Restricted ADI Pathway - APRA Clarifies Policy on Restricted Licence Period and transition to new ADI

In brief - In this article which is part one of our 'Restricted ADI Pathway' three-part series, we examine the parameters of the Restricted ADI Licence Period which applies to a Restricted ADI intending to progress to a full ADI licence.

Regulatory Limits - 'Up or Out'

A restricted authorised deposit-taking institution (Restricted ADI) has a maximum period of two years before it must meet the full requirements of the ADI prudential framework. 

This is generally an 'up or out' deadline. If a Restricted ADI is not in a position to progress to a full ADI licence it must otherwise wind up its banking business and exit the banking industry. 

The Australian Prudential Regulation Authority (APRA) has indicated it will only grant an extension of the two-year restricted period in exceptional circumstances. A recent example provides some insight into the potential nature of those 'exceptional or special' circumstances.

APRA - regulatory discretion

In mid-September 2022, APRA announced that it has granted IN1Bank Ltd a second extension of its (Restricted ADI) licence under the Banking Act for a limited time. 

We consider below whether this represents a modification of APRA's strict approach to the cut-off date of two years for the restricted licence period and factors which may be relevant to an exercise of that discretion.

Exceptional or special circumstances 

IN1Bank was granted a restricted banking licence in December 2019.

In June 2022, it was granted its first extension for a further 12 months. 

It was publicly reported that APRA determined that there were sufficient grounds for an extension due to the disruption of the pandemic.

This time round however it is reported that APRA allowed a further short extension "recognising the unique circumstances of IN1Bank’s application". 

In this regard, In1Bank has publicly indicated that it is continuing to seek a full banking licence and has recently launched a pilot digital platform for staff and some customers on its waiting list.

While APRA stated that it does not view this decision as setting a precedent for other future Restricted ADIs, APRA has also stated that it will consider possible extensions of another Restricted ADI’s licence on their own merits as the need arises.

Can Restricted ADI applicants apply for an extension past the two year restricted period?

Some insight into APRA's approach to an extension of the mandated restricted licence period is set out in APRA's Response Paper - APRA’s approach to new entrant authorised deposit-taking institutions issued in August 2021 (Response Paper). 

As discussed above, under the Restricted ADI regime, a licensee has a restricted phase of a maximum period of two years after which it must be in a position to immediately transition to a full ADI licence including compliance with rigorous prudential requirements. If it fails to meet the relevant criteria then it must exit the banking industry.

Recent examples of this exit scenario playing out are evident in the exits by Volt Bank (Volt) and Xinja Bank (Xinja). 

In the case of Volt, it recently announced in July 2022 its intention to return all funds to depositors and ultimately relinquish its licence to operate as an authorised deposit-taking institution at which time 5730 customers held deposit accounts with Volt with a total value of $107 million. 

Following Volt’s announcement, most of the Volt deposits were transferred by customers to other banking institutions and by the end of July, Volt had completed the process by voluntarily transferring the remaining 441 accounts, with a total deposit value of approximately $113,073 to the National Australia Bank (NAB). 

In the case of Xinja it announced its intention to return all funds to depositors and ultimately relinquish its licence to operate as an ADI in December 2020. At the time of the announcement, Xinja had 37,884 customers with 54,357 individual deposits worth more than $252 million and by mid-January 2021 it completed the exit process by voluntarily transferring the remaining 4,176 accounts (with a total deposit value of $65,809) to NAB.

The APRA Response Paper indicates that APRA may have the discretion to consider extending the time limit in isolated circumstances, though only where APRA assesses that the Restricted ADI can transition to an ADI licence in a short timeframe past the two-year limit.

In the case of Volt, its collapse arose from an inability to complete a $200 M round of fundraising due to a deteriorating capital market.

In the case of Xinja, its business model failed under the pressure of maintaining ongoing capital funding and relying on shareholder capital to pay out high interest on deposits without the support of a loan product to earn sufficient revenue to sustain its operation.

Based on these examples this suggests that any application by a Restricted ADI for an extension of its restricted period would, at the very least, necessitate the support of a:

• viable capital management and fundraising plan; and
• sustainable banking business model.

What is clear from recent regulatory responses is that APRA will consider granting an extension only in exceptional circumstances and where a Restricted ADI is not successful at progressing its banking business, APRA will not allow it to maintain a ‘shell licence’.