ADI licensing update – APRA revises its ADI licensing framework
APRA is updating its direct and restricted ADI licensing framework for new banking licence applicants
What you need to know
- APRA is proposing to change the ADI licensing process for restricted and direct applicants
- Applicants for a restricted banking licence will have new capital and product launch requirements, and further limits and expectations regarding deposit limits and exit plans
- Applicants for a full banking licence will be subject to an adjusted prudential and supervision framework which will be applicable for a period of time to be determined by APRA
- All new ADIs will be subject to specific capital, product launch, exit plan and deposit limit requirements
- Existing banking licence applicants should consider whether their applications meet APRA's revised expectations, including in relation to having a credible return of deposits plan
Background
APRA is proposing to update the ADI licensing application process for both "direct" (i.e. "full" ADI licence) applicants and "restricted" (i.e. "restricted" ADI licence) applicants.
The key theme underlying APRA's proposed changes to the ADI licensing framework is to pivot away from the current focus on strict compliance with prudential requirements (which tends to be a narrow assessment at the point in time of licence grant) to a more flexible assessment of "sustainability" (i.e. a holistic, forward looking measure of the applicant's long-term prospects of success).
The new emphasis on sustainability is given effect through:
- flexibility in required capital;
- a requirement to have products ready for launch by or shortly after grant of licence; and
- a realistic exit plan, including in relation to the return of deposits (if required).
These changes reflect APRA's experience to date with the restricted ADI licensing framework, having licensed three restricted ADIs since the restricted ADI regime was first introduced in 2018. In particular, these changes follow the recent withdrawal of Xinja from the market and APRA's increasing scrutiny on capital sustainability and revenue generating business to ensure that new banks are not primarily reliant on capital raising to meet their capital requirements as an APRA-regulated bank.
Proposed new restricted licensing framework
APRA's key changes to the restricted ADI application process are set out in the table below.
| Current requirement | Proposed requirement | |
|---|---|---|
| Eligibility | A restricted ADI applicant should carry on limited, lower risk banking business and have limited resources | The eligibility criteria has been removed. APRA will determine eligibility on a case by case basis |
| Capital | A restricted ADI must at all times hold minimum capital of the higher of: $3 million plus a resolution reserve (which APRA intends to generally set at $1 million); or 20% of adjusted assets | APRA will have the discretion to specify an "Initial Capital Amount" which the restricted ADI must be able to meet on date of licence grant |
| Business Operations |
A restricted ADI should not grow "significantly" beyond a $100 million balance sheet A restricted ADI can actively market its business and its new products to the general public, but only in order to develop a wait-list of customers who can only apply for the products once the Restricted ADI has gained its full ADI licence |
The $100 million asset threshold is no longer applicable (but remains a guide) A restricted ADI must achieve a limited launch of both an income-generating asset product and a deposit product before being granted an ADI licence |
| Disclosure |
A restricted ADI may use the restricted terms "ADI", "bank", "banker" and "banking" without approval from APRA A restricted ADI must provide a disclosure statement that clearly states that it is a restricted ADI and explains to customers the risks of transacting with it |
No change |
| Liquidity |
A restricted ADI is subject to a Minimum Liquidity Holdings requirement of the higher of:
|
No change |
| Business plan | A restricted ADI must provide a full business plan at the time of application that details a credible strategy for meeting the full prudential framework by the end of the restricted period | No change |
| Exit plan | A restricted ADI must have a credible exit plan that sets out how it would exit the industry if it is unable to meet the prudential framework by the end of the restricted phase, or if it decides its business model is not viable, or if it comes under stress | A restricted ADI must focus on a "credible return of deposits strategy" |
| Deposit limit | A restricted ADI will be subject to a deposit limit of $2 million on the aggregate balance of all protected accounts and a deposit limit of $250,000 on the aggregate balance of all protected accounts held by an individual account-holder | A restricted ADI is not subject to any quantitative deposit limits, but should only offer deposit products to staff, friends and family |
| Reporting requirements | A restricted ADI will be exempt from the ADI reporting standards under the Financial Sector (Collection of Data) Act 2001 and must instead comply with a reporting standard that will apply to restricted ADIs | No change |
| Prudential standards |
A restricted ADI must fully comply with APS 310 Audit and Related Matters, CPS 220 Risk Management, CPS 520 Fit and Proper and APS 910 Financial Claims Scheme |
No change |
Proposed new direct licensing framework
Currently, an ADI applicant under the direct licensing route must demonstrate to APRA's satisfaction that it meets the full suite of prudential requirements prior to being granted a banking licence.
To introduce flexibility to the process, APRA has modified some of these requirements to allow for a phased transition to full compliance with the prudential standards. We set out these proposed changes in the table below.
| Proposed change | |
|---|---|
| Capital |
A new ADI is required to maintain, at all times, a PCR of the higher of:
|
| Business Operations |
A new ADI must be able to achieve:
|
| Exit plan | A new ADI must prepare a credible return of deposits strategy as one potential exit option |
| Deposit limit | APRA will determine whether to apply a deposit limit on a case by case basis |
| Reporting requirements | A new ADI will be subject to the full range of standard reporting requirements with additional specific reporting requirements |
| Prudential standards | A new ADI must comply in full with the prudential standards, subject to the above modifications |
Further detail is set out in APRA's Information Paper and Discussion Paper. APRA is seeking submissions on the Information Paper by 30 April 2021 with a view to finalising its approach in Q2 2021.
Author: Dominic Tran, Senior Associate.
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