In brief: A Restricted ADI Licence may provide Neo Banks and Digital Banks with an earlier opportunity to conduct limited banking activities in their development cycle
The Australian Prudential Regulation Authority (APRA) has introduced a new regulatory route for institutions to conduct limited, lower risk banking business during its start-up phase and to enable them to develop the necessary resources and/or capabilities to pursue an authorised deposit-taking institution (ADI) licence.
Known as a Restricted ADI licence, the restricted regulatory route provides eligible applicants with a restricted licence for a maximum of two years before they must meet the prudential framework in full in order to qualify for an ADI licence.
This route is intended to allow an institution to conduct limited banking business while developing their capabilities and resources, facilitating entry into the banking sector while not materially lessening entry standards.
The new regulatoryroute is particularly suited to digital or neo banks which focus on mobile and digital banking without the costs of traditional branches.
If an institution is unable to meet the requirements of the prudential framework within two years, the holder of a restricted licence would need to exit the banking industry.
The new regime positions Australia well as regulators take initiative to establish regulatory frameworks for banking innovation.
Application process for a Restricted ADI licence
The Restricted ADI licence regulatory process applies the same pre-application engagement and guidance as the direct route to obtain an ADI licence but involves a proportionately shorter application that focuses on key essential elements of the prudential framework.
APRA will grant a Restricted ADI licence if it is satisfied that an Applicant meets the minimum Restricted ADI requirements and is capable of progressing to an ADI licence within the two year period.
APRA strongly encourages all potential applicants to engage in pre-application discussions to ensure that they are clear on what they need to do to become an ADI.
It has also issued guidance on the minimum information an applicant should set out in a high-level summary of their business proposition, prior to initial meeting with APRA which includes:
- an explanation of why the applicant wants to be a licensed as an ADI
- the potential applicant’s initial business proposition and strategy, including high level information on its:
i. business plan – what products it will be offering, how it will offer them and its target market
ii. sources of funding – how it proposes to fund the business and whether it has any investors and/or funding in place
iii. owners and structure – details of proposed owners and the ownership / group structure, as far as these are known
iv. corporate governance – proposed structure, board, senior management and governance arrangements, as far as these are known; and
v. project plan - an overview and timeline of the plan to set up the ADI.
Regulatory requirements for a Restricted ADI licence
Capital - A Restricted ADI will at all times need a minimum capital of the higher of: $3 million plus a resolution reserve; or 20 per cent of adjusted assets. The resolution reserve is typically set at $1 million.
Assets - Restricted ADIs should not grow significantly beyond a $100 million balance sheet, consistent with the eligibility guidelines.
Disclosure - The Restricted ADI must comply with APRA’s disclosure requirements - all customers who acquire a new or existing product from a Restricted ADI must receive a statement explaining the risks of transacting with a Restricted ADI.
Liquidity - A Minimum Liquidity Holdings (MLH) requirement equal to the higher of:
- 20 per cent of liabilities; or
- the total value of protected accounts plus an amount equal to the resolution reserve; or
- for Restricted ADIs which are holders of stored value (such as pre-paid cards), 100 per cent of the stored value at risk, plus the total value of protected accounts, plus an amount equal to the resolution reserve.
Deposit Limit - Restricted ADIs will be subject to a deposit limit of $2 million on the aggregate balance of all protected accounts and a deposit limit of $250,000 on the aggregate balance of all protected accounts held by an individual account-holder.
Application documentation required for a Restricted ADI licence
The application documentation must include the following strategic information:
- a credible strategy which details the applicant’s plan to meet the prudential framework within the restricted phase
- a credible exit plan identifying the avenues the applicant would take to exit its banking business, for example if the business model is not viable, or it comes under stress and may not progress to an ADI licence.
When a Restricted ADI is satisfied that it meets the ADI prudential framework, it should:
- provide APRA with all relevant documentation to demonstrate it meets the full prudential requirements
- submit a formal application to APRA, approved by the Board, requesting progression to an ADI
- provide a risk management declaration as required by CPS 220
- provide an attestation from the Board that it meets all prudential requirements; and
- provide external audit confirmation on its capital position.
APRA will then start the formal assessment of progression to an ADI licence, based on an assessment of the Restricted ADI against the prudential framework in the same way that an institution applying via the direct entry route would be assessed.
Use of the term ‘Bank’
Section 66 of the Banking Act prohibits a financial business from using certain restricted terms, including ‘bank’, ‘banker’, ‘banking’ and ‘ADI’ in Australia unless it has been granted consent or an exemption by APRA.
It is an offence to use these terms. Further, creating an impression that a business is a neo bank when it does not have the relevant authorisation from APRA can expose the entity and its directors to common law and statutory liability to consumers, and is likely to provoke urgent supervisory action by the regulators including injunctions.
Once a licence is granted, the Restricted ADI is authorised to use certain restricted terms such as ‘bank’ but will still need to make certain disclosures which convey to consumers that the institution is operating on a restricted licence.
Related entities of an ADI or Restricted ADI may use restricted terms in relation to the financial business carried on by the licenced institution, provided the terms are not used in a misleading way and it is clear the related entity does not have a licence.
Market conduct and dual regulation
Digital banks and neo banks operate within the financial market conduct regulation for financial services licensees. Investor protection is a key regulatory theme for banks and dual regulation an important framework for this.
The Restricted ADI licence route will allow fintech companies in the digital banking space such as evolving payment, mobile money, card and digital wallet providers with a strategic outlook to enter the banking sector, with a potential option to conduct limited banking activities at an earlier stage of the ADI licensing process - subject to a transition period of two years to build capabilities and resources for a full ADI Licence.
APRA has built upon the experience of overseas regulators in respect of neo-banks and similar disruptors and has been active in approving limited and full ADI licences in Australia for example:
- Volt was granted the first unrestricted ADI licence in January 2019, being eight months after it was granted a restricted ADI licence
- Fintech lender Xinja was granted a restricted ADI licence in December 2018
- Neo bank 86 400 was granted a full ADI licence in July 2019, seeking instead to apply for an unrestricted ADI licence rather than a restricted ADI licence.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2022.