House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Glossary

The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

General outline and financial impact

Restrictions on shareholdings

To support new entrants to the financial services market, the 15 per cent ownership restriction applying to insurance companies (life insurance and general insurance companies), Authorised Deposit-taking Institutions (ADIs) - broadly banks, credit unions and building societies, and relevant holding companies under the Financial Sector (Shareholdings) Act 1998 (FSSA) will be increased to 20 per cent. Appropriate safeguards to protect consumers and financial system stability against risks associated with concentrated ownership of financial sector companies are maintained including a fit and proper test.

Date of effect: Royal Assent

Proposal announced: This Schedule partially implements the measure A more accountable and competitive banking system from the 2017-18 Budget.

Financial impact: Nil

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.1 to 3.11.

Compliance cost impact: Nil

Restricted ADI licences

To encourage greater competition in the banking sector and allow start-up banks to enter the market at an earlier stage than is currently possible, new entrants will be allowed to operate subject to considerable concessions coupled with a time limited restriction on the ADI licence. A key restriction is that the ADI licence will be granted subject to a time limit. While concessions to the prudential framework apply, a Restricted ADI will be subject to further restrictions on their ADI licence in order to limit risk to depositors and financial stability.

Date of effect: Royal Assent.

Proposal announced: In the 2017-18 Budget, the Government announced its support for APRA's proposed licensing review. On 4 May 2018, APRA announced the commencement of its restricted ADI licence framework. This Schedule implements changes required to operationalise that framework.

Financial impact: Nil.

Human rights implications: This Schedule does not any human rights issue. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.12 to 3.18.

Compliance cost impact: Nil.

Chapter 1 Restrictions on shareholdings

Outline of chapter

1.1 To support new entrants to the financial services market, the 15 per cent ownership restriction applying to insurance companies (life insurance and general insurance companies), Authorised Deposit-taking Institutions (ADIs) - broadly banks, credit unions and building societies, and relevant holding companies under the Financial Sector (Shareholdings) Act 1998 (FSSA) will be increased to 20 per cent. Appropriate safeguards to protect consumers and financial system stability against risks associated with concentrated ownership of financial sector companies are maintained including a fit and proper test.

1.2 This Schedule also introduces a streamlined FSSA approval path for owners of domestically incorporated companies applying to become a new financial sector company (or those proposing to acquire shares in entities licensed by the Australian Prudential Regulation Authority (APRA) for fewer than five years). These owners may be eligible to receive streamlined approval to hold a stake of more than 20 per cent where certain criteria are met.

1.3 These criteria include a fit and proper assessment of the prospective owners and maximum asset holdings of the entity sought to be acquired.

1.4 Removing perceived barriers to entry in the sector should encourage greater start-up activity with the intention of increasing competition and offering consumers more choice in this critical part of the Australian economy.

Context of amendments

1.5 The FSSA operates independently to the Foreign Acquisitions and Takeovers Act 1975 to provide an upper limit restricting the allowable shareholdings of an ADI or an authorised insurance company (as authorised under the Insurance Act 1973 and registered under section 21 of the Life Insurance Act 1995, respectively).

1.6 Currently, the FSSA outlines that an unacceptable shareholding situation will exist for a financial sector company (defined in the FSSA as an ADI, an authorised insurance company or a 100 per cent holding company) if a person has shareholdings exceeding the legislated percentage amount or shareholdings which exceed the higher approved percentage made in accordance with Division 3 of the FSSA.

1.7 A higher percentage approval is required to exceed the minimum acceptable shareholding amount. To receive this, a person must apply to the Treasurer for approval to hold more than the legislated shareholding limit in a financial sector company (either at the time of market entry or following a change of ownership). Approval can be granted if the Minister determines it to be in the 'national interest'.

Summary of new law

1.8 To encourage more participation and greater competition in the financial sector market, the shareholding rules are amended to increase the minimum shareholding amount requiring approval from 15 to 20 per cent.

1.9 In addition, the Schedule creates a streamlined path for owners of domestically incorporated companies with assets less than the relevant threshold applying to become a financial sector company. This will enable owners who are found to be fit and proper persons to hold a stake of more than 20 per cent in a qualifying new or recently established financial sector company.

1.10 All references in this explanatory memorandum are to the Financial Sector (Shareholdings) Act 1998 unless otherwise specified.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 This Schedule puts in place a higher shareholding threshold under the FSSA, increasing the percentage of permitted ownership from 15 per cent to 20 per cent. This applies in relation to a financial sector company or a holding company of a financial sector company where the financial sector company is a 100 per cent subsidiary of the holding company. This increase balances the desire for increased competition in the financial sector market with the need to maintain appropriate checks and best ensuring financial system stability. [Schedule 1, items 2 to 8 and item 12, Part 2, Division 2, Division 3, sections 10 and 13]

1.12 The increase to a 20 per cent shareholding removes a misalignment between the 15 per cent ownership cap under the FSSA before Ministerial approval is required, and the 20 per cent foreign ownership threshold that exists under the Foreign Acquisitions and Takeover Act 1975 (FATA). There is limited policy rationale for this discrepancy and consistency between the thresholds in each Act will simplify investment in Australia's financial system and further signal the Government's commitment to encouraging new entrants to the sector.

1.13 The Bill gives the Treasurer the power to approve an unacceptable shareholding arrangement if the applicant is able to satisfy the Treasurer that holding a stake of more than 20 per cent is in the national interest.

1.14 In addition to amending the threshold for approvals from 15 per cent to 20 per cent, this Schedule also puts in place a new streamlined path for owners of qualifying domestically incorporated companies that are seeking to become a financial sector company. It is expected that only a minority of FSSA applications will be eligible to access this path.

1.15 If a company is incorporated in Australia and is not yet a 'financial sector company' but is seeking authority under:

(i)

the Banking Act 1959 to carry on banking business;

(ii)

authorisation under the Insurance Act 1973 to carry on an insurance business; or

(iii)

registration under the Life Insurance Act 1995 to undertake a life insurance business (any of which, if granted, would make the company a financial sector company),

or has been licensed as a financial sector company for fewer than five years [Schedule 1, item 16, subsections 14A(3) and 14A(4)], and the company meets the asset threshold test described below, the owners may apply to the Treasurer, using the streamlined FSSA approval path, for authority to hold a stake in excess of 20 per cent.

New or recently established financial sector company

Asset threshold

1.16 There is an asset threshold that must be met before an owner will be able to seek authorisation under the streamlined path for new entrants.

1.17 In relation to an ADI or a company registered under section 21 of the Life Insurance Act, the value of the total resident assets of that company must be less than the assets threshold of $200 million or any amount prescribed by the Treasurer in a legislative instrument. [Schedule 1, item 16, subsections 14A(6) and 14A(8)]

1.18 If the relevant company is authorised under the Insurance Act, the asset threshold applying in relation to the streamlined path is total resident assets of $50 million, or another amount as prescribed by the Treasurer in a legislative instrument. [Schedule 1, item 16, subsections 14A(7) and 14A(8)]

1.19 Enabling the Minister to prescribe different amounts in the rules builds into the regime a flexibility to ensure that the scheme, and thresholds, remain relevant into the future. This is consistent with the overarching theme of encouraging new entrants into the financial sector.

1.20 The instrument making power only applies in relation to the dollar amount of the threshold and not any other factor affecting the decision making process. That is, the only variation that may be made to the primary legislation via instruments made under subsection 14A(8) will be to increase (or decrease) the threshold amount. In the circumstances, and in the interests of ensuring that the threshold be able to respond to a rapidly changing market, it is appropriate to insert a so-called 'Henry VIII clause'.

1.21 Rules must be made by APRA which set out the meaning of total resident assets [Schedule 1, items 16 and 45, subsection 14A(5) and section 45A]. It is expected that these rules will refer to the approach to determine total assets as reported by financial sector companies in compliance with Reporting Standard ARS 320.0, made under section 13 of the Financial Sector (Collection of Data) Act 2001.

1.22 Approval under the streamlined path is subject to a 'fit and proper' test.

Fit and proper test

1.23 Owners must be able to demonstrate that they meet a fit and proper person test.

1.24 This test will be set out by APRA in a legislative instrument. The Government expects that APRA will consult with industry prior to finalising the fit and proper rule. Ministerial consent is also required prior to APRA making a rule under the FSSA. [Schedule 1, items 16 and 45, subsection 14A(2) and section 45A]

1.25 Subsection 45A(3) merely clarifies that the Minister's consent to make a rule under section 45A is not a legislative instrument. By virtue of the application of subsection 8(4) of the Legislation Act 2003, the Treasurer's consent to APRA making the rules is distinguished from the Treasurer determining the content of the law itself. [Schedule 1, item 45, subsection 45A(3)]

1.26 If at any point in time, the Treasurer is satisfied that a person is no longer considered a fit and proper person, the Treasurer may revoke an approval. This revocation is not subject to merits review. [Schedule 1, item 25, paragraph 18(1)(d)]

1.27 It is appropriate that the Minister's decision is not subject to merits review and this is consistent with the Administrative Review Council (ARC) principles articulated in the publication What decisions should be subject to merits review? In particular, chapter 4 of that publication, relating to "Factors that may justify excluding merits review", notes that where a significant public interest lies in the decision not being reviewable, excluding merits review may be justified.

1.28 In this case, the Minister would only remove a person's authority if that person was no longer considered to be a fit a proper person to run a financial sector company. As financial sector companies include banks (authorised deposit-taking institutions) and insurance companies, it is important both in the interests of individual deposit or policy holders, as well as the stability of the financial sector more generally, that these types of companies only be associated with persons who would meet a fit and proper test. If an owner fails to meet that test, then the Minister's ability to quickly revoke the authority is important, both to secure the interests of individuals who may be impacted but also the broader interest in ensuring Australia maintains a strong financial services sector.

1.29 Therefore, there is a "significant public interest element" in relation to these decisions of the Minister including the need to take rapid action to ensure that investor confidence in the Australian banking system, for example, is maintained and that a run on any affected bank's deposits is avoided. It is expected that such an action would be unusual and would occur after APRA has worked closely with the affected financial sector company and the relevant shareholder in order to rectify any issues it has identified within the company.

1.30 However, if a shareholder with a one fifth interest in a bank was considered by the regulator APRA and the Minister not to have the requisite character to hold shares in that bank, the decision to revoke the Shareholdings Act approval and require the shareholder to divest their interest to bring that interest back to an acceptable shareholding must occur without the ability of the shareholder to stall and hold up the Minister's decision by seeking merits review. Confidence of depositors and the banking sector more generally could be significantly impacted if the actions of a shareholder were to jeopardise the savings of affected deposit-holders.

Time limit

1.31 If the owners are able to meet the fit and proper test, then the relevant company must be either a company that has applied to be a financial sector company or a company that has been a financial sector company for less than 5 years. [Schedule 1, item 16, subsections 14A(3) and (4)]

1.32 If a financial sector company is able to meet the threshold tests, outlined below, but has been a financial sector company for greater than 5 years, then these changes will not apply to it. The amendments are designed to assist new entrants to the financial sector.

Additional conditions applying to FSSA approvals for newly established financial sector companies

1.33 Approvals granted under the streamlined path are also subject to any conditions that may be applied by the Treasurer in granting the approval. [Schedule 1, item 25, subsection 16A(1)]

1.34 In addition, the following conditions apply to all streamlined approvals granted under paragraph 14(1)(b):

•

notifying the Treasurer in writing if the assets threshold is breached;

•

five yearly review of the ownership structure of the relevant financial sector company; and

•

yearly reporting of information to APRA.

Notification if the assets threshold is exceeded

1.35 Owners of domestically incorporated companies approved under the streamlined path will remain bound by the assets thresholds noted above (at paragraphs 1.16 to 1.20) with approval conditional on the entity holding assets of lesser value than prescribed. When a financial sector company breaches these asset thresholds, and the company has a shareholder who is an owner with a streamlined FSSA approval (granted under paragraph 14(1)(b)), the financial sector company is obliged to provide the owner with a notice advising that the company has breached the asset threshold. [Schedule 1, item 35, section 21A]

1.36 Once the owner is made aware that the company has exceeded the assets threshold, the owner must give a written notice of this to the Treasurer within 30 days and that notice should specify whether the owner intends to reduce their stake in the financial sector company or if they intend to apply for an approval under paragraph 14(1)(a), subject to the national interest test. [Schedule 1, item 25, subsection 16A(2)]

Five yearly review of ownership structure

1.37 Where an approval is granted under the streamlined path provided by paragraph 14(1)(b), APRA will review the ownership structure of the financial sector company that is the subject of the FSSA approval.

1.38 This review will occur at the end of each 5 year period following the initial approval being granted. The intention behind these reviews is to ensure that the ownership structure remains appropriate for the financial sector company and gives APRA an insight into any issues that may be arising within the company relating to the ownership. [Schedule 1, item 25, subsection 16A(3)]

Yearly reporting of information to APRA

1.39 The final condition on all streamlined approvals is the provision of a yearly report to APRA to advise the regulator of any prudential information that is relevant to the ongoing operation of the approval. These reports must be submitted by the approval holder. [Schedule 1, item 25, subsection 16A(4)

1.40 The report must be in the approved form and contain the information (if any) prescribed in rules made by APRA. The report must be provided to APRA within 30 days. [Schedule 1, item 25, subsection 16A(5)]

Duration of approval under the streamlined path

1.41 If an approval has been granted to owners under the path outlined above (see paragraphs 1.14 - 1.15) these approvals generally remain in place until the end of two years after the value of the total resident assets of the financial sector company first exceeded the assets threshold applying to a company of that type. After this time, without divestment, an unacceptable shareholding situation would exist. [Schedule 1, item 22, section 15A]

1.42 In practice this means that an approval holder will have two years to rectify the unacceptable shareholding situation by either divesting their shares or seeking approval to hold the higher stake.

1.43 If the approval holder is unable to divest their interest in order to have less than a 20 per cent ownership stake in the relevant company, the approval holder may seek to maintain their current shareholding (or an amount higher than 20 per cent) via an application under paragraph 14(1)(a) which is subject to the national interest test.

1.44 If the approval holder applies for approval under paragraph 14(1)(a) within 90 days of the day that is two years after the value of the total resident assets of the financial sector company first exceeded the assets threshold, the streamlined approval originally given under the streamlined approach will remain in force for varying periods depending on the outcome of the application (see paragraphs 1.38 to 1.41).

1.45 If the application is refused, then the approval holder will have two years from the date the application was refused in order to rectify the unacceptable shareholding arrangement. Within that period, the original approval granted under section 14(1)(b) will continue to apply. [Schedule 1, item 22, paragraph 15A(2)(a)]

1.46 When seeking an application under section 14, an applicant may be requested by the Treasurer to provide further information (under section 20 of the FSSA). If the applicant is unable to provide or does not provide the Treasurer with the additional requested information, then the application will be taken to have been withdrawn by the applicant. [Schedule 1, item 34, subsection 20(4)]

1.47 In these cases, the approval holder will have two years from the date the application is taken to have been withdrawn to rectify the unacceptable shareholding situation. [Schedule 1, item 22, paragraph 15A(2)(b)]

1.48 Where an approval holder's application under the national interest test is granted by the Treasurer, then the existing application that applied before the assets threshold was exceeded and the shareholding situation became unacceptable, will apply until the new approval comes into effect. [Schedule #, item 22, paragraph 15A(2)(c)]

1.49 If the approval holder applies for approval under paragraph 14(1)(a) 90 days after the day that is two years after the value of the total resident assets of the financial sector company first exceeded the assets threshold, and the application is granted within two years, the original approval given under the streamlined process will remain in force until the new approval comes into force. [Schedule 1, item 22, subsection 15A(3)]

1.50 If an approval under the FSSA ceases to be in force, the Treasurer must notify the public via publication in the Gazette and notify the financial sector company concerned. [Schedule 1, item 22, subsection 15A(5)]

Flow-on approvals relating to new or recently established financial sector companies

1.51 If an owner has an approval to hold a stake greater than 20 per cent in a financial sector company under the streamlined path provided by paragraph 14(1)(b) and the financial sector company is the holding company of the relevant licensed company for the approval, the approval holder is considered to also have an approval in place in respect of the relevant licensed company and any financial sector company that is both a 100 per cent subsidiary of the holding company and a holding company of the relevant licensed company. [Schedule 1, item 33, section 19A]

1.52 These flow-on approvals ensure that owners are able to hold an interest in a financial sector company via a holding company, provided that the financial sector company remains a 100 per cent subsidiary of the relevant holding company.

1.53 However, if the relevant licensed company subject to the approval ceases to be a 100 per cent subsidiary of the holding company, then the approval that was in force will continue for 90 days after the day the ownership structure of the licensed company changes.

1.54 The owner may also seek approval under a new application to continue to hold an interest exceeding 20 percent in the relevant licensed company. If a further approval is obtained, then the existing approval (under the streamlined path) will continue in force until the new approval commences. [Schedule 1, item 33, section 19A]

Civil penalties

1.55 The Regulatory Powers (Standard Provisions) Act 2014 provides the framework for enforcement of civil penalties under the FSSA. [Schedule 1, items 40 and 41, sections 41A and 43A]

1.56 Penalties can be sought by the Treasurer or APRA where a financial sector company has failed to report that it has breached the assets threshold applying to it. The relevant company will have seven days within which to provide APRA with a report which details their total resident assets and the report must specify the day on which the threshold was breached.

1.57 This is important as the first day the threshold was breached interacts with the duration of an approval granted under the FSSA. As outlined above, once an approval holder is notified by the financial sector company that the company has breached the relevant assets threshold, the approval holder must decide whether to divest their shareholdings or seek an approval under the national interest test (see paragraphs 1.34 to 1.43).

APRA rules

1.58 APRA has been provided with the power to make rules with respect to matters that are required or permitted by the FSSA. These rules will include the information required in the yearly report that must be provided to APRA by the holder of an approval under the streamlined path. [Schedule 1, items 25 and 45, subsection 16A(5) and section 45A]

1.59 The rules must also prescribe the meaning of total resident assets in order to provide certainty to financial sector companies so they are able to meet their obligations to advise the holder of an FSSA approval that the company has breached the assets threshold applying to that type of company. [Schedule 1, items 16 and 45, subsection 14A(5) and section 45A]

1.60 The Schedule clarifies the scope of APRA's rule making power, including noting that it does not extend to creation of an offence or civil penalty. [Schedule 1, item 45, subsection 45A(5)]

1.61 Ministerial consent to the rules will be required so that the Minister retains oversight of the rule making process. The Minister is prevented from delegating his or her power to consent to the making of the rules. The rules are also legislative instruments, providing the Parliament with the ability to oversight and, if it views appropriate, disallow the rule. [Schedule 1, items 44 and 45, subsection 44(1A) and section 45A]

1.62 As noted above at paragraph 1.25, subsection 45A(3) merely clarifies that the Minister's consent to make a rule under section 45A is not a legislative instrument. By virtue of the application of subsection 8(4) of the Legislation Act 2003, the Treasurer's consent to APRA making the rules is distinguished from the Treasurer determining the content of the law itself.

1.63 Subsection 45A(4) provides that despite subsection 14(2) of the Legislation Act APRA rules may make provision in relation to a matter applying, adopting or incorporating, with or without modification, any matter contained in an instrument or other writing as in force from time to time. [Schedule 1, item 45, subsection 45A(4)]

1.64 In order to ensure that affected persons are readily able to understand their rights and obligations at law, and to access justice, any materials incorporated by reference in this way will be publicly available. The types of materials that may be incorporated by reference might include publicly available prudential standards published by APRA.

1.65 Further consequential amendments are made in order to ensure internal consistency within the FSSA. [Schedule 1, item 2, items 9 to 11 and item 13, items 17 to 21, items 23 and 24, items 26 to 32, items 36 to 39, items 42 and 43, item 46 and 47]

Application and transitional provisions

1.66 The amendments made by this Schedule apply the first 1 January, 1 April, 1 July or 1 October to occur after the end of the period of 2 months beginning on the day this Act receives the Royal Assent.

1.67 Transitional provisions are enacted to clarify the application of the changes to existing applications and approvals.

Existing approvals to hold a stake of more than 20 per cent

1.68 Item 48 of the Schedule provides that an application approving a shareholding exceeding 20 per cent that was made under section 14 of the FSSA and remains in force immediately before the commencement of these amendments, continues in force and is not affected by the amendments. [Schedule 1, item 48]

1.69 Similarly, if a shareholding exceeding 20 per cent has been approved under section 14 and the applicant has made an application:

•

to obtain an extension of the period of approval under subsection 15(2); or

•

in relation to the conditions to which the approval is subject under paragraph 16(3)(b) or

•

to vary the percentage specified in the approval under subsection 17(1)

1.70 The shareholding approval remains in force and the application continues to be pending approval. [Schedule 1, item 48]

Existing approvals to hold a stake of more than 15 per cent but less than 20 per cent

1.71 Item 49 of the Schedule provides transitional guidance where an applicant has an existing approval to hold an ownership stake of more than 15 per cent but less than 20 per cent under the FSSA.

1.72 In this case, unless the applicant has sought to vary the shareholding amount above 20 per cent by application to the Treasurer, made before the commencement of these provisions, then the approval is no longer required and ceases to have effect. [Schedule 1, item 49]

1.73 If an approval holder is entitled to hold a shareholding between 15 per cent and 20 per cent prior to the commencement of this Schedule and the approval holder has applied under subsection 17(1) to vary the percentage of ownership above 20 per cent but a decision on this application is still pending, the application continues to have effect. [Schedule 1, item 49]

1.74 If the application to vary above 20 per cent is not approved, the original approval will cease to have effect as it applies to a shareholding below 20 per cent.

Pending application to approve more than 20 per cent shareholding

1.75 If an application has been made under section 13 of the FSSA before the commencement of this Schedule and the applicant is seeking approval to hold a stake of greater than 20 per cent in a financial sector company, the approval will be taken to have been made pursuant to the national interest test in paragraph 14(1)(a) of the FSSA. [Schedule 1, item 50]

Pending application for approval below 20 per cent but more than 15 per cent

1.76 If an applicant has sought approval under section 14 of the FSSA for a shareholding below 20 per cent and a decision on that approval is still pending on the commencement of this item, the application is no longer required and the application is therefore taken never to have been made. [Schedule 1, item 51]

Notices requiring further information

1.77 Subsections 20(4) and (5) of the FSSA, as added by this Schedule, do not apply in relation to an application made under Division 3 of Part 2 of the FSSA before the commencement of this item. [Schedule 1, item 52]

Chapter 2 Restricted banking licences

Outline of chapter

2.1 To encourage greater competition in the banking sector and allow start-up banks to enter the market at an earlier stage than is currently possible, new entrants will be allowed to operate subject to considerable concessions coupled with a time limited restriction on the ADI licence. A key restriction is that the ADI licence will be granted subject to a time limit. While concessions to the prudential framework apply, a Restricted ADI will be subject to further restrictions on their ADI licence in order to limit risk to depositors and financial stability.

2.2 The Restricted ADI licence conditions will limit the banking business that an ADI operating under a time limited licence can carry on. The Restricted ADI will transition to an ADI licence that is not subject to a time limit or exit the industry before the end of the restricted period.

2.3 The long-standing ADI licence (not limited in duration) remains available to all applicants and is unchanged.

Context of amendments

2.4 To promote new entrants to the banking sector, an additional licensing route has been introduced. The Restricted ADI licence will impose appropriate prudential restrictions in return for providing eligible new entrants considerable concessions to the prudential framework for the restricted period. This will allow the Restricted ADI a period of time to build the full suite of resources and capabilities necessary to transition to an authority to carry on banking business as an ADI that is not subject to a time limit.

2.5 Taking into account the fact that these entrants to the market do not yet have the full suite of resources and capabilities, the Restricted ADI licence will give concessionary treatment designed to allow them time to develop their business operations, increase their capital base and comply with the full suite of prudential requirements that apply to ADIs. The prudential restrictions on the Restricted ADI licence will minimise risk to financial safety and financial system stability during the concessional restricted period.

2.6 With different prudential requirements applying to Restricted and existing ADIs, there are possible impacts on competitive neutrality. This is reduced by limiting the business that can be conducted during the period and providing a time limit on the Restricted ADI licence, with the Restricted ADI transitioning to meet the full framework or the Restricted licence terminating at the expiration of that time period.

2.7 The Restricted ADI can have the restrictions and time limitation removed at any time if it can establish that it is capable of carrying on banking business as an ADI under the full prudential framework. In this way all ADIs have a consistent bar for unrestricted banking operations.

2.8 A new entrant that is eligible for the Restricted ADI licence can alternatively apply for an ADI licence not subject to a time limit, but will need to fully meet the prudential framework from the outset.

Summary of new law

2.9 The Banking Act is amended to enable APRA to grant a time limited ADI licence. Under the Banking Act APRA is able to authorise a body corporate to carry on banking business. APRA can impose conditions on an authority pursuant to section 9AA of the Banking Act, provided that those conditions relate to prudential matters.

2.10 Doubt exists as to whether APRA could lawfully impose a condition under section 9AA of the Banking Act that limited the duration of an ADI authorisation. Clarifying that APRA may impose a time limit on an ADI licence granted to a new applicant will provide APRA with greater flexibility when considering applications for authority to carry on banking business from new entrants to the banking sector and will assist more entrants to be successful, fostering greater competition.

Comparison of key features of new law and current law

Detailed explanation of new law

2.11 The Banking Act is amended to provide for greater flexibility to encourage new entrants to the banking sector by enabling APRA to issue a time limited ADI licence. A body corporate seeking authority to carry on banking business in Australia can apply to APRA under section 9 of the Banking Act for an authority to carry on banking business and specify under section 9D that the authority is to be for a limited time. [Schedule 2, item 5, section 9D]

Application and variation of a time limited ADI licence

2.12 Initially, it is expected that APRA will provide authorities for eligible bodies corporate for a period of two years. However, APRA is provided with scope to grant an authority for a longer or shorter time period. This flexibility is important as it will enable APRA to balance the protection of depositors and financial system stability with the desire for a more open and competitive banking sector as the system evolves. [Schedule 2, item 5, subsection 9D(3)]

2.13 In order to provide clarity to both the body corporate seeking to become an ADI, and its future customers, all Restricted ADI licences must stipulate the day on which the authority ceases to have effect unless the authority is revoked at an earlier date. [Schedule 2, item 5, subsection 9D(2)]

2.14 At any point in time a Restricted ADI may seek an ADI licence under section 9 of the Banking Act that is not subject to a time limitation.

2.15 APRA may extend the time limited authority to provide the Restricted ADI with additional time, for instance where APRA assesses the Restricted ADI is able to transition to an ADI licence which is not subject to a time limit within a short timeframe following the date of the initial expiry. [Schedule 2, item 5, section 9E]

2.16 This is complemented by providing APRA with power to vary the authority and change the expiry date to a later date, at any time. These variations will be notified to the Restricted ADI and must be published in the Gazette. [Schedule 2, item 5, subsections 9E(2) and (3)]

2.17 In order to protect depositors of a Restricted ADI after its Restricted ADI licence expires, relevant laws regarding ADIs may continue to apply to the Restricted ADI after the expiration of its authority. APRA may, at any time before the expiration of the time limited authority, give the body corporate a written notice to this effect. Such a notice will clarify that specified sections of the Banking Act or Banking Regulations, another law of the Commonwealth applying to ADIs or the prudential standards will continue to apply beyond the expiration of the licence. [Schedule 2, item 5, section 9F]

2.18 This is a very important mechanism to protect the interests of consumers and ensure that the Banking Act and other relevant laws continue to hold Restricted ADIs to account should their authority expire. This mechanism is already available in subsection 9A(5A) of the Banking Act in respect of a revocation of an ADI authority under section 9 of the Banking Act.

2.19 Refusal to grant an authority that is subject to a time limit under section 9D is not reviewable under Part VI of the Banking Act which provides for merits review by the Administrative Appeals Tribunal (AAT). [Schedule 2, item 5, subsection 9D(4)]

2.20 Merits review is only excluded under subsection 9D(4) in respect of a refusal to grant an authority that is subject to a time limit under section 9D (i.e., a Restricted ADI licence), which is a new and additional licencing path. A refusal to grant an authority under section 9 to conduct banking business as an ADI continues to be reviewable under Part VI of the Banking Act

2.21 Merits review of decisions refusing to grant an authority that is subject to a time limit under section 9D would be inconsistent with the broader Restricted ADI licence scheme. As is discussed below, APRA has been provided with the ability to revoke a Restricted ADI licence and that decision is not subject to merits review. These decisions will still be subject to review under the Administrative Decisions (Judicial Review) Act 1977.

2.22 Omitting merits review of APRA decisions to refuse to issue a Restricted ADI licence, and to revoke a Restricted ADI licence once issued, provides valuable protection to customers of Restricted ADIs that are allowed to operate with concessions from the prudential framework. It enables APRA to act quickly in the interests of customers without action being delayed.

2.23 APRA works closely with all financial institutions it regulates and will be closely monitoring the progress of the Restricted ADIs towards being granted authority to carry on unrestricted business in the banking sector as ADIs. At any sign of potential failure, misconduct or risk to consumers, APRA must have the ability to act quickly and revoke the Restricted ADI licence to protect affected deposit holders as well as the overall stability of the Australian financial system.

Revocation of authority

2.24 If at any point in time, the APRA considers that the Restricted ADI has breached the conditions imposed on its authority or has otherwise acted inconsistently with the Banking Act and Prudential Standards (as they apply to the Restricted ADI), APRA may revoke an approval under section 9A of the Banking Act.

2.25 This includes ensuring that, if it is unlikely that the Restricted ADI will be in a position to apply for a section 9 authority that is not time limited at the expiry of its time limited authority, APRA is able to act to assist the Restricted ADI to exit the banking industry with minimal risk or disruption to consumers. [Schedule 2, item 1, paragraph 9A(2)(k)]

2.26 When APRA is considering revoking a Restricted ADI licence, APRA must provide the Restricted ADI with a notice in writing advising that it is considering revoking the Restricted ADI licence and outline the reasons for this in the notice. [Schedule 2, items 2 and 3, subparagraph 9A(3)(a)(iii) and subsection 9A(3A)]

2.27 The Restricted ADI will be provided with an opportunity to make submissions to address APRA's concerns and APRA will consider the submissions in its decision making process. [Schedule 2, items 2 and 3, subparagraph 9A(3)(a)(iii) and subsection 9A(3A)]

2.28 However, if APRA comes to the conclusion that it is contrary to the national interest or the interests of depositors with the Restricted ADI, APRA is not required to provide the Restricted ADI with a notice that it is considering revoking the licence and may revoke the licence immediately under subsection 9A(4) of the Banking Act.

2.29 These revocations are not subject to merits review. [Schedule 2, item 4, paragraph 9A(8)(b)]

2.30 APRA decisions to revoke a Restricted ADI licence granted under section 9D must be published in the Gazette pursuant to subsection 9A(6) of the Banking Act.

2.31 It is appropriate that APRA's decision is not subject to merits review and this is consistent with the Administrative Review Council (ARC) principles articulated in the publication What decisions should be subject to merits review? In particular, chapter 4 of that publication, relating to "Factors that may justify excluding merits review", notes that where a "significant public interest" lies in the decision not being reviewable, excluding merits review may be justified.

2.32 In this case, the APRA would consider revoking an authority in circumstances where the ADI was considered no longer appropriate to maintain an authority to carry on banking business. Public trust in banks is fundamental to the strength of the Australian banking sector and if a new ADI was to fail or act in a way that put deposit holder's savings at risk, APRA should be able to remove the ADI licence immediately.

2.33 This action is more likely in relation to a newly created Restricted ADI which is operating under a concessionary framework and does not have the same capital funding as a more established institution. The public policy interest, considering both the interests of individual deposit holders, as well as the stability of the financial sector more generally, means that APRA's ability to quickly revoke the authority is justified. This swift action could both secure the interests of individuals who may be impacted but also the broader interest in ensuring Australia maintains a strong banking sector.

2.34 As such, there is a "significant public interest" element attached to APRA's ability to revoke a Restricted ADI licence swiftly and without merits review. Of course, an institution may always apply for an ADI licence at some point in the future, if it were able to remedy the issues that caused the revocation to occur.

2.35 Prior to revoking a Restricted ADI licence, APRA may give a notice to the Restricted ADI stating that relevant laws regarding ADIs will continue to apply to the Restricted ADI after the revocation of its authority. As discussed above, this mechanism is already available in respect of revocations under section 9 of the Banking Act. [Schedule 2, item 5, section 9F]

Consequential amendments

2.36 A minor miscellaneous amendment is made to correct a drafting error made in the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018. In amending subsection 11AF(1) of the Banking Act to insert a new paragraph (d) and renumber the existing paragraph (d) as paragraph (e), a necessary and consequential amendment of paragraphs 11AF(7A)(a) and (b) of the Banking Act was not made. Reference is made to paragraph (1)(d) in error and this will be corrected with reference to paragraph (1)(e). [Schedule 2, items 6 and 7, paragraphs 11AF(7A((a) and (b) and paragraph 11AF(7C)(a)]

2.37 The amendment reinstates the position that existed prior to the drafting error. The reference to instruments made under paragraph 11AF(1)(e) not being legislative instruments is included to assist readers, as the instrument is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 (Legislation Act). This provision is therefore merely declaratory of the law and is not prescribing a substantive exemption from the requirements of the Legislation Act.

2.38 A number of prudential standards have been made under paragraph 11AF(1)(d) of the Banking Act subsequent to the amendments made by the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018, which means that they were classified under paragraph 11AF(7A)(a) of the Banking Act as not being legislative instruments.

2.39 APRA has responded by having each prudential standard registered as a legislative instrument under the Legislation Act. Subsection 8(7) of the Legislation Act provides that an instrument that is registered will be a legislative instrument even where an Act declares that it is not a legislative instrument.

Application and transitional provisions

2.40 This Schedule commences on the day after the Bill receives Royal Assent.

Chapter 3 Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Restrictions on shareholdings

3.1 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.2 The Financial Sector (Shareholdings) Act 1998 (FSSA) operates to provide an upper limit restricting the allowable shareholdings of an ADI or an authorised insurance company (as authorised under the Insurance Act 1973 and registered under section 21 of the Life Insurance Act 1995, respectively).

3.3 Currently, the FSSA outlines that an unacceptable shareholding situation will exist for a financial sector company (defined in the FSSA as an ADI, an authorised insurance company or a 100 per cent holding company) if a person has shareholdings exceeding the legislated percentage amount or shareholdings which exceed the higher approved percentage made in accordance with Division 3 of the FSSA.

3.4 A higher percentage approval is required to exceed the minimum acceptable shareholding amount. To receive this, a person must apply to the Treasurer for approval to hold more than the legislated shareholding limit in a financial sector company (either at the time of market entry or following a change of ownership). Approval can be granted if the Minister determines it to be in the 'national interest'.

3.5 To encourage more participation and greater competition in the financial sector market, the shareholding rules are amended to increase the minimum shareholding amount requiring approval from 15 to 20 per cent.

3.6 In addition, the Schedule creates a streamlined path for owners of domestically incorporated companies with assets less than the relevant threshold applying to become a financial sector company. This will enable owners who are found to be fit and proper persons to hold a stake of more than 20 per cent in a qualifying new or recently established financial sector company.

Who is regulated by this Schedule?

3.7 The amendments in this Schedule apply to persons who are seeking authority to hold a shareholding in excess of the acceptable shareholding limit imposed by the FSSA. These persons may be Australian residents or foreign persons (as defined by the Foreign Acquisitions and Takeovers Act 1975).

Application of civil penalties

3.8 Practice Note 2: Offence provisions, civil penalties and human rights^[1] observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR), regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of the Articles 14 and 15 of the ICCPR.

3.9 The civil penalty provisions in the schedule (which are in Division 2 of Part 6 of the FSSA) should not be considered 'criminal' for the purposes of international human rights law. While the civil penalty provisions included in the schedule are intended to deter people from not complying with the obligations imposed by the Act, none of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty. In addition, the maximum pecuniary penalty that may be imposed on an individual for contravening a civil penalty provision is generally lower than maximum pecuniary penalty that may be imposed for the corresponding criminal offence. The statement of compatibility therefore proceeds on the basis that the civil penalty provisions in the schedule do not create criminal offences for the purposes of Articles 14 and 15 of the ICCPR.

Human rights implications

3.10 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.11 This Schedule is compatible with human rights as it does not raise any human rights issues.

Limited banking licences

3.12 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.13 This Schedule applies to corporate entities and not individuals.

3.14 This Schedule promotes new entrants to the banking sector. The time limited ADI licence conditions will impose appropriate business restrictions but provide eligible new entrants considerable concessions, to allow the ADI a period of time to build the full suite of resources and capabilities necessary to transition to a full licence.

3.15 Taking into account the fact that these entrants to the market are new ADIs, they will be given concessionary treatment designed to allow them time to develop their business model, increase their capital base and comply with all regulatory requirements applying to ADIs.

3.16 With new entrants having different prudential standards applying, there are possible impacts on the soundness of the ADI as well as on competitive neutrality. As a result, a two year time limit will apply to these ADIs meaning the licence will automatically terminate at the expiration of that time period. The ADI can then seek an ADI licence pursuant to section 9 of the Banking Act 1959 if it wishes to continue to carry on banking business.

Human rights implications

3.17 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.18 This Schedule is compatible with human rights as it does not raise any human rights issues.