House of Representatives

Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP

Chapter 4 - Offering First Home Saver Accounts

Outline of chapter

4.1 Division 1 of Part 7 of the main Bill outlines the requirements for providers offering First Home Saver Accounts (FHSAs).

4.2 This chapter explains what FHSA providers must do before they offer, or invite to offer, FHSAs. Providers that are authorised deposit-taking institutions (ADIs) and life insurance companies are required to notify the Australian Prudential Regulation Authority (APRA), while trustees must be authorised by APRA before they are permitted to offer FHSAs.

4.3 Consequential amendments ensure that the APRA will have functions and powers in relation to FHSA providers, and can cancel a trustee's registrable superannuation entity (RSE) licence where the trustee's authorisation as an FHSA provider has been cancelled on grounds of breach or non-compliance.

Context

4.4 As noted in Chapter 1, FHSAs can only be offered by certain prudentially regulated financial institutions: ADIs; life insurance companies (including friendly societies); and RSE licensees (trustees) which operate public offer entities and are authorised to offer FHSAs.

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Trustees of other superannuation entities, including self managed superannuation funds, non public offer funds and exempt public sector superannuation funds, will not be able to offer FHSAs as they are not subject to the same level of prudential regulation as trustees of public offer entities.

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In addition, managed investment schemes and other investment vehicles that are not prudentially regulated will not be able to offer FHSAs.

4.5 The legal nature of an FHSA will differ depending on the institution that offers it. FHSAs offered by an ADI will be an account to which the ADI accepts deposits, those offered by a life insurance company will be a life policy and those offered by trustees will be a beneficial interest in a trust. This affects the requirements that providers must meet before offering FHSAs.

4.6 APRA will have administrative responsibility for these requirements as well as the prudential requirements in Division 2 of Part 7 (outlined in Chapter 5), subject to any provisions that will be administered by the Australian Securities and Investments Commission (ASIC).

Summary of new law

4.7 Before ADIs and life insurance companies offer FHSAs, they must give notice to APRA.

4.8 Trustees must be authorised by APRA before offering FHSAs, because FHSAs are a new non-superannuation product. Trustees with public offer, extended public offer and acting trustee RSE licences will be able to apply for authorisation.

4.9 Trustees will be required to satisfy APRA that they can continue to comply with the relevant prudential requirements in relation to their RSE licence as well as under the FHSA Bill 2008. This means they will be required to satisfy specific requirements relating to their risk management strategy and ensure that their capital requirements also apply in respect of their FHSA activities, but will not be required to create a new risk management strategy or obtain extra capital.

4.10 Once authorised, trustees will be required to offer FHSAs out of a separate trust from their superannuation fund, as the sole purpose test that applies to superannuation funds prevents trustees from offering FHSAs from within their superannuation funds.

4.11 Merits review will apply to APRA decisions in relation to authorisation. These will be consistent with the reviewability of APRA's decisions in relation to RSE licensing.

4.12 APRA can cancel the trustee's RSE licence on the grounds that APRA has cancelled the trustee's FHSA authorisation because of a breach or failure to comply with conditions imposed on the authorisation.

4.13 Consequential amendments are made to the Australian Prudential Regulation Authority Act 1998 (APRA Act) to give APRA functions and powers in relation to FHSA providers. These amendments also allow APRA to receive protected information and protected documents in relation to the FHSA Bill 2008, and to share information with the Commissioner of Taxation (Commissioner) and ASIC in relation to the administration of the FHSA Bill 2008.

Detailed explanation of new law

Authorised deposit-taking institutions and life insurers to give notice

4.14 ADIs and life insurers are required to give notice to APRA before they offer FHSAs. [ Section 123 ]

4.15 The prudential supervision of FHSAs offered by ADIs and life insurance companies is outlined in Chapter 5.

Registrable superannuation entity licensees to be authorised

4.16 As FHSAs are a new, non-superannuation product, trustees will be required to obtain authorisation from APRA before offering FHSAs. Authorisation aims to control entry into the FHSA industry and ensure that trustees meet minimum fitness and propriety requirements and have the necessary risk management systems and resources to offer this product.

4.17 The significance of the authorisation process is that the trustee of an FHSA trust must not issue or offer FHSAs unless the trustee is authorised by APRA under the FHSA Bill 2008. Trustees who offer FHSAs without authorisation are liable to a penalty. [ Section 110 ]

Who can apply for authorisation

4.18 A trustee who has a class of licence that would enable the trustee to be, or act as, the trustee of a public offer superannuation fund will be able to apply for authorisation. These include:

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a public offer entity licence as established by subsection 29B(2) of the Superannuation Industry (Supervision) Act 1993 (SIS Act);

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an extended public offer entity licence prescribed by regulation 3A.03 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations); or

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an acting trustee licence prescribed in regulation 3A.03A of the SIS Regulations.

[ Subsection 89(1) ]

4.19 The threshold requirements ensure that only trustees who have gained approval to operate public offer superannuation entities, by demonstrating that they have the requisite experience and resources, will be able to be authorised to offer FHSAs.

Process for applying for authorisation

4.20 Sections 89 to 91 establish the processes for applying for authorisation as an FHSA provider. Section 89 establishes the requirements for applications and the requirements for notifying certain changes to pending applications. This process is broadly based on the process for applying for a RSE licence under the SIS Act.

4.21 An application must be in the approved form, contain the information required by the approved form and be accompanied by the required application fee, if any is prescribed. [ Subsection 89(2) ]

4.22 In considering an application, APRA:

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can request additional information from a body corporate or a group of individual trustees that has applied for an RSE licence;

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must specify a reasonable time for complying with the request;

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can deem an application as having been withdrawn if the applicant does not provide the requested information within the specified time and does not have a reasonable excuse for not doing so; and

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must take all reasonable steps to inform the applicant if it treats an application as having been withdrawn.

[ Section 90 ]

4.23 APRA will have 30 days to decide applications, with discretion to extend this period by a further 14 days. If APRA does not make a decision by the end of the period, it is taken to have refused the application. [ Section 91 ]

Granting authorisation

4.24 APRA must grant an authorisation to a trustee if it has no reason to believe that the applicant would fail to comply with the FHSA Bill 2008, FHSA prudential standards that apply to the trustee and FHSA regulations, or any conditions imposed on the authorisation if authorisation was granted. [ Section 92 ]

4.25 APRA must also be satisfied that the applicant is a constitutional corporation that holds an appropriate class of RSE licence. That is, the applicant must hold a public offer, extended public offer or acting trustee RSE licence. [ Paragraph 92(1)(d) ]

4.26 The application must comply with the requirements set out in section 89.

Risk management

4.27 APRA must be satisfied that the risk management strategy for the applicant takes into account the trustee's additional FHSA business as required by paragraph 29H(1)(b) of the SIS Act. Paragraph 29H(1)(b) of the SIS Act requires the risk management strategy of the trustee to set out reasonable measures and procedures that apply to identify, monitor and manage a range of risks that may arise in respect of the operations of the RSE licensee as well as all its other activities, or proposed activities, to the extent that they are relevant to its activities, or proposed activities, as an RSE licensee. As operating an FHSA trust and offering FHSAs could have a significant impact on the trustee's resources, this new activity is relevant for the trustee's activities as an RSE licensee and must be reflected in the trustee's risk management strategy.

Capital requirements

4.28 Trustees are required to satisfy capital requirements, by holding capital or having approved arrangements in respect of their superannuation activities before being granted a public offer, extended public offer or acting trustee RSE licence. Section 93 requires trustees to ensure that the capital held in respect of their superannuation activities also covers their FHSA activities, but trustees will not be required to obtain extra capital. [ Subsection 93(1) ]

4.29 An applicant satisfies this provision if:

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it satisfies the requirement in subsection 29DA(2) of the SIS Act and regulation 3A.04 of the SIS Regulations to hold $5 million in net tangible assets. As a result, the applicant's capital held under the SIS Act would be available in respect of its activities as a trustee of FHSA trusts;

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it satisfies the requirement to have an approved guarantee of at least $5 million (subsection 29DA(3) of the SIS Act and the prescribed amount in regulation 3A.04 of the SIS Regulations), and the approved guarantee also applies in respect of each FHSA trust of which the trustee is, or is proposing to become, the trustee. The trustee would be required to amend its deed of approved guarantee to ensure that the guarantee is also given in respect of its activities as a trustee of FHSA trusts;

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the sum of its net tangible assets and approved guarantee is at least $5 million (subsection 29DA(4) of the SIS Act and the prescribed amount in regulation 3A.04 of the SIS Regulations), and the approved guarantee also applies in respect of each FHSA trust of which the trustee is, or is proposing to become, the trustee. The trustee would be required to amend its deed of approved guarantee to ensure that the guarantee is also given in respect of its activities as a trustee of FHSA trusts; or

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it already complies with requirements given by APRA in relation to capital, and agrees to comply with new requirements given by APRA in relation to the custody of the assets of each FHSA trust of which it is, or is proposing to become, the trustee. In addition to the written requirements under subsection 29DA(5) of the SIS Act in relation to the custody of superannuation fund assets, the trustee will also be required to comply with written requirements in relation to the custody of FHSA trust assets.

[ Subsections 93(2) to (5) ]

Other

4.30 The trustee is required to quote its Australian Business Number (ABN) on a range of documents unless it receives an exemption from APRA. The trustee is also required to quote the ABN of the FHSA trust on a range of documents unless it receives an exemption from APRA. [ Section 94 ]

Conditions imposed on authorisation

4.31 Conditions that are considered fundamental to ensuring the prudent operation of all FHSA trusts are imposed on all authorisations. Other conditions may also be specified in regulations, allowing additional conditions to be imposed on all RSE licences in a timely manner where necessary. [ Section 97 ]

4.32 APRA has the power to impose additional conditions on a single authorisation as long as those conditions are not inconsistent with conditions that are imposed under section 97 [ subsections 98(1) and (2) ]. This ensures that APRA is able to impose conditions on individual authorisations, in particular where there may be a specific prudential risk applying to that trustee or the FHSA trust it manages. Failure to report significant breaches of conditions on authorisation is an offence under section 111.

4.33 APRA must consult with ASIC where the RSE licensee also holds an Australian Financial Services Licence and the imposition of a condition may affect the RSE licensee's ability to provide financial services. Consultation will help to ensure consistent approaches to the regulation of RSE licensees who are also holders of an Australian Financial Services Licence. However, failure by APRA to consult with ASIC does not invalidate any additional condition that is imposed. [ Subsections 98(3) and (4) ]

Compliance with conditions

4.34 APRA can direct an RSE licensee to comply with a licence condition within a specified time where APRA has reasonable grounds to believe that the RSE licensee has breached the licence condition. [ Section 99 ]

4.35 This power is significant, because while breaching an authorisation condition does not directly result in a trustee committing an offence, failure to comply with an APRA direction given under section 99 may result in the trustee committing an offence under section 112. Section 99 does not include a minimum timeframe for complying with a request to give APRA some flexibility in setting timeframes that are reasonable in the circumstances, given the nature of the information that is being requested and the level of prudential risk involved. APRA may also cancel an authorisation if a trustee fails to comply with an authorisation condition. [ Section 107 ]

Varying conditions on authorisation

4.36 Trustees may apply to APRA for a variation or revocation of a condition that has been imposed on an authorisation by APRA. [ Section 100 ]

4.37 APRA can request additional information in respect of an application made under section 100. This ensures that APRA is able to obtain relevant information pertaining to the application. [ Section 101 ]

4.38 APRA has 30 days to decide an application to vary a condition on an authorisation, but may extend this period by a further 14 days. [ Section 102 ]

4.39 APRA may vary or revoke a condition on authorisation on application from the trustee in certain circumstances and, if it does so, it must inform the applicant. APRA must also consult with ASIC in certain circumstances. APRA is not required to vary or revoke any condition of an authorisation in the terms requested by the trustee in an application under section 100. [ Section 103 ]

4.40 APRA may also vary or revoke an authorisation condition on its own initiative as long as the variation or revocation is not inconsistent with any condition imposed under section 97 or the trustee's RSE licence. If the trustee is also the holder of an Australian Financial Services Licence, APRA must consult with ASIC in certain circumstances. [ Section 104 ]

4.41 APRA must notify trustees of its decisions in respect of variations or revocations. [ Section 105 ]

Cancellation of authorisation

4.42 APRA may cancel in writing authorisations where trustees:

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have requested that their authorisation be cancelled;

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are 'disqualified persons' under Part 15 of the SIS Act, as it applies in Division 2, Part 7 of the FHSA Bill 2008. (For details of how the SIS Act applies to FHSA trustees, refer to Chapter 5);

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have breached, or APRA has reason to believe they will breach, a condition imposed on the authorisation; or

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have failed to comply, or APRA has reason to believe they will fail to comply, with a direction by APRA under section 99.

[ Section 107 ]

4.43 APRA must notify trustees of decisions to cancel authorisations. [ Subsection 107(3) ]

4.44 APRA must also consult with ASIC in certain circumstances before cancelling an authorisation and notify ASIC after it has cancelled an authorisation. [ Section 108 ]

4.45 APRA may allow an authorisation to continue in effect in respect of specified provisions of the FHSA Bill 2008, FHSA prudential standards and regulations, or any other law of the Commonwealth, that it administers after the authorisation has been cancelled. This ensures that trustees who have had their authorisation cancelled can continue to perform certain specified duties in respect of an FHSA trust, for example, processes associated with winding-up an FHSA trust or transferring members' benefits under the successor fund arrangements. [ Section 109 ]

Offences

4.46 It is an offence for a person to be, or act as, a trustee of an FHSA trust unless the person is an ADI, life insurance company, or a trustee that holds an authorisation as an FHSA provider. In addition, an ADI or life insurance company cannot offer FHSAs if its authorisation under the Banking Act 1959 or registration under the Life Insurance Act 1995 does not allow the entity to offer such accounts or life policies. The penalty for breach of this requirement is two years imprisonment and/or 120 penalty units. [ Section 110 ]

4.47 It is also an offence for a trustee to fail to notify APRA of breaches of authorisation conditions that are, or are likely to be, significant. This offence contains a significance test, consistent with the test under the Banking Act 1959 , the Life Insurance Act 1995 and the SIS Act. [ Section 111 ]

4.48 The significance test takes into consideration a number of factors to be used when judging if a breach is significant or not. Significant breaches must be notified in writing and must be reported as soon as practicable and in any event within 10 business days.

4.49 Consistent with the SIS Act, this offence is a strict liability offence punishable by 50 penalty units. These offences are ones of strict liability because they are basic, objective requirements of APRA's prudential supervision functions, and should be complied with by all persons. Consistent with section 6.1 of the Criminal Code Act 1995 , this offence provision does not require proof of a mental element.

4.50 In addition, it is an offence for a trustee to fail to comply with a direction from APRA to comply with a condition on an authorisation under section 99. This is a strict liability offence, which carries a penalty of 60 penalty units. [ Section 112 ]

4.51 This offence is a strict liability one because it is a basic, objective requirement of APRA's prudential supervision of FHSA providers that are trustees, and should be complied with by all trustees. As the fundamental prudential requirements for trustees who provide FHSAs are imposed as conditions on authorisation, it is essential that trustees comply with APRA's directions to comply with a condition of authorisation. Consistent with section 6.1 of the Criminal Code Act 1995 , this offence provision does not require proof of a mental element.

4.52 Any contravention of these offence provisions does not affect the validity of a transaction, such as the issue of an interest in an FHSA trust. This protects the interests of members of an FHSA trust where the trustee of that trust is in contravention of the provisions. [ Section 113 ]

Merits review of APRA decisions

4.53 APRA's decisions in relation to authorisation are subject to merits review, where the equivalent decision in relation to the RSE licensing process is also subject to merits review. The process for seeking review is set out in section 75 and 76, and these are modelled on sections 344 and 345 of the SIS Act. [ Section 74 ]

Consequential amendments to the Superannuation Industry ( Supervision ) Act 1993

4.54 APRA may cancel a trustee's RSE licence where the trustee's authorisation as an FHSA provider has been cancelled under paragraphs 107(2)(b) to (f) of the FHSA Bill 2008. A trustee's authorisation may be cancelled under these paragraphs where the trustee has breached, or may breach, conditions on authorisation or has failed, or may fail, to comply with a direction to comply with conditions on authorisation. These are breaches of fundamental requirements of the prudential framework. [ Schedule 3, item 38, FHSA (Consequential Amendments) Bill 2008 ]

4.55 Where APRA cancels a trustee's authorisation as an FHSA provider following a request from the trustee, under paragraph 107(2)(a), it would not be a ground to cancel the trustee's RSE licence as such a cancellations would not result from the trustee breaching fundamental prudential requirements.

Consequential amendments to the APRA Act

4.56 APRA has responsibility for the prudential supervision of FHSA providers and has responsibility for the administration of the relevant parts of the FHSA Bill 2008. [ Schedule 3, items 5 to 9, FHSA (Consequential Amendments) Bill 2008 ]

4.57 A reference to the 'First Home Saver Accounts Act 2008' is inserted into the definition of 'prudential regulation framework law' in subsection 3(1) of the APRA Act. The term 'prudential regulation framework law' is the list of laws under which APRA takes its functions and powers. Inserting the 'First Home Saver Accounts Act 2008' into this list gives APRA functions and powers for administering the provisions of the FHSA Bill 2008 relating to prudential regulation. The definition is also required for the purposes of APRA's advisory powers and the secrecy provisions contained within section 56 of the APRA Act. [ Schedule 3, item 5, FHSA (Consequential Amendments) Bill 2008 ]

4.58 The term 'FHSA provider' is inserted into the definition of 'body regulated by APRA' in subsection 3(2) of the APRA Act. Although ADIs and life insurers are already in this definition, and trustees are included in the definition in their capacity as trustees of superannuation entities, this definition clarifies that these entities in their capacity as FHSA providers are also prudentially regulated by APRA. [ Schedule 3, item 6, FHSA (Consequential Amendments) Bill 2008 ]

4.59 Section 56 of the APRA Act is amended to refer to the FHSA Bill 2008. Section 56 protects information and documents given to APRA (apart from those already made public from other sources) from being disclosed without authorisation, while allowing for efficient and effective information exchange between APRA and other regulators. [ Schedule 3, items 8 and 9, FHSA (Consequential Amendments) Bill 2008 ]

4.60 These amendments enable APRA to gather protected information and protected documents under the FHSA Bill 2008, and to share information with regulatory agencies such as the Australian Securities and Investments Commission, and any other regulatory agencies prescribed in the regulations, to assist these agencies to perform their duties and functions. It also imposes appropriate confidentiality requirements on such information.

4.61 These amendments insert new paragraphs in the definitions of 'protected document' and 'protected information' in subsection 56(1) of the APRA Act. Documents produced under, or for the purposes of administering, a provision of the FHSA Bill 2008 which is administered by the Commissioner is a 'protected document' and 'protected information'. These amendments ensure that where the Commissioner gives documents or information to APRA in the course of administering the FHSA Bill 2008, such documents or information are protected by the confidentiality requirements under section 56 of the APRA Act and cannot be disclosed except in specified circumstances and subject to any conditions that may be imposed under this section.