Banking Law in Australia

Introduction

Australian banking law operates within a twin peaks regulatory architecture, under which the Australian Prudential Regulation Authority (APRA) supervises the safety and soundness of financial institutions, and the Australian Securities and Investments Commission (ASIC) regulates market conduct and consumer protection. The Reserve Bank of Australia (RBA) acts as the central bank, responsible for monetary policy, financial system stability, and the regulation of the payments system. The primary legislative framework is the Banking Act 1959 (Cth), which establishes the system for licensing and prudentially regulating authorised deposit-taking institutions (ADIs). This regulatory architecture has been shaped by domestic financial crises, the global financial crisis of 2007–2008, and the profound impact of the Hayne Royal Commission (2017–2019).

The Banking Act 1959 and ADI Framework

The Banking Act 1959 (Cth) is the foundational statute governing banking in Australia. Section 9 prohibits a body corporate from carrying on banking business in Australia unless it holds an ADI licence granted by APRA. The definition of “banking business” in s 5 encompasses both taking deposits (other than as part-payment for identified goods or services) and lending money. APRA may impose conditions on an ADI licence (s 9A), and ADIs must comply with ongoing prudential requirements, including capital adequacy, liquidity, risk management, and governance standards. APRA’s prudential standards (issued under s 11AF of the Banking Act) implement the Basel III capital and liquidity framework, requiring ADIs to maintain minimum Common Equity Tier 1 (CET1) capital ratios, a leverage ratio, and a liquidity coverage ratio. The Financial Claims Scheme (Part II of the Banking Act) guarantees deposits up to $250,000 per account-holder per ADI, ensuring depositor protection in the event of ADI failure.

The Reserve Bank of Australia and the “Four Pillars” Policy

The Reserve Bank Act 1959 (Cth) establishes the RBA with responsibilities for monetary policy, financial system stability, and the regulation of the payments system. The RBA sets the cash rate (the overnight money market interest rate) as its primary monetary policy instrument and operates in financial markets to implement that policy. The Payments System (Regulation) Act 1998 (Cth) confers powers on the RBA to designate payment systems, access regimes, and set standards for the safety and efficiency of the payments system. The “four pillars” policy — a longstanding government policy preventing mergers among the four major banks (Commonwealth Bank of Australia, Westpac Banking Corporation, National Australia Bank, and Australia and New Zealand Banking Group) — is enforced through the Foreign Acquisitions and Takeovers Act 1975 (Cth) and through APRA’s prudential supervision. The policy rests on the premise that further consolidation would diminish competition in the highly concentrated Australian banking market.

The Hayne Royal Commission and Its Aftermath

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (commissioner: the Hon K M Hayne AC QC, 2017–2019) exposed widespread misconduct, including the charging of fees for no service, the provision of inappropriate financial advice, and the manipulation of benchmark rates. The Royal Commission’s Final Report (February 2019) made 76 recommendations directed at strengthening the regulatory architecture. Key legislative outcomes include: the establishment of the Financial Accountability Regime (FAR) under the Banking Act 1959 (ss 37–37M), which replaced the Banking Executive Accountability Regime (BEAR) and extended accountability obligations to directors and senior executives of ADIs, insurers, and superannuation trustees; the strengthening of ASIC’s enforcement powers, including the introduction of a direction power, infringement notice powers, and enhanced capacity to ban individuals from providing financial services; and the introduction of a positive duty to act “efficiently, honestly, and fairly” as an express obligation on financial services licensees, with a corresponding private right of action (s 912A of the Corporations Act 2001 (Cth)). The Royal Commission’s recommendation to prohibit grandfathered commissions (ongoing trailing commissions to financial advisers) was implemented through amendments to the Corporations Regulations.

Consumer Credit and the National Credit Regime

The National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act) establishes a uniform national regime for the regulation of consumer credit. The Act requires persons engaging in credit activities — including lending, credit assistance, and brokerage — to hold an Australian credit licence (ACL). Licensees must comply with the responsible lending obligations (Chapter 3 of the National Credit Act), which require a lender to make reasonable inquiries about a consumer’s financial situation, requirements, and objectives, and to verify that the credit contract is “not unsuitable” for the consumer. The National Credit Code (Schedule 1 to the National Credit Act) prescribes the form and content of credit contracts, including disclosure requirements, interest rate caps, early termination rights, and enforcement procedures. ASIC oversees compliance with the national credit regime and holds enforcement powers that include civil penalties, infringement notices, and banning orders.

The Banking Code of Practice

The Banking Code of Practice is a voluntary industry code that sets minimum standards of conduct for banks operating in Australia. The Code is monitored and enforced by the Banking Code Compliance Committee (BCCC) and is published by the Australian Banking Association (ABA). The Code covers obligations relating to responsible lending, financial difficulty, fees and charges, guarantees, and small business lending. Following the Hayne Royal Commission, the Code was revised to strengthen its enforcement provisions, including the introduction of “code sanctions” (the power to require a subscriber to pay compensation, implement remediation programs, or cease certain conduct). The Code does not have direct legislative force but its provisions may be taken into account by ASIC in determining whether a licensee has complied with its statutory obligations.

The Australian Financial Complaints Authority

The Australian Financial Complaints Authority (AFCA) is the external dispute resolution (EDR) scheme for the financial services industry, established in 2018 following the Ramsay Review of the financial system’s EDR framework. AFCA replaced the Financial Ombudsman Service, the Credit and Investments Ombudsman, and the Superannuation Complaints Tribunal. AFCA has jurisdiction to determine complaints relating to banking, credit, insurance, financial advice, and superannuation, with a monetary compensation limit of $1,000,000 (indexed) for non-superannuation complaints. AFCA’s determinations are binding on financial firms that are members of the scheme, but complainants retain the right to pursue civil remedies in court. The establishment of AFCA addressed criticisms that the previous multi-ombudsman framework was fragmented and lacked effective enforcement powers.

Capital Adequacy and Prudential Standards

APRA’s prudential framework for ADIs implements the Basel III international standards, with modifications for the Australian context. The framework comprises: capital adequacy (APS 110, APS 111, and APS 112), requiring ADIs to hold capital commensurate with their risk profile; liquidity (APS 210), requiring ADIs to maintain a Liquidity Coverage Ratio and Net Stable Funding Ratio; credit risk (APS 113 and APS 220); operational risk (APS 115); and governance (CPS 510), requiring ADIs to maintain a robust risk management framework and board oversight. APRA conducts supervisory reviews and stress testing of ADIs, including the annual stress test that assesses resilience against adverse economic scenarios. The Financial Sector (Shareholdings) Act 1998 (Cth) imposes a 15% ownership limit on shareholdings in ADIs, unless the Treasurer grants an exemption.