Explanatory Memorandum
(Circulated by authority of the Minister for Financial Services & Regulation,the Honourable Joe Hockey, MP)Regulation impact statement
3.1 The Office of Regulation Review (ORR) has advised that one of the amendments to the Banking Act 1959 (Banking Act) requires a Regulation Impact Statement (RIS). The requested RIS is included in this Explanatory Memorandum. In respect of all other amendments included in this Bill, the ORR has advised that they do not require a RIS as the amendments are of a minor or government machinery nature and do not substantially alter existing arrangements.
RIS - The proposed new section 65 of the Banking Act 1959
3.2 A proposed amendment, to be contained in the Financial Sector Legislation Amendment Bill (No.1) 2000, will provide the Treasurer (or delegate [F1] ) with the power to impose conditions on his or her consent under section 63 of the Banking Act. This section requires an ADI (other than a foreign ADI) to gain the Treasurer's written consent prior to: entering into the arrangement or agreement for the sale or disposal of its business by amalgamation or otherwise; carrying on of business in partnership with another ADI; and/or effecting a reconstruction. A section 63 application is not a common event. On average, approximately one application is received per year.
3.3 Under the current legislation, the Treasurer (or delegate) cannot attach conditions to his or her consent. This is not consistent with other provisions in the Banking Act (for example, section 9) and similar provisions in other legislation such as the Financial Sector (Shareholdings) Act 1998 (FSSA) and the Financial Sector (Transfers of Business) Act 1999 (TOB Act).
Item 1 What is the problem being addressed?
3.4 As mentioned, section 63 is unlike other powers in the Banking Act (and other similar legislation), in that approvals cannot be granted subject to conditions. This seriously impedes the strength of this power in practice. The absence of any power to set and enforce conditions reduces the flexibility of the Treasurer (or delegate) in deciding whether to grant approval under section 63. This may hinder the applicant receiving a favourable outcome.
3.5 This became a significant problem last year APRA received informal advances from the sector regarding possible financial sector mergers. Due to Y2K concerns, APRA indicated in its public policy statements that it would require any mergers undertaken in the latter half of 1999 to only proceed if the parties to the merger undertook not to integrate computer systems until after 1 January 2000. While APRA made these statements it did not have the ability, in the absence of a conditions power under section 63, to enforce these requirements once the Treasurer had approved a merger. This could have proved very awkward.
Item 2 Why is government action needed to correct the problem?
3.6 The ability to grant approvals subject to conditions is an important power, since it would allow the Treasurer (or delegate) to maintain some control over the prudential impact of an event that would trigger a section 63 approval. As the legislation presently stands, it would not be possible for the Treasurer (or delegate) to enforce any undertaking made by an institution prior to consent being granted - effectively an undertaking could be ignored.
Item 1 What are the objectives of government action?
3.7 The object of these regulatory changes is to provide the Treasurer (or delegate) first with the ability to attach conditions to his or her consent under section 63 of the Banking Act and secondly, a mechanism to enforce these conditions should they be breached.
Item 2 Is there a regulation/policy currently in place? Who administers it?
3.8 Presently no other regulation or policy instrument exists that could specifically address this issue. The FSSA requires that a person may apply to the Treasurer for approval to hold a stake in a particular financial sector company of more than 15 per cent. [F2] Some FSSA applications also require the Treasurer's consent under section 63 of the Banking Act. Consequently, the proposals caught under the FSSA may have an indirect set of conditions attached to their section 63 approval. However, there are two problems associated with imposing conditions indirectly through the FSSA: not all section 63 proposals require a FSSA application; and under the FSSA the conditions are imposed on the purchaser rather then the vendor. If conditions were to be imposed under section 63, they would generally be imposed on the vendor rather than the purchaser.
3.9 Similar to section 63 applications, FSSA applications are made to the Treasurer (or delegate).
Identification of Alternatives
3.10 Option 1 - MAKE AMENDMENTS TO THE BANKING ACT
3.11 Option 2 - MAINTAIN CURRENT LEGISLATION
Item 1 Who is affected by the problem and who is likely to be affected by its proposed solution?
3.12 It is expected that the following parties will be affected by the new regulation:
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- government and regulatory bodies (the Department of the Treasury, APRA and ASIC);
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- financial sector entities (other than foreign ADIs), including shareholders; and
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- consumers of financial services.
Item 2 How will each proposed option affect existing regulations and the roles of existing regulatory authorities?
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- Government regulatory bodies (the Department of the Treasury, APRA and ASIC).
3.13 As mentioned, conditions could be imposed on some section 63 applications indirectly through imposing conditions on FSSA or TOB Act approvals as appropriate. However, this would not encompass all section 63 proposals nor would it necessarily capture all necessary conditions.
3.14 In relation to State and Territory legislation, we are unaware of any similar or conflicting legislation.
3.15 APRA and ASIC have been consulted during the formation of the policy and view the objective as beneficial to the prudential regulation of ADIs.
3.16 However, the imposition of conditions would impose more paperwork, negotiation and consultation with industry, as well as increased monitoring of successful applicants to ensure compliance with conditions. If conditions were breached, resources would be required to either revoke the consent or apply for an injunction to enforce compliance.
3.17 The ultimate benefit to government is the assurance that an undertaking made by an applicant, that is considered a condition to the consent under section 63, is enforceable.
3.18 Without the amendment to the legislation, the Treasurer (or delegate) will not be able to attach conditions to his or her consent under section 63. This will continue to be problematic for two reasons: first, undertakings made by ADIs supporting their applications will not be enforceable; and secondly, applications that do not receive consent may have been approved had a conditions making power been in force.
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- Financial sector entities (ADIs).
3.19 Financial sector entities would be required to abide by the conditions attached to the consent. These may involve the performance of particular activities that may otherwise not be imposed. It is difficult to give a clear indication of the types of conditions that may be imposed, as each approval is processed on a case-by-case basis. The following lists potential conditions:
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- a section 63 activity is approved prior to 1 January 2000, given information systems do not change until after 1 January (the Y2K issue);
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- a merger between a foreign and domestic bank is approved subject to the domicile moving to Australia;
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- a section 63 activity is approved subject to particular conditions surrounding the raising of new capital;
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- a section 63 activity is approved subject to particular share ownership agreements; and
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- a section 63 approval is subject to a sale occurring within a particular time limit.
3.20 Although the imposition of conditions may appear to be imposing further requirements on financial sector entities, it is expected that the regulation will result in more section 63 applications receiving consent. This will allow business to facilitate requested reconstructions, which under the existing regulations would not be permitted.
3.21 In addition, the burden placed on applicants is not expected to be substantial, since applications under section 63 of the Banking Act typically involve extensive consultation and work (for the Treasury or APRA) in order to make a case to the Treasurer for approval.
3.22 If conditions cannot be imposed under section 63 of the Banking Act, ADIs will continue making undertakings to support their applications that are not enforceable. Furthermore, the Treasurer (or delegate) does not have the option of approving the application subject to conditions. Instead, under the current legislation, the proposals may not receive consent.
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- Consumers of financial services.
3.23 This amendment will strengthen the prudential framework relating to the activities of ADIs, thereby increasing consumer confidence in the regulatory system by providing more certainty for customers making banking and investment decisions.
3.24 Without a conditions making power, consumers do not benefit from the certainty that any conditions attached to consent granted under section 63 are enforceable.
Items 3 and 4 Identify and categorise the expected impacts of the proposed options as likely benefits and costs
3.25 The likely benefits of Option 1 are:
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- government can be confident that any undertakings made by a section 63 applicant are enforceable when written into the consent as conditions;
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- it is expected that more section 63 applications will receive consent if conditions may be imposed; and
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- consumers will benefit from a strengthened prudential framework and increased certainty, regarding the activities of an ADI when making banking and investment decisions.
3.26 The likely costs of Option 1 are:
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- increased resources required by government when processing and monitoring a section 63 application, particularly if conditions are to be imposed;
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- financial sector entities receiving consent under section 63 subject to conditions will be required to comply with the outcome; and
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- there are no anticipated costs for consumers.
3.27 The likely benefits of Option 2 are:
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- fewer processing and monitoring resources are required by Government if conditions are not imposed on an applicant;
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- fewer resources are utilised by ADIs receiving consent under section 63 if they are not required to comply with conditions; and
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- there are no direct benefits to consumers.
3.28 The likely costs of Option 2 are:
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- any undertakings made by an ADI when submitting an application for consent under section 63 are not enforceable;
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- applications that might have received consent, had conditions been applied, will be rejected; and
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- reduced certainty for consumers where undertakings are not enforceable.
Item 5 Identify distributional effects and attribute these to the groups affected
3.29 In relation to distributional effects, there is no direct redistribution of resources from one sector to another. However, a financial sector entity receiving consent subject to conditions will be required to use appropriate resources to comply with the conditions and government will need to employ the necessary resources to process and monitor the applications.
3.30 As the legislation does not change, there are no distributional effects.
Item 6 Identify the data sources and assumptions used in making these assessments
3.31 Due to the nature of this recommendation, data analysis is not considered appropriate. In relation to assumptions, when developing this policy, we have assumed the following:
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- where the Treasurer's (or delegate's) consent is conditional, appropriate notification will be forwarded to the applicant, allowing the applicant to reconsider its position and submit a revised application if necessary. This is a realistic assumption, as under the present legislation, the processing of an application involves constant communication with the applicant.
3.32 In relation to data analysis, please refer to option 1.
3.33 Given no legislative change, we assume that there will be no other regulatory change that might affect the operation of this section.
Item 7 Summary of outcomes for each option examined
3.34 Objective: To allow the Treasurer (or delegate) to enforce undertakings made by section 63 applicants.
| Alternative | Impact on Government | Impact on ADIs | Impact on Consumers | Likely benefit/cost |
|---|---|---|---|---|
| An amendment to the Banking Act. | The ability to make and enforce conditions. | Compliance with conditions. | No major anticipated impact. | More section 63 applications receive consent. This would create more certainty for government and consumers when making policy and investment decisions respectively. |
| The current legislation is maintained. | Undertakings made by ADIs are not enforceable. | Unconditional consent. However, applications may not receive consent without being conditional. | No major anticipated impact. | The current state of uncertainty is maintained, as undertakings made by ADIs are not enforceable. In addition, the ratio of approvals to applications is not expected to rise above the current level. |
Item 1 Who were the main parties affected and what were their views?
3.35 Consultation on this issue involved representatives of industry bodies including the Australian Bankers' Association (ABA), the International Banks and Securities Association of Australia (IBSA), the Australian Association of Permanent Building Societies (AAPBS) and the Credit Union Services Corporation (Australia) Limited (CUSCAL).
3.36 Each industry group has expressed, in writing, broad agreement.
Conclusion and Recommended Option
3.37 Given that government, in relation to this issue, requires the certainty provided by legal sanctions and that universal coverage of the industry is required, option 1 is preferred. The effectiveness of the amendment rests on the premise that the Treasurer (or delegate) will provide written information to the applicant prior to imposing conditions. In addition, the Treasurer or delegate should provide the applicant sufficient time to consider, prior to granting consent, the implications of the conditions and respond accordingly.
Item 1 How will the preferred option be implemented?
3.38 The relevant amendment to the Banking Act will be made in the Financial Sector Legislation Amendment Bill (No.1) 2000. A new section 64 will be added to the Banking Act. The Treasurer (or delegate) will have two remedies available in the event a condition is breached first, consent may be revoked under section 64 or secondly an injunction may be sought under a new section 65A of the Banking Act.
Item 2 Is the preferred option clear, consistent, comprehensible and accessible to users?
3.39 The conditions making power follows section 63 of the Banking Act and the legislation is clear on the nature of the power and the consequences of breaching a condition.
Item 3 What is the impact on business, including small business, and how will compliance and paper burden costs be minimised?
3.40 When applying for consent, under section 63, a financial sector entity has the discretion to make certain undertakings to support its application when applying. However, if the Treasurer (or delegate) introduces conditions, an ADI may wish to re-submit an application. This process would also apply to smaller ADIs such as credit unions. In relation to compliance with the conditions, it is difficult to ascertain the costs to an ADI, as conditions would vary from application to application. Potential costs have been discussed previously.
Items 4 and 5 How will the effectiveness of the preferred option be assessed and how frequently? If the preferred option takes the form of regulation, is there a built in provision to review or revoke the regulation after it has been in place for a certain length of time?
3.41 The effectiveness of the amendment will be assessed on whether realistic conditions are imposed. This will be tested by whether conditions are breached. If the new sections are not working effectively, the policy behind the amendment will be reviewed and either altered or revoked in later legislation.