Retail debenture issuers hit with tighter rules

Debenture issuers and other registered financial corporations face new operating rules, as the regulator seeks to make a clearer distinction between their activities and those of authorised deposit-taking institutions.

The Government has issued Banking Exemption No.1 of 2015, which was prepared by the Australian Prudential Regulation Authority.

The Banking Act makes it an offence for a body corporate that is not an ADI to carry on banking business, such as taking deposits.

Under a 2003 exemption, debenture issuers and other financial corporations were allowed to take money on deposit from retail investors as long as they informed the investors that the investment was provided by an entity that was not registered under the Banking Act and was not covered by the depositor protection provisions of the Act.

Following the financial crisis, when there were a number of failures in the non-prudentially regulated financial sector, the Government and the regulator decided to tighten the rules governing retail debenture issuers.

Under the revised rule (Exemption No.1 of 2015), use of terms such as "deposit" and "at-call" is restricted.

All debentures sold after July 1 must have a minimum 31-day maturity. Debenture issuers with at-call maturities currently in the market have until January 1 next year to change the terms and conditions of those products.

Debenture issuers are no longer allowed to provide transactional banking facilities, such as ATM access, BPay and point of sale payment facilities and cheque accounts.