As part of APRA’s consultation process, we held a virtual roundtable with a number of our clients and lodged a submission with APRA highlighting a number of key changes, including providing more clarity and transparency, reducing barriers to entry and increasing competition, more cohesiveness between launching products and the licensing process, as well as increased collaboration between regulators.
It’s pleasing to see that APRA has provided some welcome clarity on the licensing process, expectations of applications and how APRA intends to govern the licensing process.
Prior to this consultation process, APRA put a hold on new licences from March 2020 – March 2021. Since both the suspension being lifted and the consultation being released, we’ve already seen Alex Bank granted a licence as a restricted authorised deposit-taking institution – the first in more than one and a half years. It’s great news for the sector, and we’re excited to see others follow suit following the updated guide.
Below we outline what’s included in the updated guide, including the new clarifications, what has stayed the same, and APRA’s expectations for both RADIs and Full ADIs.
What are the first steps a Financial Institution should consider in this process?
- Consider whether the RADI or Full ADI licensing pathway is more appropriate for your organisation
- Consult early with APRA
- Engage with stakeholders such as investors to assist them to understand the licensing process and implications for capital requirements
- Develop a realistic project plan to manage the licensing process and assist with communications with APRA and stakeholders
- Engage with your advisors and auditors
From an initial formal application to a substantially complete application, licensees can expect an iterative process and extensive engagement with APRA over a period of 12-18 months, and can expect a decision from APRA within 90 days of the substantially complete application.
As an aspiring licensee typically has pre licensing discussions with APRA and submits a draft application, prior to a formal one, the actual time frame for a licensing project can be 6-12 months longer.
What has stayed the same since the Consultation Package?
- APRA reaffirms its approach to balancing contestability with financial system stability
- Broad range of requirements and milestones in the pathway remain consistent
- Restrictions on use of the term “bank” in the name or description of an unlicensed entity
- The RADI pathway and “direct” pathway remain
- The focus of an entity with a RADI is to be on building capability in readiness of a Full ADI license
- RADI capital requirements remain
- Application of a limited range of Prudential Standards – including CPS511 Remuneration, CPS520 Fit & Proper & CPS234 Information Security
- The deposit limit of $2m total and $250,000 per depositor has remained. APRA draws licensees’ attention to the need for a RADI which exits the market to be able to return deposits rapidly and in an orderly fashion. This is accomplished more successfully if the RADI has a low volume of deposits and the depositors are known to the RADI by virtue of being “family & friends”
- The “highest of three methods” for calculating required liquidity holdings has remained
- Two year time limit for the RADI period
- No metrics have been specified for the “limited launch i.e. number of customers or $ threshold
What do we have more clarity on?
- Choice of RADI or Full ADI pathway depending on satisfying the entry criteria – but aspiring licensees must discuss and agree their pathway with APRA
- Additional guidance has been provided on the characteristics of an entity who is potentially eligible for the Direct ADI pathway
- Extensions of time for the two year RADI status will only be approved in exceptional circumstances
- “Family & Friends” definition includes staff of contractors or service providers
- Waitlisting of potential customers is permitted in RADI phase
- Prepaid cards as a product is permitted in RADI phase, subject to:
a. If these balances are on the RADI balance sheet they are included in the calculation of assets regarding the $100m asset threshold
b. If these balances are off the RADI balance sheet they are excluded from the calculation of assets regarding the $100m threshold
- Full public launch must occur “very shortly” after the grant of a full ADI license. This is to be understood to mean within 6 months of the grant of the license
- Should a full public launch not occur within 12 months of the grant of the full ADI license, this will be grounds for revocation of the license
- Definitions of “test launch”, “limited launch” and “full public launch”
- Disclosure to customers of RADI status and restrictions
- APRA’s considerations when assessing the capital structure, ownership and legal structure of an entity. APRA articulates its concerns regarding complex and/or opaque structures or express/implied arrangements which change or inhibit access to capital
- APRA’s expectations of a RADI during RADI phase – outlined below
It is important to demonstrate a robust product governance framework before a full public launch. End to end product life cycle responsibility needs to be built into BEAR accountability statements. ASIC’s Product Design & Distribution Obligations in RG274 need to be complied with.
What are APRA’s expectations of a RADI?
- Compliance with Financial Claims Scheme including using test data
- Monthly RADI report to APRA
- Can offer prepaid cards and personal loans to customers who predate the RADI
- Prior to limited launch the RADI must have appropriate controls and systems regarding fraud, credit risk, payments and a contingency plan
- Fit for purpose reviews occur during RADI prior to grant of Full ADI license
- RADI governance standards, including two independent directors and one independent available to vote at all board meetings, but not required to address board renewal, committee structures or board performance reviews
- Staff, representatives and employees of RADI must be trained on the restrictions applicable to the RADI
- Various audits and assurance reports are required from external auditor (financial statement auditor) or internal auditor
Certain audits lend themselves to being performed by the entity’s external auditor and others by the entity’s internal auditor. We recommend coordination between external audit and internal audit to ensure minimal duplication and maximum alignment.
What characteristics of a business would indicate eligibility for RADI?
- Credible business plan
- Plan to meet Prudential Requirements in two years including launch of live products
- Credible contingency plan and exit strategy
What characteristics of a business would indicate eligibility for a Full ADI License?
- Limited launch of one or more income generating products such as lending
- Operationally ready to launch deposit products shortly after receiving a license
- Capital levels consistent with Full ADI
- Significant banking business such as lending book
- Governance structure which complies wholly or substantially with CPS510 Governance and other relevant prudential standards
- Quality of staff and key roles
- Operational track record
Numerous locally incorporated ADIs of a similar size and scale to new ADIs exist and can provide a useful model for good practice. Your GT team can advise you on appropriate systems, processes, operating models and people models.
APRA has recognized the particular features of a new ADI which is in a period of growth. Growth entails recording losses while making substantial investments in people, technology and risk control frameworks. An entity’s balance sheet may change rapidly and the entity will likely be reliant on further injections of capital. The entity needs to remain nimble and agile.
Robust financial models are a useful tool in managing and monitoring metrics such as capital, liquidity, deposits and loan growth. GT’s Financial Modelling practice assists a range of RADI & ADI clients in developing and maintaining their models.
Reliable financial reporting systems and controls are essential for reporting reliable data to APRA and hence managing capital levels to meet prudential requirements. This is especially important during periods where the entity’s growth may be rapid and volatile.
Pleasingly, APRA has recognized the need for a proportionate approach to supervising new ADIs. In particular, APRA has articulated the composition of the “capital stack” expected for ADIs – including new ADIs. Importantly, new ADI’s will need to ensure that responsibility for capital raising is defined in the ADI’s executive accountabilities.
A newly licensed ADI will need to be prepared for frequent interaction with APRA and heightened scrutiny. Executives with experience in established locally incorporated ADIs may find the prudential supervisory intensity significantly higher than they were accustomed to in prior roles.
The deposit book will be an area of significant APRA scrutiny, regarding the composition, levels and interest rate profile of the book. An entity should have systems in place to enable implementation of any APRA imposed restrictions on the deposit book.
Having accurate data and financial reporting systems and processes will be essential to an entity being able to understand the makeup of its book. Interest rate levers can be highly effective in managing deposit growth and the profile of the book. The entity can leverage its investment in KYC and FCS to enable value driven data insights for management, the board and for APRA.
Contingency and exit planning is an explicit requirement for new ADIs and draws on precedents in the established ADI sector as well as recognising the unique challenges of an early stage growing business. An exit involving return of deposits may be the more feasible option for a new ADI, while established ADIs may find a merger or divestment the better choice.
Our practice includes numerous ADIs who have considered, or been a part of, an exit strategy or a merger. There are numerous considerations which we can assist clients with and also have experience assisting ADIs to exit the market successfully.
When will a new ADI have earned its stripes and become a fully-fledged Established ADI?
An entity which executes its growth strategy successfully will eventually move beyond the high growth stage and reach a level of stability, maturity and sustainability. An established ADI will exhibit a track record of systems, controls and risk management as well as successful financial metrics. APRA will consider a range of metrics and indicia when assessing when to supervise an ADI as Established rather than New. However no bright line thresholds have been specified and there remains considerable scope for APRA’s discretion.
Grant Thornton views the guidance published by APRA as an important development enabling improved clarity for entities considering seeking a license, and for those navigating the licensing process.
Read the full response paper here. Stay tuned for further guidance to be provided by APRA on NOHC requirements and Financial Sector Shareholdings Act.
APRA has concurrently published Guidelines – Licensing Locally-Incorporated ADIs.
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