Financial system in Australia
- authorised deposit-taking institutions (ADIs) or financial institutions, comprising banks, credit unions and building societies,
- insurance (life and general),
- financial markets—debt, equity and derivative markets, and
- 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.
Banking in Australia is dominated by what are known as the "big four", which are also referred to as the pillars of the Australia's financial system:
- Commonwealth Bank of Australia (Commbank)
- Westpac Banking Corporation (Westpac)
- Australia and New Zealand Banking Group (ANZ)
- National Australia Bank (NAB)
There are several smaller banks with a presence throughout the country, and a large number of other financial institutions, such as credit unions. Many large foreign banks have a presence, but few have a retail banking presence. The central bank is the Reserve Bank of Australia (RBA). Since 2008 the Australian government has guaranteed deposits up to $250,000 per customer per institution against banking failure.
Australia's insurance market can be divided into roughly three components: life insurance, general insurance and health insurance. These markets have been fairly distinct, with most larger insurers focusing on only one type. However, in recent times several insurance companies have broadened their scope into more general financial services, and have faced competition from banks and subsidiaries of foreign financial conglomerates.
Superannuation in Australia is government-supported and encouraged, and minimum provisions are compulsory for employees. Superannuation arrangements are provided by banks and insurance companies, though most funds are self-managed. Superannuation funds are tightly regulated.
The main participants in the Australian financial market are:
- Australian Securities Exchange is the primary stock exchange in Australia, and
- National Stock Exchange of Australia, based in Newcastle, NSW, previously called Newcastle Stock Exchange.
Bendigo Stock Exchange was acquired by the National Stock Exchange of Australia in June 2012 and shut down.
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 (APCA), including:
Cheques are still the most important non-cash payment instruments in Australia, in terms of the value transferred. The number of monthly cheque transactions in 2008 was 33.7 million with a value of $139.3 billion. Cheque use is in decline worldwide, but it is declining faster in Australia than many other countries. Between 2010 and 2014, cheque use in Australia declined by 42.8% with just over seven cheques written per person in 2014. In 2014, 166.6 million cheques were used in Australia, compared to 291.1 million in 2010.
Cheques and other payment instruments (such as travellers cheques and warrants) (also called CS1) are cleared and settled in accordance with the regulations and procedures set by APCS.
Cheques use MICR encoding containing the BSB and account number to identify the bank and account to debit, as well as other information to streamline the processing of cheques. In 2014, the cost of processing cheques was the highest of all modes of payments at $5 per transaction, compared to about $0.20 for direct debits. A recent innovation has been digital cheque imagining, which involves cheques being digitised to improve processing efficiencies. Images of cheques are now captured at branches and processing centres and exchanged electronically. This has ended the costly practice of physically transporting cheques around Australia and maintaining long-term storage and retrieval systems.
Direct entry (also called CS2) is used to transfer funds between Australian bank accounts. Clearing and settling is regulated by APCA as the Bulk Electronic Clearing System (BECS).
Direct entry uses BSB and account number to identify the bank and accounts to debit and credit. 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 wages and 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 (Electronic Fund Transfer Point of Sale) and ATM transactions (also called CS3) occur over the EFT network. Clearing and settling of EFTPOS and ATM transactions are regulated by the APCA as the Consumer Electronic Clearing System (CECS).
BPAY is a bill payment system used in Australia, which is regulated by the four major banks and not by APCA. As of January 2015, the BPAY payments system covered more than 156 participating Australian banks, credit unions and financial institutions. More than 45,000 business accept payments using BPAY and each month approximately 30 million bills are paid to the value of $24 billion.
High value payments
High value payments (also known as CS4) are regulated by APCA under the Regulations for High Value Clearing System Framework. The main high value payment systems in Australia are:
- Society for Worldwide Interbank Financial Telecommunication Payment Delivery System (SWIFT PDS)
- Clearing House Electronic Subregister System (CHESS): CHESS is an automated share transfer and settlement system developed by the Australian Securities Exchange. For a CHESS transaction, an interbank request is sent to RITS via SWIFT FIN, the service which sends financial information from one financial institution to another. When RITS notifies CHESS of settlement of the gross amount across ESAs, CHESS finalises the transaction by transferring share holdings at the participant level.
- Financial Transactions Recording and Clearance System (FINTRACS)
- Reserve Bank Information and Transfer System (RITS) is used by banks and other approved institutions to settle their payment obligations on a real-time gross settlement (RTGS) basis. Final and irrevocable settlement is achieved by the simultaneous crediting and debiting of Exchange Settlement Accounts (ESAs) held at the Reserve Bank.
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.
- Australian Competition and Consumer Commission
- Australian Securities Exchange
- Australian Payments Clearing Association
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
- Australian Cash Distribution and Exchange System Framework (CS5), Australian Payments Clearing Association Limited: accessed 26 July 2015
- Cheque Payment Transactions (Monthly volume and value)
- Bank for International Settlements, quoted in Australian Payments Clearing Association, Towards a digital economy, p.5
- Procedures for Australian Paper Clearing System Framework (CS1), Australian Payments Clearing Association Limited: accessed 26 July 2015
- Reserve Bank of Australia, quoted in Australian Payments Clearing Association, Towards a digital economy, p.6
- Procedures for Bulk Electronic Clearing System Framework (CS2), Australian Payments Clearing Association Limited: accessed 26 July 2015
- Regulations for Consumer Electronic Clearing System Framework (CS3), Australian Payments Clearing Association Limited: accessed 26 July 2015
- About BPAY, Overview. Retrieved January 2015
- Regulations for High Value Clearing System Framework (CS4), Australian Payments Clearing Association Limited: accessed 26 July 2015
- What is SWIFT-FIN message?
- About RITS
- See Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Commonwealth).