Financial Institutions
A financial institution is a company engaged in the business of dealing with monetary transactions and advice.
They are heavily regulated because they influence the supply of money and credit within a country, which can impact the country’s economy and financial stability.
Regulated/governed by the:
Australian Prudential Regulation Authority (APRA) - responsible for financial system stability, enforces the Banking Act and Financial Sector Act.
Australian Securities and Investment Commission (ASIC) - enforces the Corporations Act.
Banks
Financial institutions that are licensed to accept deposits from the public, and are able use those funds to provide loans and other financial services.
Primary role is to accept deposits and use this money to offer loans
They make money through charging interest on borrowed loans from customers.
They are licensed, Authorised Deposit-taking Institutions (ADIs)
Apply for license through the Australian Prudential Regulation Authority (APRA)
The Financial Claims Scheme (FCS) is a guarantee from the Aus government to depositors of up to $250,000.
They loan money based on a strict lending criterion to reduce the risk. Business is required to complete an application form to enable banks to assess the risk, and their level of risk will determine the interest rate offered.
Business must make monthly repayments consisting of both interest and principle payment.
Finance Companies
Non-banking financial institutions that specialise in various forms of finance and advice.
Finance companies include:
Investment banks
Insurance companies
Leasing companies
Financial advisors
They are regulated by the Australian Prudential Regulation Authority, enforcing the Financial Sector Act.
They are not under the same level of regulation as banks so are able to take more risks in their lending, and therefore charge higher interest rates than banks.
Finance companies offer:
Secured and unsecured loans
Leasing and Hire Purchase