The Banking Regulation Review
Law Business Research
Editor - Jan Putnis
Reproduced with permission from Law Business Research Ltd.
This article was first published in The Banking Regulation Review,
1st edition (published in June 2010 . editor Jan Putnis).
For further information please email Adam.Sargent@lbresearch.com
Contents

Publisher
Gideon Roberton
business development manager
Adam Sargent
mar ket ing ass ista nt
Hannah Thwaites
editorial ass ista nt
Nina Nowak
production manager
Adam Myers
pr oduction editor
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sube ditor
Charlotte Stretch
editor-in-chief
Callum Campbell
managing director
Richard Davey
Published in the United Kingdom
by Law Business Research Ltd, London
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c 2010 Law Business Research Ltd
c Copyright in individual chapters vests with the contributors
No photocopying: copyright licences do not apply.
The information provided in this publication is general and may not apply in a specific
situation. Legal advice should always be sought before taking any legal action based
on the information provided. The publishers accept no responsibility for any acts or
omissions contained herein. Although the information provided is accurate as of May
2010, be advised that this is a developing area.
Enquiries concerning reproduction should be sent to Law Business Research, at the
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acknowledge ments
The publisher acknowledges and thanks the following law firms for their learned
assistance throughout the preparation of this book:
Afr idi & Ange ll
Anders on Mo - ri & Tomots une
Bonelli Ere de Pappa lar do
Bre din Pra t
Bugge , Are ntz-Ha nse n & Ras musse n
Clayton Ut z
Da vis Polk & War dwe ll LL P
DL A Nordic
Elvinger , Hoss & Prusse n
F.O. Akinre le & Co
Formosa Tra nsnat ional Att orneys at La w
Ganado & Ass ociate s
Gide Loyrette Nouel AARPI
Gorr isse n Federsp iel
He nge ler Mueller
Ka dir, Andri & Part ner s
Kim & Chang
Le nz & Stae helin
Mar val, O�fFarre ll & Ma ira l
Matt os Filho Advoga dos
Mulla & Mulla & Cra igie Blunt & Car oe
ii
Munoz Tamayo & Asociados Aboga dos S.A.
Na utaD utilh
Paksoy
Russe ll McVeag h
Ruz. ic. ka Cse kes s.r.o.
Schoenherr s�Ci Asocia�CtiI SCA
Skudra & U - dris
slaughter and may
T Studnicki, K Pl- es zka, Z C�Lwia.kalski, J Gors ki Spk
Vieira de Almeida & Ass ociados.
Webber Wentzel
WongPart ners hip LL P
Acknowledgements
iii
Editor�fs Preface ............................................................................................vii
Jan Putnis
Chapter 1 International initiatives ....................................................... 1
Jan Putnis
Chapter 2 Argentina ........................................................................... 16
Santiago Carregal, Martin G Vazquez Acuna
and Josefina Tobias
Chapter 3 Australia ............................................................................. 28
Louise McCoach and David Landy
Chapter 4 Belgium ............................................................................. 49
Anne Fontaine
Chapter 5 Brazil .................................................................................. 64
Jose Eduardo Queiroz
Chapter 6 Colombia ........................................................................... 70
Carlos Gerardo Mantilla Gomez
Chapter 7 Denmark ............................................................................ 86
Tomas Haagen Jensen and Tobias Linde
Chapter 8 European Union ................................................................ 97
Jan Putnis
Chapter 9 France ...............................................................................112
Olivier Saba, Samuel Pariente, Jennifer Downing,
Bernard-Olivier Becker and Hubert Yu Zhang
Chapter 10 Germany ...........................................................................135
Thomas Paul and Sven H Schneider
Chapter 11 India ..................................................................................148
Shardul Thacker
Chapter 12 Italy ...................................................................................158
Giuseppe Rumi
conte nts
Contents
iv
Chapter 13 Japan .................................................................................169
Hirohito Akagami and Toshinori Yagi
Chapter 14 Korea .................................................................................179
Sang Hwan Lee, Chan Moon Park and Hoin Lee
Chapter 15 Latvia ................................................................................190
Armands Skudra
Chapter 16 Luxembourg .....................................................................201
Franz Fayot
Chapter 17 Malaysia ............................................................................214
Andri Aidham bin Dato�f Ahmad Badri,
Julian Mahmud Hashim and Tan Kong Yam
Chapter 18 Malta .................................................................................224
Rosette Xuereb
Chapter 19 New Zealand ....................................................................236
Guy Lethbridge and Debbie Booth
Chapter 20 Nigeria ..............................................................................247
Adamu M Usman and Zelda Odidison
Chapter 21 Norway .............................................................................260
Terje Sommer and Markus Nilssen
Chapter 22 Poland ...............................................................................269
Tomasz Gizbert-Studnicki, Tomasz Spyra and Michal- Bobrzy�Lnski
Chapter 23 Portugal ............................................................................280
Pedro Cassiano Santos
Chapter 24 Romania ............................................................................293
Adela-Ioana Florescu and Veronica Alexeev
Chapter 25 Singapore ..........................................................................304
Elaine Chan
Chapter 26 Slovakia .............................................................................317
Sylvia Szabo
Chapter 27 South Africa ......................................................................329
Johan de Lange and Johann Scholtz
Chapter 28 Spain .................................................................................344
Juan Carlos Machuca
Contents
Chapter 29 Sweden ..............................................................................360
Mikael Kovamees, Carl Schwieler and Lina Williamsson
Chapter 30 Switzerland .......................................................................367
Shelby R du Pasquier, Patrick Hunerwadel, Marcel Tranchet
and Valerie Menoud
Chapter 31 Taiwan ..............................................................................382
Chun-yih Cheng
Chapter 32 Turkey ...............................................................................393
Serdar Paksoy and Selin N Tiftikci
Chapter 33 United Arab Emirates .......................................................405
Amjad Ali Khan and Stuart Walker
Chapter 34 United Kingdom ...............................................................413
Jan Putnis
Chapter 35 United States ....................................................................434
Luigi L De Ghenghi, Reena Agrawal Sahni and Cristina Fong
Chapter 36 Vietnam ............................................................................473
Samantha Campbell and Nguyen Thi Tinh Tam
Appendix 1 About the Authors ..................................................487
Appendix 2 Contr ibuting Law Firms�f conta ct deta ils .....506
vii
editor�fs preface
Legal and regulatory areas of concern come and go in their perceived importance. It
is, however, very difficult to recall any other occasion when a subject regarded by many
lawyers as so obscure and arcane as international banking regulation has come to such
prominence in such a short period of time.
Before the onset of the financial crisis in western economies in 2007, banking
regulation was regarded by many as a discipline practised by technocrats who were, to
put it politely, best left to themselves. The subject has risen up the agenda so quickly
since then that few lawyers who advise financial institutions have had time to draw breath
and assess the position now reached. The reality, of course, is that no final position has
been reached and none is ever likely to be reached: banking regulation will continue to
evolve, punctuated by bursts of activity every time there is a serious crisis to manage.
What has happened is that the importance of this subject, and its rightful place amongst
legal disciplines, has finally been recognised. This means that there is now great demand,
from the banks themselves, but also from governments and regulators, for accessible
and user-friendly explanations of the applicable rules.
The continual evolution of the rules makes any survey of banking regulation
very difficult to write without risking almost immediate obsolescence. This book is an
attempt to rise to that challenge and it is hoped that future editions will address the
many further developments in this area that are expected to take place in the coming
months and years. The book is aimed principally at lawyers and others who need access
to an overview of the applicable rules in the important areas that the book covers and
a commentary on recent developments. It also includes commentary on many of the
areas of banking regulation that are of critical importance to the major cross-border
transactions in which banks become involved.
Preface
viii
The book illustrates the many and differing approaches that governments and
banking regulators have taken to addressing what they perceive to be the problems
affecting the banks that they regulate. To that extent, the lack of international coordination
is a potential source of dismay amongst politicians and others who have spent so much
time over the past three years trying to develop common approaches to the international
challenges highlighted by the financial crisis.
It is, however, to be hoped that surveys of the kind in this book also inform the
continuing debate about how to minimise the risk of a further crisis on anything like the
scale that we have just seen. It will, quite literally, pay for governments to appreciate that
further significant financial crises are inevitable in the future, and that the principal aim
of reform should, therefore, be to minimise their likely impact, both on the lives of the
millions of people who rely on banks and on local and regional economies.
It is a tribute both to the contributors and the publishers that so many leading
banking and regulatory lawyers have made themselves available to write chapters for
this book. I would like to thank them all for the support and encouragement that they
have provided at a time when many of them have been almost overwhelmed with work
on other projects emerging from the financial crisis. Many of the contributors have
also been involved in initiatives designed to stabilise and reform the banking sectors in
their countries. I would also like to thank Gideon Roberton and his colleagues at the
publishers for their efforts in coordinating the project that this book has become, and
in bringing it to fruition.
Jan Putnis
Slaughter and May
London
June 2010
28
Chapter 3
Australia
Louise McCoach and David Landy*
Clayton Utz
I INTRODUCTION
Australia has a sophisticated and stable banking industry, which provides a full range of
banking and financial services and products.
The banking market is dominated by four major Australian banks: Australia and
New Zealand Banking Group Limited, Commonwealth Bank of Australia, National
Australia Bank Limited and Westpac Banking Corporation. Their market concentration
has increased in recent years, with the Commonwealth Bank of Australia acquiring Bank
of Western Australia in October 2008 and Westpac Banking Corporation acquiring St
George Bank Limited in December 2008.
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.
At 30 April 2010, there were 185 authorised deposit-taking institutions (�eADIs�f)
authorised by the Australian Prudential Regulation Authority (�eAPRA�f) to carry on
banking business in Australia, comprising 21 Australian ADIs (being 12 Australian
banks and nine subsidiaries of foreign banks), 34 foreign ADIs, 11 building societies,
108 credit unions, three non-operating holding companies (�eNOHCs�f) and eight others.
Commercially speaking, the Australian banking industry can be said to be
deregulated; however, it cannot be said (commercially or legally) to be unregulated.
* Louise McCoach and David Landy are partners at Clayton Utz. The authors would like to
acknowledge the contribution of Tony Gregg, Eugene Bong and Greta Burkett for their
research in this chapter.
That is, an ADI incorporated in Australia, whether as a subsidiary of a foreign bank or not.
That is, ADIs not incorporated in Australia.
Australia
29
II THE REGULATORY REGIME APPLICABLE TO BANKS
i General
Overall regulation of the banking and finance system is divided between the Reserve
Bank of Australia (�ethe RBA�f), APRA and the Australian Securities and Investments
Commission (�eASIC�f).
The RBA (established by the Reserve Bank Act 1959 (Cth)) is Australia�fs central
bank and is responsible for the overall stability of the financial system and for monetary
policy. Determination and implementation of RBA policy is vested in the Payments
Systems Board and the Reserve Bank Board. However, RBA has no role in prudential
supervision of ADIs (or other financial institutions).
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.
APRA (established by the Australian Prudential Regulation Authority Act 1998
(Cth)) (�ethe APRA Act�f) is responsible for the licensing and prudential supervision of
all ADIs and NOHCs authorised by APRA. It is also responsible for the prudential
supervision of life and general insurance companies and superannuation funds. Its
supervisory powers come from a range of legislation; principally, from the Banking Act
(and the Life Insurance Act 1995 (Cth)).
APRA is charged with regulating financial sector bodies in conformity with
Commonwealth laws, which provide for prudential regulation or retirement income
standards. APRA is required:
to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality
and, in balancing these objectives, to promote financial system stability in Australia.
Although APRA is subject to Australian government direction on its policies and
priorities it is government�fs intention that APRA should have operational independence,
free from government intervention. Accordingly, the Minister is prohibited from giving
a direction to APRA in relation to a particular case.
ASIC (established by the Australian Securities and Investments Act 2001 (Cth)) has
responsibility for monitoring and promoting market integrity and consumer protection,
and for licensing, in relation to financial products and services.
The sole regulator of Australian registered companies and a regulator of financial services.
The Banking Act 1959 (Cth).
APRA Act, Section 8(2).
APRA Act, Section 12(1).
S ee Explanatory Memorandum, Australian Prudential Regulation Authority Amendment Bill
2003 (Cth), Paragraphs 3.18 and 3.19.
Australia
30
ii ADI authorisation
To carry on any banking business requires authorisation by APRA as an ADI or
exemption by APRA. Further approval is required to use the description �ebank�f.10
Banking business is defined in the Banking Act11 both by reference to:
a specific prescribed activities, which includes a business that consists, to any extent,
of taking money on deposit and making advances of money; and
b a more general concept of banking within the meaning of Paragraph 51(xiii)
of the Australian Constitution (the case law with respect to this concept is not
entirely clear; however, it suggests that accepting of deposits alone may constitute
carrying on banking business).
There are three options relevant to ADI authorisation:
a a public company incorporated in Australia can apply for ADI status (in this
context �epublic�f does not mean listed on the Australian Securities Exchange
(�eASX�f); it means a company that can access the public and the markets generally
for funds);
b a non-operating holding company of a group of companies that holds one or
more ADIs can apply for NOHC status (this allows a group to diversify across,
for example, banking, insurance, funds management and securities); and
c a foreign bank can apply for ADI status to operate in Australia through one or
more branches, which will require the foreign bank to register in Australia as a
foreign company under the Corporations Act12 (that registration will not, at a
practical level, impose obligations greater than those that the bank will assume in
maintaining ADI status.)
APRA does require a foreign body corporate that is seeking approval to carry on banking
business in Australia to provide detailed information about that foreign body corporate
to APRA as part of the application process. Specifically, APRA requires details about
the supervisory arrangements to which the foreign body corporate is subject in its home
jurisdiction.13
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 ADIs are not permitted to accept initial deposits from Australian residents
of less than A$250,000;14 and
APRA Act, Section 12(3).
Banking Act, Section 11.
10 Banking Act, Section 66 .
11 Banking Act, Section 5.
12 Corporations Act 2001 (Cth), the Australia-wide legislation relating to corporations, securities,
financial products and related markets.
13 Australian Prudential Regulatory Authority Guidelines., �eADI Authorisation Guidelines�f, April
2008, p17.
14 APRA: ADI Authorisation Guidelines; Paragraph 35.
Australia
31
b foreign ADIs must disclose to prospective depositors that the �edepositor protection�f
provisions of the Banking Act (see Section III , infra) do not apply to it.15
As a result of these restrictions, typically foreign banks have incorporated local
subsidiaries to carry on retail operations in Australia. However, foreign banks can (and
do) operate concurrently through two ADIs: an Australian ADI and a foreign ADI; in
that case, APRA requires that banking transactions between the foreign ADI and the
Australian ADI should be at arms�f length and on commercial terms and conditions.
iii Cross-border activities by non-ADI foreign banks
A non-ADI foreign bank may:
a operate a representative office in Australia for liaison purposes only . that office
will require registration with ASIC as a foreign company, as the liaison activities
will constitute carrying on business in Australia;
b access the domestic capital markets to raise funds . the occasional issue of debt
securities should not, alone, constitute carrying on business in Australia and so
avoids the need for registration with ASIC as a foreign company and for any
specific approval for the issuance of the debt securities;
c apply the proceeds of debt securities issued in Australia for its own purposes
outside Australia without the need to register with APRA as a financial corporation
under the Financial Sector (Collection of Data) Act 2001 (Cth);
d use the word �ebank�f (or similar) when issuing debt securities in Australia provided
that:
. the debt securities are offered or traded in parcels of at least A$500,000;
and
. all documentation clearly states that the issuer is not an ADI; and
e avoid the need to apply for and hold an Australian Financial Securities Licence
(�eAFSL�f) for some arranging, underwriting and intermediating services in
�efinancial products�f (which is widely defined) where those services are provided
to wholesale investors16 and where the foreign bank is regulated by the APRA
equivalent regulator in its domestic jurisdiction;17 however, unless that service
was occasional only, the bank would need to register with ASIC as a foreign
company carrying on business in Australia.
15 Banking Act, Section 11E(2).
16 S ee Section IV, vii, infra.
17 Corporations Act, Section 911A(2)(h).
Australia
32
III PRUDENTIAL REGULATION
Relationship with APRA
i Prudential supervision function
Under the Banking Act, APRA has the power to establish and enforce prudential
standards designed to enable APRA to discharge its prudential supervision function
over ADIs, NOHCs, life and general insurance companies and superannuation funds.
Each prudential standard that is currently in force is set out in full on APRA�fs website
at www.apra.gov.au. They cover a broad range of topics including capital adequacy, funds
management and securitisation, liquidity management, large exposures, equity associations,
credit quality, corporate governance and outsourcing matters in an ADI�fs business.
APRA is entitled to determine18 whether a prudential standard applies to all ADIs
(that is, all Australian ADIs and all foreign ADIs19) or all NOHCs or a specified class
of ADIs (for example, only Australian ADIs20 as opposed to foreign ADIs) or NOHCs
or one or more specified ADIs or authorised NOHCs. The standards therefore vary in
their application to ADIs and NOHCs.
The regulatory model adopted by APRA requires those bodies to which
the prudential standards apply, to be largely responsible for the implementation and
monitoring of those standards. While APRA does require regular reports from ADIs,
NOHCs and their subsidiaries in relation to specified matters, the Banking Act21 and the
prudential standards make it clear that the onus rests with those bodies to immediately
notify and provide APRA with a written report once they become aware of any significant
breach or prospective significant breach of any prudential standard. Such notice must
be given to APRA as soon as practicable, and in any case no later than 10 business days,
after becoming aware of the breach.22 To this extent the prudential standards are largely
self-regulating. Failure to notify APRA of a significant breach is an offence that carries
a penalty of 200 penalty units.23 In extreme circumstances, officers of the relevant ADI
may also be criminally liable. APRA can also waive any non-compliance with a prudential
standard if an ADI satisfies APRA that it is appropriate to do so.
If APRA has reason to believe that an ADI or NOHC has contravened or is
likely to contravene a prudential standard, APRA has the power to issue directions to
that ADI or NOHC requiring compliance with the standards (an APRA Direction).24
18 Banking Act, Section 11AF.
19 See APS113, 115, 117, 120, 150, 210, 220, 222, 231, 232, 240, 310, 510 and 520, and 610.
20 See APS110 to 112, 114, 116, 221 and 33 0.
21 For example, see Banking Act 1959, Section 62A(1B).
22 Banking Act, Section 62A(1B)(c). Note �esignificant�f is defined in Section 62A(1C) for the
purposes of Section 62A(1B).
23 Banking Act, Section 62A(1B). Under the Crimes Act 1914 (Cth), Section 4AA, one penalty
unit currently equates to A$110.
24 Banking Act, Section 11CA(1).
Australia
33
Non-compliance with an APRA Direction is an offence,25 which carries a penalty
of 50 penalty units. If an ADI or NOHC fails to comply with an APRA Direction,
APRA has the power to revoke its authorisation.26
ii Other functions
APRA also has a statistical information collection function under the Financial Sector
(Collection of Data) Act 2001(Cth).27 This Act requires all ADIs, NOHCs and their
subsidiaries to provide financial data in regular standardised reports to APRA. General
reporting forms require them to provide (except in the case of liquid assets which only
applies to specified ADIs) data relating to exposures, impaired assets, liquid assets,
commercial property and securities held, securities issued and financing arrangements.28
Other reporting forms separately require Australian ADIs or their NOHC to provide
information to APRA on capital adequacy, market risk, repricing analysis, off-balance
sheet business, securitisation, specialised lending and other exposures.29
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.
iii Consequences of an Australian ADI failure
Under the Banking Act, APRA has broad powers to investigate the affairs of an
Australian ADI that is likely to be unable to meet its obligations relating to its depositors
or is likely to suspend payments,30 including powers to:
a require the ADI to provide information with respect to financial stability;
b appoint administrators to take control of the ADI�fs business if the ADI informs
APRA that it considers or APRA considers it is likely to become unable to meet
its obligations or that it is about to suspend payment or the ADI does become
unable to meet its obligations or suspends payment; and
c having appointed an administrator, to apply to the Federal Court of Australia to
have the ADI wound up.31
25 Banking Act, Section 11CG(1).
26 Banking Act, Section 9A.
27 Financial Sector (Collection of Data) Act 2001, Section 13.
28 Australian Prudential Regulation Authority, Reporting forms and instructions accessed 29
March 2010 at www.apra.gov.au/Statistics/Reporting-forms-and-instructions-exclude-Basel-
II.cfm.
29 Australian Prudential Regulation Authority, 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.
30 Banking Act, Section 13A.
31 Banking Act, Section 14F.
Australia
34
It is an offence if an Australian ADI does not immediately inform APRA if it considers
that it is likely to become unable to meet its obligations, or that it is about to suspend
payment. The offence carries a penalty of 200 penalty units.32
APRA�fs investigative powers under the Banking Act do not extend to foreign
ADIs.33
If an ADI is unable to meet its obligations or is likely to suspend payments, the
RBA has a discretion to act as a lender of last resort.34 This discretion arguably allows
the RBA to lend monies to any ADI (regardless of whether or not that ADI is an
Australian ADI or a foreign ADI). That said, the RBA will only lend to an ADI if it is
experiencing solvency difficulties and the RBA considers that the rest of the Australian
financial system would be seriously affected by the failure of that ADI.35
Since Australia�fs Federation in 1901, last-resort support has been provided
sparingly by the RBA (or its predecessor), including support to the Primary Producers
Bank in 1931, and three private banks in their efforts to fund illiquid building societies
between 1974 and 1979.36
If an ADI is not able to meet its obligations or suspends payment, Sections
13A(3) (for Australian ADIs) and 11F (for foreign ADIs) of the Banking Act requires
the Australian assets of that ADI to be available to meet deposit liabilities in Australia
in priority to other liabilities of the ADI. An Australian ADI must first meet certain
liabilities and debts to APRA before meeting its deposit liabilities.37
Management of banks
i The Corporations Act
In its regulation of directors and officers of a corporation, the Corporations Act applies
only to Australian ADIs.
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.
32 Banking Act, Section 13.
33 Banking Act, Section 11E.
34 Reserve Bank Act 1959 (Cth), Sections 8 and 26.
35 RBA Summary of Australian Financial Regulation, www.rba.gov.au/fin_stability/reg_
framework/index.html.
36 Bryan Fitz-Gibbon & Marianne Gizycki, �eA History of Last Resort Lending and Other Support
for Troubled Financial Institutions in Australia�f Research Discussion Paper 2001-07, System
Stability Department Reserve Bank of Australia, (2001) p68.
37 Banking Act, Section 13A.
Australia
35
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�fs business or
who have the capacity to affect significantly the company�fs 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.
ii APRA Prudential Standard APS 510
APS 510 is APRA�fs corporate governance code for all ADIs (although foreign ADIs
only have to comply with selected provisions).
Under APS 510, among other things:
a there are rules for the size and composition of boards and management of
ADIs;
b ADIs must have a written remuneration policy which, although not subject to
quantitative limits, must comply with general rules to ensure that remuneration
is aligned with long-term financial soundness and prudent risk-taking, and which
must prohibit directors and senior officers from hedging equity-linked deferred
remuneration before it is fully vested;
c all ADIs must have a board audit committee; and
d Australian ADIs must have a board remuneration committee.
iii ASX Listing Rules
If listed on 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 ASX�fs Corporate Governance Principles and, if
it has not complied, why it has not.
Regulatory capital
The prudential standards relating to regulatory capital do not apply to foreign ADIs
which are expected to meet comparable capital adequacy standards in their home
jurisdictions as required by their home country supervisors. That home regulation must
be consistent in all substantial respects with the Basel II framework.38
38 ADI Authorisation Guidelines, April 2008, Paragraphs 15 and 16. The framework set out in the
paper Basel II: International Convergence of Capital Measurement and Capital Standards: A
Revised Framework . Comprehensive Version published by the Basel Committee on Banking
Supervision in June 2006.
Australia
36
The prudential standards relating to regulatory capital are found in APS110
to APS117. They are based on the standards set down in the Basel II framework,39
and aim to (among other things) ensure that ADIs �emaintain adequate capital, on both
an individual and group basis, to act as a buffer against the risks associated with their
activities�f,40 including by:
a holding the minimum levels and ratios of certain types of capital;
b establishing and maintaining internal processes to monitor that capital and to
notify APRA if any �esignificant changes�f in any capital occurs;
c having a process for applying �erisk weights�f to each credit risk to which the ADI
is exposed;
d having a process for �equantifying certain credit risk components to determine
capital requirements for a given credit exposure�f;
e keeping their retail banking, commercial banking and other banking businesses
separate and apply different operational risk capital requirements to each area of
business; and
f keeping separate internal processes to �emanage, measure and monitor�f operational,
market and interest rate risks.
i Regulatory capital requirements for Australian ADIs
Under APS110, an ADI is required to maintain, at all times, a minimum level of capital
for capital adequacy purposes that, as a ratio of its total risk-weighted assets, exceeds its
prudential capital ratio (�ePCR�f). An ADI must also maintain a risk-based capital ratio in
excess of its PCR.41
An ADI�fs PCR is typically 8 per cent of its total risk weighted assets. APRA may
increase an ADI�fs PCR above 8 per cent where APRA believes that there are prudential
reasons for doing; so, for example, APRA would normally set a newly established ADI�fs
PCR above 8 per cent during its formative years.42
For the purposes of determining an ADI�fs risk-based capital ratio (and compliance
with its PCR), its total risk-weighted assets is calculated as the sum of:43
a its risk-weighted on-balance sheet and off-balance sheet assets determined based
either on a standardised approach using external credit ratings or on an internal
ratings based approach as approved by APRA;44
b 12.5 times the sum of capital charges relating to its operational and market risks
and interest rate risks on its banking books;45 and
c its exposures (on a risk weighted adjusted basis) to securitisations.46
39 APRA Annual Report 2009, Australian Prudential Regulation Authority (2009), p9. (Note:
APRA also joined the Basel Committee on Banking Supervision in 2009.)
40 APS110.
41 APS110, Paragraph 14.
42 APS110, Paragraph 15 and Attachment F.
43 Paragraph 6, Attachment D APS110.
44 As determined in accordance with APS112 and 113.
45 As determined in accordance with APS114, 115, 116 and 117.
46 As determined in accordance with APS120.
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Under APS111, the capital to be maintained by an ADI in order to meet its PCR may
be comprised of tier 1 capital and tier 2 capital, net of all specified deductions and
amortisations, provided that at least half of such net capital is maintained in the form
of tier 1 capital.47 APRA may, in its discretion, require an ADI to hold more than half
of its required PCR in the form of tier 1 capital.48
Tier 1 capital comprises capital that satisfies certain essential characteristics,
including a permanent and unrestricted commitment of funds and which rank behind
the claims of depositors and other creditors in the event of a winding-up. Tier 1 capital
is divided into two categories: (1) fundamental tier 1 capital, which comprises an ADI�fs
paid-up ordinary shares, general reserves, retained earnings, current-year earnings,
foreign currency translation reserve, capital profits reserve and minority interests arising
from consolidation of tier 1 capital of subsidiaries, and (2) residual tier 1 capital, which
comprises an ADI�fs perpetual non-cumulative preference shares that satisfy certain
specific criteria and all other residual tier 1 capital instruments that satisfy certain other
specified criteria (innovative tier 1 capital).49
Tier 2 capital comprises all other components of capital that fall short of tier 1
capital but nonetheless contribute to the overall strength of the ADI as a going concern.
Tier 2 capital is divided into two categories: (1) upper tier 2 capital, which comprises
an ADI�fs perpetual cumulative preference shares, perpetual cumulative mandatory
convertible notes, perpetual cumulative subordinated debt, any tier 1 capital that is
ineligible to be included as part of tier 1 capital due to limits prescribed by APRA as
described below, any other hybrid capital instrument of a permanent nature approved
by APRA, certain bonus shares issued after 1 January 1992 and certain general reserves,
revaluation reserves and post-acquisition reserves, and (2) lower tier 2 capital, which
comprises an ADI�fs term-subordinated debt, limited life redeemable preference shares
and any other similar limited life capital instruments approved by APRA.
The amount of tier 1 and tier 2 capital to be included in an ADI�fs capital base for
capital adequacy purposes on and after 1 January 2008, net of all required deductions as
described below, is subject to the following limits:50
a fundamental tier 1 capital must constitute at least 75 per cent of net tier 1
capital;
b residual tier 1 capital is limited to 25 per cent of net tier 1 capital;
c innovative tier 1 capital is limited to 15 per cent of net tier 1 capital;
d total tier 2 capital is limited to a maximum of 100 per cent of net tier 1 capital;
and
e total lower tier 2 capital is limited to a maximum of 50 per cent of tier 1 capital.
There is no minimum amount of ordinary share capital required to be maintained by an
ADI. However, given that ordinary shares do form part of an ADI�fs fundamental tier 1
capital and an ADI is required to maintain at least 50 per cent of its capital for capital
47 APS110, Paragraph 14 and APS111, Paragraph 57(a)(ii).
48 APS110, Paragraph 16(a).
49 The criteria is specified in APS111, Attachments A and C.
50 APS111, Paragraph 57.
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38
adequacy purposes in tier 1 capital, it is likely that an ADI�fs ordinary share capital would
comprise a substantial portion of its regulatory capital.
For the purposes of determining capital for capital adequacy purposes, certain
deductions are required to be made by an ADI to its tier 1 and tier 2 capital.51 The
deductions to be made from tier 1 capital include the following items: asset impairment,
deferred tax, fair value gains and losses arising from certain assets, any amounts included
in general reserves for credit losses, certain goodwill and intangibles, all holdings of
own tier 1 capital instruments, amounts deriving from the ADI�fs share of undistributed
profits or losses in an associate, certain revaluation of assets, gains from sale of assets
to a securitisation and any surplus or deficit in certain ADI sponsored superannuation
funds.
An ADI must also deduct all holdings of its own upper or lower tier 2 capital
instruments, and any unused trading limit in such instruments, from its tier 2 capital.
Further, the following items are required to be deducted as to 50 per cent from
an ADI�fs tier 1 capital and as to 50 per cent from its tier 2 capital: equity exposures
and other capital investments in other ADIs or equivalent overseas entities subject to
certain exceptions, equity exposures and other capital instruments in an insurer or other
financial institution where such exposure is above a certain prescribed percentage, equity
exposures and other capital investments in non-subsidiaries above a certain percentage,
equity exposures and other capital investments in non-regulated subsidiaries, certain
guarantees and credit default swaps, any non-repayable loans made by the ADI under
APRA�fs industry support schemes, securitisation exposures that are required to be
deducted under the relevant prudential standards prescribed by APRA, shortfalls in
provisions for credit losses and unsettled non-delivery versus payment transactions.
In addition, APRA may require an ADI to deduct an amount to cover the
undercapitalisation of a non-consolidated subsidiary of the ADI from its tier 1 capital
and tier 2 capital.52
iii Impact on business
Regulatory capital requirements play an important role in the business activities of an
ADI particularly given the different risk weights assigned to various assets in determining
the ADI�fs risk-based capital ratio. Accordingly, regulatory capital considerations have a
significant influence over the types of transactions entered into by an ADI and the
manner in which it conducts its activities.
For example, changes to APS120 that were proposed by APRA in December
2009 include assigning higher risk weights for resecuritisation exposures to better reflect
the increased risk inherent in these products.53 This measure could reduce the level of
investment and activity in these products by ADIs going forward.
51 APS111, Paragraphs 39 to 57.
52 APS111, Paragraph 47.
53 APRA has introduced new prudential standards to implement all of the components of the
Basel II enhancements including releasing a revised draft of the APS120 prudential standard
relating to securitisations to include the changes to risk weights for resecuritisation exposures.
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39
Other changes to the capital adequacy standards proposed by APRA in December
2009 include limiting the predominant form of Tier 1 capital to common equity and
retained earnings, harmonising deductions from capital and requiring full disclosure of
all components of the capital base. This will impact on the capital planning activities of
ADIs and restrict the range of instruments that they will be able to issue to satisfy their
capital adequacy requirements.
iv Any significant areas of divergence of the local regime from Basel II
The Basel II Framework has been progressively implemented in Australia since January
2008 without any significant areas of divergence. Consistent with this, in December
2009, APRA announced proposals to implement the Basel Committee�fs enhancements
(announced in July 2009) to the Basel II Framework in Australia by 1 January 2011.54
v Consolidated supervision
The prudential standards impose specific requirements on ADIs that form part
of a conglomerate group. Under APS222, each Australian ADI that forms part of
a conglomerate group is required to provide APRA with details of the ADI�fs group
members, group management structure, its intra-group support arrangements and any
intra-group exposures.55
Australian ADIs are also required to notify APRA in advance of any intended
changes in the composition or operations of its group structure which has the potential
to alter materially the overall risk profile of the ADI.56
In addition, Australian ADIs are required to include in their published annual
report an outline of their group risk management policies and the procedures used to
measure and manage overall group risk exposure.
As the prudential supervisor of Australian insurance companies and pension
funds, APRA also has powers to ensure the prudent management of these entities
within an Australian banking group.57
Finally, APRA has broad powers to direct Australian ADIs to take or refrain from
taking specific actions. These powers could be used to limit the range of activities the
consolidated banking group may conduct or to restrict its overseas operations.
APS222 also imposes certain requirements on foreign ADIs (and their subsidiaries
operating in Australia) and to non-ADI entities operating in Australia which are directly
owned by the foreign parent of an ADI or by the parent�fs subsidiaries.
54 APRA, Discussion Paper: Enhancements to the Basel II Framework in Australia, 21 December 2009
www.apra.gov.au/Policy/Proposed-Basel-II-Enhancements-2009.cfm (accessed 1 April 2010).
55 APS222, Paragraph 4(a).
56 APS222, Paragraph 4.
57 S uperannuation Industry (Supervision) Act 1993 Section 6, Retirement Savings Accounts Act
1997 Section 3.
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40
IV CONDUCT OF BUSINESS
i Confidentiality
Banks in Australia have a strict duty of confidence in relation to customer account details.
At common law, there is a duty not to disclose to third parties the state of a customer�fs
account or any transactions on the account. The leading authority is the English case of
Tournier.58 The duty covers all information relating to the account, including information
obtained as a consequence of the relationship between the customer and the bank.
The four commonly agreed exceptions to the duty in Tournier are when the use
or disclosure is: consented to by the customer, compulsory under law, pursuant to a
public duty or necessary for the interests of the bank.
ii Consumer credit legislation
The Uniform Consumer Credit Code (�eUCCC�f) is a comprehensive source of regulation
covering the provision of credit in Australia. It will be largely replaced by the National
Credit Code (�eNCC�f), which will come into effect on 1 July 2010.
The NCC provides a national consumer protection framework for consumer
credit and related transactions. It regulates all credit providers (including banks) who
provide credit (widely defined) to individuals (and some unincorporated bodies) where
the purpose of the credit is predominantly for a personal, domestic or household
purpose, or relates to investment in residential property.
When the NCC applies to a particular transaction, it comprehensively affects
the credit provider�fs conduct of business, and contains numerous sources of civil and
criminal liability for failure to comply. The NCC regulates disclosure obligations and
processes on a wide range of issues (e.g., default notices and applications for variation
on the grounds of hardship).
The key obligations under the NCC are that all providers of relevant credit
must hold an Australian Credit Licence (from 1 July 2010) and comply with the NCC�fs
�eresponsible lending�f provisions.
iii Privacy
The National Privacy Principles regulate the collection, use and disclosure of �epersonal
information�f.
Part IIIA of the Privacy Act 1988 (Cth) 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).
58 Tournier v. National Provincial and Union Bank of England Ltd [1924] 1 KB 461; [1923] All ER Rep
550
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41
iv Anti-money laundering
The Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth) (AML
Act) imposes obligations on �ereporting entities�f who provide �edesignated services�f (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 and
which include implementing a compliance program, verifying the identity of customers,
reporting specified types of transactions and suspicious matters, performing ongoing
customer due diligence and maintaining accurate records.
v Consumer protection
The Australian Securities and Investments Commissions Act 2001 (Cth) regulates
consumer protection in relation to financial services, and covers unconscionable conduct,
misleading and deceptive conduct and false or misleading representations.
The Trade Practices Amendments (Australian Consumer Law) Bill will (when
passed) introduce an Unfair Terms Regime (with a commencement date of 1 July 2010
at the earliest). At the heart of the regime is the rule that unfair terms in standard form
contracts will be void. A term will be unfair if it causes a significant imbalance in the
parties�f 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.
vi Banking ombudsman
Banks and credit providers are often required by ASIC to be members of an ASICapproved
external dispute resolution scheme. To date, there are two: the Financial
Services Ombudsman and the Credit Ombudsman Service Limited .
vii Australian financial services licences (�eAFSL�f)
Subject to limited exceptions, a person who carries on a �efinancial services business�f in
Australia must hold an AFSL covering the provision of the financial services.59
�eFinancial service�f includes the provision of financial product advice, dealing in a
financial product and making a market for a financial product, where �efinancial product�f,
�edealing�f and �emaking a market�f are widely defined to include many banking products
and services.60
An exemption from the need for an AFSL in respect of the provision of a
financial service is available to an APRA-regulated body where the service is one in
relation to which APRA has regulatory or supervisory responsibilities and the service is
provided only to wholesale clients.61
A body regulated by APRA includes an ADI and an NOHC.62
59 Corporations Act, Section 911A(1).
60 Corporations Act, Section 766 A.
61 Corporations Act, Section 911A(2)(g).
62 APRA Act, Section 3(2).
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42
The distinction between a wholesale client (in respect of whom the exemption
applies) and a non-wholesale (or retail) client is, of course, critical. There are specific
categories of wholesale client (for example �esophisticated clients�f, �eprofessional investors�f
and persons certified as having a gross income of A$250,000 or net assets of A$2.5
million). However, the most commonly used criterion to be certain that the financial
services provided are to a wholesale client is the A$500,000 test: persons who invest
more than A$500,000 in respect of a financial product or service will be �ewholesale�f for
that investment.63
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 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 licence. 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 licensees in
relation to disclosures to retail clients, although there is some relief in relation to basic
deposit products.
V FUNDING AND LIQUIDITY
i Funding sources
In order to support their lending, Australian ADIs primarily source their funds from
customer deposits and (domestic and international) wholesale markets.
Typically, about 50 per cent of domestic banks�f funding comes from deposits, a
further 25 per cent from short-term wholesale funding, and 25 per cent from long-term
wholesale funding.64
Due to the recent global financial crisis, by the end of September 2009, these
proportions moved slightly to 52 per cent of Australian banks�f funding coming from
retail deposits, 21 per cent from short-term wholesale funding and 27 per cent from
long-term wholesale funding.65 At the end of September 2009, 54 per cent of the total
$673 billion in Australian banks�f wholesale funding was attributed to offshore financial
markets (80 per cent of which was long-term funding).66
63 Corporations Act, Sections 761G and 761GA.
64 These proportions will vary from bank to bank. �eBanking facts and figures�f, Australian Bankers�f
Association Inc, www.bankers.asn.au/default.aspx?ArticleID=1366 , accessed on 25 March 2010.
65 These proportions will vary from bank to bank. �eBank funding . key issues�f, Australian Bankers�f
Association Inc, www.bankers.asn.au/Bank-Funding/default.aspx, accessed on 25 March 2010.
66 Ibid.
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43
ii Impact on liquidity standards
A critical aspect of bank funding activities is the need for ADIs to maintain adequate
liquidity. To this end, the liquidity prudential standard (APS210) aims �eto ensure that all
ADIs have sufficient liquidity to meet obligations as they fall due across a wide range
of operating circumstances�f.67 It vests an ADI�fs board of directors and management
with the responsibility to maintain an appropriate liquidity management strategy.68 That
strategy is required to address at least two scenarios . the �egoing concern�f scenario (which
�erefers to the normal behaviour of cash flows in the ordinary course of business�f) and
the �ename crisis�f scenario (which �erefers to the behaviour of such cashflows in adverse
operating circumstances specific to the ADI, where it has significant difficulty in rolling
over or replacing its liabilities�f)69 and must be regularly reviewed by the ADI to ensure it
reflects current circumstances.
iii Financial claims scheme and government guarantee scheme for large deposits and wholesale
funding
The global financial crisis of 2008.9 prompted the Australian government in October
2008 to put two schemes in place to guarantee deposits with ADIs, namely the Financial
Claims Scheme (�eFCS�f), which applied to Australian ADIs only, and the Guarantee
Scheme for Large Deposits and Wholesale Funding (�ethe Guarantee Scheme�f).
APRA was appointed as the administrator of the FCS.70 The FCS was intended to
provide support to account holders of certain �eprotected accounts�f71 up to A$1 million
held at an Australian ADI from losses that may be incurred if the ADI were to become a
�edeclared ADI�f.72 Under the Banking Act, an ADI will become a �edeclared ADI�f 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.73 The FCS is currently
intended to stay in place until 12 October 2011.74
The Guarantee Scheme is administered by the RBA and was �edesigned to promote
financial stability and ensure the continued flow of credit throughout the economy at a
time of heightened turbulence in international capital markets�f.75 Under the Guarantee
67 Australian Prudential Regulation Authority, Prudential Standard APS210 . Liquidity, p1.
68 Australian Prudential Regulation Authority, Prudential Standard APS210 . Liquidity, p2.
69 Ibid.
70 T he FCS was given force by the Financial System Legislation Amendment (Financial Claims
Scheme and Other Measures) Act 2008 (Cth), and the Banking Amendment Regulations 2008
(No.1).
71 Banking Act, Sections 5(4),(5),(6) and (7).
72 Banking Act, Section 5.
73 Banking Act, Section 14F and Section 16AD.
74 Australian Prudential Regulation Authority, Discussion Paper: Financial Claims Scheme for
Authorised Deposit-taking Institutions dated 6 January 2010, p6, accessed 29 March 2010 at
www.apra.gov.au/Policy/upload/DP-FCS-for-ADIs-Jan-2010.pdf.
75 Australian Government Treasury paper, �eAustralian Government�fs 2008 Deposit and Wholesale
Funding Guarantees . Design and Operational Parameters�f, accessed 29 March 2010 at www.
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44
Scheme, customers with total deposit balances over A$1 million at a single Australian
ADI and Australian residents with total deposit balances over A$1 million at a single
foreign ADI were entitled, subject to their ADI making an application to the RBA for
the Guarantee Scheme to apply to such deposits, to the benefit of a guarantee on the
portion of their balances over A$1 million (with the first A$1 million of a customer�fs
deposit held with any Australian ADI falling under the FCS). Up until 24 March 2010,
�eeligible institutions�f (which included Australian ADIs and, subject to certain additional
requirements, foreign ADIs) were also able to apply to the RBA for the Guarantee
Scheme to extend to certain types of wholesale funding liabilities. For Australian ADIs,
those liabilities had to, amongst other things, be senior unsecured debt instruments with
a term of no more than 60 months.76 For foreign ADIs those liabilities had to be senior
unsecured debt instruments with a term of no more than 15 months (i.e., short-term
wholesale funding liabilities). The Guarantee Scheme closed to new liabilities on 31
March 2010.77 It closed to all term deposits and �eat call�f deposits held at any Foreign
ADIs by an Australian resident on 31 December 2009.78
The Guarantee Scheme will remain in force:
a for all guaranteed liabilities until maturity for guaranteed wholesale funding up to
60 months from 31 March 2010;
b for term deposits held at Australian ADIs up to 60 months from 31 March 2010;
and
c for �eat-call deposits�f held at Australian ADIs to October 2015.
While APRA and the RBA were given responsibility for administration of these two
schemes, the Australian government accepted ultimate financial responsibility.79
treasury.gov.au/documents/143 1/PDF/Design_and_operational_parameters_281008.pdf.
76 Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding Rules,
Schedule 3, accessed 24 March 2010 at www.guaranteescheme.gov.au/rules/pdf/scheme-rules-
24032010.pdf.
77 Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding
website, accessed 24 March 2010 at www.guaranteescheme.gov.au.
78 Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding Rules,
Schedule 3.
79 T he Guarantee Scheme for Large Deposits and Wholesale Funding Appropriation Act 2008
provided funding for the Guarantee Scheme. The Financial Claims Scheme (ADIs) Levy Act
2008 (Cth) and the Financial Claim Scheme (General Insurers) Levy Act 2008 (Cth) allow
for recovery of funds via industry levies under the Financial System Legislation Amendment
(Financial Claims Scheme and Other Measures) Act 2008 (Cth).
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45
VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
Control regime
i Corporations Act
An Australian ADI that has more than 50 shareholders, or which is listed on the ASX, is
subject to the takeovers provisions of the Corporations Act (Chapter 6), 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 which 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.
ii Foreign Acquisitions and Takeovers Act 1985 (Cth) (�eFATA�f)
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:
a the acquisition by a foreign person of a substantial interest in an Australian
corporation with total assets which exceed A$231 million (unless the acquirer is a
US investor, in which case the notification threshold is A$1,004 million);
b takeovers of offshore companies whose Australian subsidiaries�f gross assets
exceed A$231 million; and
c direct investments by foreign governments and their agencies irrespective of size,
including proposals to establish new businesses.
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 �econtrol�f, �einterest�f and �eassociates�f have extensive
meanings.)
According to the policy statement of the Foreign Investment Review Board
(FIR B),80 foreign investment in the Australian banking sector needs to comply with the
Banking Act, the Financial Sector (Shareholdings) Act 1998 (Cth) (�eFSS A�f) and banking
policy, including prudential requirements. Any proposed foreign takeover or acquisition of
an Australian bank will be considered on a case-by-case basis and judged on its merits.
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.
The government will permit the issue of new banking authorities to foreign
owned banks where APRA is satisfied the bank and its home supervisor are of sufficient
80 Australian Foreign Investment Policy, September 2009.
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46
standing, and where the bank agrees to comply with APRA�fs prudential supervision
arrangements.
iii Financial Sector (Shareholdings) Act 1998 (Cth) (�eFSSA�f)
A person wishing to hold more than 15 per cent voting control of a financial sector
company must apply to the Treasurer (being a cabinet minister of the Australian
government) and provide the required supporting information.81 The Treasurer may
only grant the application if the Treasurer is satisfied that the proposed acquisition is in
the national interest.
iv Banking Act
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�fs 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.
Transfers of banking business
The Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth) (�eFS
Act�f)82 gives effect to a statutory regime that allows an Australian ADI to transfer all
or part of its banking business to another Australian ADI. The transferring body and
receiving body must be established in an Australian state or territory that has enacted
legislation that ensures that the receiving body is taken to be the successor in law to
the transferring body to the extent of the transfer. All Australian states and territories
(other than Western Australia and the Australian Capital Territory) have enacted such
legislation.
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�fs 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
81 Set out in Section 13 of the FSSA.
82 Formerly the Financial Sector (Transfers of Business) Act 1999.
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47
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�fs 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.
VII THE YEAR IN REVIEW
APRA is in the process of implementing a number of reforms to Australia�fs regulatory
capital and liquidity standards in order to align them with the Basel II enhancements
announced by the Basel Committee in 2009.
Consistent with the work underway by the BIS Committee on Payment and
Settlement Systems and the International Organisation of Securities Commission, the
RBA, APRA and ASIC are also working to promote safe, efficient and robust practices
in the Australian over-the-counter (�eOTC�f) derivatives market. One aspect of this is
promoting the use of central clearing and settlement facilities for OTC derivative
transactions.
The regulation of credit and debit products issued by Australian deposit-taking
institutions has also come under scrutiny since the global financial crisis. A number
of current and proposed reforms have focused on the area of consumer protection.
In February this year, the Australian government passed legislation setting out a
comprehensive licensing regime for all providers of consumer credit and services,
imposing responsible lending requirements on all licensees (see consumer credit
legislation in Section IV, supra ).
The second half of 2009 also saw a flurry of personal property securities-related
activity in Australia, culminating in the enactment in late December of legislation
harmonising more than 70 different pieces of Commonwealth, state and territory law.
This new legislation is designed to improve the ability of individuals and businesses,
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48
particularly small to medium-sized businesses, to employ all their property in raising
capital.
2009 also saw a number of amendments to the Australian Bankers�f Association
Code of Banking Practice, which is the banking industry�fs customer charter on best
banking practice standards. These amendments include a commitment to responsible
lending, taking a proactive approach in identifying and helping customers facing financial
difficulties and making full disclosure of exception fees to customers.
VIII OUTLOOK AND CONCLUSIONS
The Australian government is in the process of reviewing the nature and operations of
a number of key banking related areas, having (in 2009) commissioned comprehensive
reports into Australia�fs superannuation system, tax system and financial products
and services. Preliminary or final reports into these areas have been delivered to the
government, and it is expected the government will formally respond to these reports
throughout the course of 2010.
A report on financial products and services in Australia, released in November
2009, recommends that ASIC be given more power, investors be given better education
and that there ought to be better (or at least greater) disclosure. For the product origination
and distribution industry there are calls for more self-regulation, greater responsibility to
investors and restrictions on commissions.83
A report on Australia as a financial centre, released in January 2010, notes that
despite a solid domestic base and the enormous opportunities in offshore markets,
the Australian financial sector�fs engagement in cross-border activities within the Asia-
Pacific region and beyond is not well developed. According to the report, there are
many reasons for this, including tax and regulatory policy settings. The report details 19
recommendations on how to substantially boost trade in financial services and further
improve the sector�fs competitiveness and efficiency.
Australia�fs corporate bond market remains underdeveloped. There is potential
for significant growth in this area. In May 2010, ASIC provided class order relief to
allow certain offers of �evanilla�f corporate bonds to be made to retail investors under
a simplified prospectus.84 The aim of the relief is to facilitate the development of a
retail corporate bond market in Australia by reducing the time and expense involved
in the issue of such bonds.
Overall, Australia�fs banking system has remained relatively stable throughout the
global financial crisis, which has meant that regulatory reform of the Australian banking
system has been on a much smaller scale compared with other G20 countries. However,
as key international bodies continue to progress their regulatory reform agendas, there
will almost certainly be regulatory changes in Australia to conform with changes adopted
globally.
83 Parliamentary Joint Committee on Corporations and Financial Services, Financial products and
services in Australia, 23 November 2009.
84 ASIC Class Order [CO 10/321].
About the authors
488
Louise McCoach
Clayton Utz
Louise McCoach is a partner in Clayton Utz�fs 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�fs 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
Clayton Utz
David Landy is a partner in Clayton Utz�fs corporate advisory and M&A group and has
over 15 years�f 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 buy-backs 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.
Clayton Utz
Level 34
1 O�fConnell Street
Sydney
New South Wales
Tel: +61 2 9353 4000
Fax:+61 2 8220 6700
lmccoach@claytonutz.com
dlandy@claytonutz.com
www.claytonutz.com