Overview of the banking and financial services system

Industry structure

The financial services industry in Australia is made up of a number of different streams including advisory, banks, building societies, credit unions, mutuals, insurance, collective investments, finance companies, non-bank credit providers and superannuation. The central bank is the Reserve Bank of Australia.

Australia has a uniform licensing regime that applies to all persons and entities carrying on a financial services business in Australia (regardless of physical location) unless entitled to rely on an exemption. Additional regulations apply to the provision of consumer credit in Australia.

The financial services industry is highly regulated and, as a result, provides a sophisticated and competitive system for those wanting to do business in Australia.

Regulators

The two key regulators in the industry are the Australian Prudential Regulation Authority (APRA) and the Australian Securities & Investments Commission (ASIC). Both regulators recover their operating costs by charging levies on the entities that they regulate.

APRA is responsible for supervising the risk management and financial stability of Australia’s banks, insurance companies and most superannuation funds. APRA sets capital adequacy requirements and has established several prudential standards for compliance in each part of the industry.

ASIC regulates all Australian companies, financial markets, and financial services organisations and professionals who provide financial products or deal in financial products or services in Australia. Regular reports are required to be lodged with ASIC regarding a company’s activities.

The Australian Transaction Reports and Analysis Centre (AUSTRAC) is the regulator for Australia’s anti-money laundering and counter-terrorism financing laws and is also a financial intelligence agency.

Licensing

All banks carrying out banking business in Australia must hold a banking licence issued by APRA (with certain limited exceptions). Insurance companies and superannuation funds are also required to be registered and licensed with APRA. Persons and entities carrying on a financial services business in Australia must either hold an Australian or foreign Financial Services Licence (FSL), be authorised by an AFS licensee to act as their representative, or be entitled to rely on an exemption from licensing. Australian FSLs are issued by ASIC. ASIC must be satisfied that the entity is competent to carry on the financial services business and has sufficient financial resources to do so.

If an entity is engaging in credit activities, it will also require an Australian Credit Licence (issued by ASIC) unless an exemption applies.

Anti-money laundering and counter-terrorism financing

Australia’s anti-money laundering and counter-terrorism financing laws cover various functions of financial services entities. There are protective measures in place, such as identification processes for opening bank accounts to prevent tax evasion and money laundering.

There are also certain reporting obligations for some transactions that require financial institutions, financial corporations, insurance companies and intermediaries, securities dealers, futures brokers, and gaming institutions to report events such as:

• suspicious transactions;
• significant cash transactions (of A$10,000 or more, or the foreign currency equivalent); and
• international telegraphic or electronic transfers of funds and instructions transmitted or received on behalf of their customers.

Entities are also required to undertake regular training for their employees in this area.

Banks

There are four major Australian banks (Commonwealth Bank, Westpac, Australia and New Zealand Banking Group and National Australia Bank), numerous smaller/regional banks, and multiple offshore banks operating in the Australian market. These institutions comprise retail banks, commercial banks and investment banks.

Mortgage-backed loans issued to home buyers, and business loans and consumer credit make up the majority of products offered by the Australian banks.

The Reserve Bank of Australia (RBA) is responsible for formulating and implementing Australia’s monetary policy. The RBA sets the target cash rate, which is the interest rate that banks pay or charge to borrow funds from other banks on unsecured overnight loans. The RBA is responsible for the stability of Australia’s financial system and accountable to the Australian Federal Parliament. Its board meets on the first Tuesday of each month, moving to eight times a year commencing in 2024.

Similar to other central banks worldwide, in an effort to slow rapidly rising inflation in Australia the RBA increased the cash rate almost monthly in 2023. (In July 2023, the target cash rate was 4.10%, up 400 basis points since May 2022). Current RBA cash rates can be found on the RBA website.

Managed funds

The managed funds industry in Australia is made up of large institutional managers as well as boutique investment managers who charge a range of management fees. Funds are generally established as unit trusts, on a single asset (such as cash, fixed interest, property, share or alternative investment funds) or mixed asset/multi-sector basis (generally categorised by risk).

Most managed funds are unlisted; however, some are listed on an exchange, such as the Australian Stock Exchange. There has been a significant increase in credit funds operating in Australia in recent years, as non-bank lending is not currently subject to the same degree of regulation as bank lending.

Life insurance

Life insurance policies require an insurer to pay a benefit to an individual upon their death, disablement, terminal medical condition diagnosis, or other injury. These products are often complex and may have exclusions unique to each product. Superannuation funds are also able to offer life insurance products to their members through a group insurance policy purchased by the superannuation fund from a life insurer.

General insurance

This sector of the industry provides underwritten insurance policies to individuals and businesses to protect against specific losses and other risks. Types of insurance offered include building and contents insurance, contract works insurance, motor vehicle insurance, product liability insurance, travel insurance, employer’s liability insurance, and professional indemnity insurance.

Superannuation

Australia’s pension funds, known as superannuation funds, are one of the largest asset holders in Australia, currently holding around A$3.5 trillion in assets. Superannuation funds operate as trusts and can be governed in various ways (a self-managed superannuation fund is managed by individual trustees, for example, while the trustee of a public sector fund is managed by government agencies).

In Australia, an employer must pay (through the private superannuation system) a minimum level of superannuation support for each of its employees, currently 11% of ordinary time earnings (increasing to 12% on 1 July 2025), capped at a maximum income of $62,270 per quarter for FY23/24.

Most recently established funds are accumulation-style funds (sometimes called defined contribution funds), meaning that contributions (made by the employer and often also by the member) accumulate over time in each member’s account. Superannuation funds also offer insurance to members. The benefit that is paid to the employee upon a triggering event is simply the balance in the employee’s account and, where applicable, an insured component. Examples of triggering events are death, disablement, terminal medical condition, or retirement.

However, some older funds provide “defined benefits”. As the name indicates, this means that the benefit paid to the member is defined by a formula. Therefore, employers do not contribute a set rate as in an accumulation fund, but rather contribute in accordance with an actuary’s recommendation, designed to ensure that the fund is adequately funded in order to pay out the promised benefits when they are due.

Benefits that accumulate or accrue in the superannuation system are generally “preserved” until the member reaches at least age 56 (or older, depending on the member’s date of birth) so that superannuation benefits cannot be accessed by a member before this age except in limited circumstances.