Section 8 of Doing Business in Australia
Australia's Banking System
The key lending institutions in the Australian financial system consist of commercial banks, retail banks and investment banks (including branches and subsidiaries of foreign banks). Non-bank financial institutions also operate within the system.
The key regulator of the banking system is the Australian Prudential Regulation Authority (APRA) which ensures that organisations in the Australian financial services industry manage their risk appropriately and that the stability of the financial system is not jeopardised.
APRA is also the body which determines whether to authorise an entity to conduct banking business and grants authorities under the Banking Act 1959 (Cth) for authorised deposit- taking institutions. Once authorised, it is possible for a foreign bank to conduct business in Australia either through an authorised branch or an authorised locally incorporated subsidiary which can engage in the full spectrum of banking activities. However, authorised foreign bank branches in Australia are prohibited from engaging in retail banking (taking deposits of less than $250,000 from the public).
Direct lending in Australia
There are a number of issues that may impact on a foreign company engaged in direct lending in Australia.
Australian financial services licences (AFSLs)
As noted in section 7 - Guide to Financial Services in Australia, all persons who carry on a financial services business in Australia are required to have an AFSL or have the benefit of an exemption from this requirement. Lenders are, generally speaking, not covered by this licensing regime, but most other types of financial services are covered.
Financial Sector (Collection of Data) Act 2001 (Cth)
This act requires a corporation to register and provide periodic reports if, among other things, 50% or more of its assets in Australia consist of debts owed to the corporation as a result of transactions entered into in the course of providing finance. A debt owed by an Australian borrower is likely to be regarded as situated in Australia.
Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth)
As noted in section 17 - Guide to Anti-Money Laundering, Counter-Terrorism Financing and Corrupt Practices Legislation, this act regulates designated services carried on through a permanent establishment in Australia, which includes a place in Australia where the entity carries on business through an agent.
As outlined in section 2 - Guide to Australia's Foreign Investment Regime, foreign investment in Australia is regulated. The restrictions on foreign investment extend to the acquisition of interests in securities, businesses and land and so can, in theory, capture the taking and enforcement of security interests. Recent legislative amendments have broadened the exemptions available to both bank and non-bank lenders and domestic security trustees so that in practice, most of these activities will now no longer be caught within Australia’s foreign investment net, so long as the assets acquired on enforcement are disposed of within the prescribed period of time.
Australian legislation sets out prohibitions on misleading and deceptive conduct in respect of a broad range of financial services and unconscionable conduct in respect of business transactions. There is also specific legislation in each state and territory which deals with the review of unjust contracts.
A range of legislation exists in respect of lending to consumers and this is discussed in section 11 - Guide to Fair Dealing and Consumer Protection in Australia.
Security can be taken over most assets such as land, shares, bank accounts, receivables, insurances, goods and equipment. In addition, the Personal Property Securities Act 2009 (Cth) (PPSA) provides that a grantor of a security interest may in some circumstances grant security over assets that it does not have title to. These include assets in which the grantor has an interest as lessee or bailee under a “PPS Lease” (as described below).
The PPSA sets out a single national system for the creation, priority and enforcement of security interests in personal property (being, in general, all property other than land). The PPSA adopts a “substance over form” approach to determining whether a security interest arises in a particular context – that is, the PPSA looks to see whether a particular transaction, in substance, creates an interest in personal property that secures payment of performance of an obligation (without regard to the form of the transaction). The effect of this is that the concept of security interest under Australian law is considerably broader than just “orthodox” security interests (such as charges and mortgages). Arrangements not traditionally thought of as security interests but which may constitute a security interest under the definition in the PPSA include step-in rights (under a construction contract, for example) and flawed-asset arrangements.
In addition, the PPSA has introduced the concept of the “PPS Lease”. PPS Leases are leases or bailments of goods which have a term of more than 1 year (if entered before 27 May 2017) or 2 years (if entered after 27 May 2017).
The PPSA also provides for the establishment of a single national register for the registration of these security interests in personal property. There are strict time limits within which a secured party is required to register their security interest on the PPSA register. A failure to register within these time limits may mean that the security interest is void as against a liquidator. In addition, a failure to register a security interest correctly or at all may cause the relevant security interest to be unperfected. An unperfected security interest will “vest” in the grantor on its winding-up, which means that the relevant secured party will lose any interest they have in the relevant collateral the subject of the unperfected security interest.
This guide is current as of April 2021.