House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer,the Hon Peter Costello, MP)

1 - Abbreviations

The following abbreviations are used in this explanatory memorandum.

2 - Outline and financial impact statement

Outline

2.1 This Bill continues the legislative amendments required to facilitate the Governments response to the recommendations of the Financial System Inquiry.

2.2 The Financial Sector Legislation Amendment Bill (No.1) 2002 (FSLAB) continues the reform process of enhancing the operation of existing financial sector legislation. Specifically, this Bill contains key measures designed to:

•

ensure that outstanding levies are recognised on an accrual basis and clarify that the Treasurers determination is specific to each levy in the Australian Prudential Regulation Authority Act 1998;

•

amend the Financial Institutions Supervisory Levies Collection Act 1998 to address concerns raised by the Australian National Audit Office (ANAO), and to ease the administration of the Australian Prudential Regulation Authoritys (APRA) collection of financial institutions supervisory levies;

•

amend the Financial Sector (Transfers of Business) Act 1999 so that APRA must consult with the Commissioner of Taxation on the taxation implications of a proposed transfer before approving transfers between regulated bodies;

•

amend the Insurance Act 1973 to complement proposed changes in the Banking Act 1959 to be included in the proposed Financial Sector Legislation Amendment Bill (No.2) 2002;

•

remove the 30 day time limit for the Minister to make a decision in the Insurance Acquisition and Takeovers Act 1991 to allow APRA to undertake necessary investigations prior to allowing a merger or acquisition to proceed;

•

remove sunset clauses in the Life Insurance Act 1995 on appeals to the Administrative Appeals Tribunal (AAT);

•

to simplify the procedures for Reserve Bank Board and Payments System Board (PSB) appointments, terminations and resignations, and repeal unnecessary service provisions in the Reserve Bank Act 1959;

•

clarify the application of section 121A of the Superannuation Industry (Supervision) Act 1993 to superannuation funds being wound up and to align the secrecy provisions applying to the Australian Tax Office with equivalent provisions applying to APRA; and

•

remove uncertainty in the Superannuation Supervision Levy Imposition Act 1998 about the levy payable by a superannuation entity that becomes a superannuation entity during a fiscal year, but was unregulated the previous year.

Financial Impact Statement

2.3 It is not envisaged that the Bill will have a significant financial impact on the operations of Government.

3 - Proposed Legislation

Clause 1 - Short Title

3.1 The short title of the Bill is defined here.

Clause 2 - Commencement

3.2 This clause provides for commencement of the various proposed amendments. More details are provided in the notes on items relating to the respective Schedules.

Clause 3 - Schedules

Schedule 1 - Amendment of the Australian Prudential Regulation Authority Act 1998

Schedule 2 - Amendment of the Financial Institutions Supervisory Levies Collection Act 1998

Schedule 3 - Amendment of the Financial Sector (Transfers of Business) Act 1999

Schedule 4 - Amendments relating to general insurance:

Insurance Act 1973

General Insurance Reform Act 2001

Schedule 5 - Amendment of the Insurance Acquisitions and Takeovers Act 1991

Schedule 6 - Amendment of the Life Insurance Act 1995

Schedule 7 - Amendment of the Reserve Bank Act 1959

Schedule 8 - Amendment of the Superannuation Industry (Supervision) Act 1993

Schedule 9 - Amendment of the Superannuation Supervisory Levy Imposition Act 1998

4 - Schedule 1 Amendment of the Australian Prudential Regulation Authority Act 1998

Item 1

4.1 This amendment modifies section 50 of the Australian Prudential Regulation Authority Act 1998 (the APRA Act) so that, consistent with Commonwealth policy, outstanding levies are recognised by APRA on an accrual basis. Presently, section 50 requires APRA to recognise the cash collected during a financial year as revenue. This amendment changes revenue recognition to the accrual concept to comply with the Commonwealth Governments accrual accounting reporting policy.

4.2 This amendment also clarifies that the Treasurers determination of Commonwealth costs is specific to the levy for each industry sector rather than treated as a single amount. The present wording of section 50 appears to direct the Treasurer to specify a single amount for all of the financial industry that must be retained for market integrity and consumer protection functions.

4.3 Currently, a large proportion of the amount specified in the Treasurers levy determination relates to APRA regulated superannuation funds, although the annual levy on superannuation funds is not due until after 30 September each financial year. This means that the amount specified by the Treasurers determination is raised from the levies in other sections of the industry, the annual levies which are due on 1 July of the financial year. This causes a cash flow problem for APRA. This amendment requires the Treasurers determination to specify a separate amount for each levy for each financial year and will resolve the cash flow problems.

Item 2

4.4 This amendment clarifies that Item 1 applies for the financial year that began on 1 July 2001 and for all later financial years.

Item 3

4.5 This amendment is a technical amendment to assist in clarifying of the operation of APRAs secrecy provisions in relation to the disclosure of personal information (within the meaning of the Privacy Act 1998).

Item 4

4.6 This amendment clarifies the operation of APRAs secrecy provisions in relation to the disclosure of personal information (within the meaning of the Privacy Act 1998).

Commencement

4.7 Item 1 will commence on 30 June 2002 in order for APRA to avoid an audit qualification from the Australian National Audit Office (ANAO). Items 2 and 3 will commence the day after the day on which this Act receives the Royal Assent.

5 - Schedule 2 Amendment of the Financial Institutions Supervisory Levies Collection Act 1998

Item 1

5.1 This amendment provides for the supervisory levy to be payable on a date specified in a notice sent by APRA, on or after 1 July of that year, to the leviable body. The date specified cannot be earlier than 28 days after the day on which the notice is given. Previously, institutions were only provided with two weeks to pay which has caused a negative reaction from industry and resulted in institutions not paying their late penalty payments. This amendment enables APRA to provide leviable bodies with the standard commercial terms-of-trade.

Item 2

5.2 This amendment provides for a date of payment to be specified in a notice sent by APRA to a superannuation entity on or after the day the return was received by APRA, or the day the fund was established. The date for payment can be no earlier than six weeks after the day on which the notice is given. This will allow APRA to more easily calculate the six weeks after a return is lodged.

5.3 This amendment corrects a drafting error. Section 9(2) of the Act does not cover those entities that become superannuation entities under the Superannuation Industry (Supervision) Act 1993 on 1 July of a financial year. The section is to be amended to cover those entities that become regulated on 1 July of a financial year.

Item 3

5.4 This amendment will ensure that late payment penalties can be calculated and invoiced on a specified calculation day. Currently invoices which incur late payment penalties must have the penalties calculated daily, making invoicing difficult.

Item 4

5.5 This amendment clarifies the application of Item 3.

Item 5

5.6 This amendment clarifies that APRA is authorised as the Commonwealths agent to recover financial sector levy debts. In addition, should a costs order be made against the Commonwealth, then the costs would be borne by APRA.

Commencement

5.7 These amendments will commence on the day after the day on which this Act receives the Royal Assent.

6 - Schedule 3 Amendment of the Financial Sector (Transfers of Business) Act 1999

Item 1

6.1 This amendment inserts new provisions into the Financial Sector (Transfers of Business) Act 1999 (the FS(ToB)) to ensure the Australian Prudential Regulation Authority (APRA) consults the Commissioner of Taxation before approving an application in relation to a transfer of business. The FS(ToB) currently requires that APRA must consult with the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission unless they expressly state that they do not want to be consulted. The Commissioner of Taxation and by implication the Australian Taxation Office, is not explicitly listed in the FS(ToB), but it has been practice to ensure applicants consult with the Commissioner of Taxation prior to the transfer being agreed.

Item 2

6.2 This amendment inserts a new provision, which provides for APRA to not have to consult with the Commissioner of Taxation if APRA is informed in writing by the Commissioner of Taxation that he/she need not be consulted.

Commencement

6.3 These amendments will commence on the day after the day on which this Act receives the Royal Assent.

7 - Schedule 4 Amendments relating to general insurance

Insurance Act 1973

Item 1

7.1 This amendment ensures that a person is a disqualified person for the purposes of the Insurance Act 1973 (the Insurance Act) if a person has breached of the Corporations Act 2001 or its foreign equivalent. This is particularly relevant at a non-operating holding company (NOHC) level where the board may have directors with no financial sector background but who may have been involved in breaches of corporate law in commercial firms in the past either in Australia or abroad. Such directors would be undesirable on the board or management of an authorised NOHC.

Items 2 and 3

7.2 These amendments allow APRA to determine that a person who is not fit and proper, as set out in a prudential standard, is also a disqualified person of the purposes of section 24. This amendment brings the Insurance Act into line with the Superannuation and Industry (Supervision) Act 1993.

7.3 It is an offence under section 24 for a disqualified person to act as a director or senior manager of a general insurance company NOHC authorised under the Insurance Act. It is also an offence under section 24 for a body corporate that allows a disqualified person to act in such a role.

7.4 Section 25 sets out when a person is a disqualified person for the purposes of section 24.

Item 4

7.5 This amendment allows APRA to impose conditions on a determination made under section 26. Section 26 allows APRA to determine that a person is not a disqualified person. In some circumstances, APRA may be prepared for persons who would otherwise be disqualified to continue to act in specific roles under specific conditions. By allowing a determination to be made subject to conditions that may be varied or revoked, APRA has more flexibility in the application of this section.

Item 5

7.6 This amendment corrects inconsistent terminology in the Insurance Act and clarifies that there may be a certain amount of negotiation between APRA and an insurer in determining an appropriate in-house capital adequacy model.

Items 6, 7 and 8

7.7 This amendment provides APRA with the power to vary or revoke a modification or replace a modification with a further modification made under subsection 32(3A). Subsection 32(3A) allows APRA to modify a prudential standard to replace the capital adequacy standard which applies to all general insurers with an in-house capital model specific to a particular institution.

Item 9

7.8 This amendment requires APRA to consult before modifying a prudential standard. The amendment is designed to ensure consistency with the existing requirements for APRA to consult general insurers, NOHCs, subsidiaries and other bodies when making or varying a prudential standard.

Item 10

7.9 This amendment clarifies that APRA may revoke an approval of a persons appointment under section 40 (Approval of an appointment of an auditor or actuary) if that person has failed to perform adequately and properly the functions and duties of what the person was required to perform under the Act rather than simply the duties of the appointment under the Insurance Act.

Item 11

7.10 This amendment repeals paragraph 43(a) which is redundant as a result of subsections 42(1) and 44(2).

Items 12 and 13

7.11 These amendments harmonise and add clarity to the wording of section 49N bringing it into line with section 49M.

Items 14 and 15

7.12 These items amend the Insurance Act so that a person who is connected to a general insurer or related group is not allowed to sit as a member of the Administrative Appeals Tribunal for the purposes of a review of a reviewable decision of the Treasurer or APRA made under the Insurance Act.

Item 16

7.13 This amendment clarifies section 117 so that when a foreign general insurer gives written notice to APRA of its address for service, that address will also be taken to be the address for service for its subsidiaries unless notified to the contrary.

Item 17

7.14 This amendment clarifies section 118 so that when a foreign general insurer gives written notice to APRA of its agents name and, in the case of an appointment, the place of residence of that person, that name and address will also be taken to be the name and address of the agent for subsidiaries unless notified to the contrary.

General Insurance Reform Act 2001

Item 18

7.15 This amendment corrects a drafting error.

Commencement

7.16 Items 1 to 17 are to commence immediately after the commencement of Schedule 1 to the General Insurance reform Act 2001. Item 18 is to commence immediately after the commencement of Schedule 2 to the General Insurance Reform Act 2001.

8 - Schedule 5 amendment of the insurance acquisitions and takeovers act 1991

Items 1 to 24

8.1 These items amend the Insurance Acquisitions and Takeovers Act 1991 (the IAT Act) by removing the 30-day time limit to make a decision to allow a merger or acquisition to take place and to make the necessary consequential amendments.

8.2 The IAT Act contains a provision that gives the Minister 30 days in which to make a go-ahead decision to allow a merger or acquisition to take place. If the Minister does not make a decision within 30 days, the Minister is unable to make a conditional decision or place a temporary or permanent restraining order on the transaction taking place. That is, the transaction goes through unchallenged. This time limit prevents the Minister (or APRA under delegation) from undertaking all necessary investigation prior to allowing a merger or acquisition to proceed. In practice the process generally takes longer than 30 days. In many cases any additional information needs to be obtained from overseas sources (and in some circumstances needs to be translated).

8.3 Problems have arisen when the 30-day time limit is about to expire and a decision has not been made. In this situation, it is necessary to either make a temporary restraining order on the transaction (which requires gazettal) or ask the companies involved to withdraw their application (on the grounds that there was insufficient information to make a decision). Placing a restraining order on the transaction in this circumstance is unnecessarily severe, as all that may be required for approval is an additional document. Gazettal of the restraining order could be detrimental to the companies involved due to market speculation.

Commencement

8.4 These amendments will commence the day after the day on which this Act receives the Royal Assent.

9 - Schedule 6 amendment of the life insurance Act 1995

Item 1

9.1 This item removes the existing sunset clause, permanently removing the right to appeal against the specified prudential decisions to the Administrative Appeals Tribunal (AAT).

9.2 The Life Insurance Act 1995 was originally amended by the Financial Laws Amendment Act 1997 to remove the right to appeal to the AAT on some prudential decisions made under the Life Insurance Act. This right to appeal was removed to allow APRA to act quickly in the event of a financial crisis to prevent contagion across the financial system. It was felt that the ability of a life insurance company to obtain a stay of a decision by seeking administrative review could have curtailed rapid action by APRA to resolve the financial crisis and could jeopardise policyholder interests.

9.3 Instead, these decisions were to be made with Ministerial consent and subject to a five year sunset clause, pending an examination of the operation of the non-reviewable decisions. The five year sunset clauses are due to expire in July 2002, and a review which included industry consultation found that there were no objections to the removal of the sunset clauses and the maintenance of the non-reviewability of decisions.

Item 2

9.4 This item repeals this subsection. Currently, the subsection refers to the need to get the Treasurers agreement to the specific prudential decisions referred to in the Life Insurance Act, which have had their right of appeal to the AAT removed. This duplicates requirements that are already contained in the various subsections to which the specific decisions refer, therefore the need for the separate stand alone requirement should be removed.

Commencement

9.5 These amendments will commence the day after the day on which this Act receives the Royal Assent.

10 - Schedule 7 Amendment of the reserve bank Act 1959

Item 1

10.1 This amendment will correct a grammatical error in the Reserve Bank Act 1959 (Reserve Bank Act).

Items 2-4, 6-7, 9-11, 14-18

10.2 Currently, the Governor-General is responsible for appointing, terminating the appointment of, and receiving resignations from, members of the Reserve Bank and Payments System Boards. These roles are normally undertaken on the basis of advice from the Treasurer, and, in the case of appointments, following a decision by Cabinet.

10.3 This amendment passes these responsibilities to the Treasurer, and streamlines the process of appointing and terminating members of the Reserve Bank and Payments System Boards. Resignations would also be addressed to the Treasurer under the new provision.

Item 5

10.4 Currently, for Reserve Bank Board members excluding the Governor, Deputy Governor, and Secretary to the Treasury, there are several grounds for the termination of their appointment. Current drafting of Section 18 of the Reserve Bank Act makes it unclear if only one, or all of the grounds need to be met for the termination of a Board members appointment.

10.5 The proposed amendment will make it explicit that only one of these termination conditions need to be met for the termination of the appointment of a member from the Reserve Bank Board.

Item 8

10.6 Under Section 22 of the Reserve Bank Act, if the Secretary to the Treasury is unable to attend a meeting of the Reserve Bank Board, the Secretary may nominate, in writing, for a Deputy Secretary to attend.

10.7 Following the restructuring of the Treasury, there is no longer a position entitled Deputy Secretary. The proposed amendment allows the Secretary to nominate in writing an appropriate senior Treasury employee to attend a Reserve Bank Board meeting as their replacement.

Items 12 and 13

10.8 Currently, for the Governor and Deputy Governor of the Reserve Bank, there are several grounds for the termination of their appointment. Current drafting of the Reserve Bank Act makes it unclear if only one or all of the grounds need to be met for the termination of the appointment of the Governor or Deputy Governor.

10.9 The proposed amendments will make it explicit that only one of these termination conditions need to be met for the termination of the appointment of the Governor or Deputy Governor.

Item 19

10.10 Section 70 of the Reserve Bank Act requires the Bank to maintain a superannuation fund for its staff, and to consult the Minister for Finance and Administration regarding the operation of the fund. It is proposed that the section be repealed.

10.11 The Reserve Bank will no longer be required under the provisions of the Reserve Bank Act to provide a superannuation fund for staff. The existing fund will continue to operate, but with reduced administrative complexity in not needing to consult with the Minister of Finance on changes to the funds rules.

Item 20

10.12 Section 74(2) of the Reserve Bank Act requires that the head office of the Reserve Bank not be in the same building as the head office of any authorised deposit-taking institution (ADI). This provision is anachronistic and unnecessarily restricts the ability of the Reserve Bank, in the event of an unexpected occurrence, to find alternative short-term accommodation.

10.13 The proposed amendment would not restrict the head office of the Reserve Bank from sharing a building with the head office of an ADI.

Item 21

10.14 The proposed amendments to the clauses relating to the appointment and resignation of members of the Reserve Bank Board will only apply to appointments and resignations made after the commencement of the proposed Schedule.

Commencement

10.15 These amendments will commence the day after the day on which this Act receives the Royal Assent.

11 - Schedule 8 Amendment of the Superannuation industry (Supervision) Act 1993

Items 1,2 and 5

11.1 Section 21 and section 133 refer to the trustee requirements for superannuation funds with fewer than five members. These amendments are consequential and maintain consistency between these sections and section 121A.

Items 3 and 4

11.2 Section 121A can have the unintended effect of requiring a superannuation fund that would not otherwise require an approved trustee to appoint an approved trustee while it is being wound up. This would occur if the membership of the fund falls below five members during the process of winding up. The requirements that must be met to become an approved trustee are considered too onerous in this situation.

11.3 This amendment ensures that a superannuation fund which is being wound up is not required to appoint an approved trustee in the course of winding up if membership falls below five members. The fund will have a twelve month grace period during which they will not be in breach of section 121A. APRA will have the discretion to extend the grace period.

Item 6

11.4 This amendment allows that the Commissioner of Taxation to disclose descriptions of court proceedings in relation to a breach or suspected breach of the legislation covered by section 252C. The Commissioner of Taxation may also disclose descriptions of activities in relation to such breaches or suspected breaches. The amendment ensures consistency with equivalent provisions applying to APRA in respect of its administration of superannuation (see section 56 of the APRA Act).

Commencement

11.5 These amendments will commence the day after the day on which this Act receives the Royal Assent.

12 - Schedule 9 Amendment of the Superannuation Supervisory Levy Imposition Act 1998

Item 1

12.1 This amendment defines unregulated entity and it gives effect to changes to Paragraph 7(1)(a) of the Superannuation Supervisory Levy Imposition Act 1998 (the SSLI Act).

Item 2

12.2 This amendment removes an existing ambiguity in the SSLI Act. The amendment provides for a superannuation entity which becomes a superannuation entity during a financial year, but which was in existence as an unregulated entity during the previous financial year, be required to pay a levy based on a percentage of the value of the entitys assets on 30 June of the previous financial year.

Commencement

12.3 These amendments will commence the day after the day on which this Act receives the Royal Assent.