Financial system in Australia
The Australian financial system consists of "the set of arrangements covering the borrowing and lending of funds and the transfer of ownership of financial claims" in Australia. It has several sectors:
- Banks, credit unions and building societies - referred to as Authorised Deposit-Taking Institutions (ADIs) or financial institutions
- Insurance (life and general)
- Financial markets—debt, equity and derivative markets
- Payments systems—cash, cheques, EFTPOS, RTGS and other high-value payment systems
Participants in the financial system consist of commercial banks, investment banks, finance companies, building or cooperative societies, credit unions, friendly societies, superannuation and approved deposit funds, public unit trusts, cash management trusts, mortgage originators, insurance companies, institutional funds investing in and financing debt.
The major banks are referred as the pillars of the Australia's financial system. Banking in Australia is dominated by what are known as the "big four":
There are several smaller banks and other financial institutions, such as credit unions, with a presence throughout the country. Many large foreign banks have a presence, but few target the retail banking market. The central bank is the Reserve Bank of Australia (RBA). Since 2008 the Australian government has guaranteed deposits up to a million dollars per customer per institution against banking failure.
- Australian Securities Exchange
- Sydney Futures Exchange
- Newcastle Stock Exchange
- Bendigo Stock Exchange
Most foreign exchange transactions are free from regulation, and the Reserve Bank of Australia has largely delegated its control to authorised money market dealers and foreign exchange dealers.
Payments and clearing systems
There are several payment systems in use within Australia, many of which are regulated by Australian Payments Clearing Association. These payment systems include:
Cash payments are cleared and settled pursuant to the regulations and procedures of the APCA - ACDES (Australian Cash Distribution Exchange System) also called CS5.
The cheque is still the most important non-cash payment instrument in Australia in terms of the value transferred using it each day. The number of monthly transactions in 2008 was 33.7 million with a value of $139.3 billion.
Cheques and other payment instruments (such as travellers cheques and warrants) are cleared and settled pursuant to the regulations and procedures of the APCS also called CS1.
Cheques payments make use of the BSB codes to identify the bank and account to debit.
Direct Entry is used to transfer funds between Australian bank accounts. Clearing and settling of Direct Entry is regulated by APCA under BECS (Bulk Electronic Clearing System) also called CS2.
Direct Entry uses BSB and account number to route payments. Some common uses of the Direct Entry system include:
- Setting up monthly Direct debits to pay recurring bills such as credit card bills
- Transferring funds to other Bank accounts, also known as third party transfers
- Payment of salaries
- Government tax refunds and payments
Participants of BECS exchange Direct Entry or DE files at intervals through the day. Net positions are usually cleared daily.
EFTPOS and ATM transactions occur over the EFT network. Clearing and settling of EFTPOS and ATM transactions are regulated by the APCA under CECS (Consumer Electronic Clearing System) also called CS3.
BPAY is a payment system used in Australia and is not regulated by APCA.
High value payments
High value payments are typically more time critical and for large sums. The main high value payment systems in Australia:
- SWIFT Payment Delivery System (SWIFT PDS)
- Clearing House Electronic Subregister System (CHESS): CHESS is an automated share transfer system developed by the Australian Securities Exchange. If a CHESS transaction is selected for RTGS settlement, then an interbank request is sent to RITS via the SWIFT FIN service. Upon settlement of the gross amount across ESAs, RITS notifies CHESS, which then settles the transaction at the CHESS participant level.
See also High Value Clearing System also known as CS4.
Payment systems no longer in use
ASIC has responsibility for market integrity and consumer protection and the regulation of certain financial institutions (including investment banks and finance companies). The general regulatory position is that a legal person carrying on a financial services business in Australia must either hold an Australian financial services licence issued to that person by ASIC or fall within a licensing exemption.
APRA is responsible for the licensing and prudential supervision of ADIs (banks, building societies, credit unions, friendly societies and participants in certain credit card schemes and certain purchaser payment facilities), life and general insurance companies and superannuation funds. APRA has issued capital adequacy guidelines for banks which are consistent with the Basel II guidelines. All financial institutions regulated by APRA are required to report on a periodic basis to APRA. Certain financial intermediaries, such as investment banks (which do not otherwise operate as ADIs) are neither licensed nor regulated under the Banking Act and are not subject to the prudential supervision of APRA. They may be required to obtain licences under the Corporations Act 2001 or other Commonwealth or State legislation, depending on the nature of their business activities in Australia.
Most investment banks are registered under the Financial Sector (Collection of Data) Act 2001. This Act requires registered financial corporations to provide statistical information to APRA.
Since 1996 the provision of credit to individuals for personal, household or domestic purposes has been regulated by the Uniform Consumer Credit Code, which has been implemented in all Australian States and Territories.
Businesses providing financial products and services are required to identify and monitor customers using a risk-based approach, develop and maintain a compliance program, report suspicious matters and certain cash transactions and file annual compliance reports.
Notes and references
- Submission to the Committee of Inquiry into the Australian Financial System ("the Campbell Committee"), Reserve Bank of Australia Occasional Paper No 7, December 1979, para 1.
- Australian Government Deposit Guarantee Design & Operational Parameters, Department of the Treasury accessed 18 June 2010
- Cheque Payment Transactions (Monthly volume and value)
- See Anti-Money Laundering and Counter-Terrorism Financing Act 2008 (Commonwealth).