House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 4 - Health benefits funds

Outline of chapter

4.1 Part 3 relates to health benefits funds. It provides for the:

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establishment and operation of health benefits funds;

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restructure, merger and acquisition of health benefits funds;

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termination and external management of health benefits funds; and

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APRA's ability to give notices to directors and remedies for non-compliance.

4.2 Unless otherwise stated, all references in this Chapter relate to the Prudential Supervision Bill.

Summary of new law

4.3 Divisions 2 (requirement to have at least one health benefits fund), 3 (operating of health benefits funds), 4 (restructure, merger and acquisition of health benefits funds), 5 (termination of health benefits funds) and 9 (duties and liabilities of directors) of Part 3 are based on Part 4-4 of the PHI Act. However, the Prudential Supervision Bill does not include the special provisions for solvency standards and directions (currently in Division 140 of the PHI Act) and capital standards and directions (currently in Division 143 of the PHI Act) as these will be absorbed in APRA's general prudential standard-making and directions powers in Divisions 2 and 3 of Part 4.

4.4 Divisions 6 (external management of health benefits funds), 7 (court-ordered terminating management of health benefits funds), and 8 (general provisions relating to external and terminating management) are based on provisions in Parts 4-4 and 5-3 of the PHI Act. The Prudential Supervision Bill will simplify the legislative regime by co-locating into Part 3 all the provisions relating to the operation, merger and acquisition, external management and termination of health benefits funds that are currently located in different parts of the PHI Act.

Comparison of key features of new law and current law

Detailed explanation of new law

Division 1 - Introduction

Simplified outline of this Part

4.5 A private health insurer must have at least one health benefits fund. Part 4-4 of the PHI Act defines the concept of a health benefits fund as well as other key concepts related to health benefits funds. [Part 3, Division 2, section 22]

4.6 There are regimes governing:

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how health benefits funds are operated; and

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changing the health benefits fund to which a policy of insurance is referable; and

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terminating health benefits funds; and

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external management of health benefits funds. [Part 3, Division 2, section 22]

4.7 APRA may require private health insurers to remedy contraventions of this Part. [Part 3, Division 2, section 22]

Division 2 - The requirement to have health benefits funds

Private health insurers must have health benefits funds

4.8 A private health insurer is required to have at least one health benefits fund at all times, in respect of:

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its health insurance business; or

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its health insurance business and some or all of its health-related businesses. [Part 3, Division 2, subsection 23(1)]

4.9 Section 4 defines health benefit fund, health insurance business and health-related business as having the same meaning as in the PHI Act.

4.10 A private health insurer may have multiple health benefits funds, but no more than one in respect of a risk equalisation jurisdiction, subject to certain exceptions. [Part 3, Division 2, subsection 23(2)]

4.11 Section 4 provides that 'risk equalisation jurisdiction' has the meaning in the PHI Act. Section 131-20 of the PHI Act, as inserted by item 45 of Part 1 of Schedule 1 to the Consequential Amendments and Transitional Provisions Bill, provides that an area is a risk equalisation jurisdiction if the Private Health Insurance (Health Benefits Fund Policy) Rules so provide. Those rules will continue to be made by the Health Minister under the PHI Act.

4.12 An exception to subsection 23(2) is provided if each fund in a risk equalisation jurisdiction (or each fund other than a single fund established through a restructure under Division 4) is a fund that existed on 1 April 2007 and was conducted by a registered organisation under the National Health Act 1953. This exception grandfathers certain pre-PHI Act arrangements, including where there has been a subsequent restructure under Division 4. [Part 3, Division 2, subsection 23(3)]

4.13 Additional exceptions to subsection 23(2) may be specified in the Private Health Insurance (Health Benefits Fund Policy) Rules. [Part 3, Division 2, subsection 23(4)]

Notifying APRA when health benefits funds are established

4.14 A private health insurer establishing a health benefits fund must notify APRA, in the approved form, of the date of the establishment of the fund and anything else specified in the APRA rules, unless the fund is established under Division 4. [Part 3, Division 2, section 24]

Inclusion of health-related businesses in health benefits funds

4.15 If a private health insurer has a health benefits fund for its health insurance business and health-related business, the dominant purpose of the fund must relate to the health insurance business. [Part 3, Division 2, subsection 25(1)]

4.16 If APRA is satisfied that an insurer is contravening subsection 25(1), APRA may direct the insurer to divest the fund of health-related business to the extent that APRA considers necessary to ensure compliance with the subsection. [Part 3, Division 2, subsection 25(2)]

4.17 APRA may also vary or revoke such a direction. A revoked direction will cease to have any effect. [Part 3, Division 2, subsections 25(3) and (4)]

4.18 Sections 98 (power to comply with a direction), 101 (direction not a ground for denying an obligation), 102 (supply of information about directions) and 103 (secrecy requirements) apply to directions given under subsection 25(2). [Part 3, Division 2, subsection 25(5)]

Division 3 - The operation of health benefits funds

Assets of health benefit funds to be kept separate from other assets

4.19 A private health insurer must keep the assets of a health benefits fund distinct and separate from the assets of other health benefits funds and other assets of the insurer, and maintain a separate authorised deposit-taking institution (ADI) account for each health benefits fund. [Part 3, Division 3, subsections 26(1) and (2)]

What are the assets of a health benefits fund

4.20 The assets of a health benefits fund are:

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the balance of money credited to the fund under section 27 (payments to health benefits funds);

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assets of the insurer obtained as a result of the expenditure or application of money credited to the fund;

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investments held by the insurer as a result of the expenditure or application of money credited to the fund; and

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other money, assets or investments of the insurer transferred to the fund. [Part 3, Division 3, subsection 26(3)]

4.21 Assets or investments obtained by the application of assets of a fund are themselves assets of the fund. [Part 3, Division 3, subsection 26(4)]

4.22 The definition of assets of a health benefits fund includes assets that are transferred into, and excludes assets transferred out of, the fund as the result of a restructure or arrangement approved under Division 4. [Part 3, Division 3, subsection 26(5)]

4.23 Assets or investments obtained by the expenditure or application of assets of the fund are not assets of the fund if the insurer conducting the fund is registered as a for profit insurer and the expenditure or application was not done for the purposes of the fund. This allows for profit insurers to draw money from the fund for other purposes, such as investment elsewhere or return to shareholders (subject to other relevant provisions, including prudential standards). [Part 3, Division 3, subsection 26(6)]

The Bill does not have effect of making insurer etc. a trustee of assets of a health benefits fund

4.24 For the avoidance of doubt, it is clarified that nothing in the Prudential Supervision Bill is intended to make an insurer or its directors a trustee or trustees of the assets of a health benefits fund of the insurer. [Part 3, Division 3, subsection 26(7)]

Payments to health benefits funds

4.25 A private health insurer is required to credit to a health benefits fund particular amounts, including premiums payable under policies referable to the fund and income from investments of the assets of the fund. [Part 3, Division 3, subsection 27(1)]

4.26 A private health insurer may make a capital payment to a health benefits fund, being an amount that is not required, under subsection 27(1), to be paid to the fund. Assets of another health benefits fund cannot be credited to a fund without APRA's written approval. Approvals under section 27 are only ever given on a case by case basis and standing approvals are not given. Therefore, an approval would not be a legislative instrument on general principles. The statement that an approval is not a legislative instrument in subsection 27(4) therefore does not constitute a substantive exemption from the definition of a legislative instrument in the Legislative Instruments Act, but is a statement of the 'status quo'. A refusal to approve the crediting of an amount to a fund is a reviewable decision under section 168. [Part 3, Division 3, subsections 27(2), (3) and (4)]

Expenditure and application of health benefits funds

4.27 A private health insurer must not apply or deal with the assets of a health benefits fund except in accordance with Division 3. Subsection 28(2) provides that the assets of a fund must not be applied for a purpose other than:

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meeting liabilities or expenses incurred for the purpose of the business of the fund; or

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making investments under section 30 (which relates to the investment of health benefits funds); or

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a distribution when a fund is terminated under Division 5; or

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a purpose specified in the APRA rules. [Part 3, Division 3, subsections 28(1) and 2)]

4.28 An insurer is prohibited from mortgaging or charging the assets of a fund except to secure an overdraft from an ADI or for purposes specified in the APRA rules. [Part 3, Division 3, subsection 28(3)]

4.29 An insurer is prohibited from borrowing money for the business of a fund except in accordance with the APRA rules. [Part 3, Division 3, subsection 28(4)]

4.30 Subsection 28(2), which imposes limits on the application of assets of a health benefits fund, does not apply to an insurer registered as a for profit insurer, which may apply the assets of a fund for any purpose not inconsistent with prudential standards or a direction under section 96. [Part 3, Division 3, subsection 28(5)]

4.31 Section 28 does not apply to the transfer of assets from one health benefits fund to another under Division 4 or a divestiture of assets directed by APRA under subsection 25(2). [Part 3, Division 3, subsection 28(6)]

Effect of non-compliance with section 28

General principle

4.32 There is a general principle that a transaction entered into in contravention of section 28 is of no effect unless either:

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the Federal Court has made an order under subsection 29(2); or

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it is included in a class of transactions specified in the APRA rules (subject to any court orders under subsection 29(6) - see below). [Part 3, Division 3, subsection 29(1)]

Order declaring the transaction to be effective

4.33 The Federal Court, on application by a party to the transaction, may make an order declaring the transaction to be effective, provided the Federal Court is satisfied that the applicant entered into the transaction in good faith and without knowledge of the contravention. [Part 3, Division 3, subsections 29(2) and (3)]

4.34 The Federal Court in deciding on an application may have regard to any hardship that would be caused to the applicant if the order was not made, and may have regard to other matters. [Part 3, Division 3, subsections 29(4) and (5)]

Order declaring the transaction to be of no effect

4.35 The Federal Court, on application by APRA, may declare that a transaction that contravened section 28 but was included in APRA rules made under paragraph 29(1)(b) is of no effect. [Part 3, Division 3, subsection 29(6)]

4.36 The Federal Court may not make an order under subsection 29(6) if it is satisfied that the effect of the order would be to cause hardship to a person who entered into the transaction in good faith and without knowledge of the contravention. [Part 3, Division 3, subsection 29(7)]

Investment of health benefits funds

4.37 A private health insurer is allowed to invest assets of a health benefits fund in any way likely to further the business of the fund. However, nothing in the Prudential Supervision Bill authorises a private health insurer to make an investment it would otherwise be prohibited from making or would not have the power to make. An insurer must not make or retain an investment prohibited by APRA rules. [Part 3, Division 3, subsections 30(1) and (2)]

4.38 A transaction is not ineffective merely because it contravenes paragraph 30(2)(c) (relating to investments prohibited by the APRA rules). [Part 3, Division 3, subsection 30(3)]

Division 4 - Restructure, merger and acquisition of health benefits funds

Restriction on restructure, merger, acquisition or termination of health benefits funds

4.39 A private health insurer must not change the health benefits fund to which a policy is referable except under Division 4. Division 4 governs the restructure of funds (transferring policies between health benefits funds of the one insurer) and merger or acquisition of funds (transferring groups of policies between two or more insurers). [Part 3, Division 3, subsection 31(1)]

When an insurer may restructure its health benefits funds

4.40 A private health insurer is allowed to restructure its health benefits funds so that insurance policies that are referable to a health benefits fund (a transferring fund) become referable to one or more other health benefits funds (receiving funds) of the insurer (whether existing or proposed) if:

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the effect of a restructure is that all insurance policies relating to one or more policy groups (groups comprising policy holders from the same risk equalisation jurisdiction) of the transferring health benefits fund become referable to the receiving fund(s);

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the insurer applies in writing, in the approved form, to APRA for approval;

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APRA approves the restructure in writing; and

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the insurer complies with any requirements imposed in the APRA rules in relation to the restructure. [Part 3, Division 4, subsection 32(1)]

How APRA decides whether to approve the restructure

4.41 APRA must approve the restructure if it is satisfied:

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that the proposed division of assets and liabilities between the transferring and receiving funds is a reasonable estimate of the net asset position of the transferring fund ('net asset position' is defined in section 4, subject to a modification described below that applies where not all policy groups are transferred); and

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the assets and liabilities would be fairly distributed amongst those funds if there is more than one receiving fund; and

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the restructure will not result in a breach of prudential standards. [Part 3, Division 4, subsection 32(2)]

4.42 In working out the net asset position of the transferring fund, it will be necessary to disregard the net asset position of the transferring fund to the extent that it relates to insurance policies that do not belong to a policy group(s) being transferred. [Part 3, Division 4, subsection 32(3)]

4.43 However, APRA cannot approve the restructure if it considers that it would result in unfairness to either the policy holders of a fund existing before the restructure or a fund as it would exist after the restructure, or if the insurer is being wound up when the application is made. An approval is not a legislative instrument as it would only be given on a case by case basis, therefore the statement in subsection 32(6) does not constitute a substantive exemption, but is a statement of the 'status quo'. A refusal to approve a restructure is reviewable under section 168. [Part 3, Division 4, subsections 32(4) and (6)]

APRA rules may provide for various matters

4.44 APRA rules may provide for:

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criteria for approving or refusing to approve applications under subsection 32(1);

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calculating reasonable estimates of the net asset position referred to in paragraph 32(2)(a);

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criteria for deciding whether assets and liabilities would be fairly distributed for the purposes of paragraph 32(2)(b);

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requirements to notify people of the outcomes of applications;

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a number of administrative matters connected with how the restructure is to proceed; and

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requirements for insurers to provide information to APRA following restructures. [Part 3, Division 4, subsection 32(5)]

Definitions

4.45 A policy group is defined as all the insurance policies that are referable to the fund and whose policy holders have addresses located in the same risk equalisation jurisdiction. APRA rules may provide for a definition where policy holders' addresses are not in the same risk equalisation jurisdiction. [Part 3, Division 4, subsection 32(7)]

Merger and acquisition of health benefits funds

When an arrangement may be entered into

4.46 A private health insurer (the transferee insurer) may enter into an agreement with one or more other private health insurers (transferor insurers) under which all the insurance policies referable to a health benefits fund, or referable to one or more policy groups of a fund, of the transferor insurer, are transferred to one or more transferee insurers. [Part 3, Division 4, subsection 33(1)]

4.47 A transfer under subsection 33(1) cannot take place without:

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the insurers jointly applying, in the approved form, to APRA for approval;

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APRA's written approval; and

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the insurers complying with any relevant requirements in APRA rules. [Part 3, Division 4, subsection 33(2)]

How APRA decides whether to approve the arrangement

4.48 APRA must approve the transfer if it is satisfied that:

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the allocation of assets and liabilities to any new health benefits fund is a reasonable estimate of the net asset position of the fund (or funds) (again, the concept of the net asset position is modified when not all policy groups are being transferred - see below);

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if there would be multiple receiving funds, that the distribution of assets and liabilities would be fairly distributed between those funds;

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if all the insurance policies that are referable to the transferring fund are transferred, the net asset position of the transferring fund after the arrangement takes effect will not be greater than zero; and

•

the transfer will not result in a breach of a prudential standard. [Part 3, Division 4, subsection 33(3)]

4.49 A refusal to approve a transfer is reviewable under section 168. It is not a legislative instrument, as decisions are made on a case by case basis. Therefore the statement in section 33(8) is not a substantive exemption from the Legislative Instruments Act, but a statement of the 'status quo'.

4.50 In working out the net assets position of the transferring fund, it will be necessary to disregard the net asset position of the transferring fund to the extent that it relates to insurance policies that do not belong to a policy group transferred to the receiving fund(s). [Part 3, Division 4, subsection 33(4)]

APRA rules may provide for various matters

4.51 APRA rules may provide for:

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criteria for approving or refusing to approve applications under subsection 33(2);

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calculating reasonable estimates referred to in paragraph 33(3)(a);

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criteria for deciding whether assets and liabilities would be fairly distributed for the purposes of paragraph 33(3)(b);

•

requirements to notify people of the outcomes of applications;

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a number of administrative matters connected with the arrangement;

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requirements for insurers to provide information to APRA following transfers. [Part 3, Division 4, subsection 33(5)]

Notice to be given if arrangement takes effect

4.52 The transferee insurer must notify APRA within 28 days after the transfer takes place, in a notice complying with any relevant requirements in the APRA rules. [Part 3, Division 4, subsection 33(6)]

Effect of arrangement

4.53 If an insurance policy becomes referable to a fund conducted by an insurer other than the insurer that issued the policy as a result of a merger or acquisition, it is treated, after the arrangement takes effect, as if the policy were issued by the transferee insurer, for both the purposes of the Prudential Supervision Bill and the PHI Act. [Part 3, Division 4, subsection 33(7)]

Consent of policy holders not required

4.54 The consent of policy holders to a restructure under section 32 or an arrangement under section 33 is not required unless the insurer's constitution requires it. [Part 3, Division 4, section 34]

Division 5 - Termination of health benefits funds

Subdivision A - Approving the termination of health benefits funds

Applying for termination

4.55 A private health insurer may to apply to APRA in the approved form for approval of the termination of each of its health benefits funds. Terminations may also occur under Federal Court orders as set out in Division 7. [Part 3, Division 5, Subdivision A, section 35]

Requiring further information

4.56 APRA may seek further information from the applicant within 28 days of receiving the application under section 35. [Part 3, Division 5, Subdivision A, section 36]

Deciding the application

4.57 APRA must approve the termination if it is satisfied that the insurer is not being wound up, each of its health benefits funds complies with all applicable prudential standards relating to capital adequacy or solvency that apply in relation to the fund, the termination will not result in unfairness to the policy holders of the fund or funds, and APRA is satisfied as to any matters specified in the APRA rules. [Part 3, Division 5, Subdivision A, subsection 37(1)]

4.58 If APRA grants the application it must do so in writing. It may also appoint a person other than the insurer as the terminating manager of the funds, and if it does must also notify the insurer of the person appointed. Approvals are only ever given on a case by case basis and standing approvals are not given. An approval would therefore not be a legislative instrument on general principles. Therefore the statement in subsection 37(4) is not an exemption from the Legislative Instruments Act, but is a statement of the 'status quo'. [Part 3, Division 5, Subdivision A, subsections 37(2) and (4)]

4.59 APRA must notify the applicant in writing if it refuses the application. [Part 3, Division 5, Subdivision A, subsection 37(3)]

4.60 A refusal to approve a termination is reviewable under section 168.

APRA can be taken to refuse application

4.61 APRA is taken to have refused the application for the purposes of section 168 if it does not notify the applicant of its decision within 90 days of the application, or within 90 days after receiving additional information sought under section 36 (whichever is the later). [Part 3, Division 5, Subdivision A, section 38]

Subdivision B - Conducting the termination of health benefits funds

The basis of the law relating to termination

4.62 Despite the provisions of any other law of the Commonwealth or a State or Territory a health benefits fund can only be wound up or terminated in accordance with Part 3. [Part 3, Division 5, Subdivision B, section 39]

Conduct of funds during termination process

4.63 After being notified that termination of its health benefits funds has been approved, an insurer is prohibited from:

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entering into an insurance policy with a person who it is not already insuring; or

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in the case of a for profit insurer, applying assets of the fund other than under subsection 28(2), unless this prohibition does not apply because of section 45 (distribution of assets remaining after termination is completed); or

•

changing its registration status from not for profit to for profit. [Part 3, Division 5, Subdivision B, subsection 40(1)]

4.64 This prevents insurers from accepting new business or drawing money from the health benefits fund other than for meeting liabilities or expenses incurred for the purpose of the business of the health benefits fund or making investments under section 30.

4.65 Within 60 days of being notified that termination has been approved, an insurer must provide written notice of the termination day (after which it will not renew policies) to each policy holder of its funds and to APRA and notify the termination day in a national newspaper or newspaper circulating where the insurer carries on business. The termination day must be at least 90 days after any notice required in this subsection. [Part 3, Division 5, Subdivision B, subsection 40(2)]

4.66 The insurer is prohibited from renewing any insurance policies after the termination day. [Part 3, Division 5, Subdivision B, subsection 40(3)]

4.67 The insurer must accept any valid claim for benefits made up to 12 months after the expiry of the last policy referable to any of the funds being terminated. [Part 3, Division 5, Subdivision B, subsection 40(4)]

Insurers etc. to give reports to APRA

4.68 The terminating manager or the insurer (if there is no terminating manager) must report to APRA within 28 days after the termination day setting out details of the assets and liabilities of the funds on that day. [Part 3, Division 5, Subdivision B, section 41]

Terminating managers displace management of funds

4.69 If a terminating manager has been appointed to a health benefits fund, management of the fund vests in the terminating manager for so long as the appointment is in force or until the termination is completed, and any officer of the insurer responsible for the management of the fund before the terminating manager was appointed is divested of that management. [Part 3, Division 5, Subdivision B, section 42]

Subdivision C - Ending the termination of health benefits funds

Power to end termination

4.70 During the termination of the health benefits funds of a private health insurer, APRA or the terminating manager may apply to the Federal Court for an order ending the termination. [Part 3, Division 5, Subdivision C, subsections 43(1) and (2)]

4.71 The Federal Court, before making an order, may direct the terminating manager or private health insurer (if there is no terminating manager) to provide a report on a relevant fact or matter. [Part 3, Division 5, Subdivision C, subsection 43(3)]

4.72 The Federal Court in making an order ending the termination may give directions for the resumption of the management and control of the health benefits funds by the insurer. [Part 3, Division 5, Subdivision C, subsection 43(4)]

Subdivision D - Completing the termination of health benefits funds

Completion of the termination process

4.73 The termination of the health benefits funds of a private health insurer is complete if 12 months have passed since the expiry of the last policy referable to any of the funds being terminated and so far as possible having regard to the assets of the funds:

•

liabilities to policy holders have been discharged;

•

any amounts of collapsed insurer assistance payments that APRA has paid to the insurer or the terminating manager have been repaid; and

•

any other liabilities of the funds have been discharged. [Part 3, Division 5, Subdivision D, section 44]

Distribution of remaining assets after completion of the termination process

4.74 If there are any residual assets of the funds after the termination process is completed, then:

•

a for profit insurer may apply the assets other than for the purposes of the fund (paragraph 40(1)(b) ceases to apply); and

•

a not for profit insurer is liable to pay APRA an amount equal to the assets. This amount would then be credited to the Risk Equalisation Special Account under section 318-5 of the PHI Act, as amended, and returned to private health insurance industry members through adjustments to risk equalisation payments. [Part 3, Division 5, Subdivision D, section 45]

Liability of officers of insurers for loss to terminated funds

4.75 If an insurer contravenes the Prudential Supervision Bill in relation to a health benefits fund that it conducts in a way that results in a loss to the fund and the termination of the fund is completed, then the persons who were officers of the insurer when the contravention occurred are jointly and severally liable to pay to APRA (for payment to the Risk Equalisation Trust Fund) an amount equal to the loss. [Part 3, Division 5, Subdivision D, subsection 46(1)]

4.76 A person is not liable under subsection 46(1) if he or she can prove that he or she exercised due diligence to prevent the contravention. A separate exoneration provision, in section 166 will also apply. [Part 3, Division 5, Subdivision D, subsection 46(2)]

4.77 The Federal Court may, on application by APRA, order any person liable under subsection 46(1) to pay to APRA (for payment to the Risk Equalisation Trust Fund) the whole or any part of the loss. [Part 3, Division 5, Subdivision D, subsection 46(3)]

Report of terminating manager

4.78 A terminating manager may make a written report to APRA at any time and must make such a report as soon as practicable after the termination of the funds. [Part 3, Division 5, Subdivision D, subsection 47(1)]

4.79 The manager may recommend, in their final report that an application be made under section 48 for the winding up of the insurer. [Part 3, Division 5, Subdivision D, subsection 47(2)]

Applying for winding up

4.80 If a terminating manager's report recommends the winding up of an insurer, APRA or the terminating manager (if directed by APRA) may apply to the Federal Court for an order that a private health insurer be wound up. [Part 3, Division 5, Subdivision D, subsections 48(1) and (2)]

4.81 The Federal Court may make such an order if it is satisfied that this would be in the financial interests of the policy holders of the health benefits funds. [Part 3, Division 5, Subdivision D, subsection 48(3)]

4.82 The winding up is to be conducted in accordance with the Corporations Act. [Part 3, Division 5, Subdivision D, subsection 48(4)]

Division 6 - External management of health benefits funds

Subdivision A - Preliminary

Purpose of Division

4.83 The purpose of the Division is to permit a health benefits fund under external management to be managed so as to maximise the chances that the policy holders of the fund continue to be covered by that fund or another fund to which the business is transferred, and if that is not possible, safeguard the financial interests of the policy holders of the fund if the fund is terminated. [Part 3, Division 6, Subdivision A, section 49]

4.84 This Division, and the other provisions in the Prudential Supervision Bill relating to external management and terminating management (flowing from external management) of health benefits funds, are based on provisions currently in Divisions 217, 220 and Part 6.5 of the PHI Act.

4.85 The Prudential Supervision Bill does not alter the essential structure of these provisions, which provide for an external management and terminating management of health benefits funds (rather than of the entire private health insurer) and apply certain provisions of Part 5.3A of the Corporations Act by reference, with modifications to external management of health benefits funds.

4.86 However the Prudential Supervision Bill arranges the provisions to set them out in consecutive divisions (Divisions 6, 7 and 8 of Part 3). There have been some changes to clarify the relationship between an external manager or terminating manager of a health benefits fund and other external administrators of a private health insurer, for example, a liquidator. The guiding principle is that external management and terminating management of a health benefits fund should proceed independently of any other external administration that may be occurring in relation to the business of a private health insurer outside its health benefits funds. There have also been amendments to clarify the way in which the provisions governing terminating management in Division 5 (previously Division 149 of the PHI Act) may apply in relation to a court-ordered termination under Division 7 (previously Division 220 of the PHI Act).

The basis of the law relating to external management

4.87 The external management of a health benefits fund is regulated by Division 6 and by various provisions in the Corporations Act applying subject to modifications set out in the Prudential Supervision Bill or APRA rules. [Part 3, Division 6, Subdivision A, subsections 50(1), (4) and (5)]

4.88 The ability of APRA rules, under subparagraph 50(1)(b)(ii) of the Prudential Supervision Bill, to modify the provisions of the Corporations Act listed in paragraph 50(1)(b) is consistent with the ability of the Minister to modify these provisions under subparagraph 217-5(1)(b)(ii) of the PHI Act. This ability provides flexibility to the external management regime by allowing APRA to modify the Corporations Act provisions listed in paragraph 50(1)(b) as these provisions change or as external management practices change. It is proposed that APRA's initial rules will replicate the existing PHI Act subparagraph 217-5(1)(b)(ii) rules, with some updating to cater for where the Corporations Act provisions were amended after the making of the current rules under subparagraph 217-5(1)(b)(ii).

4.89 A health benefits fund cannot be placed under external administration (which will be defined broadly in section 4 to include a range of different forms of external administration, including control by a liquidator or voluntary administrator under the Corporations Act) except in accordance with Part 3 of the Prudential Supervision Bill. [Part 3, Division 6, Subdivision A, subsections 50(2) and (3)]

4.90 A provision of the Corporations Act listed in subsection 50(1) applies to the external management of a fund as if:

•

a reference to the company were a reference to the fund;

•

a reference to the administrator was a reference to the external manager appointed under the Prudential Supervision Bill; and

•

a reference to the Court were a reference to the Federal Court. [Part 3, Division 6, Subdivision A, subsection 50(4)]

Subdivision B - Appointment of external managers

APRA may appoint external managers

4.91 APRA may appoint in writing an external manager to a health benefits fund if the grounds specified in subsections 52(1) and (2) are satisfied. [Part 3, Division 6, Subdivision B, subsection 51(1)]

4.92 The person appointed must be an official liquidator under the Corporations Act and must not be a person related to the fund (for example, they cannot be a policy holder, auditor or actuary in relation to the fund). The appointment takes effect from the date specified in the appointment. [Part 3, Division 6, Subdivision B, subsections 51(2) and (3)]

Preconditions for appointment of external managers

4.93 APRA must not appoint an external manager to a health benefits fund unless APRA believes it is in the interests of the policy holders of the fund. [Part 3, Division 6, Subdivision B, subsection 52(1)]

4.94 In addition, APRA must not appoint an external manager to a health benefits fund unless:

•

APRA is satisfied that the private health insurer has contravened, in relation to the relevant health benefits fund:

•

a prudential standard relating to capital adequacy or solvency; or

•

a direction under section 96; or

•

a request for external management of the fund is made to APRA by a resolution of the directors of the insurer; or

•

a ground specified in APRA rules applies in respect of the fund. [Part 3, Division 6, Subdivision B, subsection 52(2)]

External managers to displace management of funds

4.95 If an external manager has been appointed to a fund, management of the fund vests in the external manager for so long as the appointment is in force, and any officer of the insurer responsible for the management of the fund before the external manager was appointed, is divested of that management. [Part 3, Division 6, Subdivision B, section 53]

Subdivision C - Duties and powers of external managers

Duties of external managers

4.96 The main duties of an external manager of a health benefits fund are:

•

to examine the business, affairs and property of the fund and ascertain its assets and liabilities;

•

to apportion the assets and liabilities between the fund and the other business (if the business of the fund has been mixed with other business);

•

to form an opinion as to which course of action maximises the chance that the policy holders of the fund continue to be covered by that fund or another fund to which the business is transferred; and

•

make a final report to APRA recommending that course of action. [Part 3, Division 6, Subdivision C, subsection 54(1)]

4.97 The external manager is required to manage the day-to-day administration of the fund as efficiently and economically as possible. [Part 3, Division 6, Subdivision C, subsection 54(2)]

Additional powers of external managers

4.98 The additional powers of an external manager under the provisions of Division 8 of Part 5.3A of Chapter 5 of the Corporations Act (conferred under section 50), do not include the power to remove or appoint directors of the private health insurer and execute a document, bring or defend proceedings, or do anything else, in an insurer's name. This is in part to avoid the application of inapplicable powers or provisions and in part to avoid duplication as section 70 in Division 8 of Part 3 of the Prudential Supervision Bill separately confers certain powers. Subsection 442D(1) of the Corporations Act also does not apply to the external manager's powers, meaning that that the external manager's power prevails over the power of secured parties and receivers. [Part 3, Division 6, Subdivision C, subsection 55(1)]

4.99 For the purpose of the protection of people dealing with an external manager under section 442F of the Corporations Act (as it applies through the operation of section 50 of the Prudential Supervision Bill), the assumptions contained in sections 128 and 129 of the Corporations Act are taken to apply, subject to any modifications in the APRA rules. What this means in practice is that a person dealing with an external manager is entitled to believe that the external manager has been duly appointed and is acting within his or her powers and functions and complying with the Prudential Supervision Bill, unless the person dealing with the external manager knows or suspects that this is not in fact the case. The ability to modify the application of sections 128 and 129 allows APRA to appropriately tailor the operation of these provisions to the private health insurance context. [Part 3, Division 6, Subdivision C, subsection 55(2)]

Protection of property during external management

4.100 The provisions of Division 6 of Part 5.3A of Chapter 5 of the Corporations Act (conferred under section 50) relating to the protection of property during external management, are not taken to include section 440A. Section 440A provides that a company under Part 5.3A administration (which translates for present purposes as a fund under external management) cannot be wound up voluntarily and any proceedings for the winding up of the company or the appointment of a provisional liquidator are to be adjourned, although the court has discretion to allow those proceedings to continue. [Part 3, Division 6, Subdivision C, subsection 56(1)]

4.101 The fact that section 440A is not applied does not mean that it is intended that a health benefits fund can be wound up by a liquidator when under external management. To the contrary, the intention is that an external management of a health benefits fund be isolated and protected from any winding up of the company and occur independently of the winding up. This intention is effected by other provisions in the Prudential Supervision Bill, including subsections 50(2) and (3). Accordingly, it is unnecessary for the relationship between external management and winding up to be regulated by applied section 440A of the Corporations Act. [Part 3, Division 6, Subdivision C, subsection 56(1)]

4.102 Applied section 440D of the Corporations Act provides for a stay of any court proceedings against a company (which translates as the 'fund') in relation to any of its property without the administrator's (external manager's) written consent or the leave of the Federal Court. Where an external manager or the Federal Court is considering (under applied section 440D of the Corporations Act) whether or not to allow a legal proceeding to continue while the fund is under external management, the external manager or the Federal Court must consider whether the action in question does, or does not, relate to the property of the fund and whether such proceedings would be materially detrimental to the interests of policy holders of the fund. [Part 3, Division 6, Subdivision C, subsection 56(2)]

Rights of chargee, owner or lessor of property of fund under external management

4.103 The provisions of Division 7 of Part 5.3A of Chapter 5 of the Corporations Act (conferred under section 50) relating to the rights of chargees, owners or lessors of the property of a fund during external management, do not include section 441A and selected words in subsection 441D(1) in the applied Division. Section 441A relates to situations where there is a charge over all, or substantially all, of the property of a company or there are two or more charges. [Part 3, Division 6, Subdivision C, subsection 57(1)]

4.104 It allows a secured creditor or receiver or controller acting for a secured creditor to enforce a security interest in certain circumstances, despite other provisions of Part 5.3A of the Corporations Act. The effect of not applying section 441A in relation to an external administration of a health benefits fund will be to protect the assets of a health benefits fund from potential action by secured creditors, while the external management is in force. The modification to section 441D is consequential upon the 'disapplication' of section 441A. It should be noted that, under subsection 28(3) of the Prudential Supervision Bill, it will continue to only be possible to give charges over fund assets in very limited circumstances. [Part 3, Division 6, Subdivision C, subsection 57(1)]

4.105 Nothing in the applied Division 7 prevents the external manager or the Federal Court from agreeing to the enforcement of a charge if satisfied that the charge does not relate to the property of the fund and enforcement of the charge would not be materially detrimental to the interests of the policy holders of the fund. [Part 3, Division 6, Subdivision C, subsection 57(2)]

Subdivision D - Procedure relating to voluntary deeds of arrangement

Matters that may be included in the APRA rules

4.106 The APRA rules may provide for:

•

the external managers of health benefits funds to convene meetings of creditors and policy holders of funds to consider the possibility of the responsible insurers for those funds executing voluntary deeds of arrangement;

•

the details of how the meetings are to be convened or conducted, and the matters that may be decided;

•

the kind of recommendations that made be made to APRA by the external manager; and

•

the actions APRA may take in response to such recommendations. [Part 3, Division 6, Subdivision D, subsection 58(1)]

4.107 It is expected that, initially, the APRA rules for the purpose of this Division will be in substantially the same form as those currently in force for the purposes of the external management provisions in the PHI Act.

4.108 This section does not limit the scope of the APRA rules for the purposes of other provisions in this Part. [Part 3, Division 6, Subdivision D, subsection 58(2)]

Subdivision E - External managers' reports to APRA

External managers to give reports to APRA

4.109 An external manager must, as soon as practicable but in any event within three months or such longer time as APRA determines in writing, conclude the examination of the health benefits fund and make a final written report to APRA. [Part 3, Division 6, Subdivision E, subsections 59(1) and (2)]

4.110 The external manager in the report to APRA is required to recommend a course of action that maximises the chance that the policy holders of the fund continue to be covered by that fund or another fund to which the business is transferred, and set out the reasons for that recommendation. [Part 3, Division 6, Subdivision E, subsection 59(3)]

4.111 Without limiting the courses of action he or she may recommend, an external manager may recommend that:

•

subject to a Federal Court order, that the responsible insurer for the fund implement a scheme of arrangement concerning the business of the fund; or

•

subject to a Federal Court order, that a terminating manager be appointed to the funds of the insurer; or

•

that the external management cease and the business of the fund be resumed by responsible insurer. [Part 3, Division 6, Subdivision E, subsection 59(4)]

4.112 The external manager must recommend that APRA approve the execution of a voluntary deed of arrangement if APRA rules so provide. [Part 3, Division 6, Subdivision E, subsection 59(5)]

4.113 Without limiting what a scheme or arrangement ordered by the Federal Court may provide for, the scheme may provide for:

•

the continuation of the business of the fund on terms set out in the scheme; or

•

the transfer of the business of the fund on terms set out in the scheme to another private health insurer; or

•

execution of a deed in the same form as a voluntary deed of arrangement rejected at any meeting of creditors and policy holders under section 58. [Part 3, Division 6, Subdivision E, subsection 59(6)]

Dealing with reports given to APRA

Deciding what to do in relation to a recommendation

4.114 In deciding whether or not to approve a course of action recommended in a report under subsection 59(3), APRA may seek further information from the external manager and engage any person to assist it in evaluating the assessments and projections relied upon in the report. In reaching a decision APRA must have regard to the external manager's report and any additional information provided by the external manager or by any person engaged to assist APRA. [Part 3, Division 6, Subdivision E, subsection 60(1)]

APRA to inform manager if satisfied with a recommended course of action

4.115 If APRA is satisfied that a course of action recommended by the external manager will be in the interests of the policy holders of the health benefits fund, APRA must by written notice inform the external manager to that effect. If the recommended course of action is the external management cease, the external management ends when notice is given under subsection 60(2) (see paragraph 62(2)(c)). [Part 3, Division 6, Subdivision E, subsection 60(2)]

Additional steps to be taken by APRA if satisfied with certain kinds of recommended course of action

4.116 If APRA is satisfied that a scheme of arrangement (as specified in paragraph 59(4)(a)) is the appropriate course of action (approach the court for an order implementing a scheme of arrangement), APRA must direct the external manager to apply under subsection 61(1) to the Federal Court to give effect to that. If the course of action is termination of the funds of the private health insurer, APRA must direct the external manager to apply under subsection 66(1) for a terminating manager's appointment. [Part 3, Division 6, Subdivision E, subsections 60(3) and (4)]

4.117 APRA rules may provide for what needs to be done in relation to the action, if it is not an action specified in subsections 59(4) or (5). [Part 3, Division 6, Subdivision E, subsection 60(5)]

If APRA is not satisfied with a recommended course of action

4.118 If APRA is not satisfied that a course of action recommended by the external manager will be in the interests of the policy holders of the fund, it may take a different course of action that it is satisfied will be in the interests of the policy holders of the fund. These courses of action include (but are not limited to) APRA applying to the Federal Court for orders giving effect to a scheme of arrangement for the business of the fund or appointing a terminating manager to the health benefits funds of the responsible insurer. [Part 3, Division 6, Subdivision E, subsections 60(6) and (7)]

Federal Court orders in respect of schemes of arrangement

4.119 An external manager is required to apply to the Federal Court for an order giving effect to a scheme of arrangement recommended under paragraph 59(4)(a) if directed to do so by APRA. [Part 3, Division 6, Subdivision E, subsection 61(1)]

4.120 On an application by the external manager under subsection 61(1), or an application by APRA under paragraph 60(7)(a), for an order giving effect to a scheme of arrangement, APRA and any other interested person are entitled to be heard, and the Federal Court may make such orders as it considers will be in the interests of the policy holders of the health benefits fund concerned. [Part 3, Division 6, Subdivision E, subsection 61(2)]

Subdivision F - Miscellaneous

When an external management begins and ends

4.121 This clause provides that an external management of a health benefits fund begins when an external manager is appointed under section 51 to administer the fund, and ends when either:

•

APRA terminates the appointment of the external manager and does not appoint a replacement; or

•

a voluntary deed of arrangement relating to the fund is executed; or

•

APRA notifies the external manager, under subsection 60(2), that it has accepted the external manager's recommendation, made under subsection 59(3), that the external management cease; or

•

the Federal Court makes an order under section 61 giving effect to a scheme of arrangement for the business of the fund; or

•

a terminating manager of the fund is appointed. [Part 3, Division 6, Subdivision F, section 62]

Effect of things done during external management of health benefits funds

4.122 Anything done in good faith by or with the consent of the external manager of a health benefits fund is valid and effectual and not liable to be set aside in a termination of a fund. This applies in addition to section 80, which relates inter alia to irregularities and defects in the appointment process. [Part 3, Division 6, Subdivision E, section 63]

Disclaimer of onerous property

4.123 For the purpose of determining the power of an external manager to disclaim onerous property (certain encumbered or problematic property that a liquidator can set aside or ignore when assessing assets) under the provisions of Division 7A of Part 5.6 of Chapter 5 of the Corporations Act (as applied by section 50), those provisions apply as if the external manager were the liquidator of the company and references to the company's creditors were references to the policy holders of a health benefits fund. [Part 3, Division 6, Subdivision F, subsection 64(1)]

4.124 A disclaimer by an external manager has the same effect and the external manager is under the same obligations, for the purposes of the Prudential Supervision Bill, as if the disclaimer had been made under Division 7A of Part 5.6 of Chapter 5 of the Corporations Act. This means an external manager is able to set aside certain property whose value is difficult to realise when managing the insurer's assets and liabilities. [Part 3, Division 6, Subdivision F, subsection 64(2)]

Application of provisions of Corporations Act

4.125 The application under the Prudential Supervision Bill of sections in the Corporations Act includes application of relevant regulations and other instruments made under those sections (unless the contrary intention appears). [Part 3, Division 6, Subdivision F, subsections 65(1), (2) and (3)]

4.126 APRA rules made under the Prudential Supervision Bill may, for the purposes of the application of a provision of the Corporations Act, also modify regulations and other instruments made under the modified provision of the Corporations Act. [Part 3, Division 6, Subdivision F, subsection 65(4)]

4.127 The fact that the Prudential Supervision Bill provides for a specific modification of a provision in the Corporations Act does not imply that further modifications to that provision cannot be made by APRA rules, provided the modifications made by the APRA rules are consistent with those made by the Prudential Supervision Bill. [Part 3, Division 6, Subdivision F, subsection 65(5)]

4.128 The definitions and interpretations principles under the Corporations Act have effect on applied sections (unless the contrary intention appears). [Part 3, Division 6, Subdivision F, subsection 65(6)]

4.129 Rules made by APRA under the Act may take the place of regulations and other instruments that could be made under the applied sections. [Part 3, Division 6, Subdivision F, subsection 65(7)]

Division 7 - Ordering the termination of health benefits funds

Applications by external managers to the Federal Court

4.130 An external manager is required to apply to the Federal Court for an order appointing a terminating manager, under subsection 60(4), if directed to do so by APRA. [Part 3, Division 7, subsection 66(1)]

4.131 APRA and any other person likely to be affected by the termination are entitled to be heard on the application. [Part 3, Division 7, subsection 66(2)]

Orders made on applications for appointments of terminating managers

4.132 The Federal Court may, on an application by the external manager under subsection 66(1), or by APRA under paragraph 60(7)(b), make an order for the appointment of a terminating manager of the health benefits funds of a private health insurer, and any related orders. The Federal Court must not make such an order unless it considers the order will be in the interests of the policy holders of the funds. [Part 3, Division 7, section 67]

Notice of appointments

4.133 If the Federal Court orders the appointment of a terminating manager of the health benefits funds of a private health insurer APRA must notify the insurer in writing of the person appointed. Section 69 of the Prudential Supervision Bill provides that, subject to any other orders made by the Court, the provisions relating to terminating management in Subdivisions B, C and D of Division 5 apply as if APRA had approved the termination of the health benefits funds, and as if the notice given under section 68 were a notification under subsection 37(2). This clarifies the relationship between Division 5 of the Prudential Supervision Bill (currently Division 149 of the PHI Act) and Division 7 of the Prudential Supervision Bill (currently Division 220 of the PHI Act), in relation to which there has been some uncertainty. [Part 3, Division 7, sections 68 and 69]

Division 8 - External managers and terminating managers

Subdivision A - Powers of managers

Powers of managers

4.134 Division 8 of the Prudential Supervision Bill sets out general provisions that apply to both external managers and terminating managers and is based on Part 6-5 of the PHI Act. While a health benefits fund is under external management or terminating management, the external or terminating manager has power to:

•

control, carry on and manage the business, affairs and property of the fund;

•

terminate or dispose of all or any part of the business or dispose of any property;

•

do anything (including executing documents or bringing or defending proceedings) in the name of the responsible private health insurer for the purpose of the business of the fund;

•

appoint a lawyer or agent; and

•

perform any other function or exercise any power that the insurer or its officers or employees could perform or exercise if the fund was not under external management or terminating management. [Part 3, Division 8, Subdivision A, subsection 70(1)]

4.135 Unless a manager provides written approval, whilst the fund is under external or terminating management the rights of the insurer or its officers to exercise the powers above are suspended. This will also be the case if there is an external administrator of one or more assets of the fund. [Part 3, Division 8, Subdivision A, subsection 70(2)]

4.136 Nothing in Division 8, or sections 42 and 53, implies that an officer or employee of the insurer, or an external administrator, is removed from office. For example an officer or employee may continue to have functions in relation to business of the insurer that falls outside the health benefits funds. [Part 3, Division 8, Subdivision A, subsection 70(3)]

Officers etc. not to perform functions etc. while fund is under management

4.137 If a health benefits fund is under external or terminating management, an individual (other than the manager) commits an offence with a penalty of 60 penalty units, or imprisonment for 12 months, or both if:

•

the person performs or exercises, or purports to perform or exercise, any function or power of an officer of the responsible insurer for the fund or an external manager of any assets of the fund; and

•

the function or power is a function or power of the manager; and

•

the person does it without the manager's written approval. [Part 3, Division 8, Subdivision A, section 71]

Managers act as agents of private health insurers

4.138 A manager exercising a power as manager of a health benefits fund is taken to be acting as the agent of the responsible insurer for the fund. This section does not allow the insurer to direct the manager in the exercise of his or her powers. [Part 3, Division 8, Subdivision A, section 72]

Subdivision B - Information concerning, and records and property of, health benefits funds

Directors etc. to help managers

4.139 Each director of the responsible insurer for a health benefits fund under external management or terminating management must as soon as practicable after the management:

•

give the manager all records in the director's possession that relate to the business of the fund; and

•

tell the manager of the location of other records known to the director. [Part 3, Division 8, Subdivision B, subsection 73(1)]

4.140 The above does not apply to the extent that the person is entitled to retain the records, against the manager and the responsible insurer of the fund. [Part 3, Division 8, Subdivision B, subsection 73(6)]

4.141 The directors and officers of the responsible insurer for a fund under external management or terminating management must give the manager a statement about the business, property, affairs and financial circumstances of the fund. The statement must be made within seven days (or longer as allowed by the manager) and comply with the manager's requirements as to form and contents. [Part 3, Division 8, Subdivision B, subsections 73(2) and (3)]

4.142 A director or officer of the responsible insurer must attend on the manager and give her or him information about the business, property, affairs and financial circumstances of the fund as the manager reasonably requires. [Part 3, Division 8, Subdivision B, subsection 73(4)]

4.143 An individual commits an offence with a penalty of 30 penalty units if the person does not comply with the requirements of this section. [Part 3, Division 8, Subdivision B, subsection 73(5)]

Managers' rights to certain records

4.144 A person is not entitled to retain possession of records against the manager of the fund or enforce a lien on the records (although the lien otherwise stands). An exception is where a secured creditor is entitled to retain possession of the records other than by way of a lien. However, the manager will still be entitled to inspect and make copies of the documents. The manager is entitled to inspect and copy such records held by a secured creditor at any reasonable time. [Part 3, Division 8, Subdivision B, subsections 74(1) and (2)]

4.145 A manager may give a person notice of at least three days to deliver to the manager specified records that are in the person's possession. [Part 3, Division 8, Subdivision B, subsections 74(3 ) and (4)]

4.146 An individual commits an offence with a penalty of 30 penalty units if the person does not comply with a notice under subsection (3), unless the person is entitled to retain the records against the manager and the insurer. [Part 3, Division 8, Subdivision B, subsections 74(5) and (6)]

Only manager can deal with property of fund under management

4.147 A transaction or dealing affecting the property of a health benefits fund under external management or terminating management entered into by the responsible insurer or a person purportedly on behalf of the fund or the insurer is void (subject to a Federal Court order) unless:

•

it was entered into by the manager; or

•

the manager consented to the transaction or dealing beforehand; or

•

it was ordered by the Federal Court or a State or Territory Supreme Court. [Part 3, Division 8, Subdivision B, subsections 75(1) and (3)]

4.148 Subsection 75(1) does not apply to a payment by an ADI (such as a bank, building society or credit union) made in good faith and in the ordinary course of its banking business, out of the account of the relevant private health insurer, while the external management or terminating management is under way but before the first of:

•

the ADI being notified by the manager of the external management or terminating management; or

•

the manager advertising the external management or terminating management in a national newspaper or newspaper circulating where the insurer carries on business. [Part 3, Division 8, Subdivision B, subsection 75(2)]

4.149 An individual commits an offence with a penalty of 60 penalty units or imprisonment for 12 months, or both if:

•

the person is an officer of the responsible insurer for a fund under external management or terminating management, or the receiver, or receiver and manager of any of the assets of the fund; and

•

the person purported to enter into a transaction or dealing on behalf of the responsible insurer that is void because of the operation of this clause, or was in any way concerned in or a party to the transaction or dealing. [Part 3, Division 8, Subdivision B, subsection 75(4)]

Order for compensation where officer involved in void transaction

4.150 If a court finds a person guilty of an offence against subsection 75(4) and is satisfied that the health benefits fund under external management or terminating management concerned has suffered a loss because of the transaction involved in the offence, the court may order the person to pay compensation to the responsible insurer for the fund. An order under subsection 76(1) may be enforced as a judgement of the court. The exoneration provision in section 166 of the Prudential Supervision Bill applies in relation to subsection 76(1). [Part 3, Division 8, Subdivision B, subsections 76(1) and (2)]

Subdivision C - Provisions incidental to appointment of managers

Remuneration of managers

4.151 APRA may, in writing, determine the remuneration and allowances for a manager, unless the Federal Court has made such an order under section 67. Unless APRA determines otherwise, the remuneration and allowances are to be paid out of the assets of the health benefits fund under external management or terminating management. [Part 3, Division 8, Subdivision C, section 77]

Directions to managers

4.152 APRA may give a manager, other than a terminating manager appointed in accordance with an order of the Federal Court under Division 7, written directions concerning the exercise of their powers. While the directions may be general, depending on the circumstances they may take into account the specific circumstances of the health benefits fund under external management or terminating management, and may include directions requiring the provision of interim reports. If the terminating manager was appointed by the court (and not by APRA under subsection 37(2)), then the Federal Court may give directions concerning the exercise of the powers vested in the manager or the provision to APRA of reports. [Part 3, Division 8, Subdivision C, subsections 78(1), (2), (3) and (4)]

4.153 The manager must comply with written direction. [Part 3, Division 8, Subdivision C, section 78(5)]

Termination of appointments of managers

4.154 APRA may terminate the appointment of a manager with effect from the date specified in the instrument. This includes a terminating manager appointed by the Federal Court under Division 7. APRA would require this capability in certain circumstances, such as when the external or terminating management has been completed or it emerges that a manager, including a terminating manager appointed by the court, has a conflict of interest, or is not conducting their functions in a competent manner or in accordance with the law.

4.155 In that event the manager is divested of the functions and powers set out in subsection 70(1) and all the other functions and powers of the manager in relation to the health benefits fund(s) cease. [Part 3, Division 8, Subdivision C, subsection 79(1)]

4.156 If the appointment of an external manager is terminated, APRA may appoint a replacement manager to carry on the external management. If it does not, then the power to control, carry on and manage the business, affairs and property of the health benefits fund vests again in the officers of the responsible insurer. [Part 3, Division 8, Subdivision C, subsections 79(2) and (4)]

4.157 If the appointment of a terminating manager is terminated, APRA must appoint a replacement manager to carry on the terminating management, subject to two exceptions. The first exception is where the Federal Court has ordered an end to the termination of the funds under section 43. In that event the power to control, carry on and manage any remaining business, affairs and property of the health benefits fund vests again in the officers of the responsible insurer, subject to any order of the court under subsection 43(4). The second is where the termination is complete and the manager has reported to APRA under section 47. In all other circumstances (for example where the terminating manager has been removed under the section because they cannot continue to perform the functions of terminating manager, or it is inappropriate that they continue to do so) APRA must appoint another terminating manager. [Part 3, Division 8, Subdivision C, subsections 79(3) and (4)]

Act of managers valid etc.

4.158 The acts of a manager of a health benefits fund are valid despite any defect or irregularity found later in his or her appointment. [Part 3, Division 8, Subdivision C, subsection 80(1)]

4.159 Persons dealing with the fund in good faith without any knowledge of any defect or irregularity in the appointment of the manager are protected from the invalidity of certain transactions. [Part 3, Division 8, Subdivision C, subsection 80(2)]

4.160 Persons making or permitting any payment or disposition of assets of the fund without any knowledge of the defect or irregularity in the appointment of the manager are protected and indemnified. [Part 3, Division 8, Subdivision C, subsection 80(3)]

Indemnity

4.161 A manager of a health benefits fund is indemnified against any action, claim or demand by a person in relation to anything done (or not done) in good faith in exercising the powers of a manager under the Prudential Supervision Bill. [Part 3, Division 8, Subdivision C, section 81]

Qualified privilege

4.162 A manager of a health benefits fund is conferred qualified privilege in respect of any statement made by him or her in the course of performing the duties of a manager. [Part 3, Division 8, Subdivision C, section 82]

Subdivision D - Miscellaneous

Time for doing act does not run while act prevented by this Division or other provisions

4.163 If Divisions 5, 6 or 8 prevent an act from being done, the time for doing any act that must be done by a certain time is extended by the time that those divisions prevented it from being done. [Part 3, Division 8, Subdivision D, section 83]

Continued application of other provisions of the Prudential Supervision Bill

4.164 In relation to the fund or the rights and obligations of persons in relation to the responsible insurer for the fund, the appointment of an external manager or terminating manager to a health benefits fund does not affect the continued application of the Prudential Supervision Bill or the PHI Act other than:

•

in the case of external management, the provisions of Division 6 (which relate to external managers); or

•

in the case of terminating management, the provisions of Divisions 5 or 7 (which relate to terminating managers). [Part 3, Division 8, Subdivision D, section 84]

Modifications of the Prudential Supervision Bill in relation to health benefits funds under management

4.165 APRA rules may set out modifications of the Prudential Supervision Bill or the PHI Act relating to how Chapter 3 of the PHI Act (which relates to community rating and complying health policies, among other things) applies where the health benefits funds are under external management or terminating management, including different modifications according to the nature of the funds concerned, as long as the modifications do not modify a provision that creates an offence or include a new provision that creates an offence. The Prudential Supervision Bill and the PHI Act operate subject to such modifications. [Part 3, Division 8, Subdivision D, subsections 85(1), (2), (3) and (5)]

4.166 This modification power will allow APRA to ensure that the requirements of Chapter 3 of the PHI Act can, if necessary, be appropriately adjusted to the context of external or terminating management and, if necessary, can be appropriately tailored to those health benefit funds concerned. This power would only be exercised in limited circumstances, such as where strict compliance with a provision in the PHI Act, for example community rating requirements, would be difficult to achieve in the content of terminating a health benefits fund.

4.167 APRA must consult with the Health Secretary prior to making any rules under this section. [Part 3, Division 8, Subdivision D, subsection 85(4)]

Order of Federal Court to be binding on all persons

4.168 This clause provides that an order of the Federal Court made under Divisions 5, 6 or 7 is binding on all persons and has effect notwithstanding anything in the constitution or rules of a private health insurer or health benefits fund to which the order relates. [Part 3, Division 8, Subdivision D, section 86]

APRA rules dealing with various matters

4.169 This clause provides that the APRA rules may:

•

provide for a range of administrative and procedural matters in relation to meetings required or permitted to be held under Division 6 (external management); and

•

stipulate the form and contents of any document required or permitted to be given to APRA or an external manager or terminating manager of a health benefits fund under a provision of Division 5 (terminating management) or 6 (external management). [Part 3, Division 8, Subdivision D, section 87]

Division 9 - Duties and liabilities of directors etc.

Notices to remedy contravention

4.170 APRA may give a private health insurer that has contravened this Part written notice requiring the insurer to take specific action within a specific period to remedy the contravention. The insurer is required to comply with the notice and failure to comply is an offence under section 148. [Part 3, Division 9, subsection 88(1)]

4.171 The specified period in the notice:

•

must be a period ending not earlier than one month after the giving of the notice; and

•

may be extended by APRA any time before the notice period ends, for a period as APRA thinks fit. [Part 3, Division 9, subsection 88(2)]

4.172 The action specified in the notice is action APRA thinks appropriate and reasonable to overcome the effects of the contravention. [Part 3, Division 9, subsection 88(3)]

Liability of directors in relation to non-compliance with notices

4.173 If a private health insurer has been notified by APRA under section 88 in respect of a contravention that has resulted in a loss to a health benefits fund and has not complied with the notice, the persons who are directors of the insurer when the contravention occurred are jointly and severally liable to pay to the insurer an amount equal to the loss. [Part 3, Division 9, subsection 89(1)]

4.174 A person is not liable under subsection 89(1) if they can prove they exercised due diligence to ensure that the insurer complied with the notice. [Part 3, Division 9, subsection 89(2)]

4.175 An action to recover an amount under subsection 89(1) may be brought by the insurer or, with APRA's approval, a policy holder of the health benefits fund involved. APRA's approval may be subject to conditions as to the persons or number of persons who may join the action as plaintiffs. This approval is not a legislative instrument, as it is done on a case by case basis, and is therefore an administrative decision. Therefore the statement in subsection 89(5) is not a substantive exemption from the Legislative Instruments Act but a statement of the 'status quo'. A separate exoneration provision, in section 166, will also apply. [Part 3, Division 9, subsections 89(3), (4) and (5)]

APRA may sue in the name of private health insurers

4.176 APRA may bring an action in the name of a private health insurer to recover an amount the insurer is entitled to recover under Division 9. [Part 3, Division 9, section 90]