House of Representatives

Explanatory Memorandum

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

Chapter 5 - Prudential regulation of First Home Saver Account providers

Outline of chapter

5.1 The main Bill provides the regulatory framework for First Home Saver Accounts (FHSAs) offered by authorised deposit-taking institutions (ADIs), life insurance companies and registrable superannuation entity (RSE) licensees that are authorised to offer FHSAs (trustees).

5.2 ADIs and life insurance companies are already subject to prudential supervision under the Banking Act 1959 and the Life Insurance Act 1995 respectively. Consequential amendments to the Banking Act 1959 , the Life Insurance Act 1995 and the Australian Prudential Regulation Authority Act 1998 (APRA Act) ensure that the Australian Prudential Regulation Authority (APRA) can administer, monitor and enforce these entities' FHSA activities.

5.3 Division 2 of Part 7 creates a prudential regulatory framework for FHSA trusts operated by trustees that are authorised under the First Home Saver Accounts Bill 2008 (FHSA Bill 2008). It does this by applying the relevant parts of the SIS Act regulatory framework to FHSAs, FHSA trusts, their trustees and holders of FHSAs issued by trustees. APRA also has the power to make prudential standards in relation to FHSA trusts and trustees.

5.4 Additional investment management requirements apply to FHSAs offered as investment-linked products by life insurance companies and trustees. These requirements reflect the differences in the purpose and nature of FHSAs from the products generally offered by life insurance companies and trustees.

Context

5.5 The FSHA Bill 2008 provides a prudential regulatory framework for FHSA trusts and trustees that are authorised to operate these trusts, rather than regulating them directly under the Superannuation Industry (Supervision) Act 1993 (SIS Act). This is because FHSAs are not a superannuation product, and the sole purpose test that applies to superannuation funds prevents trustees from offering FHSAs from within their superannuation entities.

5.6 The requirement for a separate trust also preserves the integrity of Australians' retirement savings by preventing cross-contamination and cross-subsidisation of FHSAs by superannuation - where the funds of superannuation members (many of whom will be ineligible to open an FHSA) are used to fund the start-up and operating costs of FHSAs. Similarly, FHSA trusts cannot invest through pooled superannuation trusts and cannot pay benefits into eligible rollover funds.

5.7 The (SIS Act) creates a prudential regulatory framework for RSE licensees and superannuation funds, and deals with matters including duties and obligations for trustees, responsible officers of trustees, auditors, actuaries, custodians and investment managers of superannuation funds. The SIS Act also provides APRA with powers and functions in relation to the prudential supervision of superannuation funds and trustees.

5.8 Division 2 of Part 7 applies the SIS Act prudential regulatory framework to FHSA trusts, where it is appropriate to do so, to ensure regulatory consistency for the trustees' FHSA activities and superannuation activities.

5.9 Unlike under the SIS Act framework, APRA will have the power under the FHSA Bill 2008 to make prudential standards in relation to FHSA trusts and trustees, thereby enabling prudential standards to apply consistently to all FHSA providers where this is necessary.

5.10 As FHSAs have a different purpose and nature from superannuation products and life policies that are usually offered by trustees and life insurance companies, and FHSA holders are likely to have a shorter investment horizon, additional investment management requirements apply to FHSAs offered by trustees and as investment-linked life policies.

Summary of new law

5.11 The FHSA business of ADIs and life insurance companies will be supervised under the prudential framework in the Banking Act 1959 and the Life Insurance Act 1995 respectively.

5.12 However, life insurance companies that offer FHSAs as investment-linked contracts will be subject to additional investment management requirements that take into account the purpose and nature of FHSAs. These requirements are consistent with those that apply to trustees that offer FHSAs.

5.13 The FSHA Bill 2008 provides a prudential regulatory framework for FHSA trusts and trustees that are authorised to operate these trusts, rather than regulating them directly under the SIS Act.

5.14 Relevant parts of the SIS Act are applied by reference, in accordance with the application provisions, under Division 2 of Part 7 of the FHSA Bill 2008. This Division also excludes any provisions of the SIS Act that are not relevant to FHSA trusts and trustees, and modifies the application of particular provisions of the SIS Act to ensure the regulatory framework applies correctly.

5.15 These provisions ensure that FHSA trusts, trustees, and persons who have duties, functions and powers in relation to these entities will be subject to a prudential regulation framework that is consistent with the framework applying to superannuation funds and their trustees, where appropriate, while still reflecting the differences between these two products.

5.16 Unlike under the SIS Act framework, APRA will have the power under the FHSA Bill 2008 to make prudential standards in relation to FHSA trusts and trustees, thereby enabling prudential standards to apply consistently to all FHSA providers where this is necessary.

Detailed explanation of new law

First Home Saver Account providers that are ADIs

5.17 FHSA providers that are ADIs are already prudentially regulated under the Banking Act 1959 . Section 8 establishes that FHSAs may be offered as accounts by ADIs, which ensures that the prudential framework under the Banking Act 1959 will apply to FHSAs. ADIs may offer FHSAs if they are not prevented from doing so by any condition imposed on their authorisation under section 9 of the Banking Act 1959 . [ Section 110 ]

5.18 FHSA providers that are ADIs can transfer their FHSA business to other ADIs under the Banking Act 1959 and the Financial Sector (Business Transfer and Group Restructure) Act 1999 .

Amendments to the Banking Act 1959

5.19 To ensure that APRA has appropriate supervisory and enforcement powers in relation to ADIs' FHSA activities, the First Home Saver Accounts (Consequential Amendments) Bill 2008 (FHSA (Consequential Amendments) Bill 2008) makes consequential amendments to the Banking Act 1959 . These amendments give APRA the ability to take action under the Banking Act 1959 where an FHSA provider that is an ADI has, or may have, breached a prudential requirement under the FHSA Bill 2008.

5.20 Enabling APRA to enforce requirements that apply to FHSA providers that are ADIs under the Banking Act 1959 rather than the FHSA Bill 2008 ensures that ADIs are subject to a consistent monitoring and enforcement regime and minimises compliance costs. For prudential requirements applying to FHSA providers that are ADIs, see Division 3 of Part 7 of the FHSA Bill 2008.

5.21 APRA is able to issue a direction under section 11CA of the Banking Act 1959 , in respect of an FHSA provider that is an ADI, where specified triggers relating to the FHSA Bill 2008 are satisfied.

•

Where an FHSA provider that is an ADI has contravened the FHSA Bill 2008, APRA can issue one of the directions listed in subsection 11CA(2) of the Banking Act 1959 [ Schedule 3, item 10, FHSA ( Consequential Amendments) Bill 2008, paragraph 11CA(1)(a) of the Banking Act 1959 ].

•

Where an FHSA provider that is an ADI is likely to contravene the FHSA Bill 2008, and the contravention is likely to give rise to a prudential risk, APRA can issue one of the directions listed in subsection 11CA(2) of the Banking Act 1959 [ Schedule 3, item 11, FHSA (Consequential Amendments) Bill 2008, paragraph 11CA(1)(c) of the Banking Act 1959 ].

5.22 APRA can issue a direction to comply with all or part of the FHSA Bill 2008 under paragraph 11CA(2)(aa) of the Banking Act 1959 , where one of the triggers in subsection 11CA(1) is satisfied. All other directions in subsection 11CA(2) can also be issued to an FHSA provider that is an ADI, where these directions are relevant to the ADI's FHSA activities, but no amendment is required as these directions relate to the entirety of the ADI's business and are not limited to matters arising under the Banking Act 1959 . [ Schedule 3, item 12, FHSA (Consequential Amendments) Bill 2008, subsection 11CA(2) of the Banking Act 1959 ]

5.23 APRA can accept an enforceable undertaking in connection with a matter arising under the FHSA Bill 2008, if the matter is within APRA's responsibility. Therefore, if APRA has a concern about an FHSA provider that is an ADI, and the concern relates to a prudential requirement under the FHSA Bill 2008, APRA can address the concern by accepting an enforceable undertaking from the FHSA provider. [ Schedule 3, item 13, FHSA (Consequential Amendments) Bill 2008, section 18A of the Banking Act 1959 ]

5.24 If APRA has the power to make a decision under the FHSA Bill 2008 in relation to an FHSA provider that is an ADI, and the decision is subject to merits review, review of the decision is conducted in accordance with Part 6 of the Banking Act 1959 . This ensures a consistent regime of review of APRA's decisions in relation to ADIs. Currently, APRA does not have the power to make decisions in relation to ADIs under the FHSA Bill 2008. [ Schedule 3, item 14, FHSA (Consequential Amendments) Bill 2008, section 51A, Banking Act 1959 ]

5.25 ADIs are required to report significant breaches of the FHSA (Consequential Amendments) Bill 2008 to APRA. [ Schedule 3, item 15, FHSA (Consequential Amendments) Bill 2008, section 62A of the Banking Act 1959 ]

First Home Saver Account providers that are life insurance companies

5.26 FHSA providers that are life insurance companies authorised under the Life Insurance Act 1995 are already prudentially regulated under that Act. Where life insurance companies offer FHSAs, section 8 requires that they be offered as 'life policies', which ensures that FHSAs will be a life policy as defined by section 9 of the Life Insurance Act 1995 and therefore subject to the full prudential framework under the Life Insurance Act 1995 .

5.27 Life insurance companies may offer FHSAs if they are not prevented from doing so by any condition on their registration imposed under section 22 of the Life Insurance Act 1995 . [ Section 110 ]

5.28 In addition, under the FHSA Bill 2008, new investment management requirements will apply to FHSAs that are offered by life insurance companies as investment-linked contracts, within the meaning of section 14 of the Life Insurance Act 1995 . Details are set out in paragraphs 1.28 and 1.29.

5.29 FHSA providers that are life insurance companies can transfer their FHSA business to other life insurance companies under the Life Insurance Act 1995 and the Financial Sector (Business Transfer and Group Restructure) Act 1999 .

Amendments to the Life Insurance Act 1995

5.30 The definitions of 'investment account' and 'investment-linked account' in section 14 of the Life Insurance Act 1995 are amended to clarify that an FHSA that is offered as an investment account or investment-linked account can be withdrawn in accordance with the requirements under section 31 of the FHSA Bill 2008. [ Schedule 3, items 16 to 19, FHSA (Consequential Amendments) Bill 2008 ]

5.31 The current definitions of an 'investment account' and 'investment-linked account' require the account balance to be paid on 'a specified date' or one of a number of specified dates (see subparagraphs 14(2)(a)(ii) and 14(4)(b)(ii) of the Life Insurance Act 1995 ). The amendments to section 14 clarify that an investment account or an investment-linked account can also be a contract that provides for the balance of the contract to be paid in accordance with the release criteria under section 31 of the FHSA Bill 2008.

5.32 Auditors and actuaries will be able to give information relating to FHSAs to APRA:

•

where the auditor or actuary is required to give information under sections 88 and 89 of the Life Insurance Act 1995 relating to a contravention of the Life Insurance Act 1995 or the FHSA Bill 2008 to APRA; and

•

where an auditor or actuary may give information to APRA under sections 88A and 98A of the Life Insurance Act 1995 , if the auditor or actuary considers the information may assist APRA in performing its functions under the Life Insurance Act 1995 or the FHSA Bill 2008.

[ Schedule 3, items 20 and 21, FHSA (Consequential Amendments) Bill 2008, section 74, Life Insurance Act 1995 ]

5.33 APRA's monitoring and investigation powers under Part 7 of the Life Insurance Act 1995 apply to the FHSA activities of FHSA providers that are life insurance companies. [ Schedule 3, items 22 and 23, FHSA (Consequential Amendments) Bill 2008 ]

5.34 The effect of these amendments is to extend APRA's monitoring and enforcement powers to prudential requirements that apply to life insurance companies under the FHSA Bill 2008.

5.35 For example, APRA will be able to accept an enforceable undertaking under section 133A in connection with a matter arising under the FHSA Bill 2008. The triggers for issuing a show-cause notice under section 136 are satisfied if APRA suspects an FHSA provider that is a life insurance company has breached, or is likely to breach, a prudential provision of the FHSA Bill 2008. APRA will also be able to conduct an investigation in relation to a matter arising under the FHSA Bill 2008, where the FHSA provider is a life insurance company.

5.36 Prudential standards that apply to life insurance companies cannot be inconsistent with the FHSA Bill 2008. [ Schedule 3, item 24, FHSA (Consequential Amendments) Bill 2008, section 230A, Life Insurance Act 1995 ]

5.37 APRA can issue a direction under subsection 230B(2) of the Life Insurance Act 1995 to comply with all or part of the Life Insurance Act, in respect of an FHSA provider that is a life insurance company, where:

•

an FHSA provider that is a life insurance company has contravened the FHSA Bill 2008; or

•

an FHSA provider that is a life insurer is likely to contravene, the FHSA Bill 2008 and the contravention is likely to give rise to a prudential risk.

[ Schedule 3, item 25, FHSA (Consequential Amendments) Bill 2008, paragraphs 230B(1)(a) and (b), Life Insurance Act 1995 ]

5.38 APRA can issue a direction to comply with all or part of the FHSA Bill 2008 under paragraph 230B(2)(a) of the Life Insurance Act 1995 , where one of the triggers in subsection 230B(1) is satisfied. All other directions in subsection 230B(2) can also be issued to an FHSA provider that is a life insurance company, where these directions are relevant to the life insurance company's FHSA activities, but no amendment is required as these directions relate to the entirety of the life insurance company's business and are not limited to matters arising under the Life Insurance Act 1995 . [ Schedule 3, item 25, FHSA (Consequential Amendments) Bill 2008, subsection 230B(2), Life Insurance Act 1995 ]

5.39 If APRA has the power to make a decision under the FHSA Bill 2008 in relation to an FHSA provider that is a life insurance company, and the decision is subject to merits review, review of the decision would be conducted in accordance with section 236 of the Life Insurance Act 1995 . This ensures a consistent regime of review of APRA's decisions for life insurance companies. Currently, APRA does not have the power to make decisions in relation to life insurance companies under the FHSA Bill 2008. [ Schedule 3, items 26 and 27, FHSA (Consequential Amendments) Bill 2008 ]

First Home Saver Account providers that are trustees

5.40 The prudential supervision of trustees who are authorised under the FHSA Bill 2008 as FHSA providers will be given effect through the provisions in Division 2 of Part 7 and section 121.

Basic application provision

5.41 The basic application provision creates application rules in relation to the requirements, functions and obligations that apply to trustees of FHSA trusts, FHSA trusts, an interest in an FHSA trust and holder of such an interest. [ Section 114 ]

5.42 Subject to the exclusion and modification provisions in Division 2 of Part 7 [ subsection 114(1) ]:

•

the first application rule ensures that all obligations, functions and requirements that apply to trustees of public offer superannuation funds will apply to trustees of FHSA trusts [ paragraph 114(2)(a) ];

•

the second application rule ensures that all obligations, functions and requirements that apply in relation to a public offer superannuation fund will apply in relation to an FHSA trust [ paragraph 114(2)(b) ];

•

the third application rule ensures that all obligations that apply in relation to members of superannuation funds will apply in relation to holders of FHSAs issued by trustees [ paragraph 114(2)(c) ]; and

•

the fourth application rule ensures that all the requirements that apply in relation to a superannuation interest will apply to an interest in an FHSA trust [ paragraph 114(2)(d) ].

Trustees of First Home Saver Account trusts

5.43 Under the first application rule, all the obligations that apply to a trustee that is a trustee of a public offer superannuation fund will apply to a trustee of an FHSA trust (FHSA trustee), subject to the exclusion and modification provisions. [ Paragraph 114(2)(a) ]

5.44 Where an obligation applies to all trustees of regulated superannuation funds or trustees of a public offer entity, this obligation will apply to an FHSA trustee.

Example 5.1

Section 35A imposes accounting and record keeping obligations on trustees of 'all superannuation entities'. Paragraph 35A(1)(a) provides:

'(1)

Each trustee of a superannuation entity must ensure that :

(a)

accounting records that correctly record and explain the transactions and financial position of the entity are kept ; '

As the term 'superannuation entities' includes a 'public offer superannuation fund', this obligation will apply to trustees of an FHSA trust. Applying this rule, paragraph 35A(1)(a) becomes:

(1)

[ The ] FHSA trustee must ensure that :

(a)

accounting records that correctly record and explain the transactions and financial position of the [ FHSA trust ] are kept .

Example 5.2

Section 133 allows APRA to suspend or remove trustees if specified triggers are satisfied. Subsection 133(1) provides:

'(1)

The Regulator may suspend or remove a trustee of a superannuation entity if : '

Again, as the term 'superannuation entities' includes a 'public offer superannuation fund', this obligation will apply to trustees of an FHSA trust. Applying this rule, subsection 133(1) becomes:

(1)

The Regulator may suspend or remove an FHSA trustee if :

Example 5.3

Section 154 imposes on trustees certain limitations on the payment of commission and brokerage. Subsection 154(1) provides:

'(1) The trustee of a public offer entity must comply with the requirements of the regulations in relation to the payment of commission or brokerage in respect of : '

[ ... ]

(2)

The trustee is guilty of an offence if the trustee contravenes subsection (1 ).

the term 'public offer entity' includes a 'public offer superannuation fund', this requirement will apply to a trustee of an FHSA trust. Applying this rule, section 154 becomes:

(1)

The FHSA trustee must comply with the requirements of the regulations in relation to the payment of commission or brokerage in respect of :

[ ... ]

(2)

The FHSA trustee is guilty of an offence if the trustee contravenes subsection (1 ).

5.45 Where an obligation only applies to a trustee of a fund that is not a public offer superannuation fund - including a self managed superannuation fund, a non public offer superannuation fund and an exempt public sector superannuation fund - these obligations will not apply to an FHSA trustee. These provisions, subsections or paragraphs will be automatically excluded by this application rule, and no further rules are needed to deal with these cases.

Example 5.4

Paragraph 35A(1)(c) requires trustees of self managed superannuation funds to keep accounting records and audit the fund in specific ways. These requirements do not apply to a trustee of a public offer superannuation fund, and so will be automatically e

Applying this rule, subsection 35A(1) will contain these requirements:

(1)

[ The ] FHSA trustee must ensure that :

(a)

accounting records that correctly record and explain the transactions and financial position of the [ FHSA trust ] are kept ; and

(b)

the accounts of the [ FHSA trust ] are kept in a way that enables the preparation of reporting documents referred to in section 13 of the Financial Sector (Collection of Data) Act 2001 ; and

(d)

the accounting records of the [ FHSA trust ] are kept in a way that enables those accounts, statements and returns to be conveniently and properly audited in accordance with this Act .

Example 5.5

Section 104A requires trustees of self managed superannuation funds to sign a declaration.

As this requirement does not apply to the trustee of a public offer superannuation fund, this requirement will not apply to an FHSA trustee. Applying this rule, section 104A will be automatically excluded.

First Home Saver Account trusts

5.46 Under the second application rule, all the obligations and requirements that apply in relation to a public offer superannuation fund will apply in relation to FHSA trusts, and persons that have obligations, functions or powers in relation to FHSA trusts. [ Paragraph 114(2)(b) ]

5.47 Where an obligation applies to all superannuation entities, this obligation will apply to FHSA trusts.

Example 5.6

Section 52 inserts certain provisions into the governing rules of all 'superannuation entities'. Subsection 52(1) provides:

'(1) If the governing rules of a superannuation entity do not contain covenants to the effect of the covenants set out in subsection (2 ), those governing rules are taken to contain covenants to that effect.'

As the term 'superannuation entities' includes a 'public offer superannuation fund, this requirement will apply to an FHSA trust. Applying this rule, subsection 52(1) becomes:

(1)

If the governing rules of an FHSA trust do not contain covenants to the effect of the covenants set out in subsection (2 ), those governing rules are taken to contain covenants to that effect .

Example 5.7

Section 129 requires approved auditors and actuaries of a superannuation entity to report certain breaches to APRA. Subsection 129(1) provides:

'(1)

This section applies to a person in relation to a superannuation entity if :

(a)

the person forms the opinion that it is likely that a contravention of any of the following may have occurred, may be occurring, or may occur, in relation to the entity : '

As the term 'superannuation entity' includes a 'public offer superannuation fund', this obligation will apply to auditors and actuaries of FHSA trusts. Applying this rule, subsection 129(1) becomes:

(1)

This section applies to a person in relation to an FHSA trust if :

(a)

the person forms the opinion that it is likely that a contravention of any of the following may have occurred, may be occurring, or may occur, in relation to the FHSA trust :

Example 5.8

Section 257 enables APRA to require the trustee to appoint a person to investigate the financial circumstances of the fund. Subsection 257(1) provides, in part:

'(1)

APRA may, by written notice given to a trustee of a superannuation entity , require the trustee, or the trustees, of the entity to appoint an individual, or a committee of individuals, to :

(a)

carry out an investigation of the whole or a specified part of the financial position of the entity as at a specified time or in relation to a specified period ; '

As the term 'entity' in paragraph (a) includes a 'public offer superannuation fund', APRA's power to require an investigation would apply in relation to the financial position of the FHSA trust. Applying this rule, subsection 257(1) will provide, in part:

(1)

APRA may, by written notice given to an FHSA trustee , require the trustee to appoint an individual, or a committee of individuals, to :

(a)

carry out an investigation of the whole or a specified part of the financial position of the FHSA trust as at a specified time or in relation to a specified period ;

5.48 Where an obligation only applies in relation to funds other than a public offer superannuation fund - including a self managed superannuation fund, a non public offer superannuation fund or an exempt public sector superannuation fund - these obligations will not apply in relation to an FHSA trust. These provisions, subsections or paragraphs will be automatically excluded by this application rule.

Example 5.9

Section 129 requires the auditor or actuary of a superannuation fund to provide information to the Regulator in specified ways, if the person forms the opinion that a breach may have occurred, may be occurring, or may occur. Subsection 129(3) provides, in part:

'(3)

Subject to subsection (3A ), the person must, immediately after forming the opinion :

(a)

tell a trustee of the entity about the matter in writing ; and

(b)

if the superannuation entity is not a self managed superannuation fund [ ... ] - tell the Regulator about the matter in writing ; and

(c)

if the superannuation entity is a self managed superannuation fund [ ... ] - tell the Regulator about the matter in the approved form.'

As the term 'self managed superannuation fund' does not include a 'public offer superannuation fund', the requirement in paragraph (c) is not relevant for FHSA trusts and will be automatically excluded. Applying this rule, subsection 129(3) becomes:

(3)

Subject to subsection (3A) , the person must, immediately after forming the opinion :

(a)

tell an FHSA trustee about the matter in writing ; and

(b)

tell the Regulator about the matter in writing ;

Holder of a First Home Saver Account

5.49 Under the third application rule, all the requirements that apply in relation to members or beneficiaries of public offer superannuation funds will apply in relation to holders of FHSAs. [ Paragraph 114(2)(c) ]

Example 5.10

Section 105 requires trustees of regulated superannuation funds to keep members and beneficiaries reports for at least 10 years. Members and beneficiaries reports are defined as a report given:

(b)

( i) in the case of a regulated superannuation fund - to all members of the fund , or to all members included in a particular class of members ;

By applying this rule, the requirements relating to members of a superannuation fund will be a requirement relating to holders of an FHSA. The definition of a 'member or beneficiary report' becomes a report given:

(b)

( i) in the case of an FHSA trust - to all FHSA holders , or to all FHSA holders included in a particular class of FHSA holders ;

Interest in a First Home Saver Account trust

5.50 Under the fourth application rule, all the requirements that apply in relation to an interest in a public offer superannuation fund will apply in relation to an interest in an FHSA trust. [ Paragraph 114(2)(d) ]

Example 5.11

Section 152 prohibits the issuing of an interest in a public offer entity unless the trustee and the fund satisfy certain criteria. Subsection 152(1) applies to conduct including:

(a)

issuing superannuation interests in a public offer entity ;

By applying this rule, the requirements relating to issuing 'superannuation interests' will apply to the issue of an interest in an FHSA trust. Subsection 152(1) will apply to conduct including:

(a)

issuing interests in an FHSA trust ;

Disapplication provision

5.51 Section 115 disapplies particular sections of the SIS Act so that these sections do not apply in the FHSA Bill 2008.

5.52 Some provisions of the SIS Act should not be applied to FHSAs, because the concepts, regulations or procedures in those provisions are only relevant under the superannuation framework.

5.53 For some other matters, such as trustees' obligations in relation to FHSA holders' tax file numbers (TFNs), the FHSA Bill 2008 contains specific rules which would overlap with SIS Act rules. In relation to other matters, such as investments in instalment warrants, the Government has determined that the current rules in the superannuation regulation framework should not apply to FHSA trusts.

5.54 Where these sections would otherwise be 'caught' by the basic application provision, section 115 is used to disapply these sections from the prudential framework that is applied to FHSAs. Where these sections are automatically excluded under the basic application rule, because they do not apply to a public offer superannuation fund or a trustee of such funds, there is no need to also disapply these concepts or requirements using section 115.

5.55 The provisions of the SIS Act that will not apply are as follows.

Modification provision

5.56 Section 116 modifies references and concepts in the SIS Act so that they become references and concepts that are relevant for the FHSA Bill 2008.

5.57 While the basic application provision applies the SIS Act requirements to the equivalent persons or entities under the FHSA Bill 2008, references within the SIS Act to requirements, functions or duties imposed by other sections of the SIS Act or by the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) are not affected by the application provision, and so will still refer to the requirements, functions or duties under the SIS Act or the SIS Regulations.

5.58 For provisions of the SIS Act that apply in accordance with sections 114 and 115, these modification rules will ensure these provisions apply correctly. In the following paragraphs and examples, the term 'FHSA Act' is used to explain how the modification rules would operate if the FHSA Bill 2008 is passed and comes into force. Likewise, the term 'FHSA Regulations' is used to explain how the modification rules would operate in relation to the regulations that are proposed to be made under the FHSA Bill 2008, if the FHSA Bill 2008 is passed and comes into force.

•

The first modification rule ensures that references to the SIS Act become references to the 'FHSA Act' [ paragraph 116(a) ].

•

The second modification rule ensures that references to the SIS Regulations become references to the 'FHSA Regulations' [ paragraph 116(b) ].

•

The third modification rule ensures that references to a calendar year become references to a financial year [ paragraph 116(c) ].

5.59 In addition, APRA will have the power to make prudential standards in relation to the FHSA trusts [ sections 121 and 122 ]. Some modification rules ensure that prudential standards are reflected in the regulatory framework, and breaches of prudential standards will be enforceable under the regulatory framework.

•

The fourth modification rule ensures that breaches of prudential standards will be enforced in the same way as breaches of the 'FHSA Act' [ paragraph 116(d) ];

•

The fifth modification rule ensures that conduct (including functions and powers) that are required or authorised by, or otherwise performed in connection with, the prudential standards are treated in the same way as conduct (including functions and powers) that are required or authorised by, or otherwise performed in connection with the 'FHSA Act' [ paragraph 116(e) ].

References to ' this Act'

5.60 Without modification, references to 'this Act', as they apply under the basic application provision, will still refer to the SIS Act. As such, the first modification rule changes these references so that they refer to the 'FHSA Act'. [ Paragraph 116(a) ]

5.61 Under this modification rule, all references to persons or entities performing their functions or duties under or in accordance with 'this Act' will refer to performance of functions or duties under or in accordance with the 'FHSA Act'. Likewise, all references to breaches of 'this Act' will refer to breaches of the 'FHSA Act'.

Example 5.12

Section 35A requires trustees to keep accounts of the fund in specific ways. Paragraph 35A(1)(d) requires trustees to ensure that:

(d) the accounting records of the FHSA trust are kept in a way that enables those accounts, statements and returns to be conveniently and properly audited in accordance with this Act .

Without modification, the reference 'this Act' still refers to the SIS Act. By applying this modification rule, 'this Act' will refer to the 'FHSA Act' and paragraph 35A(1)(d) will require trustees to ensure that:

(d) the accounting records of the FHSA trust are kept in a way that enables those accounts, statements and returns to be conveniently and properly audited in accordance with the ' FHSA Act' .

Example 5.13

Section 131A allows the Regulator to refer matters to professional associations of auditors or actuaries, where specific triggers are met. Paragraph 131A(1)(d) allows the Regulator to refer matters where the Regulator is of the opinion that the approved auditor or actuary:

(d) is otherwise not a fit and proper person to be an approved auditor or an actuary for the purposes of this Act .

By applying this modification rule, the reference 'this Act' will become a reference to the 'FHSA Act' and paragraph 131A(1)(d) will allow the Regulator to refer matters where the Regulator is of the opinion that the approved auditor or actuary:

(d) is otherwise not a fit and proper person to be an approved auditor or an actuary for the purposes of the ' FHSA Act' .

References to ' the Regulations'

5.62 Without modification, references to 'the regulations', as it is applied under the basic application provision, will still refer to the SIS Regulations. As such, the second modification rule changes these references so that they refer to the 'FHSA Regulations'. [ Paragraph 116(b) ]

Example 5.14

Section 301 provides a definition of 'SIS officer' as:

a person exercising powers or performing functions under or in relation to this Act or the regulations .

By applying the first and second modification rules, 'this Act' will become a reference to the 'FHSA Act' and 'the regulations' will become a reference to 'FHSA Regulations'. The definition will become:

a person exercising powers or performing functions under or in relation to the ' FHSA Act' or the ' FHSA Regulations' .

Also refer to the fourth and fifth modification rules.

Reference to ' year of income'

5.63 Under the third modification rule, references to a 'year of income' in the SIS Act will be treated as references to a 'financial year', as this ensures trustees will comply with audit and accounting requirements, as well as requirements relating to in-house assets, in accordance with the financial year. [ Paragraph 116(c) ]

Other modification rules

5.64 The fourth and fifth modification rules relate to APRA's power to determine prudential standards that apply to trustees that are FHSA providers. [ Paragraphs 116(d) and (e) ]

5.65 APRA's power to make prudential standards in relation to FHSA trusts and trustees, and the modifications that ensure the prudential standards become part of the regulatory framework for FHSA trusts and trustees, are explained below.

Prudential standards in relation to trustees and related modifications

5.66 APRA will have the power to make prudential standards in relation to FHSA trusts [ section 121 ]. This enables APRA to apply consistent prudential standards to FHSA providers, where necessary. Prudential standards made under this Division would only apply to the FHSA trusts operated by an FHSA provider and not to their superannuation entities.

5.67 Prudential standards assist to improve the clarity and certainty of prudential regulation by providing additional detail on prudential matters set out in the enabling legislation. Currently, standards complement and reinforce the prudential requirements set out in the Banking Act 1959, Insurance Act 1973 and Life Insurance Act 1995 by specifying how the regulatory framework is intended to operate in practice and APRA's expectations in overseeing that framework. Standards enable key minimum requirements to be articulated at a level of detail that would not be appropriate within principles-based, enabling legislation.

5.68 Standards introduce greater flexibility into the prudential framework as they can be more readily adjusted over time to respond to developments in both domestic and international conditions, industry best practice and broader structural changes in the market. This enhances the effectiveness of prudential regulation by ensuring that regulation remains relevant over time.

5.69 APRA will have the flexibility to make, vary or revoke prudential standards that apply to a single trustee that is an FHSA provider, a class of trustees that are FHSA providers or all trustees that are FHSA providers. This flexibility allows APRA to make discretionary decisions under its prudential standards, including discretions to approve, impose, adjust or exclude specific prudential requirements in relation to one or more specified trustees that are FHSA providers. [ Subsections 121(1), (2) and (4) ]

5.70 A prudential standard must be consistent with the 'FHSA Act', the 'FHSA Regulations' and the Financial Sector (Collection of Data) Act 2001 . [ Subsection 121(3) ]

5.71 Generally, prudential standards that do not apply to one or more specified trustees are legislative instruments, and are therefore subject to the requirements of the Legislative Instruments Act 2003 . This Act requires prudential standards that are legislative instruments to be registered on the Federal Register of Legislative Instruments. [ Subsection 121(8) ]

5.72 However, a standard, variation or revocation of the standard that applies to one or more specified trustees is not a legislative instrument for the purposes of section 5 of the Legislative Instruments Act 2003 . This is because it is an administrative decision that applies the law to an entity and not to a class of entities, it does not create an exemption from the requirements of the Legislative Instruments Act 2003 . [ Subsection 121(7) ]

5.73 APRAs decisions in relation to a standard, variation or revocation of the standard that applies to one or more specified trustees that are FHSA providers are subject to merits review. [ Section 74 ]

5.74 The modification rules in sections 116 and 117 modify the prudential framework that applies to trustees that are FHSA providers, by specifying how the new prudential standards will apply to these trustees and how breaches of these prudential standards will be enforced. These are explained below.

' conduct ( including an omission ) that is inconsistent with the prudential standards'

5.75 Under the fourth modification rule in section 116, a breach of prudential standards made under section 121 will be enforced in the same way as a breach of the FHSA Bill 2008. Other conduct contrary to prudential standards will also be treated in the same way as conduct contrary to the FHSA Bill 2008. [ Paragraph 116(d) ]

5.76 This modification rule ensures that if a person fails to fulfil any functions or duties imposed under the prudential standards, or breaches a requirement in the prudential standards, the failure or breach can be enforced in the same way as breaches of the FHSA Bill 2008. In effect, all provisions that refer to breaches of the 'FHSA Act' or circumstances inconsistent with the 'FHSA Act' will refer to breaches of the 'FHSA Act' and prudential standards, or circumstances inconsistent with the 'FHSA Act' and prudential standards.

Example 5.15

Paragraph 131A(1)(a) enables the Regulator to refer matters to professional associations where the Regulator is of the opinion that the approved auditor or actuary has failed to carry out or perform adequately and properly:

(i)

the duties of an auditor or an actuary under this Act or the regulations ;

Applying this modification rule, if a person failed to perform their functions under the prudential standards, it would be treated in the same way as a breach of the 'FHSA Act'. In effect, paragraph 131(1)(a) would allow the Regulator to refer matters where the Regulator is of the opinion that an approved auditor or actuary has failed to carry out or perform adequately and properly:

(i)

the duties of an auditor or an actuary under the ' FHSA Act', the prudential standards or the ' FHSA Regulations' ;

' conduct ( including an omission ) that is required or authorised by, or otherwise performed in connection with, the prudential standards'

5.77 Under the fifth modification rule, functions, obligations and powers imposed by prudential standards will apply to persons and entities in the same way as functions, obligations and powers imposed by the FHSA Bill 2008. Likewise, where a prudential standard authorises or permits particular conduct, this will apply as though the conduct is authorised or permitted by the FHSA Bill 2008.

5.78 The concept 'conduct (including an omission) that is required or authorised by, or otherwise performed in connection with, the prudential standards' is a broad one, which includes all provisions that refer to persons or entities' functions, duties and powers. It includes provisions that enable (but do not require) a person to take action, such as:

•

an auditor or actuary may report certain information to APRA under section 130 of the SIS Act;

•

APRA may accept enforceable undertakings in connection with a matter that is related to APRA's functions and powers under section 262A of the SIS Act; and

•

a person or an entity that takes action in accordance with the prudential standards, the entity would not be liable in civil proceedings under section 341 of the SIS Act and section 127 of the FHSA Bill 2008.

Additional references to prudential standards

5.79 Other provisions of the SIS Act, when applied to FHSAs, should also refer to prudential standards. Section 117 makes the following modifications to the SIS Act.

5.80 The first modification inserts a reference to 'prudential standards' in paragraph 130A(a), so that the section will relevantly read, the auditor or actuary of an FHSA trust may give to the Regulator information about the FHSA trust or a trustee of the FHSA trust obtained in the course of, or in connection with, the performance by the person of audit or actuarial functions under the 'FHSA Act' and the prudential standards. [ Subsection 117(2) ]

5.81 The second modification inserts a new paragraph 133(1)(d), referring to the prudential standards, so that the section will relevantly read, the Regulator may suspend or remove a trustee of an FHSA trust, if the trustee has breached a prudential standard or the trustee's authorisation as an FHSA provider has been cancelled. [ Subsection 117(3) ]

5.82 The third modification inserts a new paragraph 135(1)(ca), referring to the prudential standards, so that the section will relevantly read, the Regulator may determine the terms and conditions of the appointment of the acting trustee, despite anything in the prudential standards. [ Subsection 117(4) ]

5.83 The fourth modification inserts a reference to 'prudential standards' in paragraph 139(b), so that the section will relevantly read, while a person is acting as a trustee under Part 17 of the SIS Act (as it applies in the 'FHSA Act'), the entity's governing rules, the 'FHSA Act', the prudential standards, the 'FHSA Regulations' and any other law apply in relation to the person as if the person were the trustee. [ Subsection 117(5) ]

5.84 The fifth modification inserts a reference to 'prudential standards' in subsection 320(1), so that the section will relevantly read, the Regulator may intervene in any proceeding relating to a matter arising under the 'FHSA Act' or the prudential standards. [ Subsection 117(6) ]

5.85 The last modification inserts a reference to 'prudential standards' in section 341, so that the section will relevantly read, a person is not liable in civil action or civil proceedings in relation to an act done in fulfilment of an obligation imposed by the 'FHSA Act', the prudential standards or the 'FHSA Regulations'. [ Subsection 117(7) ]

Capital requirements for custodians

5.86 Section 118 modifies the capital requirement for custodians of FHSA trusts, to ensure that the custodian's approved guarantee can also cover their activities as custodian of FHSA trusts. This mirrors the modifications to trustee's capital requirements in subsections 93(3) and (4).

5.87 A custodian would satisfy its capital requirements under paragraph 123(1)(b) of the SIS Act (as it applies under subsection 114(2)) if it has an approved guarantee of $5 million [ Regulation 13.19 of the SIS Regulations ] and the trustee of the FHSA trust is also entitled to the benefit of the approved guarantee in relation to the custodian's FHSA activities.

5.88 In effect, the custodian would be required to amend its deed of approved guarantee to ensure that the guarantee also applies to its activities as a custodian of FHSA trusts, but is not required to obtain an additional amount under its approved guarantee. [ Subsection 114(2) and section 118 ]

Transfer of First Home Saver Account trusts

5.89 Section 119 modifies the transfer of fund (or successor fund) mechanism under the SIS Act, as it applies under subsection 114(2).

5.90 An FHSA trust cannot be transferred to an approved deposit fund, because an FHSA is not a superannuation product. [ Subsection 114(2) and paragraph 119(b) ]

5.91 The receiving FHSA trust must have a trustee that is also an authorised FHSA provider. [ Subsection 114(2) and paragraph 119(c) ]

Other aspects of the prudential regulation framework for trustees

5.92 Some other aspects of the prudential framework for FHSA trustees are explained below.

Civil penalty provisions and criminal offences

5.93 Part 21 of the SIS Act, and criminal offences in the SIS Act, apply to FHSA trusts and their trustees in accordance with the basic application rules in section 114 and modification rules in section 116.

5.94 If these provisions are not automatically excluded by the rules in section 114 or disapplied by section 115, they would continue to be a civil penalty provision or a provision carrying a criminal offence in relation to the FHSA Bill 2008.

5.95 In effect, a contravention civil penalty provisions would entail the consequences of breaching a civil penalty provision under Part 21 of the SIS Act, as it applies in the FHSA Bill 2008; and trustees and other persons can commit an offence if they breach a provision of the SIS Act, as it applies in the FHSA Bill 2008, and the provision carries an offence.

Review of decisions

5.96 The definition of 'reviewable decision' and review procedures in sections 10, 344 and 355 of the SIS Act apply to FHSA trusts and their trustees, in accordance with the basic application rules in section 114 and the modification rules in section 116. As such, if these provisions are not automatically excluded by section 114 or disapplied by section 115, APRA continues to be able to make decisions in relation to the FHSA Bill 2008 and these decisions continue to be subject to review.

5.97 APRA's decisions in relation to authorisation and prudential standards that apply to specified trustees are not listed in the definition of 'reviewable decisions' in section 10 of the SIS Act. These decisions are subject to review under Subdivision 4, Division 2A of Part 5. The review procedures for these decisions are consistent with the review procedures under the SIS Act.

5.98 Arrangements for the review of decisions made by the Commissioner of Taxation are outlined in Chapter 8.

Disqualification

5.99 Parts 15 and 16 of the SIS Act apply to trustees of FHSA trusts, their responsible persons, as well as auditors, actuaries, custodians and investment managers of FHSA trusts.

5.100 Individuals and bodies corporate may be disqualified under these Parts, in accordance with the basic application rules in section 114 and the modification rules in section 116. These will be disqualifications under the FHSA Bill 2008 rather than under the SIS Act.

5.101 However, some disqualification criteria, in relation to personal or corporate bankruptcy and conviction for an offence in respect of dishonest conduct, will be common under the FHSA Bill 2008 and the SIS Act. As such, an individual or body corporate disqualified because of bankruptcy or conviction for such an offence will be disqualified under both the FHSA Bill 2008 and the SIS Act.

5.102 A disqualification under the FHSA Bill 2008 carries consequences for the disqualified person. For example, an individual commits an offence if the individual acts as a responsible person of a trustee, investment manager or custodian while disqualified [ section 126K of the SIS Act, as it applies under subsection 114(2) ]; where a trustee becomes a disqualified person, APRA may cancel its authorisation as an FHSA provider [ paragraph 107(2)(b) ]; and a person that acts as the custodian or investment manager of an FHSA trust while disqualified also commits an offence [ section 126 of the SIS Act, as it applies under subsection 114(2) ].

Exemptions and modifications

5.103 Part 29 applies to FHSA trusts and their trustees, in accordance with the basic application rules in section 114 and modification rules in section 116. As such, APRA can determine exemptions and modifications in relation to FHSA trusts and trustees under the FHSA Bill 2008 independently of exemptions and modifications determined under the SIS Act.

Reporting under the Financial Sector ( Collection of Data ) Act 2001

5.104 The Financial Sector (Collection of Data) Act 2001 requires an entity that is a 'body regulated by APRA', within the meaning of the APRA Act, to report data in accordance with the Financial Sector (Collection of Data) Act 2001 . ADIs and life insurance companies are already bodies regulated by APRA within the meaning of the APRA Act, and trustees of FHSA trusts are also defined as a 'body regulated by APRA' [ Schedule 3, item 6, FHSA (Consequential Amendments) Bill 2008 ]. As such, all FHSA providers will be required to report data in accordance with reporting standards determined under section 13 of the Financial Sector (Collection of Data) Act 2001 .

Investment management for investment-linked First Home Saver Accounts

5.105 Investment-linked FHSAs differ from other investment-linked products generally offered by trustees and life insurance companies. FHSAs are likely to be much shorter term investment products and have less predictable withdrawal patterns. In addition, given that the purpose of FHSAs is to save for a first home, account holders are likely to have a greater aversion to risk and lower tolerance for capital losses, relative to superannuation and life insurance customers.

5.106 Principles-based investment rules will apply to investment-linked FHSAs to ensure that FHSA investments reflect the purpose and nature of the accounts. These rules will not apply to accounts that are offered by banks, building societies and credit unions as these must be capital-guaranteed and do not carry the same risks as investment-linked accounts.

First Home Saver Accounts offered by trustees

5.107 The investment rules established under paragraph 52(2)(f) of the SIS Act apply by reference to FHSA trusts operated by trustees in accordance with subsection 114(2) [ subsection 120(1) ]. Additional investment rules have also been imposed to reflect the purpose and nature of FHSAs.

5.108 The investment rules require that the investment strategy has regard to the entire circumstances of the entity. The trustee must have regard to the risk of capital loss, the likely return from the underlying investments, the liquidity requirements, and the ability to discharge financial liabilities.

5.109 As FHSAs can be withdrawn within four financial years after opening, they are likely to be much shorter term investment products than superannuation. Unlike most superannuation accounts, FHSAs will generally be less able to recover financial losses caused by short-term market fluctuations prior to the savings being withdrawn for a first home deposit. A new covenant, subparagraph 52(2)(f)(v), is inserted into the SIS Act covenants as they apply to trustees in the FHSA Bill 2008, requiring investment strategies to have regard to the risk of capital loss given the relatively shorter term investment horizon of FHSAs as reflected in the FHSA payment rules. [ Subsection 120(3) ]

5.110 In having regard to the risk of capital losses, these requirements should not prevent trustees from formulating investment strategies that may be suited to individuals with a longer investment horizon than the minimum contemplated by the payment rules, provided that strategies take into account the possibility that savings could be withdrawn once the minimum requirements are met.

Investment choice

5.111 Providers may develop more than one investment option and allow FHSA holders to choose between options. Providers offering FHSA holders a choice between different investment options must formulate an investment strategy for each option, in place of a single strategy for the entity [ subsection 120(2) ], that separately complies with subparagraphs 52(2)(f)(i) to (v) of the SIS Act as it applies under subsection 114(2) [ subsection 120(4) ]. As a consequence of these amendments, subsection 52(4) of the SIS Act becomes redundant and is omitted [ subsection 120(5) ].

5.112 FHSA holders may choose between investment options formulated by the FHSA provider in accordance with the investment rules. Where an FHSA holder directs the trustee to adopt a particular investment option for the FHSA holder's investments, the trustee is exempted from the requirement not to be subject to direction. [ Subsection 120(7) ]

5.113 In accordance with section 55 of the SIS Act, the trustee has a defence to an action for loss or damage suffered by a person as a result of an investment made by the trustee, if the investment is made in accordance with paragraph 52(2)(f) of the SIS Act. For FHSAs this defence is extended to loss or damage suffered by a person as a result of an investment made by the trustee, if the investment is made in accordance with paragraph 52(2)(fa) of the SIS Act as it applies under subsection 114(2). [ Subsection 120(6) ]

Accounts offered by life insurance companies

5.114 Further investment rules will apply to FHSAs that are offered as investment-linked life policies in addition to those already in place for statutory funds under the Life Insurance Act 1995 . [ Section 124 ]

5.115 These additional investment rules apply only to life policies that are offered as investment-linked contracts, within the meaning of section 14 of the Life Insurance Act 1995 [ subsection 124(1) ]. Balances of FHSAs offered as investment account policies, by definition, cannot reduce in value otherwise than by amounts withdrawn by the account holder or by charges payable under the contract. Accordingly, they are not subject to additional investment rules due to their low risk nature.

5.116 Providers of investment-linked life policies must have regard to the diversification of the class or group of assets underlying the policies [ paragraph 124(2)(a) ]. Consideration of diversification both within and among asset classes is important to manage the investment risk associated with investment-linked accounts.

5.117 Investment-linked life policies are required to have particular regard to the risk of capital loss given the relatively shorter term investment horizon of FHSAs. [ Subparagraph 124(2)(b)(i) ]

5.118 The liquidity of the class or group of assets underlying investment-linked life policies is required to have regard to the unpredictability in cash flow of FHSAs. [ Subparagraph 124(2)(b)(ii) ]

5.119 If an investment-linked life policy allows an account holder to choose between different investment options, each option must conform with the additional investment rules specified in section 124. [ Subsection 124(3) ]

Protection of small balances

5.120 FHSA providers are required to ensure that fees do not exceed investment earnings in any given year for accounts that have small balances.

5.121 The provisions are modelled on the 'member protection' rules that protect small superannuation balances from being eroded by fees and charges outlined in the SIS Regulations.

5.122 If an FHSA balance is less than $1,000 an FHSA provider must not make a payment of fees if that payment would exceed the total earnings for that FHSA for the period. [ Subsection 125(1) ]

5.123 An FHSA provider is not required to limit fees if the:

•

FHSA holder consents in writing;

•

the fees are calculated based on the FHSA holder's units in an FHSA trust; or

•

the FHSA is an FHSA policy issued by a life insurance company.

[ Subsection 125(2) ]

5.124 An FHSA provider is also not required to limit fees for the period if the fees are apportioned based on the FHSA provider's total:

•

earnings for all FHSAs it provides; or

•

balances for all FHSAs it provides.

[ Subsection 125(3) ]

5.125 FHSA providers are not able to avoid the small balance rules by delaying fees until a subsequent period. For example, by charging fees in a later period where the FHSA balance will have increased to above $1,000.

5.126 An FHSA provider commits an offence if it fails to comply with these requirements. The penalty is up to 100 penalty units. [ Subsection 125(1) ]

5.127 If an FHSA provider fails to comply with these rules, the fees paid are still valid. [ Subsection 125(4) ]