Restricted Banking Authority Disclosure Statement

Last Updated 7 July, 2021

Banking Authority Restrictions

Alex Bank Pty Ltd (Alex Bank) has been granted a restricted Banking Authority from the Australian Prudential Regulation Authority (APRA). Under this authority Alex Bank has restrictions on the amount of deposits it can take and has simpler prudential requirements while it builds its resources and capability.

Alex Bank has until 7 July 2023 to meet APRA’s full prudential requirements or it must exit the banking industry.

Arrangements have been put in place to protect customers in the event Alex Bank exits the banking industry. This includes:

  • Alex Bank Pty Ltd being required by APRA to contact customers to advise how they are impacted e.g. deposits may be returned or transferred to another bank;
  • The Banking Act 1959 provisions for the protection of depositors apply to Alex Bank Pty Ltd; and
  • Alex Bank Pty Ltd is covered by the Australian Government Financial Claims Scheme (FCS). The FCS applies only to protected accounts. It is important customers check the terms and conditions of their specific product to determine if it is protected under the FCS.

Under the terms of Alex Bank’s restricted Banking Authority, unless otherwise approved in writing by APRA, Alex Bank must:

  1. only accept deposits where:
    1. the aggregate balance of all protected accounts held with Alex Bank does not exceed $2 million; and
    2. the aggregate balance of all protected accounts held by each account-holder with Alex Bank (calculated using a single customer view) does not exceed $250,000;
  2. maintain, at all times, Common Equity Tier 1 Capital equal to the greater of:
    1. $3 million plus the resolution reserve, which is $1 million unless otherwise determined by APRA; or
    2. 20 per cent of adjusted assets of the body corporate;
  3. hold, at all times, liquid assets equal to the greater of:
    1. 20 per cent of total liabilities; or
    2. the aggregate balance of all protected accounts held with the body corporate plus an amount equal to the resolution reserve;
  4. limit the value of assets held on its balance sheet to $100 million, unless otherwise approved in writing by APRA;
  5. comply with the individual prudential standard and the conditions on the reporting standard exemption. Should the body corporate breach these requirements, it must promptly enact its exit plan, unless otherwise agreed to in writing by APRA;
  6. carry out all actions outlined in its exit plan if it reaches the trigger thresholds in that plan;
  7. only offer products included in its business plan for the restricted phase as submitted to APRA in its application for an authority under section 9 of the Act, and must seek prior approval from APRA should it wish to offer any additional products;
  8. disclose to its customers and potential customers that it is operating on a restricted licence in all its dealings; and
  9. not carry on banking business in any country other than Australia; and
  10. not use any derivative without approval from APRA.

Requirements of the Prudential Standards for Restricted Banking Authority

Under the restricted Banking Authority, there are simpler prudential requirements while resources and capabilities are being developed. A summary of the requirements follows. A reference to ‘Alex’ is reference to Alex Bank Pty Ltd and the group of which Alex Bank Pty Ltd is a member.

Capital Adequacy

Alex is required to hold a minimum Prudential Capital Requirement of $3 million plus resolution reserve of $1 million, or 20 per cent of adjusted assets, whichever is higher. Alex is required to have:

  • a capital management plan for managing its capital levels on an ongoing basis; and
  • systems and procedures to identify, measure, monitor and manage risks to ensure that capital is held at a level consistent with the risk profile.

Measurement of Capital

Alex is required to hold its entire capital requirement as Common Equity Tier 1 Capital (CET1). Alex will be required to make all necessary regulatory adjustments to its capital from its CET1.

Liquidity

Alex must hold at all times Minimum Liquidity Holdings (MLH) equal to the greater of:

  • 20 per cent of liabilities; or
  • the value of protected accounts plus the resolution reserve.

MLH assets must be free from encumbrances and include high quality assets such as government securities, bank bills and bank deposits.

Alex must have:

  • systems and procedures to identify, measure, monitor and manage activities to ensure liquidity is held at a level consistent with the risk profile; and
  • a liquidity management plan which:
    • sets out strategy for maintaining liquidity resources over time;
    • sets out actions and procedures for monitoring compliance with minimum liquidity requirements; and
    • addresses a retail deposit run and includes measures to repay retail depositors as soon as practicable.

Credit Quality

Alex must have an adequate credit risk management system which includes policies, procedures and systems for:

  • accurate and complete measurement of credit exposure;
  • sound and prudent processes to value collateral held to determine security coverage;
  • prompt identification of potential problem facilities on a timely basis including provisioning for impaired facilities; and
  • regular monitoring of portfolio credit quality.

Large Exposures

A large exposure is an exposure to a counterparty or group of related counterparties greater than or equal to 10% of Common Equity Tier 1 Capital.

Exposures to a counterparty or group of related counterparties are subject to the following limits:

  • unrelated external parties (other than governments, central banks and ADIs) – 25% of Common Equity Tier 1 Capital;
  • unrelated ADIs – 50% of Common Equity Tier 1 Capital, with aggregated exposure to non-deposit-taking subsidiaries capped at 25% of Common Equity Tier 1 Capital;

APRA must be notified within 1 business day of committing to any exposures to non-government, non-ADI counterparties in excess of 10% of Common Equity Tier 1 Capital.

Associations with Related Entities

All entities controlled by Alex Corporation Limited or Alex Pty Ltd are related entities. The following limits apply to exposures to these related entities:

  • related entity regulated by APRA – 25% of Alex Bank’s Common Equity Tier 1 Capital;
  • related entity not regulated by APRA – 15% of Alex Bank’s Common Equity Tier 1 Capital; and
  • aggregate exposure to all related entities – 35% of Alex Bank’s Common Equity Tier 1 Capital.

Audit and Related Matters

Alex is expected to meet and continue to meet on an ongoing basis the full requirements of APS 310 Audit and Related Matters. External auditors will be expected to provide assurance against Alex’s compliance with the applicable Restricted ADI reporting and prudential requirements.

Public Disclosure

Alex will need to meet specific disclosures that apply to Restricted ADIs.

Risk Management

Alex must:

  • maintain a risk management framework that is appropriate to its size, business mix and complexity;
  • maintain a Board-approved risk appetite statement;
  • maintain a Board-approved risk management strategy that describes the key elements of the risk management framework that give effect to the approach to managing risk;
  • maintain a Board-approved business plan that sets out the approach for the implementation of the strategic objectives of the institution or group;
  • maintain adequate resources to ensure compliance with this Prudential Standard; and
  • notify APRA when it becomes aware of a significant breach of, or material deviation from, the risk management framework, or that the risk management framework does not adequately address a material risk.

Outsourcing

Alex must be able to demonstrate to APRA that any outsourcing arrangements for material business activities that impact on its strategic plans during the restricted phase are subject to appropriate due diligence, approval, contractual arrangements, monitoring and contingency planning. All material outsourced arrangements must allow APRA access to the documentation and information related to the outsourcing arrangement, including the right to conduct on-site visits to the service provider.

Alex must notify APRA as soon as possible after entering into an outsourcing agreement for a material business activity, and in any event no later than 20 business days after execution of the outsourcing agreement.

Alex must consult with APRA prior to entering into any offshoring agreement involving a material business activity.

Alex must maintain sufficient and appropriate resources to manage and monitor each outsourcing relationship at all times. The type and extent of resources required will depend on the materiality of the outsourced business activity. At a minimum, monitoring must include:

  1. maintaining appropriate levels of regular contact with the service provider. This will range from daily operational contact to senior management involvement; and
  2. a process for regular monitoring of performance under the agreement, including meeting criteria concerning service levels.

Alex must advise APRA of any significant problems that have the potential to materially affect the outsourcing arrangement and, as a consequence, materially affect the business operations, profitability or reputation of the ADI.

Where an outsourcing agreement is terminated, Alex must notify APRA as soon as practicable and provide a statement about the transition arrangements and future strategies for carrying out the outsourced material business activity.

Business Continuity Management

APRA expects Alex to meet customer obligations in the event of a disruption. As a minimum, Alex must demonstrate it has considered its exposure to, and has developed response plans for, plausible disruption scenarios to its business operations which are commensurate with the nature, size and complexity of its operations. This may be incorporated in scenario analysis or exit plans.

Alex must notify APRA no later than 24 hours after it experiences a major disruption that has the potential to have a material impact on its risk profile, or affect its financial soundness and explain action being undertaken, the likely effect and the timeframe for returning to normal operations.

Governance

APRA Prudential Standard CPS 510 Governance sets out minimum foundations for good governance of APRA-regulated institutions.

Key requirements of APRA’s Prudential Standard CPS 510 Governance as modified for the purpose of Alex’s restricted Banking Authority are:

  • the Board must have:
    1. an independent director as the chairperson of the Board of directors;
    2. a minimum of two independent directors at all times; and
    3. one independent director to be eligible and present to vote at all board meetings.
  • Alex must have a Remuneration Policy that aligns remuneration and risk management;
  • Alex will not be required to have Board Remuneration, Audit and Risk committees; and
  • Alex will not be required to have in place a policy for Board renewal or procedures for assessing Board performance.

Strategy to ADI Licence

Alex must maintain a plan that sets out how it will meet the full prudential requirements within the required timeframe set by APRA (strategy to ADI licence).

Exit Plan

Alex must maintain a plan that sets out its approach for returning funds for depositors and surrendering its Banking Authority in the event it must exit the banking industry.

Operational Risk

Alex must have in place management information systems and monitoring mechanisms to assist with early detection and correction of deficiencies in procedures for managing operational risk.

Fit and Proper

Persons who are responsible for the management and oversight of Alex, and persons employed by a member of the group whose activities may materially affect the business or financial standing of the group, need to have appropriate skills, experience and knowledge, and act with honesty and integrity. Alex must prudently manage the risk that persons in positions of responsibility might not be fit and proper through actions including:

  • ensuring the fitness and propriety of responsible persons is assessed prior to initial appointment and then re-assessed annually; and
  • ensuring that a person is not appointed to, or does not continue to hold, a responsible person position for which they are not fit and proper.

These requirements also apply to appointed auditors.

Financial Claims Scheme

Prior to commencing deposit taking activities, Alex Bank Pty Ltd will be required to ensure it is adequately prepared should it become a declared ADI for Financial Claims Scheme purposes.

The key requirements of the Prudential Standard APS 910 Financial Claims Scheme are that Alex must:

  • be able to generate the aggregate balance of all protected accounts held by an account-holder;
  • be able to generate and transmit payment instructions in respect of each account-holder;
  • facilitate collection of an account-holders alternative ADI account data to which an EFT payment may be made;
  • generate and provide reports to APRA and to account-holders;
  • facilitate communication with account-holders and other parties; and
  • ensure systems and data required by the Prudential Standard are subject to external audit.

Disclosure Requirements

Alex Bank Pty Ltd must include a disclosure on all promotional and marketing material, whether in paper form, electronic form or website or social media based content. Unless otherwise approved by APRA, the disclosure must:

  • prominently display a statement that Alex Bank Pty Ltd is operating under a time limited and restricted Banking Authority; and
  • provide details of where further information is available.

The further information referred to above must include at a minimum:

  1. an explanation in plain language of the restrictions on the Banking Authority, and how the restrictions impact customers;
  2. an explanation in plain language of the requirements of the simpler prudential standards;
  3. the date by which Alex Bank Pty Ltd must meet the prudential requirements in full or surrender its Banking Authority; and
  4. any other information in regards to the Banking Authority that might reasonably be expected to have a material influence on a customer’s decision to acquire a product from Alex.

Prior to entering into a customer relationship, Alex Bank Pty Ltd must provide the customer with a written disclosure statement (the statement).

The statement must be prominently displayed and written in plain language and must disclose at a minimum, the following matters:

  1. Alex Bank Pty Ltd has been granted a restricted Banking Authority from the Australian Prudential Regulation Authority (APRA). Under this authority Alex Bank Pty Ltd has restrictions on the amount of deposits it can take and has simpler prudential requirements while it builds its resources and capabilities;
  2. Alex Bank Pty Ltd has until 7 July 2023 to meet APRA’s full prudential requirements or it must exit the banking industry; and
  3. arrangements have been put in place to protect customers in the event Alex Bank Pty Ltd exits the banking industry. This includes:
    1. Alex Bank Pty Ltd being required by APRA to contact customers to advise how they are impacted, e.g. deposits may be returned or transferred to another bank;
    2. the Banking Act 1959 provisions for the protection of depositors apply to Alex Bank Pty Ltd; and
    3. Alex Bank Pty Ltd is covered by the Australian Government Financial Claims Scheme (FCS). The FCS applies only to protected accounts. It is important customers check the terms and conditions of their specific product to determine if it is protected under the FCS.

Notification requirements

APRA must be immediately informed, in accordance with section 62A of the Banking Act, of:

  1. any breach of the minimum capital adequacy requirements and any potential breach of these requirements (e.g. breaches of trigger ratios), including remedial actions taken/planned to deal with the problem;
  2. any breach of minimum liquidity holdings, or concerns over the adequacy of liquidity holdings;
  3. any concerns that a large exposure or risk concentration may have the potential to impact materially upon capital adequacy, along with proposed measures to address these concerns; or
  4. any breach or potential breach of a limit specified in the Prudential Standard prescribing Alex Bank’s restricted ADI prudential requirements.