AUSTRALIA

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

The banking market includes significant foreign banks, investment banks, a number of regional banks and non-bank financial institutions carrying on banking business, including credit unions, building societies and friendly societies.

1 Louise McCoach and David Landy are partners at Clayton Utz. The authors would like to acknowledge the contribution of Greta Burkett, Alex Chernishev, Terence Kwong, Dominic Matthews, Caitlin Sheehy and Robert Turnbull for their research in this chapter.

2 Australian Securities Exchange, ‘Financial Sector Profile’ June 2011, accessed 22 December 2012 at www.asx.com.au/documents/research/financial_sector_factsheet.pdf.

3 APRA List of ADIs, accessed 13 December 2012 at www.apra.gov.au/adi/pages/adilist.aspx.

4 That is, an ADI incorporated in Australia, whether as a subsidiary of a foreign bank or not.

5 That is, ADIs not incorporated in Australia.

Technically, exchange control is an RBA function; however, at a practical level, there is no need for RBA approval where foreign exchange transactions are conducted through money market dealers and foreign exchange dealers authorised by RBA.

6 The Banking Act 1959 (Cth).

7 Banking Act, Section 11AA.

8 The sole regulator of Australian registered companies and a regulator of financial services.

9 APRA Act, Section 8(2).

10 APRA Act, Section 12(1).

Any entity that wishes to carry on a banking business in Australia is required by the Banking Act to be authorised by APRA as an ADI or have the benefit of an exemption from the authorisation requirement.19 Further approval is required for an entity to use the description ‘bank’ in its name.20

11 See Explanatory Memorandum, Australian Prudential Regulation Authority Amendment Bill 2003 (Cth), paragraphs 3.18 and 3.19.

12 The ministers responsible for administering the APRA Act are the Treasurer and the Assistant Treasurer.

13 APRA Act, Section 12(3).

14 The Australia-wide legislation relating to corporations, securities, financial products and related markets.

15 Reserve Bank of Australia and Australian Prudential Regulation Authority, ‘Macroprudential Analysis and Policy in the Australian Financial Stability Framework’, p. 3, September 2012, accessed 18 December 2012 at www.rba.gov.au/fin-stability/resources/2012-09-map-aus-fsf/pdf/2012-09-map-aus-fsf.pdf.

16 Ibid., p. 2.

17 Ibid., p. 3.

There are three options relevant to ADI authorisation:

There are two key restrictions on operating through branches as a foreign ADI that typically make it impractical for foreign banks to carry on retail operations as a foreign ADI:

A foreign bank that does not have ADI status may:

32 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.

33 www.apra.gov.au.

34 The consultation package included Basel Committee on Banking Supervision, ‘Basel III: A global regulatory framework for more resilient banks and banking systems’, December 2010, accessed 1 December 2012 at www.bis.org/publ/bcbs189.pdf and Basel Committee on Banking Supervision, ‘Basel III: International framework for liquidity risk measurement, standards and monitoring’, December 2010, accessed 1 December 2012 at www.bis.org/publ/bcbs188.pdf.

35 APRA Website, ‘Implementing Basel III capital reforms in Australia’, September 2012, accessed 14 December 2012 at www.apra.gov.au/adi/PrudentialFramework/Pages/Implementing-Basel-III-capital-reforms-in-Australia-September-2012.aspx; APRA Website, ‘Basel III capital: counterparty credit risk and other measures’, November 2012, accessed 14 December 2012 at www.apra.gov.au/adi/PrudentialFramework/Pages/Basel-III-CCR-Final-November-2012.aspx.

36 APRA, ‘Discussion Paper: Implementing Basel III liquidity reforms in Australia’, 16 November 2011, accessed 18 December 2012 at www.apra.gov.au/adi/documents/adi_dp_iblr_november_2011.pdf.

38 For example, see Banking Act Section 62A(1B).

39 Banking Act, Section 62A(1B)(c). Note ‘significant’ is defined in Section 62A(1C) for the purposes of Section 62A(1B).

40 Banking Act, Section 62A(1B). Under the Crimes Act 1914 (Cth), Section 4AA, one penalty unit currently equates to A$110.

41 Banking Act, Section 11CA(1).

42 Banking Act, Section 11CG(1).

43 Banking Act, Section 9A and Section 11AB(2)(a).

44 Banking Act, Section 11CG(2).

45 Financial Sector (Collection of Data) Act 2001 (Cth), Section 13.

Foreign ADIs are also required to provide information to APRA in relation to their Australian branches, regarding standardised credit risk (off-balance sheet exposures), repricing analysis, off-balance sheet business and securitisation.

The consequences of an ADI failure are largely regulated by Section 13A of the Banking Act, which gives APRA broad powers, acting on its own or through the appointment of an administrator, to investigate the affairs of an Australian ADI or take control of an Australian ADI’s business in the following circumstances:

47 APRA, Reporting forms and instructions accessed 29 March 2010 at www.apra.gov.au/Statistics/Basel-II-reporting-forms-and-instructions-for-all-ADIs.cfm. APRA Reporting Forms ARF 112.2A, 117, 118 and 120.2.

48 Basel Committee on Banking Supervision, ‘Consultative Document: Definition of Capital Disclosure Requirements’ December 2011, accessed 23 November 2012 at www.bis.org/publ/bcbs212.pdf.

49 Banking Act, Section 13A.

50 Banking Act, Section 13.

52 Banking Act, Section 14F.

53 Banking Act, Section 11E.

54 APRA, ‘Strengthening APRA’s Crisis Management Powers: Consultation Paper’, September 2012, accessed 23 November 2012 at www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2012/APRA/Key%20Docs/PDF/Discussion%20Paper.ashx.

55 Banking Act, Section 13A.

56 Banking Act, Section 13A(4). In ‘Strengthening APRA’s Crisis Management Powers: Consultation Paper’, it has been argued that the Section 13A(3) hierarchy of priorities applying to Australian ADIs unduly constrains statutory managers from implementing a recovery plan for distressed ADIs. Therefore, it has been proposed that the schemes of priorities not apply where a statutory manager has been appointed over an ADI.

The Corporations Act requires an Australian ADI to have a minimum of three directors, at least two of whom must ordinarily reside in Australia. There is no statutory requirement for any other organ of management (board committees, supervisory boards, etc.). Nor is there any statutory rule governing the make-up of the board. The ultimate responsibility for management remains at the board level; the existence, role and responsibilities of board committees (including credit committees) are an internal management matter and do not receive any recognition under the Corporations Act, other than by Section 198D, which provides that decisions made by validly delegated board committees are as effective as decisions made by the board itself.

There are three main actors in the management of Australian ADIs (in common with all Australian incorporated companies): executives, executive directors and non-executive directors. Directors (both executive and non-executive) are subject to statutory duties of care, diligence and good faith. Those statutory duties also apply to non-directors who are involved in making decisions that affect a substantial part of the company’s business or who have the capacity to significantly affect the company’s financial standing.

Directors and executives owe their duties to the corporate entity, rather than to shareholders. The constitution of a wholly owned subsidiary can include a provision enabling its directors to act in the interests of the sole shareholder. Otherwise, the Corporations Act does not relevantly distinguish between holding and subsidiary companies.

The Corporations Act does not prescribe any limits on the remuneration of directors and executives, although there are limits on the level of retirement benefits that can be paid without shareholder approval and a prohibition on hedging unvested remuneration by key management personnel of disclosing entities (which includes entities listed on the Australian Securities Exchange (‘ASX’)).

The Corporations Act also regulates directors and officers of foreign ADIs, although not to the same extent that Australian ADIs are regulated.

58 See speech by RBA Governor Macfarlane in 1999 quoted at p. 67 in Bryan Fitz-Gibbon & Marianne Gizycki, ‘A History of Last Resort Lending and Other Support for Troubled Financial Institutions in Australia’ Research Discussion Paper 2001-07, System Stability Department Reserve Bank of Australia, (2001).

The prudential standards relating to corporate governance are found in APS 510. Although APS 510 applies to all ADIs, foreign ADIs only have to comply with selected provisions.

If listed on the ASX, an ADI needs to 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 it has not.

Over the course of 2012, APRA released a set of revised prudential standards for regulatory capital. The revised standards are broadly in line with the Basel III reforms and became effective on 1 January 2013. The key requirements of the revised prudential standards are summarised below.

61 Australian Prudential Regulatory Authority Guidelines, ‘ADI Authorisation Guidelines’, April 2008, paragraphs 15 and 16.

62 APS 110, paragraph 23.

63 APS 110, paragraph 22.

64 APS 110, Attachment A, paragraph 4.

65 As determined in accordance with APS 112 and 113.

66 As determined in accordance with APS 114, 115, 116 and 117.

67 As determined in accordance with APS 120.

68 See APS 110, paragraph 22 and the definition of ‘Regulatory Capital’ in APS 111, paragraph 8.

II instruments, notwithstanding that they fail to satisfy the new capital requirements introduced on 1 January 2013.

Both additional Tier I capital and Tier II capital instruments must meet the requirements for loss-absorption set out in APS 111. Under those requirements, additional Tier I capital and Tier II capital instruments must include a provision that they will be written

accessed 18 December 2012 at www.apra.gov.au/adi/PrudentialFramework/Documents/Interim_arrangements_AT1_and_T2_capital_instruments_30_March_2012.pdf; APRA Media Release, ‘To All locally incorporated authorised deposit-taking institutions – Basel III capital: interim arrangements for Additional Tier 1 and Tier 2 capital instruments’, 28 September 2012, accessed 18 December 2012 at www.apra.gov.au/adi/Documents/20120928-Letter-to-industry-on-interim-arragements.pdf; APRA Media Release, ‘To All locally incorporated authorised deposit-taking institutions – Interim arrangements for additional Tier 1 capital instruments’, 27 May 2011, accessed 18 December 2012 at www.apra.gov.au/adi/Publications/Documents/Basel-III-interim-Tier-1-criteria_FINAL.pdf.

70 APS 111, Attachment B.

71 APS 111, Attachment E.

72 APS 111, paragraphs 27–29 and Attachment E.

74 APS 111, Attachment J, paragraph 1.

75 APS 111, Attachment J, paragraph 3.

76 APS 110, paragraph 22.

77 APS 110, paragraph 24.

78 APS 110, paragraph 25.

79 APS 110, paragraph 29.

80 Ibid.

81 APS 110, Attachment B.

In addition, the following items must be deducted from the corresponding category of capital (subject to some exceptions):

Regulatory capital requirements play an important role in the business activities of an Australian ADI particularly given the different risk weights assigned to various assets in determining the Australian ADI’s risk-based capital ratio. Accordingly, regulatory capital considerations have a significant influence over the types of transactions entered into by an Australian ADI and the manner in which it conducts its activities.

Other changes to the capital adequacy standards proposed by the Basel III reforms will impact on the capital planning activities of Australian ADIs and restrict the range of instruments that they will be able to issue to satisfy their capital adequacy requirements.

To supplement the specific capital adequacy requirements for conglomerate groups under APS 110, APRA has developed additional prudential standards aimed at minimising contagion risk between conglomerate group members. These additional standards are set out in APS 222.

89 APS 120, Attachment D, paragraph 24.

90 APS 110, paragraph 10.

91 APRA Media Release, ‘APRA releases consultation package for the supervision of conglomerate groups (Level 3)’, 14 December 2012, accessed 14 December 2012 at www.apra.gov.au/MediaReleases/Pages/12_34.aspx.

93 APS 222, paragraph 8.

94 APS 222, paragraph 8(c).

95 APS 222, paragraph 9.

96 APS 222, paragraphs 21–31.

97 APS 222, footnotes 7–9.

98 Superannuation Industry (Supervision) Act 1993 (Cth), Section 6, Retirement Savings Accounts Act 1997 (Cth), Section 3.

The National Consumer Credit Protection Act 2009 (‘the NCCP Act’) (including the National Credit Code that comprises Schedule 1 to the Act) and related legislation came into effect on 1 July 2010.

The NCCP Act regulates all persons who engage in credit activities relating to credit regulated by the NCCP Act, by introducing a licensing requirement, as well as a new responsible lending regime.

Credit is only regulated under the NCCP Act if it is provided wholly or predominantly either:

With respect to licensing, any person who engages in ‘credit activities’ as defined in the NCCP Act is required to hold an Australian credit licence. At a high level, there are two categories of persons who will engage in credit activities for the purposes of the Act and will therefore need to be licensed:

Licensees are subject to a number of general conduct obligations and must also comply with the new ‘responsible lending’ requirements set out in the NCCP Act. New requirements under the Act in relation to ‘responsible lending’ include a requirement to provide consumers with a credit guide.

The National Credit Code (‘the NCC’) is largely a national re-enactment of the former Uniform Credit Codes. It imposes prescriptive disclosure obligations and

processes on a wide range of activities relating to the entry and ongoing conduct of the consumer credit or consumer lease transactions, as well as providing consumers with certain rights to challenge unjust transactions or unconscionable interest or charges or to apply for variations on the grounds of hardship.

Both the NCCP Act and the NCC contain various sources of civil and criminal liability for failures to comply.

In August 2012 the NCCP Act was amended by the Consumer Credit Legislation Amendment (Enhancements) Act 2012 (‘the Enhancements Act’). The Enhancements Act, commencing 1 March 2013, will impose new obligations on businesses that engage in credit services, particularly in relation to consumer leases, short-term small amount loans and reverse mortgages. This includes responsible lending obligations and new disclosure requirements.

In addition, the Enhancements Act:

The National Privacy Principles (‘the NPPs’) which comprise Schedule 3 to the Privacy Act 1988 (Cth) (‘the Privacy Act’) regulate the collection, use and disclosure of ‘personal information’.

Part IIIA of the Privacy Act comprehensively regulates the conduct of banks and credit reporting agencies in relation to customer credit histories (or credit reports). The Act ensures that customers can know what is on their credit report and are informed when a bank might make an adverse comment on their credit report (and how a customer can avoid this happening).

The Privacy Act has been amended by the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (‘the Amendment Act’) which was passed on 29 November 2012 and received royal assent on 12 December 2012. The Amendment Act implements the Australian government’s first stage response to the Australian Law Reform Commission’s 2008 report, ‘For Your Information: Australian Privacy Law and Practice’. There will be a 15-month transition period before the changes come into force, with the new provisions coming into force on 12 March 2014.

The Amendment Act will amend the Privacy Act in a number of important ways including:

The APPs mirror the NPPs in many respects but are structured differently, to accurately reflect the life cycle of personal information from collection to disclosure. The APPs also expand the protections afforded to individuals regarding their personal information in certain areas, and impose new obligations in relation to the collection, handling and maintenance of personal information by APP entities. Key changes include the introduction of a new regime to regulate direct marketing and a new ‘accountability’ regime for transfers of personal information outside Australia.

The Amendment Act also establishes a more comprehensive credit reporting regime. The amendments expand the categories of information which can be accessed by credit providers in the credit reporting system.

The Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth) (‘the AML Act’) imposes obligations on ‘reporting entities’ who provide ‘designated services’ (which is widely defined to include many financial transactions). Reporting entities include banks.

The AML Act requires reporting entities to perform a number of duties, which includes implementing a compliance programme, verifying the identity of customers, reporting specified types of transactions and suspicious matters, performing ongoing customer due diligence and maintaining accurate records.

The Australian Securities and Investments Commissions Act 2001 (Cth) (‘the ASIC Act’) regulates consumer protection in relation to financial services, and covers unconscionable conduct, misleading and deceptive conduct and false or misleading representations.

The ASIC Act also includes an unfair contract terms regime which commenced on 1 July 2010. Under the regime, a term in a standard form contract that is found to be unfair is void. A term will be unfair if it causes a significant imbalance in the parties’ rights and obligations arising under the contract and it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, subject to certain exclusions.

Persons who hold an Australian Credit Licence (which will include most banks and credit providers) are required by ASIC to be members of an ASIC-approved external dispute resolution scheme. To date, there are two: the Financial Services Ombudsman and the Credit Ombudsman Service Limited.

It follows that the provision of financial products and services by an ADI to a non wholesale (or retail) client requires an AFSL.

An application for an AFSL is made to ASIC; therefore it is additional to the application to APRA for ADI authorisation. It is unlikely that an ADI will not satisfy the requirements of ASIC in relation to the AFSL. In short the application to ASIC must provide evidence of ability to satisfy statutory obligations and which involves providing ASIC detailed information in relation to internal management and operations and information demonstrating the experience and qualifications of management. Once licensed, an AFSL holder must provide periodic reports to ASIC as regards compliance with its AFSL.

The Corporations Act imposes onerous requirements upon AFSL holders in relation to disclosures to retail clients, although there is some relief in relation to basic deposit products.

102 Corporations Act, Section 766A.

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

104 APRA Act, Section 3(2).

105 Corporations Act, Sections 761G and 761GA.

In line with its G-20 commitments, Australia is moving towards increased regulation of the over-the-counter (‘OTC’) derivatives market.

On 3 January 2013, the Corporation Legislation (Derivative Transactions) Act 2012 (Cth) (‘the Derivatives Act’) came into effect, setting out a framework for the reform of the OTC derivatives market by amending the Corporations Act.

The Derivatives Act itself does not impose any obligations, but rather, empowers the Minister for Financial Services and Superannuation (the ‘Minister’) to prescribe a class of derivatives as subject to one or more of the following mandatory obligations:

Prior to exercising this power, the Minister is required to consult with ASIC, APRA and the RBA and to prepare a regulation impact statement concerning the utility, feasibility and impact of the relevant mandatory obligation(s) on the affected markets. Once a class of derivatives is prescribed by the Minister, ASIC may make derivative transaction rules (‘DTRs’). These are detailed rules regarding the scope, duration, applicability and consequences for non-compliance with the mandatory obligation(s). DTRs are to be developed by ASIC in consultation with the public and relevant bodies such as APRA and the RBA. 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.

107 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services in Australia, 23 November 2009.

Failure to comply with DTRs will trigger civil penalty provisions in the Corporations Act but will not invalidate the relevant derivative transactions themselves.

Each of Australia’s four major banks are part of a financial services conglomerate that includes a superannuation trustee company and an insurance company. As such, the regulation of the Australian banking market is inextricably linked with the superannuation and insurance industries.

The superannuation industry forms part of the modern Australian retirement income system, which is comprised of the following ‘three pillars’:

A strong retirement income system supports many of the macroeconomic ends that a sophisticated and stable banking industry seeks to deliver. This has led to many parallel regulatory developments in both the superannuation and banking industries. Accordingly, the banking and superannuation industries intersect at various points.

The prudential regulator, APRA, is the principal regulator of the superannuation industry, and has been since 1998. ASIC also has responsibilities in this area. APRA has recently been empowered to make and enforce prudential standards for the superannuation industry in much the same way that APRA already makes and enforces prudential standards in respect of ADIs, NOHCs, life insurance companies and general insurance companies. The new prudential standards developed for the superannuation industry are discussed in further detail below.

In general, employers in Australia contribute on a quarterly basis a percentage of an employee’s salary or wages into a fund established to comply with superannuation legislation requirements (known as a complying superannuation fund). At present, the minimum level of contributions by an employer in respect of an employee is nine per cent of that employee’s ordinary time earnings.

Employees generally have the right to choose a superannuation fund and move their superannuation savings between funds. Although the minimum superannuation contribution is currently 9 per cent, any employer and employee can contribute additional amounts. These voluntary contributions may be made as part of the overall terms and conditions of employment.

Alternatively, employees may make additional contributions to superannuation through salary reductions.

A complying superannuation fund is taxed at the concessional rate of up to 15 per cent of its assessable income. Capital gains, including gains on the disposal of shares and other securities held by the fund, are taxed at the rate of 10 per cent where the asset was held for 12 months or more. The Australian government also allows deductions for employers’ superannuation contributions and deductions for contributions by people who are substantially self-employed.

In general, superannuation fund members are unable to access retirement benefits until they reach a minimum age, known as the ‘preservation age’, or they meet a specified condition of release (for example, permanent retirement, death, permanent incapacity). The preservation age for persons born before 1 July 1960 is 55 years. For persons born after this date but before 30 June 1964, there is a gradual increase in the preservation age up to 60 years. For all persons born after 30 June 1964 the preservation age is 60 years. Payments made from a taxed superannuation fund to persons aged 60 or more are tax-free.

In December 2010, the Australian government responded to the Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System (the ‘Cooper Review’ or ‘Super System Review’) by announcing its ‘Stronger Super’ package of reforms, which is made up of four main parts:

In 2011, the Australian government engaged in further consultation regarding Stronger Super and introduced a number of bills which, at the time of writing, are at various stages of the legislative process, the majority of which have become law. The first tranche of the legislation for Stronger Super comprised the Superannuation Guarantee (Administration) Amendment Act 2012 (Cth), the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 (Cth) and the Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Act 2012 (Cth).

The Act aims to create a workable framework for the MySuper product. Important features of the Act are:

The Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Act 2012 (Cth), which commenced on 29 March 2012, provides low income earners with a tax concession on their superannuation contributions.

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110 Superannuation Legislation Amendment (Trust Obligations and Prudential Standards) Act, Part 3A.

111 APRA Media Release, ‘APRA releases quarterly superannuation statistics for September 2012’, November 2012, accessed 1 December 2012 at www.apra.gov.au/MediaReleases/Pages/12_31.aspx.

112 SPS 220 Risk Management, SPS 231 Outsourcing, SPS 232 Business Continuity Management, SPS 310 Audit and Related Matters, SPS 510 Governance and SPS 520 Fit and Proper.

113 SPS 114 Operational Risk Financial Requirement, SPS 160 Defined Benefit Matters, SPS 250 Insurance in Superannuation, SPS 521 Conflicts of Interest and SPS 530 Investment Governance.

Second, with respect to trustee and director duties, the TOPS Act implements several reforms including:

It is anticipated that the majority of these proposed reforms will be enacted and take effect from 1 July 2013.

APRA has recently released revised prudential standards following its review of the prudential supervision of insurance companies (‘LAGIC’). The revised standards are aimed at improving the risk sensitivity of capital standards so that:

The new standards effectively harmonise APRA’s approach to the regulation in Australia of capital held by insurers and make it consistent with that applied to Australian ADIs including through the adoption of a three-pillar approach to the prudential requirements and supervision of both life and general insurers.

In order to support their lending, Australian ADIs primarily source their funds from customer deposits and (domestic and international) wholesale markets.

The current APS 210 will be superseded by a revised APS 210 which will implement the Basel III global liquidity reforms in Australia. In November 2011, APRA released a discussion paper and revised draft APS 210, which contemplates two liquidity regimes for ADIs:

121 Some of the requirements in APS 210 are confined to select categories of ADIs including Australian ADIs, Australian branches of foreign ADIs and foreign-owned subsidiaries of ADIs.

122 APS 210, p. 1.

123 APS 210, p. 2.

124 APS 210, pp. 2–3.

125 APS 210 p.2.

APRA has indicated that larger ADIs will have until 2015 to meet the LCR standard and 2018 to meet the NSFR standard, which is in line with the timetable for Basel III. In order to satisfy the LCR standard, ADIs must hold high-quality liquid assets that fall into two categories:

Australia has relatively low levels of government debt which may result in insufficient Level 1 and Level 2 assets being available to meet the demand for those assets by ADIs seeking to satisfy the LCR standard. To address this situation (both in Australia and in other jurisdictions in a similar position), the Basel Committee has announced that it will accept alternative standards for determining liquid assets for LCR purposes in the affected jurisdictions, including the recognition of committed liquidity facilities with a central bank for a fee. Consistent with this, the RBA and APRA announced on 17 December 2010 that an ADI will be able to establish a committed secured liquidity facility with the RBA (‘CLF’) to cover any shortfall between the ADI’s holding of high-

13 December 2012 at www.apra.gov.au/adi/documents/adi_dp_iblr_november_2011.pdf.

The global financial crisis prompted the Australian government to establish two schemes in October 2008 under which the Australian government guaranteed certain obligations of ADIs. The Financial Claims Scheme (‘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 (‘the Guarantee Scheme’) was established to effect a government guarantee of larger deposit balances with ADIs and certain ADI wholesale funding liabilities.

128 RBA and APRA, ‘Australian Implementation of Global Liquidity Standards’, Joint Media Release 17 December 2010, accessed on 23 December 2012 at www.rba.gov.au/media-releases/2010/jmr-10-31.html.

129 RBA, ‘The RBA Committed Liquidity Facility’, Media Release 16 November 2011, accessed on 14 December 2012 at www.rba.gov.au/media-releases/2011/mr-11-25.html.

130 RBA and APRA, ‘Australian Implementation of Global Liquidity Standards’, Joint Media Release 17 December 2010, accessed on 23 December 2012 at www.rba.gov.au/media-releases/2010/jmr-10-31.html; APRA, ‘Discussion Paper – Implementing Basel III Liquidity Reforms in Australia’ 16 November 2011 accessed 13 December 2012 at www.apra.gov.au/adi/documents/adi_dp_iblr_november_2011.pdf.

131 RBA, ‘The RBA Committed Liquidity Facility’, Media Release 16 November 2011, accessed on 14 December 2012 at www.rba.gov.au/media-releases/2011/mr-11-25.html.

Under the FCS, which is administrated by APRA,133 the Australian government guarantees certain ‘protected accounts’134 (originally with a cap of up to A$1 million) held at an Australian ADI in the event that the ADI becomes a ‘declared ADI’.135 Under the Banking Act, an ADI will become a ‘declared ADI’ if APRA has applied to the Federal Court of Australia to wind up that ADI and the Minister has made a declaration under Section 16AD of the Banking Act.136 In May 2011, APRA released a FCS consultation paper which proposed that the FCS be automatically activated either at the time that APRA applies to the court for a winding up of an insolvent ADI or at the time that the court issues a winding-up order. That consultation paper also proposed that the Treasurer should have a discretion to activate the FCS when APRA appoints a statutory manager to an ADI, before APRA applies for the winding-up of the ADI. As at the date of this publication, these proposed amendments have not been implemented in the Banking Act. The FCS was due to expire on 12 October 2011, it being three years since its introduction.137 On 11 September 2011, the Australian government announced the permanent extension of the FCS and, from 1 February 2012, a new permanent cap for ‘protected accounts’ of A$250,000 per person per ADI.138 Under the new arrangements, term deposits existing on 10 September 2011 will continue to be guaranteed up to a cap of A$1 million until 31 December 2012, or until the deposit matures, whichever occurs first. In addition, the Australian government has clarified that certain rules will apply to rolled over deposits under the new arrangements.

Pages/11_30.aspx.

141 APRA Media Release, ‘APRA release proposed amendments to prudential standard of Financial Claims Scheme’, 7 November 2012, accessed 1 December 2012 at www.apra.gov.au/MediaReleases/Pages/12_27.aspx.

142 Australian Government Guarantee Website, ‘About the Scheme’, accessed 27 November 2012 at www.guaranteescheme.gov.au/.

143 Australian Government Paper, ‘Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding Rules’, Schedule 3, accessed 28 November 2012 at www.guaranteescheme.gov.au/rules/pdf/scheme-rules-20042011.pdf.

144 Ibid.

The Guarantee Scheme will remain in force for liabilities or deposits in respect of which an application was made or accepted prior to 24 March 2010:

Liability for Australian income tax is based on the dual tests of source and residence and is determined in accordance with the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth) (together, ‘the Australian Tax Act’).

Under the Australian Tax Act, an Australian resident is subject to tax on all income derived, irrespective of whether the income is Australian or foreign sourced, and all net capital gains. As a general rule, under Australian domestic law, a non-resident will be subject to Australian tax only in respect of income derived from an Australian source. Capital gains derived by a non-resident are generally not subject to Australian tax unless they are derived from the direct or indirect holding of an interest in Australian real property or in respect of an asset held in carrying on business through an Australian permanent establishment.

An Australian resident subsidiary of a foreign bank would therefore be subject to tax in Australia on its worldwide income at the company tax rate (currently 30 per cent). A foreign bank that does not carry on business through an Australian branch, on the other hand, would be subject to Australian income tax in respect of its Australian sourced income. However, where the foreign bank is resident in a country with which Australia has concluded a double tax agreement (‘DTA’), the business profits of the foreign bank would generally not be taxable in Australia where the foreign bank does not have a permanent establishment in Australia.

The Australian Tax Act contains specific provisions for the taxation of Australian branches of foreign banks. Pursuant to those provisions:

Certain foreign banks may choose not to apply these provisions in respect of a year of income. The election is made on an annual basis and is only available where the foreign bank is a resident of a country with which Australia has concluded a DTA and the tax treatment under that DTA is more favourable. However, the interest withholding tax provisions would still apply even where such an election is made.

Interest and dividends paid to a non-resident by an Australian resident are taxed on a withholding basis: tax will be withheld from interest at a rate of 10 per cent, and from a dividend paid from untaxed profits, at a rate of 30 per cent. There is no withholding from dividends paid from after tax profits (those dividends are fully franked) or conduit foreign income (foreign income derived by an Australian subsidiary that is repatriated as a dividend to a foreign parent). These rates of withholding may be further reduced where the foreign bank is resident in a jurisdiction with which Australia has concluded a DTA. Foreign banks resident in Finland, France, Japan, New Zealand, Norway, South Africa, the UK and the US may be eligible for the interest withholding tax exemption under the applicable DTA, subject to certain safeguards, including in relation to back-to-back loans.

148 The Board of Taxation is currently reviewing the appropriateness of the current LIBOR cap on the deductibility of interest. Refer to Assistant Treasurer and Minister Assisting for Deregulation, ‘Board of Taxation to Review Permanent Establishment Attribution Rules’, Media Release No. 36 dated 24 May 2012.

this announcement, the rate of withholding for borrowings by foreign bank branches from their overseas head office will fall from 5 per cent to 2.5 per cent in 2014–2015 and to zero in 2015–2016. The rate of withholding for borrowings by other financial institutions from foreign financial institutions and borrowings by financial institutions from offshore retail deposits will fall from 10 per cent to 7.5 per cent in 2014–2015 and to 5 per cent in 2015–2016.

The Australian Tax Act contains comprehensive rules for the taxation of financial arrangements (‘TOFA’). These provisions provide methods for calculating gains and losses arising from financial arrangements (of which some are elective), and the time at which these gains and losses will be brought to account for income tax purposes. These methodologies are intended to reflect the different methods that may be used in financial accounting standards for dealing with financial assets and liabilities.

Thin capitalisation provisions apply to foreign controlled Australian entities, as well as foreign banks carrying on business through an Australian branch. These provisions will limit debt deductions where the relevant entity does not meet minimum equity funding requirements. A foreign bank may elect to group its Australian branch together with its wholly owned Australian subsidiaries for this purpose.

Whereas returns paid in respect of ‘debt interests’ may generally be deductible, returns paid in respect of ‘equity interests’ are not deductible. The Australian Tax Act contains a prescriptive set of rules which must be applied to determine whether an interest constitutes a ‘debt interest’ or an ‘equity interest’ for Australian tax purposes.

Tax regulations which commenced on 12 December 2012 removed uncertainty regarding the debt-equity characterisation of certain hybrid capital instruments as a result of the Basel III capital reforms and insurance capital reforms. As a result, eligible Tier II instruments issued by ADIs on or after 1 July 2013 are not precluded from being treated as debt for tax purposes. This means that returns paid in respect of such instruments may potentially be deductible.

Australia also has a transfer pricing regime which applies to cross-border transactions involving related parties. An arm’s-length principle is used to calculate the Australian taxable income that would be expected to be derived if the parties were dealing at arm’s length with each other. These provisions apply equally to dealings between a foreign bank and its Australian branch.

Australian transfer pricing rules are currently under reform.

Australia has a broad-based goods and services tax (‘GST’) imposed at a rate of 10 per cent on the supply of goods and services in Australia. The supply of certain goods and services, including the supply of most banking and financial services, are exempt from GST (in Australia called ‘input taxed’). Others, including exported goods and services, are zero rated (or, in Australia, called ‘GST free’).

An Australian ADI that has more than 50 shareholders, or which is listed on the ASX, is subject to the takeover provisions in Chapter 6 of the Corporations Act, which prohibit the acquisition of more than 20 per cent of the voting shares in a company unless the acquirer follows one of a number of prescribed routes that require the terms applicable to that acquisition to be made available to all shareholders for acceptance or rejection.

Related provisions require the public disclosure of shareholdings of 5 per cent or more in a company listed on ASX and allow both a listed company and ASIC to issue compulsory tracing notices to uncover the beneficial owners of shares held through nominees and trustees.

The Corporation Act restricts an Australian ADI from financially assisting a person to acquire shares in the Australian ADI (or its holding company) without shareholder approval unless the assistance does not materially prejudice the interests of the Australian ADI (or its shareholders) or the Australian ADI’s ability to pay its creditors.

FATA imposes a regime under which certain acquisitions of interests in Australian companies, including Australian ADIs, must be notified to the Australian government. The government can refuse permission for an acquisition which is contrary to the national interest.

The following transactions are compulsorily notifiable (with the following monetary thresholds being indexed annually for inflation):

A person is taken to hold a substantial interest in a corporation if that person, alone or with any associates, is in a position to control 15 per cent or more of the voting power in the corporation or holds interests in 15 per cent or more of the issued shares in the corporation. (The terms ‘control’, ‘interest’ and ‘associates’ have extensive meanings.)

Acquisitions of interests by US investors in financial sector companies, as defined by the FSSA (which includes banks), are exempt from FATA. The FSSA continues to apply.

Although the Banking Act regulates banking business in Australia, there is no formal approval required by APRA under the Banking Act for the acquisition of shares in an Australian ADI. However, given the ambit of APRA’s powers, it is customary when acquiring a large stake in an Australian ADI to include a condition precedent to address the possibility that APRA could act to block or impose conditions on a proposed acquisition.

151 Australian Foreign Investment Policy, January 2012.

152 Set out in Section 13 of the FSSA.

For a voluntary transfer of business to take effect, APRA must receive a complying application, the transfer must be adequately adopted by the transferring body and the receiving body in accordance with specified transfer rules (for example, by approval of the body’s members in general meeting), the transfer must be approved by APRA, and APRA must issue a certificate of transfer stating the transfer is to take effect. APRA may also approve mechanisms specified by either or both the transferring body or the receiving body for determining things that are to happen, or that are taken to be the case, in relation to assets and liabilities that are to be transferred, or in relation to the transfer of business that is to be effected.

Once a certificate of transfer from APRA comes into force, the receiving body becomes the successor in law of the transferring body to the extent of the transfer. That is, the transferred assets and liabilities become assets and liabilities of the receiving body without any transfer, conveyance or assignment, and to the extent of the transfer, the duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body. The terms and conditions of employment (including any accrued entitlement to employment benefits) of employees of the transferring body are not affected by these successor arrangements. Subject to certain exceptions, a transfer effected under the Act does not cause the receiving body, transferring body or any other person to be in breach of an Australian law or any contractual provision prohibiting, restricting or regulating the assignment or transfer of any asset or liability, or release any surety from all or any of the surety’s obligations.

In granting its approval, APRA must have regard to the interests of the depositors of the transferring body and the receiving body, and the interests of financial sector as a whole. APRA must also consult with the Australian Competition and Consumer Commission, ASIC and the Commissioner of Taxation in deciding whether to approve the transfer (unless those agencies have notified that they do not wish to be consulted). APRA may impose conditions as part of its approval.

APRA may also issue internal transfer certificates under the FS Act that enable the transfer of assets or liabilities (or both) between two bodies corporate that are part of the same company group as part of a proposal by an Australian ADI for a restructure that would make the Australian ADI a subsidiary of a non-operating holding company.

APRA may also make a determination under the FS Act that a compulsory transfer of a business from one ADI to another Australian ADI occur where the transferring body has breached the Banking Act, the transferring body has informed APRA that it considers it is likely to become unable to meet its obligations or that it is about to suspend payment, and in other limited specified circumstances.

The unprecedented level of financial markets reform was one of the key challenges that the Australian banking industry faced in 2012.

APRA also introduced new prudential standards for the superannuation industry, updated and harmonised the capital requirements for general and life insurers, developed its prudential framework for conglomerate groups and embarked on a broader review of APRA’s crisis management powers. This is likely to be an area of continued focus for the Australian government in 2013.

Additionally, the Australian government has moved towards increased regulation of Australia’s OTC derivatives market to reduce the systemic risk associated with OTC derivatives and improve the transparency of this market.

The introduction of new investor protections and consumer credit reforms also resulted in more regulatory activity during 2012, particularly those introduced by the Enhancements Act and the FOFA reforms.

Australia’s financial system is considered to be sound and resilient due to prudent economic management, strong supervision of the financial sector and a relatively low exposure to the troubled eurozone economies. Having said this, Australia is not immune to the persistent volatility in the global markets caused by the unresolved European debt crisis, a slowdown in China’s growth and fears of the US approaching a ‘fiscal cliff’.

Given these concerns we expect that the regulators will continue to focus on strengthening the stability of Australia’s financial system through continued regulatory reform. Navigating these regulatory reforms will be a major challenge for Australia’s banking industry in 2013. Some of the more significant hurdles include:

Scenario-based stress testing by both APRA and the International Monetary Fund has shown that the Australian banking system would be able to withstand a future economic crisis due largely to the efforts of Australian banks to strengthen their capital position through the use of equity issues and profit retention.

155 International Monetary Fund, ‘Australia: Financial System Stability Assessment’, dated 26 October 2012, p. 1.

156 Reserve Bank of Australia, ‘Financial Stability Review’, March 2012, accessed 14 December 2012 at www.rba.gov.au/publications/fsr/2012/mar/pdf/0312.pdf.

Level 15

1 Bligh Street

Sydney

New South Wales

Australia

Tel: +61 2 9353 4000

Fax:+61 2 8220 6700

lmccoach@claytonutz.com

dlandy@claytonutz.com

www.claytonutz.com

Louise McCoach is a partner in Clayton Utz’s banking and financial services group. Her practice covers a broad range of banking and regulatory work, including advising on prudential supervision matters and the regulation of financial institutions. Ms McCoach also has extensive experience in debt capital markets, securitisation and derivatives including acting for creditors to securitisation restructures and advising on related enforcement and insolvency-remoteness issues. Ms McCoach’s experience extends to acting on CDO transactions and innovative derivatives-based facilities for commercial paper programmes and advising on associated regulatory, capital adequacy and netting issues.

David Landy is a partner in Clayton Utz’s corporate advisory and M&A group and has over 20 years’ experience. His broad range of corporate law experience includes mergers and acquisitions, corporate and financial market regulation and general corporate and commercial advice.

Mr Landy has extensive experience in corporate and financial market regulation (including Corporations Act, ASX Listing Rules and ASX Settlement Rules), mergers and acquisitions, capital management (share buybacks and capital reductions), capital raisings, Australian Securities Exchange (ASX) listings, employee share plans and equity incentive plans and Financial Services Reform.

Mr Landy has also assisted organisations and their boards in establishing and reviewing their corporate governance frameworks.