ADI vs Non-ADI Lenders: What Private and Commercial Financiers Should Know

Introduction

Under Section 9 of the Banking Act 1959 (Cth) (‘Banking Act‘), only entities authorised by APRA may operate as authorised deposit-taking institutions, accepting deposits and making loans. Non-ADI lenders — often called non-bank lenders — provide credit without accepting deposits and are primarily regulated by ASIC.

This legal separation carries genuine consequences for private lenders and commercial financiers, from Financial Claims Scheme coverage to product flexibility. This article explains what divides ADIs from non-ADI lenders and why non-bank lending does not mean unregulated.

Interactive Tool: Check Your Status as an ADI or Non-Bank Lender

The Legal Basis for the ADI Framework Under the Banking Act

Section 9 of the Banking Act & APRA Authorisation

A body corporate seeking to carry on banking business in Australia must first obtain authorisation from the Australian Prudential Regulation Authority (APRA) under Section 9 of the Banking Act. Banking business is ordinarily understood as the mixture of deposit taking and lending. Without this authorisation, an entity cannot lawfully accept deposits from the public.

Once APRA grants the authority, the body corporate becomes an authorised deposit-taking institution (ADI) and is subject to APRA’s prudential requirements and ongoing supervision. This regulatory oversight extends to:

• capital adequacy;
• liquidity;
• risk management; and
• governance standards.

The legal foundation in Section 9 of the Banking Act is what ultimately separates an ADI from a non-ADI lender.

The Types of ADIs & How They Differ

Banks represent the most recognised category of ADIs. They include the major banks alongside neobanks, challenger banks, and digital banks, some of which operate entirely online without physical branches. Under the APRA glossary, banks are ADIs that assume or use the term “bank” in relation to their banking business.

Credit unions and building societies are customer or member-owned ADIs that typically offer similar products to banks but with different cost structures.

Foreign banks operate in Australia through:

• locally incorporated subsidiaries licensed by APRA, which can serve both retail and wholesale clients; or
• Australian branches regulated by the home regulator but restricted to wholesale clients only.

What Defines a Non-ADI Lender & Why It Does Not Mean Unregulated

The Three Main Categories of Non-ADI Lenders

Non-ADI lenders are entities that provide finance without accepting deposits, placing them outside the definition of banking business. Three distinct categories make up this sector:

• Registered financial corporations (RFCs) include finance companies and money market corporations;
• Securitisers originate loans and package them into asset-backed securities sold to investors rather than funding through deposits; and
• Managed investment funds pool investor contributions and direct that capital toward lending activities.

As of late 2016, the total assets of non-ADI lenders were around $450 billion, representing approximately 5–6 per cent of total financial system assets.

How ASIC & the National Credit Code Regulate Non-ADI Lending

Non-ADI lenders operate under a comprehensive regulatory framework administered primarily by the Australian Securities and Investments Commission (ASIC). ASIC oversees conduct, disclosure, and accountability obligations across the sector.

Key licensing requirements include:

• An Australian Financial Services (AFS) Licence granted by ASIC under the Corporations Act 2001 (Cth) (‘Corporations Act‘); and
• A Credit Licence under the National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act‘) for those engaged in consumer credit.

Credit licensees must abide by responsible lending rules, including an obligation to assess that a credit contract is “not unsuitable” for the customer.

Core Regulatory & Practical Differences Between ADIs & Non-ADIs

Deposit-Taking Powers & the Financial Claims Scheme

As established above, only an ADI may accept deposits from the public and offer products such as term deposits and savings accounts. In contrast, non-ADI lenders cannot accept deposits at all — a non-bank lender is restricted to providing loans and other credit products without holding an Australian banking licence.

The Financial Claims Scheme applies differently across the two categories:

• ADI deposits: protected under the Australian Government-backed Financial Claims Scheme up to $250,000 per person per ADI. Where an ADI operates under multiple brands, deposits held across those brands are counted together for FCS purposes.
• Non-ADI arrangements: these lenders cannot offer deposit products at all. In addition, funds held in offset accounts linked to non-bank lending arrangements may also fall outside the Financial Claims Scheme.

Funding Models & Capital Levels

Funding models differ significantly between the two categories:

• ADIs: fund their lending through retail deposits alongside wholesale markets.
• Non-ADI securitisers: rely on warehouse facilities provided by banks during loan origination, and the securitisation market once loans are packaged and sold to investors.
• Non-securitisers: fund themselves through loans and equity from specialist lenders, high net worth individuals, and family offices.

Capital levels also differ across the non-bank lending sector:

• Securitisers: such as mortgage and auto lenders, hold lower capital because most loans are sold to investors and do not remain on their balance sheet.
• Non-securitisers: including commercial property lenders, maintain higher capital levels, reflecting the greater risk of their lending activities.

APRA’s Reserve Rulemaking Powers Over Non-ADI Lenders

The 2017 amendments to the Banking Act introduced a reserve power for APRA under Part IIB to make rules applying to non-ADI lenders when their provision of finance is materially contributing to risks of instability in the Australian financial system. Before exercising this power, APRA would consider factors including:

• the size of the non-ADI sector;
• the nature of lending activities; and
• the impact of non-ADI lending practices on ADIs.

The rules are scalable, time-limited, and targeted only at the specific lending activity causing the identified risk. This power is reserved for exceptional circumstances, and APRA has stated it would be unlikely to need to make a rule given the sector’s size and nature.

Practical Implications for Private Lenders & Commercial Financiers

Loan Structuring & Offset Account Arrangements

Non-ADI lenders can offer offset accounts only by partnering with an ADI to provide the linked account. Money held in such offset facilities may not be protected by the Financial Claims Scheme as deposits held with an ADI are, and private lenders structuring loan products should disclose this distinction to borrowers.

Non-bank lenders typically offer several types of home loans, including:

• basic loans;
• standard full-feature loans with redraw facilities; and
• split rate loans.

Their interest rates are generally higher than those offered by banks, reflecting non-bank lending to riskier borrowers on average. This pricing gap allows private credit funds to compete with ADIs in specific market segments.

Regulatory Compliance & APRA’s Indirect Influence

Beyond the AFS Licence and Credit Licence requirements already outlined, non-ADI lenders face an additional obligation: RFCs with debt assets exceeding $50 million must register with APRA under the Financial Sector (Collection of Data) Act 2001 (Cth) (‘Financial Sector (Collection of Data) Act‘), and if you are unsure how this applies to your operations, it is wise to speak with private lender and non-bank finance lawyers.

APRA exercises indirect influence over non-bank lenders through its regulation of ADIs that provide warehouse facilities. Prudential Standard APS 120 (‘APS 120‘) on securitisation and related capital requirements incentivise banks to impose lending standards on loans originated through their warehouse facilities. This indirect mechanism shapes credit quality across the non-bank lending sector while supporting broader financial stability.

Conclusion

The legal separation between ADIs and non-ADI lenders is anchored in deposit-taking authority under Section 9 of the Banking Act, with ADIs supervised by APRA and non-ADI lenders regulated through ASIC’s licensing and conduct framework. Private lenders and commercial financiers benefit from understanding the regulatory consequences attaching to each status, including Financial Claims Scheme coverage, offset account limitations, and the operational flexibility the non-ADI model provides within a regulated environment.

GRM Law’s private lender and non-bank finance lawyers provide tailored advice on non-bank lending structures and regulatory compliance for private lenders and commercial financiers across Queensland and nationally. Reach out today to discuss how your lending operations fit within Australia’s dual regulatory framework.

Frequently Asked Questions

Disclaimer: This is general information only and is not legal advice. For advice on your circumstances, contact GRM LAW.