House of Representatives

Explanatory Memorandum

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

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.