Insights

04/06/18

Government introduces new rules to facilitate investment and competition in financial services

The Government has recently released draft legislation aimed at supporting investment and new entrants into the financial services market.  The Draft Bill proposes two key amendments to the Financial Sector (Shareholdings) Act 1998 (the FSSA):

  • increasing from 15% to 20% the ownership limit that can be sought in a financial sector company without having to seek approval from the Treasurer; and
  • a new streamlined FSSA approval path for owners to hold (or invest ) more than 20% in a new or recently established financial sector company provided the investors meet a “fit and proper” test and comply with asset requirements and ongoing conditions.

Why these changes? Why now?

The increase of the shareholding threshold to 20% brings the FSSA in line with the Foreign Acquisitions and Takeovers Act 1975 (FATA).  There was limited policy rationale for the discrepancy between the FSSA and the FATA, and consistency will simplify investment (and approvals) in Australia’s financial system.

At the same time, the Australian Prudential Regulation Authority (APRA) has recently introduced a dual-phase licensing regime for authorised deposit-taking institutions (ADIs): a direct route and a restricted route.  The direct route allows applicants to conduct their intended banking business from the granting of the licence if the applicant can demonstrate that it meets the prudential framework and is ready to commence banking business.  The restricted route provides eligible applicants with a restricted licence for a maximum of 2 years before they must meet the prudential framework in full, so as to enable them to conduct limited banking business while developing their capabilities and resources.  

The proposed changes to the FSSA, combined with APRA’s announced dual-phase licensing regime, are intended to reduce perceived barriers to entry in the sector so as to encourage greater start up activity and support innovation, while maintaining appropriate safeguards to protect consumers and financial system stability.  The proposed changes, if passed, will likely encourage greater participation and competition in the financial system.

What happens next?

The consultation period for the Draft Bill is now complete. The Government is yet to announce a date for a decision on the Draft Bill.

Want to know more?

Under the Draft Bill, the Treasurer can approve ownership of more than 20% in a new or recently established financial sector company where the company has assets below a threshold amount and the owner is a “fit and proper” person.

The new approval path is available where the following criteria are met:

  • Age: The company must be incorporated in Australia and have (i) relevantly applied for a license under the Banking Act 1959, the Insurance Act 1973 or the Life Insurance Act 1995 or (ii) been licensed as a financial sector company for less than 5 years.
  • Asset threshold: The company must have total resident assets below the threshold amount.  In relation to an ADI or a life insurer, the value of total resident assets must be less than $200 million (or any amount prescribed by the Treasurer).  In relation to a general insurance company, the value of total resident assets must be less than $50 million (or any amount prescribed by the Treasurer).  APRA will determine the rules that set out the meaning of “total resident assets”.  However, it is expected they will adopt the approach outlined in Reporting Standard ARS 320.0.
  • Fit and proper test: The owner must be “fit and proper”.  APRA will determine a “fit and proper” test which will need Ministerial consent before becoming a rule under the FSSA.  The Government expects that APRA will consult with industry prior to finalising the test.

Approvals granted under this provision will be subject to the following conditions (in addition to any other conditions applied by the Treasurer):

  • an obligation to notify the Treasurer in writing within 30 days if the asset threshold is breached.  The notice must also specify whether the owner intends to divest holdings or apply for an exemption subject to the national interest test;
  • annual provision of relevant information to APRA; and
  • a review of the ownership structure by APRA at the end of each 5-year period following the initial approval being granted.

Approval remains in force until the end of 2 years after the day that the value of the total resident assets of the relevant licensed company first exceeds the asset threshold.

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