How can international banks operate in your jurisdiction?
Key regulators and applicable legislation
Banks in Australia are subject to several legislative regimes, and regulated by a number of different regulators. The principal legislation and key regulators are:
- the Australian Prudential Regulation Authority (APRA), which regulates entities that conduct banking business in Australia, underthe Banking Act 1959(Cth) (Banking Act) and APRA Prudential Standards and Guidelines;
- the Australian Securities and Investments Commission (ASIC), which is Australia’s corporate, markets and financial services regulator under theCorporations Act 2001(Cth) (Corporations Act). It also administers theAustralian Securities and Investments Commission Act 2001(Cth) and theCompetition andConsumer Act 2010(Cth); and
- the Australian Transaction Reports and Analysis Centre (AUSTRAC) which regulates providers of designated services under theAnti-Money Laundering and Counter-Terrorism Financing Act 2006(Cth) (AML/CTF Act) and related regulations.
Requirements under the Banking Act
In order for an international bank to be permitted to carry on “banking business” in Australia, which consists principally, a taking of deposits and making advances of money, it must apply to APRA for authority. An organisation to which such authority is granted is an authorised deposit-taking institution (ADI). In addition, as the words “bank”, “banker” and “banking” are considered restricted words under the Banking Act, an entity that proposes to use those expressions must obtain prior consent from APRA, (unless that use falls within some narrow exemptions).
Subject to APRA’s approval, an international bank may carry on banking business through a locally incorporated subsidiary or by establishing an Australian branch. A locally incorporated subsidiary will be a separate legal entity from its foreign bank parent, whereas the Australian branch is part of the same legal entity as the foreign bank. If an international bank receives authority to operate through an Australian branch, it is known as a “foreign ADI”. If operating through a subsidiary, it will be an ADI. A representative office may only be opened with APRA’s prior written consent and is not permitted to carry on banking business. However, it can carry out liaison and research activities.
It is possible for an international bank to operate through both a local branch and a locally incorporated subsidiary. In that case the foreign ADI branch and subsidiary will need to take steps to operate at arm’s length from one another. It is also APRA’s current preference for newly established operations of foreign banks to be established as branches and not as locally incorporated subsidiaries.
Requirements under the Corporations Act
A locally incorporated subsidiary of an international bank will be subject to the same general corporate requirements as any other Australian company. If an international bank operates in Australia through a local branch or a representative office, it will need to register as a foreign company under the Corporations Act. ASIC will assign an Australian Registered Body Number to the international bank branch. As a registered foreign company in Australia, the international bank branch will have certain ongoing reporting obligations to ASIC, including the annual lodgement of balance sheets, profit and loss statements, cash flow statements and other documents with ASIC. Such financial reports must be prepared either in accordance with the law in the company’s place of origin or, if reports are not prepared in the company’s place of origin, in accordance with the Corporations Act. The reports may be audited. There are also some exemptions from reporting which may be available.
If the international bank is intending to conduct a financial services business in Australia then it will also need to obtain an Australian financial services license (AFSL). Under the Corporations Act, an entity is deemed to carry on business in Australia if it has a place of business in Australia, and therefore, the operation of an Australian branch or locally incorporated subsidiary will generally provide the requisite geographical connection. “Financial services” are broadly defined and include, providing advice, dealing, arranging or providing custodial or depositary services in relation to financial products. “Financial products” are facilities through which a person makes a financial investment, manages financial risk or makes non-cash payments and includes securities, derivatives, funds and a wide range of other financial arrangements. This definition does not include “credit facilities” such as loans or security provided for loans. In addition, if an ADI is only dealing with wholesale clients in relation to financial products that are regulated by APRA then no AFSL will be required. Other exemptions may apply if the international bank is only transacting in financial products on its own behalf.
There are other regulatory requirements with which an international bank operating in Australia must comply, including those relating to privacy and competition. Furthermore, depending on whether an international bank is owned wholly or in part by a foreign government, it may be required to comply with Australia’s foreign investment regime and seek approval from the Foreign Investment Review Board for its establishment or certain transactions that it may undertake.
The AML/CTF Act may apply to an international bank’s dealings with Australian customers if:
- the international bank’s dealings with Australian customers constitute “designated services” under the AML/CTF Act (which include the operation of accounts, making of a loan, accepting an electronic funds transfer, issuing or selling a security or derivative and providing remittance services); and
- there is the requisite geographical link with Australia.
Provided that the requirements above are met, the international bank will be classified as a “reporting entity”. As a reporting entity, it will need to comply with certain requirements under the AML/CTF Act, including the: establishment of an AML/CTF program, assessment and determination of risks in relation to the designated services, customer identification, initial and ongoing verification of customer identification material, cash transaction (exceeding A$10,000), reporting international funds transfer (of any amount) and suspicious matter reporting and restrictions on certain practices.
Anti-corruption and anti-bribery
Bribery and corruption are serious criminal offences under Australian Federal and State laws, which will apply to an international bank’s activities. At a Federal level, division 70.2 of the Criminal Code 1995 (Cth) prohibits the bribery of both foreign public officials and Australian Commonwealth public officials. This captures the conduct of an Australian subsidiary of an international bank, or of any person who engages in conduct constituting an element of the criminal offence where that conduct occurs wholly or partly in Australia. Each of the respective States and Territories of Australia has a legislative regime that applies to any person engaging in corrupt activity. Penalties include incarceration for individuals and fines for corporations.
What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?
Home country authorizationIn order to open a branch in Australia as a foreign ADI, an international bank must be an authorised bank in its home country and have received consent from its home supervisor for the establishment of a banking operation in Australia. APRA will need to consider that the international bank is subject to adequate prudential supervision in its home country. For instance, the international bank must meet comparable capital adequacy and operational risk standards as set by its home country’s regulator.
Corporate governance requirementsThere are also corporate governance requirements that must be met by all ADIs, whether local or foreign ADIs. These requirements are set out in APRA’s Australian Prudential Standard (APS) 510. Both the foreign ADI and its substantial shareholders (that is, persons who or whose associates own 5% of the votes attached to voting shares in the foreign ADI) must demonstrate to APRA that they are “fit and proper”. There are extensive criteria in determining whether a person is fit and proper, which are provided in APS 520. With respect to a foreign ADI and its substantial shareholders, these include being well-established and financially sound entities of standing and substance. In relation to directors and senior management of a foreign ADI, a requisite level of experience, competence and integrity must be demonstrated.
Risk managementThe international bank’s risk management and internal control systems must also be acceptable to APRA, including in the areas of credit risk, market risk, liquidity risk and operational risk. The international bank must demonstrate that its arrangements for reporting to its parent foreign bank or head office are adequate and it must also have compliance processes and systems to ensure compliance with APRA’s prudential standards and other Australian regulatory and legal requirements. Its information and accounting systems must be capable of producing all required statutory and prudential information accurately and on time from the start of banking operations in Australia. External and internal audit arrangements must also satisfy APRA’s requirements under APS 310.
Depositor protection limitsDepositors with foreign ADIs do not have the benefit of certain protections provided under the Banking Act to depositors with locally incorporated ADIs, such as APRA’s ability to issue recapitalisation directions or to appoint a statutory manager. Accordingly, for the protection of retail depositors, foreign ADIs are not permitted to accept an initial deposit from individuals and non-corporate institutions of less than A$250,000. To prevent attempts to circumvent this restriction, APRA will look through to the ultimate source of the A$250,000 deposit. Furthermore, the international bank must disclose to prospective depositors the requirements of the Banking Act that do not apply to it and must obtain prior approval from APRA for the form of such disclosure.
International banks should also note that various Australian statutes distinguish between “retail” and “wholesale” investors, with stricter regulatory requirements applying for the provision of services to retail investors. The distinction between “retail” and “wholesale” is complex but broadly, involves an asset threshold, an investment threshold and the level of sophistication of the investors.
Is resolution an important factor in your supervisor’s determination of a branch?
In 2013, APRA conducted an assessment (outlined in the “Information Paper – Domestic systemically important banks in Australia – December 2013”) to identify the domestic systemically important banks (D-SIBs) in Australia. APRA concluded in that paper that the “big four” banks in Australia are identified as D-SIBs in Australia and are therefore subject to the D-SIB framework, including setting up adequate resolution and recovery plans and a requirement for an additional 1% of tier one equity capital. However, APRA also concluded in the paper that there is no objective basis to extend the D-SIB framework to the wider group of banks as that would not reflect the spirit of the Basel Committee’s D-SIB reforms.
Other than the assessment conducted in 2013, there are currently no regulatory requirements or prudential standards that specifically target resolution and recovery planning requirements. However, there are other existing requirements (such as APS 232 – Business Continuity Management) which APRA relies on to ensure banks have in place strategies to deal with any major disruptions.
However, the Banking Act requires that the Australian assets of an insolvent foreign ADI be available to meet the ADI’s Australian liabilities in priority to its other liabilities. Other than in relation to capital or the appointment or removal of directors, APRA can issue any directions to a foreign ADI which it can issue to a locally incorporated ADI, including a direction not to transfer assets out of Australia. APRA can issue such directions where, for example, the ADI is in distress or financial system stability is at risk. However, APRA cannot appoint a statutory manager to the Australian business of a foreign ADI or invoke compulsory or voluntary transfer of business powers which are available to it in relation to locally incorporated ADIs.
In its 2014 annual report, APRA acknowledged that although its resolution regime is “broadly consistent with minimum international standards”, there are gaps and deficiencies in its powers that prevent full alignment with international standards.
A recent government inquiry into Australia’s financial system (which concluded in December 2014) recommended an increase in APRA’s crisis management and resolution options, and the inquiry strongly supported enhancement of crisis management toolkits for regulators. This may lead to some regulatory reform by APRA specifically to cover this area.
What are the regulatory reporting requirement placed on branches?
The Financial Sector (Collection of Data) Act 2001 (Cth) (Data Collection Act) provides that “registrable corporations” which are subject to the Data Collection Act must supply APRA with certain financial information and documentation. Section 7 of the Data Collection Act provides that a registrable corporation is a foreign corporation, a trading corporation or a financial corporation whose total assets exceed $5 million; and
- whose sole or principal business in Australia is borrowing money and the provision of finance;
- whose assets arising from the provision of finance exceed 50 per cent of its total assets in Australia; or
- it engages in the provision of finance in the course of carrying on in Australia a business of selling goods by retail, and the value of its assets (comprising debts due and resulting from transactions entered into in the course of the provision of finance) exceeds $25m.
There are various exemptions which apply. For instance, a corporation will not be subject to this regime if it is an ADI, or the principal purpose for which the corporation borrows money is to provide financial accommodation to a “related corporation” (as defined in the Data Collection Act).
If a corporation is a “registrable corporation”, it must supply APRA with certain financial information and documentation including:
- details of the company’s incorporation;
- details of related corporations and particulars of its ordinary borrowing and the type of finance ordinarily provided by the corporation; and
- an audited balance sheet describing the assets and liabilities of the corporation.
In addition, APRA has the power to determine reporting standards in relation to the financial documentation that a registrable corporation supplies to APRA under section 13 of the Data Collection Act. The full suite of the current reporting standards are on APRA’s website, and includes reporting standards regarding statements of financial position, debt securities held, equity securities held and other information. Each reporting standard provides different asset thresholds and reporting periods. For example, the reporting standard regarding the statement of financial position (RS320) requires a registrable corporation to provide a statement of financial position (in prescribed form) only if the registrable corporation’s total assets are over A$50m, with reporting to APRA to be made each calendar month.
Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?
The Australian Prudential Regulation Authority (APRA) has in the past allowed foreign banks to have both a branch and a local subsidiary authorised to conduct banking business in Australia. Some of those legacy arrangements still exist. However, APRA’s current practice is to allow a foreign bank that complies with the applicable application requirements, to establish a branch or a local subsidiary, but not both.
A bank can establish a branch in Australia without having first established a subsidiary. Both for a branch or a subsidiary APRA’s authorisation will be required and the criteria for authorisation are broadly the same. It is not more difficult to obtain authorisation as a branch as compared to a subsidiary. APRA will expect any newly incorporated Australian subsidiary to be approved by the bank’s home country prudential regulator and for that subsidiary to comply with the rules of that regulator insofar as they apply to foreign subsidiaries. It will also expect the parent of a local subsidiary bank to take operational, regulatory and prudential responsibility for its subsidiary. It has become usual for foreign banks to establish a representative office before establishing either a branch or a subsidiary but that is not an APRA requirement. A representative office is not permitted to conduct or solicit banking business.
The main considerations in choosing whether to establish a branch or subsidiary will be (a) the nature of the business that the bank wishes to conduct in Australia and (b) home country prudential considerations which may differ depending upon whether a branch, rather than a subsidiary is established. One notable restriction on an Australian branch of a foreign bank is a restriction on it accepting deposits from retail customers. That restriction does not apply to a subsidiary of a foreign bank.
Where can I find further information?