Financial services

Australia has a sophisticated and stable banking and financial services system. Its four major banks are Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation.

Last updated: October 2018

Introduction

Australia has a sophisticated and stable banking and financial services system. Its four major banks are Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation. There are also many investment banks and regional banks. Significant foreign banks with an Australian presence include Citigroup and the Bank of China. Non-bank financial institutions include credit unions, building societies, friendly societies and finance companies. Together, these entities offer a full range of banking and financial services and products to Australian businesses and consumers.

Financial services regulatory regime

Australia’s banking system is prudentially regulated by the Australian Prudential Regulation Authority (APRA). Meanwhile, the Australian Securities and Investments Commission (ASIC) regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, and deposit-taking and credit products.

A uniform licensing regime applies in Australia to entities offering product advice; custodial or depository services; and clearing and settlement facilities.

The regime also applies to those operating a managed investment scheme or dealing in shares, debentures, interests in managed investment schemes, foreign exchange, deposit products and derivatives.

Where an entity conducts a financial services business in Australia, it must be covered by an Australian financial services licence (AFSL) unless it is able to rely on an available exemption. Prospective foreign financial services providers should carefully consider their eligibility for a licensing exemption.

Australia’s financial services regime also:

  • prescribes training, competency and other conduct requirements, particularly for those who sell or offer retail products
  • implements standardised sale and disclosure rules with respect to financial products and services.

Investment products

Two principal types of investment products (as distinct to superannuation or pension products) are offered in the Australian market: securities (including shares and debentures in a body corporate) and interests in managed investment schemes.

Each entity that provides financial services to people located in Australia in relation to a product must consider whether they are required to be covered by a licence or can rely on an exemption. This includes the issuer or operator of the interests in the product, together with any promoter, distributer or manager of the product.

There is also a separate requirement that a foreign financial services provider (including an issuer/operator of an offshore collective investment) register as a foreign company in Australia. The provider must also appoint a local agent if it is a body corporate and carries on business in Australia.


Investment companies

Regulations likely apply to the offer of interests in an investment vehicle that is structured as a body corporate (meaning that, broadly, it has a legal personality - ie. it can sue and be sued, hold assets in its own name, contract in its own name and has perpetual succession), be they shares or debentures, to persons in Australia. As such, it is necessary for both the investment vehicle and distributor to consider what licensing and registration requirements might apply.

As a general observation it is significantly easier from a licensing perspective to offer interests in an investment company to persons located in Australia than interests in a managed or collective investment scheme.

Managed or collective investment schemes

Collective investment vehicles generally exhibit the characteristics of a managed investment scheme, which can take various legal forms. Some managed investment schemes are mere contract-based schemes in which the promoter gives a personal promise that the investor will receive benefits under certain conditions. However, the most common legal form is a unit trust. Unit trust products exist for each of the traditional and alternative asset classes including direct property, property securities, equity (domestic and foreign), cash, private equity, hedge funds and infrastructure.

Under a managed investment scheme, investors contribute funds that are pooled or used in a common enterprise to produce financial benefits for the investors.

Setting it apart from shares and debentures, investors do not have day-to-day control over the operation of the scheme, and instead leave this task to a professional manager.

To obtain an Australian financial services licence to operate a managed investment scheme, an entity must meet financial requirements, as well as several general licensing requirements that set minimum standards of competency, educational levels and experience for participants. In addition to this licensing requirement, if interests in a scheme are offered on a retail basis, the scheme will generally require registration. However, if interests in the scheme are only offered to Australian wholesale investors, there is no requirement for the scheme to be registered.

There is a clear distinction between retail and wholesale investors. Unless classified as wholesale, investors will be deemed to be retail. Typical wholesale investors include institutional investors; investors who are regarded as being sophisticated; or experienced investors making large investments.

A scheme that requires registration is highly regulated and must comply with the Corporations Act. Included in these regulatory requirements is the need for a responsible entity, being a public company, to operate the scheme. The responsible entity fuses the role of trustee and manager into one.

Many foreign asset managers have established funds in Australia under Australian law and operate on the same basis as domestic managers. Alternatively, a foreign manager may market established foreign schemes directly in Australia, either exclusively to Australian wholesale investors, or to retail investors as well. To do so, the manager must consider the relevant financial services licensing requirements and the need for registration as a foreign company in Australia.

Where the target market is Australian wholesale investors, several exemptions from certain provisions of the Corporations Act may be available. These include licensing relief for operators who are regulated in certain foreign jurisdictions (such as the United Kingdom, the United States, Singapore and Hong Kong). If the target market is Australian retail investors, then exemptions are much more limited and some Australian regulation of the foreign scheme or manager or both will generally be inevitable.

Typically, a strategic alliance is entered into by foreign managers with Australian licensees to minimise the Australian regulatory burden and gain access to Australian retail distribution.

Superannuation

Generally, all employers in Australia contribute quarterly a percentage of an employee’s ordinary time earnings into a fund.

Employees generally have the right to choose their superannuation fund and move their superannuation savings between funds. If an employee does not choose a fund, an employer must contribute in respect of that employee into a fund that is authorised to offer a "MySuper Product" (a simple, low-cost default superannuation product).

Although the minimum superannuation contribution is currently 9.25 per cent, any employer or employee can contribute additional amounts.
These contributions may be made as part of the overall terms and conditions of employment or through salary reductions (known as salary sacrifice). However, there are caps on the amount that a person can contribute into the superannuation system each financial year in return for being taxed at lower rates. As a disincentive, if a person contributes in excess of the cap, they will need to pay excess contributions tax.

 

If the minimum contribution is not made by the employer, they must pay a special tax, called the Superannuation Guarantee Charge (SGC). While contributions are not compulsory under legislation, the SGC makes contributing to a superannuation fund the lower-cost option for employers.

Regulated superannuation funds are licensed and regulated by APRA (other than self-managed superannuation funds, which are regulated by the Australian Taxation Office) under the Superannuation Industry (Supervision) Act 1993.

Superannuation funds are subject to ongoing capital adequacy, governance and reporting requirements. The conduct of their business and product disclosure is heavily regulated by legislation and prudential standards.

Insurance and risk management

The Australian insurance market is highly regulated. General and life insurers must be authorised under their respective statutes to carry on insurance business in Australia. However, this does not preclude Australians from buying insurance directly from offshore insurers.

Insurers are subject to ongoing capital adequacy, solvency and reporting requirements, administered by APRA. Their conduct of business is heavily regulated by legislation governing market conduct and the operation of insurance contracts.

Insurers and insurance brokers require an AFSL if they provide financial services to retail or wholesale clients. Reinsurers who wish to operate in Australia must also be authorised to carry on insurance business in Australia. They also have similar ongoing capital adequacy, solvency and reporting requirements.

Risk management is a highly developed profession in Australia, with first-rate skills available. Risk management, including by insurance, is a legislative requirement in many Australian industries, including the insurance industry itself. Alternative risk transfer methods are also used, with leading service providers offering specialist skills in appropriate risk management techniques.

Combating money laundering and financing counter-terrorism

There are no restrictions on the amount of currency (whether in cash or by an international funds transfer instruction) that may be brought into or taken out of Australia. However, there are reporting obligations for certain transactions. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) imposes obligations on businesses operating in the financial sector, which are defined as “reporting entities” that provide certain “designated services”. The Federal Government is considering extending the operation of the Act to those who provide professional services, including lawyers, conveyancers, real estate agents, accountants, and trust and company service providers.

Designated services include a broad range of activities such as providing bank accounts, providing loans, factoring receivables, providing finance lease facilities, trading in derivatives, issuing units in managed funds, providing hire purchase facilities, issuing bills of exchange, providing promissory notes or letters of credit and many other financial transactions. Reforms were enacted in late 2017 to expand the scope of the AML/CTF Act to cover businesses that exchange digital currency for money, or vice versa. These amendments came into effect in April 2018.

The obligations of reporting entities providing a designated service include:

  • implementing an AML/CTF compliance program, which includes verifying the identity of clients before a designated service is provided, and collecting and verifying information about beneficial owners of clients
  • reporting specific kinds of transactions and suspicious matters to the Australian Transaction Reports and Analysis Centre
  • performing ongoing customer due diligence
  • keeping accurate records (the initial record-keeping obligations commenced on 13 December 2006).

Enforcement of taxation laws

The Financial Transaction Reports Act 1988 (Cth) (FTR Act) assists in the administration and enforcement of taxation laws as well as other Commonwealth, state and territory legislation. When the AML/CTF Act was introduced in 2006, certain parts of the FTR Act were repealed and others became inoperative. However, the FTR Act still requires the reporting of certain transactions and imposes obligations in relation to certain services provided by cash dealers under the Act.

Cash dealers include financial institutions, financial corporations, insurance companies and intermediaries, securities and derivatives dealers, trustees or managers of unit trusts, and gaming institutions. However, the reporting obligations under the FTR Act apply only to transactions to which the AML/CTF Act does not apply. 

Regulation of credit

The Australian credit regime that regulates consumer credit and leases was introduced by the National Consumer Credit Protection Act 2009 (Cth) (NCCP) and the National Credit Code (Schedule 1 of the Act). This provides a uniform licensing regime for providers of consumer credit and other credit services. It requires credit providers to be members of an external disputes resolution scheme. It also imposes responsible lending conduct requirements on credit providers; and sanctions and enforcement powers for ASIC as the regulator.

Consumer credit and leases are regulated throughout their life cycle. This includes advertising, pre-contractual conduct, contract formation, loan administration, termination and enforcement of credit contracts and leases. However, the regime will only apply to certain credit activities under the National Credit Code. Significantly, loans to companies and small businesses are not regulated by the NCCP.

Australian Credit Licence

Where an entity engages in “credit activities” while carrying on a business in Australia, it will generally need an Australian credit licence or an authorisation from a credit licensee before commencing business, unless it is able to rely on an available exemption. Whether an exemption is available is factually driven will depend, among other things, on the scope of the activities undertaken by the entity in Australia.

A credit activity is defined in the NCCP as including certain activities relating to credit contracts and consumer leases; securing payment obligations by related mortgages and guarantees; and providing credit services, acting as an intermediary or offering credit assistance.

If a credit licence is obtained, it will be issued subject to various conditions, which will restrict the licensee to certain credit activities that are consistent with their experience and qualifications.

One of the key provisions in the NCCP is the responsible lending obligation, which is intended to ensure that lenders and brokers engage in prudent lending and leasing. In broad terms, this is an obligation for licensees to ensure that they do not provide, suggest or assist with a credit contract or consumer lease that is “unsuitable” for the consumer. This may be because it does not meet a consumer’s requirements or objectives; or the consumer is unable to comply with the financial obligations, or could only do so with substantial hardship.

Specifically, licensees are required to make reasonable inquiries about a consumer’s requirements, objectives and financial situation; take reasonable steps to verify the consumer’s financial situation; and make an assessment or preliminary assessment (in the case of a broker) as to whether the proposed contract would be unsuitable. That must be in writing and provided to the consumer on request.

Obligations are imposed on credit licensees and their credit representatives to provide disclosure documents at particular points of the loan and lease origination process. These assist the consumer to understand who they are dealing with, available dispute resolution services and an indication of any cost the consumer may incur. 

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