This instrument is APRA’s Prudential Standard APS 222 Associations with Related Entities, made under s 11AF of the Banking Act 1959 and published as Banking (prudential standard) determination No. 7 of 2020. It revokes the prior Determination No. 9 of 2014 (and the prior version of APS 222) and commences on 1 January 2022 (see front matter and Schedule). The standard applies on a Level 1 basis to all authorised deposit-taking institutions (ADIs) except purchased payment facility providers, with a limited set of requirements applying to foreign ADIs (Application, paragraphs 1 to 3).

Mechanically, the standard requires ADIs to:

adopt Board-approved policies on dealings and associations with related entities, reviewed at least annually (paragraph 12);
identify, measure, monitor, manage and control contagion and step-in risks arising from related entities and “step-in risk entities” (paragraphs 13 and Attachment A);
apply minimum standards for dealings that could give rise to prudential concerns, including arms-length dealing, documented terms for support and restrictions on cross-default provisions (paragraphs 13, 15, 16 and 21);
maintain exposures to related entities within specified quantitative limits measured against Tier 1 capital on a Level 1 basis (paragraphs 29 to 31, and Measuring exposures, paragraphs 34 to 37);
follow prior notification and approval processes for significant acquisitions or exposures (Prior notification requirements, paragraph 38; Approval requirements, paragraph 44);
apply particular constraints for funds-management related entities, including separation rules, limits on purchases and CET1 deductions for certain liquidity facilities and underwriting arrangements (Attachment B);

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Banking (prudential standard) determination No. 7 of 2020

Prudential Standard APS 222 Associations with Related Entities

Banking Act 1959

I, John Lonsdale, delegate of APRA:

under subsection 11AF(3) of the Banking Act 1959 (the Act) REVOKE Banking (prudential standard) determination No. 9 of 2014, including Prudential Standard APS 222 Associations with Related Entities, made under that Determination; and
under subsection 11AF(1) of the Act DETERMINE Prudential Standard APS 222 Associations with Related Entities, in the form set out in the Schedule, which applies to all ADIs to the extent provided in paragraphs 2 to 3 of the prudential standard.

This instrument commences on 1 January 2022.

Dated: 8 December 2020

[Signed]

John Lonsdale

Deputy Chair

Interpretation

In this Determination:

ADI has the meaning given in section 5 of the Act.

APRA means the Australian Prudential Regulation Authority.

Schedule

Prudential Standard APS 222 Associations with Related Entities comprises the document commencing on the following page.

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Prudential Standard APS 222

Associations with Related Entities

Objectives and key requirements of this Prudential Standard<br>The objective of this Prudential Standard is that authorised deposit-taking institutions identify, monitor and control contagion risks arising from their associations and dealings with related entities and those creating step-in risk.<br>The key requirements of this Prudential Standard are that an authorised deposit-taking institution must:<br>have a Board-approved policy that governs its associations and dealings with its related entities;identify, monitor, manage and control potential contagion risk between the authorised deposit-taking institution and its related entities and step-in risk entities;meet minimum requirements with respect to dealings with related entities and step-in risk entities which may give rise to prudential concerns; andmaintain exposures to related entities within limits.

Table of Contents

Adjustments and exclusions

Previous exercise of discretion

The role of the Board

Control of risks arising from related entities

Provision of support

Group badging and disclosures

Participation in group operations

Limits on exposures to related entities

Measuring exposures to related entities

Prior notification requirements

Notification requirements

Approval requirements

Attachment A — Step-in risk

Attachment B — Funds management

Attachment C — Extended Licensed Entity

Authority

This Prudential Standard is made under section 11AF of the Banking Act 1959 (the Banking Act).

Application

This Prudential Standard applies to all authorised deposit-taking institutions (ADIs), on a Level 1 basis, except purchased payment facility providers (PPF providers), subject to paragraph 3 of this Prudential Standard.
A foreign ADI is only required to comply with the requirements in paragraphs 23 to 28 of this Prudential Standard.
This Prudential Standard commences on 1 January 2022.

Interpretation

Terms that are defined in Prudential Standard APS 001 Definitions (APS 001) appear in bold the first time they are used in this Prudential Standard.
Where this Prudential Standard provides for APRA to exercise a power or discretion, this power or discretion is to be exercised in writing.
In this Prudential Standard, unless the contrary intention appears, a reference to an Act, Regulations or Prudential Standard is a reference to the Act, Regulations or Prudential Standard as in force from time to time.

Definitions

The following definitions are used in this Prudential Standard:
control over an entity includes, but is not limited to, having: 1. more than 50 per cent of voting rights over the entity; 2. a voting agreement with other shareholders resulting in control of voting rights over the entity; 3. significant influence over the appointment of persons to or removal of persons from the entity’s management, Board of directors (Board[1]) or board committees; 4. significant influence over a senior manager or senior management of the entity (including influence on the policies of the entity);
ELE subsidiary means a subsidiary that has been approved to be part of an ADI’s extended licensed entity (ELE);
entity has the meaning given in section 9 of the Corporations Act 2001 (Corporations Act) for the purposes of Chapter 2E of that Act, a government-related entity or a trust;
funds management means the provision of investment and related services for the management of investors’ funds;[2]
government-related entity means a public sector entity, a state-owned enterprise or an entity controlled (whether directly or indirectly) by any level of government or a central bank;
related entity of an ADI means an entity which could give rise to risk to the ADI due to conflicts of interest and contagion, where the risk would not arise if the ADI were dealing with an unrelated entity. A related entity of an ADI includes, but is not limited to, any of the following: 1. an entity which is directly or indirectly controlled by the ADI; 2. an entity which directly or indirectly controls the ADI; 3. a substantial shareholder of the ADI; and 4. a related individual of the ADI and the related individual’s relatives.

Where APRA considers it appropriate, APRA may require an ADI to treat an entity as a related entity;

related individual of an ADI means a senior manager of the ADI, an individual who is a Board member of the ADI or any other individual that is likely to have direct or indirect control over the ADI, the ADI’s senior management or the ADI’s Board;
step-in risk entity means an entity to which an ADI is likely to provide support beyond any legal or contractual obligation to do so; and
substantial shareholder means a person or entity which has a substantial holding in the ADI, where ‘substantial holding’ has the meaning given in section 9 of the Corporations Act but is read as if it referred to 10 per cent or more of the total number of votes attached to voting shares instead of 5 per cent or more.
A dealing with a related entity includes, but is not limited to, on- and off-balance sheet credit transactions, support arrangements, asset purchases and sales, service contracts, leasing agreements, derivatives transactions, acquisition of real property, provisions, restructuring and write-offs.

Adjustments and exclusions

APRA may adjust or exclude a specific prudential requirement in this Prudential Standard in relation to one or more specified ADIs.[3]

Previous exercise of discretion

An ADI must contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion by APRA under a previous version of this Prudential Standard.

The role of the Board

The Board of an ADI is ultimately responsible for oversight of the ADI’s associations with its related entities and for approving policies governing the ADI’s dealings and associations with its related entities. The Board must ensure these policies are reviewed at least annually and that they remain adequate and appropriate for the ADI’s risk appetite, risk profile, capital, balance sheet size and the complexity of the ADI’s group.

Control of risks arising from related entities

An ADI’s policies on dealings and associations with related entities must consider contagion risks to the ADI that arise from its group structure and related entities, and form part of the ADI’s risk management strategy and risk management framework required under Prudential Standard CPS 220 Risk Management. An ADI must assess contagion risks to the ADI on a regular basis, at least annually, taking into consideration:
the number and size of entities within its group and the complexity of the group structure;
the adequacy of systems, controls and risk management across the group;
the level of financial and operational interdependence across the group;
whether other members of the group are regulated entities (i.e. regulated by APRA or by an equivalent prudential regulator overseas);
whether the location of the ADI’s subsidiaries undermines the ability of its subsidiaries to be resolved in a sound and timely manner; and
badging and product distribution arrangements that might link the ADI’s reputation to other entities.
An ADI’s policies on dealings and associations with related entities must be based on an assessment of material risks to the ADI and, at a minimum, include:
a requirement that the ADI deal with related entities on an arm’s-length basis and on market terms and conditions;
limits on exposures to related entities at both an individual and aggregate level, which are determined having regard to: 1. the level that would be approved for unrelated entities of an equivalent credit status; and 2. the impact on the ADI’s stand-alone capital and liquidity positions in the event of a failure of a related entity;
the circumstances in which the limits relating to exposures and write-offs may be exceeded and the authority and processes required for approving such excesses;
the authority and processes required for the approval and maintenance of group structures, where the ADI is the head of a group, and establishing and acquiring subsidiaries;
procedures to address risks arising from participation in group operations (refer to paragraphs 27 and 28 of this Prudential Standard);
procedures for resolving conflicts of interest arising from dealings with related entities;
processes to ensure the transparency of third-party dealings that are connected with related entities; and
procedures to address material risks to the ADI arising from the ADI distributing financial products of another counterparty and vice-versa.
An ADI’s Board must first approve the terms and conditions agreed to by an ADI in relation to dealings with its related entities that are not consistent with terms and conditions that would be negotiated with an unrelated entity with justifications fully and clearly documented in a register.
An ADI must not:
have unlimited exposures to related entities either in aggregate or at an individual entity level; or
agree to cross-default provisions whereby a default by a related entity on an obligation, whether financial or otherwise, triggers or is deemed to trigger a default by the ADI on its obligations.
An ADI must implement adequate systems and controls to identify, measure, monitor, manage and report exposures arising from dealings with related entities and step-in risk entities. Where APRA is not satisfied with the adequacy of the ADI’s systems and controls or is of the view that the ADI is exposed to substantial contagion risk, APRA may:
determine higher capital adequacy requirements including Prudential Capital Requirements (PCRs) for the ADI;
require the ADI to establish additional internal controls or a more robust reporting mechanism; or
require the ADI to take measures to reduce the level of contagion risk to its related entities or step-in risk entities.
An ADI must meet the requirements in relation to the identification, measurement and management of step-in risk as set out in Attachment A to this Prudential Standard.

Provision of support

An ADI must not undertake any dealings with unrelated entities for the purpose of supporting the business of related entities.
An ADI must not provide support to related entities, and an ADI must not accept support from its related entities, unless such support is expressed clearly in legal documentation, is fixed as to time and amount, and is in accordance with the ADI’s policies and the prudential requirements set out in paragraphs 13 to 17 of this Prudential Standard.[4]
An ADI must satisfy APRA, upon request, that when it purchases assets from or securities or other forms of liabilities issued by a related entity, or sells assets and securities to a related entity, that these activities do not constitute the ADI providing capital support to the related entity. APRA may require an ADI to deduct from Common Equity Tier 1 Capital the value of assets, securities or other liabilities where APRA is not satisfied that the activities do not constitute the provision of capital support.
An ADI must meet the requirements in Attachment B to this Prudential Standard in relation to the provision of liquidity facilities to funds management vehicles.
A foreign ADI must not provide support to its subsidiaries operating in Australia, and a foreign ADI must not accept support from its subsidiaries operating in Australia, unless such support is expressed clearly in legal documentation and is fixed as to time and amount. A foreign ADI that wishes to give a general guarantee over the obligations of its Australian subsidiaries must be able to demonstrate to APRA that its home supervisor is aware of the obligations and has no objection to the transaction.

Group badging and disclosures

An ADI must not use a brand name in common with members of its conglomerate group except where the ADI and group members clearly and prominently disclose their roles and responsibilities in order to reduce the risk of giving the impression that a non-ADI member of the group is an ADI, or that a group member is guaranteed or supported by an ADI in the group.
Unless otherwise prohibited by the laws of a foreign jurisdiction, when there are financial transactions between an external counterparty and a member of the ADI’s group that uses a common brand name with the ADI, the ADI must ensure that disclosure to the external counterparty includes that:
the group member with whom the counterparty is dealing is not an ADI (where this is the case) and that the member’s obligations do not represent deposits or other liabilities of the ADI in the group;
the ADI does not stand behind the group member, unless support is provided for in legal documentation (refer to paragraphs 20 and 23 of this Prudential Standard). Where support is provided for, the nature and limitations of the ADI’s obligations arising from its involvement must be disclosed; and
the investor is exposed to investment risk including possible delays in repayment and loss of income and principal invested, as relevant.
APRA may require an ADI to not use a brand name in common with a group member if that would give rise to a prudential concern having regard to the following factors:
the presence of appropriate disclosures;
the type of entity involved (whether the group member is regulated or unregulated);
the group member’s risk profile, reputation and associations;
the manner in which various products and services are marketed;
the types of customers involved with the group member; and
other factors on a case-by-case basis.

Participation in group operations

An ADI must establish policies and procedures to address risks posed to the ADI from participating in group operations including, but not limited to, sharing premises with other group members, centralising back-office functions or outsourcing services to other group members.
Where an ADI participates in group operations, the ADI must:
ensure that those operations do not adversely affect the safety and soundness of the ADI as a stand-alone entity;
be satisfied that any exposures generated are addressed by the ADI’s policies and procedures on participating in group operations;
ensure dealings with other parties arising from participation in group operations are appropriately documented in written service agreements;[5]
ensure there is a clear documented obligation for a service provider to comply with a direction given by APRA in relation to the operations of the ADI; and
ensure such operations are not likely to lead to confusion for customers about the respective roles and responsibilities of the ADI and the group member.

Limits on exposures to related entities

The exposures of an ADI to its related entities must not exceed the following limits:[6]
related ADIs or overseas based equivalents: 1. exposure to an individual related ADI or overseas based equivalent – 25 per cent of an ADI’s Tier 1 Capital on a Level 1 basis; and 2. aggregate exposure to all related ADIs and overseas based equivalents – 75 per cent of an ADI’s Tier 1 Capital on a Level 1 basis; and
other related entities: 1. exposure to an individual regulated related entity (other than a related ADI or related overseas-based equivalent) – 25 per cent of an ADI’s Tier 1 Capital on a Level 1 basis; 2. exposure to an individual unregulated related entity – 15 per cent of an ADI’s Tier 1 Capital on a Level 1 basis; and 3. aggregate exposure to all related entities (other than related ADIs and related overseas-based equivalents) – 35 per cent of an ADI’s Tier 1 Capital on a Level 1 basis.
An ADI’s exposure to an ELE subsidiary is not subject to the limits in paragraph 29 of this Prudential Standard or requirements in Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111) relating to the treatment of investments in and capital support provided to an ADI’s subsidiaries.[7]
An ADI must meet the requirements in relation to its ELE subsidiaries as set out in Attachment C to this Prudential Standard.
An ADI’s exposures to the foreign parent of the ADI, the foreign parent’s overseas based subsidiaries and their directly owned non-ADI entities operating in Australia are required to be within the limits in Prudential Standard APS 221 Large Exposures (APS 221).
Notwithstanding paragraph 29 of this Prudential Standard, APRA may set specific limits in relation to an ADI’s exposure to one or more related entities having regard to the ADI’s individual circumstances.

Measuring exposures to related entities

An ADI’s exposure to a related entity is the aggregate of all claims, commitments and contingent liabilities arising from on- and off-balance sheet transactions in both the banking and trading books with the related entity, and must be measured in accordance with Attachment A to APS 221.
An ADI’s exposure to a regulated related entity must be measured in accordance with paragraph 34 of this Prudential Standard and must include any equity exposures and capital support provided to the regulated related entity (including any off-balance sheet exposure arising from guarantee of capital instruments issued by the related entity) that has not been deducted from the ADI’s Level 1 capital for capital adequacy purposes.
Where an ADI is required to apply the look-through requirement in Attachment A to APS 221 for an exposure to a structured vehicle that is a related entity and the ADI has an exposure to an underlying asset that is another related entity of the ADI, the ADI must recognise all of these exposures under the limits in paragraph 29 of this Prudential Standard.
An ADI’s exposure to a related entity excludes the exposures specified in paragraph 18 of APS 221.

Prior notification requirements

An ADI must notify APRA prior to:
establishing or acquiring a subsidiary other than an entity which is to be used purely as a special purpose vehicle to provide finance to the ADI;
committing to any proposal to acquire (whether directly or indirectly) greater than, or equal to, 20 per cent of the equity interest in an entity; or
committing to any proposed exposure to a related entity that is greater than, or equal to, 10 per cent of the ADI’s Tier 1 Capital.
APRA may require an ADI to not proceed with a transaction that has been subject to the prior notification requirements in paragraph 38 of this Prudential Standard, or impose prudential conditions on the transaction or higher capital adequacy requirements on the exposure, if APRA is not satisfied with the ADI’s risk assessment. Factors that APRA will consider include, but are not limited to:
the ADI’s assessment of the factors in paragraph 13 of this Prudential Standard;
the adequacy of the ADI’s systems, controls and resources to identify, measure, monitor, manage and report exposures and risks arising from the activity; and
whether the transaction exposes the ADI to substantial contagion risks or hinders effective supervision.
APRA may determine that an ADI is not required to notify APRA prior to committing to proposed transactions that are below a specified threshold, having regard to the robustness of the ADI’s risk management framework.

Notification requirements

An ADI must notify APRA immediately of any breach of the limits in paragraph 29 of this Prudential Standard or other specific limits imposed by APRA under paragraph 33 of this Prudential Standard, including how the breach arose and remedial actions taken or planned to deal with the breach.[8]
An ADI must notify APRA regarding any equity investments that are not subject to the prior notification requirements set out in paragraph 38 of this Prudential Standard, within three months of undertaking the investment.
An ADI must notify APRA immediately after it becomes aware of any circumstances that might reasonably be seen as having a material impact or potentially adverse consequences for an ADI in the group or for the overall group. This includes, but is not limited to, material changes in the structure of a group which is headed by the ADI and a significant breach of, or material changes in, the ADI’s policies on dealings with related entities.

Approval requirements

An ADI must obtain approval from APRA prior to undertaking any proposed exposures in excess of the limits set out in paragraph 29 of this Prudential Standard or any specific limit imposed by APRA under paragraph 33 of this Prudential Standard. APRA will only grant such approval on an exceptions basis taking into consideration the individual circumstances of the ADI and the ADI’s assessment of:
the contagion risks involved with exceeding the limits (including the factors in paragraph 13 of this Prudential Standard) and why the proposed exposures will not unreasonably expose the ADI to excessive risk; and
how the proposed exposures are consistent with its policies on related entities.
An ADI must obtain approval from APRA prior to the establishment or acquisition of a regulated entity, branch or presence domestically or overseas.

Attachment A — Step-in risk

An ADI must maintain a risk appetite statement and strategy for managing its associations and dealings with step-in risk entities.
An ADI must have adequate systems and controls in place to identify, measure, monitor, manage and report exposures arising from dealings with step-in risk entities.
An ADI must identify an entity which exposes the ADI to step-in risk. In identifying step-in risk entities, the factors that an ADI must consider include, but are not limited to:
the nature and extent of the ADI’s sponsorship of the entity, including whether the ADI manages or advises the entity, places its securities into the market, or provides the entity with liquidity facilities or credit enhancements;
whether investors expect the ADI to support the entity during a stress scenario;
whether business arrangements with the entity (e.g. distributing or marketing of the other entity’s products) expose the ADI to reputational contagion;
whether the entity has a limited capacity to access liquidity when facing an unanticipated increase in redemption requests;
whether the ADI is a major provider of assets, or is perceived to be a major provider of assets, or other financial services to the entity;
whether the entity carries the ADI’s brand; and
whether there have been past instances of the entity receiving support from the ADI beyond the ADI’s legal or contractual obligation.
Where an ADI has identified a step-in risk entity, the ADI must determine the materiality of the step-in risk through an assessment of the potential impact on the capital and liquidity of the ADI if it were to step-in to support the entity.

Attachment B — Funds management

The requirements in this Attachment apply to an ADI’s associations with a funds management vehicle that is a related entity of the ADI. Where an ADI has an exposure to a funds management vehicle that is an unrelated entity, the ADI must meet the requirements in APS 221 with respect to exposure limits and look-through requirements for structured vehicles.

Separation

An ADI must not act as a manager, responsible entity, approved trustee, trustee or any similar role in relation to funds management.
An ADI must deal with a funds management vehicle and its investors on an arm’s- length basis and on market terms and conditions.
An ADI must not:
have any ownership or beneficial interest in a funds management vehicle;[9] or
allow any of the ADI’s directors, officers or employees to sit on the Board of a funds management vehicle unless the Board is made up of at least four members. The ADI may be represented by one director on a Board of four to six directors and by no more than two directors on a Board of seven or more directors.
The requirements in paragraph 4 do not apply to an ADI’s ownership or beneficial interest in, or seats on the Board of:
a custodian;
a life insurance company and its statutory funds regulated by APRA or an equivalent regulator overseas;
an RSE licensee or custodian established under provisions of the Superannuation Industry (Supervision) Act 1993 or equivalent legislation overseas;
a licensed trustee company of a common fund, within the meaning of Chapter 5D of the Corporations Act; or
a responsible entity of a managed investment scheme, within the meaning of section 9 of the Corporations Act, or similar entities registered under like statutory provisions overseas.

Purchase of securities

An ADI must not purchase more than 20 per cent of the outstanding value of a funds management vehicle’s securities unless the purchase arises as part of an underwriting agreement.

Liquidity facilities

An ADI must deduct the value of a liquidity facility provided to a funds management vehicle, from the ADI’s Common Equity Tier 1 Capital, if any of the following conditions are met:
the facility is able to be drawn upon to fund additional assets held by the vehicle, to acquire assets of the vehicle, to fund the final scheduled repayment of investors or to cover against dilution of seller’s risk (e.g. the cancellation of assets or breach of warranties);
the repayments of the facility to the ADI are subordinated to the interests of investors; or
the facility is provided without another facility being provided by an unrelated entity to the funds management vehicle, unless the ADI provides a liquidity facility that covers less than 10 per cent of outstanding securities and is used for the purpose of: 1. providing short-term funding for smoothing time differences in payment flows (excluding the retirement of securities at maturity or on roll-overs); 2. meeting margin payments on futures transactions; or 3. covering delays in settling asset transactions involving the vehicle.

Underwriting of funds management vehicles

An ADI that acts as an underwriter or committed dealer for the issue of securities by a funds management vehicle must deduct the value of the facility from the ADI’s Common Equity Tier 1 Capital if:
the funds management vehicle does not have an express right to select an alternative party to provide the facility;
the ADI does not have the ability to withhold payment, and to terminate the facility if necessary, upon the occurrence of events which would materially and negatively impact the soundness of the ADI; and
the ADI underwrites a significant proportion of the issue of securities and either of the following conditions exist: 1. the ADI cannot demonstrate its ability in placing securities of the type underwritten; or 2. the amount of the ADI’s aggregate commitment under all underwriting facilities as sole dealer is more than 20 per cent of the ADI’s Tier 1 Capital.
An ADI that underwrites the issue of securities by a funds management vehicle must not hold more than 20 per cent of the outstanding value of a funds management vehicle’s securities after two months of the underwriting agreement’s commencement. Additionally, from two months after the underwriting agreement’s commencement, any exposure over this amount must be deducted from Common Equity Tier 1 Capital.

Attachment C — Extended Licensed Entity

An ADI must obtain approval from APRA to treat one or more of its subsidiaries as consolidated with the ADI itself, to form an ELE for prudential and reporting purposes.[10]
An ELE subsidiary that no longer meets the criteria in paragraph 3 of this Attachment will cease to form part of the ELE and must be treated as a non-ELE related entity of the ADI. An ADI must inform APRA as soon as it becomes aware that an ELE subsidiary is likely to or no longer satisfies the criteria set out in this Attachment.
In order for a subsidiary to be eligible to be consolidated with the ADI itself to form an ELE:
the subsidiary must: 1. be incorporated in Australia unless the subsidiary has been established to borrow on behalf of the ADI and continues to restrict its activities to solely borrowing on behalf of the ADI; 2. be wholly owned by the ADI, and the Board of the subsidiary must be composed entirely of members of the ADI’s Board or senior management; 3. not be an entity regulated directly by APRA or by an equivalent regulator overseas; 4. not undertake any business that the ADI is prevented from conducting under the Banking Act; 5. not be structured, or undertake business, for the purpose of circumventing APRA’s prudential or reporting requirements; and 6. not undertake borrowings from, or establish liabilities (either on- or off-balance sheet) to, entities other than the ADI, except where the subsidiary has been established to borrow on behalf of the ADI, and all funds are on-lent directly to the ADI. Taxation liabilities, employee entitlements, administration and operating expenses of the subsidiary are excluded from this requirement; and
the ADI must: 1. have complete information on the individual assets, liabilities and off-balance sheet positions of the subsidiary. The ADI must have access to the stand-alone accounting records of the subsidiary, and must be able to provide APRA with full and unfettered access to those records and any other information, at any time; 2. have unrestricted control over the composition of the subsidiary’s assets and liabilities. The ADI must demonstrate to APRA that there are no legal or regulatory barriers, or any other material risks, to the transfer of any assets or funds including assets or funds of underlying subsidiaries back to the ADI. There must be no legal obstacle to the ADI instituting a wind-up of the subsidiary, or any underlying subsidiaries, at any time and placing the remaining assets on the balance sheet of the ADI; 3. manage the assets, liabilities and off-balance sheet business of the subsidiary as part of its internal management practices. This includes reporting structures, accounting processes, audit arrangements and risk management and measurement systems. The ADI’s risk management processes, management information systems and internal controls must be applied to the operations of the subsidiary. Senior management of the ADI must monitor the operations of the subsidiary to the same extent as the operations of the ADI itself. Systems for monitoring and control over the subsidiary must be included within the internal and external audit programs of the ADI; and 4. satisfy APRA that the number and size of subsidiaries on an individual and aggregate basis proposed to be included, or currently included, in the ELE does not undermine the ability:
1. of the ADI and the subsidiaries to be managed and resolved in a sound and timely manner; and
2. for APRA to assess the soundness of the ADI as a stand-alone legal entity.
Where an ADI seeks to include a non-operating holding company (NOHC) as part of its ELE, the ADI may also include the NOHC’s subsidiaries as part of the ELE provided these subsidiaries meet the requirements in this Attachment. However, only the first level of subsidiaries below a NOHC are eligible to be treated as part of the ELE.
In assessing whether a subsidiary should form part of an ELE, APRA will have regard to the requirements in this Attachment, as well as the substance and form of the subsidiary and its relationship with the ADI. APRA may, at its discretion, require an ADI to provide additional information, including the provision of an accounting or legal opinion, on any of the requirements in this Attachment or deem that a subsidiary is no longer eligible to form part of an ELE.

[1] A reference to the Board in the case of a foreign ADI, is a reference to the senior officer outside Australia.

[2] A funds management vehicle holds assets and issues securities to (or receives funds from) investors in order to facilitate funds management activities.

[3] Refer to subsection 11AF(2) of the Banking Act.

[4] For the avoidance of doubt, paragraph 20 also applies to provision of support by a foreign-owned ADI to non-ADI entities operating in Australia directly owned by the ADI’s foreign parent or by the parent’s subsidiaries (and vice versa).

[5] Outsourcing of the ADI’s material business activities to a related entity must satisfy the prudential requirements set out in Prudential Standard CPS 231 Outsourcing.

[6] These limits are measured against an ADI’s or ELE’s Level 1 capital calculated in accordance with Prudential Standard APS 111 Capital Adequacy: Measurement of Capital as appropriate. None of these limits should be taken to permit transactions or exposures which are otherwise prohibited by any Prudential Standard. The large exposure limits in paragraph 30 of Prudential Standard APS 221 Large Exposures do not apply to the exposures of an ADI to its related entities when this paragraph applies.

[7] Refer to paragraph 8 of Attachment D to APS 111 on equity holdings and other capital support provided to financial institutions.

[8] This does not apply to an exposure for which APRA has provided an approval under paragraph 44 of this Prudential Standard.

[9] For the avoidance of doubt, this does not apply to purchases of a fund management vehicle’s securities, which must comply with paragraph 6 of this Attachment.

[10] For the avoidance of doubt, a reference to an ADI in this Attachment means an ADI as defined in section 5 of the Banking Act, rather than an ELE.

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Banking (prudential standard) determination No. 7 of 2020

Prudential Standard APS 222 Associations with Related Entities

Banking Act 1959

I, John Lonsdale, delegate of APRA:

under subsection 11AF(3) of the Banking Act 1959 (the Act) REVOKE Banking (prudential standard) determination No. 9 of 2014, including Prudential Standard APS 222 Associations with Related Entities, made under that Determination; and
under subsection 11AF(1) of the Act DETERMINE Prudential Standard APS 222 Associations with Related Entities, in the form set out in the Schedule, which applies to all ADIs to the extent provided in paragraphs 2 to 3 of the prudential standard.

This instrument commences on 1 January 2022.

Dated: 8 December 2020

[Signed]

John Lonsdale

Deputy Chair

Interpretation

In this Determination:

ADI has the meaning given in section 5 of the Act.

APRA means the Australian Prudential Regulation Authority.

Schedule

Prudential Standard APS 222 Associations with Related Entities comprises the document commencing on the following page.

Prudential Standard APS 222

Associations with Related Entities

Definitions and scope. The Prudential Standard sets out a set of specific defined concepts that determine coverage and obligations. Key definitions include related entity, related individual, step-in risk entity, control, substantial shareholder (read at 10 per cent for this standard), funds management and ELE subsidiary (Definitions). The definition of related entity is deliberately functional: an entity that could give rise to risk to the ADI because of conflicts of interest and contagion, and APRA may require an ADI to treat other entities as related entities where APRA considers it appropriate (Definitions, paragraph 1.7).

Contagion risk and step‑in risk. The standard distinguishes contagion risk that flows from structural, financial or reputational links across a group (Control of risks, paragraph 13) from “step‑in risk”, which is the risk an ADI will provide support beyond legal or contractual obligation (Definitions, step‑in risk entity). Attachment A sets out the required approach to step‑in risk: a risk appetite statement, systems to identify and measure step‑in exposures, and factors an ADI must consider in identifying step‑in risk entities (Attachments A.1-A.3). Materiality of step‑in risk must be assessed against potential capital and liquidity impact (Attachment A.4).

Arm’s-length principle and documentation. Paragraph 13.2 requires policies that, at minimum, include a requirement that an ADI deal with related entities on an arm’s-length basis and on market terms. Provision of support must be legally documented, fixed as to time and amount, and consistent with ADI policies and prudential requirements (Provision of support, paragraphs 20-21). APRA may require APRA‑satisfactory evidence that purchases or sales of securities/assets do not constitute capital support and can require deductions from Common Equity Tier 1 (CET1) where it is not satisfied (Provision of support, paragraph 23).

Quantitative limits. APS 222 prescribes specific limits on related‑entity exposures measured on a Level 1 Tier 1 capital basis (Limits on exposures, paragraph 29). The main limits are:

Related ADIs or overseas equivalents: 25 per cent of Tier 1 capital to any individual related ADI; aggregate 75 per cent to all related ADIs (paragraph 29.1).
Other regulated related entities: up to 25 per cent to an individual regulated related entity (paragraph 29.2.i).
Individual unregulated related entity: 15 per cent (paragraph 29.2.ii).
Aggregate other related entities (excluding related ADIs): 35 per cent (paragraph 29.2.iii).

ELE carve‑out and treatment. Exposures to ELE subsidiaries are not subject to paragraph 29 limits or to APS 111 capital treatment for investments and capital support provided to subsidiaries where paragraph 30 applies (paragraph 30 and Attachment C). An ADI may seek APRA approval to treat eligible subsidiaries as part of an ELE (Attachment C.1). Attachment C sets out eligibility tests (including Australian incorporation except for borrowing vehicles, wholly owned, Board composition, non-APRA-regulated status and constraints on borrowings), information and control requirements, and APRA’s discretion to revoke ELE status (Attachment C.2-C.4).

Funds management rules. Attachment B imposes separation requirements: ADIs must not act as manager, responsible entity or trustee for a funds management vehicle that is a related entity, must deal at arm’s length, and must not have ownership or beneficial interest in funds vehicles (Attachment B Separation paragraphs 1-4). There are limits on purchases (no more than 20 per cent of outstanding value except under underwriting) and CET1 deductions where liquidity facilities meet specified features or underwriting arrangements meet specified criteria (Attachment B Liquidity facilities and Underwriting paragraphs).

Governance and reporting. The Board has ultimate responsibility for oversight and must approve policies, review them at least annually and ensure adequacy for the ADI’s risk profile, capital and complexity (The role of the Board, paragraph 12). ADIs must maintain systems and controls to identify, measure, monitor and report related‑entity exposures and step‑in risk, and notify APRA of breaches, material group developments and certain investments within defined timeframes (Notification and Prior notification requirements, paragraphs 38 and 41-43).

APRA powers and discretion. APRA can require higher capital adequacy, additional controls and remedial measures where unsatisfied with systems and exposures (Control of risks, paragraph 17). APRA may also set specific limits, require an ADI to treat an entity as related, and disallow group badging where it raises prudential concerns (Group badging and disclosures, paragraph 20-21; Limits on exposures, paragraph 33).

Measurement rules. Exposures are to be measured as the aggregate of claims, commitments and contingent liabilities across both banking and trading books, using Attachment A to APS 221 and related look‑through requirements; paragraph 34 to 37 set measurement rules and reference Attachment A to APS 221 for look-through treatment (Measuring exposures to related entities, paragraphs 34-37).

These main concepts determine the scope of obligations, the capital/limit envelope, governance expectations and the range of APRA’s supervisory interventions.

Primary regulated entities. The standard applies to all ADIs on a Level 1 basis, except purchased payment facility providers, unless APRA adjusts or excludes requirements for particular ADIs (Application paragraphs 1-3; Adjustments and exclusions paragraph 22). ADIs therefore bear the principal compliance costs: board governance, policy maintenance, systems for measurement and reporting, recalibration of intra‑group credit and support, and potential capital adjustments.

Foreign ADIs. A foreign ADI is required only to comply with paragraphs 23 to 28, which deal principally with the provision of support, group badging and disclosures, participation in group operations and related conduct (Application paragraph 2; Provision of support paragraph 24). The standard also restricts foreign ADIs from providing support to their Australian subsidiaries unless documented and fixed as to time and amount, and requires foreign ADIs that wish to give a general guarantee for Australian subsidiaries to demonstrate awareness and no objection from the home supervisor (Provision of support paragraph 25).

Related entities in corporate groups. The standard applies to entities that are related to an ADI in the sense defined: entities directly or indirectly controlled by the ADI, entities that control the ADI, substantial shareholders, related individuals and relatives, and any entity APRA requires an ADI to treat as related (Definitions). That definition is broad and functional: it includes entities that create contagion risk by virtue of governance links, shared branding, financial interdependence or reputational linkage (Control of risks paragraph 13).

Senior officers and Boards. Related individuals are specifically defined to include senior managers and board members (Definitions). The standard therefore affects decisions about board composition of subsidiaries, restrictions on director appointments to funds management vehicles (Attachment B Separation paragraph 3), and the ADI’s Board, which must take ultimate responsibility for policies and reviews (The role of the Board paragraph 12).

Funds management vehicles. Where funds management vehicles are related entities, strict separation rules apply: ADIs cannot act as manager or trustee, cannot have an ownership interest except in specified excluded categories, and face CET1 deductions for certain liquidity facilities and underwriting roles (Attachment B). This affects group structures where vertical integration between banking and funds management businesses exists.

ELE subsidiaries and group consolidation. Subsidiaries that an ADI wishes to treat as part of an Extended Licensed Entity (ELE) must meet eligibility criteria in Attachment C and obtain APRA approval. Inclusion in an ELE changes how exposures and capital treatment apply to those subsidiaries (Attachment C paragraphs 1-4; Limits on exposures paragraph 30). This affects groups seeking consolidated prudential/reporting treatment and alters the regulatory treatment of intra-group exposures for those subsidiaries.

External counterparties and customers. The standard imposes rules on group badging and disclosures, which affect external counterparties who deal with group members using a common brand,ADIs must disclose when the counterparty is dealing with a non-ADI group member and must disclose the nature and limitations of any ADI support (Group badging and disclosures paragraphs 20-21). This alters disclosure obligations in consumer and investor-facing documentation and marketing.

APRA. APRA gains supervisory control in multiple ways. It may require an ADI to treat an entity as related, set specific limits or higher capital requirements for particular ADIs, disallow use of brand names where prudential concerns arise, and impose prior-notification or approval conditions on acquisitions, exposures or ELE treatment (Adjustments and exclusions paragraph 22; Control of risks paragraph 17; Group badging and disclosures paragraph 21; Prior notification requirements paragraph 38; Approval requirements paragraph 44). APRA also exercises discretion in writing where the standard contemplates APRA decisions (Interpretation paragraph 2).

Who pays. The compliance and capital costs fall to ADIs. They must bear the administrative cost of Board-approved policies, annual reviews, expanded systems and controls, reporting to APRA, potential CET1 deductions (Attachment B), potential capital add-ons (Control of risks paragraph 17) and the economic cost of conforming intra‑group trading to arm’s-length and limit‑compliant terms. Related entities may see reduced access to informal intra‑group support and tighter contractual terms.

In sum, the standard affects the regulated ADI, its group‑related entities including funds management vehicles and subsidiaries, foreign parents and their Australian subsidiaries, customers who need disclosures, and APRA as the decision-maker and enforcer.

Board responsibilities. The Board must approve policies governing associations and dealings with related entities and ensure these policies are reviewed at least annually and remain appropriate to the ADI’s risk appetite, profile, capital, size and complexity (The role of the Board paragraph 12). The Board must approve any non-arm’s-length terms agreed with related entities before those terms take effect, and ensure justifications are fully and clearly documented in a register (Control of risks paragraph 13.3).

Policy content and operational duties. ADIs must adopt policies addressing contagion and step-in risk and make those policies part of the broader risk management framework required by CPS 220 Risk Management (Control of risks paragraph 13.1-13.2). Policies must include arm’s-length dealing, limits on exposures at individual and aggregate levels set with reference to comparable unrelated counterparties, authority and processes for exceeding limits and write-offs, approval processes for group structure establishment and subsidiary acquisition, conflict-of-interest resolution processes, transparency of third-party dealings connected with related entities, and procedures for risks from product distribution and badging (Control of risks paragraph 13.2.i-viii).

Exposure limits and measurement. ADIs must maintain exposures to related entities within specified limits (Limits on exposures paragraph 29). Exposures are measured as the aggregate of all claims, commitments and contingent liabilities across on- and off-balance-sheet items in banking and trading books, using Attachment A to APS 221 for measurement and look-through requirements (Measuring exposures paragraphs 34-37). ADIs must recognise look-through exposures where a related entity has exposure to another related entity (Measuring exposures paragraph 36).

Prohibition and restrictions. ADIs must not have unlimited exposures to related entities or agree to cross-default provisions that would cause a related entity’s default to trigger a default by the ADI (Control of risks paragraph 13.4). ADIs must not undertake dealings with unrelated entities for the purpose of supporting related entities (Provision of support paragraph 20). ADIs must not provide or accept support from related entities unless documented, fixed and consistent with policies and prudential requirements (Provision of support paragraph 21). Foreign ADIs face additional restrictions in relation to providing support to subsidiaries operating in Australia (Provision of support paragraph 24).

Notifications and approvals. ADIs must notify APRA prior to establishing or acquiring subsidiaries (other than special-purpose borrowing SPVs), prior to acquiring 20 per cent or more equity interest, or prior to committing to exposures to a related entity equal to or greater than 10 per cent of Tier 1 capital (Prior notification requirements paragraph 38). ADIs must immediately notify APRA of breaches of the limits in paragraph 29 and other specific limits, and notify APRA within three months about certain equity investments that were not covered by prior notification (Notification requirements paragraphs 41-42). APRA can require an ADI not to proceed with a prior-notified transaction, impose conditions, or require higher capital where APRA is not satisfied with the risk assessment (Prior notification requirements paragraph 39). APRA approval is required for exposures in excess of the limits in paragraph 29 and for establishment or acquisition of regulated entities, branches or presences domestically or overseas (Approval requirements paragraph 44).

Specific treatment for funds management and underwriting. Attachment B places duties on ADIs to avoid ownership and management roles in funds management vehicles that are related entities (Attachment B Separation paragraphs). ADIs must deduct certain liquidity facilities and underwriting commitments from CET1 where the facility or underwriting has specified characteristics (Attachment B Liquidity facilities and Underwriting paragraphs).

ELE duties. An ADI wishing to treat subsidiaries as part of an ELE must obtain APRA approval and meet the Attachment C eligibility criteria, including control and information access obligations and assurance that inclusion will not undermine manageability, resolvability or APRA’s ability to assess the ADI as a stand-alone entity (Attachment C paragraphs 1-4). An ADI must inform APRA where an ELE subsidiary ceases to meet criteria (Attachment C.1).

APRA’s rights. APRA has supervisory rights to require higher capital adequacy, additional internal controls, remedial measures, to adjust or exclude requirements for specified ADIs, to set specific limits, to deem an entity related, to withhold approval of transactions or require conditions, to require non-use of a group brand, and to require deductions from CET1 in certain circumstances (Control of risks paragraph 17; Adjustments and exclusions paragraph 22; Group badging and disclosures paragraph 21; Provision of support paragraph 23).

Recordkeeping and documentation. The standard requires documentation of non-arm’s-length terms in a register (Control of risks paragraph 13.3). Provision of support must be expressed in legal documentation and fixed as to time and amount (Provision of support paragraph 21). Systems and controls must allow identification, measurement, monitoring and reporting of exposures and step-in risk (Control of risks paragraph 13.5; Attachment A paragraphs 1-2).

In short, the duties impose governance, documentation, measurement, limit and notification obligations on ADIs; APRA retains broad supervisory powers to require remedial steps, capital adjustments or limit-setting, and ADIs possess the right to seek APRA approval for exceptions, ELE inclusion and transactions above limits.

Administrative powers rather than criminal sanctions. The Prudential Standard itself sets out supervisory and remedial powers rather than criminal penalties. It provides APRA with several enforcement levers tied to prudential supervision. Where APRA is not satisfied with an ADI’s systems or the level of contagion risk, APRA may determine higher capital adequacy requirements, require additional internal controls or reporting mechanisms, or require the ADI to take measures to reduce contagion risk (Control of risks paragraph 17). These remedies are framed as supervisory actions, which can translate into enforceable directions under the Banking Act where APRA exercises statutory powers.

APRA’s discretion to adjust or exclude requirements and impose specific limits. APRA may adjust or exclude specific prudential requirements for specified ADIs (Adjustments and exclusions paragraph 22). APRA may also set specific limits in relation to an ADI’s exposure to one or more related entities having regard to the ADI’s individual circumstances (Limits paragraph 33). Those are preventative/mitigating measures APRA can impose where APRA judges them necessary.

Approval and prior-notification enforcement. APRA may require an ADI not to proceed with transactions subject to prior notification, or impose prudential conditions or higher capital requirements if APRA is not satisfied with the ADI’s risk assessment (Prior notification requirements paragraph 39). APRA may refuse to grant approvals required by the standard, for example for exposures in excess of paragraph 29 limits or for establishment/acquisition of regulated entities, branches or presences (Approval requirements paragraph 44).

Capital treatment and CET1 deductions. APRA may require an ADI to deduct from Common Equity Tier 1 capital the value of assets, securities or other liabilities when APRA is not satisfied that these activities do not constitute provision of capital support to a related entity (Provision of support paragraph 23). Attachment B prescribes mandatory CET1 deductions for certain liquidity facilities and underwriting commitments to funds management vehicles where specified conditions are met (Attachment B Liquidity facilities and Underwriting paragraphs). These deductions have direct balance-sheet and capital-adequacy consequences, and serve as an enforcement mechanism to penalise economically support-like activities that are not appropriate.

Disclosure and branding orders. APRA may require an ADI to not use a brand name in common with a group member if that would give rise to prudential concerns, taking account of disclosures, type of entity, risk profile and other factors (Group badging and disclosures paragraph 21). Such an order affects commercial branding and distribution.

Reporting and breach notifications. ADIs must notify APRA immediately of breaches of the limits in paragraph 29 or of other specific limits imposed by APRA, including how the breach arose and remedial actions (Notification requirements paragraph 41). Failure to comply with notification requirements would give APRA supervisory grounds for intervention.

Interaction with statutory enforcement powers. The Prudential Standard operates within APRA’s statutory regime. While APS 222 does not itself set out criminal penalties, non-compliance with a prudential standard can lead to statutory sanctions and directions under the Banking Act and related legislation. The Standard expressly contemplates APRA setting higher capital requirements and imposing reporting and operational requirements, which APRA can back with statutory enforcement powers.

Practical enforcement pathway. In practice APRA is likely to use a combination of supervisory orders, capital add-ons or CET1 deductions, conditions on approvals, directions on branding or group structure, and refusal of approvals to enforce compliance. The Standard provides the policy and technical triggers; the actual use of enforcement tools will be exercised under APRA’s statutory powers and in writing as required by the Interpretation section (Interpretation paragraph 2).

Banking Act and APRA statutory framework. APS 222 is made under s 11AF of the Banking Act 1959 (Authority). It operates as a prudential standard within APRA’s statutory supervisory framework and therefore interacts with the Banking Act’s enforcement and direction powers. The Interpretation section states references to Acts or Prudential Standards are to be read as in force from time to time (Interpretation paragraph 3), implying APS 222 should be applied in the context of other prudential standards and the Banking Act as they evolve.

APS 221 and APS 111. APS 222 cross-references measurement and capital treatment rules in APS 221 Large Exposures and APS 111 Capital Adequacy (Limits paragraph 31; Measuring exposures paragraph 34; footnote 6). Exposures to related entities are to be measured in accordance with Attachment A to APS 221 (Measuring exposures paragraph 34). Footnote 6 clarifies that the limits are measured against Level 1 capital calculated in accordance with APS 111 and that the large exposure limits in APS 221 do not apply to related-entity exposures where paragraph 29 applies. Attachment references to APS 111 paragraph 30 and footnote 7 specify that ELE exposures are not subject to paragraph 29 limits nor to APS 111 treatment where paragraph 30 applies.

CPS 220 Risk Management and CPS 231 Outsourcing. APS 222 requires related-entity policies to form part of the ADI’s risk management strategy and framework in accordance with CPS 220 (Control of risks paragraph 13.1). Attachment B notes that outsourcing material business activities to a related entity must meet the prudential requirements in CPS 231 Outsourcing (Group operations footnote 5).

Corporations Act definitions. The standard imports the Corporations Act’s definition of entity for the purposes of Chapter 2E and adapts the Corporations Act “substantial holding” definition by reading it as 10 per cent for this standard (Definitions paragraphs 1.3 and 1.8). This anchors the related-entity coverage to corporate-law definitions and to control/substantial holding concepts used elsewhere in corporate regulation.

Superannuation and life insurance laws. Attachment B excepts certain categories from the restriction on ownership or beneficial interest in a funds management vehicle, including life insurance companies and statutory funds regulated by APRA, RSE licensees or custodians established under the Superannuation Industry (Supervision) Act 1993, or licensed trustee companies of common funds (Attachment B Separation paragraph 4). These cross-references ensure APS 222 does not conflict with other regulated financial-services structures.

Foreign supervisors and cross-border interactions. The standard imposes constraints on foreign ADIs providing support to Australian subsidiaries and requires foreign ADIs to demonstrate their home supervisor’s awareness and lack of objection if giving general guarantees for Australian subsidiaries (Provision of support paragraph 25). This creates an interaction point with home-country prudential regimes and introduces an explicit requirement for cross‑jurisdictional coordination in support guarantees.

Other statutory disclosure and consumer laws. The standard’s group badging and disclosure requirements require ADIs to disclose clearly that a group member is not an ADI or that the ADI does not stand behind a group member unless documented support exists (Group badging and disclosures paragraph 20.2). This requirement will interact with consumer protection and disclosure laws, marketing rules and financial services disclosure obligations, requiring coordination of external communications.

ELE treatment and reporting regimes. Attachment C’s ELE consolidation for prudential and reporting purposes requires APRA approval and imposes obligations on information access, accounting records and control structures (Attachment C paragraphs 2.2.i-ii). ELE inclusion will interact with reporting obligations under APS 111, APS 221 and other prudential reporting standards by changing the Level 1 consolidation base and capital treatment.

In short, APS 222 is intended to be applied in concert with APS 221 (large exposures), APS 111 (capital), CPS 220 (risk management), CPS 231 (outsourcing) and relevant statutory regimes under the Banking Act and Corporations Act. It embeds cross-references and carve-outs to avoid direct conflict with other APRA‑regulated frameworks but creates points of interaction and potential duplication that ADIs must reconcile in compliance and reporting systems.

This instrument is Banking (prudential standard) determination No. 7 of 2020 and it revokes Banking (prudential standard) determination No. 9 of 2014, including the previous Prudential Standard APS 222 Associations with Related Entities (front matter). The instrument is dated 8 December 2020, signed by John Lonsdale, Deputy Chair, and the Prudential Standard commences on 1 January 2022 (front matter and Application paragraph 3).

No further amendments or later versions are included in the text supplied. The standard itself preserves APRA’s ability to adjust or exclude specific prudential requirements in relation to one or more specified ADIs (Adjustments and exclusions paragraph 22), which is an ongoing mechanism to tailor the standard to individual circumstances without formal instrument amendment. Attachment C also contemplates APRA’s discretion in deeming subsidiaries no longer eligible as ELE subsidiaries, again providing a supervisory lever rather than a legislative amendment mechanism (Attachment C paragraph 4).

The standard incorporates and updates cross-references to APS 111, APS 221, CPS 220 and CPS 231. The text references APS 001 for defined terms and requires ADIs to read Acts, Regulations and Prudential Standards as in force from time to time (Interpretation paragraph 3), which means future amendments to those referenced standards will affect the application of APS 222 without an immediate need to amend APS 222 itself.

Key dates and transitional mechanics recorded in the instrument:

Instrument made and signed: 8 December 2020 (front matter).
Commencement: 1 January 2022 (front matter and Application paragraph 3).
Revocation: revokes Determination No. 9 of 2014, including the prior APS 222 (front matter).

There is no record in the supplied text of transitional provisions for ADIs to move from the prior standard to the new standard beyond the commencement date. ADIs seeking to rely on prior exemptions or discretions granted under earlier versions are required to contact APRA if they intend to rely on those prior exercises of discretion for compliance with the new standard (Previous exercise of discretion paragraph 23). This creates an administrative step for entities with historical APRA discretions.

Footnotes and cross-references in the instrument provide further transitional or interpretive guidance. For example, footnote 6 clarifies measurement against Level 1 capital and the interaction with APS 221 large exposure limits, and footnote 10 clarifies the meaning of ADI in Attachment C is the statutory definition under s 5 of the Banking Act rather than the ELE concept.

In summary, APS 222 replaces the 2014 Determination No. 9 version, took effect 1 January 2022, and embeds supervisory discretion to tailor requirements rather than relying solely on formal instrument amendments; ADIs should treat prior exemptions as requiring reconfirmation with APRA (Previous exercise of discretion paragraph 23).

The text supplied contains no cases, judicial decisions or references to litigation arising under APS 222. There is no recorded litigation history, judicial review, administrative appeal, or case law cited in the instrument. The instrument’s footnotes and body do not name any court decisions.

Given that APS 222 is a prudential standard made under the Banking Act and addresses supervisory expectations, potential legal disputes could arise in practice from APRA’s exercise of discretion, imposition of conditions, refusals of approval, or CET1 deductions demanded by APRA. However the instrument itself does not record any litigation or precedent.

Practically, any enforcement action APRA takes under APS 222 (for example, a requirement to deduct items from CET1, imposition of capital add-ons, or a direction to cease use of a brand name) would be taken under APRA’s statutory powers and could, depending on the measure, be subject to merits-based review or judicial review in the courts. The instrument requires APRA to exercise discretion in writing (Interpretation paragraph 2), which creates an administrative record that could be material in any challenge. No such cases are named in the supplied text.

Where ADIs rely on prior exemptions or discretions granted under earlier versions of APS 222, the instrument requires ADIs to contact APRA if they intend to place reliance on those prior exercises of discretion for compliance with the new standard (Previous exercise of discretion paragraph 23). That procedural requirement could be a point of contention in a dispute if, for example, an ADI believed a prior exemption continued to apply. The instrument itself does not specify dispute or appeal procedures.

In conclusion, the supplied instrument contains no litigation history. Readers should assume that any legal contestation arising from APRA’s enforcement of APS 222 would proceed under the ordinary administrative law and Banking Act frameworks, but the instrument provides no case law or judicial interpretations to guide application.

Broad definition of related entity. The standard defines a related entity functionally as any entity “which could give rise to risk to the ADI due to conflicts of interest and contagion” and lists examples including entities controlled by the ADI, entities that control the ADI, substantial shareholders and related individuals and relatives (Definitions paragraph 1.7). APRA may also require an ADI to treat an entity as related where APRA considers it appropriate. The functional breadth and APRA’s power to designate relatedness mean ADIs may unexpectedly treat entities as related and thus fall within the standard’s limits and notification regimes.

Related individual and control over individuals. Related individual includes senior managers and board members (Definitions). The standard’s examples of “control” include significant influence over appointment or removal of persons to management or the Board and “significant influence” over senior management (Definitions paragraph 1.1). Influence-based concepts may capture de facto controllers or families close to management, bringing associated companies and relatives into scope.

Step‑in risk identification and perception. Attachment A requires ADIs to assess step-in risk taking into account market and investor expectations, prior support history, branding and sponsorship arrangements and liquidity access (Attachment A paragraph 3). This means reputational or perceived linkages can produce a regulatory step-in risk even if no legal support exists. The standard requires ADIs to quantify materiality by assessing potential impact on capital and liquidity in a stress to determine step-in risk materiality (Attachment A paragraph 4). ADIs that distribute or brand products for other group entities face heightened obligations.

Prior notification thresholds and timing. ADIs must notify APRA prior to establishing or acquiring a subsidiary (except SPVs used purely to borrow), prior to acquiring 20 per cent or more equity interest, or prior to committing to exposures equal to or greater than 10 per cent of Tier 1 capital (Prior notification requirements paragraph 38). Transactions executed without prior notice that meet these thresholds risk APRA’s authority to prevent or condition the transaction under paragraph 39. ADIs that misjudge thresholds or timing expose themselves to supervisory rejection or imposed conditions.

CET1 deductions for certain facilities and underwriting in funds management. Attachment B mandates deductions from CET1 where liquidity facilities to funds management vehicles meet certain criteria or where underwriting facilities meet conditions (Attachment B Liquidity facilities and Underwriting paragraphs). ADIs may believe they are merely providing market services, but the standard treats economically support-like features as capital reductions. Careful legal and structuring work is required to avoid constructive capital support being treated as CET1 deductions.

ELE eligibility is strict on ownership and control. Attachment C requires ELE subsidiaries to be wholly owned, Australian incorporated (except borrowing SPVs), Board composition aligned with ADI Board or senior management, not be APRA-regulated and not borrow from third parties except narrowly defined exceptions (Attachment C paragraph 2.2). An ADI that assumes ELE inclusion will exempt subsidiaries from paragraph 29 limits may find eligibility denied or revoked, with consequent limit and capital effects. APRA can require accounting or legal opinions and can deem a subsidiary ineligible at its discretion (Attachment C paragraph 4).

Arm’s-length requirement and approval for non-arm’s-length terms. Paragraph 13.2.i mandates arm’s-length dealings and paragraph 13.3 requires Board approval and a documented register for any non-arm’s-length terms. ADIs with historical intra-group preferential pricing or support must document justifications, seek Board sign-off and expect scrutiny.

Branding disclosure and potential prohibition. Paragraphs 20-21 require prominent disclosures where a group member using a common brand is not an ADI and may result in APRA requiring cessation of common-brand use if prudential concerns exist. Marketing or distribution arrangements that create consumer confusion therefore have regulatory risk beyond standard disclosure obligations.

Measurement complexity and look-through. Exposures are to be measured per Attachment A of APS 221 and ADIs must apply look-through where related structured vehicles have underlying related-entity assets (Measuring exposures paragraphs 34-36). That requires robust data, systems and legal clarity on beneficial ownership and contingent exposures; mismeasurement can produce immediate breach notifications and capital consequences.

Foreign supervisor dependencies. For foreign ADIs, giving a general guarantee for Australian subsidiaries requires demonstration that the home supervisor is aware and does not object (Provision of support paragraph 25). ADIs cannot assume freedom to give cross-border guarantees without home-host coordination.

Notification and immediate reporting duties. ADIs must notify APRA immediately of breaches of limits or of circumstances with material impact on the ADI or group (Notification requirements paragraph 41 and 43). “Immediately” is not quantified and could be interpreted strictly in supervisory practice. Failure to notify promptly increases supervisory friction.

APRA’s discretion to set higher capital or bespoke limits. APRA can require higher capital adequacy requirements, set specific limits, or demand remedial controls where unsatisfied (Control of risks paragraph 17 and Limits paragraph 33). This discretionary space means ADIs cannot rely solely on the letter of the standard; supervisory judgement will affect outcomes.

In short, ADIs should not assume narrow coverage. The standard’s functional definitions, look‑through measurement, CET1 deduction mechanics and APRA’s broad discretion create multiple points where common commercial arrangements could trigger prudential consequences.

Governance and Board-level actions. The ADI Board must adopt and approve a policy governing dealings with related entities and review it at least annually to align with risk appetite, capital and complexity (The role of the Board paragraph 12). Ensure Board minutes record the annual review, and maintain a register documenting any instances where terms deviate from arm’s-length standards with full justifications (Control of risks paragraph 13.3). The Board should also approve the policy on step-in risk and risk appetite statements required by Attachment A.

Policies and operational frameworks. Integrate related-entity policies into the ADI’s CPS 220 risk management framework (Control of risks paragraph 13.1). Policies must address arm’s-length dealing, limits (both individual and aggregate), authority and procedures for excesses and write-offs, approval and maintenance of group structures, conflict-of-interest resolution, transparency for third-party dealings, and distribution-related risk mitigation (Control of risks paragraph 13.2). Document processes for identifying related entities and step-in risk entities, including criteria listed in Attachment A paragraph 3.

Systems, controls and reporting. Implement systems and controls to identify, measure, monitor and report on exposures to related entities and step-in risk entities, across both banking and trading books, and covering on- and off-balance-sheet items (Control of risks paragraph 13.5; Measuring exposures paragraph 34). Ensure the exposures measurement methodology conforms to Attachment A to APS 221, including look-through requirements for structured vehicles (Measuring exposures paragraphs 34-36). Build information flows to support immediate breach reporting, prior-notification workflows and quarterly/annual reporting needs.

Capital planning and CET1 treatment. Review all liquidity facilities, underwriting commitments and purchases/sales of assets/securities with related entities to assess whether APRA could view them as capital support. Where Attachment B conditions are met, make CET1 deductions as required or restructure facilities to avoid capital support characteristics (Attachment B Liquidity facilities and Underwriting paragraphs). Incorporate potential APRA-imposed capital add-ons into capital planning and stress testing (Control of risks paragraph 17).

Limit setting and monitoring. Translate paragraph 29 limits into the ADI’s limit framework: 25 per cent for individual related ADIs, aggregate 75 per cent for related ADIs, 25 per cent for individual regulated related entities, 15 per cent for individual unregulated related entities, and aggregate 35 per cent for other related entities (Limits paragraph 29). Ensure real-time or near-real-time monitoring of exposures against Tier 1 capital on a Level 1 basis and include look-through exposures per APS 221 measurement rules (Measuring exposures paragraph 34).

Prior notification and approvals. Institute a transaction approval workflow that triggers prior notification to APRA for proposed subsidiary establishment/acquisition (except SPV borrowing vehicles), acquisitions of equity equal to or greater than 20 per cent, or proposed exposures to related entities equal to or greater than 10 per cent of Tier 1 capital (Prior notification requirements paragraph 38). Prepare due-diligence packages that address APRA’s considerations in paragraph 39, including contagion assessment, adequacy of systems, and supervisor practicability.

ELE applications and maintenance. If seeking ELE status for subsidiaries, prepare evidence the subsidiary meets Attachment C criteria: Australian incorporation or narrow borrowing exception, wholly owned, Board composition aligned with ADI Board or senior management, not APRA-regulated, not undertaking excluded business, no third-party borrowings (Attachment C paragraph 2). Ensure full and unfettered access to subsidiary accounting records and demonstrate unrestricted control over composition of assets and liabilities, wind-up rights and absence of legal barriers to asset transfer (Attachment C paragraph 2.2).

Funds management arrangements. If the ADI has related funds management vehicles, restructure arrangements to avoid acting as manager or trustee for related vehicles and ensure no ownership unless falling within explicit exceptions (Attachment B Separation paragraphs). Avoid purchasing more than 20 per cent of outstanding securities of a funds vehicle unless underwritten and manage underwriting exposures to meet the conditions that avoid CET1 deductions or ensure required deductions are reflected in regulatory capital (Attachment B purchase and underwriting paragraphs).

Branding, marketing and disclosure. Review group branding and product distribution to ensure disclosures required by paragraph 20 are prominent and accurate: make clear when the counterparty is not an ADI, state the ADI does not stand behind the member unless documented support exists, and disclose investor risks including delays and loss of principal (Group badging and disclosures paragraph 20). Be prepared to remove common-brand use where APRA raises prudential concerns (Group badging and disclosures paragraph 21).

Documentation and legal structuring. Ensure all support arrangements are in clear legal documentation, fixed as to time and amount, and consistent with policy and prudential requirements (Provision of support paragraph 21). Where purchasing assets or securities from related entities, be prepared to satisfy APRA that such transactions do not constitute capital support; obtain legal and accounting opinions where appropriate and maintain documentary evidence.

Coordination with home supervisors and foreign ADIs. Foreign ADIs must comply with paragraphs 23 to 28 and must not provide support to Australian subsidiaries unless documented and fixed (Provision of support paragraph 24). For general guarantees, coordinate with home supervisors and obtain evidence home supervisor awareness and non-objection (Provision of support paragraph 25). Document home-host communications for APRA review.

Audit, internal controls and external verification. Embed monitoring of related-entity exposures into internal and external audit programs; Attachment C requires systems and monitoring to be included within internal and external audit programs where ELE subsidiaries are involved (Attachment C paragraph 2.2.iii). Maintain audit trails for measurement, look-through calculations, CET1 deduction decisions and Board approvals for non-arm’s-length terms.

Notification timeliness and breach remediation. Create procedures for “immediate” notification to APRA on limit breaches, and for notification within three months of certain equity investments (Notification requirements paragraphs 41-42). Maintain remedial action plans and evidence of steps taken to address breaches, since APRA expects explanation of how breaches arose and remedial steps (Notification requirements paragraph 41).

Engage APRA proactively. Use the standard’s adjustment/exclusion mechanism where appropriate: consult APRA early if the ADI seeks relief or contemplates relying on prior APRA discretion granted under an earlier version of the standard (Adjustments and exclusions paragraph 22; Previous exercise of discretion paragraph 23). Prepare comprehensive submissions addressing APRA’s listed considerations in paragraph 39 when seeking approvals or exemptions.

By following these concrete steps,Board sign-off, integrated policies, robust measurement and systems, documented legal structuring of support, proactive APRA engagement and auditable controls,an ADI can operationalise compliance with APS 222 while managing capital and operational impacts.

Deep Dive

What it does

Current sections

Banking (prudential standard) determination No. 7 of 2020

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Authority

Application

Interpretation

Definitions

Adjustments and exclusions

Previous exercise of discretion

The role of the Board

Control of risks arising from related entities

Provision of support

Group badging and disclosures

Participation in group operations

Limits on exposures to related entities

Measuring exposures to related entities

Prior notification requirements

Notification requirements

Approval requirements

Attachment A — Step-in risk

Attachment B — Funds management

Separation

Purchase of securities

Liquidity facilities

Underwriting of funds management vehicles

Attachment C — Extended Licensed Entity

Source text: opening excerpt

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Main concepts

Who it affects

Key duties and rights

Penalties and enforcement

How it interacts with other laws

Amendment history

Litigation history

Gotchas

How to comply

Authority

Application

Interpretation

Definitions

Adjustments and exclusions

Previous exercise of discretion

The role of the Board

Control of risks arising from related entities

Provision of support

Group badging and disclosures