House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Chapter 8

Other measures : transfers of business

Outline of chapter

8.1 Schedule 5 of the Bill amends the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Business Transfer Act) in order to provide for greater flexibility and certainty when arranging for a compulsory transfer of business from a distressed ADI.

Context of amendments

8.2 Part 4 of the Business Transfer Act contains compulsory transfer of business powers that could be used to transfer business from a distressed ADI to a healthy ADI that was willing to receive (purchase) the business. However, present restrictions may impact on the use of these powers to manage a distressed ADI.

8.3 Part 4 also provides for compulsory transfers of business between life insurers.

8.4 The Act also provides for voluntary transfers of business and restructures of ADI corporate groups, however no changes are proposed to these provisions as they are less likely to be used in the resolution of a distressed ADI.

Summary of new law

8.5 Amendments to the Business Transfer Act will broaden the compulsory transfer of business powers to allow transfers from an ADI to a non-ADI entity and to allow further transfers of associated business functions from an entity related to an ADI that is also transferring business. These changes could be used to facilitate transfers of business to a bridge bank or asset management company if such entities were ever established. The flexibility to break up an institution in this way could also be used to facilitate the sale of parts of a distressed institution to one or multiple buyers.

8.6 Further amendments to the Act also provide greater reassurance that compulsory transfers of business could be used effectively should they need to be applied to a distressed ADI. These include: clarifying that the Commonwealth is liable for any challenges for acquisition of property otherwise than on just terms in order to provide certainty for the institution agreeing to receive business under the Act; and allowing greater flexibility in the circumstances when the compulsory transfer provisions can be used by allowing for a Ministerial determination that a transfer should occur.

Comparison of key features of new law and current law

Detailed explanation of new law

Changes to types and preconditions for effecting compulsory transfers of business

8.7 Existing section 25 of the Business Transfers Act allows APRA to make a compulsory transfer determination between two regulated bodies of the same type - that is, from an ADI to an ADI or from a life insurance company to another life insurance company.

8.8 There are no substantial changes to the operation of compulsory transfers between life insurance companies. Parts of the framework for making such transfers have been re-enacted to separate them from the changes made to ADI arrangements. [Schedule 5, Item 7, subsection 25(1C)]

8.9 Arrangements for transfers from one ADI to another largely remain unchanged but are now set out separately from the life insurance provisions and from new transfer types. [Schedule 5, Item 7, Subsection 25(1)]

8.10 The main difference for ADI to ADI transfers is to introduce an ability for the Minister to declare in writing that a transfer of business should occur from a specified ADI. [Schedule 5, Item 13, Section 25A] This mechanism is designed to give greater flexibility to authorities as to when a compulsory transfer can be undertaken. This recognises that it is difficult to predict all circumstances when a compulsory transfer of business may be useful in facilitating an appropriate resolution option.

8.11 If such a determination is made APRA no longer needs to be satisfied that another condition in new section 25(1)(a) is met before making a compulsory transfer determination (although other conditions in section 25, including that APRA has considered the interests of depositors and considers that the transfer is appropriate, must still be satisfied).

8.12 New powers are introduced to enable a transfer from an ADI to a non-ADI entity. [Schedule 5, Item 7, Subsection 25(1A)] In practice such transfers can only be of unregulated business as non-ADI entities are not authorised by APRA to undertake banking business, including deposit-taking activities. Non-ADI entities receiving business could be a private business willing to purchase a non banking part of the ADIs business. Transfers could be made to an asset management company set up for the purpose of receiving such business.

8.13 Transfers can be made from an ADI to a non-ADI for the same reasons as a transfer to an ADI (as set out in paragraph 25(1)(a)) or alternatively if APRA has already made a partial transfer from the transferring ADI to an ADI of regulated business. The latter arrangement allows an ADI to be broken up into banking and non-banking entities, or could allow greater flexibility in how a receiving group of companies structures business received under a compulsory transfer.

8.14 If APRA is making, or has made within a reasonable period, a compulsory transfer from an ADI to an ADI or non-ADI, APRA may also make a determination that there is to be a compulsory transfer from a body that is related to the ADI (that is not an ADI, life insurer or general insurer) to another body that is the original receiving body or is related to the original receiving body. [Schedule 5, Item 7, Subsection 25(1B)]

8.15 The purpose of allowing such related transfers is to allow for the transfer of important business functions that may be required for the operation of the ADI, but are performed by another entity within its corporate group. Such functions could be transferred along with the ADI's business in order to allow preserve the continued effective operation of the ADI's business functions.

8.16 Items 1 to 6 and 8 to 11 are consequential to the above restructuring of section 25 or of the broadening of transferring and receiving bodies that can be involved in a compulsory transfer. [Schedule 5, Items 1 to 6 and 8 to 11]

8.17 Amendments made to section 8, 24 and 25 apply to the making of determinations on, or after commencement. [Schedule 5, Item 19]

8.18 Determinations made by APRA under section 25 or declarations made by the Minister under section 25A are not legislative instruments. The provisions specify that the instruments are not legislative instruments in order to assist readers, as they are not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 . [Schedule 5, Item 12 and Item 13 Section 25A(2)]

Compulsory transfers not grounds for denying obligation

8.19 A compulsory transfer of business or actions related to effecting a compulsory transfer of business cannot be used to trigger default or protective clauses under a contract with the financial institution, so that the contract or the other party to the contract cannot deny contractual obligations, accelerate debts or close out transactions merely because the statutory manager has implemented a recapitalisation (see also similar provisions in Schedule 2, on no ending of contractual obligations). [Schedule 5, Item 14]

8.20 This change applies only to contracts made after commencement. [Schedule 5, Item 19]

Interaction with the Trade Practices Act

8.21 A compulsory transfer of business or anything done to enable or facilitate a compulsory transfer of business are authorised for the purposes of subsection 51(1) of the Trade Practices Act 1974 . [Schedule 5, Items 15 to 17]

8.22 This exemption is intended to ensure that the transfer can occur quickly and give certainty to acquiring parties without formal competition review processes which may take some time. The Australian Competition and Consumer Commission (ACCC) must be consulted on the competition implications of a compulsory transfer under paragraph 26(2)(a) of the Business Transfer Act and can be consulted under various other potential approval mechanisms, for example, the Treasurer's national interest decision under the Financial Sector (Shareholdings) Act 1998 .

8.23 The automatic authorisation applies to transfers occurring after commencement. [Schedule 5, Item 19]

Compensation for the acquisition of property

8.24 Existing section 44 of the Business Transfer Act ensures that any action that would result in an acquisition of property from a person otherwise than on just terms would remain valid, with the receiving body liable to pay compensation of a reasonable amount as agreed with the person.

8.25 Amendments to section 44 are made to clarify that the Commonwealth is liable for any challenges for acquisition of property otherwise than on just terms under a compulsory transfer. This is intended to provide certainty for the institution agreeing to receive business from a transferring body. Receiving bodies remain liable for compensation for acquisitions of property otherwise than on just terms arising from a voluntary transfers of business or restructure under parts 3 or 4A of the Act. [Schedule 5, Item 18]

8.26 This change applies to acquisitions of property occurring on or after commencement. [Schedule 5, Item 19]

Index

Schedule 1 :

Schedule 2 :

Schedule 3 :

Schedule 4 :

Schedule 5 :