual Bank Limited?

Should a decision be made by the Board of Directors in the best interests of the bank and its members to issue MCIs, at that time and as part of the terms of issue, the Board would decide who to issue MCIs to. These could include member shareholders and, or non-member shareholders of Teachers Mutual Bank Limited.

Will holders of MCIs be able to vote?

The Federal Government passed legislation allowing mutuals to issue MCIs for the purpose of raising permanent capital. This legislation ensures that an MCI shareholder cannot hold more than one vote at a general meeting, no matter how many MCIs they hold.

What do I need to do?

We’re asking all members to vote in favour of the proposed amendment to Teachers Mutual Bank Limited’s Constitution to permit issuance of mutual capital instruments (MCIs) at the upcoming AGM on Saturday 19 November 2022.

By doing so, you’ll help us grow and ensure the sustainability of your mutual bank into the future.

Who do I speak to for more information?

If you have specific questions about MCIs, please email [email protected].