Consent to use restricted word banking
EXPLANATORY STATEMENT
Issued by the authority of the Australian Prudential Regulation Authority (‘APRA’)
This explanatory statement relates to the instrument giving consent to the use of a
restricted word or expression under paragraphs 66(1)(d) and 66(2A)(b) of the Banking
Act 1959 (‘the Banking Act’) and which is dated 16 June 2005 (‘the instrument’).
APRA’s power under section 66 of the Banking Act to consent to the use of
restricted words and expressions relating to banking
Subsection 66(1) of the Banking Act prohibits anyone who is carrying on a financial
business, whether or not in Australia, from assuming or using in Australia a restricted
word or expression in relation to that financial business without APRA’s consent.
Subsection 66(4) specifies the restricted words and expressions. They include bank,
banker and banking, whether used alone or as part of another word or expression, or
in combination with other words, letters or symbols.
Subsection 66(4) also defines financial business as a business that consists of,
includes, or relates in whole or in part to, the provision of financial services.
The prohibition on the use of restricted words and expressions in subsection 66(1) is
subject to certain exceptions specified in section 66. One of the exceptions, which is
set out in subsection 66(1AC), provides that an authorised deposit-taking institution
(‘ADI’) can use the word banking in referring to the fact that it has been granted an
authority as an ADI under the Banking Act. (The other exceptions specified in
section 66 are not presently relevant.)
Subsection 66(1B) provides that a consent given by APRA for the purposes of
subsection 66(1) can be expressed to apply to a particular person or to a class of
persons.
Paragraph 66(2A)(b) provides that if the consent applies to a class of persons, it has to
be given by notice in writing published in the Gazette. By virtue of section 56 of the
Legislative Instruments Act 2003 (‘the Legislative Instruments Act’), the requirement
for gazettal is taken to be a requirement that the instrument be registered under that
Act.
Subsection 66(2) empowers APRA to impose conditions on its consent.
Purpose of the instrument
The instrument, made by a delegate of APRA, gives a consent to offshore banking
units within the meaning of the Income Tax Assessment Act 1936 (‘the Tax Act’) to
use the term banking as part of the expression offshore banking unit in relation to their
financial businesses which they carry on in the capacity of an offshore banking unit,
subject to certain conditions specified in the instrument. The instrument also gives a
consent to bodies corporate that are related to an offshore banking unit to use banking
as part of offshore banking unit in relation to the financial businesses of the offshore
banking units to which they are related.
Background to and reason for the instrument
The offshore banking regime is a concessional tax regime that allows entities that are
determined to be (in effect, approved as) an offshore banking unit under section
128AE of the Tax Act to undertake certain non-resident to non-resident financial
transactions at a reduced rate of taxation.
The offshore banking regime was established to match similar regimes in the region.
Without an Australian offshore banking regime, there was a potential for all nonresident to non-resident financial transactions to move to foreign centres to take
advantage of their lower tax rates.
Determinations that an entity is an offshore banking unit are made by the Treasurer
under section 128AE of the Tax Act. Originally only prudentially regulated
institutions such as banks and foreign exchange dealers were entitled to apply for
offshore banking unit status, but the criteria for determining an entity to be an
offshore banking unit have been widened in recent years, and the types of entities that
the Treasurer can determine to be an offshore banking unit now include not only
specified classes of financial entities, such as insurance companies and funds
managers, but also any company that the Treasurer considers appropriate in
accordance with guidelines made by the Treasurer. The types of services that
offshore banking units can provide have also been widened, so that traditional
banking services are now only one of a range of investment and other financial
services that offshore banking units can offer. For the types of services that offshore
banking units can provide on a concessionally taxed basis, see section 121D of the
Tax Act (definition of OB activities).
The term offshore banking is recognised across the globe as being associated with
concessional rates of taxation in relation to non-resident to non-resident transactions.
Offshore banking unit has a corresponding meaning which denotes an entity – not
necessarily a bank – that is entitled under the applicable tax legislation to carry out
such transactions subject to low rates of tax.
The business carried on by offshore banking units can be characterised as a financial
business within the meaning of section 66 of the Banking Act. Because offshore
banking unit includes the restricted term banking, subsection 66(1) of the Banking Act
prevents offshore banking units from using the expression “offshore banking unit” in
connection with their offshore banking unit business without APRA’s consent.
Clearly, it would be difficult for offshore banking units to carry on their business if
they were not allowed to use the very expression which defines what they are. APRA
therefore considers it appropriate to give a class consent under section 66 permitting
offshore banking units to use banking as part of the composite expression offshore
banking unit, in relation to their offshore banking unit business.
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The rationale for the prohibition on the use of restricted expressions relating to
banking contained in section 66 is the protection of the public. Under the Banking
Act, banking business can only be carried on in Australia by ADIs (subject to certain
limited exceptions which are not presently relevant). Hence, if financial businesses
that are not ADIs could use the restricted expressions, consumers could be misled into
thinking that the businesses concerned were ADIs, which are regulated under the
Banking Act and prudentially supervised by APRA. This could lead consumers to
believe that money invested with those businesses would be more secure than is really
the case.
Offshore banking units, however, have a legitimate case for using banking as part of
the composite expression offshore banking unit, which is the designation given to
them by both the Tax Act and common usage. Offshore banking units are typically
used by wealthy and financially sophisticated investors. There is a relatively low risk
of such persons being misled into thinking that an offshore banking unit is a bank or
other kind of ADI merely because of the presence of the word banking in its name or
designation. Nevertheless, the possibility of some investors being so misled cannot be
ruled out, and APRA has therefore imposed conditions on the consent given to
offshore banking units that are not ADIs, which require them to give a “consumer
warning” to certain classes of their customers in relation to transactions involving
lending or investment. The consumer warning makes it clear that the offshore
banking unit is not authorised under the Banking Act to carry on banking business,
and is not subject to APRA’s prudential supervision or to the depositor protection
provisions in section 13A of the Banking Act.
Offshore banking units that are ADIs are already permitted to use banking, and certain
other restricted expressions, for purposes connected with their banking business by
virtue of various class consents applying to ADIs that have been given under section
66 of the Banking Act. However, those consents do not go so far as to permit such
offshore banking units to use banking in relation to their offshore banking unit
business. The instrument therefore also gives consent for offshore banking units that
are ADIs to use banking, as part of offshore banking unit, in relation to their offshore
banking unit business. However, the instrument does not impose conditions on these
offshore banking units requiring them to give a consumer warning to their customers,
since the purpose of the consumer warning is to make it clear that the offshore
banking unit is not an ADI, whereas these offshore banking units are ADIs.
Related bodies corporate (basically, holding companies and subsidiaries) of offshore
banking units also have a legitimate case for using banking as part of offshore banking
unit, when referring to the financial business carried on by the offshore banking unit
to which they are related. The instrument accordingly consents to their using banking
in this way.
The instrument imposes a condition which applies generally, to all offshore banking
units and related bodies corporate of offshore banking units. That condition precludes
the offshore banking unit or related body corporate from using banking or offshore
banking unit in a misleading or deceptive way.
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Explanation of the instrument
The consents, which are set out in clauses I and II under the heading “Consents” in the
Schedule to the instrument, permit the restricted expression banking to be used as part
of the expression offshore banking unit by offshore banking units, and by bodies
corporate that are related to offshore banking units, subject to specified conditions.
The conditions, numbered 1 to 4, are set out under the heading “Conditions” in the
Schedule to the instrument.
As indicated by the consents, condition 1 applies to all offshore banking units and
bodies corporate related to offshore banking units, while conditions 2 to 4 only apply
to offshore banking units that are not an ADI.
Interpretation provisions are contained in clauses A to E under the heading
“Interpretation” in the Schedule to the instrument.
The consents, conditions and interpretation provisions are largely self-explanatory,
and will not be paraphrased here. The following explanations and comments
concerning the contents of the instrument are made because they might assist in
understanding the objectives of and interpreting the instrument.
Note that, by virtue of paragraph 22(1)(a) of the Acts Interpretation Act 1901, person
includes a body corporate and a body politic as well as an individual.
Section 13A of the Banking Act, which is referred to in the consumer warning, makes
provision for APRA to initiate the investigation and placement under statutory
management of an ADI that is likely to fail to meet its obligations or suspend
payment. Subsection 13A(3) makes the assets of an ADI that becomes unable to meet
its obligations or that suspends payment available to meet the ADI’s deposit liabilities
in Australia in priority to all its other liabilities. Subsection 13A(4) requires an ADI
to hold assets in Australia (excluding goodwill) of a value that is greater than the total
value of its deposit liabilities in Australia.
The definition of managed investment scheme in clause A gives that expression the
same meaning as in section 9 of the Corporations Act 2001 (‘the Corporations Act’).
However, in addition, the definition also gives managed investment scheme an
expanded meaning, so that it also covers schemes operated outside Australia which
have the general characteristics of a managed investment scheme specified in
paragraph (a) of the definition in the Corporations Act but which are not a body
corporate or a franchise.
Issue is defined in clause A by adopting the definition of issue in section 761E of the
Corporations Act (with the necessary modification that references in section 761E to
financial products are to be read as references to investment products). According to
the definition in section 761E, an investment product is “issued” to a person when it is
first issued, granted or made available to that person by another person who is
responsible for the obligations owed by or under the product.
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Clause B contains further guidance regarding what is meant by a reference to issuing
an investment product to the investor.
The purpose of condition 2 is to ensure that a customer of an offshore banking unit
who makes any loan to or through, or any investment of a pooled nature with or
through, the offshore banking unit is given a consumer warning which ensures that the
customer is not misled by the designation offshore banking unit into believing that
they are dealing with a real bank.
Condition 3 provides that the consumer warning only has to be given where the
offshore banking unit concerned is a resident or where it is a non-resident but the
issuing or arranging for the issuing of the investment product concerned is done by
the offshore banking unit in the course of carrying on business in Australia. Resident
and non-resident are defined in clause A by reference to the definitions of those terms
in the Tax Act.
The purpose of condition 3 is to ensure that the consumer warning only has to be
given in situations where either the offshore banking unit or the transaction involving
its customer has a sufficient connection with Australia.
Condition 4 sets out a list of exceptions to the obligation to give a consumer warning.
Paragraph (a) of condition 4 refers to a situation where the customer of the offshore
banking unit is a related body corporate of the offshore banking unit. APRA
considers that a related body corporate is likely to have detailed knowledge of the
status of the offshore banking unit, and its interests are likely to be so closely aligned
with those of the offshore banking unit, that it is not necessary to require that it be
given the consumer warning.
Paragraph (b) of condition 4 refers to a situation where the customer of the offshore
banking unit is a professional investor. Professional investor is defined in clause A
by reference to the definition of professional investor in section 9 of the Corporations
Act. The last-mentioned definition lists various categories of people and companies
that are likely to be knowledgeable and sophisticated in relation to financial matters –
such as various kinds of financial institutions and financial industry participants, listed
companies, public offer investment companies, and persons who, either alone or
together with their associates, control at least $10 million.
Paragraph (c) of condition 4 refers to a situation where the investment product is
provided for use by or in a business that is not a small business. Small business is
defined in clause A as a business employing less than 20 people – or less than 100
people where the business includes the manufacture of goods. The reason for this
exception is that it is reasonable to assume that businesses that are not small
businesses will have sufficient sophistication, commercial knowledge, and access to
professional advice and expertise not to need the warning.
Paragraph (d) of condition 4 refers to a situation where no consideration is given for
the investment product, whether directly or indirectly. Because such an investment
product is in effect “free”, APRA considers that it is not necessary to mandate a
consumer warning for it.
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Paragraph (e) of condition 4 refers to a situation where the customer of the offshore
banking unit has previously been given the consumer warning in respect of the same
kind of investment product. What is meant by the same kind of investment product is
specified in clause C.
Consultation
Section 17 of the Legislative Instruments Act imposes consultation obligations on the
makers of legislative instruments. Subsection 17(1) requires the maker of a legislative
instrument to undertake consultation which the maker considers to be appropriate and
which is reasonably practicable before making the legislative instrument. This
obligation applies particularly where the proposed instrument is likely to:
(a) have a direct, or a substantial indirect, effect on business; or
(b) restrict competition.
(These paragraphs correspond to paragraphs 17(1)(a) and (b).)
Section 18 of the Legislative Instruments Act sets out circumstances where
consultation may be unnecessary or inappropriate. They include the circumstance that
the legislative instrument is of a minor or machinery nature and does not substantially
alter existing arrangements: paragraph 18(2)(a).
In the present case, the effect of the instrument is to permit offshore banking units,
which are already carrying on business, to continue to operate using the designation
offshore banking unit, which is recognised by both the Tax Act and common usage,
subject to conditions relating to disclosure. In APRA’s view, these circumstances
mean that the instrument does not substantially alter existing arrangements and is of a
minor or machinery nature, and is therefore covered by the exception in paragraph
18(2)(a).
Further, APRA has formed the view that the instrument does not have a direct, or a
substantial indirect, effect on business, within the meaning of paragraph 17(1)(a) of
the Legislative Instruments Act, and that it does not restrict competition within the
meaning of paragraph 17(1)(b) of that Act. The consent which the instrument gives to
offshore banking units to use the restricted term is permissive, not restrictive or
burdensome, in that it simply allows them to use the designation given to them by the
Tax Act. The conditions imposed by the instrument, which require disclosure to
consumers and which are designed to avoid consumers being misled, are not
particularly onerous or costly for offshore banking units to comply with, in that they
merely require the inclusion of a relatively short statement in informational or
promotional material given to the consumer. Moreover, the conditions ensure that
offshore banking units do not obtain an unfair competitive advantage from the use of
the restricted term.
The use of the designation offshore banking unit in the Tax Act implies a legislative
intent that offshore banking units should be known by this designation and
consequently should be able to employ this designation in carrying on their business.
The instrument gives effect to that legislative intent, with conditions of an ancillary
nature which require appropriate disclosure.
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Lastly, consultation with offshore banking units would be relatively costly and timeconsuming, in that APRA is not aware of any industry body representing offshore
banking units, and the identities of the individual offshore banking units are unknown
to APRA. Consultation could therefore only take place through the medium of
advertising.
For the foregoing reasons, APRA has decided not to undertake consultation in relation
to the instrument.
Regulation Impact Statement
The Office of Regulation Review has advised APRA that it does not consider that a
Regulation Impact Statement is necessary, on the ground that the instrument is of a
minor or machinery-of-government nature.
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