An extract from The Banking Regulation Review, 11th Edition
The Australian banking industry is dominated by the big four banks – Commonwealth Bank of Australia Limited (CBA), Westpac Banking Corporation (Westpac), National Australia Bank Limited (NAB) and Australia and New Zealand Banking Group Limited (ANZ) – which are by far the largest banks in Australia by total assets, accounting for almost 80 per cent of total bank assets. The big four banks also make up four of the six largest entities by market capitalisation listed on the Australian Stock Exchange. Other institutions, including mutual financial institutions, local operations of foreign banks (whether operating through a local subsidiary or not) and specialist financial services providers, also carry on banking business in Australia. The Australian banking industry is globally connected, with the big four banks (and Macquarie Group Limited) having operations overseas and most global banking groups having operations in Australia. Recently, the conduct of banks towards their customers has been the subject of intense public scrutiny through the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Banking Royal Commission), which exposed considerable misconduct in the financial sector and recommended a number of law reforms currently being consulted on and implemented in relation to consumer lending and non-banking financial services commonly provided by banks in Australia.
The regulatory regime applicable to banks
The Australian Constitution grants the national (federal) legislature legislative power with respect to banking, other than state banking within the boundaries of the state concerned. Banking business has long been held to be the taking of deposits from customers on loan, to be repaid on demand or as otherwise agreed between the lender and the customer, and the utilisation of that money in the interim by the lending of it. Deposit-taking is the essential element of banking. This definition is substantially replicated in legislation. This limited concept of banking business is relevant when considering the Australian regulatory environment.
Australia has a twin peaks approach to financial sector regulation: the Australian Prudential Regulation Authority (APRA) is responsible for financial system stability and depositor protection and the Australian Securities and Investments Commission (ASIC) is responsible for market conduct and consumer protection.
The Reserve Bank of Australia (RBA) is also involved as the central bank, lender of last resort and facilitator of interbank settlements, and in regulating payment systems.
A person may only carry on banking business in Australia if authorised by APRA to do so. Unless it otherwise determines, APRA may only authorise bodies corporate (and not other kinds of corporate structures) to engage in banking business. Bodies corporate authorised by APRA are called authorised deposit-taking institutions (ADIs).
Banking business is regulated separately from the provision of financial services. This includes insurance, securities dealing, fund management, underwriting, stockbroking, custodial and depositary services, and advisory services. Financial services are regulated separately by ASIC, and in most cases require an Australian financial services licence (AFSL). ADIs must obtain an AFSL to provide financial services, although the power to impose or revoke conditions on the AFSL that would affect the ADI's ability to carry on its banking business are removed from ASIC and vested in the Minister for Financial Services personally.
For most purposes, the provision of credit is not a financial service and does not require an AFSL. Consumer credit activities are regulated separately by ASIC. Persons who wish to provide credit to consumers require a credit licence issued by ASIC. ADIs must hold a credit licence to lend to consumers, although they are entitled to this licence as of right.
In considering whether to grant ADI authorisation to an applicant, APRA will consider the following factors:
- capital: applicants must be able to comply with the capital adequacy requirements imposed by APRA;
- ownership: applicants (or their holding companies) must comply with the ownership restrictions in the Financial Sector (Shareholdings) Act 1998 (Cth) (discussed below), and all substantial shareholders must be fit and proper in the sense of being well-established and financially sound entities of standing and substance;
- governance: applicants must satisfy APRA prudential standards concerning corporate governance, and have policies in place to ensure that key office holders are fit and proper persons;
- risk management and internal controls: applicants must satisfy APRA that these are adequate and appropriate for limiting risk exposures from their operations;
- compliance: applicants must have compliance processes and systems in place that are adequate and appropriate for ensuring compliance with APRA prudential standards and other regulatory requirements;
- information and accounting systems: these must be adequate to maintain up-to-date records of all transactions, to keep management continuously and accurately informed of the ADI's condition and to comply with reporting obligations;
- audit: internal and external audit arrangements must satisfy APRA prudential standards; and
- for foreign bank applicants, the standard of supervision in their home jurisdiction and the consent of their home supervisor.
In an effort to increase competition in the banking industry, APRA allows applicants to apply to be authorised as a restricted ADI (RADI). RADIs are required to hold significantly less capital than full ADIs (the higher of 20 per cent of adjusted assets or A$3 million plus a winding-up reserve) and are subject to less stringent prudential standards. However, RADIs may only accept protected deposits (see Section III) up to A$250,000 per customer and up to A$2 million in aggregate. RADI authorisation is only valid for up to two years, after which the RADI must either obtain full ADI authorisation or exit the industry. The RADI licensing scheme was introduced to make it easier for new ventures to enter the Australian banking industry without prejudicing the depositor protection and financial stability achieved by current prudential standards. Unless otherwise stated, references in this chapter to ADIs are references to full ADIs.
The provision of a purchased payment facility (PPF) – a facility purchased from another person that is able to be used for making payments up to the amount standing to its credit from time to time, and under which payments are made by the provider of the facility rather than the purchaser – or being the holder of stored value for a PPF is deemed by legislation to be carrying on banking business. Consequently, providers of PPFs (e.g., digital wallet services) are required to obtain ADI authorisation from APRA. However, the authorisation granted to PPF providers is typically subject to a condition limiting them only to providing PPFs and preventing them from lending money (other than incidental advances to customers in the course of providing a PPF).
ADIs in Australia are structured as bodies corporate. Mutual (customer-owned) financial institutions existing under state laws were, from 1 July 1999 onwards, converted to companies limited by shares under the national corporations legislation. Notwithstanding their conversion to companies with share capital, mutual financial institutions are subject to additional disclosure requirements if their constitutions are to be amended to vary or cancel the rights of members or a class of members. On 6 April 2019, the Treasury Laws Amendment (Mutual Reforms) Act 2019 commenced, narrowing the scope of the definition of mutual entities and making it easier for them to raise capital from external sources.
Financial institutions may be corporate groups. It is only the entity carrying on banking business – that is, accepting deposits from customers – that must be an ADI. Other entities in the corporate group can provide other non-banking services that are typically provided by banks in Australia, such as securities dealing, wealth management, wholesale debt issuance and insurance. The ADI may be either the holding company or a subsidiary within the corporate group. If a holding company is not an ADI, APRA may authorise it to be a non-operating holding company (NOHC) of an ADI. If a prospective ADI is a subsidiary of another body corporate, APRA may refuse to grant it authority to carry on banking business unless the body corporate of which it is a subsidiary is authorised as a NOHC. NOHC authorisation subjects the holding company to the ownership restrictions in the Financial Sector (Shareholdings) Act 1998.
Foreign banks may enter the Australian banking industry either by obtaining ADI authorisation for a local subsidiary or by obtaining authorisation to carry on banking business through a branch in Australia (the latter is called a foreign ADI in the Banking Act; the former is in reality a local ADI but with a foreign owner). A local subsidiary ADI of a foreign bank is subject to the same capital requirements and other prudential standards as a locally owned ADIs. Local branches of foreign banks are not subject to any capital requirements, but APRA imposes a condition on their ADI authorisation prohibiting them from accepting initial deposits of less than A$250,000 from individuals (other than their employees) and unincorporated entities. If a foreign bank wishes to accept retail deposits, it must establish a local subsidiary.
APRA is a statutory body corporate established for the purposes of regulating bodies in the financial sector in accordance with laws providing for prudential standards or for retirement income standards, and administering the financial claims scheme (FCS) provided for in the Banking Act 1959 and Insurance Act 1973 (the FCS is discussed in Section III). In performing its functions, APRA is obliged to balance the objectives of financial safety, efficiency, competition, contestability and competitive neutrality; and promote financial system stability in Australia.
In performing its functions and exercising its powers, APRA is also required to support New Zealand authorities in meeting their statutory responsibilities for prudential regulation and financial system stability and, to the extent reasonably practicable, to avoid any action that is likely to have a detrimental effect on financial system stability in New Zealand.
APRA seeks to maintain a low incidence of failure among its regulated institutions, while not hindering competition and efficiency gains. Its stated strategic priorities for 2019 to 2023 are:
- improving and broadening risk-based supervision;
- improving resolution capability;
- improving external engagement and collaboration;
- transforming data-enabled decision making; and;
- transforming leadership, people and culture.
APRA, together with the RBA, ASIC and the Federal Treasury, is a member of the Council of Financial Regulators. The Council of Financial Regulators is a coordinating body for Australia's main financial regulators, facilitating the sharing of information between regulators and their cooperation on matters of common concern. The four members of the Council of Financial Regulators are also members of the Trans-Tasman Council on Banking Supervision, along with the New Zealand Treasury, the Reserve Bank of New Zealand and the New Zealand Financial Markets Authority. The Trans-Tasman Council on Banking Supervision aims to support the development of a single economic market in banking services between Australia and New Zealand, and to promote a joint approach to trans-Tasman banking supervision and crisis resolution.
Internationally, APRA and the RBA represent Australia on the Basel Committee on Banking Supervision and the RBA and federal Treasury represent Australia on the Financial Stability Board.
ADIs with total liabilities of A$100 billion (in July 2017-equivalent values; the threshold is indexed quarterly) in any quarter are subject to a quarterly tax – the Major Bank Levy – of 0.015 per cent of their total liabilities, adjusted to exclude Additional Tier 1 (AT1) capital, FCS-protected deposits, net derivatives liabilities and their exchange settlement account balance with the RBA. The high level of concentration in the Australian banking industry means that the Major Bank Levy is only payable by the big four banks plus Macquarie Group Limited (a NOHC, the ADI being Macquarie Bank Limited), with other ADIs at little risk of exceeding the A$100 billion liabilities threshold. The Major Bank Levy was imposed to reduce the competitive advantage that the major banks derive from their size and greater access to international capital markets, as well as to extract a contribution from them for the implicit subsidy they receive from perceptions of being too big to fail.