House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP

General outline and financial impact

Outline of Bill

The Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Bill 2010 (the Bill) amends the Australian Prudential Regulation Authority Act 1998, the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995, the Superannuation Industry (Supervision) Act 1993, and the Financial Sector (Collection of Data) Act 2001 and related Acts to enhance Australia's crisis management and prudential framework.

The Bill also amends the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998, the First Home Saver Account Providers Supervisory Levy Imposition Act 2008; the General Insurance Supervisory Levy Imposition Act 1998; the Life Insurance Supervisory Levy Imposition Act 1998; the Retirement Savings Account Providers Supervisory Levy Imposition Act 1998 and the Superannuation Supervisory Levy Imposition Act 1988 ( the levy imposition Acts) and the Financial Institutions Supervisory Levies Collection Act 1998 to improve the methodologies governing the determination of financial sector levies.

APRA's preventive powers

Schedules 1 to 3 of the Bill promote the prudential regulation of bodies in the financial sector by amending the Banking, Insurance and Life Insurance Acts to enhance the powers of the Australian Prudential Regulation Authority (APRA) to prevent prudential concerns arising.

The amendments:

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enable APRA by legislative instrument to set criteria for granting authorisation to carry on business as an authorised deposit-taking institution (ADI), insurer or authorised non-operating holding company (NOHC) of an ADI or insurer;

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enable APRA to continue an authorisation in-effect upon revocation for relevant purposes;

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enable APRA to make prudential standards in respect of corporate groups or parts of groups under the Insurance Act;

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clarify that the prudential standards may exclude assets from being 'assets in Australia' for the purposes of section 28 of the Insurance Act;

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clarify the relationship between section 28 of the Insurance Act and sections 62M, 62ZZC and 62ZZE of that Act;

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enable prudential standards under the Banking Act to exclude assets and amounts from being 'assets in Australia' for the purposes of subsection 13(4) of that Act; and

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enable incorporation by reference in prudential standards made under the Banking, Insurance and Life Insurance Acts.

Date of effect: The amendments commence 28 days after the Bill receives Royal Assent.

Proposal announced: The measures were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

APRA's correction powers

Schedules 1 to 3 of the Bill promote the prudential regulation of bodies in the financial sector by amending the Banking, Insurance and Life Insurance Acts to strengthen APRA's powers to correct breaches of the prudential framework by issuing directions.

The amendments:

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enhance the triggers for issuing directions;

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make it an offence for a NOHC of a general insurer to fail to comply with a direction to remove a director or senior manager; and

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clarify that APRA may issue directions to foreign ADIs relating to their control of assets and their responsibility for liabilities.

Date of effect: The amendments commence 28 days after the Bill receives Royal Assent.

Proposal announced: The measures were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

APRA's and ATO's investigation powers

Schedules 1 to 4 of the Bill promote the prudential regulation of bodies in the financial sector by enhancing APRA's and the ATO's investigation powers.

In particular, the schedules amend the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, Retirement Savings Accounts Act, and Australian Prudential Regulation Authority Act (APRA Act) to:

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clarify APRA's and the ATO's investigation powers during the winding-up of a regulated entity;

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respond to the High Court's decision in Rich v Australian Securities and Investments Commission ( ASIC);

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harmonise record keeping provisions for APRA-regulated entities with respect to their accessibility by APRA; and

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enhance the protection and sharing of information by APRA.

Date of effect: The amendments commence 28 days after the Bill receives Royal Assent.

Proposal announced: The measures were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

APRA's failure management powers

Schedules 1 to 4 of the Bill promote the prudential regulation of bodies in the financial sector by making amendments related to APRA's failure management powers.

In particular, the schedules amend the Banking Act, Insurance Act, Life Insurance Act , Reserve Bank Act 1959 ( RBA Act), and Financial Sector Legislation Amendment (Business Transfer and Group Restructure Act) 1999 ( the Business Transfer and Group Restructure Act) in relation to:

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the appointment of a judicial manager to a general or life insurer, and APRA's powers with respect to judicial management of general and life insurers, and the statutory management of an ADI;

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compulsory transfer of business provisions with regard to a general or life insurer;

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matters relating to the winding up of an ADI, general insurer or life insurer; and

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the recapitalisation of an ADI, general insurer or life insurer.

Date of effect: The amendments commence 28 days after the Bill receives Royal Assent.

Proposal announced: The measures were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Auditors and actuaries

Schedules 1 to 4 of the Bill promote the prudential regulation of bodies in the financial sector and the administration of the Financial Claims Scheme (FCS) by amending the regulatory framework that applies to the auditors and actuaries of regulated entities.

In particular, the schedules amend the Banking, Insurance, Life Insurance, Superannuation Industry (Supervision), Financial Sector (Collection of Data) and Retirement Savings Accounts Acts to:

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harmonise the provisions relating to the appointment of auditors and the conduct of audits under the Banking, Insurance and Life Insurance Acts, as appropriate;

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enhance the auditing of data under the Financial Sector (Collection of Data) Act (FSCODA);

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insert equivalent offences (as relevant) to those contained in sections 311 and 1309 of the Corporations Act 2001 ( Corporations Act) into the Banking, Insurance, Life Insurance, Superannuation Industry (Supervision), Financial Sector (Collection of Data) and Retirement Savings Accounts Acts; and

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require auditors and actuaries of life insurers to give information to APRA on request that relates to APRA's functions under the Life Insurance Act or the FSCODA.

Date of effect: The amendments commence 28 days after the Bill receives Royal Assent.

Proposal announced: The measures were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Financial Claims Scheme

Schedules 1 and 2 contain amendments to the FCS provided for in the Banking Act and the Insurance Act to promote APRA's administration of that scheme.

Schedule 1 of the Bill amends the Banking Act to:

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enable APRA to determine the rate of interest that applies to protected accounts for the purposes of determining entitlements under the FCS, where APRA considers that the rate of interest is not certain;

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clarify the operation of the FCS in relation to pooled trust accounts; and

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clarify that APRA may require a liquidator to assist it in paying account-holders their entitlements under the FCS.

Schedule 2 of the Bill amends the Insurance Act to:

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clarify that the FCS applies to policies that were transferred to the declared general insurer, as well as policies that were issued by the declared general insurer;

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enhance APRA's ability to administer the scheme by enabling it to issue approved forms in respect of common administrative matters, enabling it to settle claims under the scheme; and enabling it to seek reasonable assistance or information from a judicial manager related to its functions and duties under the FCS;

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enable the scheme to operate in relation to claims against insurers of deregistered companies under section 601AG of the Corporations Act;

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ensure entitlements paid under the FCS are treated as if paid by the failed general insurer under the terms and conditions of its policy, for all relevant purposes;

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enable the Minister to declare that the FCS applies to an insolvent insurer under external administration or judicial management; and

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enable APRA to seek reasonable assistance, and specified information, from a judicial manager of a general insurer, where doing so would enable APRA to perform its duties and functions in relation to the FCS.

Date of effect: The amendments commence 28 days after the Bill receives Royal Assent.

Proposal announced: The measures were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

APRA's data collection powers

Schedules 3 and 4 of the Bill make amendments relating to the data collection regime in the FSCODA to promote: the harmonisation and flexibility of the data-collection and publishing regime; APRA's role as the central repository for the collection of financial data; and the administration of the FCS.

Schedule 4 of the Bill amends the FSCODA to:

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ensure APRA can collect data to assist the Minister formulate financial policy or to assist another financial sector agency perform its functions or exercise its powers;

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enable APRA to collect data from an expanded class of financial sector entities on direction from the Minister;

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clarify that APRA may collect data relating to the FCS under the FSCODA;

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protect confidential information in reporting standards from publication where publication is likely to detrimentally affect the stability of the financial system or financial institutions and the requested data is required urgently by APRA for a specified purpose;

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ensure APRA is not delayed by having to consult when preparing reporting standards where such delay would have a detrimental effect on financial system stability; and

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enable APRA to exempt an individual entity from requirements of reporting standards by written notice that is not a legislative instrument.

Schedule 3 of the Bill amends section 124 of the Life Insurance Act to provide that the documents required to be provided by a life insurer to a policy owner upon request are those specified by a reporting standard under the FSCODA.

Date of effect: The amendments commence 28 days after the Bill receives Royal Assent.

Proposal announced: The measures were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Financial sector levies

Schedules 4 and 5 of the Bill improves the methodologies governing the determination of financial sector levies by implementing recommendations of the 2009 Report of the Review of Financial Sector Levies and making related amendments.

Schedule 4 of the Bill replaces the reference to 'Treasurer' in paragraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act 1998 with a reference to 'trustee'.

Schedule 5 of the Bill:

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amends section 7 of the Superannuation Supervisory Levy Imposition Act 1998 so that the levy payable by a new starter is based on the entity's asset value on the day it became a superannuation entity; and

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replaces all reference to 'asset value' in the levy imposition Acts with references to 'levies base' so that a valuation basis other than assets can be used in determining levies payable.

In addition, schedule 7 of the Bill repeals the Authorised Non-operating Holding Companies Supervisory Levy Determination Validation Act 2000; the General Insurance Supervisory Levy Determination Validation Act 2000; the Life Insurance Supervisory Levy Determination Validation Act 2000; the Retirement Savings Account Providers Supervisory Levy Determination Validation Act 2000; and the Superannuation Supervisory Levy Determination Validation Act 2000.

Date of effect: The amendments in schedules 4 and 7 of the Bill commence 28 days after the Bill receives Royal Assent. The amendments in schedule 5 commence on 1 July 2010.

Proposal announced: The measures in schedules 4 and 5 of the Bill were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Minor and technical amendments

Schedules 1, 2, 3, 4 and 6 of the Bill make amendments of a minor or technical nature to the Banking Act, Insurance Act, Life Insurance Act, Superannuation (Industry) Supervision Act and Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act to correct drafting errors, reflect drafting practice, or ensure that present provisions in those Acts operate as intended.

Date of effect: The amendments commence 28 days after the Bill receives Royal Assent.

Proposal announced: The majority of measures were announced in the Minister for Financial Services, Superannuation and Corporate Law's Press Release No. 5 of 2010, dated 19 January 2010. An exposure draft of the measures was publically released on 19 January 2010.

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Summary of regulation impact statement

Regulation impact on business

Impact: The measures in the Bill apply to financial sector businesses in Australia, and the auditors, actuaries, and managers of such businesses.

Main points:

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The measures improve APRA's ability to regulate bodies in the financial sector in accordance with prudential laws, and enhance its ability to administer the FCS.

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The amendments improve methodologies governing the determination of financial sector levies.

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The measures may impose compliance costs on business. However, these costs are overall expected to be low and outweighed by the benefits of the amendments.