Banking exemption No. 2 of 2018

Registered entity. The exemption applies only to a registered entity, which is defined in condition 13 of the Schedule as either a corporation whose name is entered in the Register of Entities kept by APRA under section 8 of the Financial Sector (Collection of Data) Act 2001, or a corporation that met the definition of “registrable corporation” in section 7 of that Act as it existed immediately before amendment by the Treasury Laws Amendment (Banking Measures No. 1) Act 2018. This means the entity must already be captured by APRA’s data collection regime, which typically covers non-ADI lenders, credit unions, and other financial institutions. The exemption does not apply to unregistered entities, which would still need to apply for an individual exemption or risk prosecution under section 8.

Investment product and taking money on deposit. The conditions relevantly apply where a registered entity “takes money on deposit” by offering, issuing, or selling an investment product. Investment product is defined broadly as securities, financial products (as defined in the Corporations Act, but excluding securities), or any other arrangement that involves the taking of money on deposit. This captures debentures, notes, certain managed investment schemes, and other instruments that represent a deposit-like arrangement. The phrase “taking money on deposit” is not separately defined, but it is the core of the banking business that section 8 prohibits.

At-call product. Condition 13 defines “at-call product” as a debenture payable on demand or up to and including 30 days from when a retail investor makes an investment. Condition 1 prohibits offering such products to retail investors, requiring a minimum maturity period of at least 31 days. This is a structural restriction intended to prevent the exempted entity from offering products that resemble a transaction account accessible at any time. The 31-day lock-up ensures the entity’s funding base is more stable and distinguishes its products from ADI deposits, which may be at call.

Retail investor. A retail investor is defined by cross-reference to the retail client test in section 761G of the Corporations Act. This imports the thresholds and presumptions that apply under the general law for financial products. The conditions only apply when dealing with retail investors; offerings to wholesale or professional investors are not subject to the restrictions on maturity, transaction facilities, warnings, etc.

Prudential supervision warning. Condition 12 defines a required three-part statement that must be clearly and prominently set out in certain disclosure documents or, in other cases, given to the investor. The warning says the registered entity is not authorised under the Banking Act and is not supervised by APRA, the investment will not be covered by the depositor protection provisions in section 13A of the Banking Act, and the investment will not be covered by the financial claims scheme under Division 2AA of the Banking Act. This warning directly informs the investor that the entity lacks a banking licence and that there is no government-backed deposit insurance for the investment. The warning is central to the instrument’s consumer protection rationale: the investor is meant to have clear notice of the risks before committing funds.

ADI and APRA. ADI (authorised deposit-taking institution) is defined as in section 5 of the Banking Act. APRA is the Australian Prudential Regulation Authority. The instrument repeatedly contrasts the exempted entity with ADIs: the entity cannot use words like “deposit” or “at-call” and must affirm it is not an ADI or supervised by APRA.

The exemption primarily affects two groups. First, it affects registered entities that are not ADIs but that wish to take deposits from retail investors. These entities are typically non-bank lenders, mortgage funds, debenture issuers, and other on-lenders that raise funds from the public by issuing investment products such as debentures. Without this exemption, such entities could only take deposits if they held an ADI licence, which would require compliance with the full prudential framework under the Banking Act and would subject them to APRA supervision and the Financial Claims Scheme. By complying with the conditions in the Schedule, these entities can continue their deposit-taking business without becoming ADIs. The conditions impose compliance costs, but avoid the more onerous capital, liquidity, and reporting requirements of being an ADI. The instrument does not, however, exempt such entities from other regulatory regimes such as the Corporations Act or the Australian Securities and Investments Commission’s oversight.

Second, the exemption affects retail investors who invest in those registered entities. A retail investor will face restrictions: they cannot invest in an at-call product; their funds must be locked for at least 31 days; they cannot redeem early unless they meet a hardship condition; they will not have access to ATM, BPAY, EFTPOS, or cheque facilities attached to the investment; and they will be given a warning that the entity is not supervised by APRA and that the investment is not covered by the depositor protection or the financial claims scheme. For the retail investor, the investment is more like a fixed-term debenture than a transaction account. The investor’s only recourse in the event of default is through general law, the Corporations Act disclosure obligations, and any contractual rights, not through APRA-regulated compensation schemes.

The instrument also indirectly affects ADIs. By allowing non-ADI entities to take deposits subject to those restrictions, it creates a legal channel through which funds can be directed away from ADIs. But the restrictions on at-call products and transaction facilities mean that the exempted entities cannot compete directly for transaction or savings accounts; they are limited to time deposits above 31 days. This reduces competitive pressure on ADI deposit pricing for at-call products but may increase competition for term deposit-like products.

The duties under the instrument fall entirely on the registered entity. There is no duty imposed on the retail investor except that, to exercise the early release right under condition 3, the investor must make a written request and demonstrate exceptional circumstances leading to hardship. The entity then has the discretion to release funds, subject to its own written procedure.

The principal duties for the registered entity are set out in conditions 1 to 12. Condition 1: if the entity offers, issues, or sells a debenture to a retail investor, the debenture must have a maturity period of at least 31 days, and the investor must not be able to redeem any funds for 31 days from the date invested. Condition 2: on maturity of a debenture held by a retail investor, the entity must either roll the funds into another debenture with at least 31 days to maturity, or, if the investor requests no rollover, repay in cash, cheque, or direct credit to an ADI account. Condition 3: the entity may (but is not obliged to) allow early release upon a written hardship request, provided the entity follows a written procedure. Condition 4: the early release must comply with that written procedure, which must set out criteria for determining exceptional hardship.

Condition 5: the entity must not offer ATM, BPAY, EFTPOS, or cheque account facilities to retail investors in relation to an investment product. Condition 6: the entity must not use or assume the words “deposit” or “at-call” (or like expressions) in relation to an investment product offered to a retail investor. Condition 7 clarifies that this includes use as part of another word or in combination. Condition 8: if the entity issues securities that require disclosure under Part 6D.2 of the Corporations Act (e.g., a prospectus for debentures), a prudential supervision warning must appear in each disclosure document. Condition 9: if the product requires a Product Disclosure Statement under Part 7.9 of the Corporations Act, the warning must be in the PDS. Condition 10: in other cases (e.g., where no disclosure document is required but information is provided), the warning must be given in paper or electronic form before issue or sale. Condition 11 lists exceptions to the warning requirement, such as when the investor is a related body corporate, a professional investor, an exempt public authority, or when the investor has already been given a substantially similar warning previously (with grandfathering for pre-2016 statements). Condition 11(j) allows APRA to waive the warning in writing on satisfaction that investor protection does not require it.

The entity also has the right to rely on the exemption. It imposes no duty on APRA other than the ability to issue written waivers or to revoke or vary the determination under subsection 11(4). Investors have the right to receive the warning and, if they fall within the hardship provisions, a right to apply for early release, but the entity retains discretion.

The instrument itself does not create new penalties. Its enforcement mechanism operates through the underlying Banking Act. If a registered entity fails to comply with any condition in the Schedule, the exemption from section 8 ceases to apply (since the determination is made subject to compliance). Consequently, the entity is then carrying on banking business without authorisation and commits the offence under subsection 8(1) of the Banking Act: maximum 200 penalty units (which at current rates is approximately $44,400 for a body corporate), the offence is indictable (subsection 8(2)), and it is a continuing offence where each day the business is carried on constitutes a separate offence (subsection 8(3)). This can lead to multiple penalties covering the entire period of non-compliance.

The instrument also contemplates that APRA may revoke or vary the determination under subsection 11(4). While the instrument does not specify a revocation process, APRA as the maker retains the power to amend or cancel the exemption for any or all registered entities, particularly if systemic non-compliance emerges. APRA could also impose more specific conditions on individual entities under separate determinations. There is no private right of action under the instrument; investors who suffer loss due to an entity’s failure to comply with conditions may have recourse under the Corporations Act for misleading disclosure or under contract law, but not under the Banking Act itself. The prudential supervision warning is explicitly required to tell the investor that the entity is not supervised by APRA and not covered by the FCS, which limits the investor’s expectations of regulatory protection.

One enforcement nuance is that condition 11(e) exempts “exempt public authority” from the warning requirement, but such authorities are still subject to the other conditions. The definition of “exempt public authority” is imported from the Corporations Act. Meanwhile, the conditions also require that the warning be “clearly and prominently” set out. If a document buries the warning in fine print, it likely violates the condition, and the exemption is lost. The entity bears the compliance risk.

The instrument operates explicitly within the framework of the Banking Act, being a determination under section 11. It does not modify any other law; it only grants an exemption from a single provision section 8. The Schedule repeatedly cross-references the Corporations Act 2001, the Financial Sector (Collection of Data) Act 2001, and specific provisions within the Banking Act (section 13A and Division 2AA). Conditions 8 and 9 require that the prudential warning appears in disclosure documents or PDSs prepared under Parts 6D.2 and 7.9 of the Corporations Act. This means the entity must already satisfy those disclosure requirements; the exemption adds an overlay of additional wording but does not reduce any existing obligations under the Corporations Act. ASIC retains full jurisdiction over prospectuses and PDS compliance.

The instrument also interacts with the competition law framework. By allowing non-ADI deposit-taking with restrictions, it may affect the structure of the deposit market, but it does not create any exemption from the Competition and Consumer Act 2010.

The warning statements about the depositor protection provisions (section 13A) and the financial claims scheme (Division 2AA) connect to the Banking Act’s protections that apply only to ADI deposits. The entity is telling the investor that those protections do not apply, effectively contracting out of any mistaken belief that the investment is bank-guaranteed. This is consistent with the policy behind the Banking Act that only ADIs benefit from the FCS.

Because the instrument is a legislative instrument, it is subject to the Legislation Act 2003, including disallowance by either house of Parliament within 15 sitting days after tabling and automatic repeal after 10 years (sunsetting) unless reviewed. It is also subject to the Acts Interpretation Act 1901 for the interpretation of references. The definition of “registered entity” refers to the Financial Sector (Collection of Data) Act, meaning that APRA can effectively control who qualifies by adding or removing names from its register. This gives APRA a gatekeeping role without issuing individual exemptions.

The instrument states that it revokes Banking exemption No. 1 of 2015, which was made on 18 March 2015. That earlier exemption presumably had similar conditions but is now superseded. The source does not contain any internal amendment history of this instrument itself (it is the original version). No subsequent amending instruments are referenced. As a legislative instrument, any future amendments would need to be published as separate amending determinations.

The source text contains no references to litigation or cases. There is no record in the instrument of any court decisions interpreting or applying it. It is likely that the instrument has not been the subject of judicial review; however, any decision of APRA to revoke, vary, or refuse an exemption could theoretically be challenged under the Administrative Decisions (Judicial Review) Act 1977 or the common law, but no such litigation is documented in the source. Similarly, any prosecution under section 8 of the Banking Act for non-compliance with the conditions could generate court decisions, but no cases are cited.

Several aspects of the instrument warrant careful attention. First, the definition of “registered entity” includes a corporation that was a “registrable corporation” under the Financial Sector (Collection of Data) Act as it existed before the 2018 amendment. This transitional definition ensures that entities that were registered under the earlier regime remain covered even if the definition later changes. However, it creates a static reference: if the post-2018 Act narrows the class of registrable corporations, some entities might fall out without realising they need to check their status.

Second, the definition of “at-call product” in condition 13 is a debenture payable on demand or up to and including 30 days. Condition 1 then prohibits offering such a product to a retail investor. But the prohibition applies to debentures specifically; for other investment products (like financial products that are not debentures), the condition does not impose a minimum maturity? The careful reading shows condition 1 applies only to “a debenture”. For non-debenture investment products, the entity may offer at-call products to retail investors, subject to other conditions (e.g., condition 6 forbids using the word “at-call” but not the substance for non-debentures). This gap may be intentional, but it is easy to overlook.

Third, the early release hardship condition (condition 3) is permissive (“may”), not mandatory. The entity is not required to release funds even if the investor demonstrates hardship. The entity must have a written procedure, but that procedure can define hardship narrowly. An investor denied release has no regulatory recourse through APRA.

Fourth, the warning requirement exceptions in condition 11 include a grandfathering provision for statements given before 1 January 2016 (subparagraph 11(i)(i)). The investor must have been given that statement, and the statement must have told them the entity was not authorised under the Banking Act and not supervised by APRA, and the investment was not covered by depositor protection. For pre-2016 statements, the warning did not need to mention the financial claims scheme (which was introduced later). However, condition 11(i)(ii) requires that for statements given on or after 1 January 2016, the warning must include the FCS disclaimer. If an entity relies on a pre-2016 statement and the investor invests again, but the original statement was not updated for the FCS, the exception may still apply because the condition only requires that the prior statement contained the pre-2016 language, not that it was updated. This may create confusion for entities that need to decide whether to reissue warnings.

Fifth, condition 11(j) allows APRA to waive the warning requirement in writing if satisfied that investor protection does not require it. This is a concession, but APRA may be reluctant to grant waivers because the warning is central to the exemption’s policy.

Sixth, the instrument does not provide for any period of grace if an entity inadvertently breaches a condition. Once a condition is breached, the exemption is lost immediately, and the entity is carrying on banking business unlawfully. There is no cure period or self-reporting mechanism.

A registered entity seeking to rely on this exemption should implement the following compliance steps. First, confirm that it is indeed a registered entity falling within the definition, either by being on the APRA Register of Entities or being a pre-2018 amendment registrable corporation. Maintain evidence of registration and monitor any changes to the Financial Sector (Collection of Data) Act that might affect status.

Second, for any investment product offered to a retail investor, ensure it is not an at-call debenture. All debentures offered to retail must have a minimum 31-day maturity and no redemption before 31 days. Document the maturity period in the product terms and ensure the entity cannot process early redemption within that period (other than under the hardship procedure). For non-debenture products, the minimum maturity does not apply, but the entity should still avoid using the word “at-call” in any product name or description because condition 6 applies to all investment products, not just debentures.

Third, establish a written early release procedure that sets out criteria for determining “exceptional circumstances that may lead to hardship”. Train staff to handle such requests and maintain records of each determination. The procedure must be applied consistently; the entity retains discretion not to release even if the procedure criteria are met, but must follow the procedure.

Fourth, remove or block any ATM, BPAY, EFTPOS, or cheque account facilities linked to retail investment products. This includes ensuring that the facility cannot be used to access funds held in the investment. If the entity offers separate transaction accounts through an ADI partnership, those must be clearly separated from the investment product.

Fifth, review all product names, advertising, and disclosure documents to ensure they do not use the word “deposit” or “at-call” in relation to the investment product. This includes checking that these words are not used as part of a product name (e.g., “Deposit Notes”) or in marketing copy. Consider alternatives like “debenture”, “note”, “term investment”, or “bond”.

Sixth, prepare a prudential supervision warning that includes the three required statements: (a) not authorised under the Banking Act and not supervised by APRA, (b) investment not covered by depositor protection under section 13A, (c) investment not covered by the financial claims scheme. Ensure this warning is “clearly and prominently set out” in any disclosure document or PDS that is subject to Parts 6D.2 or 7.9 of the Corporations Act. In other cases where information is given via paper or electronic communication before the issue or sale, the warning must be in that communication. If no such communication is given, the entity must give a paper or electronic document containing the warning before issue or sale.

Seventh, identify whether any exceptions to the warning requirement apply. For example, if the investor is a related body corporate, professional investor, or if the warning was already given previously and the same conditions apply, the warning may be omitted. However, reliance on the pre-2016 grandfathering exception requires careful recordkeeping of prior warnings and confirmation that no information has been given suggesting the warning is no longer operative. Where APRA has granted a written waiver under condition 11(j), keep the waiver on file.

Eighth, monitor ongoing compliance. The conditions apply each time an investment product is issued or sold. The entity should maintain an internal compliance checklist and audit procedures to ensure that no product runs afoul of the restrictions. Because non-compliance triggers loss of the exemption and potential criminal liability, the compliance stakes are high. Regular training for sales and product teams is warranted. It may also be prudent to obtain legal advice on whether particular product features constitute an “at-call” product or whether an entity falls within the definition of registered entity, especially if there are structural changes or new financial product types.