New banks, new rules: APRA updates ADI licensing regime

This article was written by Jo Dodd, Marina Lauer and Ashley Wong.

Last Friday, the Australian Prudential Regulation Authority (APRA) released its revised framework for licensing of authorised deposit-taking institutions (ADIs), creating a new pathway for financial institutions to become ADIs through the new "Restricted ADI licence". This week, volt bank limited was announced as the first restricted ADI (RADI) under the new regime.

These announcements coincide with the commencement of the relaxed restrictions on the use of the word "bank" under section 66 of the Banking Act 1959 (Cth) (Banking Act) which were enacted by the Treasury Laws Amendment (Banking Measures No. 1) Act 2018 (Cth) earlier this year. All ADIs are now permitted to use the word "bank" and its cognate expressions, with APRA given new powers to make determinations otherwise.

In this alert, we summarise the key features of the new RADI licensing pathway and the changes to section 66 of the Banking Act. Both measures have been designed to reduce barriers to entry for new players in the banking sector and to increase competition in Australia's banking industry, especially amongst smaller ADIs.

A bank by any other name…?

The new Restricted ADI licensing framework, which came into effect on 4 May 2018, introduces a restricted licensing option intended to allow new entrants more time to develop the resources and capabilities to comply with all ADI licence requirements. The new regime permits the grant of a RADI licence before the point at which an institution is ready to be fully licensed, with phased-in regulatory obligations reflecting the restricted range of permitted activities.

The RADI pathway is targeted towards start-ups and smaller businesses with limited banking experience and lower risk banking activities. The phase-in of obligations is balanced by the fact that RADIs must comply with all requirements for an ADI licence, or exit the industry, within two years of the grant of the RADI licence.

This restricted licensing pathway is to be contrasted with both the "direct route" (where an ADI licence is granted, with or without conditions as to prudential matters) and with licences granted to providers of "purchased payment facilities" (where a limited ADI licence is granted to such providers, permitting engagement only in activities associated with the provision of purchased payment facilities).

RADI licence applicants must satisfy a wide range of requirements which are outlined in APRA's new information paper. These include that the applicant, at the time of application to APRA and whilst they hold a RADI licence, must:

hold minimum capital of the higher of A$3,000,000 plus a resolution reserve, or 20% of adjusted assets — all regulatory capital must be held as Common Equity Tier 1 Capital, except for mutually-owned RADIs which may hold capital as Tier 2 Capital;
not grow significantly beyond a A$100,000,000 in assets;
comply with APRA's disclosure and reporting requirements, including disclosing its identity as a RADI to prospective customers;
meet, at all times, a minimum liquidity holdings requirement broadly-speaking equal to the higher of either 20% of liabilities or the total value of protected accounts plus an amount equal to the resolution reserve plus 100% of stored value held;
have appropriate strategies in place both for transitioning to an ADI licence and for ceasing banking business should it be unable to meet all ADI licence requirements within 2 years; and
limit deposits to A$2,000,000 (in aggregate across all customers) and $250,000 in aggregate per customer and (although active marketing is permitted), ensure new products are subject to limited release or withheld until the RADI moves to an ADI licence.

Very few changes have been made to APRA's proposal for the RADI which was released for consultation on 30 November 2017. One key legislative change which has occurred since then, however, is the relaxation of restrictions on using the word "bank".

... what's in a name? Relaxed restrictions on using the word "bank" have also commenced

Previously, unless you obtained separate consent from APRA (or were already an ADI with a valid banking authority issued prior to 1 July 1998), it was an offence under the Banking Act for an ADI to use the word "bank" and its cognate expressions other than in mere reference to having been granted an authority under the Banking Act.

The need for separate consent from APRA has now been relaxed and, for now at least, all ADIs (including RADIs and purchased payment facilities) may use the word "bank" and its cognate expressions in reference to their financial business[1] in Australia without restriction.

The relaxation on the restrictions is intended to reduce barriers for new banking sector entrants, specifically early phase ADIs, and to better align with community expectations.[2]

New section 66AA of the Banking Act permits APRA to make a written determination about an ADI or class of ADIs prohibiting them from using the word "bank" in relation to their financial business, including as part of another word or expression or in combination with other words, letters or symbols.

APRA has announced that it will consider using this new power in relation to ADIs that "do not have the ordinary characteristics of banks (for example, purchased payment facilities) or otherwise in serious or unusual circumstances that warrant the making of a determination", but that affected ADIs will be consulted prior to such a determination being made. Revised guidelines will also be published by mid-2018.

Restrictions on other terms such as "credit union", "credit society", "credit co-operative", and "building society", and restrictions on non-ADI entities using the word "bank", continue unchanged.

In particular, the amendment does not affect the existing exemption under Banking exemption No. 1 of 2018 for foreign corporations authorised as banks in their home countries, who use the word "bank" when issuing securities in the Australian wholesale capital market.[3]