The Australian Prudential Regulation Authority has revoked an existing consent for non-regulated financial businesses operating in the short-term money market to describe themselves as ‘merchant banks’.
There are 39 non-regulated financial businesses currently entitled to use the term ‘merchant bank’, although very few of those businesses have actually been using the term.
APRA’s decision comes after its review of the guidelines for approval to use the term ‘bank’ under Section 66 of the Banking Act 1959, in response to the Government's Competitive and Sustainable Banking System package announced in December 2010.
For many years the Reserve Bank of Australia and, subsequently, APRA have allowed money market corporations (listed in Category D of registered financial corporations under the Financial Sector (Collection of Data) Act 2001 (FSCODA)) to use the restricted word ‘bank’ only in the expressions ‘merchant bank’, ‘merchant banker’ and ‘merchant banking’. In its review, APRA found that the term ‘merchant bank’ had been overtaken in common language by the term ‘investment bank’, a term that APRA does not allow unauthorised financial businesses to use. Therefore, APRA believes the use of the term ‘merchant bank’ could cause confusion in the minds of the public when used by entities that are not authorised to carry on banking business in Australia. The global financial crisis has highlighted the importance of a clear demarcation between the regulated banking system and the non-regulated or ‘shadow’ financial sector.
APRA has consulted with relevant institutions on its proposal to revoke the existing consent and has provided appropriate transition to allow those businesses using the term ‘merchant bank’ to revise their promotional material.
Further information on Category D registered financial corporations under FSCODA is available on APRA’s website.
Information on guidelines and exemptions relating to Section 66 of the Banking Act 1959 can also be found on APRA's website.