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The federal government recently passed the Financial Sector Legislation Amendment (No.1) Act (FSLA) which continues the government's financial sector reform agenda. It builds on the financial sector legislation already implemented by the government in response to the recommendations of the 1997 Financial System Inquiry.

The FSLA's most notable amendment is the changes made to enhance the prudential regulation of Authorised Deposit-Taking Institutions (ADI) under the Banking Act 1959. The amendments allow the treasurer to impose conditions on his or her consent, when considering an application by an ADI under section 63 of the Banking Act.

A section 63 application is one made to the treasurer by an ADI (excluding a foreign ADI) proposing to enter into an arrangement or agreement to restructure or sell part of its banking business operations.

While a section 63 application is not a common event, it was considered that in assessing an application (before this recent amendment), the treasurer may have disapproved an application owing to the inability to impose conditions. Another problem was that any undertaking made by an ADI in support of its application was not enforceable.

Before the FSLA, the treasurer (or delegate) could not attach conditions to the consent. This is not consistent with other provisions of the Banking Act, for example section 9, which authorizes an applicant to carry on a banking business subject to any relevant conditions imposed by the treasurer. Nor is it consistent with similar provisions in other legislation such as the Financial Sector (Shareholdings) Act 1998 and the Financial Sector (Transfer of Business) Act 1999.

Following the FSLA, a new section 64 and 65A is added to the Banking Act. Section 64 allows the treasurer to impose whatever conditions he or she sees as appropriate in granting an application under section 63. Section 65A enables the treasurer to take out an injunction against an ADI where it contravenes specific sections of the Banking Act, or conditions imposed by the treasurer.

A Regulation Impact Statement issued to the Office of Regulation Review has stated that the amendments are only likely to effect government and regulatory bodies (such as treasury and the Australian Prudential Regulatory Authority), financial sector entities (other than foreign ADIs), and consumers of financial services.

Sean Sydenham

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