Australia has a sophisticated and stable banking industry, which provides a full range of banking and financial services products.

The banking market is dominated by four major Australian banks, measured by market capitalisation: Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation.2

Subject to limited exceptions,3 only banks authorised by the Australian Prudential Regulation Authority (APRA) as an authorised deposit-taking institution (ADI) may carry on a banking business in Australia.4 As at December 2016, the Australian banking sector comprised 153 ADIs.5 Of these, 31 are Australian-owned, seven are foreign subsidiaries, 45 are branches of foreign banks, four are building societies and 58 are credit unions. There are eight ADIs that do not fall within any of these categories.

In addition, three entities are authorised to be non-operating holding companies (NOHCs). NOHCs are holding companies of ADIs, which have authority from APRA under Section 11AA of the Banking Act 1959 (Cth) (Banking Act). When a body corporate seeks authority to carry on a banking business in an Australian ADI, APRA’s permission may be conditional upon the applicant’s holding company obtaining authority to be an NOHC.6


The regulatory regime applicable to the banking sector in Australia follows a generally decentralised approach, with a division of functional regulation between three key organisations, as well as a range of other regulators and government bodies.

i Regulators

The key regulators of the Australian banking system are:

  • a APRA, which specialises in the prudential management of financial institutions, regulating banks, insurance companies, building societies, credit unions and superannuation funds. APRA is an independent body free from government intervention, although it is subject to ministerial direction on its policies and priorities at a general level;
  • b the Australian Securities and Investments Commission (ASIC), which regulates financial market conduct, and credit and market integrity more generally. It also regulates consumer protection as it relates to financial products and instruments; and
  • c the Reserve Bank of Australia (RBA), which is Australia’s central bank, and which is responsible for the stability of the Australian currency and financial system. It does not have a direct role in the prudential supervision of ADIs, but conducts monetary policy and provides selected banking and registry services to a range of Australian and overseas government agencies and institutions.

Other regulatory bodies responsible for aspects of the banking system include:

  • a the Australian Competition and Consumer Commission (ACCC), which monitors competition, fair trading and consumer protection (in areas other than financial services);
  • b the Australian Securities Exchange (ASX), which regulates equities, derivatives and enterprise trading markets, and ensures compliance with disclosure and market awareness obligations; and
  • c the Australian Treasury, which is responsible for advising the government on the stability of the financial system, and on legislative and regulatory matters regarding financial system infrastructure.
ii Inter-governmental cooperation

Primarily through the Asia-Pacific Economic Forum (APEC), Australia also engages with its regional neighbours on a continuing basis to advocate greater harmonisation and improvements in the regulatory standards for financial institutions in the Asia-Pacific region. The Melbourne APEC Finance Centre was established to study and assist emerging regulatory regimes,7 and the Centre for International Finance and Regulation, opened in 2010, provides financial regulators from the Asia-Pacific region with specialised training.8 In addition, the RBA is a member of the Executive Meeting of East Asia-Pacific Central Banks,9 where central banks discuss financial issues in an informal manner.10

The government has also created numerous bilateral institutions and relationships to assist in developing supervisory standards in the region, normally through memoranda

of understanding (MoUs), with foreign financial sector regulators that have supervisory responsibility for banking operations of material interest to APRA.

In the case of New Zealand, where almost all banking services are provided by Australian banks, the Trans-Tasman Council on Banking Supervision was created to promote a joint approach by Australia and New Zealand to banking supervision.11 Numerous MoUs have also been entered into with other prudential regulators, including Hong Kong,12 China13 and Bank Negara Malaysia, the Malaysian supervisory body, to establish strategic cross-border cooperation in relation to global financial services to ensure efficiency and effectiveness of regulation in the overall financial systems.14


i Relationship with the prudential regulator

Any entity that wishes to carry on a banking business in Australia is required to be authorised by APRA as an ADI unless it has the benefit of an exemption.15 There are three options for ADI authorisation available: a body corporate incorporated in Australia can apply for Australian ADI status;16 a non-operating holding company of a group of companies that includes one or more ADIs can apply for NOHC status;17 and a foreign body corporate can apply for foreign ADI status18 (and, if authorised, will be required to register in Australia as a foreign company under the Corporations Act 2001 (Cth)19 (Corporations Act)).

Prudential supervision

APRA has the power to establish and enforce prudential standards20 for ADIs, NOHCs, life insurance companies, general insurance companies and superannuation funds.21 Prudential

standards have the force of law, and an ADI or authorised NOHC must comply with them.22

Prudential standards cover a broad range of topics including capital adequacy, funds management and securitisation, liquidity management, large exposures, equity associations, credit quality, corporate governance and outsourcing. APRA may determine whether a prudential standard applies to all ADIs or NOHCs, or to specified ADIs or NOHCs.23

The bodies to which APRA’s prudential standards apply are responsible for compliance with these standards, including implementation and monitoring. Failure by an ADI (or any of its group members) to report a breach carries a penalty of 200 penalty units, with criminal liability for officers in extreme circumstances.24

If APRA has reason to believe that an ADI or NOHC has contravened or is likely to contravene a prudential standard, APRA has the power to issue directions requiring the ADI or NOHC to undertake (or not undertake) certain actions, including requiring compliance with the relevant prudential standard, removing a director or senior manager, or requiring an audit.25 Non-compliance with such a direction carries a penalty of 50 penalty units26 and gives APRA power to revoke authorisation.27 A responsible officer who fails to take reasonable steps to ensure compliance with such a direction will be guilty of an offence.28

Consequences of an ADI failure

An Australian ADI is guilty of an offence if it does not hold assets (excluding goodwill, and any assets or other amount excluded by APRA’s prudential standards) in Australia of a value greater than or equal to the total amount of its deposit liabilities in Australia, unless APRA has authorised the ADI to hold assets of a lesser value.29

In the case of an Australian ADI failure, APRA has broad powers, acting on its own or through the appointment of an administrator, to investigate such ADI’s affairs or take control of its business.30 There have not been any ADI failures in Australia in recent history.

It is an offence if an Australian ADI does not immediately inform APRA if it considers that it is likely to become unable to meet its obligations, or that it is about to suspend payment.31

Where an ADI statutory manager (being either APRA or an administrator of an ADI’s business appointed by APRA)32 is in control of an Australian ADI’s business, and APRA considers that the ADI is insolvent and cannot be restored to solvency within a reasonable period, APRA may apply to the Federal Court of Australia for an order that the ADI be wound up.33

If an Australian ADI becomes unable to meet its obligations or suspends payment, Section 13A(3) of the Banking Act sets out priorities for the application of the Australian assets of that ADI:

  • a first to APRA for the recovery of monies paid and costs incurred by APRA under the Financial Claims Scheme (FCS);
  • b then to account holders with protected accounts;
  • c then to the RBA;
  • d then to the providers of emergency financial support certified by APRA; and
  • e finally to other liabilities (if any) in the order of their priority apart from the operation of the Banking Act.
Foreign ADIs

APRA’s powers under the Banking Act to investigate, take control of or apply for the winding up of an ADI do not extend to foreign ADIs.34

Section 11F of the Banking Act requires that the assets in Australia of foreign ADIs be available to meet liabilities in Australia in priority to other liabilities of that ADI.

ii Management of banks

Management of banks is governed by prudential standards set by APRA as well as by the Corporations Act.

APRA imposes a wide range of detailed governance requirements, captured in its Prudential Standard CPS 510. CPS 510 was recently revised to make governance requirements even more robust, and higher standards have been in effect since 1 January 2015. Foreign ADIs only have to comply with some provisions of CPS 510.

Board requirements

CPS 510 states that the board of directors bears ultimate responsibility for governance of an ADI. An APRA-regulated body needs to have at least five directors at all times (the Corporations Act requires a minimum of three, with at least two in Australia at all times). The majority of the directors are required to be independent.35

Management duties

Under the Corporations Act, executive and non-executive directors are subject to statutory duties of care, diligence and good faith. Duties are owed to the corporate entity, but a constitution can stipulate that a wholly owned subsidiary’s directors must act in the interests of its holding company.36

CPS 520 requires individuals with positions of responsibility in APRA-regulated institutions to maintain minimum levels of fitness and propriety. It is the responsibility of the board to ensure that such persons meet these minimum levels and to set a policy to that effect.

Prudential Standard CPS 220 came into effect on 1 January 2015, and requires APRA-regulated companies to take a very active role in dealing with risks and building appropriate systems. The board of such a body is held responsible for having ‘a risk management framework that is appropriate to the size, business mix and complexity’ of the institution or group it heads.37

ASX Listing Rules

If listed on the ASX, an ADI must comply with the ASX Listing Rules, which require each listed entity to publish an annual report that indicates whether the entity has complied with the guidelines set out in the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations and, if it has not complied, why not.

iii Regulatory capital
Regulatory capital

The prudential standards relating to regulatory capital are found in Prudential Standards APS 001 and 110 to 117. They are based on the standards set out in the Basel III38 framework and aim, inter alia, to ensure that Australian ADIs maintain adequate capital, on both an individual and group basis, to act as a buffer against the risks associated with their activities.39

The prudential standards relating to regulatory capital do not apply to foreign ADIs, which are expected to meet comparable capital adequacy standards in their home jurisdictions.40

Consistency with the Basel III framework

Since the release of the Basel III consultation package in December 2010, as updated in June 2011,41 APRA has been actively involved in implementing a series of updates to its prudential standards to ensure consistency with the capital requirements of the Basel III framework. Under the revised standards, new capital requirements took effect in Australia on an accelerated basis from 1 January 2013, subject to certain transitional arrangements.

In a number of areas, APRA’s prudential standards go beyond the minimum Basel III capital requirements.42 For example, in exercising its discretion in relation to the definition and measurement of capital, APRA’s prudential standards have resulted in a more conservative capital adequacy regime for Australia than is required under Basel III.

Minimum capital requirements

The amount of Tier 1 and Tier 2 capital to be included in an Australian ADI’s capital base for capital adequacy purposes, net of all required deductions as described below, is subject to the following minimum capital requirements:43 a common equity Tier 1 capital ratio of 4.5 per cent, a Tier 1 capital ratio of 6.0 per cent and a total capital ratio of 8.0 per cent. APRA may determine higher prudential capital requirements for an ADI and may change an ADI’s capital requirements at any time.44

New capital buffers

In line with the Basel III framework, the minimum capital requirements applicable to Australian ADIs are supplemented by capital conservation and countercyclical buffers. The capital conservation buffer requires Australian ADIs to set aside an additional amount of common equity Tier 1 capital equal to 2.5 per cent of their total risk-weighted assets unless determined otherwise by APRA.45 The countercyclical buffer requires Australian ADIs to hold additional common equity Tier 1 capital of between zero and 2.5 per cent (as determined by APRA) of their total risk-weighted assets.46


i Consumer protection

The Australian Securities and Investments Commission Act 2001 (Cth) contains specific prohibitions covering unconscionable conduct, misleading and deceptive conduct, false or misleading representations, and unfair contracts in relation to financial services and financial products.

Equivalent prohibitions of general applicability regarding consumer protection are contained in the Australian Consumer Law, a schedule to the Competition and Consumer Act 2010 (Cth). These general prohibitions have broad applicability in the banking sector, for example, in relation to market disclosures and company conduct, where the supply of a financial service or product need not be central to the conduct.

This general consumer protection function is regulated by the ACCC, with the specific consumer protection function as it applies to financial services and products regulated by ASIC. However, there is precedent for ASIC delegating its specific consumer protection function to the ACCC, in light of the ACCC’s more general experience and greater resources.

ii Privacy

The handling of personal information by most Australian and Norfolk Island Government agencies, all private sector and not-for-profit organisations with an annual turnover or more than A$3 million in Australia, including banks and other financial institutions, all private health service providers and some small businesses, are regulated by the Australian Privacy Principles (APPs), which comprise Schedule 1 to the Privacy Act 1988 (Cth) (Privacy Act). The APPs regulate all handling of personal information, as defined in the Privacy Act, including in relation to the collection, use and disclosure of personal information.

Additionally, Part IIIA of the Privacy Act comprehensively regulates the conduct of credit providers, credit reporting bodies and certain other entities in relation to the handling of individuals’ credit information. Inter alia, Part IIIA regulates the collection, use and disclosure of credit information by credit reporting bodies and credit providers, and provides customers with access and correction rights in respect of their credit information (subject to certain exceptions). The legally binding Privacy (Credit Reporting) Code 2014 (Version 1.2) supplements the provisions of Part IIIA of the Privacy Act by imposing additional procedural requirements on credit providers and credit reporting bodies.

iii Anti-money laundering and counter-terrorism financing

The Australian Transaction Reports and Analysis Centre (AUSTRAC) is Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regulator and specialist financial intelligence unit (FIU). Its role is to oversee compliance with AML/CTF legislation by a wide range of financial service providers, including all ADIs. AUSTRAC was established in 1989 under the Financial Transactions Reports Act 1988 (Cth) (FTR Act), initially as an FIU. Its role was expanded under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). In its role as AML/CTF regulator, AUSTRAC supervises regulated entities’ compliance with customer identification, reporting, record keeping and other requirements under the AML/CTF Act and the FTR Act.

The AML/CTF Act and its associated rules and regulations seek to reduce the risk that transactions involve money laundering or financing of terrorism. Obligations arising under the AML/CTF Act apply to entities (referred to as reporting entities) that provide designated services, as defined in that Act. Designated services include providing account and deposit-taking services. Reporting entities have obligations to enrol with AUSTRAC, adopt and maintain an AML/CTF programme, report certain matters to AUSTRAC and keep records of certain matters. A reporting entity’s AML/CTF programme includes customer identification and verification procedures that require the reporting entity to collect and verify information relating to the identity of customers and beneficial owners of customers and a process to determine whether a customer or a beneficial owner of a customer is a politically exposed person, being someone entrusted with a prominent public position or function in a government body or international organisation (or an immediate family member or close associate of such a person), prior to providing a designated service to the customer. Different identification and verification requirements apply depending upon the level of the money laundering and terrorism financing risk associated with the customer. Additional obligations apply to providers of remittance services.

iv Australian financial services licence (AFSL)

Subject to limited exceptions, a person who carries on a ‘financial services business’ in Australia must hold an AFSL covering the provision of those financial services.47

‘Financial service’ includes the provision of financial product advice, dealing in a financial product and making a market for a financial product, where ‘financial product advice’, ‘dealing’ and ‘making a market’ are widely defined to include many banking products and services.48

An exemption from the need to hold an AFSL in respect of the provision of a financial service is available to an APRA-regulated body where the service is one in relation to which APRA has regulatory or supervisory responsibilities and the service is provided only to wholesale clients.49 A body regulated by APRA includes ADIs and NOHCs.50 The distinction between a wholesale client (in respect of whom the exemption applies) and a non-wholesale (or retail) client is therefore determinative as to whether an ADI is required to hold an AFSL. Moreover, this distinction may differ depending on the particular class of product or service being provided and the source of funds being applied by the client in relation to the service. For products other than general insurance products, superannuation products and retirement savings account products, a wholesale client will include ‘sophisticated clients’, ‘professional investors’ and persons certified as having a gross income of A$250,000 for each of the last two financial years or net assets of A$2.5 million. A commonly used test as to wholesale client status is the A$500,000 test – persons who invest more than A$500,000 in respect of a financial product (other than general insurance products, superannuation products and retirement savings account products) will be considered wholesale for that investment and any financial services that relate to that investment (however, note that superannuation-sourced money is generally not counted towards satisfying the A$500,000 test).51

The provision of financial products and services by an ADI to a non-wholesale (or retail) client generally requires an AFSL.

An application for an AFSL is made to ASIC, and involves an applicant providing ASIC with detailed information in relation to the experience and qualifications of certain personnel, its operations and other information demonstrating its ability to satisfy its obligation to comply with financial services laws. As an AFSL holder, an ADI will be required to comply with statutory obligations imposed on all AFSL holders under the Corporations Act, and other legislation relating to the provision of financial services and the specific conditions of its AFSL. AFSL holders are required to report instances of significant non-compliance to ASIC.52

The Corporations Act also imposes onerous disclosure requirements in relation to the provision of financial services to retail clients (although there is some relief in relation to basic deposit products53) and in some instances product registration requirements.

v Derivatives

Australian on-exchange and over-the-counter (OTC) derivatives markets are regulated under Part 7.5A of the Corporations Act. Part 7.5A empowers the Minister54 to prescribe a class of

derivatives as subject to one or more of the following mandatory obligations: trade reporting, central clearing or trade execution.

Once a class of derivatives is prescribed by the Minister, ASIC may, with the Minister’s consent,55 make derivative transaction rules (DTRs) imposing mandatory trade reporting, central clearing or trade execution obligations in respect of the prescribed class of derivatives.56 The DTRs are intended to be detailed rules regarding the scope, duration, applicability and consequences for non-compliance with the relevant mandatory obligation or obligations. All DTRs must be approved by the Minister, and the Minister may pass regulations limiting the classes of persons and transactions to which the DTRs apply.

To date, ASIC has made DTRs imposing mandatory trade reporting and clearing obligations on Australian market participants both in and outside Australia.

The mandatory reporting obligations are imposed under the ASIC Derivative Transaction Rules (Reporting) 2013 (Reporting DTRs). The Reporting DTRs require certain reporting entities (including some foreign entities) to report to licensed or prescribed trade repositories, transaction and position information in relation to OTC derivatives in one of the prescribed classes. The classes of derivatives prescribed by the Minister for the purposes of the reporting obligations are limited to interest rate, credit, equity, foreign exchange and commodity (other than electricity) derivatives.57

Reporting entities are defined broadly to include all Australian entities, as well as certain other foreign entities to the extent their derivatives activity satisfies prescribed nexus tests.58 Foreign reporting entities may also rely on alternative reporting to the extent they report to a prescribed repository under a substantially equivalent foreign regime and satisfy a number of other conditions.59 Supplementary regulations limit the scope of the reporting mandate so that non-financial end users will not be affected.60

Australia’s reporting regime is ‘double-sided’ (i.e., both parties report), subject to limited single-sided reporting relief. Single-sided reporting relief is available to smaller market participants holding total gross notional outstanding positions of less than A$5 billion for at least two consecutive quarters, and which are not required to report under another DTR, (being Phase 3B entities) subject to certain conditions being met.61 In addition, delegated reporting rules allow a reporting entity to be taken to have complied with its reporting obligations if it has appointed in writing another person to report on its behalf and conducted a reasonable level of inquiry to determine whether the reporting is taking place.62

Mandatory clearing obligations commenced in April 2016 under the ASIC Derivative Transaction Rules (Clearing) 2015 (Clearing DTRs). The Clearing DTRs require derivatives in one of the prescribed classes between two ‘clearing entities’, or between a ‘clearing entity’ and a ‘foreign internationally-active dealer’, to be centrally cleared.63

The classes of derivatives prescribed by the Minister for the purposes of the clearing obligations are limited to interest rate derivatives denominated in Australian dollars, US dollars, euros, British pounds and Japanese yen.64 Supplementary regulations limit the practical effect of the central clearing mandate to a small number of major domestic and foreign banks that act as dealers in the Australian OTC derivatives market.65

The Australian Council of Financial Regulators consulted on the case for imposing mandatory trade execution requirements, and in November 2015 published a report on the findings of the consultation. The report did not recommend implementing mandatory trade execution requirements, although it did recommend that the regulators continue to periodically assess the case for doing so.66

In February 2016, APRA undertook a public consultation in relation to proposals to implement margin requirements and risk mitigation standards for non-centrally cleared OTC derivatives entered into by APRA-regulated entities. The proposals are set out in a draft Prudential Standard CPS 226: Margining and risk mitigation for non-centrally cleared derivatives (draft CPS 226).67 The draft CPS 226 proposed a variation to margin requirements to be phased in from 1 September 2016 to 1 September 2017,68 and initial margin requirements from 1 September 2016 to 1 September 2020.69 Consultation closed in May 2016, and 22 submissions were received. Following the consultation process, APRA announced a delay to the proposed implementation date of 1 September 2016 and released a final prudential standard (final CPS 226) with no set commencement date. At the time of writing, the prudential standard has not yet commenced,70 and APRA has announced it will advise an implementation date and phase-in timetable in due course.71 An APRA-regulated institution will only be subject to margin requirements where its consolidated group’s notional amount of non-centrally cleared derivatives exceeds the relevant minimum qualifying level. The margin requirements apply only to transactions with counterparties that also have consolidated group-level activity in excess of the relevant qualifying level. Under the final CPS226, these qualifying levels will be set at A$4.5 trillion for both variation and initial margin requirements. The qualifying levels will progressively reduce over the phase-in period.

vi Taking security
Personal property

The Personal Property Securities Act 2009 (Cth) (PPSA) regulates the taking of security over personal property in Australia and is supported by a single online register. For the purpose of the PPSA, personal property includes all forms of tangible property (e.g., goods) and intangible property (e.g., trademarks and licences), and excludes land and certain prescribed statutory rights and licences (e.g., water rights and gambling licences).

Real estate

In contrast to taking security over personal property, a financier’s ability to take security over real estate varies depending on the state or territory in which the property is located.72 Most land in Australia is registered under a system known as the Torrens system. Each state and territory operates its own Torrens system, including its own register on which it records details of the land located in its jurisdiction and any registered interests in that land (e.g., mortgages, leases and easements). Registration of an interest in land in the Torrens system creates title to the relevant parcel of land. Consequently, on a sale of a Torrens title, it is registration of a transfer, not execution of the instrument of transfer, that passes title to the purchaser. An important and fundamental principle of the Torrens system is that the register is paramount. Accordingly, the registered proprietor of an estate of interest in land obtains what is known as an ‘indefeasible’ title to its interest. This means title is not defeated by existing defects in title prior to registration or other unregistered interests, subject to limited exceptions. Importantly for finance transactions, the registered proprietor includes a mortgagee of Torrens land. Generally, the most common form of security granted over real estate is a registered real property mortgage (or ‘Torrens title mortgage’), which operates as a statutory charge on the relevant interest in the land once registered.73

vii Consumer credit

The National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) regulates the provision of consumer credit in Australia and is designed to protect consumers’ interests. The NCCP Act includes the National Credit Code (NCC) as a schedule. ASIC is responsible for administering the NCCP Act. The NCC applies to persons and entities that engage in credit activities (e.g., providing credit under a credit contract or consumer lease, or benefiting from a mortgage or guarantee relating to a credit contract) provided to an individual or strata corporation wholly or predominantly for personal, domestic or household purposes, or to purchase, renovate or improve residential property for investment purposes, or a consumer lease. Any person who engages in such credit activities is required to hold an Australian credit licence (ACL) or be entitled to rely on an exemption from the requirement. ACL holders are subject to general conduct obligations, including to engage in credit activities efficiently, honestly and fairly. ACL holders are also required to comply with responsible lending obligations that require the licensee to make reasonable enquiries about the consumer’s requirements and objectives, take reasonable steps to verify the consumer’s financial situation and undertake an assessment as to whether the proposed credit contract will be unsuitable for the consumer before entering into the credit contract. The NCC imposes prescriptive disclosure obligations relating to the entry and ongoing conduct of consumer credit and consumer lease transactions, and provides consumers with rights to challenge unjust transactions or unconscionable interest or charges or to apply for variations on the grounds of hardship.


i Funding sources

Australian ADIs primarily source their funds from customer deposits and (domestic and international) wholesale markets. Under APS 210, ADIs are required to maintain an annual funding strategy as well as a contingency funding plan. 74

ii Liquidity standards

APRA sets liquidity requirements and guidelines for Australian ADIs through Prudential Standard APS 210 and the Prudential Practice Guide on Liquidity.

APS 210 requires an ADI75 to ‘maintain an adequate level of liquidity to meet its obligations as they fall due across a wide range of operating circumstances’.76 It vests an ADI’s board and management with the responsibility to maintain an appropriate liquidity management strategy,77 which must be regularly reviewed by the ADI.78

Banks with relatively straightforward business models are subject to a minimum liquidity holding regime,79 which specifies a level of eligible liquid assets (as a percentage of liabilities) that must be held, determined on a case-by-case basis, taking into account any off-balance sheet commitments. Larger ADIs with a more complex liquidity risk are classified as ‘LCR banks’, and are required to apply various scenario analyses to test their position and set their liquidity requirements.

LCR banks are also required to satisfy an extra test introduced by APRA in 2015 to ensure consistency with Basel III liquidity standards. The test requires Australian ADIs to maintain high-quality liquid assets at levels sufficient to satisfy their liquidity coverage ratio.80 The aim is to promote short-term resilience in an acute short-term (30 day) stress scenario by maintaining a risk profile with quality assets. These requirements are in line with Basel III recommendations.

In March 2016, APRA began consultation on the Net Stable Funding Ratio (NSFR), the second Basel III liquidity standard, with a view to this taking effect in January 2018. When introduced, the NSFR will establish a minimum stable funding requirement for ADIs based on an ADI’s asset liquidity position and off-balance sheet activities. The requirements of the NSFR will ensure that long-term assets of ADIs are financed by a minimum amount of stable funding.

iii Recovery and resolution
RBA as lender of last resort

If an ADI is unable to meet its obligations or is likely to suspend payments, the RBA has discretion to act as a lender of last resort.81 This discretion allows the RBA to lend monies to any Australian or foreign ADI, although the RBA has indicated that it would only act if the Australian financial system were compromised. Since Australia’s federation in 1901, last-resort support has been provided sparingly by the RBA.

Claims and government guarantee schemes for large deposits and wholesale funding

The global financial crisis prompted the government to establish two schemes under which it guaranteed certain obligations of ADIs. The FCS was established to effect a government guarantee of deposits of up to A$1 million with Australian ADIs. The Guarantee Scheme for Large Deposits and Wholesale Funding (Guarantee Scheme) was established to effect a government guarantee of larger deposit balances with ADIs and certain ADI wholesale funding liabilities.

Under the FCS, the government guarantees certain ‘protected accounts’82 held at an Australian ADI in the event that the ADI becomes a ‘declared ADI’.83 This will occur if APRA has applied to the Federal Court of Australia to wind up that ADI, and the Finance Minister has made a declaration under Section 16AD of the Banking Act.84 ‘Protected accounts’ are now protected up to a cap of A$250,000 per account holder per ADI.85

Customers with deposit balances above the level covered by the FCS could still take advantage of a government guarantee under the Guarantee Scheme, although the Guarantee Scheme closed to new liabilities on 31 March 2010.86

iv Tax

Generally, Australian-resident taxpayers are assessed on their worldwide income, while non-resident taxpayers are only taxed on income derived from Australian sources. Non-residents are not typically subject to capital gains tax, except where the gains relate to Australian land, interests in Australian land, or shares or rights in land-rich entities, or where the gains relate to an asset of an Australian permanent establishment (PE). Broadly speaking, a PE for Australian tax purposes is a fixed location in Australia where the business of the non-resident is carried on, including an employee in Australia who habitually exercises contracting power for the non-resident.

Australian subsidiaries of a foreign company would typically be taxed on their worldwide income at the current corporate rate of 30 per cent, while a foreign company would generally only be taxed on income or gains derived from Australian sources (subject to the comments below on double tax agreements (DTAs)).

Tax treaty network

Australia has a highly developed network of DTAs, the main function of which is to avoid the double taxation of income. New treaties are regularly renegotiated with major trading partners to reflect modern treaty practices. These agreements generally prevail over the domestic tax legislation, to the extent that they are inconsistent. Under a DTA, the business profits of a foreign bank would generally not be taxed in Australia unless the foreign bank operates in Australia via a PE.

Withholding tax

Australian income tax law requires that tax be withheld from various payment types, generally as a final tax. Relevantly, amounts paid by an Australian-resident entity to a non-resident as a dividend, royalty or interest will generally be subject to withholding tax. The basic rate of withholding is 30 per cent for dividends and royalties, and 10 per cent for interest, although it will often be less under a relevant DTA or an exemption under Australian domestic law. For interest payments, foreign banks resident in the United States, the United Kingdom, Norway, Finland, Japan, France, South Africa, Switzerland, Germany or New Zealand that satisfy relevant conditions may access the ‘treaty lender concession’ contained in the relevant DTA between Australian and relevant foreign law countries, which reduces the rate of interest on payments that have access to treaty lender concessions to zero (subject to integrity provisions, including the use of back-to-back loan arrangements to fall within the concessions). Australia is generally including this concession in new or renegotiated DTAs with other jurisdictions.

Australian domestic law also contains a ‘public offer’ exemption that applies to arrangements involving lenders in any foreign country where the debt is publicly offered for participation. This exemption is subject to a set of prescriptive requirements.

In the case of dividends, a withholding tax exemption exists to the extent the profits from which the dividend is sourced have already been taxed at the corporate level (‘franked dividends’) or represent income derived from foreign business operations (‘conduit foreign income’). More recent treaties with major trading partners allow for the dividend withholding tax rate to be reduced to nil in certain circumstances.

Australian tax law adopts a ‘substance over form’ approach when determining whether a payment is a dividend or an interest payment.

Taxation of financial arrangements (TOFA)

The TOFA regime contains rules relating to the tax treatment of gains and losses from ‘financial arrangements’, and in particular codifies the timing of bringing gains and losses to account for income tax purposes. Where the TOFA regime applies, prima facie, taxpayers are required to bring sufficiently certain gains or losses to account on an accrual basis, and insufficiently certain gains or losses to account on a realisation basis. Where certain conditions are satisfied, taxpayers may elect to apply one or more of four alternative methods (hedging financial arrangements, financial reports, fair value and foreign exchange retranslation methods) of bringing gains and losses to account, typically enabling taxpayers to more closely align their accounting and tax outcomes.

Thin capitalisation

Australian thin capitalisation rules apply to restrict the deductibility of debt deductions claimed by Australian entities when the debt borrowed by the entity to fund the Australian assets exceeds certain limits. These rules are intended to prevent multinational enterprises shifting profits out of Australia by funding their Australian operations with excess debt to reduce their Australian taxable income. In determining what is debt and equity, Australian tax law contains rules that adopt a ‘substance over form’ approach.

There are a number of different methods for calculating the maximum debts permitted under the thin capitalisation rules. These include the ‘safe harbour’ limit, the ‘arm’s-length’ limit and the ‘worldwide gearing limit’. The calculation of the debt limits varies depending on the kind of entity. Entities can elect the method for calculating maximum debt that achieves the highest deduction and is the easiest to administer.

Transfer pricing

Australia has a transfer pricing regime aimed at ensuring that cross-border transactions are based on an arm’s-length price. The arm’s-length principle uses the behaviour of independent parties as a benchmark for determining the appropriate income and expense that is allocated between the cross-border parties.

Under a recent reform of the transfer pricing rules, the arm’s-length principle will be determined consistently with the OECD guidance and will operate on a self-assessment basis. Entities are also now required to have transfer pricing documentation prepared to support their self-assessed position prior to the lodgement of their income tax return. Further, these new rules will enable the Commissioner of Taxation to have the power to reconstruct (and not just question) cross-border transactions for Australian tax purposes, where the Commissioner of Taxation determines that parties have not entered into a transaction at arm’s length.

Legislation has recently passed in Australia giving effect to the OECD’s new transfer pricing standards as part of Action Item 13 of the OECD Base Erosion and Profit Shifting Action Plan. These new measures will require entities with annual global income of A$1 billion or more to provide to the Australian Taxation Office (ATO) annually specific information on the global activities of the entity, including the location of its income and taxes paid (‘country-by-country report’), an overview of an entity’s global business, its organisational structure and transfer pricing policies, and the local entity’s intercompany transactions. The government has recently signed multilateral agreements that will facilitate the exchange of country-by-country reports between tax authorities of the 31 countries signatory to that agreement.

The US Foreign Accounts Tax Compliance Act (FATCA)

FATCA is a US regime that was introduced in 2010 to combat offshore tax evasion by US persons. The rules operate by imposing due diligence and reporting obligations on offshore accounts held by US persons with non-US financial institutions (foreign financial institutions).On 28 April 2014, the Australian and US governments signed an intergovernmental agreement (IGA) intended to reduce the compliance burden on Australian banks. Under the IGA, Australian financial institutions may satisfy their US reporting requirements by reporting information to the ATO, which then coordinates the sharing of information with its US counterpart. The IGA also improves existing tax information-sharing arrangements between Australia and the US for the purpose of preventing tax evasion.

Domestic legislation has been passed in Australia that gives effect to the IGA.

v Stamp duty

Ad valorem stamp duty is not generally payable in relation to banking and finance transactions and documents such as mortgages and loan agreements. This is because the entry into these transactions and documents either does not give rise to a relevant dutiable event or transaction, or a stamp duty concession is available.

vi Goods and services tax (GST)

Australia has a consumption tax, GST, which is currently imposed at a rate of 10 per cent on the taxable supply of goods and services in Australia. The supply of most banking and financial services is not subject to GST because it is an input-taxed financial supply. However, parties to an input-taxed financial supply may not be entitled to a refund of the GST cost of their acquisitions that relate to that supply. This unrecoverable GST cost will not be an issue if the goods or services are exported such that they are not subject to GST because they are GST-free.


The following restrictions on changes in ownership apply to Australian ADIs:



Corporations Act

An acquirer may not acquire a relevant interest (broadly defined) in the voting securities of an Australian ADI that has more than 50 shareholders or that is listed on the ASX if that would result in the acquirer’s voting power (defined in the Corporations Act) exceeding 20 per cent, except by complying with the takeovers provisions in Chapter 6 of the Corporations Act. Chapter 6 of the Corporations Act contains a number of exceptions to the 20 per cent prohibition, including an acquisition by way of a takeover bid or scheme of arrangement.

Australia’s foreign investment framework

Under Australia’s foreign investment rules, the Treasurer has the power to block or unwind certain transactions if he or she finds that they are contrary to the national interest. The term ‘national interest’ is not defined, and the Treasurer has complete discretion to determine what the national interest is and whether a transaction is contrary to it.

In particular, a foreign government investor that seeks to acquire 10 per cent or more (and in some cases less than 10 per cent) of an Australian ADI, regardless of the value of the target, must notify the transaction to the Foreign Investment Review Board (failure to notify is an offence) and obtain a statement of no objection from the Treasurer to proceed with the acquisition.

A foreign government investor includes:

• a foreign government;

• an individual or corporation sole that is an agency or instrumentality of a foreign government (separate government investor); and

• any entity in which foreign governments, separate government investors or other foreign government investors (including by application of this limb of the definition) from one country have an interest of 20 per cent or more, or foreign governments, separate government investors or other foreign government investors (including by application of this limb of the definition) from multiple countries have an interest of 40 per cent or more.

The term foreign government investor is interpreted broadly to include state-owned enterprises, sovereign wealth funds and statutory pension funds.

Acquisitions by foreign persons that are not foreign government investors of shares in Australian ADIs are exempt from these rules, on the grounds that such acquisitions are regulated under the Financial Sector (Shareholdings) Act 1998 (Cth). See discussion below for further details.

Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA)

A person may only acquire more than 15 per cent of a financial sector company (as defined in the FSSA) if the acquisition is approved by the Treasurer (even where the 15 per cent shareholding limit is not exceeded, the Treasurer may declare that a person has ‘practical control’).

A financial sector company includes an ADI, an authorised insurance company or a holding company of either of them.

The Treasurer may approve an application to hold a stake in a particular financial sector company of more than 15 per cent if it is in the national interest.

Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth) (FS Act)

The FS Act regulates a transfer of the business of an ADI. Two ADIs may apply to APRA for the transfer of business from one ADI to the other. To grant approval, APRA must be satisfied that the transfer should be approved, having regard to the interests of the depositors of the transferring body when viewed as a group, the interests of the depositors of the receiving body when viewed as a group and the interests of the financial sector as a whole, and any other matters that APRA considers relevant. APRA must consult with the ACCC, ASIC and the Commissioner of Taxation in deciding on the application.*

* The specific requirements of the application process are outlined in the APRA, Transfer Rules No. 1 of 2015.


2016 marked another volatile year for the global banking industry, as financial and geopolitical uncertainty (including as a result of the United Kingdom’s decision to exit the European Union) continued to dominate the landscape. Australian financial institutions generally managed to avoid the direct effects of this market volatility, although they did experience some periods of marginally higher funding costs in offshore markets.87 Overall, industry returns suffered from downward pressure owing to a subdued domestic economy, more stringent liquidity and capital requirements, increasing loan impairments and margin compression.88 Despite this, residential property lending was relatively strong, leading to the introduction by APRA of regulatory measures to restrain speculation in the residential property sector.89


In summary, the prevailing low interest rate environment and economic outlook for Australia remain challenges for Australian financial institutions, reinforcing the need for the government’s regulatory reform agenda for the upcoming years to continue to focus on strengthening the resilience of the financial system, stimulating innovation in the financial system, supporting consumers of financial products, and strengthening regulator capabilities and accountability. In implementing the government’s objectives in these areas, APRA has indicated that it will focus on improving capital strength and the stability of liquidity and funding profiles, enhancing both the public and private sectors’ readiness for adversity, and strengthening the risk culture within the financial system. APRA will also focus on ensuring that sound mortgage lending standards are met and the ongoing implementation of Basel III related policy initiatives in Australia.90 Other industries that are receiving regulatory attention are general insurance, life insurance, private health insurers and superannuation.91 APRA has indicated that it will continue to collect data and will introduce stress testing models to better monitor these industries.92

The rise of new financial technology and innovation is also on the regulatory agenda, particularly where they threaten to outpace current regulation. Technologies such as blockchain pose regulatory issues concerning privacy, data encryption, identity management and virtual currencies.93 The government is developing its understanding of the operational and systemic challenges that these new technologies pose, and has implemented a model of government partnership with the private sector through establishing the FinTech Advisory Group.94 The Group will support the government’s objective to maintain a strong regulatory environment while supporting the growing innovation.95

1 Hanh Chau, Adam D’Andreti, Paula Gilardoni, Deborah Johns, Muhunthan Kanagaratnam and Duncan McGrath are partners, Peter Reeves is a special counsel and Louise McCoach is a consultant at Gilbert +
Tobin. The authors would like to acknowledge the contributions of Madeleine Brett-Williams, Adam Musgrave and Georgina Willcock. The authors also acknowledge Catherine Gamble for coordinating the preparation of this chapter.

2 Australian Bankers’ Association Inc, ‘History of Banks’ at www.bankers.asn.au/Banks-in-Australia/History-of-Banks.

3 Banking Act 1959 (Cth), Section 11.

4 Banking Act 1959 (Cth), Sections 8 and 9.

5 APRA, list of Authorised Deposit-Taking Institutions at www.apra.gov.au/adi/pages/adilist.aspx.

6 Banking Act, Section 11AA.

7 See generally, Melbourne APEC Finance Centre, www.apec-melbournefincen.org.au.

8 Minister for Financial Services, Superannuation and Corporate Law, Establishment of a Centre for International Finance and Regulation, 11 March 2010.

9 Executives’ Meeting of East Asia Pacific Central Bank, at www.emeap.org/index.php/about-emeap.

10 Financial Services Institute of Australasia and Access Economics, Navigating Reform: Australia and the Global Financial Crisis, October 2009, pp. 40–3; Australia–Japan Research Centre, The Basel Process and Regional Harmonisation in Asia, Pacific Economic paper No. 326 April 2002, The Australian National University, p. 2.

11 Reserve Bank of New Zealand, memorandum of understanding concerning co-operation in banking and insurance supervision, May 2012, at www.rbnz.govt.nz/regulation_and_supervision/banks/relationships/4810737.html.

12 Memorandum of understanding between the Hong Kong Monetary Authority and the Australian Prudential Regulation Authority, effective 27 April 2005.

13 Memorandum of Understanding between the China Banking Regulatory Commission and the Australian Prudential Regulation Authority, effective 23 May 2005.

14 Minister for Financial Services, Superannuation and Corporate Law, ‘Leadership Challenges for the New Era’, speech at sixth World Islamic Economic Forum, Kuala Lumpur, Malaysia, 19 May 2010; see for a list of MOUs between APRA and other regulatory organisations.

15 Banking Act, Sections 8, 9 and 11.

16 APRA determines the criteria and information requirements for granting or rejecting a banking authority and publishes these in the ADI Authorisation Guidelines available at www.apra.gov.au/adi/Documents/ADI-Guidelines-11-4-081.pdf.

17 NOHC status is available only to an Australian-incorporated company that does not carry on a business other than ownership and control of its subsidiary group. Substantively, APRA’s requirements of NOHC status are the same as for Australian ADI status.

18 APRA, ‘ADI Authorisation Guidelines’, April 2008, Paragraph 6.

19 Corporations Act 2001 (Cth), Section 601CD.

20 Banking Act 1959 (Cth), Section 11AF. Copies of APRA’s prudential standards are available at www.apra.gov.au/adi/PrudentialFramework/Pages/prudential-standards-and-guidance-notes-for-adis.aspx.

21 Banking Act, Section 11AF; Insurance Act 1973 (Cth), Section 32; Life Insurance Act 1995 (Cth), Section 230A; and Superannuation Industry (Supervision) Act 1993 (Cth), Section 34C.

22 Prudential standards can be made under Section 11AF of the Banking Act. An instrument made under Section 11AF of the Banking Act is a legislative instrument (Section 11AF(7B)). See Sections 5 and 6 of the Legislative Instruments Act 2003 (Cth) for the effect of instruments declared to be legislative instruments.

23 Banking Act, Section 11AF.

24 Banking Act, Section 62A(1B). Under the Crimes Act 1914 (Cth), Section 4AA, one penalty unit currently equates to A$180.

25 Banking Act, Section 11CA(1), 11CA(2).

26 Banking Act, Section 11CG(1).

27 Banking Act, Sections 9A and 11AB(2)(a).

28 Banking Act, Section 11CG(2).

29 Banking Act, Section 13A(4).

30 Banking Act, Section 13A(1).

31 Banking Act, Section 13.

32 Banking Act, Section 13A(2).

33 Banking Act, Section 14F.

34 Banking Act, Section 11E.

35 CPS 510, Paragraph 29.

36 Corporations Act, Section 187.

37 CPS 220, Objectives and Key Requirements.

38 Basel III is a global non-binding regulatory framework, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.

39 APS 110.

40 APS 110, Paragraph 3.

41 See ‘Basel III: A global regulatory framework for more resilient banks and banking systems’, December 2010: www.bis.org/publ/bcbs189.pdf.

42 See Annex 10 of the above for a listing of such requirements.

43 APS 110, Paragraph 22.

44 APS 110, Paragraph 23.

45 APS 110, Paragraph 25.

46 APS 110, Paragraph 29.

47 Corporations Act, Section 911A(1).

48 Corporations Act, Sections 766B, 766C, 766D.

49 Corporations Act, Section 911A(2)(g).

50 Australian Prudential Regulation Authority Act 1998 (Cth), Section 3(2).

51 Corporations Act, Sections 761G and 761GA.

52 Corporations Act, Section 912D.

53 Corporations Act, Section 1012D.

54 References to the Minister in this subsection (Derivatives) are references to the Minister of Revenue and Financial Services.

55 Corporations Act, Section 901K.

56 Corporations Act, Section 901A.

57 Corporations (Derivatives) Determination 2013.

58 Reporting DTRs, Rule 1.2.5.

59 Reporting DTRs, Subrule 2.2.1(3).

60 Corporations Laws Amendment (2014 Measures No. 3) Regulation 2014, Schedule 2 – Central clearing and trade reporting; Corporations Amendment (Derivatives Transactions) Regulation 2013, Schedule 1 Amendments; Corporations Act Regulation 7.5A.50.

61 Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulation 2015, Part 2 – Amendments commencing 1 October 2015; Corporations Act Regulation 7.5A.71.

62 ASIC Derivative Transaction Rules (Reporting) Amendment 2015 (No. 1); Reporting DTRs, Rule 2.2.7; Corporations Act Regulation 7.5A.72.

63 Clearing DTRs, Rules 1.2.3, 1.2.4, 1.2.5 and 2.1.1.

64 Corporations (Derivatives) Amendment Determination 2015 (No. 1), Schedule 1 – Amendments; Corporations (Derivatives) Determination 2013.

65 Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulation 2015; Corporations Act Regulation 7.5A.64.

66 Council of Financial Regulators Report on the Australian OTC Derivatives Market – November 2015, page 2.

67 Draft CPS 226; APRA Discussion Paper ‘Margining and risk mitigation for non-centrally cleared derivatives’ 25 February 2016.

68 Draft CPS 226, Paragraph 13.

69 Draft CPS 226, Paragraph 19.

70 Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives, Paragraph 6.

71 Response to submissions, margining and risk mitigation for centrally cleared derivatives, Paragraph 1.5.

72 Australia has a federal system, and power is shared between the federal government and the government of each state or territory. Australia has six states and two primary mainland territories, plus some other minor territories.

74 APS 210 Paragraph 13.

75 APS 210 in some respects applies differently to different categories of ADIs, including foreign-owned subsidiaries.

76 APS 210, objectives and key requirements.

77 APS 210, Paragraph 12; in relation to a foreign ADI, the responsibilities of the board in APS 210 are to be fulfilled by the senior officer outside Australia.

78 APS 210, Paragraph 16.

79 APS 210, Paragraphs 60 to 62.

80 APS 210, Paragraph 50-52.

81 Reserve Bank Act 1959 (Cth), Sections 8 and 26.

82 Banking Act 1959 (Cth), Sections 5(4), (5), (6) and (7).

83 Banking Act 1959 (Cth), see Section 5 for the definition of ‘declared ADI’ and Section I6AF.

84 Banking Act 1959 (Cth), Sections 14F and 16AD.

85 See APRA, ‘Financial Claims Scheme technical Frequently Asked Questions for ADIs’: www.apra.gov.au/CrossIndustry/FCS/Pages/fcs-faq.aspx.

86 Australian Treasury media release, ‘Government Withdraws Bank Funding Guarantee and State Guarantee’, 7 February 2010: ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/013.htm&pageID=003&min=wms&Year=&DocType.

87 APRA, Annual Report 2016, page 20.

88 KPMG, Major Australian Banks: Full Year 2016 Results Analysis at home.kpmg.com/au/en/home/insights/2016/11/major-australian-banks-full-year-2016.html.

89 APRA, Annual Report 2016, page 20.

90 APRA, Annual Report 2016, page 35.

91 Ibid.

92 Ibid.

93 Blockchain Summit 2016, ‘Regulation, policy & technical developments shaping the future of Blockchain’: www.blockchainsummit.com.au/regulation-policy--technical-developments-shaping-the-future-of-

94 The FinTech Advisory Group was established by the government and will advise the Treasurer on key issues regarding Australia’s FinTech Industry. See fintech.treasury.gov.au/working-with-australias-fintech-industry.

95 See footnote 92.