Introductory Info

Date introduced: 28 June 2018
House: House of Representatives
Portfolio: Treasury
Commencement: Schedule 1 commences on the first 1 January, 1 April, 1 July or 1 October following Royal Assent. Schedule 2 commences the day after Royal Assent.

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Financial Sector Regulation) Bill 2018 (the Bill) is to reduce ownership restrictions and other barriers to entry for new authorised deposit-taking institutions (ADIs) and other financial sector companies in order to improve competition in the sector.[1]

Structure of the Bill

The Bill consists of two Schedules.

• Schedule 1 is divided into two parts:
  • Part 1 amends the Financial Sector (Shareholdings) Act 1998 (FSSA) to increase the current maximum shareholding limit on general and life insurance companies, ADIs and relevant holding companies from 15 per cent to 20 per cent and
  • Part 2 amends the FSSA to streamline the arrangements for establishing a new financial sector company.
• Schedule 2 is divided into two parts:
  • Part 1 amends the Banking Act 1959 (Banking Act) to ensure the Australian Prudential Regulation Authority (APRA) can grant time-limited ADI licences to new entrants into the banking sector under its new restricted ADI licensing framework and
  • Part 2 makes minor miscellaneous amendments to the Banking Act.

Background

In March 2016 the Government released its statement on Australia’s FinTech future. According to the then Treasurer, Scott Morrison:

FinTech stimulates technological innovation and the Turnbull Government’s FinTech statement sets out our vision for developing a strong and vibrant FinTech industry in Australia to help boost jobs and growth in our transitioning economy.

The statement forms part of our National Innovation and Science Agenda and demonstrates our credentials for backing innovation in financial services.[2]

Ownership of financial sector companies

Consistent with that statement, in the 2017–18 Budget, the Government announced that it would seek to relax ownership restrictions on innovative new entrants to the financial sector as part of its agenda to encourage the establishment of new FinTech companies.[3] The Government argues that its proposed approach would give new entrants the time to ‘test and grow their businesses before they need to consider diversifying their ownership’.[4]

The proposed amendments in Schedule 1 of the Bill would:

• lift the restrictions on closely held ownership for financial sector companies in the FSSA from 15 per cent to 20 per cent and
• introduce a ‘streamlined’ approach for new entrants to the financial sector by allowing owners of domestically incorporated companies to seek approval from the Treasurer to hold more than 20 per cent of shares in an insurer or an ADI, provided:
  • the owner passes a ‘fit and proper person’ test
  • the company is in the process of seeking a licence from APRA to act as an insurer or ADI, or has been licenced to do so for less than five years and
  • if the company is an ADI or life insurer, it has assets less than $200 million; or if it is a general insurer, it has assets less than $50 million.

An approval under the streamlined approach will generally apply for a period of two years after which any shareholdings in excess of the 20 per cent threshold would need to be divested, or the owners would need to seek further approval from the Treasurer to continue their higher ownership share, subject to a ‘national interest’ test.[5]

Authority to carry on a banking business

To carry on a banking business in Australia a company is required to be authorised by APRA under section 9 of the Banking Act. That Act does not contain a definition of ‘bank’. Rather, a ‘banking business’ is defined in subsection 5(1) of the Banking Act as a business that:

• undertakes ‘banking’ as defined by paragraph 51(xiii) of the Constitution
• is a ‘corporation’ as defined by paragraph 51(xx) of the Constitution that:
  • takes money on deposit or makes advances of money or
  • provides other financial services as prescribed by Regulations.

The Banking Act is not prescriptive about the requirements that companies are required to satisfy to obtain or to maintain an ADI license. Rather, the Banking Act provides that APRA may impose, vary or revoke conditions on such a license.[6] These conditions must relate to prudential matters.[7]

Subsection 5(1) of the Banking Act defines prudential matters as matters relating to:

• the conduct of any part of the affairs of, or the structuring or organising of, an ADI, an authorised non-operating holding company (NOHC), a relevant group of bodies corporate, or a particular member or members of such a group, in such a way as:
  • to keep the ADI, NOHC, group or member or members of the group in a sound financial position
  • to facilitate resolution of the ADI, NOHC, group or member or members of the group
  • to protect the interests of depositors of any ADI
  • not to cause or promote instability in the Australian financial system or
  • not to cause or promote instability in the New Zealand financial system
• the conduct of any part of the affairs of an ADI, an authorised NOHC, a relevant group of bodies corporate, or a particular member or members of such a group, with integrity, prudence and professional skill.

APRA’s standard conditions for granting an ADI licence are described in its ADI Authorisation Guidelines. The criteria, at a broad level, includes meeting minimum start-up capital requirements, having appropriate governance standards in place and satisfying APRA that they have (or will have) appropriate risk management, internal control systems, audit and compliance systems in place.[8]

APRA has developed a restricted licensing framework which it finalised in May 2018 that has less stringent prudential requirements than a full ADI license.[9] Under the restricted framework, an ADI could be given a restricted ADI licence that applies for a period of two years before the company must meet the prudential requirements of a full license. If the company is unable to meet the full requirements of APRA’s prudential framework within that period then it would need to exit the banking industry.[10]

The restricted licensing framework includes limits on the amount of deposits that the ADI can issue, including:

• a maximum deposit amount of $250,000 per customer to ensure that the deposit is protected by the Financial Claims Scheme[11] and
• an overall limit of $2 million in total customer deposits.[12]

One new ADI, Volt Bank, has already been approved by APRA under the restricted framework.[13] The restricted licence regime addresses doubts about whether APRA can lawfully impose time limits as a condition of a banking licence because it is arguable that such a time limit would not constitute a prudential matter. This Bill seeks to give legal certainty that APRA can issue a separate category of licences which are time-limited to new or recently established financial sector companies.[14]

Competition in the Banking Sector

According to the then Treasurer, the measures in the proposed Bill seek to make the financial sector ‘more contestable, more innovative and improve overall choices and outcomes for customers in the banking and financial system’.[15]

Australia has a highly concentrated financial system with the banking sector dominated by the four largest banks and the general insurance markets dominated by the four largest insurers. The four major banks account for over 75 per cent of small business loans, housing loans, retail deposits and credit card issuances and the four largest insurers account for over 80 per cent of lenders mortgage insurance, reinsurance and travel insurance.[16]

The Productivity Commission (PC) released its inquiry report into Competition in the Australian Financial System on 29 June 2018. The report considered in detail the issues addressed by this Bill; namely the impact of ownership restrictions on competition and the ability of new entrants in the ADI market to enhance competition.

The PC welcomed the lifting of ownership restrictions on financial sector companies stating that the adjustments to shareholder limits are ‘an important step in alleviating barriers to entry for small start-up financial firms’.[17]

The PC also endorsed the lowering of barriers to entry in the banking sector, welcoming APRA’s moves to introduce restricted ADI licences for new entrants.[18] It noted that similar arrangements in the United Kingdom are believed to be largely responsible for increasing the number of new entrant banks from one in 2010 to more than 14 since 2014.[19]

However, the PC downplayed the ability of new start-ups to significantly reduce the market power of the large banks, at least in the short term, stating:

Fintechs are not, on present indications, likely to have the kind of competitive disruptive effect that would alter the market power of major banks in the foreseeable future...

We must look further afield for substantial offsets to current market power.[20]

It noted a couple of reasons for this, including:

• FinTechs tend to focus on less heavily regulated banking services such as consumer lending or investment management, rather than deposit-taking which has stricter prudential requirements[21]
• customers may be reluctant to switch to smaller providers, tending to trust established institutions over smaller institutions[22]
• they face barriers to expansion, such as limited ability to raise capital and to access wholesale funding at competitive rates and
• in addition, FinTechs may see more value in collaborating with the major banks rather than acting as competitors.[23]

It is clear that the PC views the measures in this Bill as a modest, but important, step to lowering barriers to entry in the financial sector. Over time, as the FinTech industry matures and trust in smaller institutions grows, new entrants may become more substantial challengers to the established banks.[24]

The PC also made a number of further recommendations to increase competition in the financial sector including:

• APRA making prudential capital requirements for smaller institutions more flexible[25]
• requiring APRA to undertake post-implementation reviews on its prudential standards to assess the effects on consumers and market competition from its regulatory decision making[26]
• requiring general insurers to disclose premium increases more transparently to allow customers to compare offers[27]
• expanding the types of products that can be tested in ASIC’s ‘regulatory sandbox’. The sandbox allows new financial products to be tested for a limited period of time without the need to obtain a financial services license[28] and
• setting up the Australian Competition and Consumer Commission (ACCC) as a ‘competition champion’ for the financial sector.[29]

At the time of writing, the Government has not yet released its response to the PC report.

Committee consideration

Senate Standing Committee for Selection of Bills

At its meeting of 16 August 2018, the Senate Standing Committee for the Selection of Bills recommended that the Bill not be referred to Committee for inquiry and report.[30]

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills (the Scrutiny Committee) considered the Bill in its Scrutiny Digest of 15 August 2018.[31] The Scrutiny Committee raised concerns that the Bill allows for significant matters to be dealt with through delegated legislation. In particular, the criteria for the proposed ‘fit and proper’ person test is to be contained within delegated legislation with no guidance provided in the primary legislation.[32]

The Scrutiny Committee sought further advice from the Treasurer as to why it is considered necessary to specify the criteria for the fit and proper person in delegated legislation.[33] The response from the Minister was noted in the Scrutiny Digest of 12 September 2018 and the Committee left its concerns to the Senate as whole to consider.[34]

The criteria for the proposed fit and proper person test would be set out in legislative instruments (‘rules’) made by APRA. The Explanatory Memorandum states the Government expects that APRA will consult with industry on the proposed criteria for the fit and proper person test. The legislative instrument would also be subject to Ministerial consent and would be disallowable by the Parliament.[35] Further, such legislative instruments made by APRA under its proposed rule‑making powers may not create an offence or civil penalty, provide powers of arrest, detention, entry search or seizure, impose a tax, appropriate monies or amend the text of the FSSA.[36]

Policy position of non-government parties/independents

The Shadow Minister for Financial Services, Clare O’Neil, indicated the Australian Labor Party’s strong support for the Bill:

The opposition will be supporting the Bill that's before the parliament. Of course we're going to support the Bill, because the Bill before us is one that is designed to increase competition in our banking sector, and you're not going to find a political party in this parliament, in this House or the other, that is more committed to making sure that we have more competition in banking and that we have better services for Australians through that crucial sector in our economy.[37]

However, Ms O’Neil noted that the changes in the Bill are likely to have modest impacts on competition:

The Bill is going to make a small impact on the ability of fin-techs to come into financial services and to compete against the major banks.[38]

The positions of other non-government parties and independents are not known at the time of writing this Bills Digest.

Position of major interest groups

Ownership of financial sector companies

Treasury consulted on the proposed changes through the Exposure Draft of the Financial Sector (Shareholdings) Amendment (Relaxing Ownership Restrictions) Bill 2018 (the draft Bill).[39] The proposed changes in the draft Bill were consolidated into the Bill currently before Parliament. No submissions to this consultation are publicly available at the time of writing.

Restricted ADI license

There is limited information on the position of major interest groups in relation to this measure in the Bill. However, a number of submissions were made to APRA when it consulted on its licensing framework for restricted ADI licences in August 2017.[40] Industry broadly supports the proposals; however, existing ADIs favour stricter restrictions on temporary ADI licences while the start-up industry supports relaxing these restrictions.

Australian Bankers’ Association

The Australian Bankers’ Association (ABA) made a submission to APRA on 4 December 2017. The ABA stated that it supports measures to enhance competition in the banking sector but cautioned that such measures need to be balanced with the need to protect the interests of consumers and the stability of the banking system.[41] The ABA submitted:

• the two year restricted licensing period is too long. A period of 12 months, with APRA given discretion to approve a further 12 months, would be more appropriate and would be in line with the approach taken in the UK
• the $250,000 limit on individual depositors and the $2 million aggregate limit should be lowered and
• banks operating under a restricted licence should not be able to call themselves a ‘bank’ but rather, should be required to use the term ‘restricted bank’. [42]

FinTech Australia

FinTech Australia also made a submission to the APRA consultation in December 2017. FinTech Australia supports the restricted licensing framework but, contrary to the ABA, argues that some of the requirements are overly restrictive. FinTech Australia considers that the restricted licensing period should be extended to three years[43] and that the $2 million maximum deposit threshold is too low and would not allow a start-up’s products to be tested on sufficient customers.[44]

Financial implications

The Bill is not expected to have any financial implications.[45]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[46]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights (PJCHR) considered the Bill in its scrutiny report of 14 August 2018. The PJHCR considered that the Bill does not raise any human rights concerns.[47]

Key issues and provisions

Schedule 1 – Restrictions on shareholdings

Schedule 1 has two parts. Part 1 reduces ownership restrictions on financial sector companies which are set out in the FSSA, lifting the maximum ownership threshold for financial sector companies (without Treasurer approval) from 15 per cent to 20 per cent and introduces the proposed streamlined ownership requirements for new entrants to the banking sector. Part 2 introduces the proposed transitional arrangements for these changes.

Restrictions on shareholdings

Under the FSSA, if a person holds a stake in a financial sector company that exceeds the allowed percentage, the Federal Court may make orders to ensure that the situation ceases to exist.[48] Currently the allowed percentage is 15 per cent or a higher percentage approved by the Treasurer. Items 2–7 of Part 1 in Schedule 1 to the Bill amend the FSSA to increase the maximum shareholding limits on financial sector companies from 15 per cent to 20 per cent, before the shareholder must seek approval from the Treasurer.

Streamlined approval process

Under section 13 of the FSSA individuals may currently apply to the Treasurer for approval of a higher shareholding percentage than the allowable percentage. Existing subsection 14(1) provides that the Treasurer may approve the application if he, or she, is satisfied that doing so is ‘in the national interest’.

Item 12 of Part 1 in Schedule 1 to the Bill repeals and replaces subsection 14(1) of the FSSA. Proposed subsection 14(1) provides that the Treasurer may grant the application if either:

• the Treasurer is satisfied that to do so is in the national interest: proposed paragraph 14(1)(a) or
• the Treasurer is satisfied that the criteria in subsection 14A(1) are met: proposed paragraph 14(1)(b).

In this way the Bill creates a separate test which will specifically be applied to new or recently established financial sector companies.

Items 9 and 13–15 of Part 1 in Schedule 1 to the Bill make consequential amendments to sections 13 and 14 of the FSSA to clarify that different rules apply depending on whether an approval is granted under paragraph 14(1)(a) or 14(1)(b).

Criteria for approving a higher shareholding percentage

Item 16 inserts proposed section 14A into the FSSA to set out the test to apply for the purposes of paragraph 14(1)(b). First, the applicant must be a fit and proper person and second, the company must be a new or recently established financial sector company which satisfies the proposed asset test.

Fit and proper person test

Proposed subsection 14A(2) provides that rules made by APRA under the FSSA may prescribe the matters to be considered in determining whether a person is a fit and proper person for the purposes of approving a higher shareholding percentage. These criteria will be set out by APRA in a legislative instrument which cannot be made unless the Minister has consented, in writing, to its making.[49] The Treasurer is not limited by these rules and may consider other matters in making an assessment.[50] If at any point in time the Treasurer is satisfied that the person is no longer a fit and proper person then the Treasurer may revoke the approval.[51]

As noted above, the Senate Scrutiny Committee highlighted their concerns with APRA defining the criteria for the fit and proper person test in delegated legislation.

New or recently established financial sector company

Proposed subsection 14A(3) of the FSSA establishes that a company is a newly established financial sector company if it:

• has applied, but has not yet been approved to carry on a banking business or an insurance business or registered as a life insurance company and
• assuming it would be so approved or registered, then it would have total resident assets less than the assets threshold.

Proposed subsection 14A(4) provides that a company is a recently established financial sector company if it:

• is an ADI, is authorised to carry on a general insurance business or is a registered life insurance company
• at the time the individual applies for approval of a higher shareholding percentage, the company has been licensed for less than five years and
• the company’s total resident assets are less than the assets threshold.

Under Proposed subsection 14A(5) of the FSSA, the meaning of total resident assets will be defined in the rules made by APRA. The note to that subsection states that the instrument may specify different definitions for different types of financial sector companies.

Proposed asset test

The proposed asset test has two elements:

• the total resident assets—which, as stated above, will be worked out under the rules and
• the assets threshold—which is specified in proposed subsections 14A(6) and (7).

For ADIs and life insurers the assets threshold is $200 million or another amount set out in a legislative instrument made by the Treasurer.[52]

The assets threshold for general insurers is $50 million or another amount set out in a legislative instrument made by the Treasurer.[53]

Duration of an approval for a higher shareholding percentage

Just as the Bill establishes two separate processes for approving a higher percentage shareholding, it also establishes two separate processes for working out the duration of any approval. Accordingly, items 17–20 of Part 1 in Schedule 1 to the Bill amend section 15 of the FSSA to make clear that the period of an approval granted under paragraph 14(1)(a) is worked out under that section.

Item 22 of Part 1 in Schedule 1 to the Bill inserts proposed section 15A into the FSSA which outlines the expiry date of a streamlined approval which has been granted under paragraph 14(1)(b). Once a streamlined approval has expired the shareholder will either need to divest themselves of shares in order to get below the 20 per cent threshold, or apply for an approval to continue to hold a higher shareholding under the national interest test.

Proposed subsection 15A(1) provides that a streamlined approval expires two years after the date that the financial sector company’s total resident assets first exceed the assets threshold. This is called the threshold day. This is to give the shareholder time to divest their shareholding or to seek further approval under paragraph 14(1)(a) of the FSSA which contains the national interest test.

If the shareholder applies for a higher shareholding limit within 90 days of breaching the assets threshold then the expiry date is worked out under proposed subsection 15A(2) as follows:

• if the application under paragraph 14(1)(a) is refused—then the approval under paragraph 14(1)(b) is extended to two years after the date of refusal
• if the application under paragraph 14(1)(a) is taken to be withdrawn (where the applicant fails to provide the necessary information to support their application[54]) the approval under paragraph 14(1)(b) is extended to two years following the withdrawal and
• if the application under paragraph 14(1)(a) is approved the expiry date is extended to the date that the subsequent approval takes effect.

Alternatively, if the shareholder applies for an approval under paragraph 14(1)(a) more than 90 days after the threshold day, then the expiry date will only be extended if the request to maintain the higher shareholding is approved under paragraph 14(1)(a).[55]

Conditions applying to approvals of a higher shareholding percentage

Section 16 of the FSSA provides that the Treasurer can approve a higher shareholding percentage subject to a number of conditions, and may vary or revoke such conditions.

Item 25 of Part 1 in Schedule 1 to the Bill inserts proposed section 16A into the FSSA which would introduce a number of specific additional conditions on an approval of a higher shareholding percentage under paragraph 14(1)(b). These are:

• the financial sector company is obliged to notify APRA and the owner of the company with the higher shareholding in writing if it breaches the assets threshold[56]
• following such a notification, the holder of an approval is obliged to provide written notice to the Treasurer within 30 days specifying whether they intend to divest their shareholdings or to seek approval for a higher shareholding under the national interest test[57]
• the company’s ownership structure is required to be reviewed by APRA every five years.[58] The purpose of this review is for APRA to ensure that the ownership structure remains appropriate and to provide APRA insight into any issues relating to ownership[59] and
• the company is required to provide a yearly report of prudential information to APRA in the required manner and form.[60]

APRA’s powers

Proposed section 45A would give APRA new powers to make rules relating to matters under the FSSA. These rules would include setting the information requirements for the yearly reports provided to APRA under the streamlined approval process, and requiring APRA to define total resident assets.

Such rules are subject to Ministerial consent under proposed subsection 45A(4) and would be disallowable by Parliament.[61]

Further, proposed subsection 45A(5) provides that the rules may not: impose penalties, provide powers of arrest or detention, provide powers of entry search or seizure, impose a tax, appropriate revenue or amend the text of the FSSA.

However, the Bill introduces civil penalty provisions which are enforceable under Part 4 of the Regulatory Powers (Standard Provisions) Act 2014.[62] The Treasurer or APRA can seek a civil penalty to be applied by the Federal Court to a company that fails to report to APRA that it has breached the asset threshold.[63]

Part 2 – Application and transitional provisions

Part 2 of Schedule 1 to the Bill includes transitional provisions of the Bill that provide:

• existing approvals to hold more than 20 per cent of the shares in a financial sector company remain in force[64]
• existing approvals to hold more than 15 per cent but less than 20 per cent are no longer required, and are no longer in effect[65]
• pending applications to hold a shareholding of more than 20 per cent remain in effect and are taken to have been made under paragraph 14(1)(a)—the national interest test[66] and
• pending applications to hold more than 15 per cent but no more than 20 per cent are taken never to have been made.[67]

Schedule 2 – Restricted ADI Licences

Under section 9 of the Banking Act, APRA may grant an authority to a company to carry on a banking business (an ADI licence), subject to conditions imposed by APRA. The amendments in Schedule 2 to the Bill would allow APRA to grant an ADI licence for a limited time period (a restricted ADI license).

Granting of a restricted ADI license

Item 5 in Part 1 of Schedule 2 inserts proposed sections 9D–9F into the Banking Act:

• proposed subsection 9D(1) provides that an application made by a company for a banking authority under subsection 9(2) of the Banking Act may be an application for an authority that applies for a limited time
• proposed subsection 9D(2) provides that if APRA grants a restricted ADI licence then it must state:
  • the day it ceases to have effect (the expiry day) and
  • that it ceases to have effect on the expiry day unless it is extended, or if it is revoked earlier, or if it continues to be in effect in accordance with proposed section 9F (see below).
• proposed subsection 9D(3) provides that a restricted ADI licence can either cease to have effect on the day two years after it is granted by APRA, or on another day that APRA considers appropriate.

Proposed section 9E of the Banking Act provides that APRA may extend a restricted ADI licence at any time before the expiry day by notifying the company and publishing the variation in the Gazette.

Proposed section 9F provides that APRA may, at any time before the expiry date, notify the company that the licence remains in effect for a specified matter, for a specified period, for the purposes of:

• a specified provision of the Banking Act
• a specified provision of another law of the Commonwealth that is administered by APRA or
• a specified provision in the prudential standards.

The Explanatory Memorandum states that the rationale for this is to ensure that depositor protections continue to apply after the restricted ADI licence expires.[68]

Conditions of a restricted ADI license

The Bill does not impose further conditions on the granting of a restricted ADI license, but APRA may impose specific conditions on a restricted licence under its existing powers. The Explanatory Memorandum to the Bill indicates that the prudential requirements imposed under a restricted licence would be concessionary, reflecting the fact that new entrants to the market would not have the full resources or capabilities to comply with the full suite of prudential requirements that apply to established ADIs.[69]

However, the business that can be conducted may be limited in order to ensure that banks operating under a restricted licence are not given a competitive advantage over other ADIs that are subject to more stringent conditions.[70]

Revocation of a restricted ADI licence

APRA has the power to revoke an ADI licence under section 9A of the Banking Act, a power that would also apply to restricted licences. APRA may revoke an ADI licence under a number of defined circumstances, including if APRA is satisfied, amongst other things, of the following:

• the bank has failed to comply with a requirement under the Banking Act (and associated Regulations) or with certain other Commonwealth legislation, or with a condition of its ADI authority[71]
• it is contrary to the national interest, or to the stability of the financial system, or to the interests of depositors for the authority to remain in force[72]
• the company is insolvent[73] or
• the company has ceased to carry on a banking business in Australia.[74]