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Are financial services regulated in Australia?

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Overview of financial services regulation in Australia

Financial services in Australia are highly regulated to ensure the stability of the financial system and the protection of consumers. The regulatory framework is comprehensive and covers various aspects of the financial services industry, including retail clients, authorised deposit-taking institutions, settlement facilities, and apra-regulated entities. The regulatory regimes in place aim to manage financial risks and promote operational risk management within the industry. Licensing requirements are stringent, and a financial services license is required for companies engaging in a wide range of activities, including providing depository services, dealing in financial products, and offering payment facilities. The regulation also imposes obligations on senior executives and requires them to act in the best interests of their clients. The regulatory framework covers various areas such as consumer protection, misconduct, deceptive conduct, and misleading representations. Additionally, it addresses monetary policy, business disruptions, and market conduct. The prudential requirements set by authorities ensure the stability and strength of the financial system. Insurance companies and providers of financial advice are also subject to specific regulations, including the provision of personal advice to retail and wholesale clients. Overall, the financial services regulation in Australia is designed to maintain the integrity of the market and provide a safe environment for businesses and consumers.

Objectives of financial regulation

Financial regulation in Australia has several key objectives to ensure market integrity, protect consumers, maintain financial system stability, and regulate the conduct of financial institutions.

One of the primary objectives is to maintain market integrity by preventing fraudulent practices and promoting fair and transparent financial markets. This involves preventing market manipulation, insider trading, and other misconduct that could undermine investor confidence and market efficiency.

Another objective is consumer protection. Financial regulation aims to safeguard retail clients from deceptive conduct, misleading representations, and other unfair practices. This includes ensuring financial advice is appropriate and being provided by licensed professionals, as well as addressing issues related to misleading product disclosure.

Financial regulation also plays a crucial role in maintaining the stability of the financial system. Regulators such as the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA), and the Reserve Bank of Australia work together to monitor and assess risks, set prudential requirements, and enforce regulations to prevent excessive risk-taking and systemic disruptions.

ASIC is responsible for regulating the conduct of financial institutions and enforcing laws relating to investments, superannuation, and insurance. APRA, on the other hand, focuses on the prudential regulation of banks, insurance companies, and other financial institutions. The Reserve Bank of Australia sets monetary policy and oversees the stability of the financial system, including the regulation of payment systems and the supervision of banks.

By regulating the conduct of financial institutions and ensuring market integrity, financial regulation in Australia aims to protect consumers, maintain financial system stability, and foster trust in the financial services industry.

Regulatory framework for financial services in Australia

The regulatory framework for financial services in Australia is designed to maintain market integrity, protect consumers, and ensure the stability of the financial system. It involves a collaborative effort between regulatory bodies such as the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA), and the Reserve Bank of Australia (RBA). These regulators are responsible for overseeing the conduct of financial institutions, setting prudential requirements, enforcing regulations, and monitoring risks. ASIC focuses on regulating investments, superannuation, and insurance, while APRA focuses on the prudential regulation of banks and insurance companies. The RBA oversees the stability of the financial system, including the regulation of payment systems and the supervision of banks. Together, they work to prevent fraudulent practices, promote fair and transparent financial markets, safeguard retail clients from deceptive conduct, and address issues related to misleading product disclosure. By enforcing regulations and ensuring compliance, the regulatory framework aims to foster a reliable and trustworthy financial services industry in Australia.

Authorised deposit taking institutions (ADIs)

In Australia, authorised deposit-taking institutions (ADIs) form the core of the financial services industry. ADIs include banks, credit unions, and building societies, all of which are heavily regulated to ensure financial system stability and consumer protection.

The regulatory framework for ADIs is primarily governed by the Australian Prudential Regulation Authority (APRA). APRA's supervisory regime aims to ensure that ADIs maintain sound financial positions and operate with prudential requirements. This includes monitoring the capital adequacy, risk management practices, and governance structures of ADIs.

Within the regulatory regime, there are distinctions in the requirements for different forms of banks. This includes variations in licensing requirements, operational risk management, and ongoing prudential obligations. For instance, larger banks with higher risk-weighted assets are subject to additional requirements such as the counter-cyclical capital buffer, which ensures they have sufficient capital buffers during economic downturns.

ADIs are also subject to specific requirements regarding the scope of business or organization. This includes regulations on dealings in relation to settlement facilities, payment facilities, and depository services. Moreover, ADIs are obligated to provide timely and accurate financial disclosures to the APRA and the broader market.

APRA regulated entities

APRA, the Australian Prudential Regulation Authority, oversees the prudential regulation and supervision of several types of entities in Australia. These entities include authorized deposit-taking institutions (ADIs) such as banks, credit unions, and building societies, as well as private health, life, and general insurance companies, and the superannuation industry.

APRA's primary responsibility is to ensure the financial resilience and stability of these entities. It does this by setting prudential standards and guidelines that govern their governance practices, compliance processes, risk management, and capital adequacy.

For ADIs, APRA's role is to safeguard the stability of the financial system by monitoring their capital adequacy, risk management practices, and governance structures. APRA ensures that these institutions maintain sound financial positions and operate within the required prudential requirements. This is crucial to protect retail clients and maintain consumer confidence in the financial services industry.

In the insurance sector, APRA ensures that insurance companies have adequate financial resources to meet their obligations to policyholders. It monitors their solvency, capital levels, and risk management practices to minimize the risk of insolvency and protect policyholders.

Licensing requirements

Licensing requirements for financial institutions, specifically for obtaining an authorised deposit-taking institution (ADI) licence, are stringent in Australia. The Australian Prudential Regulation Authority (APRA) is responsible for overseeing this process and ensuring the stability and resilience of the financial system.

To obtain an ADI licence, financial institutions must meet certain criteria and comply with APRA's prudential standards and guidelines. These requirements include having a robust governance structure, sound risk management practices, adequate capital levels, and compliance processes.

Recently, APRA introduced updates regarding applications for a Restricted ADI Licence. This new licensing category is designed for entities looking to enter the banking industry with limited activities and a smaller customer base. It allows for a phased approach to obtaining an ADI licence, with a focus on sustainability and ensuring the safe return of deposits.

After obtaining a Restricted ADI Licence, financial institutions must meet certain milestones and demonstrate their ability to meet the prudential requirements specified by APRA. Once these milestones are met, the institution can progress to an unrestricted ADI licence and engage in a broader range of banking activities.

By implementing these licensing requirements and updates, APRA aims to promote stability and protect consumers within the financial services industry. Compliance with APRA's prudential standards ensures that authorised deposit-taking institutions operate in a safe and sound manner, safeguarding the financial system's integrity.

Financial system stability

Financial system stability is a crucial aspect of financial services regulation in Australia. The regulatory framework is designed to ensure the stability and resilience of the financial system, which is essential for the overall health of the economy. The Australian government, along with regulatory bodies such as APRA, plays a key role in monitoring and maintaining financial system stability. This involves oversight of financial institutions, including authorised deposit-taking institutions and APRA-regulated entities, to mitigate financial risks and ensure robust operational risk management practices. Additionally, licensing requirements and prudential regulation ensure that financial institutions have adequate capital levels and comply with necessary obligations in relation to their business models. By promoting financial system stability and effective risk management, the regulatory regimes in place aim to protect retail clients and promote consumer confidence in the financial services industry.

Core principles for soundness and integrity

The core principles for soundness and integrity in the regulation of financial services in Australia are designed to ensure the stability and integrity of the financial system. These principles are implemented through a robust regulatory framework that oversees the activities of financial institutions and protects the interests of retail clients.

One of the main aspects of financial regulation in Australia is the prudential requirements imposed on financial institutions. These requirements aim to enhance financial system stability by managing financial risks and promoting operational risk management. Key prudential requirements include the Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR). The NSFR measures the amount of stable funding relative to the liquidity profile of an institution's assets and liabilities, while the LCR focuses on the ability of an institution to withstand short-term liquidity shocks.

These prudential requirements play a significant role in safeguarding the financial system in Australia. By ensuring that financial institutions maintain adequate levels of stable funding and liquidity, they contribute to the resilience of the institutions and reduce the likelihood of business disruptions. Additionally, these requirements promote responsible lending practices and mitigate the potential for excessive risk-taking.

Overall, the core principles for soundness and integrity in financial regulation in Australia, coupled with prudential requirements such as the NSFR and LCR, enhance the stability and integrity of the financial system. They provide a comprehensive framework for effective risk management, protect consumers, and foster confidence in the financial services industry.

Consumer protection

Consumer protection in the financial services industry in Australia is ensured through various measures, including the National Consumer Credit Protection Act 2009 (NCCPA) and the National Credit Code. These laws outline the obligations and rights of consumers when engaging in credit activities.

Under the NCCPA, financial institutions and credit providers are required to provide clear and accurate information to consumers, including details about fees, charges, interest rates, and repayment terms. Lenders must also undertake responsible lending assessments to ensure that credit is provided to consumers who can afford it.

The National Credit Code regulates how lenders should conduct themselves during the credit application process and sets out various consumer protection measures. This includes obligations for lenders to assess the suitability of credit products for consumers, disclose any fees or charges, and provide important documents such as credit contracts and statements of account.

The ongoing public debate and media scrutiny surrounding financial product design and marketing highlight the importance of ensuring that financial products are suitable for consumers. Regulatory developments in this area have aimed to increase transparency and accountability, and focus on providing consumers with better access to responsible and suitable financial products.

Overall, these consumer protection measures play a crucial role in safeguarding the rights and interests of consumers in the financial services industry in Australia.

Business models in the financial services industry

The financial services industry encompasses a wide range of businesses and institutions that provide various financial products and services to individuals, businesses, and organizations. These businesses operate under different business models, which determine the way they generate revenue and deliver their services. The banking sector, for example, includes major banks, domestic banks, and authorized deposit-taking institutions (ADIs), each with their own unique business models. Insurance companies, on the other hand, offer insurance products and services based on different risk assessment and pricing models. Some financial institutions focus on providing financial advice, both personal and wholesale, while others specialize in offering payment facilities or dealing in securities. Regardless of the specific business model, all financial services providers in Australia are subject to regulatory requirements and obligations to ensure the financial system stability and consumer protection.

Risks involved in the financial services industry

The financial services industry is a dynamic and complex sector that plays a crucial role in the global economy. It encompasses a wide range of activities, including banking, insurance, asset management, and securities trading. While the industry offers numerous opportunities for individuals and businesses to grow their wealth and manage their finances, it also carries inherent risks that need to be carefully managed.

One of the primary risks in the financial services industry is the volatility of financial markets. Fluctuations in interest rates, exchange rates, and asset prices can have a significant impact on investments and portfolios. Market risk is especially prevalent in trading activities, where financial institutions face the possibility of incurring losses due to adverse market movements.

Another key risk is credit risk, which arises from the possibility of borrowers defaulting on their loan obligations. Financial institutions often lend money to individuals and businesses, and if they are unable to recover those loans, it can have a detrimental effect on their financial health. To mitigate this risk, institutions employ stringent credit assessment processes and set up provisions to cover potential loan losses.

Operational risk is yet another concern in the financial services industry. It refers to the risks of internal processes, systems, and people failing to function as intended. This could be due to technological glitches, fraud, human error, or external events such as natural disasters. Operational risk can disrupt business operations, lead to financial losses, and damage the reputation of the institution. Therefore, it is essential for financial service providers to have robust operational risk management frameworks in place.

Compliance and regulatory risk are critical factors that financial institutions must contend with. The financial services industry operates in a highly regulated environment, with numerous laws and regulations governing its activities. Failure to comply with these requirements can result in regulatory enforcement actions, legal penalties, reputational damage, and loss of customer trust. Institutions must stay up-to-date with evolving regulations, invest in compliance infrastructure, and implement effective internal controls to mitigate compliance and regulatory risks.

Lastly, the reputation and conduct risk is an intangible but significant risk in the financial services industry. A single instance of misconduct or unethical behavior can have far-reaching consequences, leading to reputational damage and loss of business. It is vital for financial institutions to promote a culture of integrity, transparency, and ethical behavior among their employees to mitigate reputational and conduct risks.

Operational risk management and compliance obligations

Operational risk management and compliance obligations are two crucial aspects of the financial services industry that institutions must prioritize to ensure smooth operations and regulatory compliance.

Operational risk refers to the potential for disruption or loss caused by failures in internal processes, systems, or human error. Financial institutions must have robust operational risk management frameworks in place to identify, assess, and mitigate these risks effectively. This includes implementing adequate internal controls, conducting regular risk assessments, and investing in technology and infrastructure to minimize operational vulnerabilities.

Proactive operational risk management helps institutions minimize the likelihood and impact of disruptions, ensuring the continuity of their services and safeguarding the interests of their clients. By identifying and addressing potential weaknesses in their operations, institutions can reduce the likelihood of financial losses, reputational damage, and customer dissatisfaction.

Compliance obligations, on the other hand, refer to the legal and regulatory requirements that financial institutions must adhere to. The financial services industry operates in a highly regulated environment, and institutions are subject to various laws and regulations aimed at protecting consumers, maintaining market integrity, and ensuring financial stability.

Institutions must stay ahead of evolving regulatory developments and implement effective compliance programs to meet their obligations. This includes monitoring and assessing regulatory changes, developing and implementing policies and procedures, conducting regular compliance audits, and training employees on compliance requirements.

Non-compliance with regulatory obligations can have severe consequences. Financial institutions may face regulatory enforcement actions, substantial fines, reputational damage, and loss of customer trust. Therefore, prioritizing compliance is essential for financial service providers to maintain their license to operate and preserve the trust and confidence of their clients.

Operational risk management and compliance obligations go hand in hand, as effective operational risk management is vital for meeting compliance requirements. By identifying and mitigating operational risks, institutions can ensure that they are operating within the guidelines of relevant regulations and mitigating the potential for non-compliance.

Moreover, an integrated approach to operational risk management and compliance allows institutions to streamline their processes, optimize resource allocation, and improve overall efficiency. It also demonstrates a commitment to good governance and responsible business practices, enhancing their reputation and customer trust.

Licence application process for financial institutions

The licence application process is a crucial step for financial institutions seeking to operate within the highly regulated financial services industry in Australia. Obtaining the necessary licence is not only a legal requirement but also a testament to an institution's commitment to operating in a responsible and compliant manner.

The licence application process is overseen by the relevant regulatory authority, which in Australia is generally the Australian Securities and Investments Commission (ASIC). The application process involves a comprehensive assessment of the prospective institution's suitability to provide financial services.

To initiate the process, financial institutions must submit a detailed application that provides thorough information about their business model, organizational structure, key personnel, risk management strategies, and compliance procedures. The application also requires providing evidence of meeting specific requirements, such as having appropriate financial resources, qualified personnel, and robust internal systems.

During the assessment, regulatory authorities consider factors such as the institution's financial stability, operational capabilities, and adherence to market integrity and consumer protection obligations. The process also evaluates the institution's capacity to manage risks effectively and provide quality services while maintaining compliance with relevant legislation and regulations.

Once the application is submitted, regulatory authorities may request additional information or clarification as part of the evaluation process. This may involve engaging in discussions, conducting site visits, or seeking additional documentation.

The length of the application process can vary depending on the complexity of the business model and the responsiveness of the applicant. It is essential for financial institutions to thoroughly prepare their application and promptly address any queries or requests from the regulatory authorities to ensure a smooth and expedited evaluation process.

Upon successful completion of the evaluation and satisfaction of all regulatory requirements, financial institutions will be granted their licence to operate in the Australian financial services industry. It is important to note that obtaining a licence is not a one-time event. Licensed institutions are subject to ongoing monitoring and regulation by the relevant authorities to ensure continued compliance with regulatory obligations.

In conclusion, the licence application process for financial institutions in Australia is a vital step in establishing themselves as trustworthy and compliant entities within the highly regulated financial services industry. By meeting regulatory requirements and demonstrating a commitment to operational excellence and consumer protection, institutions can obtain and maintain their licence to operate, providing confidence to both clients and regulatory authorities.

Australian companies operating a depository service

Australian companies operating a depository service play a crucial role in the country's financial services industry. A depository service refers to the safekeeping and administration of financial assets, providing a secure platform for individuals, companies, and institutional investors to store and transact securities.

Depository services in Australia are regulated by the Australian Securities and Investments Commission (ASIC) under the Financial Services Licensing regime. Companies offering depository services must obtain a financial services license from ASIC to ensure compliance with regulatory requirements and protect the interests of clients.

To obtain a license, Australian companies operating a depository service must go through a comprehensive application process. This involves providing detailed information about their business model, operational procedures, risk management strategies, and compliance processes. Companies must also demonstrate their ability to meet specific requirements related to financial resources, personnel expertise, and robust internal systems.

Regulatory authorities evaluate a company's suitability to offer a depository service based on factors such as financial stability, operational capabilities, and adherence to market integrity and consumer protection obligations. They also assess the company's ability to effectively manage risks associated with handling and safeguarding financial assets.

Once the license application is submitted, regulatory authorities may request additional information or clarification as part of the evaluation process. These may include discussions, site visits, or the submission of additional documentation. The length of this evaluation process may vary depending on the complexity of the company's operations.

Successful completion of the evaluation and fulfillment of all regulatory requirements result in the granting of a license to operate a depository service in Australia. Once licensed, companies must adhere to ongoing monitoring and regulation by ASIC to ensure continuous compliance with regulatory obligations.

Australian companies operating a depository service play a vital role in supporting the functioning of financial markets and facilitating efficient and secure transactions. Their services ensure that market participants can access and trade financial instruments with confidence, while regulatory oversight ensures that client assets are protected and industry standards are upheld.

By operating within the framework of regulatory requirements, Australian companies operating a depository service contribute to the integrity and stability of the financial system and provide investors and market participants with a reliable and trustworthy platform for managing their financial assets.

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