House of Representatives

Explanatory Memorandum

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

Chapter 4 - Amendments to APRA's failure management powers

Outline of chapter

4.1 Schedules 1 to 4 of the Bill contain amendments relating to APRA's failure management powers.

4.2 The schedules amend the Banking, Insurance, Life Insurance, RBA, and Business Transfer and Group Restructure Acts in relation to:

•

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;

•

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

•

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

•

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

Context of amendments

4.3 Recognising that prudential regulation does not (and, in a market economy, cannot) have a 'no failure' objective, it is important that APRA has effective powers to intervene when regulated financial institutions are at risk of experiencing financial difficulties that threaten their ongoing viability, and to ensure the effective resolution of the situation in a manner which maintains the stability of the financial system and protects depositors and policyholders.

Statutory and judicial management

4.4 APRA currently has the power to appoint a statutory manager to an ADI, and apply to the Federal Court for the appointment of a judicial manager to a general or life insurer, when one or more of the grounds for appointment (set out in the respective legislation) are met. However, in some respects there is a lack of clarity in relation to APRA's powers in relation to these appointments, specifically APRA's ability to collect information relating to the affairs of an ADI in statutory management, and APRA's ability to seek information from a judicial manager.

4.5 APRA's powers in these respects should be clear.

Transfer of business

4.6 Transferring the business of an entity in financial distress to a healthy institution may be a less disruptive and costly means of resolving problems in financial institutions than wind-up.

4.7 Currently, Part 4 of the Business Transfer and Group Restructure Act contains compulsory transfer of business powers that may be used to transfer business from a distressed ADI. This Part also provides for compulsory transfers of business from a distressed life insurer to a healthy life insurer that is willing to receive (purchase) the business. However, it does not currently provide for compulsory transfers of business between general insurers or a transfer from a life insurer to an entity that is not a life insurer. APRA's failure management powers would be enhanced by addressing these deficiencies.

Winding up

Priority provisions

4.8 Subsection 13A(3) of the Banking Act presently provides that if an ADI becomes unable to meet its obligations or suspends payment, its assets in Australia are to be available to meet its liabilities in the following order:

•

first, the ADI's liabilities (if any) to APRA because of the rights APRA has against the ADI because of section 16AI (relating to payouts to depositors under the FCS);

•

second, the ADI's debts (if any) to APRA under section 16AO (relating to expenses incurred in administering the FCS);

•

third, the ADI's deposit liabilities in Australia (other than any such liabilities covered under paragraph 13A(3)(a));

•

fourth, the ADI's other liabilities (in the order of their priority apart from subsection 13A(3)).

4.9 The section, however, does not provide priority for debts owed to the Reserve Bank of Australia (RBA) or under industry support contracts.

Definition of foreign ADI

4.10 Section 11E of the Banking Act provides that Division 2 (Protection of depositors) of the Act does not apply to a foreign ADI. Section 11D defines foreign ADI for the purposes of section 11E as not including the Bank of China.

4.11 The Bank of China was originally subject to the depositor protection provisions of the Banking Act as it accepted retail deposits. However, the Bank of China has now ceased to accept retail deposits and should be treated like all other foreign ADIs for the purposes of the depositor protection provisions of the Act.

Liquidation of an insurer following judicial management

4.12 The Insurance Act does not specify whether a winding up of a general insurer, following the recommendation of a judicial manager, is to be conducted according to the Corporations Act. This may lead to uncertainty and therefore should be resolved.

Recapitalisation

4.13 When an ADI, general insurer or life insurer is in financial distress, there is uncertainty over the extent of APRA's powers to issue a direction to the entity that requires the entity to recapitalise. Legal powers to facilitate mandatory recapitalisation only exist with certainty where an ADI is in statutory management or a general or life insurer is in judicial management.

Summary of new law

4.14 Schedules 1 to 4 of the Bill contain amendments relating to APRA's failure management powers. In particular, the schedules:

•

amend the Banking Act to specify that APRA may appoint a statutory manager to an ADI if doing so is in the interests of depositors, or for financial system stability, or both;

•

amend the Insurance and Life Insurance Acts to clarify that, before applying to appoint an external administrator to an insurer, a person is required to give to APRA all documents that will be filed in support of an application;

•

amend the Insurance and Life Insurance Acts to clarify that APRA has the right to be heard in proceedings for the replacement of a judicial manager;

•

amend the Banking Act to enable APRA, by written notice, to require a person to provide information, or documents containing information, that relate to the affairs of an ADI that is under statutory management;

•

amend the Insurance and Life Insurance Acts to enable APRA to seek information from a judicial manager to assist it in carrying out its functions and duties relating to the FCS;

•

amend the Business Transfer and Group Restructure Act to provide APRA with additional flexibility in relation to a compulsory transfer of the businesses of a life insurer, and the ability to require the compulsory transfer of the businesses of a general insurer;

•

amend the Banking Act and the RBA Act to clarify the priority of debts to the RBA and under industry support contracts in the winding up of an ADI;

•

amend the Banking Act to clarify that, as the Australian branch of the Bank of China no longer takes retail deposits, the deposit protection provisions in the Act will no longer apply to the branch consistent with the treatment of all foreign banks;

•

amend the Insurance Act to clarify that, where a Court orders that a general insurer be wound up on the basis of a recommendation from a judicial manager, the wind up will be conducted in accordance with the Corporations Act; and

•

amend the Banking, Insurance and Life Insurance Acts to enable APRA to issue a recapitalisation direction to an ADI, general insurer or life insurer, in certain circumstances.

Comparison of key features of new law and current law

Detailed explanation of new law

External administration

Triggers for appointing a statutory manager

4.15 The Bill amends section 13A of the Banking Act to specify that APRA may appoint a statutory manager to an ADI if:

•

it is likely that the ADI will be unable to carry on banking business in Australia consistently with the interest of its depositors; or

•

it is likely that the ADI will be unable to carry on banking business in Australia consistently with the stability of the financial system in Australia.

4.16 The amendment allows the appointment of a statutory manager when either or both triggers are met.

4.17 This amendment reflects that the interests of depositors and the stability of the financial system are separable concepts, and that there may be circumstances where an ADI is conducting its banking business in a manner that is not in the interests of its depositors, but where this does not necessarily adversely affect the stability of the financial system. The reverse could also be the case. There is a need for APRA to be able to appoint a statutory manager in either of these situations in order to ensure prompt remedial measures are taken to address the situation.

4.18 The amendment enables APRA to appoint a statutory manager in a timely and responsive manner where there is a need for early intervention to prevent detriment to the depositors of the affected ADI or the stability of the financial system, or both . [Schedule 1, items 20 and 21, subparagraph 13A(1)(b)(iii) and subparagraph 13A(1)(b)(iv) of the Banking Act 1959]

Information about applications to appoint an external administrator to a general and life insurer

4.19 The Bill amends section 62ZQ of the Insurance Act and section 179C of the Life Insurance Act to require a person to give the following documents to APRA before making an application for the appointment of an external administrator of a general insurer:

•

a copy of the application; and

•

a copy of all the documents that will be filed in support of the application.

4.20 The Bill amends the current offences in subsection 62ZQ(4) of the Insurance Act and subsection 179C(4) of the Life Insurance Act so that they apply to a failure to provide the specified documents. The Bill also repeals subsection 65ZQ(3) of the Insurance Act and subsection 179C(3) of the Life Insurance Act because the details prescribed in these subsections are contained in the amended subsections 62ZQ(1A) and 179C(1A).

4.21 This amendment enables APRA to receive these details prior to the hearing so as to understand the circumstances giving rise to the application, and so that it can take appropriate and timely action . [Schedule 2, items 54 to 56, and Schedule 3, items 45 to 47, subsections 62ZQ(1) to 62ZQ(4) of the Insurance Act 1973 and subsections 179C(1) to 179C(4) of the Life Insurance Act 1995]

Right to be heard in proceedings to replace a judicial manager

4.22 It is important to ensure that a person appointed as judicial manager under the Insurance or Life Insurance Acts has appropriate expertise and experience.

4.23 Currently, APRA has the right to be heard when the Federal Court of Australia appoints a judicial manager or terminates judicial management. However, when the Federal Court decides to replace one judicial manager with another, it is not clear that APRA has the right to be heard.

4.24 The Bill amends section 62R of the Insurance Act and section 163 of the Life Insurance Act to clarify that APRA has the right to be heard in proceedings related to the replacement of a judicial manager. This ensures that APRA's views are taken into account in all circumstances where the Federal Court may issue an order relating to the appointment or cancellation of the appointment of judicial management . [Schedule 2, item 50, and schedule 3, item 42, subsection 62R(3) of the Insurance Act 1973, and subsection 163(3) of the Life Insurance Act 1995]

Powers relating to statutory and judicial managers

4.25 The Bill amends the Banking Act to enable APRA, by written notice, to require a person to provide information, or documents containing information, that relate to the affairs of an ADI that is under statutory management. The amendment does not limit section 14A of the Banking Act which currently provides for the powers and functions of a statutory manager.

4.26 The notice must specify the period within which the information or documents must be given to APRA, and may specify the form and manner in which the information or documents must be given.

4.27 If APRA is the statutory manager, it may issue the notice if:

•

APRA reasonably believes that the person has the information or documents; and

•

APRA requires the information for the purposes of Division 2, Part 2 of the Banking Act (protection of depositors).

4.28 If APRA is not the statutory manager, APRA may issue the notice if:

•

the statutory manager requests, in writing, that APRA require such information or documents from the person;

•

APRA reasonably believes that the person has the information or documents; and

•

APRA is satisfied that the statutory manager requires the information for the purposes of Division 2, Part 2 of the Banking Act (protection of depositors).

4.29 A person that fails to comply with APRA's requirement to give information or documents commits an offence that is punishable by 50 penalty units or 12 months imprisonment, or both.

4.30 The amendment recognises that information about the financial condition of the ADI is most likely to be within the knowledge of key personnel within the ADI or with whom the ADI deals. The amendment enables APRA to require such information in a timely manner so as to maximise the chances of rehabilitation or crisis resolution.

4.31 The Bill amends section 62ZD of the Insurance Act to enable APRA to request information from the judicial manager about the following matters:

•

the conduct of judicial management;

•

the financial position of the general insurer under judicial management;

•

a matter that, APRA considers, will enable APRA to perform its functions under Part VC (FCS for Policyholders with Insolvent General Insurers) of the Insurance Act.

4.32 The notice must specify a period within which the information is to be given to APRA, which must be a reasonable period.

4.33 This is equivalent to APRA's ability to require information from a general insurer or a liquidator of a general insurer.

4.34 If a judicial manager fails or refuses to give APRA such information on request, it commits an offence. The fault-based offence is punishable by 100 penalty units or six months imprisonment, or both. The strict liability offence is punishable by 60 penalty units. The strict nature of the latter offence reflects APRA's need to receive prompt and accurate information about the conduct of judicial management and other relevant matters.

4.35 These amendments ensure that the statutory or judicial manager has can obtain the information required to understand the affairs of a distressed ADI or general insurer . [Schedule 1, item 27 and schedule 2, item 52, section 14AD of the Banking Act 1959, and section 62ZD of the Insurance Act 1973]

Powers of a judicial manager

4.36 The Bill amends subsection 62T(1) of the Insurance Act and subsection 165(1) of the Life Insurance Act to specify that a judicial manager of a general or life insurer has the powers of the Board of the insurer as well as the powers of the management of the insurer.

4.37 These amendments align the powers of a judicial manager with the powers of a statutory manager under the Banking Act. There are certain decisions that may only be taken by the Board of the insurer, which may be required to be made by a judicial manager for the purposes of fulfilling its functions.

4.38 These amendments apply to a judicial manager whether or not the judicial manager was appointed before, on, or after the commencement of these amendments . [Schedule 2, items 51 and 93, and schedule 3, items 43 and 63, subsection 62T(1) of the Insurance Act 1973, and subsection 165(1) of the Life Insurance Act 1995]

Business transfer

4.39 The Bill amends section 25 of the Business Transfer and Group Restructure Act to give APRA additional powers in relation to the compulsory transfer of the businesses of a general or life insurer, so that they are consistent with APRA's powers in relation to the compulsory transfer of an ADI's businesses.

4.40 Before APRA may issue a compulsory transfer determination, APRA must have considered the interests of policy owners of the insurer whose business will be transferred (when viewed as a group) and considered that, having regard to those interests, it is appropriate for the transfer to be made. APRA must also be satisfied that the conditions specified in subsection 25(2) are met.

4.41 The conditions in subsection 25(2) relate to the consent of the company that is receiving the transfer, the interests of the financial system as a whole and other relevant matters, the existence of relevant State or Territories legislation supporting the transfer, and the consent of the Minister (or a decision by the Minister that their consent is not required).

4.42 The Bill inserts subsection 25(1D), which enables APRA to require the compulsory transfer of a life insurer's (other than a friendly society's) non-regulated business to an entity that is not a life insurer, if APRA is satisfied that:

•

the life insurer concerned has contravened the Life Insurance Act, instruments made or conditions imposed under that Act; or

•

APRA has given the life insurer written notice that APRA proposes to investigate the entity's life insurance business; or

•

a judicial manager of the transferring body has recommended that the business or part of the business of the life insurer be transferred to another company; or

•

APRA has made a determination under subsection 25(1C) of the Act for the transfer of some or all of the life insurer's regulated business to another life insurer (whether or not the transfer has yet happened).

4.43 The Bill inserts subsection 25(1E), which enables APRA to require the compulsory transfer of some or all of a general insurer's business to another general insurer. The Bill also inserts subsection 25(1F), which enables APRA to require the compulsory transfer of a general insurer's non-regulated business to an entity that is not a general insurer.

4.44 For both types of compulsory transfer, APRA is required to be satisfied of any of the following triggers:

•

the general insurer concerned has contravened the Insurance Act, any regulations or other instruments made or conditions imposed under that Act;

•

APRA has served a written notice on the general insurer that an investigation is to be made;

•

a judicial manager of the general insurer has recommended that its business be transferred to another general insurer.

4.45 Additionally, for a compulsory transfer of non-regulated business from a general insurer to an entity that is not a general insurer (subsection 25(1F)), APRA may also be satisfied that APRA has made a determination under subsection 25(1E) for the transfer of some or all of the general insurer's regulated business to another general insurer (whether or not the transfer has yet happened).

4.46 Transfers are exempt from Part IV of the Trade Practices Act (which would be re-named the Competition and Consumer Act 2010 if the Trade Practices Legislation Amendment (Australian Consumer Law) Act (No 2) 2010 receives Royal Assent).

4.47 The Bill makes consequential amendments to section 62ZI of the Insurance Act and section 175 of the Life Insurance Act so that a judicial manager of a general or life insurer may recommend that a compulsory business transfer takes place under the Business Transfer and Group Restructure Act.

4.48 Lastly, the Bill also amends subsection 25(1C) of the Act to reflect the fact that one of the possible preconditions for a compulsory transfer is that a judicial manager of a life insurer has recommended that such a transfer be made . [Schedule 2, item 53, schedule 3, item 44, and schedule 4, items 4 and 5, paragraph 62ZI(2)(aa) of the Insurance Act 1973, paragraph 175(2)(aa) of the Life Insurance Act 1995, subparagraph 25(1C)(a)(iii) and subsections 25(1D) to 25(1F) of the Financial Sector (Business Transfer and Group Restructure) Act 1999]

Winding up

Priority provisions

4.49 The Bill amends subsection 13A(3) of the Banking Act so that it provides for liabilities to be paid in the following order:

•

first, the ADI's liabilities (if any) to APRA because of the rights APRA has against the ADI because of section 16AI;

•

second, the ADI's debts (if any) to APRA under section 16AO;

•

third, the ADI's liabilities (if any) in Australia in relation to protected accounts that account-holders keep with the ADI;

•

fourth, the ADI's debts (if any) to the RBA;

•

fifth, the ADI's liabilities (if any) under an industry support contract that is certified under section 11CB;

•

sixth, the ADI's other liabilities (if any) in the order of their priority apart from subsection 13A(3) . [Schedule 1, item 22, subsection 13A(3) of the Banking Act 1959]

4.50 The amendments reflect changes made by the Financial System Legislation Amendment (FCS and Other Measures) Act 2008 ( FCS Act) to the depositor protection and compensation arrangements under the Banking Act. They also provide appropriate priority for debts owed to the RBA and liabilities under industry support contracts.

4.51 The Bill clarifies that the amendments apply in relation to an ADI that becomes unable to meet its obligations, or suspends payment, on or after the commencement of the amendments . [Schedule 1, item 46, Application-priorities for application of the assets of an ADI in Australia]

4.52 A related amendment is also be made to section 86 of the RBA Act. That section presently provides that notwithstanding anything contained in any law relating to the wind-up of companies, but subject to subsection 13A(3) of the Banking Act, debts due to the Bank by an ADI shall, in the wind-up, have priority over all other debts other than debts due to the Commonwealth. The amendment removes the words 'other than debts due to the Commonwealth' from section 86 to reflect changes in the law regarding the priority of the Commonwealth . [Schedule 4, item 27, section 86 of the Reserve Bank Act 1959]

Definition of foreign ADI

4.53 The Bill repeals section 11D of the Banking Act, so that section 11E (and the remaining provisions of Division 1B) of the Act apply to the Bank of China as they do to all other foreign ADIs . [Schedule 1, item 18, section 11D of the Banking Act 1959]

4.54 The Bank of China was originally subject to the depositor protection provisions of the Banking Act as it accepted retail deposits through its branch operations in Australia. However, the Bank of China has now ceased to accept retail deposits and should be treated like all other foreign ADIs for the purposes of the depositor protection provisions of the Act. That is, it should be exempted from those provisions and subject to the remaining provisions of Division 1B (Provisions relating to certain ADIs) of the Banking Act.

Liquidation of a general insurer following judicial management

4.55 The Bill amends section 3 of the Insurance Act to insert a definition of 'wind up'. The definition provides that wind up, in relation to a company, means the wind up of the company is conducted in accordance with the Corporations Act.

4.56 This definition is used in section 62ZI of the Insurance Act. The section enables a judicial manager to recommend that the general insurer under judicial management be wound up, and section 62ZU of the Insurance Act, enables the Court to order the wind up of a general insurer upon the recommendation of a judicial manager. A now redundant reference to a wind up conducted in accordance with the Corporations Act is also removed from section 62ZV of the Insurance Act.

4.57 The amendments ensure that where the Court approves a recommendation by a judicial manager to wind up a general insurer, the winding up is conducted in accordance with the Corporations Act . [Schedule 2, items 6 and 57, subsections 3(1) and 62ZV(2) of the Insurance Act 1973]

Recapitalisation

4.58 The Bill amends the Banking, Insurance and Life Insurance Acts to insert a new definition of 'recapitalisation direction' as a direction given by APRA under, respectively, subsection 13E(1) of the Banking Act, subsection 103B of the Insurance Act and subsection 230AB(1) of the Life Insurance Act.

4.59 The Bill inserts new Subdivision AA, Division 2, Part 2 of the Banking Act, new Division 1, Part 9 of the Insurance Act and new Subdivision A, Division 2, Part 10A of the Life Insurance Act, to give APRA the power to issue a recapitalisation direction to an ADI, general insurer or life insurer, and without the entity being in statutory or judicial management.

4.60 The triggers for the issue of a recapitalisation direction are:

•

the ADI, general insurer or life insurer informs APRA that it may cease meeting obligations or may suspend payment; or

•

APRA believes that the ADI, general insurer or life insurer may cease meeting obligations or suspend payment; or

•

APRA believes that the ADI, general insurer or life insurer's conduct is contrary to depositors or policyholders' interests or financial system stability; or

•

the ADI, general insurer or life insurer ceases to meet obligations or suspends payment.

4.61 The Bill inserts a provision that provides that a recapitalisation direction is not a legislative instrument. The provision is included to assist readers, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003. [Schedule 1, item 25, schedule 2, item 83, and schedule 3, item 51, subsection 13E(4) of the Banking Act 1959, subsection 103B(3) of the Insurance Act 1973, and subsection 230AB(3) of the Life Insurance Act 1995]

4.62 APRA is required to consult with the Australian Competition and Consumer Commission (ACCC) before issuing a recapitalisation direction.

4.63 APRA is able to require the ADI, general insurer or life insurer to increase the capital that it holds to a specified level by issuing shares, rights to acquire shares, or other capital instruments that are specified by regulation.

4.64 Before issuing a recapitalisation direction, APRA is required to obtain an independent expert valuation report to ascertain the value of the shares, rights to acquire share or capital instruments. However, the failure to obtain such a report does not invalidate the recapitalisation direction, or anything done in compliance with such a direction.

4.65 The Minister may, by written notice, issue valuation assumptions that are to be used by the expert in creating the valuation report. The Minister may also, by further written notice given to the expert, revoke but not vary, the notice of assumptions.

4.66 The Bill provides that such notices given by the Minister are not legislative instruments. The provision is included to assist readers, as the instruments are not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003. [Schedule 1, item 25, schedule 2, item 83, and schedule 3, item 51, subsections 13J(4) and 13K(4) of the Banking Act 1959, subsections 103F(4) and 103G(4) of the Insurance Act 1973, and subsections 230AF(4) and 230AG(4) of the Life Insurance Act 1995]

4.67 The ADI, general insurer or life insurer may comply with the direction despite any provision of:

•

the Corporations Act;

•

the company constitution;

•

any contracts or arrangements to which the entity is a party; and

•

any listing rules of a financial market that is defined under section 761A of the Corporations Act (such as those of the ASX).

4.68 If the ADI, general insurer or life insurer is party to a contract, the fact that it is subject to a recapitalisation direction does not allow other parties to the contract (other than the ADI, general or life insurer) to:

•

deny any obligation under a contract;

•

accelerate any debt under a contract; or

•

close out any transactions relating to the contract.

4.69 An acquisition of shares, rights to acquire shares or other capital instruments as a direct result of the recapitalisation direction are exempt from the competition provisions of Part IV of the Trade Practices Act 1974. The Trade Practices Act would be renamed the Competition and Consumer Act 2010 if the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 receives Royal Assent.

4.70 As soon as practicable after the recapitalisation, the ADI, general insurer or life insurer is required to write to its members to identify the transaction and explain its effect on those members.

4.71 APRA may publish certain information relating to a recapitalisation direction in the Gazette, and must provide information about the direction to the Minister or the RBA if requested to do so.

4.72 It is a criminal offence, punishable by a fine of 50 penalty units, for an ADI, general insurer or life insurer to do, or refuse or fail to do, an act which results in a contravention of a recapitalisation direction given to the ADI, general insurer or life insurer. This is a continuing offence and is the same penalty which applies to APRA's other directions powers.

4.73 However, the offence provisions do not apply if:

•

the ADI, general insurer or life insurer made reasonable efforts to comply with the recapitalisation direction; and

•

the ADI, general insurer or life insurer's contravention is due to circumstances beyond its control.

4.74 It is also a criminal offence, punishable by a fine of 50 penalty units, for an officer of the ADI, general insurer or life insurer (whose duties include ensuring that the insurer complies with the direction, or with a class of directions that includes the direction) to fail to take reasonable steps to ensure compliance. This is a continuing offence and also is the same penalty which applies to APRA's other directions powers in relation to officers. For the purpose of the offence, 'officer' is defined as having the meaning given by section 9 of the Corporations Act.

4.75 The Bill makes consequential amendments to the Insurance Act relating to the issue of, and compliance with, a recapitalisation direction. These amendments allow APRA, or an inspector of a general insurer, to recommend that a recapitalisation direction be given to the general insurer; and allow APRA to seek the appointment of a judicial manager if a general insurer has failed to comply with a recapitalisation direction . [Schedule 1, items 4, 25 and 26, schedule 2, items 5, 47, 49, 83, and 84, and schedule 3, items 51,52, and 61, section 5, subdivision AA, division 2, part 2, and section 13R of the Banking Act 1959, section 3, section 60, section 62M, division 1 of part 9, and section 103N of the Insurance Act 1973, subdivision A, division 2, part 10A, section 230AM and Dictionary in the Schedule of the Life Insurance Act 1995]