Is it just us or is having your own digital bank the new must-have item at the moment? The announcement by APRA late last week that it had signed off on Australia’s first ever digital bank under a restricted licensing regime came as no surprise to those who have been monitoring the debate around how to increase competition in the banking sector.
So, if owning your own bank is the next-big-thing, in the world of fintech, how does one go about getting a piece of the banking pie for themselves? Today we will take a closer look at forming a bank within the process used by the Australian Prudential Regulatory Authority (APRA) under the restricted licensing regime.
Who is the regulator of banking in Australia?
If you posed this question to the ordinary person on the street many would no doubt say that the Australian Securities and Investments Commission (ASIC) is the regulator of banks in Australia. It is true that ASIC regulates the banks in so far as they hold an Australian Financial Services Licence (AFSL), but the use of that AFSL is generally limited to the banks’ activities pertaining to the provision of wealth management, credit or wholesale banking products and services.
The primary regulator of banks in Australia is APRA, who under the twin financial regulators model that is used in Australia, is charged with responsibility for the licensing and prudential supervision of Authorised Deposit Taking Institutions (ADIs), life and general insurance companies and superannuation funds.
Forming a Bank – How does one get a licence to operate a bank?
An organisation that wishes to conduct banking business must apply to APRA for a licence authorising it to conduct business banking under the Banking Act 1959 (Cth) (Banking Act). An organisation that has been granted a banking licence under the Banking Act by APRA is thereafter known as an authorised deposit taking institution (ADI).
Achieving an ADI licence requires significant resources and capabilities, for this reason, there are two routes available to become an ADI: the direct route and the restricted route.
The direct route allows an applicant to conduct their intended banking business from the granting of the licence. The precursor to that being, the applicant must demonstrate that it meets the prudential framework and be ready to commence banking business the granting of the licence.
As the name suggests, the restricted route provides an applicant with a restricted licence for a maximum of two years before they must meet the prudential framework in full. If after two years they are unable to attain those prudential standards they must exit the banking sector. It is similar in operation to the regulatory sandbox that ASIC has created for eligible fintechs who are seeking to validate their concept prior to obtaining a full AFSL.
An applicant who has been granted a restricted licence is able to conduct limited banking business whilst they develop their capabilities and resources in order to meet the prudential standards – the objective of the restricted route is to facilitate entry into the banking sector thus increasing competition whilst ensuring that entry standards are not lessened so as to maintain protections for Australian consumers.
What is involved in practical terms then for seeking authorisation under the ‘restricted route’?
As noted above, the purpose of the restricted licence is to enable competition within the banking sector but in a controlled manner which does not come at the cost of appropriate safeguards to the Australian public. The very nature of the restricted licence means that a less onerous application and capability requirements are imposed on an applicant – but for a limited period of time – two years, after which they must be able to other satisfy the prudential framework requirements. So let’s have a closer look at that licence application process and evaluate the lower standard of requirements.
The first step is to engage early with APRA’s licensing team and organise a meeting with them to discuss the concept that you have and to better understand from their perspective what it is that you are required to do as part of the restricted licence application process. The types of things that APRA will want to see from you at this meeting include: business plans, corporate structure and owner details, corporate governance frameworks, how you propose to fund your bank (where is the investment coming from) and a project plan. (Forming a Bank – Step One – Meet with APRA)
The next step is to submit your business plan to APRA for their high-level review and feedback. It is during this phase that APRA will address any prudential concerns it may hold with the applicant and it should be seen as a pre-licence application test run if anything, a way for the applicant to actively seek out feedback which may concern APRA. The feedback phase may involve multiple sections within APRA meeting with the applicant and raising issues. It is from here that the applicant is to reflect on the feedback provided via APRA’s meeting channels and evaluate their application at that point – be that not to continue or to enhance the current draft application to address any flags that APRA cues with the applicant pre-application. (Forming a Bank – Step Two – Seek APRA’s formal feedback on your business plan)
You’ve met with APRA, you’ve been through the feedback process and now you have your application in good order and are ready to lodge it. The next step is to pay the application fee and lodge your application – the current fee for a banking licence – direct or restricted route – is $80,000 AUD and is payable upon lodgement. The legislative instrument that sets out the applicable filing fees being the Australian Prudential Regulatory Authority Instrument Fixing Charges No 1 of 2013 . (Forming a Bank – Step 3 – Pay the Licence Application Fee on Lodgement)
APRA’s current advice is that it will take between 3 to 18 months to assess an application for a banking licence. In the application assessment phase, you can expect that an allocated APRA case manager, from their licensing group, will be in contact with you in regards to further requisitions they may have. The key matters that APRA will need to be confident that an applicant can satisfy are:
• financial soundness;
• the ability to manage risk effectively;
• the fit and proper expectations for key persons;
• a sound risk culture – both conduct and financial;
• the ability to satisfy prudential requirements;
• public protection – that the applicant does not pose a risk to the safety of the depositors’ funds or the stability of the financial system.
Compliance Quarter has extensive experience and expertise in managing licence applications in complex regulatory environments. If you would be interested in discussing how we may be able to assist you in applying for a restricted banking licence, we would be pleased to arrange a consultation with you – click here to contact us.