The Australian Prudential Regulation Authority (APRA) today announced its proposed regulatory arrangements for a new class of Authorised Deposit-taking Institutions (ADIs) specialising in credit card services.

Known as Specialist Credit Card Institutions (SCCIs), the new entities will issue credit cards and acquire credit card transactions from merchants.

APRA will authorise and supervise SCCIs under the Banking Act 1959 to ensure that they meet their obligations to other participants within the credit card scheme.

APRA has been working closely with the Reserve Bank of Australia over the past few months in developing this new SCCI regime. Under the Reserve Banks reforms, a four-party credit card scheme that has been designated by the Reserve Bank will be required to consider applications for participation by SCCIs on the same terms as for other ADIs.

"New entrants to the credit card market that are made possible by these reforms will increase competition to the ultimate benefit of consumers," said Mr Graeme Thompson, APRAs Chief Executive Officer.

A full copy of the draft Authorisation Guidelines and Prudential Standard is available on APRAs website www.apra.gov.au together with the proposed capital, reporting, and levy requirements for SCCIs.

APRA invites comments on the draft by 31 October 2002.

APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. It currently regulates $1.5 trillion in assets for 20 million Australians.

The main features of the proposed SCCI regime are:

• To give APRA the power to regulate SCCIs under the Banking Act, a regulation will be made under subparagraph (b)(ii) of the definition of "banking business" in section 5 of the Banking Act to prescribe credit card issuing and acquiring activities in four-party credit card schemes (Bankcard, Visa and MasterCard) as constituting banking business. As a result, any entity wishing to undertake the "banking business" of issuing credit cards and/or acquiring credit card transactions as a participant or member in these schemes, whether in conjunction with other banking business (i.e. as ordinary ADIs) or in the form of a pure credit card operation (i.e. as SCCIs), must obtain an ADI authority from APRA. The proposed regulation will not affect existing ADIs that are members of these schemes as they will continue to be covered by their existing ADI authority; nor will it affect non-financial companies that issue credit cards or acquire credit card transactions without participating directly in a four-party credit card scheme. As ADIs, SCCIs will be subject to the requirements of the Banking Act (and any other Acts applicable to ADIs such as the Financial Sector (Shareholdings) Act 1998 and the Financial Sector (Transfers of Business) Act 1999) and APRAs ongoing supervision.
  
  
• SCCIs will be authorised as a special class of ADIs. Conditions will be imposed on the authority of SCCIs restricting activities of these specialist institutions (and their subsidiaries). SCCIs, which must be locally incorporated, will be allowed to engage only in credit card operations (issuing and/or acquiring). SCCIs will be prohibited from taking deposits other than holding incidental credit balances in cardholders accounts (e.g. prepayments or refunds) that arise in the normal course of the credit card operations.
  
  
• Foreign or domestic non-financial (commercial) corporations wishing to participate in any of the four-party credit card schemes in Australia will need to establish a SCCI subsidiary under the new regime. Foreign banking organisations wishing to undertake only credit card business in Australia would be able to establish such presence under the SCCI regime. Existing ADIs will also be allowed to establish SCCI subsidiaries under the proposed regime to segregate their credit card operations from other banking business.
  
  
• The draft Authorisation Guidelines for SCCIs adapts the existing ADI guidelines for SCCIs. In most cases, the authorisation criteria for SCCIs will be the same as for ADIs. Initial capital requirements for SCCIs will be assessed on a case-by-case basis depending on the nature (issuing or acquiring or both) and volume of the anticipated business. Given that SCCIs will not have depositor funds at risk, APRA is prepared to facilitate granting exemptions under the Financial Sector (Shareholdings) Act where the 15 per cent shareholding limit is exceeded.
  
  
• As ADIs, SCCIs will be subject to the same prudential requirements in respect of capital adequacy, board composition, fitness and propriety of directors and senior management, liquidity, credit quality, asset securitisation, large exposures, associations with related entities, outsourcing, external and internal audit arrangements and risk management systems as set out in the relevant ADI Prudential Standards, including draft revised ADI Standards (available on the APRA website www.apra.gov.au). Given their specialised nature that may result in a concentration of certain types of risks, it is proposed that SCCIs be subject to a higher minimum capital ratio of 15 per cent.
  
  
• As ADIs, SCCIs will be subject to the Financial Sector (Collection of Data) Act 1998. Accordingly, all the existing ADI reporting standards (including their corresponding reporting forms) will apply to SCCIs (ADI reporting standards and the relevant reporting forms are available on the APRA website). Since SCCIs will be authorised to engage only in credit card issuing and/or acquiring business, some of these reporting requirements (which intend to capture the full range of banking activities of ordinary ADIs) would not be relevant to SCCIs. APRA will exempt SCCIs from returns that are considered irrelevant to SCCIs given their limited business activities. In due course, further consideration will be given to collecting additional data on the acquiring or issuing businesses. Consistent with existing arrangements, any amended ADI returns and the associated reporting standards will be released for industry comment before being finalised.
  
  
• As ADIs under the Banking Act, SCCIs will be subject to the Financial Institutions Supervisory Levies Collection Act 1998 and the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998. Since SCCIs will be restricted to undertake only credit card issuing and/or acquiring business, the supervisory effort required for these specialist institutions will be less than that for other ADIs that undertake the full range of banking activities. To reflect this, it is proposed that a lower levy amount be imposed on SCCIs on the same basis as foreign bank branches. These levies are determined by the Minister for Revenue and Assistant Treasurer; ADI levies for 2002-03 are available on the Minister for Revenue and Assistant Treasurers website http://assistant.treasurer.gov.au.

Comments on the draft Authorisation Guidelines and Prudential Standard (available on the APRA website www.apra.gov.au) as well as the proposed capital, reporting, and levy requirements for SCCIs are invited by 31 October 2002, and can be sent to creditcard@apra.gov.au.