Latest Products

Foreign Banks in the Phased approach

Thursday 14 September 2017

The discussion paper on the phased licensing approach, Licensing: a phased approach to authorising new entrants to the banking industry, is intended as a step towards lowering the barriers of entry and making it easier for new potential banks, while at the same time using licensing to maintain the integrity of the Australian financial market.

However, there is a sense that the proposed approach is aimed at fintech start-ups or new entrants to the market, without considering new players to the market coming from other jurisdictions.

When presenting at the recent Meet the Regulators event at We Work, Melisandre Waterford, General Manager of Licensing at the Australian Prudential Regulation Authority (APRA), said APRA did not expect well-resourced banks or subsidiaries of well-resourced banks to be going for the phased approach, instead favouring full licensing.

However, John Wakefield, Compliance Manager, told GRC Professional that, in many jurisdictions, those aiming for bank licences get the license first and then build up what is needed to become a bank.

“With APRA, you build your bank first, then they license you. In other jurisdictions, they give you your license, then give you a certain period to build your bank.” Wakefield said. “APRA’s approach is understandable, but from a foreign bank’s point of view it does not provide them with certainty that they will be granted a licence.”

But if the lowering the barriers of entry is seen as opportunity to improve competition in the banking industry, why not also lower the barriers for foreign banks from well-resourced jurisdictions?

Wakefield said the challenge for foreign entrants to the Australian market is that they don’t want to commit too much in the way of funds and resources, only to face a situation where the license is not extended.

In looking at the APRA issues paper, Wakefield said he hoped to see an indication that Foreign Authorised Deposit Institutions (ADIs) or foreign banks who want to set up banks in Australia might be permitted the comfort of having license—or even a restricted license—up-front, thus motivating them to commit.

Instead, “The discussion paper appears to focus more on fintechs and start-ups, which I think is a good approach, but they need to be thinking about not just new players or new entrants to the market.They also need to consider the more traditional ADI start-ups. Just giving people a sense of certainty right off the bat.”

Is there a reason for not including foreign banks or ADIs?

“A lot of foreign ADIs have opened branches in Australia, particularly in the past four or five years, and perhaps APRA see the current licensing process as working well. They may not be aware that there could be a perception of uncertainty in the process.”

Fintechs and foreign banks have similar mindsets
Wakefield explained that, for potential foreign entrants to the Australian market, it is important for them to be able to establish a proof-of-concept before they commit fully to entering the market. This is the same for tech start-ups who go through the same process, and either they are ready at the end of the two years or they aren’t.

“If you are a foreign bank setting up a branch in Australia, it is very much the same mindset,” Wakefield said. “Is coming to Australia right for us or isn’t it? You can be at that half-way point where you can dip your toe in the water and establish your bank to see if it is right for the Australian market and whether the Australian market is a good environment for your bank.”

He added that what APRA is probably considering is that new entrants to the industry, like tech start-ups, have limited resources and have limited capacity to get their branch up and running.

“If you are a foreign entrant to that market, you allocate a certain budget and a certain amount of resources to that start-up to manage costs. While offshore banks are large, well-established, prudentially-regulated institutions in their home countries, it will still take some time to get their branches in Australia up-to-speed, to build the local infrastructure and hire people. As with a tech start-up, there is a large cost outlay up front and then a long lead time to build up the business revenue.”

In this respect, a foreign bank setting up in Australia probably has the same concerns as a new tech start-up.

“I think the APRA approach is very good, and they are applying it the right way, but it would be good if they could clarify whether they have considered applying it to foreign bank start-ups as well,” Wakefield said.


Regulatory certainty for foreign entrants
Wakefield notes that the issues paper references the approach to licensing taken by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in the UK. Wakefield points out that the two regulators have a collaborative approach to licensing because they used to be a part of the same entity.

By comparison, while the ‘twin peaks’ model works well in Australia, there appears to be little collaboration between the regulators on common matters. “APRA and ASIC might be thinking about the same things, but come at it from different perspectives, and it can cause confusion in the minds of applicants, particularly foreign banks who are used to dealing with a single regulator,” Wakefield observed.

There are similarities with the licensing the fintech start-ups, where one regulator is looking at the sandbox approach and the other regulator is looking at the phased licensing approach.

“With this proposal, and the ASIC sand-box proposal, I would like to see something from APRA and ASIC saying, ‘Here is how the sandbox works in conjunction with APRA’s proposals’,” Wakefield said.

The Australian Transaction Reports and Analysis Centre (AUSTRAC) also needs to be consulted to determine the point at which an entity must enrol with the regulator.

According to Wakefield, it would be useful for the regulators to collectively produce a licensing guide, such as that produced by the UK regulators that clearly sets out:

  • The end-to-end licensing process and the order in which each regulator should be engaged;
  • Which authorisations are provided by which regulator and what are the overlaps, if any;
  • How the regulators work together to collectively consider the foreign bank’s applications;
  • What information each regulator needs to process the application and what evidence needs to be provided. Knowing this up front can help an applicant avoid a lot of back-tracking and duplication.
Other opportunities for regulatory clarity
Another area where ASIC and APRA can appear to be working at ‘cross-purposes’ is around cross-border business activity.

“A notable area of difference between APRA’s approach and ASIC’s approach is cross-border dealing.” Wakefield said. “APRA is happy for an offshore bank to do business in Australia, so long as the business is conducted entirely from offshore with no physical activity in Australia. ASIC, on the other hand, are happy to provide exemptions for banks to conduct physical activity onshore, subject to certain conditions. This approach is rather disjointed and can create headaches for foreign banks trying to establish a model for doing business in Australia.”

Wakefield noted the dangers with this arrangement, “Without clear and consistent boundaries on what is acceptable activity for cross-border dealing there is potential for offshore banks to over-reach in the level of business they conduct. Again, it would be useful for APRA and ASIC to provide collaborative guidance on the extent of business that foreign banks can conduct in Australia.”


John Wakefield, Compliance Manager