APRA releases consultation package on banking exemption orders and section 66 guidelines

The Australian Prudential Regulation Authority (APRA) today released a consultation package on proposed changes to exemption orders under the Banking Act 1959 (Banking Act) as well as revised guidelines on implementation of section 66 of the Banking Act.

A number of institutions that undertake ‘banking business’, as defined in the Banking Act, are currently exempt from the need to be authorised as deposit-taking institutions (ADIs). Such exemptions are generally historical in nature. The exemptions cover Registered Financial Corporations (RFCs) and religious charitable development funds, which are funds that have been set up to borrow and use money for religious and/or charitable purposes.

In December 2012, the Government announced that the Australian Securities and Investments Commission (ASIC) and APRA would consult on a number of proposals to strengthen the regulation of RFCs that issue debentures to retail clients. In this consultation package, APRA proposes to restrict the use of certain terms by RFCs, including the words ‘deposit’ and ‘at-call’, and to require all debenture offerings to have a minimum maturity of 31 days. These changes are intended to reduce the potential for retail investors to confuse debentures issued by RFCs with deposit products offered by ADIs.

APRA proposes that these new requirements would take effect from 1 July 2013. Any funds raised after that date would need to comply with the proposed requirements; existing retail debenture issues would be allowed a transition period of up to three years in which to become compliant.

APRA is also of the view that it is not appropriate to continue to exempt RCDFs from the need to be authorised under the Banking Act where they are offering products to retail investors. Accordingly, APRA is proposing that RCDFs wishing to continue to accept retail funding seek to become either an ADI or an RFC or operate a managed investment scheme. APRA proposes to withdraw the current exemption order for RCDFs that offer retail products from 28 June 2014. However, RCDFs that do not take funds from retail investors may continue to receive a Banking Act exemption.

APRA’s proposals are also consistent with recent recommendations from the International Monetary Fund, in its 2012 Financial Sector Assessment Program (FSAP) review of Australia, that APRA tighten the conditions for exemption from the Banking Act.

APRA’s guidelines on section 66 of the Banking Act provide information on the use of restricted words and expressions. APRA has revised these guidelines in response to recent developments in the classification of ADIs.

APRA seeks comment from interested parties on its proposals and the revised draft section 66 guidelines, which can be found on APRA's website.