TMeffect Pty Limited and Australian Prudential Regulation Authority
[2017] AATA 921
•22 June 2017
TMeffect Pty Limited and Australian Prudential Regulation Authority [2017] AATA 921 (22 June 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2016/3643
Re:TMeffect Pty Limited
APPLICANT
AndAustralian Prudential Regulation Authority
RESPONDENT
DECISION
Tribunal:Deputy President S E Frost
Date:22 June 2017
Place:Sydney
The decision under review is set aside. Instead the Tribunal consents to the applicant’s assumption and use of the restricted word ‘bank’ in the proposed name ‘Bankrolla’.
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Deputy President S E Frost
CATCHWORDS
CORPORATIONS – prudential regulation – change of applicant’s name to include restricted word in relation to a financial business – whether name including the word ‘bank’ will undermine objective of protecting the public from confusion – whether audience to applicant’s business is likely to mistake the applicant for a bank – decision set aside and substituted
LEGISLATION
Banking Act 1959 (Cth), ss 5, 9, 51A, 51B, 51C, 66
Corporations Act 2001 (Cth), Pt 6D.3A
CASES
Annand & Thompson Pty Ltd v Trade Practices Commission [1979] FCA 36; (1979) 40 FLR 165
SECONDARY MATERIALS
APRA Guidelines: Implementation of section 66 of the Banking Act 1959
C Moore, ‘Equity Crowdfunding in Australia: How Far Have We Come and Where to Next?’ (2017) 35 Company and Securities Law Journal 102
REASONS FOR DECISION
Deputy President S E Frost
22 June 2017
INTRODUCTION
The applicant wants to change its name to Bankrolla Pty Limited and carry on business under that name as a crowd-sourced funding intermediary.
It needs the consent of the respondent (APRA) to do so. That is because, in the absence of consent from APRA, it is an offence to assume or use the word ‘bank’ in relation to a financial business: subsections 66(1) and (4) of the Banking Act 1959 (Cth).
The applicant applied to APRA for consent but a delegate refused it. The applicant asked APRA to reconsider the decision but the reconsideration confirmed the original decision. The Tribunal is now asked to review the decision.
JURISDICTION
APRA’s decision is a decision to which Part VI of the Banking Act applies: subsection 66(2C)(a). That makes it a reviewable decision of APRA: s 51A. Section 51B entitles a person affected by a reviewable decision of APRA, and who is dissatisfied with that decision, to request APRA to reconsider it, and requires APRA in that circumstance to reconsider the decision and either confirm or revoke it, or vary it in such manner as APRA thinks fit: subsections 51B(1) and (3).
Section 51C(1) provides that applications may be made to the Tribunal for review of ‘decisions of APRA that have been confirmed or varied under subsection 51B(3)’. Accordingly, the decision under review in the Tribunal is not the reconsideration decision but the original decision – that is the decision that has been confirmed under subsection 51B(3). APRA, quite properly, did not take the technical point that, in the applicant’s application to the Tribunal, the decision under review was identified as the reconsideration decision. In any event it is clear that what the applicant wants is for the Tribunal to review the ‘Refusal of consent to use restricted word or expression’: Exhibit 1, T1-2. That is what I will do.
THE SECTION 66 RESTRICTION
Subject to some exceptions that are not relevant to this case, it is an offence under s 66(1) to assume or use a restricted word or expression in relation to a financial business unless APRA has consented to the assumption or use of the word or expression.
Section 66(4) provides:
·the words bank, banker and banking are restricted words, as are any other word or expression of like import to any of them;
·assuming or using a word or expression includes assuming or using it as part of another word or expression, or in combination with other words, letters or other symbols.
The purpose of the restriction is obviously the protection of the public. If an entity calls itself a bank then consumers are likely to think it is a bank. And so the assumption or use of the specified words and expressions is generally confined to those entities where those words or expressions are not likely to confuse. A typical example of an entity likely to be permitted to assume or use the restricted words or expressions is an “authorised deposit-taking institution”, or ADI – a body corporate authorised to carry on a banking business: definition, s 5, and s 9(3) of the Banking Act.
The applicant is not an ADI and it does not want to become one. But it accepts, and I find, that its proposed activity of operating as a crowd-sourced funding intermediary will have it carrying on a financial business. APRA’s consent to the name change is therefore required.
APRA’S DECISION-MAKING PROCESS
Both at the original decision stage, and on reconsideration, the relevant APRA delegates explained the reasons for their decisions. Both sets of reasons note that the question whether APRA should grant consent ‘will have to be made on the facts of the particular case’.[1] In each case the reasons refer to a document published by APRA and identified as APRA Guidelines: Implementation of section 66 of the Banking Act 1959, which I will refer to as the Guideline.
[1] Exhibit 1, T20-476 at [13]; T23-513 at [20].
Both sets of reasons quote part of paragraph 3, and all of paragraph 48 of the Guideline; I reproduce the quoted material below:
[3]… APRA is of the view that the assumption or use of restricted words by non-ADIs is inherently confusing and likely to mislead potential customers. Therefore, in accordance with the purpose of the restriction, APRA is unlikely to grant consent to financial businesses that are not regulated in Australia or overseas as ADIs except in exceptional circumstances.
…
[48]Applications made by financial businesses that are not regulated as ADIs in Australia or overseas may be made and will be considered on their merits. However, APRA considers that the use of a restricted word (or words) in relation to a financial business should be limited to ADIs and like-regulated institutions, unless there are exceptional circumstances. The onus is on the applicant to demonstrate that there are exceptional circumstances. Consent would only be granted if APRA is satisfied that to grant consent would not defeat the purpose of the restriction, namely the protection of the public.
One commonly sees guidelines of this nature in government agencies. They are particularly useful where decision-making has been delegated by, say, an agency head to other officers within the agency hierarchy. Generally the purpose is to guide delegates to exercise their powers in a reasonably consistent way, to minimise the risk of capricious or idiosyncratic outcomes.
But guidelines of this kind must be drafted carefully, so as not to deflect the delegate from the proper exercise of the delegated power. They must not have the effect of restating the question for determination, in a way that is inconsistent with the statutory provision. And they should not try to mandate, rather than suggest, the considerations to be taken into account when the statutory provision itself, including any relevant context, leaves the decision-maker’s discretion at large. Instead, they must leave the delegate to exercise the discretion, by reference to the particular considerations identified by the individual decision-maker as part of the decision-making function.
Here the Guideline may effectively prevent the delegate from exercising the discretion in a proper way. That is because of the statement in paragraph 3 that the assumption or use of restricted words by non-ADIs is ‘inherently confusing and likely to mislead potential customers’. In other words, confusion is a given. It is not left to the delegate to decide whether the assumption or use of restricted words in the particular case is confusing; the Guideline has already explicitly decided that question. Then, according to the Guideline, the confusion – which has already been found to exist – can only be negated if exceptional circumstances exist. In this way the Guideline has re-cast the statutory question from (implicitly) ‘Would the public be protected if the assumption or use of the restricted word were permitted?’ to ‘Since the assumption or use of the restricted word will give rise to confusion, are there exceptional circumstances to warrant consent?’ The Guideline, in my view, provides an unsafe guide to the proper exercise of the discretion.
SHOULD CONSENT BE GIVEN?
I would need little persuasion to conclude that if a non-ADI were permitted to call itself The Bank of X, or The X Bank, or X Banking Corporation, then the public could very easily be confused into thinking that the entity was a bank. I would not be likely to grant consent in those circumstances. I doubt that any reasonable decision-maker would.
But suppose an entity, carrying on a financial business, and perhaps with its offices located just across the river from Flinders Street Station, wanted to call itself Southbank Financial Services. It would need consent from APRA: s 66(4)(b)(i) of the Banking Act. But it is not hard to see that the question of consent would be approached in an entirely different way to the examples in the preceding paragraph. Context is important. In context, the use of the word ‘bank’ in the word ‘Southbank’ does not convey the sense of a bank as it would ordinarily be understood in a financial sector environment. The same might be said of other examples of compound words, perhaps not based on location, such as ‘Embankment’, ‘Bankruptcy’, or the even more pointed ‘Non-bank’ or ‘Non-banking’. The extent to which these compounds are objectionable, if at all, will likely depend on a range of factors. But it is unlikely that any of these compounds could properly be regarded as inherently confusing.
Turning now to the case at hand, the word ‘bankroll’, as a verb, has an accepted common meaning: the definition provided by the Macquarie Online Dictionary is ‘to provide funds for; act as backer for’. That meaning has a particular resonance in the industry sector the applicant wants to operate in, which is the crowd-sourced funding sector.
Mr Pinter, the director of the applicant, who represented the applicant in the Tribunal hearing, provided the following description of the applicant’s proposed activities in a letter dated 19 February 2016 to APRA (T17-457):
The nature of the service is to match investors (both wholesale & retail) and company issuers via our intermediation service, in accordance with the regulations and licence conditions provided under the Bill[2] …
Investors will be able to access a website, review the CSF[3] offer document and subscribe for ordinary shares in eligible CSF companies.
Eligible CSF companies will apply to Bankrolla for intermediation services, agreeing to our gatekeeper processes, checks and reviews. When those conditions have been met, Bankrolla will act as intermediary to the offer and acceptance of shares, receipting money (via Westpac escrow), applying cooling off, caps and other conditions. The successful conclusion of which will result in funding for the issuer, share allotment to the investors and a small commission for Bankrolla.
[2] The Bill referred to by Mr Pinter is the Corporations Amendment (Crowd-sourced Funding) Bill (the ‘Amending Bill’, which had a number of iterations in 2015, 2016 and 2017).
[3] ‘CSF’ is short for ‘crowd-sourced funding’: amendment to s 9 of the Corporations Act 2001 by clause 1, Schedule 1 to the Amending Bill.
The business will undoubtedly involve the receipt and payment of money. That is something that banks do. But the applicant proposes to undertake those activities only under the newly created, well-defined, and heavily controlled crowd-sourced funding (CSF) regime in the new Part 6D.3A of the Corporations Act 2001. That tells me that people who are likely to engage with the applicant will be people who want to take advantage of that regime; even the most ill-informed of them are likely to see the applicant as a CSF intermediary (as it will hold itself out in the marketplace) rather than as a bank.
Ms Higgins, counsel for APRA, took me to an article, authored by Catie Moore, and entitled Equity Crowdfunding in Australia: How Far Have We Come and Where to Next? (2017) 35 C&SLJ 102.[4] Highlighted portions of that article include the following (footnotes omitted):[5]
[4] The Company and Securities Law Journal, published by Thomson Reuters.
[5] Exhibit 1, ST4
Equity crowdfunding is an emerging form of corporate fundraising in international capital markets and has a regulated presence in over 15 jurisdictions. Primarily used by entrepreneurs, start-ups and small businesses, crowdfunding offers an alternative to traditional financing options including personal loans, corporate debt facilities and traditional capital markets. Crowdfunding allows businesses to engage with a large pool of investors, known as the crowd, in an online marketplace. … Crowdfunding tends to attract businesses, ventures and products that are novel, innovative and – more often than traditional sources of financing – risky.
…
Equity crowdfunding is simply one form of financing in the context of a broader crowdfunding phenomenon. It involves using the internet to offer equity interests in a small business or start-up venture to a large number of potential investors (the crowd) in exchange for a contribution of funds. …
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… [E]quity crowdfunding also endorses competition … This is because a large proportion of money raised through equity crowdfunding is from retail investors who do not generally engage with traditional capital markets. …
…
The transaction structure is itself risky and requires close regulation of all three actors involved. … Investors are arguably the most vulnerable participant at all stages of the transaction, because crowdfunding is easily accessible and open to any individual with internet access. It therefore has the potential to attract a number of unsophisticated retail investors who may be easily manipulated into investing into a project that has little prospect of success. …
Loss of investment due to the potential risk associated with a crowdfunded venture is a crucial issue facing investors in the crowdfunding space. Correspondingly, the protection of retail investors is one of the primary priorities of corporate policymakers.
…
Start-up businesses are notoriously risky ventures with high rates of failure. This is a significant issue for mum and dad investors who may be largely unaware of the risks involved in the transaction due to the lack of financial acumen. …
With respect, I accept the accuracy of those observations. But what they point to is the inherent riskiness of equity crowdfunding – irrespective of the name of the crowdfunding intermediary. Yes, it may be that retail investors with little financial acumen will be lured into the crowdfunding space and will lose money. That is a risk created by the removal of the regulatory barriers to crowd-sourced funding.[6] It exists by the very nature of the activity.
[6] Explanatory Memorandum to the 2016 Bill, Summary of regulation impact statement, Exhibit 1, ST3-744.
It is in light of those indisputable facts that the current application must be determined.
The essential question for determination is whether the objective of protecting the public would be undermined by the granting of consent to the assumption and use of the name ‘Bankrolla’. In considering that question I must obviously put aside the issue of the inherent riskiness of equity crowdfunding – because that inherent riskiness remains no matter what the applicant chooses to call itself. The inherent riskiness of the activity is plainly an irrelevant consideration for the purposes of the essential question I have identified.
Instead the focus must be on whether the public might be confused into thinking the applicant is actually a bank, with the same level of capital adequacy, depositor-priority and other prudential requirements that apply to ADIs: Guideline, at [3].
During the hearing Ms Higgins suggested that the relevant segment of the public whose interests are most likely to be affected by granting consent to the change of name – she referred to it as the ‘likely audience’ – is the segment of the public wishing to engage in crowd-sourced funding activities. Within that likely audience are both the educated and the uneducated, both the sophisticated and the unsophisticated. Some, perhaps many, will be unsophisticated retail investors, the ‘mums and dads’ referred to in Ms Moore’s article referred to above. But Ms Higgins noted, correctly in my view, that it is impossible to protect the ‘hopelessly stupid’ – which I took to be a colourful variant of the expression ‘quite unusually stupid’, used by Franki J in a trade practices context in Annand & Thompson Pty Ltd v Trade Practices Commission [1979] FCA 36; (1979) 40 FLR 165 at 176.
Making proper allowance for the wide range of people who may end up being within the ‘likely audience’, I am comfortably satisfied that there is little risk that the public will be confused into thinking the applicant is a bank if it is permitted to use the name ‘Bankrolla’. The word ‘bankroller’ is not suggestive of banking activity, its somewhat playful adaptation ‘bankrolla’ even less so. Only the quite unusually stupid would think a business with that name satisfies the same level of capital adequacy, depositor-priority and other prudential requirements that apply to ADIs.
DECISION
The decision under review is set aside. Instead the Tribunal consents to the applicant’s assumption and use of the restricted word ‘bank’ in the proposed name ‘Bankrolla’.
I certify that the preceding 27 (twenty-seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost
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Associate
Dated: 22 June 2017
Date of hearing: 3 April 2017 Advocate for the Applicant: Mr M Pinter Counsel for the Respondent: Ms R C A Higgins
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