House of Representatives

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Outline of Bill

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

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

APRA's preventive powers

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

The amendments:

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

APRA's correction powers

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

The amendments:

•

enhance the triggers for issuing directions;

•

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

•

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

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

APRA's and ATO's investigation powers

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

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

•

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

•

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

•

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

•

enhance the protection and sharing of information by APRA.

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

APRA's failure management powers

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

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

•

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

•

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

•

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

•

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

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Auditors and actuaries

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

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

•

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

•

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

•

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

•

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

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Financial Claims Scheme

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

Schedule 1 of the Bill amends the Banking Act to:

•

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

•

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

•

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

Schedule 2 of the Bill amends the Insurance Act to:

•

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

•

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

•

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

•

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

•

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

•

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

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

APRA's data collection powers

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

Schedule 4 of the Bill amends the FSCODA to:

•

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

•

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

•

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

•

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

•

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

•

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

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

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Financial sector levies

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

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

Schedule 5 of the Bill:

•

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

•

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

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

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Minor and technical amendments

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

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

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

Financial impact: The measures have no significant financial impact.

Compliance cost impact: Low.

Summary of regulation impact statement

Regulation impact on business

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

Main points:

•

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

•

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

•

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

Chapter 1

Amendments to APRA's preventive powers

Outline of chapter

1.1 Schedules 1 to 3 of the Bill contain amendments to the Banking, Insurance and Life Insurance Acts that enhance APRA's powers to prevent prudential concerns arising.

Context of amendments

Minimum criteria for authorisation or registration

1.2 The Banking, Insurance and Life Insurance Acts permit a body corporate to apply to APRA for authorisation^[1] to carry on a regulated business or be a NOHC of a regulated business. If an application is made, APRA may grant or refuse the application.

1.3 Currently, APRA sets out criteria for the granting of such an authorisation in guidelines. APRA cannot presently set such criteria by legislative instrument.

1.4 The ability to set criteria by legislative instrument rather than by guidelines would provide greater certainty as to the legal standing of those criteria.

Continuing licences in-effect

1.5 The Banking, Insurance and Life Insurance Acts provide APRA with the power to revoke an authorisation in certain circumstances. However, none of the Acts currently provide that APRA may continue an authorisation in effect upon revocation, as is the case under section 29GB of the Superannuation Industry (Supervision) Act in relation to Registrable Superannuation Entity (RSE) licences.

1.6 The inability to continue an authorisation in effect upon revocation may hinder APRA's ability to appropriately monitor an entity, or act under relevant laws, after the entity's authorisation has been revoked.

Prudential standards in respect of corporate groups

1.7 Section 32 of the Insurance Act currently provides that APRA may determine prudential standards relating to prudential matters that must be complied with by: all general insurers; or all authorised NOHCs; or the subsidiaries of general insurers or authorised NOHCs; or a specified class of general insurers, authorised NOHCs or subsidiaries of general insurers or authorised NOHCs; or one or more specified general insurers, authorised NOHCs or subsidiaries of general insurers or authorised NOHCs.

1.8 Section 32 allows APRA to require the head entity of a corporate group and its subsidiaries to comply with prudential standards individually. However, it is not clear that APRA may make prudential standards in respect of corporate groups or parts of groups, as it may currently do under section 11AF of the Banking Act.

1.9 APRA's ability to efficiently utilise prudential standards under the Insurance Act would be enhanced by an ability to make prudential standards in respect of corporate groups or parts of such groups.

Prudential standard to determine assets in Australia

1.10 Section 28 of the Insurance Act currently requires all general insurers to maintain assets in Australia (excluding goodwill and other amounts excluded in the prudential standard) of a value that equals or exceeds the total amount of the general insurer's liabilities in Australia. This requirement is designed to ensure that the total value of assets held within the jurisdictional reach of APRA and the Australian courts is sufficient to meet a general insurer's liabilities in Australia for the purposes of subsection 116(3) of the Insurance Act 1973.

1.11 There is uncertainty, however, as to whether the current reference to 'amounts' in section 28 of the Insurance Act enables APRA to exclude all relevant 'assets' for the purposes of the section. There is also uncertainty as to the relationship between section 28 and certain other provisions of the Insurance Act.

1.12 A similar provision to section 28 of the Insurance Act exists in subsection 13A(4) of the Banking Act. That subsection provides that an ADI is guilty of an offence if it does not hold assets (excluding goodwill) in Australia of a value that is equal to or greater than the total amount of its deposit liabilities in Australia and APRA has not authorised the ADI to hold assets of a lesser value.

1.13 Unlike section 28 of the Insurance Act, however, subsection 13A(4) of the Banking Act does not currently enable APRA to exclude assets or amounts from being treated as assets in Australia for the purposes of the subsection. This means that APRA cannot presently exclude assets from being treated as 'assets in Australia' under the subsection so as to protect Australian deposit holders.

Incorporation by reference in prudential standards

1.14 Currently, the Banking and Life Insurance Acts do not contain a provision for the incorporation by reference of documents into prudential standards. The Insurance Act contains such a provision.

1.15 The inability to incorporate documents by reference increases the burden on APRA of maintaining and administering prudential standards. For example, it means that APRA is required to make new prudential standards each time versions of documents referred to in the standards (such as the Audit and Assurance Standards Board's Audit Guidance) are updated.

Summary of new law

1.16 Schedules 1 to 3 of the Bill amend the Banking, Insurance and Life Insurance Acts to:

•

enable APRA by legislative instrument to set criteria for granting authorisation to carry on business as an ADI, insurer or authorised NOHC of an ADI or insurer;

•

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

•

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

•

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

•

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

•

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

•

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

Comparison of key features of new law and current law

Detailed explanation of new law

Minimum criteria for authorisation or registration

1.17 The Banking, Insurance and Life Insurance Acts permit a body corporate to apply to APRA for authorisation to carry on a regulated business in Australia or be a NOHC of a regulated business. If an application is made, APRA may grant or refuse the application.

1.18 The Bill amends the Banking, Insurance and Life Insurance Acts to provide that APRA may, by legislative instrument, set criteria for the granting of such an authorisation . [Schedule 1, items 5 and 8, schedule 2, items 9 and 12, and schedule 3, items 2 and 4, subsections 9(2A) and 11AA(1A) of the Banking Act 1959, subsections 12(1B) and 18(2A) of the Insurance Act 1973, and subsections 20(2A) and 28A(2A) of the Life Insurance Act 1995]

1.19 The amendment enhances the authorisation framework by permitting minimum standards for entry and participation in regulated financial markets to be made by legislative instrument. Currently, such criteria are set out in APRA guidelines.

Continuing licence in-effect

1.20 The Banking, Insurance and Life Insurance Acts provide APRA with the power to revoke an authorisation in certain circumstances. However, none of the Acts presently provide that APRA may continue an authorisation in effect upon revocation, as is the case under section 29GB of the Superannuation Industry (Supervision) Act in relation to RSE licences.

1.21 The Bill inserts an equivalent provision to section 29GB of the Superannuation Industry (Supervision) Act into the Banking, Insurance and Life Insurance Acts. The effect of the provisions is that a notice to revoke an authorisation may state that the authorisation continues in effect in relation to a specified matter or a specified period, as though the revocation had not happened, for the purposes of a Commonwealth law administered by APRA or a provision of the prudential standards and that any such statement has effect accordingly . [Schedule 1, items 7 and 9, schedule 2, items 11 and 13, and schedule 3, items 3 and 5, subsections 9A(5A) and 11AB(5A) of the Banking Act 1959, sections 16A and 22A of the Insurance Act 1973, and sections 28 and 28E of the Life Insurance Act 1995]

Prudential standards in respect of corporate groups

1.22 Section 32 of the Insurance Act currently provides that APRA may determine prudential standards relating to prudential matters that must be complied with by:

•

all general insurers; or

•

all authorised NOHCs; or

•

the subsidiaries of general insurers or authorised NOHCs; or

•

a specified class of general insurers, authorised NOHCs or subsidiaries of general insurers or authorised NOHCs; or

•

one or more specified general insurers, authorised NOHCs or subsidiaries of general insurers or authorised NOHCs.

This allows APRA to require the head entity of a corporate group and its subsidiaries to comply with prudential standards individually. However, it does not allow APRA to make prudential standards in respect of corporate groups, or parts of groups, as a whole.

1.23 In contrast, section 11AF of the Banking Act currently prescribes that prudential standards may require an ADI or its authorised NOHC to ensure that its subsidiaries (or particular subsidiaries), or it and its subsidiaries (or particular subsidiaries), collectively satisfy particular requirements in relation to prudential matters. This allows APRA to make prudential standards for groups or parts of groups under the Banking Act.

1.24 The Bill harmonises the Insurance Act with the Banking Act by permitting APRA to make prudential standards for corporate groups, or parts of groups, as a whole under the Insurance Act.

1.25 The Bill achieves this by amending section 32 of the Insurance Act to provide that without limiting the prudential matters in relation to which APRA may determine a prudential standard, a prudential standard may require:

•

each general insurer or authorised NOHC; or

•

a specified class of general insurers or authorised NOHCs; or

•

one or more specified general insurers or authorised NOHCs;

to ensure that the company's subsidiaries (or particular subsidiaries), or the company and the company's subsidiaries (or particular subsidiaries), collectively satisfy particular requirements in relation to prudential matters . [Schedule 2, item 18, subsection 32(3) of the Insurance Act 1973]

1.26 The amendment enables APRA to make prudential standards with respect to general insurance groups or parts of such groups where it is desirable to do so.

Prudential standard to determine assets in Australia

Amendments to the Insurance Act

1.27 Section 28 of the Insurance Act currently requires all general insurers to maintain assets in Australia (excluding goodwill and other amounts set out in the prudential standard) of a value that equals or exceeds the total amount of the general insurer's liabilities in Australia. This requirement is designed to ensure that the total value of assets held within the jurisdictional reach of APRA and the Australian courts is sufficient to meet a general insurer's liabilities in Australia for the purposes of subsection 116(3) of the Insurance Act.

1.28 There is uncertainty, however, as to whether the current reference to 'amounts' in section 28 enables APRA to exclude all relevant 'assets' for the purposes of the section.

1.29 In response, the Bill amends section 28 of the Insurance Act to clarify that APRA can exclude assets, in addition to amounts, from being assets in Australia for purposes of that provision by prudential standards . [Schedule 2, item 17, paragraph 28(a) of the Insurance Act 1973]

1.30 The Bill also makes amendments to other provisions of the Insurance Act to clarify their relationship with section 28 of the Act.

•

Paragraph 62M(a)(ii) currently provides that the Federal Court of Australia (Federal Court) may make an order that a general insurer be placed under judicial management if the Court is satisfied that the general insurer is a foreign general insurer and is, or is likely to become unable to meet, from its assets in Australia, its liabilities in Australia. The Bill amends the subsection to clarify that the foreign general insurer's 'assets in Australia' for the purposes of the paragraph do not include any assets or amounts excluded by the prudential standards under section 28 . [Schedule 2, item 48, subparagraph 62M(a)(ii) of the Insurance Act 1973]

•

Subsection 62ZZC(1) of the Insurance Act currently provides that the Minister may declare that the FCS applies in relation to a foreign general insurer if the insurer is under judicial management and APRA has advised the Minister that it considers the insurer is unable to pay, from its assets in Australia, all its debts that are liabilities in Australia, as and when those debts become due and payable. The Bill amends the subsection to clarify that the foreign general insurer's 'assets in Australia' for the purposes of the subsection do not include any assets or amounts excluded by the prudential standards under section 28 . [Schedule 2, item 62, subparagraph 62ZZC(1)(b)(ii) of the Insurance Act 1973] A related amendment is also made to APRA's power to advise the Minister of its belief that the insurer's 'assets in Australia' are insufficient . [Schedule 2, item 63, paragraph 62ZZE(1)(b) of the Insurance Act 1973]

1.31 The Bill makes consequential amendments to two notes in subsection 16A(1) of the Insurance Act as a result of the above amendments . [Schedule 2, items 89 and 90, subsections 116A(1) (note 2) and 116A(1) (note 3) of the Insurance Act 1973]

1.32 The Bill also amends subsection 116A(3) of the Insurance Act so that it makes reference to section 116 of that Act . [Schedule 2, item 91, subsection 116A(3) of the Insurance Act 1973]

1.33 Section 116A currently defines when a liability is taken to be a liability in Australia for the purposes of particular sections. Part of this definition is contained in subsection 116A(2) and part in subsection 116A(3). Subsection 116A(2) is presently drafted so as to apply to section 116 of the Act, but subsection 116A(3) is not.

1.34 The amendment rectifies this inconsistency. By doing so, it clarifies that the relevant provisions in section 116A apply to the requirement in section 116 that, in winding up, a general insurer's assets in Australia are firstly applied to meeting its liabilities in Australia.

Amendments to the Banking Act

1.35 A similar provision to section 28 of the Insurance Act exists in subsection 13A(4) of the Banking Act. That subsection provides that an ADI is guilty of an offence if it does not hold assets (excluding goodwill) in Australia of a value that is equal to or greater than the total amount of its deposit liabilities in Australia and APRA has not authorised the ADI to hold assets of a lesser value.

1.36 Unlike section 28 of the Insurance Act, however, subsection 13A(4) of the Banking Act does not currently enable APRA to exclude assets or amounts from being treated as assets in Australia for the purposes of the subsection.

1.37 The ability for APRA to exclude assets or amounts from being treated as assets in Australia in the banking context is desirable for similar reasons to those for which it presently exists in the general insurance context. In particular, it enables APRA to exclude assets and amounts which may not be held by a court to fall within the definition of 'assets in Australia' or which APRA considers to have doubtful or no value to depositors in Australia in the event of an ADI becoming insolvent.

1.38 To address this situation, the Bill amends subsection 13A(4) to enable APRA to exclude assets or amounts from being assets in Australia for the purposes of that subsection by prudential standards . [Schedule 1, item 23, subsection 13A(4)(a) of the Banking Act 1959]

Incorporation by reference in prudential standards

1.39 Currently, the Banking and Life Insurance Acts do not contain a provision for the incorporation by reference of documents into prudential standards. The Insurance Act contains such a provision.

1.40 The Bill amends the Banking and Life Insurance Acts to enable prudential standards to provide for a matter by applying, adopting or incorporating, with or without modification, any matter contained in any instrument or other writing as in force or existing from time to time despite: section 64AA of the Acts Interpretation Act 1901; and section 14 of the Legislative Instrument Act 2003. [Schedule 1, item 11, and schedule 3, item 50, subsection 11AF(7BA) of the Banking Act 1959 and subsection 230A(12C) of the Life Insurance Act 1995]

1.41 The amendments harmonise the Banking, Insurance and Life Insurance Acts and allow for updated versions of documents which are referred to in APRA's prudential standards (such as the Audit and Assurance Standards Board's Audit Guidance) to be automatically applied in prudential standards made under the Banking and Life Insurance Acts.

Chapter 2 - Amendments to APRA's correction powers

Outline of chapter

2.1 Schedules 1 to 3 of the Bill amend the Banking, Insurance and Life Insurance Acts to enhance APRA's power to correct breaches of the prudential framework by issuing directions.

Context of amendments

2.2 Effective enforcement powers ensure that APRA is able to compel compliance with, and rectify breaches of, minimum standards. APRA is equipped with various enforcement powers and sanctions including the power to enter into court-enforceable undertakings, issue directions, and seek court injunctions to enable it to respond proportionately to compliance issues.

2.3 In most situations, APRA is able to address prudential concerns by working cooperatively with the Board and management of a supervised entity, thereby allowing the Board and senior management to maintain full responsibility for decisions made by the entity.

2.4 However, there may be times where APRA judges that it is necessary to use more direct tools to rectify or manage prudential concerns. In particular, directions powers enable APRA to specify how an entity should resolve compliance issues and therefore enable APRA to compel an entity to take specific action to address prudential risks that have been identified.

2.5 The Banking, Insurance, and Life Insurance Acts each enable APRA to issue directions to regulated entities under specified circumstances. Refining and, where appropriate, enhancing the triggers that allow the issue of directions would ensure APRA can respond in a timely and decisive way to emerging prudential concerns which affect an entity, the entity's group or affect the financial system more broadly.

Summary of new law

2.6 Schedules 1 to 3 of the Bill amend the Banking, Insurance and Life Insurance Acts to:

•

enhance the triggers for issuing directions;

•

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

•

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

Comparison of key features of new law and current law

Detailed explanation of new law

Triggers for issuing direction

2.7 Under the Banking, Insurance and Life Insurance Acts, triggers must be satisfied prior to APRA issuing a direction. The Bill amends the triggers for giving a direction to an ADI, general insurer, life insurer or an authorised NOHC of these entities.

Deterioration in financial condition

2.8 Currently, paragraphs 11CA(1)(h) of the Banking Act, 104(1)(g) of the Insurance Act and 230B(1)(g) of the Life Insurance Act provide that APRA may issue a direction if there is 'a sudden material deterioration in the body corporate's financial condition' [Emphasis added].

2.9 The Bill amends the relevant provisions to remove the word 'sudden'. This reflects that it is not the speed but the extent of the deterioration that should be relevant in determining whether the trigger is met . [Schedule 1, item 13, Schedule 2, item 86, Schedule 3, item 54, paragraph 11CA(1)(h) of the Banking Act 1959, paragraph 104(1)(g) of the Insurance Act 1973, and paragraph 230B(1)(g) of the Life Insurance Act 1995]

ADI receiving external support

2.10 The Bill amends section 11CA of the Banking Act to clarify that APRA may disregard any external support for an ADI in deciding whether to give a direction under the section . [Schedule 1, item 16, subsection 11CA(1B) of the Banking Act 1959]

2.11 Currently, it is unclear whether APRA may disregard external support, for example, the provision of Australian Government (Government) support to an ADI, in determining whether to give a direction to an ADI under section 11CA of the Banking Act. The amendment clarifies that APRA may disregard such support.

2.12 The Bill also enables regulations made under the Banking Act to specify that a particular form of support is not external support for the purposes of the above mentioned amendment. This enables the regulations to clarify any types of external support that are not to be disregarded by APRA in deciding whether to give a direction under section 11CA of the Banking Act . [Schedule 1, item 16, subsection 11CA(1C) of the Banking Act 1959]

Reference to subsidiaries

2.13 The Bill amends the grounds for giving directions under section 11CA of the Banking Act, section 104 of the Insurance Act and section 230B of the Life Insurance Act so that a direction can be given in certain circumstances as a result of the conduct or circumstances of subsidiaries of regulated entities . [Schedule 1, item 14, Schedule 2, item 87, Schedule 3, item 55, subsection 11CA(1AA) of the Banking Act 1959, subsection 104(1A) of the Insurance Act 1973, and subsection 230B(1AA) of the Life Insurance Act 1995]

2.14 Currently, APRA has the power to direct a regulated entity to do, or cause a subsidiary to do, certain things if a directions trigger is met. However, the triggers themselves do not presently refer to subsidiaries.

2.15 The Bill amends the sections identified above to enable APRA to use its existing powers to direct a body corporate that is an ADI, insurer or authorised NOHC of an ADI or insurer, if:

•

APRA has reason to believe that:

-

a subsidiary of the body corporate is, or is about to become, unable to meet the subsidiary's liabilities; or

-

there is, or there might be, a material risk to the security of the assets of a subsidiary of the body corporate; or

-

there has been, or there might be, a material deterioration in the financial condition of a subsidiary of the body corporate; or

-

a subsidiary of the body corporate is conducting the subsidiary's affairs in an improper or financially unsound way; or

-

a subsidiary of the body corporate is conducting the subsidiary's affairs in a way that may cause or promote instability in the Australian financial system; and

•

APRA considers that the direction is reasonably necessary for one or more prudential matters relating to the body corporate . [Schedule 1, item 14, Schedule 2, item 87, Schedule 3, item 55, subsection 11CA(1AA) of the Banking Act 1959, subsection 104(1A) of the Insurance Act 1973, and subsection 230B(1AA) of the Life Insurance Act 1995]

2.16 The amendment reflects that the conduct or circumstances of a subsidiary of a regulated body may in some instances affect prudential matters relating to the regulated body.

2.17 The Bill also makes amendments to sections 11CA of the Banking Act, 104 of the Insurance Act and 230B of the Life Insurance Act to clarify that:

•

the new direction power triggers do not limit the existing triggers in those sections in any way; and

•

the existing direction power triggers in those sections do not limit the new triggers in any way . [Schedule 1, items 12 and 14, Schedule 2, items 85 and 87, Schedule 3, items 53 and 55, subsections 11CA(1) and 11CA(1AA) of the Banking Act 1959, subsections 104(1) and 104(1A) of the Insurance Act 1973, and subsections 230B(1) and 230B(1AA) of the Life Insurance Act 1995]

2.18 As a result of the amendments inserting the new triggers, consequential amendments are made to paragraph 11CA(1A)(b) of the Banking Act, paragraph 104(2)(b) of the Insurance Act and paragraph 203B(1A)(b) of the Life Insurance Act. The amendments insert a reference to the new triggers into those paragraphs . [Schedule 1, items 15, schedule 2, item 88, and schedule 3, item 56, paragraph 11CA(1A)(b) of the Banking Act 1959, paragraph 104(2)(b) of the Insurance Act 1973, and paragraph 203B(1A)(b) of the Life Insurance Act 1995]

Failure by an authorised NOHC to comply with a direction to remove a director under the Insurance Act

2.19 Section 27 of the Insurance Act presently allows APRA to direct general insurers, corporate agents and authorised NOHCs of general insurers to remove a person from the position of director or senior manager, in certain circumstances.

2.20 Subsection 27(7) of the Insurance Act presently makes it an offence (penalty: 300 penalty units) for a general insurer or corporate agent to fail to comply with such a direction. However, it does not presently make it an offence for an authorised NOHC of a general insurer to fail to so comply.

2.21 The Bill rectifies this inconsistency by amending subsection 27(7) of the Insurance Act so as to apply it to a NOHC of a general insurer on the same terms as it presently applies to general insurers and corporate agents. As a result, a NOHC of a general insurer commits an office if: the NOHC does, or fails to do, an act; and by doing or failing to do the act, the NOHC fails to comply with a direction under section 27 of the Insurance Act . [Schedule 2, items 15 and 16, subsection 27(7), paragraphs 27(7)(a) and (b) of the Insurance Act 1973]

Directions to foreign ADIs regarding assets and liabilities

2.22 The Bill amends the Banking Act to clarify that APRA may direct a foreign ADI:

•

to act in a way that a particular asset, or a particular class of assets, of the ADI is returned to the control (however described) of the part of the ADI's banking business that is carried on in Australia; or a particular liability, or a particular class of liabilities, of the ADI ceases to be the responsibility (however described) of the part of the ADI's banking business that is carried on in Australia; or

•

to not act in a way that a particular asset, or a particular class of assets, of the ADI ceases to be under the control (however described) of the part of the ADI's banking business that is carried on in Australia; or a particular liability, or a particular class of liabilities, of the ADI becomes the responsibility (however described) of the part of the ADI's banking business that is carried on in Australia . [Schedule 1, item 17, subsection 11CA(2B) of the Banking Act 1959]

2.23 The amendment clarifies that APRA may issue a direction to prevent inappropriate intra-entity transactions that may undermine the financial position of the ADI's Australian operations. This may be particularly important in a situation where the foreign ADI is in financial distress and to ensure that liability holders in Australia are not disadvantaged in the winding up or other resolution of the ADI.

2.24 The amendment does not limit the generality of paragraph 11CA(2)(p) of the Banking Act. That paragraph presently provides that APRA may give an ADI (including a foreign ADI) or an authorised NOHC of an ADI a direction to do, or cause a subsidiary to do, anything related to the way in which the affairs of the body corporate are to be conducted or not conducted . [Schedule 1, item 17, subsection 11CA(2B) of the Banking Act 1959]

Chapter 3 - Amendments to APRA's and the ATO's investigation powers

Outline of chapter

3.1 Schedules 1 to 4 of the Bill contain amendments relating to APRA's and the ATO's investigation powers.

3.2 The schedules amend the Banking, Insurance, Life Insurance, Superannuation Industry (Supervision), Retirement Savings Accounts, and APRA Acts to:

•

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

•

respond to the High Court's decision in Rich v ASIC;

•

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

•

enhance the protection and sharing of information by APRA.

Context of amendments

Investigations during wind-up

3.3 APRA currently has the power to investigate, or appoint an inspector to investigate, the affairs of all APRA-regulated institutions. The ATO has similar powers in relation to the superannuation entities which it regulates. However, there is uncertainty as to whether APRA and the ATO may commence or continue an investigation once such an entity enters external administration or, in the case of a superannuation entity, the entity is wound up, dissolved or terminated or the trustee becomes externally-administered or insolvent under administration.

3.4 This uncertainty is undesirable. Investigation powers are important for gathering information and evidence for the purposes of administering and enforcing relevant laws.

Disqualification

3.5 The High Court's decision in Rich v ASIC^[2] overturned the view that disqualification proceedings were protective and not penal in nature.

3.6 Amendments have been made to the Corporations Act and the Trade Practices Act to overcome the potential implications of the High Court's decision. However, no such amendments have been made to relevant laws administered by APRA, or in the case of certain superannuation entities, the ATO.

3.7 Similar amendments to those applying in the Corporations and Trade Practices Acts contexts, should also apply in the context of the Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts. Persons subject to disqualification proceedings under these Acts are in a position of considerable responsibility with respect to the assets of others and the stability of Australia's financial system. It would not be desirable, for example, if such a person was able through the relevant privilege to retain their position with a financial institution in circumstances where they are in fact not a fit and proper person to do so.

Record-keeping by financial institutions

3.8 The Insurance, Life Insurance, and Superannuation Industry (Supervision) Acts currently contain provisions with respect to the keeping of records by regulated entities. The Banking Act does not contain such provisions. Entities regulated under the Banking Act are, however, subject to the record keeping requirements in the Corporations Act.

3.9 The current record keeping provisions are not consistent with respect to their accessibility by APRA. It is important that APRA can efficiently access records kept by financial institutions where required to further the administration of prudential laws.

Protection and sharing of information

3.10 Section 56 of the APRA Act provides for the protection and sharing of protected information and documents by APRA.

3.11 Currently, the definitions of protected information and documents in section 56 covers much but not all information collected under prudential laws in relation to financial sector entities (as defined in the FSCODA). All such information and documents should be subject to the protection of section 56 and the information sharing regime it contains.

Summary of new law

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

•

amend the Banking, Insurance, Life Insurance, and Superannuation (Supervision) Acts to clarify that APRA's investigation powers apply to a regulated entity that is, or becomes, externally administrated or insolvent under external administration;

•

amend the Banking, Insurance, Life Insurance, Superannuation (Supervision) and RSA Acts so that a person cannot refuse to provide information or documents under relevant laws or during relevant proceedings on the grounds that the information or documents might tend to make the person liable to a penalty by way of disqualification;

•

amend the Banking, Insurance, Life Insurance, and Superannuation (Supervision) Acts to harmonise the record keeping provisions for APRA-regulated entities with respect to their accessibility by APRA; and

•

amend the definitions of protected information and documents in section 56 of the APRA Act so that they capture all information or documents collected under prudential laws from a financial sector entity within the meaning of the FSCODA.

Comparison of key features of new law and current law

Detailed explanation of new law

Investigations during wind-up

3.13 The Bill amends sections 13, 13A, 61 and 62 of the Banking Act, section 52 of the Insurance Act, and section 137 of the Life Insurance Act to provide, for the avoidance of doubt, that the sections apply to a relevant institution that is, or becomes, an externally administered body corporate (within the meaning of the Corporations Act) in the same way as the sections applies to any other relevant institution . [Schedule 1, items 19, 24, 43 and 44, schedule 2, item 46, and schedule 3, item 40, sections 13, 13A, 61 and 62 of the Banking Act 1959, section 52 of the Insurance Act 1973 and section 137 of the Life Insurance Act 1995]

3.14 An equivalent amendment is also made to section 263 of the Superannuation Industry (Supervision) Act. That amendment provides, for the avoidance of doubt, that the section applies to a superannuation entity, in the same way as it applies to any other superannuation entity, if: the superannuation entity is wound up, dissolved or terminated; or, the trustee of the superannuation entity is or becomes an externally-administered body corporate (within the meaning of the Corporations Act 2001), or insolvent under administration . [Schedule 4, item 36, section 263 of the Superannuation Industry (Supervision) Act 1993]

3.15 The amendments clarify that APRA may commence or continue an investigation after an ADI, general insurer or life insurer enters external administration, or, in the case of a superannuation entity, after the entity is wound up, dissolved or terminated or its trustee enters external administration or becomes insolvent under external administration.

Disqualification

3.16 The Bill amends the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act and RSA Act to provide that a person is not entitled to fail to comply with a requirement under those respective Acts:

•

to answer a question or give information;

•

to produce books, accounts or other documents; or

•

to do any other act whatever;

on the grounds that the answer or information, production of the book or other thing, or doing that other act, as the case may be, might tend to make the person liable to a penalty by way of a disqualification under relevant laws . [Schedule 1, item 40 , schedule 2, item 14, schedule 3, item 58, and schedule 4, items 28, and 34, subsection 22A(3) of the Banking Act 1959, subsection 26A(3) of the Insurance Act 1973, subsection 245C(3) of the Life Insurance Act 1995, subsection 67AA(3) of the Retirement Savings Accounts Act 1997, and subsection 126L(3) of the Superannuation Industry (Supervision) Act 1993]

3.17 The Bill further amends the Acts to provide that in any proceeding under, or arising out of, them, a person is not entitled to refuse or fail to comply with a requirement:

•

to answer a question or give information;

•

to produce books, accounts or other documents; or

•

to do any other act whatever;

on the ground that the answer or information, production of the book or other thing, or doing that other act, as the case may be, might tend to make the person liable to a penalty by way of a disqualification under the Acts. This applies whether or not the subject person is a defendant in, or a party to, the proceeding or any other proceeding . [Schedule 1, item 40 , schedule 2, item 14, schedule 3, item 58, and schedule 4, items 28, and 34, subsections 22A(1) and 22A(2) of the Banking Act 1959, subsections 26A(1) and 26A(2) of the Insurance Act 1973, subsections 245C(1) and 245C(2) of the Life Insurance Act 1995, subsections 67AA(1) and 67AA(2) of the Retirement Savings Accounts Act 1997, and subsections 126L(1) and 126L(2) of the Superannuation Industry (Supervision) Act 1993]

3.18 Amendments are also made by the Bill to facilitate the operation of the above amendments.

3.19 The relevant Acts presently contain various provisions relating to the admissibility of information or documents obtained from a person under them as evidence against that person in a criminal proceeding or a proceeding for the imposition of a penalty. The Bill provides that these provisions do not apply to a proceeding for the imposition of a penalty by way of disqualification under the respective Acts. This prevents any inconsistency arising between those present provisions and the new provisions inserted by the Bill.

3.20 Similarly, to facilitate the operation of the new provisions the Bill provides that they have effect despite anything in any provision of the respective Acts or the Administrative Appeals Tribunal Act 1975. This includes, in the case of the Banking, Insurance, and Superannuation Industry (Supervision) Acts, the provisions in those Acts that provide that the Federal Court is to apply the rules of evidence and procedure for civil matters when hearing proceedings for a pecuniary penalty order . [Schedule 1, item 40 , schedule 2, item 14, schedule 3, item 58, and schedule 4, items 28, and 34, subsections 22A(4) and 22A(5) of the Banking Act 1959, subsections 26A(4) and 26A(5) of the Insurance Act 1973, subsections 245C(4) and 245C(5) of the Life Insurance Act 1995, subsections 67AA(4) and 67AA(5) of the Retirement Savings Accounts Act 1997, and subsections 126L(4) and 126L(5) of the Superannuation Industry (Supervision) Act 1993]

3.21 Finally, for the purposes of the new provisions, the Bill defines penalty as including forfeiture . [Schedule 1, item 40 , schedule 2, item 14, schedule 3, item 58, and schedule 4, items 28, and 34, subsection 22A(6) of the Banking Act 1959, subsection 26A(6) of the Insurance Act 1973, subsection 245C(6) of the Life Insurance Act 1995, subsection 67AA(6) of the Retirement Savings Accounts Act 1997, and subsection 126L(6) of the Superannuation Industry (Supervision) Act 1993]

3.22 The amendments respond to the High Court's decision in Rich v ASIC, which overturned the view that disqualification proceedings were protective and not penal in nature. The amendments are modelled on the amendments made to the Corporations Act in 2007. Similar amendments have also been made to the Trade Practices Act.

3.23 In the case of the Superannuation Industry (Supervision) Act, the amendments are inserted into Subdivision C of Division 3 of Part 15 of that Act. As a result, the heading to that section is changed from 'Offences relating to disqualified persons' to 'Other matters relating to disqualification'. The amended heading better reflects the provisions in the subdivision after the relevant amendments are inserted . [Schedule 4, item 33 , Subdivision C of Division 3 of Part 15 (heading) of the Superannuation Industry (Supervision) Act 1993]

Record-keeping

3.24 The Insurance, Life Insurance, and Superannuation Industry (Supervision) Acts currently contain provisions with respect to the keeping of records by regulated entities. The Banking Act does not contain such provisions. Entities regulated under the Banking Act are, however, subject to the record keeping requirements in the Corporations Act.

3.25 The Bill makes amendments to the above-mentioned Acts to harmonise the record keeping provisions for APRA-regulated entities with respect to their accessibility by APRA. In particular, the amendments require that the records are kept in Australia; that APRA is notified, in the approved form, of their location and any change to that location within 28 days; and that the records are kept in English or in a form in which they are readily convertible into writing in English. Each of these requirements, with the exception of the requirement to notify APRA of the location at which records are kept, currently applies to some but not all APRA-regulated entities . [Schedule 1, item 42 , schedule 2, items 40, and 41, schedule 3, item 9, and schedule 4, items 30 to 32, subsections 60(1) and 60(3) to 60(5) of the Banking Act 1959, paragraphs 49Q(1)(a) and 49Q(1)(b) and subsections 49Q(1B) to 49Q(1D) of the Insurance Act 1973, subsections 76A(1) and 76A(3) to 76A(5) of the Life Insurance Act 1995, and paragraph 35A(2)(b) and subsections 35A(2B) to 35A(2D) of the Superannuation Industry (Supervision) Act 1993]

3.26 The Bill provides APRA with discretion to approve an entity keeping its records in a country other than Australia. This approval may be given subject to specified conditions and is reviewable on its merits by the Administrative Appeals Tribunal . [Schedule 1, item 42 , schedule 2, items 41 and 43, schedule 3, items 9 and 57, and schedule 4, items 30 and 32, subsections 60(2) and 60(7) of the Banking Act 1959, subsections 49Q(1A) and 49Q(3) of the Insurance Act 1973, subsections 76A(2) and 263(1) of the Life Insurance Act 1995, and subsections 10(1) and 35A(2A) of the Superannuation Industry (Supervision) Act 1993]

3.27 The Bill amends the Banking and Life Insurance Acts to make it an offence (penalty 200 penalty units) for a relevant entity to contravene the requirements to keep their records in Australia (or other approved country) and in English or in a form in which they are readily convertible into writing in English. In the case of the Insurance Act and the Superannuation Industry (Supervision) Act, the present offences in sections 49Q and 35A of those respective Acts apply . [Schedule 1, item 42 , schedule 2, item 42, and schedule 3, item 9, subsection 60(6) of the Banking Act 1959, subsection 49Q(2) of the Insurance Act 1973, and subsection 76A(6) of the Life Insurance Act 1995]

3.28 To support the notification requirements referred to above, the Bill inserts a definition of 'approved form' into the Banking, Insurance and Life Insurance Act. The term is defined for relevant purposes to mean a form approved, in writing, by APRA. The term is already defined in the Superannuation Industry (Supervision) Acts . [Schedule 1, item 3, schedule 2, item 1, and schedule 3, item 59, subsection 5(1) of the Banking Act 1959, subsection 3(1) of the Insurance Act 1973, and dictionary in the schedule to the Life Insurance Act 1995]

Protection and sharing of information

3.29 Section 56 of the APRA Act provides for the protection and sharing of protected information and documents by APRA.

3.30 The Bill amends the definitions of protected information and documents in section 56 of the APRA Act so that they include any information or documents obtained or produced under a prudential law which relates to the affairs of a financial sector entity within the meaning of the FSCODA . [Schedule 4, item 1, subsection 56(1) of the Australian Prudential Regulation Authority Act 1998]

3.31 The amendment ensures that information and documents collected from such financial sector entities are subject to the protection of section 56 and the information sharing regime it contains. At present, some but not all financial sector entities are covered by section 56.

Chapter 4 - Amendments to APRA's failure management powers

Outline of chapter

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

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

•

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

•

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

•

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

•

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

Context of amendments

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

Statutory and judicial management

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

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

Transfer of business

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

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

Winding up

Priority provisions

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

•

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

•

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

•

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

•

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

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

Definition of foreign ADI

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

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

Liquidation of an insurer following judicial management

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

Recapitalisation

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

Summary of new law

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

Comparison of key features of new law and current law

Detailed explanation of new law

External administration

Triggers for appointing a statutory manager

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

•

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

•

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

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

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

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

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

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

•

a copy of the application; and

•

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

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

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

Right to be heard in proceedings to replace a judicial manager

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

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

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

Powers relating to statutory and judicial managers

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

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

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

•

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

•

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

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

•

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

•

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

•

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

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

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

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

•

the conduct of judicial management;

•

the financial position of the general insurer under judicial management;

•

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

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

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

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

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

Powers of a judicial manager

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

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

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

Business transfer

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

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

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

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

•

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

•

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

•

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

•

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

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

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

•

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

•

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

•

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

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

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

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

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

Winding up

Priority provisions

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

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

Definition of foreign ADI

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

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

Liquidation of a general insurer following judicial management

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

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

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

Recapitalisation

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

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

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

•

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

•

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

•

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

•

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

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

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

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

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

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

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

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

•

the Corporations Act;

•

the company constitution;

•

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

•

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

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

•

deny any obligation under a contract;

•

accelerate any debt under a contract; or

•

close out any transactions relating to the contract.

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

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

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

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

4.73 However, the offence provisions do not apply if:

•

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

•

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

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

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

Chapter 5 - Amendments relating to auditors and actuaries

Outline of chapter

5.1 Schedules 1 to 4 of the Bill contain amendments enhancing the regulatory framework that applies to the auditors and actuaries of regulated entities.

Context of amendments

Appointment of auditors and conduct of audits

5.2 Currently, under the Banking, Insurance, and Life Insurance Acts there are various provisions relating to the appointment of auditors and the conduct of audits. These provisions vary across the Acts.

5.3 Further, there are currently no provisions in the FSCODA relating to the appointment of auditors and the conduct of audits. APRA may require much of the data collected under the FSCODA to be audited via its existing powers in the Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts. However, these provisions do not extend to all data collected under the FSCODA.

Offences relating to auditors

5.4 Currently there are no statutory prohibitions under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, Retirement Savings Accounts Act 1997 (RSA Act) or the FSCODA against misleading or otherwise interfering with an auditor in carrying out its functions. Further, the Acts do not require an auditor to advise APRA or the ATO (as relevant) where a person has sought to interfere with the auditor carrying out their duties and functions.

5.5 However, such provisions presently exist under the Corporations Act. Section 1309 of the Corporations Act makes it an offence for an officer or employee of a corporation to knowingly mislead an auditor of a corporation, or if the corporation is controlled by another corporation an auditor of the other corporation. Section 311 of the Corporations Act makes it an offence for auditors to fail to report to ASIC within 28 days attempts to unduly influence, coerce, manipulate or mislead them; or, attempts to otherwise interfere with the proper conduct of the audit.

5.6 The present offences in the Corporations Act apply when auditors are undertaking functions or exercising duties under the Corporations Act, but not when undertaking similar functions or exercising similar duties under the prudential Acts.

Information from auditors and actuaries of life insurers

5.7 Section 49 of the Insurance Act currently permits APRA to give a written notice to any person who is, or has been, an auditor of a general insurer requiring them:

•

to give APRA information about the insurer; or

•

to produce books, accounts or documents about the insurer;

if APRA considers that the provision of the information, or the production of the books, accounts or documents, will assist APRA in performing APRA's functions under the Insurance Act.

5.8 However, no equivalent provision currently exists in the life insurance context. As a result, at present APRA cannot issue a notice to auditors and actuaries of life companies to gather information that it may require to perform its functions in the life insurance context.

Summary of new law

5.9 Schedules 1 to 4 of the Bill contain amendments to the Banking, Insurance, Life Insurance, Superannuation Industry (Supervision), Financial Sector (Collection of Data) and Retirement Savings Accounts Acts that:

•

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

•

enhance the auditing of data under the FSCODA;

•

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

•

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

Comparison of key features of new law and current law

Detailed explanation of new law

Appointment of auditors and conduct of audits

5.10 Currently, under the Banking, Insurance, and Life Insurance Acts there are various provisions relating to the appointment of auditors and the conduct of audits. However, the provisions vary across the Acts.

5.11 The Bill amends the Banking, Insurance and Life Insurance Acts to harmonise the obligations of auditors and actuaries under the Acts, where appropriate. In particular, the Bill:

•

Amends the Banking, Insurance and Life Insurance Acts to provide that prudential standards made under the Acts may provide for matters relating to the appointment of auditors or the conduct of audits. This clarifies the existing law . [Schedule 1, item 10, schedule 2, item 18, and schedule 3, item 49, subsection 11AF(1AB) of the Banking Act 1959, paragraph 32(3)(b) of the Insurance Act 1973, and subsection 230A(1A) of the Life Insurance Act 1995]

•

Amends the Banking Act to provide that an auditor appointed in accordance with prudential standards (appointed auditor) must perform the functions and duties of an auditor set out in the prudential standards. Similar provisions presently exist in the Insurance and Life Insurance Acts . [Schedule 1, items 2 and 36, subsections 5(1), 16AV(1) and 16AV(2) of the Banking Act 1959]

•

Amends the Banking and Life Insurance Acts to provide that an appointed auditor of an ADI or auditor appointed by a life insurer must comply with prudential standards in performing their duties and functions or exercising their powers, as relevant. Auditors of general insurers are currently subject to an express duty to comply with APRA's prudential standards. The proposal ensures that auditors of ADIs and life insurers are also subject to this duty . [Schedule 1, item 36, and schedule 3, item 11, subsections 16AV(1) and 16AV(3) of the Banking Act 1959, and section 83B of the Life Insurance Act 1995]

•

Amends the Banking Act to provide that ADIs and authorised NOHCs of ADIs must make any arrangements that are necessary to enable an appointed auditor to perform their functions and duties. Currently, under the Insurance and Life Insurance Acts, an insurer must make arrangements necessary to enable the auditor to perform the functions specified in the prudential standards. The amendment ensures that ADIs and authorised NOHCs of ADIs are subject to this requirement . [Schedule 1, item 36, subsections 16AV(1) and 16AV(4) of the Banking Act 1959]

•

Amends the Life Insurance Act to require a life insurer to appoint another person as its auditor within 6 weeks of that office being vacated. General insurers are presently subject to an equivalent requirement . [Schedule 3, item 11, subsections 83(2) of the Life Insurance Act 1995]

5.12 The Bill also amends the Insurance and Life Insurance Acts to provide that APRA may, by written notice, require an insurer to appoint a person specified in the notice to be an auditor for a purpose specified in the notice. At present, the Acts require insurers to have an auditor. The amendments empower APRA to require insurers to appoint additional auditors for particular purposes, for example, to conduct a special purpose audit. For ADIs, the prudential standards provide for such audits . [Schedule 2, item 28, and schedule 3, item 11, subsection 40(1) of the Insurance Act 1973, and subsection 83A(1) of the Life Insurance Act 1995]

5.13 As a result of this amendment, the Bill creates a distinction between the 'principal auditor' of an insurer and 'an auditor' of an insurer. The latter term captures both the principal auditor and an auditor appointed for a specific purpose by notice from APRA.

5.14 The distinction ensures that provisions in the Insurance and Life Insurance Acts are targeted at relevant auditors. For example, the present requirements under the Acts on insurers to appoint an auditor,^[3] to notify APRA of that appointment, or for the auditor to audit the insurer's yearly statutory accounts, are not intended to apply to auditors appointed by notice from APRA for a specific purpose. As a result, such provisions are amended to refer to the 'principal auditor' rather than to 'an auditor'. Similarly, those provisions intended to apply to all auditors are amended so as to refer to 'an auditor' . [Schedule 2, items 4, 19, 21 to 34, 36 to 39, 44, and 45, and schedule 3, items 10 to 26, 28, 32 to 36, 38, 41, and 60, subsection 3(1), paragraphs 38AA(3)(a) and 38AA(7)(a), subparagraphs 38A(2)(a)(ii), 38E(1)(b)(i) and 38E(1)(c)(i), division 1 of Part IV (heading), subsections 39(2) to 39(4), subsections 40(2), 43(2), 46(1), and 46(2), paragraphs 49(1)(a), 49A(1)(a), 49A(11)(c), and 49B(a), subsections 49J(1) to 49J(4), and paragraphs 49R(1)(a) and 49R(3)(a) of the Insurance Act 1973, and subsection 80(3), section 83, subsection 83A(2), section 84, paragraph 84(a), subsection 85(1), paragraphs 85(1)(a), 85(2)(a) and 85(2)(b), subsection 85(2), section 86, subsections 87(1), 87(3), 87(4), 88(1), to 88(2A), paragraphs 88(2B)(c), 88(3)(a) and 88(4)(b), subsections 88(4), and 89(1), paragraphs 125(1)(b) and 125A(1)(a), subsection 126(1), paragraphs 132A(3)(a) and 132A(7)(a), subparagraphs 156A(2)(a)(ii), 156E(1)(b)(i) and 156E(1)(c)(i), and the dictionary in the schedule of the Life Insurance Act 1995]

5.15 The Bill also makes similar amendments to the Banking Act to clarify whether particular provisions apply only to appointed auditors (that is, auditors appointed under the prudential standards) or to all auditors of relevant entities . [Schedule 1, items 37, 39, 41 and 45, paragraphs 16BA(11)(c), subsection 17(1), subparagraphs 52A(2)(a)(ii), 52E(1)(b)(i) and 52E(1)(c)(i), and paragraphs 62A(1A)(a) and 62A(1D)(a) of the Banking Act 1959]

5.16 The Bill includes saving provisions to ensure that the amendments relating to the appointment of auditors under the Insurance and Life Insurance Acts do not unintentionally affect any present appointments. Those appointments continue as if they had been made after the relevant amendments commence. In addition, the saving provisions clarify that any auditor presently appointed under the Insurance or Life Insurance Acts is the principal auditor of the insurer after the amendments commence . [Schedule 2, item 92, and schedule 3, item 62, saving provisions-appointment as an auditor of a general insurer or life company]

5.17 Finally, the Bill amends the FSCODA to provide for the appointment of auditors and the conduct of audits under that Act.

5.18 There are currently no provisions in the FSCODA relating to the appointment of auditors and the conduct of audits. APRA may require much of the data collected under the Act to be audited via its existing powers in the Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts. However, these provisions do not extend to all data collected under the FSCODA.

5.19 The Bill addresses this situation by:

•

amending subsection 13(2) of the FSCODA so that reporting standards may include matters relating to the auditing of reporting documents; and

•

setting out the functions and duties of auditors appointed under reporting standards . [Schedule 4, item 14 and 20, paragraphs 13(2)(bb) and section 17B of the Financial Sector (Collection of Data) Act 2001]

5.20 The functions and duties of an auditor appointed under a reporting standard are equivalent to those applying in the banking and insurance contexts. The auditor must perform the functions and duties of an auditor that are set out in the reporting standards and must comply with the reporting standards in performing those functions and duties. In addition, the financial sector entity that appoints the auditor must make any arrangements that are necessary to enable the auditor to perform their functions and duties . [Schedule 4, item 20, section 17B of the Financial Sector (Collection of Data) Act 2001]

5.21 The above provisions do not apply in circumstances in which APRA may presently audit data that is collected under the FSCODA. Rather, the provisions apply if a financial sector entity is required to appoint an auditor under reporting standards that relate to the collection of information that APRA requires:

•

to perform APRA's functions in relation to the FCS;

•

to assist a financial sector agency perform its functions or exercise its powers; or

•

under a reporting standard issued on the direction of the Minister . [Schedule 4, item 20, section 17A of the Financial Sector (Collection of Data) Act 2001]

Offences relating to auditors

5.22 Currently there are no statutory prohibitions under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, RSA Act or the FSCODA against misleading or otherwise interfering with an auditor in carrying out their functions. Further, the Acts do not require an auditor to advise APRA or the ATO (as relevant) where a person has sought to interfere with the auditor carrying out their duties and functions.

5.23 However, such provisions presently exist under the Corporations Act for the purposes of that Act. Section 1309 of the Corporations Act makes it an offence for an officer or employee of a corporation to knowingly mislead an auditor of a corporation, or if the corporation is controlled by another corporation an auditor of the other corporation. Section 311 of the Corporations Act makes it an offence for auditors to fail to report to ASIC within 28 days attempts to unduly influence, coerce, manipulate or mislead them; or, attempts to otherwise interfere with the proper conduct of the audit.

5.24 The Bill addresses this inconsistency, by inserting equivalent offences to those in the Corporations Act into the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, RSA Act and the FSCODA.

Auditor must notify APRA of attempts to unduly influence them

5.25 First, the Bill amends the Acts to require auditors to notify APRA in writing as soon as practicable, and in any case within 28 days, of becoming aware of certain circumstances. These circumstances are:

•

any attempt by any person to unduly influence, coerce, manipulate or mislead the auditor in connection with the performance of the auditor's functions or duties; or

•

any attempt by any person to otherwise interfere with the performance of the auditor's functions or duties.

5.26 It is an offence (punishable by 12 months imprisonment or a fine of 50 penalty units, or both) for an auditor to fail to comply with the above mentioned requirement. The penalty mirrors that applicable to the equivalent offence that presently exists in section 311 of the Corporations Act.^[4] [Schedule 1, item 38, schedule 2, item 35, schedule 3, item 29, schedule 4, items 20, 29 and 35, section 16D of the Banking Act 1959, section 49D of the Insurance Act 1973, section 90 of the Life Insurance Act 1995, section 17C of the Financial Sector (Collection of Data) Act 2001, section 69 of the Retirement Savings Accounts Act 1997, and section 130BA of the Superannuation Industry (Supervision) Act 1993]

Person knows the information is false or misleading

5.27 Second, the Bill amends the Acts to make it an offence for an employee, officer or trustee of a regulated entity to knowingly give false or materially misleading information relating to the affairs of the entity to an auditor of the entity, or to knowingly allow such information to be so given . [Schedule 1, item 38, schedule 2, item 35, schedule 3, item 29, schedule 4, items 20, 29 and 35, subsection 16E(1) of the Banking Act 1959, subsection 49DA(1) of the Insurance Act 1973, subsection 91(1) of the Life Insurance Act 1995, subsection 17D(1) of the Financial Sector (Collection of Data) Act 2001, subsection 70(1) of the Retirement Savings Accounts Act 1997, and subsection 130BB(1) of the Superannuation Industry (Supervision) Act 1993]

5.28 The penalty for the offence is imprisonment for five years or a fine of 200 penalty units, or both. The penalty mirrors that applicable to the equivalent offence that presently exists in section 1309 of the Corporations Act.^[5]

Person fails to ensure the information is not false or misleading

5.29 Finally, the Bill amends the Acts to make it an offence for an employee, officer or trustee of a regulated entity to give false or materially misleading information relating to the affairs of the entity to an auditor of the entity, or to allow such information to be so given, in circumstances where they did not take reasonable steps to ensure the information was not false or materially misleading . [Schedule 1, item 38, schedule 2, item 35, schedule 3, item 29, schedule 4, items 20, 29 and 35, subsection 16E(2) of the Banking Act, subsection 49DA(2) of the Insurance Act 1973, subsection 91(2) of the Life Insurance Act 1995, subsection 17D(2) of the Financial Sector (Collection of Data) Act 2001, subsection 70(2) of the Retirement Savings Accounts Act 1997, and subsection 130BB(2) of the Superannuation Industry (Supervision) Act 1993]

5.30 The penalty for the offence is imprisonment for 2 years or a fine of 100 penalty units, or both. The penalty mirrors that applicable to the equivalent offence that presently exists in section 1309 of the Corporations Act.^[6]

5.31 For the purpose of the above mentioned offences, if the information given to the auditor is in response to a question asked by the auditor, the information and the question must be considered together in determining whether the information is false or misleading . [Schedule 1, item 38, schedule 2, item 35, schedule 3, item 29, schedule 4, items 20, 29 and 35, subsection 16E(3) of the Banking Act 1959, subsection 49DA(3) of the Insurance Act 1973, subsection 91(3) of the Life Insurance Act 1995, subsection 17D(3) of the Financial Sector (Collection of Data) Act 2001, subsection 70(3) of the Retirement Savings Accounts Act 1997, and subsection 130BB(3) of the Superannuation Industry (Supervision) Act 1993]

Information from auditors and actuaries of life insurers

5.32 The Bill amends the Life Insurance Act to provide that APRA may, by written notice, given to a person who is, or was, an auditor or actuary of a life insurer, require the person:

•

to give APRA information about the insurer; or

•

to produce books, accounts or documents about the insurer;

if APRA considers that the giving of the information, or the production of the books, accounts or documents, will assist APRA in performing APRA's functions under the Life Insurance Act, the FSCODA, or the First Home Saver Accounts Act 2008. [Schedule 3, items 8, 27 and 30, subsections 74(2), 88B(1) and 98B(1) of the Life Insurance Act 1995]

5.33 It is an offence for a person to fail to comply with such a notice, or in complying with such a notice for them to give APRA information that is false or misleading. The penalty for the offence is 60 penalty units if prosecuted as an offence of strict liability. Otherwise, the penalty is imprisonment for 6 months or a fine of 100 penalty units, or both . [Schedule 3, items 27 and 30, subsections 88B(2) to 88B(5) and 98B(2) to 98B(5) of the Life Insurance Act 1995]

5.34 Similar provisions presently apply under the Insurance Act in relation to persons who are, or have been, auditors and actuaries of general insurers. It is important that APRA can obtain accurate information from such persons to ensure that it can effectively perform its functions, including protecting the interests of the owners and prospective owners of insurance policies in a manner consistent with the continued development of a viable, competitive and innovative insurance industry.

5.35 As a result of the amendments, consequential amendments are made to subsections 132A(3) and 132A(7) of the Life Insurance Act to update notes in those subsections that informs readers of the provisions in the Act related to auditors and actuaries giving information to APRA . [Schedule 3, items 37 and 39, subsections 132A(3) (note 1) and 132A(7) (note 1) of the Life Insurance Act 1995]

Chapter 6 - Amendments to the Financial Claims Scheme

Outline of chapter

6.1 Schedules 1 and 2 of the Bill contain amendments relating to the FCS provided for in the Banking Act and the Insurance Act.

Context of amendments

6.2 The FCS was introduced by the FCS Act.

6.3 The FCS is administered by APRA and provides depositors in Australian-incorporated ADIs with a guarantee of their deposits to a threshold prescribed by regulations. The threshold is currently set at $1 million per account-holder per ADI. In addition, the FCS provides compensation to eligible policyholders with claims against a failed general insurer.

Amendments to the scheme provided for in the Banking Act

6.4 While the FCS provided for in the Banking Act has operated effectively to achieve its objectives, its operation would benefit from clarifying:

•

the rate of interest that applies to protected accounts for the purposes of determining entitlements under the scheme, where the rate is not clear from the terms and conditions of the protected account itself;

•

how the scheme operates in relation to pooled trust accounts; and

•

APRA's power to require a liquidator to assist it in paying account-holders their entitlements under the FCS.

Amendments to the scheme provided for in the Insurance Act

6.5 Similarly, the FCS provided for in the Insurance Act would benefit from:

•

clarifying that the scheme may apply to policies that are transferred to a declared general insurer, in addition to policies issued by the insurer itself;

•

enhancing APRA's ability to administer the scheme by enabling it to issue approved forms in respect of common administrative matters and enabling it to settle claims in appropriate circumstances;

•

enabling the scheme to operate in relation to claims made under section 601AG (Claims against insurers of deregistered company) of the Corporations Act;

•

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

•

enabling it to be declared in relation to any insolvent insurer, not just insurers under judicial management; and

•

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

Summary of new law

6.6 Schedules 1 and 2 contain amendments relating to the FCS.

6.7 Schedule 1 of the Bill amends the Banking Act to:

•

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

•

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

•

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

6.8 Schedule 2 of the Bill amends the Insurance Act to:

•

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

•

enhance APRA's ability to administer the scheme by enabling it to issue approved forms in respect of common administrative matters and enabling it to settle claims under the scheme;

•

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

•

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

•

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

•

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

Comparison of key features of new law and current law

Detailed explanation of new law

Determining the applicable rate of interest

6.9 The Bill amends section 16AF of the Banking Act to clarify the calculation of interest payable on protected accounts for the purposes of determining entitlements under the FCS. Interest is payable at the rate of interest that is payable according to the terms and conditions of the protected account unless APRA considers that rate is not certain. In that case, the rate of interest is that which APRA declares in writing to be payable . [Schedule 1, item 29, section 16AF(1A) of the Banking Act 1959]

6.10 This amendment ensures that, where there is uncertainty about the rate of interest that applies to a protected account, APRA has the power to issue a determination to provide certainty.

6.11 The Bill also provides that such a declaration is not a legislative instrument . [Schedule 1, item 29, section 16AF(1B) of the Banking Act 1959]. This provision is included only to inform readers that the notice is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003.

Pooled Trust Accounts

6.12 Sections 16AF to 16AI of the Banking Act currently provide for the payment of account-holders under the FCS. To calculate the amounts payable to depositors the scheme administrator aggregates the net credit balance in each protected account the account-holder has with the declared ADI. The account-holder is not, however, entitled to be paid any amounts totalling more than the limit on payments prescribed by the regulations (currently $1 million).

6.13 An account-holder can be an individual or an entity as defined by the Income Tax Assessment Act 1997 (ITAA). This means that an account-holder can include an individual, a body corporate, a body politic, a partnership, any other unincorporated association or body of persons, a trust, a superannuation fund, or an approved deposit fund for the purposes of the ITAA.

6.14 The Bill clarifies the rules relating to pooled trust accounts (PTAs). These are accounts in which a trustee is permitted to hold the funds of two or more trusts. The Bill provides that a PTA constitutes a single protected account for purposes of paying account-holders of a declared ADI under the FCS. This is achieved by:

•

amending section 16AF of the Banking Act to clarify that if: one person holds a protected account; and the person is the trustee of 2 or more trusts; and the net credit balance of the account consists of the trust funds of 2 or more of those trusts; then the person is entitled to be paid the amount worked out under subsection 16AF(1); and [Schedule 1, item 30, section 16AF of the Banking Act 1959]

•

amending the definition of account-holder in subsection 5(1) of the Banking Act to clarify that an account-holder for FCS purposes is the entity that holds in its name, or keeps in its name, the subject account . [Schedule 1, item 1, subsection 5(1) of the Banking Act 1959]

Liquidator of an ADI to assist in making payments under FCS

6.15 The Bill amends section 16AJ of the Banking Act to clarify that APRA may require a liquidator (including a provisional liquidator) to assist APRA in APRA's function of paying account-holders their entitlements under the FCS. This is in addition to the general assistance that APRA may request from a liquidator under subsection 16AJ(1) of the Banking Act . [Schedule 1, item 33, subsections 16AJ(2) to 16AJ(9) of the Banking Act 1959]

6.16 Section 16AJ presently enables APRA to issue a notice on the liquidator of the declared ADI, requiring the liquidator to give APRA reasonable assistance in the performance of its functions, and the exercise of its powers, in relation to the FCS. The amendment clarifies that this provision extends to the liquidator being required to assist APRA in APRA's functions of paying account-holders their FCS entitlements.

6.17 For example, the amendment enables APRA, by notice issued under section 16AJ, to require the liquidator to:

•

carry on the business of the ADI insofar as necessary, or do any other things, to facilitate APRA paying account-holders their entitlements under the FCS;

•

seek to re-enter the ADI into a payment system; or

•

transfer the entitlements of the account-holders to accounts held by the account-holders in another ADI . [Schedule 1, item 33, subsection 16AJ(3) of the Banking Act 1959]

6.18 The requirements of such notices take precedence over the other aspects of the wind up of the ADI, including the duties and functions of the liquidator under the Corporations Act . [Schedule 1, item 33, subsection 16AJ(4) of the Banking Act 1959]. In addition, the amendments ensure that a liquidator has the powers that are necessary or convenient to comply with the notice . [Schedule 1, item 33, subsection 16AJ(6) of the Banking Act 1959]

6.19 The amendments also ensure that the liquidator's costs will be met. The liquidator is not required to comply with a notice issued by APRA unless:

•

there is sufficient property available to meet the costs that are likely to be incurred by the liquidator in complying with the notice; or

•

APRA indemnifies the liquidator for those costs . [Schedule 1, item 33, subsection 16AJ(5) of the Banking Act 1959]

6.20 The amendments also specify that a liquidator's costs of complying with such a notice issued by APRA are taken to be expenses properly incurred for the purposes of section 556 (Priority payments) of the Corporations Act. That section relates to the priority for applying the assets of a company during winding up . [Schedule 1, item 33, subsection 16AJ(7) of the Banking Act 1959]

6.21 For the purposes of the above provisions the liquidator's costs include: any remuneration, or fees for services payable to the liquidator for complying with such a notice issued by APRA; and any expenses incurred by a liquidator in complying with such a notice issued by APRA . [Schedule 1, item 33, subsection 16AJ(8) of the Banking Act 1959]

6.22 Finally, the Bill makes two consequential amendments to section 16AJ as a result of the above mentioned amendments. The first changes the numbering of the section. The second omits the words '(including a provisional liquidator)' from the current wording of paragraph 16AJ(c). The words are redundant due to the insertion of the subsection 16AJ(9) which provides that a reference in section 16AJ to a liquidator includes a reference to a provisional liquidator . [Schedule 1, items 31 to 33, section 16AJ, paragraph 16AJ(c), and subsection 16AJ(9) of the Banking Act 1959]

Declaring FCS for a general insurer under external administration

6.23 The Bill amends section 62ZZC of the Insurance Act to enable the Minister to declare that the FCS applies in respect of a general insurer when an external administrator has been appointed to the general insurer under Chapter 5 of the Corporations Act, if APRA also believes that the general insurer is insolvent . [Schedule 2, item 61, paragraph 62ZZC(1)(a) of the Insurance Act 1973]

6.24 The amendment expands the circumstances under which the Minister may declare the FCS in respect of a general insurer. Currently, under section 62ZW of the Insurance Act the Minister may only declare the FCS in respect of a general insurer that is under judicial management and that APRA believes is insolvent.

6.25 There may be circumstances where it is appropriate for the Court to appoint an external administrator, within the meaning of Chapter 5 of the Corporations Act, to a general insurer, rather than a judicial manager. However, such an appointment should not prevent the Minister from declaring the FCS in respect of the general insurer and assisting eligible policyholders where it is appropriate to do so.

6.26 A consequential amendment is also made to section 62ZW of the Insurance Act, which provides an outline of the operations of the FCS . [Schedule 2, item 58, paragraph 62ZW(a) of the Insurance Act 1973]

Eligibility of transferred policies and claims against deregistered companies

6.27 The Bill makes two amendments to the Insurance Act relating to eligibility to make a claim under the FCS.

6.28 The Bill amends section 62ZZF of the Insurance Act to clarify that a policyholder that is entitled to make a claim under a protected policy, and whose policy liability has been accepted by the declared general insurer before the FCS was declared in respect of the general insurer, is eligible to claim under the FCS . [Schedule 2, item 64, paragraph 62ZZF(1)(a) of the Insurance Act 1973]

6.29 The amendment clarifies the law. It not clear whether the current reference to policy issued by a declared general insurer in section 62ZZF includes policies that have been transferred from another general insurer. The amendment clarifies that the FCS provided for in the Insurance Act applies to protected policies issued by the general insurer as well as any protected policy in relation to which liability was accepted by the insurer, before becoming a declared general insurer.

6.30 Consequential amendments are made to sections 62ZZH (Entitlement on basis of notionally extended cover), 62ZZI (APRA must determine insurer's liability in respect of claim) and 62ZZJ (APRA must make a determination relating to eligibility on receiving an application under the Scheme) as a result of the above amendment . [Schedule 2, items 67, 68 and 72, subsection 62ZZH(1), subsection 62ZZI(1), and subsection 62ZZJ(3) of the Insurance Act 1973]

6.31 The Bill also amends section 62ZZJ of the Insurance Act to ensure that claims under section 601AG (Claims against insurers of deregistered company) of the Corporations Act are eligible claims for the purposes of the FCS . [Schedule 2, items 71 and 73, subsections 62ZZJ(3) and paragraph 62ZZJ(4)(a) of the Insurance Act 1973]

6.32 Section 601AG provides that a person may recover from the insurer of a deregistered company the amount that would have been payable to the deregistered company if the following are satisfied:

•

the company had a liability to the person; and

•

the insurance contract covered that liability immediately before the company's deregistration.

6.33 The amendment aligns the treatment of claims under section 601AG of the Corporations Act with the treatment of claims under section 51 (Right of third party to recover against insurer) of the Insurance Contracts Act 1984, to which the FCS may currently apply.

Approved forms

6.34 The Bill amends sections 62ZZF and 62ZZG of the Insurance Act to enable APRA to issue approved forms. 'Approved form' is defined in section 3 of the Insurance Act as a form approved in writing by APRA (except in section 62ZZKA, where it refers to an approved form that is issued by the Australian Taxation Office) . [Schedule 2, item 1, subsection 3(1) of the Insurance Act 1973]

6.35 Subsection 62ZZF(1) relates to the entitlement to payment of claimants under a protected policy. Such policyholders are currently required to make a claim under insurance cover provided by a protected policy in order to be entitled to payment under the FCS. The Bill amends subsection 62ZZF(1) to require that the relevant claim be made in the approved form, if such a form has been issued by APRA . [Schedule 2, item 65, paragraph 62ZZF(1)(b) of the Insurance Act 1973]

6.36 Similarly, subsection 62ZZG(1) relates to the entitlement to payment of third parties under the FCS (that is, claims supported by section 601AG of the Corporations Act and section 51 of the Insurance Contracts Act). The Bill amends the section to require such claimants to make their claim in the approved form, if one has been issued by APRA . [Schedule 2, item 66, paragraphs 62ZZG(1)(a) and 62ZZG(1)(aa) of the Insurance Act 1973]

6.37 The Bill also requires a person making a claim under section 62ZZG(1) to do so within the period prescribed by the regulation. This requirement is consistent with that which presently applies to claims under subsection 62ZZF(1). However, as is currently the case with subsection 62ZZF(1), APRA may allow extra time for a claimant to make their claim . [Schedule 2, items 59 and 66, subsection 62ZZA(1) and paragraph 62ZZG(1)(aa) of the Insurance Act 1973]

6.38 Amendments are also made to subsection 62ZZJ(1) and (3) of the Insurance Act. Currently, those subsections refer to 'the form (if any) approved by APRA'. As a result of the insertion of the definition of 'approved form' in subsection 3(1) of the Act, the above references are replaced with references to 'the approved form (if any)' . [Schedule 2, item 70, subsections 62ZZJ(1) and 62ZZJ(3) of the Insurance Act 1973]

6.39 Finally, the Bill repeals section 62ZZB of the Insurance Act. That section currently enables APRA to approve forms for the purposes of subsections 62ZZJ(1) and 62ZZJ(3). The section is redundant as a result of the above mentioned amendments to APRA's form making powers under the Insurance Act . [Schedule 2, item 60, section 62ZZB of the Insurance Act 1973]

Claims settlement

6.40 The Bill amends subsection 62ZZI(1) of the Insurance Act to enable APRA to determine the amount of liability in respect of a protected policy by coming to an agreement (or settlement) with the policyholder or claimant . [Schedule 2, item 69, subsection 62ZZI(1) of the Insurance Act 1973]. The Bill also amends section 62ZZJ of the Insurance Act to enable APRA to do the same to determine the amount of liability in respect of a third party claim supported by section 601AG of the Corporations Act or section 51 of the Insurance Act . [Schedule 2, item 74, subsection 62ZZJ(4) of the Insurance Act 1973]

6.41 This power allows APRA to negotiate a timely and fair settlement with the claimant where it is appropriate to do so. This may assist the claimant by enabling earlier payment under the FCS and may assist APRA in efficiently administering the scheme.

Payments made under the FCS taken to be payments made by general insurer

6.42 The Bill amends section 62ZZM of the Insurance Act to provide that when a person's entitlement under the FCS connected to a general insurer and a protected policy is met, the person is taken to have been paid the amount by the general insurer under the terms and conditions of the policy for all purposes except those prescribed by the regulations . [Schedule 2, items 75 and 76, subsections 62ZZM(1) and 62ZZM(2) of the Insurance Act 1973]

6.43 Currently, section 62ZZM is more limited in relation to when a person is taken to have been paid by the general insurer under the terms and conditions of their policy. The section presently provides that such payments will only be taken to have been paid by the general insurer under the terms and conditions of the policy for the purpose of subrogation or a purpose prescribed by the regulations.

6.44 This amendment provides enhanced clarity and certainty to the scheme administrator and others dealing with the scheme.

APRA may require assistance from a judicial manager

6.45 The Bill amends section 62ZZO of the Insurance Act to enable APRA, by issuing a written notice, to seek reasonable assistance from a judicial manager of a general insurer in the performance of its functions, and the exercise of its powers, under the FCS . [Schedule 2, items 77 and 78, section 62ZZO and paragraph 62ZZO(c) of the Insurance Act 1973]. Currently, under section 62ZZO APRA may require such assistance from a general insurer (whether or not it is a declared general insurer) and a liquidator (including provisional liquidator) or a general insurer.

6.46 Similarly, the Bill amends section 62ZZP of the Insurance Act to enable APRA, by written notice, to require a judicial manager of a general insurer to give a specified person, within a reasonable specified time, specified information relevant to:

•

identifying a person who may have an entitlement under the FCS;

•

determining whether a person has an entitlement under the FCS;

•

determining the amount of an entitlement under the FCS;

•

meeting an entitlement under the FCS;

•

preparing or giving a statement or report required under applicable taxation laws;

•

complying with an obligation under a taxation law; or

•

assessing whether and how information could be provided by a general insurer (or its liquidator) to enable one of the above actions to be taken if the general insurer were to become a declared general insurer . [Schedule 2, items 79 and 80, paragraph 62ZZP(1)(b) and subsection 62ZZP(1) of the Insurance Act 1973]

6.47 APRA can presently obtain such information under section 62ZZP from a general insurer (whether or not it is a declared general insurer) or a liquidator of a general insurer, but not a judicial manager.

6.48 The Bill inserts a civil penalty provision and an offence provision to support APRA's new powers in relation to a judicial manager.

•

A judicial manager is subject to a civil penalty of 200 penalty units if they do not comply with a requirement made of them under section 62ZZO or subsection 62ZZP(1); and [Schedule 2, item 81, subsection 62ZZQ(8) of the Insurance Act 1973]

•

A judicial manager commits an indictable offence (penalty: 100 penalty units) if: they do, or refuse to do, an act; and the doing of the act, or failure to do the act, results in a contravention of a requirement made under section 62ZZO or subsection 62ZZP(1) . [Schedule 2, item 81, subsections 62ZZQ(9) and 62ZZQ(10) of the Insurance Act 1973]

6.49 These amendments recognise that it may be necessary for APRA to receive reasonable assistance and/or specific information from the judicial manager in order to properly perform its functions in relation to the FCS.

Chapter 7 - Amendments to APRA's data collection powers

Outline of chapter

7.1 Schedule 4 of the Bill amends the data collection regime in the FSCODA. Schedule 3 of the Bill makes a related amendment to the Life Insurance Act.

Context of amendments

Collection of data to assist the Minister and other financial sector agencies

7.2 The FSCODA aims to recognise APRA as the central repository for the collection of financial data and to harmonise and increase the flexibility of the collection and publishing regime for such data.

7.3 Currently, APRA can collect data under the FSCODA to assist it in the prudential regulation or monitoring of bodies in the financial sector and to facilitate the RBA's formulation of monetary policy.

7.4 The global financial crisis highlighted that the Government and other financial sector regulators may require specific data to inform decisions and monitor subsequent outcomes that cannot presently be collected by APRA under the FSCODA. This includes data from non-prudentially regulated bodies which operate in the financial sector.

Collection of data related to the FCS

7.5 APRA can currently obtain the information it requires to perform its functions under the FCS from individual ADIs and general insurers under the Banking and Insurance Acts respectively. However, there is uncertainty as to whether APRA can use the FSCODA to obtain such information from a class of ADIs or general insurers.

7.6 Should APRA be unable to collect FCS related information from a class of institutions, its ability to efficiently administer the FCS may be impeded.

Reporting standards containing confidential information

7.7 While a one-off data collection can be effected as a legislative instrument under the FSCODA, it may create problems insofar as it may force APRA to publically reveal the sensitive information it has sought to collect or which has led it to make the collection.

7.8 Such an outcome would be undesirable, particularly where the publication of the information is likely to have a detrimental effect on financial system stability or the stability of one or more financial institutions.

Urgent reporting standards

7.9 Subsection 13(6) of the FSCODA presently exempts APRA from its obligation to consult with relevant financial sector entities when preparing proposed reporting standards, in circumstances where it is satisfied that the delay that would be involved in holding the consultations would prejudice the interests of depositors, policyholders or members of the financial sector entity or entities concerned.

7.10 However, subsection 13(6) does not presently provide an exception from the requirement to consult where the resulting delay would have a detrimental effect on financial system stability.

Exemptions from requirements contained in reporting standards

7.11 Under section 16 of the FSCODA APRA may currently exempt a single entity from requirements in reporting standards via a legislative instrument. Such decisions are of an administrative rather than legislative nature.

Annual financial statements and returns

7.12 Currently, section 124 of the Life Insurance Act provides that an owner of a policy issued by a life insurer is entitled, upon request, to be provided by the insurer with a copy of the latest annual financial statements and returns given by the insurer to APRA under the FSCODA.

7.13 Life insurers are required to give a number of financial statements and returns to APRA under the FSCODA. There is uncertainty as to which of these statements and returns are required to be provided to policy owners under section 124 of the Life Insurance Act.

Summary of new law

7.14 The FSCODA related amendments in the Bill promote the harmonisation and flexibility of the data-collection and publishing regime and APRA's role as the central repository for the collection of financial data. The amendments also assist APRA administer the FCS.

7.15 Schedule 4 of the Bill amends the FSCODA to:

•

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

•

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

•

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

•

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

•

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

•

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

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

Comparison of key features of new law and current law

Detailed explanation of new law

Collection of data to assist the Minister and other financial sector agencies

7.17 The global financial crisis highlighted that the Minister and regulators may require specific data to inform decisions and monitor subsequent outcomes that cannot presently be collected by APRA under the FSCODA. The Bill amends section 3 (Objects of the Act), section 5 (Entities covered by the Act), and related provisions of the FSCODA to address this situation.

7.18 Currently, section 3 of the FSCODA provides that the object of the Act is to enable APRA to collect data to assist it in the prudential regulation or monitoring of bodies in the financial sector and to facilitate the RBA's formulation of monetary policy. This may limit the ability of APRA to collect data under the Act to assist the Minister formulate financial policy or to assist other financial sector agencies perform functions or exercise powers not presently covered by section 3.

7.19 As a result, the Bill amends section 3 of the FSCODA to ensure that APRA can also collect data under the Act to assist another financial sector agency perform its functions or exercise its powers, and to assist the Minister formulate financial policy. Financial sector agency is defined to mean: ASIC or the RBA; or a Commonwealth, State or Territory authority prescribed by the regulations . [Schedule 4, items 7 and 22, subsection 3(1) and section 31 of the Financial Sector (Collection of Data) Act 2001]

7.20 The amendment ensures that data can be collected by APRA under the FSCODA to assist the Minister or another financial sector agency, where it would be efficient and appropriate to do so. For example, it ensures that data can be collected under the Act to assist the RBA monitor financial system stability.

7.21 To facilitate the operation of the above mentioned amendments, the Bill makes consequential amendments to section 31 (Definitions) of the FSCODA that are minor and technical . [Schedule 4, items 23 to 25, section 31 of the Financial Sector (Collection of Data) Act 2001]

7.22 The Bill also empowers APRA upon receipt of a direction from the Minister to determine reporting standards to be complied with by any person, not presently covered by the Act, that provides a financial service or participates in a payment system (with the exception of the RBA) . [Schedule 4, items 8, 9, and 11, section 5 and paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001]

7.23 Section 5 of the FSCODA defines those entities which are covered by the Act. The definition presently covers entities regulated by APRA as well as discretionary mutual funds. However, the definition does not extend to other persons who provide financial services or participate in a payment system. As a result, reporting standards to be complied with by such persons cannot presently be made.

7.24 The Bill addresses this situation by amending section 5 so that such persons are covered by the Act and by making related amendments to the FSCODA that allow APRA upon direction of the Minister to determine reporting standards to be complied with by them.

7.25 Persons required to provide data under such a reporting standard are subject to the same rights and obligations as presently apply in relation to existing collections of data under the FSCODA. Similarly, the process which APRA is required to follow in collecting the data is the same as that presently applicable to existing collections under the Act.

7.26 To assist with the administration of the new provisions, the Bill provides that the Minister may, in writing, delegate all or any of their functions under the FSCODA to: the Secretary of the Treasury; or any SES employee, or acting SES employee, in the Treasury . [Schedule 4, item 21, Section 29A of the Financial Sector (Collection of Data) Act 2001]

Collection of FCS data

7.27 The Bill amends section 13 of the FSCODA to ensure that reporting standards may require financial sector entities to provide information (including personal information or tax file numbers) to APRA that it requires to perform its functions under the FCS . [Schedule 4, item 15, subsection 13(2A) of the Financial Sector (Collection of Data) Act 2001]

7.28 APRA can currently obtain information (including personal information and tax file numbers) that it requires to perform its functions under the FCS from individual ADIs and general insurers under the Banking Act and Insurance Act respectively. However, there is uncertainty as to whether APRA can use the FSCODA to obtain such information from a class of ADIs or general insurers.

7.29 The amendment ensures that such information can be collected under the FSCODA to further the efficient administration of the FCS.

Reporting standards containing confidential information

7.30 While a one-off data collection can be effected as a legislative instrument under the FSCODA, it may create problems insofar as it may force APRA to publically reveal the sensitive information it has sought to collect or which has led it to make the collection.

7.31 Such an outcome would be undesirable, particularly where the publication of the information is likely to have a detrimental effect on financial system stability or the stability of one or more financial institutions.

7.32 As a result, the Bill amends the FSCODA to exempt a reporting standard from the Legislative Instruments Act 2003 where:

•

APRA considers, on reasonable grounds, that the reporting standard includes confidential information the publication of which is likely to have a detrimental effect on financial system stability, or on the stability of one or more financial institutions;

•

the information to be contained in the reporting documents is required urgently by APRA for any of the following purposes: to determine the financial or prudential condition of financial sector entities; to determine the nature or level of exposure that financial sector entities have to risks, including risks relating to particular transactions, entities, business sectors, asset classes or events; to assess potential threats to financial system stability; to assist APRA, the Minister or the RBA to respond to any such threats; or to determine what, if any, action should be taken by, or in relation to, one or more financial sector entities; and

•

the reporting standard does not require the information referred to above to be given on an ongoing basis . [Schedule 4, item 13, subsection 13(1) of the Financial Sector (Collection of Data) Act 2001]

7.33 If such a reporting standard is determined, APRA must, as soon as practicable after the reporting standard is determined, give a copy of the standard to each financial sector entity that is required to comply with the standard. This ensures that those responsible for complying with the standard are made aware of it . [Schedule 4, item 17, paragraph 13A(1)(a) of the Financial Sector (Collection of Data) Act 2001]

7.34 The making of the standard and the confidential information it contains are protected from inappropriate disclosure. It is an offence (punishable by imprisonment for two years) for a financial sector entity to disclose to any person: that the entity has been given a copy of the relevant standard; or any confidential information that is included in the standard. However, the offence does not apply if:

•

the disclosure is to APRA for the purposes of APRA performing its functions under a law of the Commonwealth; or

•

the disclosure is to an employee, officer or contractor of the financial sector entity for the purposes of them performing their duties in relation to the reporting standard; or

•

the disclosure is to a lawyer for the financial sector entity; or

•

the disclosure is authorised under an Act or other law; or

•

the confidential information included in the reporting standard has already been lawfully made available to the public from other sources . [Schedule 4, item 17, section 13B of the Financial Sector (Collection of Data) Act 2001]

7.35 To ensure that relevant entities are aware of the above provisions prohibiting inappropriate disclosure, APRA must explain the effect of the provisions to any entity which receives a reporting standard to which the provisions apply. The explanation must be by way of a written statement given to the entity at the same time that it is given a copy of the relevant reporting standard by APRA . [Schedule 4, item 17, subsection 13A(2) of the Financial Sector (Collection of Data) Act 2001]

7.36 As noted above, the amendments provide an exception from the requirements of the Legislative Instruments Act for the relevant reporting standards. APRA is, however, required to give a copy of any such standard to the Minister as soon as practicable after it is determined and must report the number of times during a year that such a reporting standard is determined in its annual report. Under subsection 59(4) of the APRA Act, the Minister must cause a copy of APRA's annual report to be tabled in each House of Parliament within 15 sitting days after the day on which the Minister receives the report . [Schedule 4, items 2 and 17, paragraph 59(2)(b) of the Australian Prudential Regulation Authority Act 1998, paragraph 13A(1)(b) of the Financial Sector Collection of Data Act 2001]

7.37 Finally, the Bill makes consequential amendments to paragraphs 13(1)(a) and 13(1)(b) of the FSCODA that result from the new distinction between reporting standards which are and are not legislative instruments . [Schedule 4, items 10 and 12, paragraphs 13(1)(a) and 13(1)(b) of the Financial Sector (Collection of Data) Act 2001]

Urgent reporting standards

7.38 Subsection 13(5) of the FSCODA requires APRA, when preparing proposed reporting standards, to consult with those affected by the standard or, in certain circumstances, with other associations or bodies representing them.

7.39 Subsection 13(6) of the FSCODA exempts APRA from its obligation to consult under subsection 12(5), in circumstances where it is satisfied that the delay that would be involved in holding the consultations would prejudice the interests of depositors, policyholders or members of the financial sector entity or entities concerned.

7.40 However, subsection 13(6) does not presently provide an exception from the requirement to consult where the resulting delay would have a detrimental effect on financial system stability. It would not be appropriate for APRA to consult in such circumstances.

7.41 The Bill rectifies this situation by amending subsection 13(6) of the FSCODA so that APRA does not have to consult under subsection 13(5) of the Act where it is satisfied that the delay that would be involved in holding the consultations would have a detrimental effect on financial system stability . [Schedule 4, 16, subsection 13(6) of the Financial Sector (Collection of Data) Act 2001]

Exemption from requirement to comply with a reporting standard

7.42 Section 16 of the FSCODA currently provides that APRA may, by legislative instrument, exempt a financial sector entity, or a class or kind of financial sector entities, from the requirement to comply with:

•

all the requirements contained in any one or more applicable reporting standards; or

•

a specified requirement or requirements contained in an applicable reporting standard or applicable reporting standards.

7.43 The Bill amends section 16 of the FSCODA to enable APRA to exempt a single entity from the above mentioned requirements by way of a written notice which is not a legislative instrument. The amendment reflects that a decision to so exempt a single entity is of an administrative nature rather than of a legislative nature . [Schedule 4, item 18, subsections 13(1) and 13(1A) of the Financial Sector (Collection of Data) Act 2001].

7.44 An exemption for a class or kind of financial sector entities remains a legislative instrument . [Schedule 4, item 18, subsections 16(1B) of the Financial Sector (Collection of Data) Act 2001]

7.45 The Bill also makes a consequential amendment to section 16 of the FSCODA to reflect the amended structure of the section following the change referred to above . [Schedule 4, item 19, subsections 16(2) of the Financial Sector (Collection of Data) Act 2001]

7.46 To ensure that the amendments do not affect present exceptions under subsection 16(1) of the FSCODA, the Bill includes a saving provision. The provision provides that any exemption under subsection 16(1) in force immediately before the commencement of the amendments has effect, after that commencement, as if the exemption had been made under subsection 16(1) as in force in its amended form . [Schedule 4, item 37, saving-exemptions under subsection 16(1) of the Financial Sector (Collection of Data) Act 2001]

Annual financial statements and returns of a life insurer

7.47 The Bill amends section 124 of the Life Insurance Act so that it provides that an owner of a policy issued by a life insurer is entitled to be provided by the company with a copy of a reporting document (within the meaning of the FSCODA) relating to the company, or part of the document, if:

•

a reporting standard determined under section 13 of the FSCODA specified that a copy of that document, or part of that document, is to be so provided on the request of an owner of the policy; and

•

the owner of the policy requests a copy of that document or part of that document . [Schedule 3, item 31, subsections 124(1) of the Life Insurance Act 1995]

7.48 Currently, section 124 of the Life Insurance Act provides that an owner of a policy issued by a life insurer is entitled, upon request, to be provided by the insurer with a copy of the latest annual financial statements and returns given by the insurer to APRA under the FSCODA.

7.49 Life insurers are required to give a number of financial statements and returns to APRA under the FSCODA. There is uncertainty as to which of these statements and returns are required to be provided to policy owners under section 124 of the Life Insurance Act.

7.50 The amendment resolves this uncertainty.

Chapter 8 - Amendments relating to levies

Outline of chapter

8.1 Schedule 4 of the Bill amends the Financial Institutions Supervisory Levies Collection Act 1998.

8.2 Schedule 5 of the Bill amends the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998; the Life Insurance Supervisory Levy Imposition Act 1998; the General Insurance Supervisory Levy Imposition Act 1998; the Retirement Savings Account Providers Supervisory Levy Imposition Act 1998; the Superannuation Supervisory Levy Imposition Act 1998; and the First Home Saver Account Providers Supervisory Levy Imposition Act 2008 (the levy imposition Acts).

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

Context of amendments

8.4 APRA's capacity to undertake the various elements of its prudential supervision task is funded through industry levies which are determined annually by the Government.

8.5 The levies also cover consumer protection and market integrity functions of ASIC and the Australian Taxation Office in relation to APRA-regulated institutions.

8.6 The legislative framework for levies comprises the following arrangements:

•

the Financial Institutions Supervisory Levies Collection Act 1998 which prescribes the timing of payment and the collection of levies; and

•

the levy imposition Acts which impose levies on regulated entities and prescribe related matters.

8.7 On 1 July 2008, the then Assistant Treasurer announced an examination of the methodologies governing the determination of financial sector levies. This was in response to industry views on the methodologies and the fact that the methodologies had not been considered for some time.

8.8 The review of the levy methodologies was undertaken by Treasury and APRA. As a result of this work, the review team recommended the following legislative changes to the Assistant Treasurer:

•

that a drafting error in subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act be corrected;

•

that the levy date for new starters under the Superannuation Supervisory Levy Imposition Act 1998 should be amended so as to bring it into line with the other imposition Acts; and

•

that the imposition Acts be amended to provide more flexibility by enabling a valuation basis other than assets to be used on a case-by-case basis in the annual determinations.

8.9 In addition, it has been identified that the following Acts are redundant: the Authorised Non-operating Holding Companies Supervisory Levy Determination Validation Act 2000; the General Insurance Supervisory Levy Determination Validation Act 2000; the Life Insurance Supervisory Levy Determination Validation Act 2000; the Retirement Savings Account Providers Supervisory Levy Determination Validation Act 2000; and the Superannuation Supervisory Levy Determination Validation Act 2000.

Summary of new law

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

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

8.12 Schedule 5 of the Bill:

•

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

•

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

8.13 In addition, schedule 7 of the Bill repeals the redundant Acts identified above.

Comparison of key features of new law and current law

Detailed explanation of new law

Subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act

8.14 Currently subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act 1998 establishes that the levy payable for a financial year by a trustee of a superannuation entity is due and payable on a business day that is specified in a notice given by APRA to the Treasurer, if the entity is a superannuation entity on 1 July of the financial year and became a superannuation entity before that day.

8.15 The Bill amends subparagraph 9(2)(a)(i) of the Act to refer to 'a notice given by APRA to the trustee' instead of 'a notice given by APRA to the Treasurer' . [Schedule 4, item 3, subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act 1998]

8.16 The present reference to 'Treasurer' in the subparagraph is a drafting error. The amendment corrects this error.

Regulated levy component for new starters under the Superannuation Supervision Levy imposition Act

8.17 The Superannuation Supervisory Levy Imposition Act 1998 imposes a levy on superannuation entities. Section 5 of the Levy Act defines a 'superannuation entity' to mean a superannuation entity within the meaning of the Superannuation Industry (Supervision) Act, other than a self-managed superannuation fund.

8.18 Under section 7 of the Superannuation Supervisory Levy Imposition Act, the levy comprises two components: a restricted levy component and an unrestricted levy component. Each component requires the application of a levy percentage to the superannuation entity's asset value.

8.19 Subparagraph 7(1A)(a)(ii) of the Superannuation Supervisory Levy Imposition Act provides that if the superannuation entity was an unregulated entity on 30 June of the previous financial year ('a new starter') then, for the purpose of working out the restricted levy component, the restricted levy percentage is applied to the entity's asset value on 30 June of the previous financial year.

8.20 This method of calculating the restricted levy component is not appropriate for new starters. For example, under the present arrangements if a fund becomes a regulated superannuation fund on 1 October of a particular financial year, its restricted levy component is to be worked out by applying the restricted levy percentage to its asset value as at 30 June in the previous financial year. However, as the fund is a new starter it is unlikely to have had any assets, or have been in existence, on 30 June of the previous financial year. As a result, the fund is likely to pay only the minimum amount for this component, which could be less than commensurate with the costs of APRA's supervisory resources.

8.21 The Bill rectifies this situation by amending subparagraph 7(1A)(a)(ii) of the Superannuation Supervisory Levy Imposition Act so that the restricted levy component for a new starter is the restricted levy percentage of the entity's levy base on the day when it became a superannuation entity . [Schedule 4, item 30, subparagraph 7(1A)(a)(ii) of the Superannuation Supervisory Levy Imposition Act 1993]

8.22 The amendments bring the levy arrangements for superannuation entities into line with those applicable to ADIs, general insurers, life insurers, retirement savings account providers and leviable first home saver account providers. The respective levy imposition Acts in relation to those entities presently provide that the valuation day for a new starter is the day that it becomes regulated.

8.23 The Bill also amends subsection 7(1B), which relates to the unrestricted levy component, to align its structure with that adopted in subsection 7(A) and to ensure that it operates consistently with subsection 7(A) . [Schedule 4, item 32, subsection 7(1B) of the Superannuation Supervisory Levy Imposition Act 1993]

Valuation basis for determining levies

8.24 From inception, gross assets have been used as the primary measure for determining levies. This has generally proved to be a reasonable measure, but from time to time it has generated particular anomalies. For example, using assets as a valuation basis may not be appropriate for a financial institution which has a large volume of transactions but holds minimum assets and as a result is subject to the minimum levy, or where a participant otherwise does not conform to the general characteristics of other entities within the industry.

8.25 The Bill addresses this by amending the imposition Acts to provide flexibility so that a valuation basis other than assets can be used by the Minister in determining levies on a case-by-case basis. This is achieved by replacing all relevant references to 'asset value' in the imposition Acts with references to 'levy base' . [Schedule 5, items 1 to 4, 6 to 21, 23 to 29, 31 and 33, section 7 of the Authorised Deposit-taking Institutions Supervisor Levy Imposition Act 1998, section 7 of the First Home Saver Account Providers Supervisory Levy imposition Act 2008, section 8 of the General Insurance Supervisory Levy Imposition Act 1998, section 7 of the Life Insurance Supervisory Levy Imposition Act 1998, section 7 of the Retirement Savings Account Providers Supervisory Levy Imposition Act 1998, and section 7 of the Superannuation Supervisory Levy Imposition Act 1998]

8.26 As a consequence of this amendment, the Bill also repeals subsection 7(4A) of the Life Insurance Supervisory Levy Imposition Act 1998 and subsection 7(4A) of the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998. These provide that the asset value of a life insurance company or ADI must exclude an amount equal to the total balances of all first home saver accounts (within the meaning of the First Home Saver Accounts Act) . [Schedule 5, items 5 and 22, subsection 7(4A) of the Authorised Deposit-taking Institutions Supervisor Levy Imposition Act 1998 and subsection 7(4A) of the Life Insurance Supervisory Imposition Act 1998]

8.27 The provisions are not desirable due to the above mentioned amendments that replace references to 'asset value' with references to 'levy base'. As a result of the change to 'levy base', it is preferable that any relevant adjustments to levies payable be done in the ministerial annual determinations.

Repeal of redundant Acts

8.28 Schedule 7 of the Bill repeals the following Acts:

•

the Authorised Non-operating Holding Companies Supervisory Levy Determination Validation Act 2000;

•

the General Insurance Supervisory Levy Determination Validation Act 2000;

•

the Life Insurance Supervisory Levy Determination Validation Act 2000;

•

the Retirement Savings Account Providers Supervisory Levy Determination Validation Act 2000; and

•

the Superannuation Supervisory Levy Determination Validation Act 2000. [Schedule 7, items 1 to 5, the Authorised Non-operating Holding Companies Supervisory Levy Determination Validation Act 2000, General Insurance Supervisory Levy Determination Validation Act 2000, the Life Insurance Supervisory Levy Determination Validation Act 2000, the Retirement Savings Account Providers Supervisory Levy Determination Validation Act 2000 and the Superannuation Supervisory Levy Determination Validation Act 2000]

8.29 The five Acts validate levy determinations made on 11 August 1998, before they were notified in the Gazette on 13 August 1998. According to the validation Acts, the determinations are taken to be effective on and at all times after 1 July 1998. The Acts provided legal support to relevant levy collection actions taken from 1 July 1998 to 13 August 1998.

8.30 The Acts are now redundant as the relevant levy determinations were revoked in 1999.

9.6 The term NOHC is defined in section 5 of the Banking Act and section 3 of the Insurance Act, respectively. Those sections define NOHC, in relation to a body corporate, to mean a body:

•

of which the first body corporate is a subsidiary; and

•

that does not carry on a business (other than a business consisting of the ownership or control of other bodies corporate); and

•

that is incorporated in Australia.

9.7 The amendment promotes the effective operation of the authorisation regime by ensuring that APRA may refuse an application to carry on banking or insurance business in Australia if the body corporate is a subsidiary of any body corporate (whether or not a NOHC as defined) that does not hold a NOHC authority.

Winding up of an ADI on application by APRA

9.8 Subsection 14F(2) of the Banking Act currently provides that if an ADI is wound up on application by APRA, the winding up is to be conducted in accordance with the Corporations Act under which the ADI is incorporated or is taken to be incorporated.

9.9 The Bill amends subsection 14F(2) to omit the words 'under which the ADI is incorporated or is taken to be incorporated' . [Schedule 1, item 28, subsection 14F(2) of the Banking Act 1959]

9.10 The amendment reflects that ADIs are now all incorporated under the Corporations Act. In the past some ADIs had been incorporated under other laws.

References to delegates

9.11 The Bill removes references to delegates from subsections 16AK(2) and 16AO(1) of the Banking Act and subsection 62ZZU(1) of the Insurance Act . [Schedule 1, items 34 and 35, and schedule 2, item 82, paragraphs 16AK(2)(d) and 16AK(2)(e) and subsection 16AO(1) of the Banking Act 1959, and subsection 62ZZU(1) of the Insurance Act 1973]

9.12 The references are not necessary given the operation of section 34AB of the Acts Interpretation Act 1901. That section provides that where an Act confers power on an authority to delegate a function or power, the function or power when performed or excised by a delegate is deemed to have been performed or exercised by the authority.

Foreign reinsurers

9.13 The Bill amends the Insurance Act to ensure that foreign insurers will only be exempt from the requirement to apply for authorisation to carry on insurance business in Australia if they solely conduct reinsurance business. If the foreign insurer conducts any other insurance business in Australia they must be authorised . [Schedule 2, items 2, 3, 7 and 8, subsections 3(1), 3(5) to 3(6A) of the Insurance Act 1973]

9.14 The amendments clarify the existing law.

Incorrect reference in subsection 38AA(6) of the Insurance Act

9.15 Subsection 38AA(6) of the Insurance Act currently provides that a body corporate commits an offence if the body corporate contravenes subsection 38AA(5).

9.16 The current reference to subsection 38AA(5) in subsection 38AA(6) is incorrect. The reference should be to subsection 38AA(4).

9.17 The Bill corrects this drafting error, by replacing the reference to subsection 38AA(5) in subsection 38AA(6) with a reference to subsection 38AA(4) . [Schedule 2, item 20, subsection 38AA(6) of the Insurance Act 1973]

Reference to prudential standards in section 38 of the Life Insurance Act

9.18 Subsection 38(4) of the Life Insurance Act currently provides that a life insurer must not borrow money, for the purposes of the business of a statutory fund, by means of an unsecured borrowing if the result would be that the total amount of principal outstanding under unsecured borrowings for the purposes of the business of the fund would exceed an amount ascertained in accordance with the regulations.

9.19 The Bill replaces the current reference to 'regulations' in subsection 38(4) of the Insurance Act with a reference to 'prudential standards' . [Schedule 3, item 6, subsection 38(4) of the Life Insurance Act 1995]

9.20 The amendment ensures that APRA can provide for the relevant matters in the prudential standards.

Repeal of section 44 of the Life Insurance Act

9.21 The Bill repeals section 44 of the Life Insurance Act . [Schedule 3, item 7, section 44 of the Life Insurance Act 1995]

9.22 Section 44 of the Life Insurance Act requires life insurance companies to submit a half yearly 'restricted investments return' to APRA. However, this requirement is redundant as APRA collects the data under the Financial Sector (Collection of Data) Act 2001. Therefore, the section is repealed.

9.23 As a result of the repeal of section 44, the Bill also repeals items 274 and 275 of schedule 1 of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act. Those items make amendments to section 44 of the Life Insurance Act that commence on 1 July 2011. The items are redundant as a result of the repeal of section 44 . [Schedule 4, item 26, items 274 and 275 of schedule 1 of the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007]

Reference to 'policyholders' in the Life Insurance Act

9.24 The Bill replaces the reference to 'policyholders' in section 3 (Objectives of the Act) of the Life Insurance Act with a reference to 'policy owners' . [Schedule 3, item 1, paragraph 3(2)(d) of the Life Insurance Act 1995]. The Bill also replaces the references to 'policy-owner' in subsection 209(5) of the Life Insurance Act with references to 'policy owner' . [Schedule 3, item 48, paragraphs 209(5)(a) and 209(5)(b) of the Life Insurance Act 1995]

9.25 The amendments make the relevant provisions consistent with the remainder of the Act which uses the terms 'policy owners' and 'policy owner' rather than 'policyholders' and 'policy-owner'.

Incorrect reference in section 36C of the Business Transfer and Group Restructure Act

9.26 The definition of 'prudential requirements' in subsection 36C(4) of the Business Transfer and Group Restructure Act presently makes reference to prudential standards in force under section 360A of the Life Insurance Act.

9.27 The reference to section 360A of the Life Insurance Act is incorrect. Under the Life Insurance Act, prudential standards are in fact made under section 230A.

9.28 As a result, the Bill amends subsection 36C(4) of the Business Transfer and Group Restructure Act to replace the reference to subsection 360A of the Life Insurance Act with a reference to section 230A of that Act . [Schedule 4, item 6, subsection 36C(4) of the Financial Sector (Business Transfer and Group Restructure Act) 1999]

References to maximum penalties

9.29 The Bill amends the Banking, Insurance, Life Insurance, and Superannuation Industry (Supervision) Acts to replace all references to 'Maximum penalty' with references to 'Penalty'.

9.30 The change reflects current drafting practice and does not affect the operation of the relevant provisions . [Schedule 6, items 1 to 78, subsections 7(1), 8(1), 9(6), 10(3), 11(3), 11AA(5), 11CG(1) and (2), 11E(2), 13(3), 13A(4), 13B(1A), 14A(2A), 16B(1A), 33(4), 36(1A) and (2A), 41(2), 42(1A) and (3), 45(1A) and (4), 46(2), 51B(7), 51D(3), 61(3), 62(1A), 63(1) and (4), 66(1) and (3), 66A(1), 67(1) and (3), and 69(3AA), (5A) and (7A) of the Banking Act 1959, subsections 7A(1), 9(1), 10(1) and (2),14(1), 17(8), 20(1), 27(7), section 28, and subsections 49(3) and (4), 49A(3) and (4), 49F(1) and (2), 49L(1), and 49Q(2) of the Insurance Act 1973, subsections 16E(1) and (7), 16L(4), 16Q(4), 16R(6), 16U(4), 16V(7), 180(4), and 230F(1) and (3) of the Life Insurance Act 1995, and subsections 11B(3) and (4), 11C(2), (3) and (4), 64(3) and (3A), 103(3), 104(2), 104A(3), 105(2), 107(3) and (4), 108(3) and (4), 122(2), 124(2), 131B(1) and (2), 141A(3) and (6), 154(2) and (2A), 252C(2) and (10), 254(4) and (5), 260(2) and (3), 262(1) and (2), 299C(3), 299F(4) and (4A), 299G(4) and (4A), 299H(6) and (7), 299J(6) and (7), 299K(6) and (7), 299L(6) and (7), 299M(4) and (5), 299Y(2) and (3), and 347A(6) of the Superannuation Industry (Supervision) Act 1993]

Chapter 10 - Regulation Impact Statement

Background

Scope of the Regulation Impact Statement

10.1 This Regulation Impact Statement addresses proposed amendments to the Australian Prudential Regulation Authority Act 1998, the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995, the Superannuation Industry (Supervision) Act 1993, the Financial Sector (Business Transfer and Group Restructure) Act 1999, the Financial Sector (Collection of Data) Act 2001 and other Acts, relating to Australia's crisis management and prudential framework. The proposed amendments suggest changes to legislation or regulations affecting business. Hence, the changes are addressed in this Regulation Impact Statement ('RIS').

Prudential regulation and administration of the FCS

10.2 The purpose of the Australian Prudential Regulation Authority (APRA) is to:

•

regulate bodies in the financial sector in accordance with laws of the Commonwealth that provide for prudential regulation or for retirement income standards;

•

administer the Financial Claims Scheme (FCS) provided for in the Banking Act and Insurance Act; and

•

develop the administrative practices and procedures to be applied in performing that regulatory role and administration.

10.3 In performing and exercising its functions and powers, APRA is required to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing those objectives, is to promote financial system stability in Australia.

Prudential regulation

10.4 Prudential regulation aims to ensure that, under all reasonable circumstances, financial promises made by regulated entities are met within stable, efficient and competitive financial markets.

10.5 It is aimed at ensuring that the quality of a financial institution's systems for identifying, measuring and managing the various risks in its business act to reduce the risk of failure and that, where failure does occur, public confidence in the financial system is maintained while the failure is appropriately managed.

10.6 Australia's prudential framework is primarily risk-based, consultative and consistent with international best practice. This risk-based approach recognises that management and Boards of supervised institutions are primarily responsible for the financial soundness of their respective institution.

10.7 Where difficulties arise within a regulated financial institution, intervention by the regulator will be proportionate to the seriousness of the problem and level of risk to depositors, policyholders and industry.

10.8 APRA has a range of supervisory powers which escalate from preventive to corrective and through to failure management.

Preventive powers

Authorisation

10.9 APRA has an authorisation and minimum standard framework that applies to entities seeking to operate in the regulated market. Minimum standards for entry and participation in regulated financial markets give consumers greater confidence, even in the absence of full information, that financial promises will be met. This, in turn, promotes the safety and stability of the financial system as a whole.

Fitness and propriety

10.10 Under the prudential Acts, where APRA is satisfied that a director or senior manager does not meet fit and proper standards, it has the power to seek their disqualification or direct their removal. It can also remove an actuary or auditor or seek their disqualification.

Prudential standards

10.11 Prudential standards help improve the clarity and certainty of prudential regulation and maintain flexibility in the prudential regulation regime. APRA is able to determine standards that apply to authorised deposit-taking institutions (ADIs) and general insurers, as well as subsidiaries and non-operating holding companies (NOHCs) of those entities. APRA is also able to determine prudential standards for life insurance companies.

10.12 These standards are complemented by monitoring of regulated entities and a compliance regime that encourages their continuing adherence to the standards. This ensures that institutional and regulatory arrangements are working as intended and assists in the early detection of problems. Remedial action is taken in circumstances where an entity or individual fails to meet the minimum requirements.

10.13 APRA has powers to require information from regulated entities regarding their operations. This information forms the basis of assessments by APRA of the entity's prudential status and assists in the early detection of any emerging risks.

Correction powers

10.14 Effective enforcement powers ensure that APRA is able to compel compliance with, and rectify breaches of, minimum standards. APRA is equipped with various enforcement powers and sanctions including the power to enter court-enforceable undertakings, issue directions, and seek court injunctions to enable it to respond proportionately to compliance issues.

Court-enforceable undertakings

10.15 This power is intended to enable APRA to formalise and, if necessary, enforce an agreement that is reached with market participants. The Banking, Insurance and Life Insurance Acts enable APRA to accept an enforceable undertaking that relates to a matter regarding which APRA has a function or power under the Act.

Issuing of directions

10.16 In most situations, APRA is able to address prudential concerns by working cooperatively with the Board and management of a supervised entity, thereby allowing the Board and senior management to maintain full responsibility for decisions made by the entity.

10.17 However, there may be times where APRA judges that it is necessary to use more direct tools to rectify or manage prudential concerns. Directions powers enable APRA to specify how an entity should resolve compliance issues and therefore enable APRA to compel an entity to take specific action to address prudential risks that have been identified.

Court injunctions

10.18 The power to seek a court injunction enables APRA to act immediately to protect relevant interests in very serious cases and where other enforcement powers are insufficient. The Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts each contain a power for APRA to seek a court injunction.

Failure management

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

10.20 Key aspects of APRA's failure management powers include the ability to apply for transfer of business of an entity that is in financial distress to a healthy institution; initiate external administration; and initiate wind-up.

Transfer of business

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

10.22 The compulsory transfer of business powers in relation to ADIs are contained in the Financial Sector (Business Transfer and Group Restructure) Act, and for life insurers are contained in the Financial Sector (Business Transfer and Group Restructure) Act and the Life Insurance Act.

10.23 APRA currently has limited compulsory transfer powers in relation to general insurers under the Insurance Act.

External administration

10.24 Under the Banking Act, APRA can appoint an administrator (known as a statutory manager) if an ADI appears likely to become, or becomes, unable to meet its obligations or suspends payment.

10.25 The Insurance and Life Insurance Acts contain a model of external administration (known as judicial management) which allows APRA to apply to a court for an order that a life insurer or general insurer be placed under judicial management on a number of grounds. These include where the entity indicates that such action is in the interests of policyholders or where the company is, or is likely to become, unable to meet its policy or other liabilities.

10.26 The Banking, Insurance and Life Insurance Acts empower a statutory or judicial manager to recapitalise a financial institution by issuing new shares, selling shares, cancelling existing shares or varying or restricting rights attached to shares. A statutory or judicial manager may also alter the governance arrangements of an ADI or insurer, respectively.

Wind-up

10.27 The exercise of this power varies across each of the prudentially regulated industries. For ADIs, APRA may initiate wind-up where an entity is insolvent, or where a statutory manager is in control of the ADI's business and APRA considers that the ADI could not be restored to solvency within a reasonable period. The wind-up is undertaken under corporations law, with depositors receiving first preference over the assets of the ADI.

10.28 In the case of life insurers APRA may initiate wind-up of an entity where it has conducted an investigation and is satisfied that it is necessary or proper for a wind-up application to be made to the court, or where the court has accepted the recommendation of the judicial manager that the life insurer be wound up. The application for wind-up is made under the Life Insurance Act, with policy owners receiving first preference over the statutory assets of the life insurer.

10.29 APRA may apply for the wind-up of a general insurer under the Insurance Act and the Corporations Act 2001 where the insurer is insolvent, or where an investigation into the insurer has been completed and the company's liabilities exceed its assets. The general insurer's creditors in Australia receive preference over its assets in Australia.

Financial Claims Scheme

10.30 The Financial System Legislation Amendment (FCS and Other Measures) Act 2008 (FCS Act) introduced the FCS.

10.31 The FCS is administered by APRA and provides depositors in Australian-incorporated ADIs with a guarantee of their deposits to a threshold prescribed by regulations. The threshold is currently set at $1 million per account-holder per ADI.

10.32 In addition, the FCS provides compensation to eligible policyholders with claims against a failed general insurer.

Data collection powers

10.33 The Financial Sector (Collection of Data) Act (FSCODA) aims to ensure that APRA can collect the data it requires for the purposes of its prudential functions. It also aims to harmonise and increase the flexibility of the data collection and publishing regimes and to recognise APRA as the central repository for the collection of financial data.

10.34 The FSCODA covers the following broad areas:

•

the entities covered by the Act;

•

the registration of certain corporations and the obligations on those corporations;

•

the power for APRA to determine reporting standards that will require compliance through the provision of reporting documents by financial sector entities; and

•

the application of the Commonwealth's criminal code to certain offences in the Act.

10.35 The FSCODA allows APRA to develop an understanding of the condition of financial institutions and to monitor their compliance with prudential requirements.

10.36 The collection of financial data under the FSCODA also enables general research and analysis to be undertaken into trends and pressures affecting the financial sector and the publication of relevant information.

Levy arrangements

10.37 APRA's capacity to undertake the various elements of its prudential supervision task is funded through industry levies which are determined annually by the Government.

10.38 The levies also cover consumer protection and market integrity functions of the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO) in relation to APRA-regulated institutions.

10.39 The legislative framework for levies is comprised of the following arrangements:

•

the Financial Institutions Supervisory Levies Collection Act 1998 which prescribes the timing of payment and the collection of levies; and

•

a series of imposition Acts which impose levies on regulated entities and prescribes related matters.

10.40 The imposition Acts are the:

•

Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998;

•

Authorised Non-operating Holding Companies Supervisory Levy Imposition Act 1998;

•

Life Insurance Supervisory Levy Imposition Act 1998;

•

General Insurance Supervisory Levy Imposition Act 1998;

•

Retirement Savings Account Providers Supervisory Levy Imposition Act 1998;

•

Superannuation Supervisory Levy Imposition Act 1998; and

•

First Home Saver Account Providers Supervisory Levy Imposition Act 2008.

Assessing the problem

10.41 On 12 October 2008, the Government introduced the FCS Act, which established the FCS and strengthened APRA's powers to manage a financial sector crisis.

10.42 APRA and Treasury have undertaken work to operationalise the FCS and to review Australia's prudential framework to ensure that it provides for the effective supervision of, and where necessary, management of distress at a prudentially regulated institution.

10.43 This is consistent with developments overseas where countries such as the UK and the US have sought to review and strengthen their financial regulatory frameworks.

10.44 The majority of proposals considered by this RIS would address matters identified during the above process. The amendments would address inconsistencies between the laws which APRA administers, and between those and other laws. They are also required to ensure that APRA can take appropriate action to assist in the prevention of, and respond to, institutional distress.

10.45 The importance of consistent prudential regulations was recognised by the 1997 Financial Systems Inquiry (Wallis inquiry). The inquiry found that Australian financial service providers wanting to compete in global markets would be disadvantaged by inconsistencies in the regulatory framework, and that inconsistent regulation may create opportunities for regulatory arbitrage. The Inquiry also found that Australia's financial sector regulatory framework was fragmented and unnecessarily complex, leading to increased compliance costs for financial service providers.

10.46 It was following the inquiry that the government moved to establish APRA, a single regulator for authorised ADIs, insurers and superannuation entities, which was tasked with their prudential regulation.

10.47 Reforms since the Inquiry have continued to harmonise Australia's regulatory framework by removing inconsistencies, unnecessary complexity, and fragmentation. The proposals outlined in this RIS would continue this process to the benefit of business, consumers and the financial system.

10.48 This RIS also considers proposed amendments to the levy arrangements that were recommended by a Government review of the arrangements or which are consequential to making those amendments.

10.49 On 1 July 2008, the then Assistant Treasurer announced an examination of the methodologies governing the determination of the financial sector levies. This was in response to industry views on the methodologies and the fact that the methodologies had not been considered for some time.

10.50 The review of the levy methodologies was undertaken by Treasury and APRA. As a result of this work, the review team recommended the following legislative changes to the Assistant Treasurer:

•

that the levy date for new starters should be redefined;

•

that the imposition Acts should be amended to provide more flexibility so that a valuation basis other than assets can be used on a case-by-case basis in the annual determinations; and

•

that a drafting error in subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act be corrected.

Objectives

10.51 The objective of the proposed amendments is to improve APRA's ability to regulate bodies in the financial sector in accordance with prudential laws and to enhance its ability to administer the FCS. The amendments would achieve this by enhancing APRA's preventive, correction, failure management and data collection powers, and by enhancing the operation of the FCS.

10.52 The proposed amendments also aim to improve the methodologies governing the determination of financial sector levies. The amendments would achieve this by implementing recommendations of the 2009 Report of the Review of Financial Sector Levies and making related amendments.

Analysis of proposed amendments to APRA's preventive powers

Proposal 1 - Incorporation by reference in prudential standards

10.53 Currently, the Banking and Life Insurance Acts do not contain a provision for the incorporation by reference of documents into prudential standards. The Insurance Act contains such a provision.

10.54 The proposal would harmonise the Acts by inserting a provision in the Banking and Life Insurance Acts which would allow for updated versions of documents which are referred to in APRA's prudential standards (such as the Audit and Assurance Standards Board's Audit Guidance) to be automatically applied in prudential standards made under those Acts.

10.55 The proposal is expected to have low compliance costs. It may result in administrative efficiencies for APRA but would not affect the ambit of prudential standards. Prudential standards are generally legislative instruments which are subject to disallowance and for which APRA must comply with best practice regulation requirements at the time they are made.

Proposal 2 - Prudential standards in respect of corporate groups

10.56 The Insurance Act prescribes that APRA can make prudential standards in respect of a single regulated entity or NOHC. This allows APRA to regulate the head entity of a group and require it to monitor its subsidiaries. However, it does not allow APRA to make prudential standards in respect of corporate groups or parts of groups.

10.57 The Banking Act prescribes that prudential standards may require an ADI or its authorised NOHC to ensure that its subsidiaries, or it and its subsidiaries, collectively satisfy particular requirements in relation to prudential matters. This allows APRA to make prudential standards for groups as a whole under the Banking Act.

10.58 The proposal would harmonise the Insurance Act with the Banking Act by permitting APRA to make prudential standards for corporate groups as a whole under the Insurance Act. It would also permit APRA to make prudential standards with respect to parts of the group.

10.59 The proposal reflects the corporate structures which general insurers may adopt.

10.60 The proposal is expected to have low compliance costs. It may result in administrative efficiencies for APRA but would not materially affect the ambit of prudential standards. In addition, as noted above prudential standards are generally legislative instruments which are subject to disallowance and for which APRA must comply with best practice regulation requirements at the time they are made.

Proposal 3 - Prudential standard to determine assets

10.61 Subsection 13A(4) of the Banking Act provides that an ADI is guilty of an offence if it does not hold assets (excluding goodwill) in Australia of a value that is equal to or greater than the total amount of its deposit liabilities in Australia and APRA has not authorised the ADI to hold assets of a lesser value.

10.62 The proposal would amend subsection 13A(4) to enable APRA to exclude assets or amounts from being assets in Australia for the purposes of that subsection via prudential standards.

10.63 The proposal would also amend the equivalent provision in the Insurance Act, paragraph 28(a), so that APRA can exclude assets, in addition to amounts, from being assets in Australia for the purposes of that provision via prudential standards.

10.64 The proposed amendments would harmonise subsection 13A(4) of the Banking Act and paragraph 28(a) of the Insurance Act, as applicable.

10.65 The proposal would also amend section 116A of the Insurance Act to clarify that the definition of when a liability is taken to be in Australia in that section, applies to the requirement in section 116 that, in winding up, a general insurer's assets in Australia are firstly applied to meeting its liabilities in Australia.

10.66 The proposed amendments are expected to have low compliance costs. The amendments to the Insurance Act are not expected to have a material change on the present operation of the law. In regards to the Banking Act amendment, APRA has advised that guidance on the assets which may be excluded can be obtained from examining the relevant prudential standard that presently applies in the context of general insurers, that is, GPS 120. Such a prudential standard would also be a legislative instrument. This being the case, APRA would consult on a draft standard with industry as part of the process of making the standard and its making would be subject to best practice regulation requirements.

Proposal 4 - Minimum criteria for authorisation

10.67 Currently, the Banking, Insurance and Life Insurance Acts permit a body corporate to apply to APRA for authorisation to carry on a regulated business or be a NOHC of a regulated business. If an application is made, APRA may grant or refuse the application.

10.68 The proposal would amend the Banking, Insurance and Life Insurance Acts to permit APRA, by legislative instrument, to set criteria for the granting of such an authorisation.

10.69 The proposed amendments would enhance the authorisation framework by permitting minimum standards for entry and participation in regulated financial markets to be made by legislative instrument. Presently, such criteria are set out in guidelines made by APRA.

10.70 The proposal is expected to have low compliance costs. It will, however, permit APRA to make minimum standards in a manner providing greater certainty as to the regard courts and tribunals must have to them.

Proposal 5 - Continuing an authorisation in-effect upon revocation

10.71 The Banking, Insurance and Life Insurance Acts provide APRA with the power to revoke an authorisation in certain circumstances. However, none of the Acts presently provide that APRA may continue an authorisation in-effect upon revocation, as is the case under section 29GB of the Superannuation Industry (Supervision) Act in relation to RSE licences.

10.72 The proposal would insert an equivalent provision to section 29GB of the Superannuation Industry (Supervision) Act into the Banking, Insurance and Life Insurance Acts. The provisions would provide that a notice to revoke an authorisation may state that the authorisation continues in-effect in relation to a specified matter or specified period, as though the revocation had not happened, for the purposes of a prudential law.

10.73 The proposed amendment would ensure that APRA can continue to appropriately monitor an entity, and act under relevant laws, after the revocation of an authority in circumstances where it is desirable to do so.

10.74 The proposal is expected to have low compliance costs.

Analysis of proposed amendments to APRA's correction powers

Proposal 1 - Triggers for issuing directions

10.75 Under the Banking, Insurance and Life Insurance Acts, triggers must be satisfied prior to APRA issuing a direction.

10.76 The proposal would amend the triggers to:

•

clarify the triggers for giving directions under the Banking Act and Insurance Act where there is deterioration in a regulated entity's financial condition;

-

At present, the relevant provisions are that APRA may issue a direction if there is 'a sudden material deterioration in the body corporate's financial condition' [emphasis added]. The proposal would remove the word 'sudden' to reflect that it is not the speed but the extent of the deterioration which should be relevant to trigger the directions power.

•

ensure APRA can issue a direction under the Banking Act while a regulated entity is receiving external support; and

-

At present, it is unclear whether the provision of Government financial support to an ADI would enable an ADI to avoid triggering APRA's directions power. The proposal would clarify that APRA may issue a direction despite external assistance being given.

•

amend the grounds for giving directions in the Banking, Insurance and Life Insurance Acts so that they refer to subsidiaries.

-

At present, APRA has the power to direct a supervised entity to control the actions of its subsidiaries where a directions trigger is met. The proposal would amend the triggers so that APRA may issue a direction to an ADI, general insurer, life insurer or authorised NOHC as a result of the conduct of a subsidiary, in appropriate circumstances.

10.77 The proposal is not expected to have a significant impact on business. The amended powers would ensure that APRA can use its directions powers in the exceptional circumstances in which they may be required, rather than effecting wider change. APRA would continue to address prudential concerns by working cooperatively with regulated entities where possible.

Proposal 2 - Failure by an authorised NOHC to comply with a direction to remove a director under the Insurance Act

10.78 It is currently an offence under the Insurance Act for general insurers and corporate agents to fail to comply with a direction to remove a director or senior manager. However, it is not an offence for an authorised NOHC to fail to comply with such a direction.

10.79 The proposal would rectify this inconsistency by making it an offence under the Insurance Act for a NOHC to fail to comply with a direction from APRA to remove a director or senior manager.

10.80 The provision would ensure that the existing direction power is effective, rather than affecting the ambit of that power.

Proposal 3 - Directions to a foreign ADI regarding assets and liabilities

10.81 The proposal would amend the Banking Act to clarify that APRA may direct a foreign ADI:

•

to act in a way so that: a particular asset or class of assets of the ADI is returned to the control (however described) of the part of the ADI's banking business that is carried on in Australia; or a particular liability or class of liabilities of the ADI ceases to be the responsibility (however described) of the part of the ADI's banking business that is carried on in Australia; or

•

to not act in a way that: a particular asset or class of assets of the ADI ceases to be under the control (however described) of the part of the ADI's banking business that is carried on in Australia; or a particular liability or class of liabilities of the ADI becomes the responsibility (however described) of the part of the ADI's banking business that is carried on in Australia.

10.82 The amendment would clarify that APRA may issue a direction to prevent inappropriate intra-entity transactions that may undermine the financial position of the ADI's Australian operations.

10.83 This may be particularly important in a situation where the foreign ADI is in financial distress and to ensure liability holders in Australia are not disadvantaged in the winding up or other resolution of the ADI.

10.84 The proposal is not expected to have a significant impact on business. The proposal would clarify APRA's existing directions powers to ensure that they capture the relevant transactions of a foreign bank branch. Such clarity presently exists in relation to equivalent transactions entered into by Australian subsidiaries of foreign banks and other Australian banks.

Analysis of proposed amendments to APRA's failure management powers

External administration

Proposal 1 - Information about applications to appoint an external administrator to a general insurer

10.85 Currently, where a creditor or another party seeks to apply to the courts to appoint an external administrator to a general insurer or life insurer, the person is required to give APRA notice of the appointment, but is not required to provide details of the application.

10.86 It is important for APRA to receive these details prior to the hearing so as to understand the circumstances giving rise to the application and take appropriate and timely action. For example, APRA may seek to be heard in relation to the proposed external administration of the general insurer or life insurer, or APRA may apply to the Federal Court for the appointment of a judicial manager who would replace any other form of external administration.

10.87 The proposal would require a person who wants to apply to a court for the appointment of an external administrator of a general insurer to first give the following documents to APRA:

•

a copy of the application; and

•

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

10.88 The cost to the party seeking external administration is expected to be low as the party would only be required to provide existing court documents to APRA. Moreover, this requirement may prevent duplicate external administration processes, and thus may reduce the costs of administration for the insurer, its policyholders and affected third parties.

Proposal 2 - Triggers for appointing a statutory manager

10.89 The statutory preconditions and processes for appointing a statutory manager are an important part of the failure management regime. The statutory preconditions determine when APRA can appoint a statutory manager.

10.90 Currently, the Banking Act may not allow the appointment of a statutory manager to the ADI unless the intervention both is in the depositors' interests and would promote the stability of the financial system.

10.91 In exceptional circumstances, such as in the early stages of sector-wide distress, it may be that APRA can only be satisfied of one of these two factors with the result that it may be unable to appoint a statutory manager until further events have unfolded, even if there is a need for immediate intervention. Such a situation is likely to be detrimental to the depositors of the affected ADI and could reduce confidence in the financial system at a critical time.

10.92 The proposal would clarify that APRA may appoint a statutory manager to an ADI if it is in the interests of depositors or for financial system stability (or both). The proposal is not expected to increase compliance costs.

Proposal 3 - Right to be heard in proceedings to replace a judicial manager

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

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

10.95 The proposal would clarify that APRA has the right to be heard in proceedings related to the replacement of a judicial manager. This would ensure that APRA's views are taken into account in all circumstances where the Federal Court may issue an order relating to the appointment or termination of judicial management.

10.96 APRA would be required to bear the costs of appearing before the Court, and the impact on other parties and the Court is not expected to be significant.

Proposal 4 - Powers relating to statutory and judicial managers

10.97 It is important that the statutory or judicial manager has the necessary powers to gather the information required to understand the affairs of a distressed ADI, general insurer or life insurer and to implement measures to resolve distress at the institution.

10.98 Under the Banking Act, a statutory manager would require information about the financial condition and operations of the ADI in a timely manner so as to maximise the chances of rehabilitation or crisis resolution. Such information is most likely to be within the knowledge of key personnel within the ADI or with whom the ADI deals. The proposal would enable the statutory manager to question these individuals, to assist in carrying out its duties and functions.

10.99 Under the Insurance and Life Insurance Acts, a judicial manager is vested with the powers of the directors, but not the powers of the Board. There are certain decisions that may only be taken by the Board, which may be required to be made by a judicial manager for the purposes of fulfilling its functions. The proposal would vest the powers of the Board in the judicial manager, thereby aligning its powers with the powers of a statutory manager under the Banking Act.

10.100 The proposal would also enable APRA to require information or assistance from the judicial manager about matters that would enable APRA to perform its functions in relation to the FCS. This would be equivalent to APRA's ability to require information or assistance from a general insurer or a liquidator of a general insurer, and would enhance APRA's capacity to fulfil its duties and functions in relation to the administration of the FCS.

10.101 The proposal is not expected to have a material impact on the cost of an administration. Improving the efficient operation of the relevant powers could, however, result in small administrative cost savings.

Business transfer

10.102 The ability to transfer business from a distressed financial institution to another buyer is an important mechanism for managing some types of distress at financial institutions.

10.103 Part 4 of the Financial Sector (Business Transfer and Group Restructure) Act contains compulsory transfer of business powers that may be used to transfer business from a distressed ADI. This Part also provides for compulsory transfers of business from a distressed life insurer to a healthy life insurer that is willing to receive (purchase) the business. However, it does not currently provide for compulsory transfer of business between general insurers.

10.104 The proposal would enable APRA to require a compulsory transfer of business from one general insurer to another under the Financial Sector (Business Transfer and Group Restructure) Act. This would be equivalent to APRA's ability to require a compulsory transfer of business from one ADI to another, or from one life insurer to another.

10.105 The proposal would also enable APRA to require a compulsory transfer of aspects of a general or life insurer's business to another entity that is not a general or life insurer. This would be equivalent to APRA's present ability to require a transfer of business from an ADI to an unregulated entity, such as an asset management company.

10.106 Existing requirements in relation to compulsory transfers would apply. For example, APRA is required to consider the interests of the policyholders, and the Board of the receiving entity must have consented to the transfer.

10.107 This measure would impose some costs on the affected general insurer at the time of compulsory transfer as it would be required to give APRA information so as to allow the transfer to occur. However, APRA would bear the bulk of the costs of reaching agreement with the receiving general insurer, preparing the transfer documents and drawing up the transfer scheme.

10.108 The equivalent power for ADIs and life insurers has been rarely used as APRA would generally only consider a compulsory transfer if it is necessary to avoid or minimise the high costs of an insurance or ADI failure for the economy and consumers.

Winding up

Proposal 1 - Priority provisions

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

•

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

•

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

•

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

•

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

10.110 The proposal would amend subsection 13A(3) so that it provides for liabilities to be paid in the following order:

•

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

•

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

•

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

•

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

•

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

•

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

10.111 The amended provision would reflect changes made by the FCS Act to the depositor protection and compensation arrangements under the Banking Act. It would also provide appropriate priority for debts owed to the Reserve Bank and liabilities under industry support contracts.

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

10.113 The amendments are not expected to impose costs on business.

Proposal 2 - Definition of foreign ADI

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

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

10.116 The proposal would repeal section 11D of the Banking Act, so that section 11E (and the remaining provisions of Division 1B) of the Act apply to the Bank of China, as they do to all other foreign ADIs.

10.117 The proposal is not expected to impose compliance costs.

Proposal 3 - Liquidation of an insurer following judicial management

10.118 The proposal would amend the Insurance Act to clarify that, where the Court approves a recommendation by a judicial manager to wind up a general insurer, the winding up would be conducted in accordance with the Corporations Act.

10.119 The amendment is not expected to impose compliance costs. Increased certainty, however, may reduce costs associated with the winding up of a general insurer.

Proposal 4 - Recapitalisation

10.120 The proposal would amend the Banking, Insurance and Life Insurance Acts to enable APRA to direct an ADI, general insurer or life insurer to recapitalise in circumstances equivalent to those which would presently allow APRA to appoint a statutory or judicial manager to them.

10.121 APRA would be able to require the ADI, general insurer or life insurer to increase the capital that it holds to a specified level by issuing equity, or other capital instruments specified by regulations.

10.122 APRA would be required to consult with the Australian Competition and Consumer Commission (ACCC) before issuing a direction that requires an entity to recapitalise. However, the recapitalisation direction would be subject to an exemption from the competition provisions of Part IV of the Trade Practices Act 1974.

10.123 It would be a criminal offence, punishable by a fine of 50 penalty units, for an ADI or insurer to fail to comply with a direction or for a responsible officer to fail to take reasonable steps to ensure compliance. This is the same penalty which applies to APRA's other directions powers. However, the offence provisions do not apply if: the ADI or insurer made reasonable efforts to comply with the recapitalisation direction; and the ADI's or insurer's contravention is due to circumstances beyond its control.

10.124 The proposal is not expected to have material cost implications for business or shareholders.

•

Similar recapitalisation powers can presently be exercised when an ADI or insurer is in statutory or judicial management. The proposal would, however, provide the flexibility of allowing the powers to be used without placing the institution into statutory or judicial management in appropriate circumstances, such as when doing so could adversely affect the ability to recapitalise.

•

As is the case with the recapitalisation powers under statutory or judicial management, APRA must obtain an expert's report on the fair value of any issue prior to the exercise of the recapitalisation power unless it is satisfied that doing so would detrimentally affect the interests of depositors or policyholders, or the stability of the financial system in Australia.

10.125 The proposal is not expected to have a material impact on competition. A recapitalisation direction would only be issued where the benefits of doing so outweighed the costs. The requirement to consult with the ACCC would ensure that competition effects are properly considered as part of this process. In addition, the present recapitalisation power under statutory or judicial management includes an equivalent exemption from the competition provisions of the Trade Practices Act. If the exemption was not included in the present regime, APRA may have to place an institution into statutory or judicial management to obtain the certainty required to recapitalise an institution in circumstances where doing so would not be beneficial to depositors, policyholders, other stakeholders or the financial system.

Analysis of proposed amendments to APRA's and the ATO's investigation powers

Proposal 1 - Investigations during wind-up

10.126 APRA currently has the power to investigate, or appoint an inspector to investigate, the affairs of all APRA-regulated institutions. The ATO has similar powers in relation to the superannuation entities which it regulates. However, there is uncertainty as to whether APRA and the ATO may commence or continue an investigation once such an entity enters external administration.

10.127 This uncertainty is undesirable. Investigation powers are important for gathering information and evidence for the purposes of administering and enforcing relevant laws.

10.128 The proposal would amend the Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts to clarify that APRA (and the ATO as relevant) may commence or continue an investigation after a regulated entity enters external administration or, in the case of a superannuation entity, its trustee enters external administration or becomes insolvent under external administration.

10.129 The proposal would provide certainty to business, APRA and the ATO as to the ability of APRA and the ATO to investigate during liquidation. Only a small number of entities, in particular those in liquidation, would be affected by the proposal. In addition, the statutory requirements for commencing an investigation would still have to be met for APRA or the ATO to commence any investigation.

Proposal 2 - Disqualification

10.130 The proposal would amend the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act and Retirement Savings Accounts Act 1997 to provide that a person is not entitled to fail to comply with a requirement under those respective Acts:

•

to answer a question or give information;

•

to produce books, accounts or other documents; or

•

to do any other act;

on the ground that the answer or information, production of the book or other thing, or doing that other act, as the case may be, might tend to make the person liable to a penalty by way of a disqualification under relevant laws.

10.131 The proposal would also amend the Acts to provide that in any proceeding under, or arising out of, the Acts, a person is not entitled to refuse or fail to comply with a requirement:

•

to answer a question or give information;

•

to produce books, accounts or other documents; or

•

to do any other act;

on the ground that the answer or information, production of the book or other thing, or doing that other act, as the case may be, might tend to make the person liable to a penalty by way of a disqualification under the Acts.

10.132 The proposal responds to the High Court's decision in Rich v Australian Securities and Investments Commission^[7] which overturned the view that disqualification proceedings were protective and not penal in nature. The amendments would be modelled on the amendments made to the Corporations Act in 2007. Similar amendments have also been made to the Trade Practices Act.

Proposal 3 - Record keeping

10.133 The Insurance, Life Insurance, and Superannuation Industry (Supervision) Acts currently contain provisions with respect to the keeping of records by regulated entities. The Banking Act does not contain such provisions. Entities regulated under the Banking Act are, however, subject to the record keeping requirements in the Corporations Act.

10.134 The proposal would harmonise the record keeping provisions for APRA-regulated entities with respect to their accessibility by APRA. In particular, the proposal would ensure records are kept in Australia; that APRA is notified of their location and any change to that location within a reasonable time; and that the records are kept in English or in a form in which they are readily convertible into English. Each of these requirements, with the exception of the requirement to notify APRA of the location at which records are kept, currently applies to some but not all APRA-regulated entities.

10.135 The proposal would restrict the location at which APRA-regulated entities must keep their records. This could impose costs on entities which would vary depending upon their particular circumstances. It may also restrict the ability of entities to outsource some functions overseas. In addition, it would require an entity to report the location of its records to APRA using a form prescribed by APRA.

10.136 To ensure the proposal does not have unintended consequences on business, APRA would be provided with a discretion to exempt entities from the requirement to keep records in Australia, where appropriate. This discretion would also be extended to those APRA-regulated entities, namely general insurers and superannuation entities, which are presently required to keep their records in Australia.

10.137 Reporting costs are expected to be low.

Proposal 4 - Protection and sharing of information

10.138 Section 56 of the Australian Prudential Regulation Authority Act provides for the protection and sharing of protected information and documents by APRA.

10.139 The proposal would amend the definitions of 'protected information' and 'protected document' in section 56 of the Australian Prudential Regulation Authority Act so that that they include any information or documents obtained or produced under a prudential law which relate to the affairs of a financial sector entity within the meaning of the FSCODA.

10.140 The proposal would ensure that information and documents collected from such financial sector entities are subject to the protection of section 56 and the information sharing regime it contains. At present, some but not all financial sector entities are covered by section 56.

10.141 The proposal is not expected to impose compliance costs on business.

Analysis of proposed amendments relating to auditors and actuaries

Proposal 1 - Appointment and conduct of audits

10.142 Currently, there are various provisions relating to auditors and actuaries under the Banking, Insurance, and Life Insurance Acts. However, the provisions vary across the Acts.

10.143 The proposal would harmonise the obligations of auditors and actuaries under the Acts, where appropriate. In particular, the proposal would:

•

require auditors and actuaries of life insurers to give information to APRA on request that will assist it perform its functions under the Life Insurance Act, the FSCODA, or the First Home Saver Accounts Act 2008. APRA currently has equivalent power in relation to the auditors and actuaries (as relevant) of general insurers and ADIs. The proposal would ensure that the auditors and actuaries of life insurers are treated in a similar manner;

•

provide that prudential standards made under the Banking, Insurance and Life Insurance Acts may set out matters relating to the appointment of auditors or the conduct of audits. This clarifies the existing law;

•

ensure that auditors of an ADI perform the functions and duties of an auditor that are set out in the prudential standards. A similar provision presently exists in the Insurance and Life Insurance Acts;

•

require auditors of ADIs and life insurers to comply with prudential standards in carrying out their duties and functions. Auditors of general insurers are currently subject to an express duty to comply with APRA's prudential standards. The proposal would ensure that auditors of life insurers and ADIs are also subject to this duty;

•

require ADIs and authorised NOHCs of ADIs to facilitate an auditor in the performance of their functions under the Banking Act. Currently, under the Insurance and Life Insurance Acts, an insurer must make arrangements necessary to enable the auditor to perform the functions specified in the Act (for the Insurance Act) or prudential standards and reporting standards made under the FSCODA (for the Life Insurance Act); and

•

permit APRA, by written notice, to require an insurer to appoint a person specified in the notice to be an auditor for a purpose specified in the notice. This would allow APRA to appoint auditors for particular purposes, for example, to conduct a special purpose audit. For ADIs the prudential standards deal with such audits.

10.144 The proposal would also ensure that a reporting standard made by APRA under section 13 of the FSCODA may include matters relating to the auditing of reporting documents in certain circumstances. The proposal would also require that:

•

the auditor perform the functions and duties of an auditor that are set out in the reporting standards;

•

the auditor comply with the reporting standards in performing the functions and duties; and

•

the financial sector entity make any arrangements that are necessary to enable the auditor to perform the functions and duties.

10.145 The amendments would assist in ensuring the accuracy of the data that APRA collects from the financial industry in relevant circumstances.

10.146 The proposal is expected to have low compliance costs.

•

It would only require auditors and actuaries to provide information that they already have. It would not require auditors and actuaries to obtain or prepare additional information.

•

Auditors would already carry out the duties set out in the prudential standards in the usual performance of their duties.

•

ADIs are presently required to appoint an auditor under prudential standards.

•

ADIs and insurers typically already facilitate the work of an auditor or actuary in the performance of their relevant functions, which reflects existing industry practice.

Proposal 2 - Offences relating to auditors

10.147 Currently there are no statutory prohibitions under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, Retirement Savings Accounts Act or the FSCODA against misleading or otherwise interfering with an auditor in carrying out their functions. Further, the Acts do not require an auditor to advise APRA or the ATO (as relevant) where a person has sought to interfere with the auditor carrying out their duties and functions.

10.148 However, such provisions presently exist under the Corporations Act for the purposes of that Act. Section 1309 of the Corporations Act makes it an offence for an officer or employee of a corporation to knowingly mislead an auditor of a corporation, or if the corporation is controlled by another corporation an auditor of the other corporation. Section 311 of the Corporations Act makes it an offence for auditors to fail to report to ASIC within 28 days attempts to unduly influence, coerce, manipulate or mislead them; or, attempts to otherwise interfere with the proper conduct of the audit.

10.149 These present offences in the Corporations Act apply when auditors are undertaking functions or exercising duties under the Corporations Act, but not when undertaking similar functions or exercising similar duties under the prudential Acts.

10.150 The proposal would rectify this inconsistency, by applying equivalent provisions to those in the Corporations Act to the above Acts. Auditors would therefore be subject to the same requirements, as relevant, for both Corporations Act and prudential purposes.

10.151 The proposal is expected to have low compliance costs. As noted above, auditors are presently subject to equivalent provisions for Corporations Act purposes. The proposal may require reporting to APRA or the ATO where the auditor is performing functions other than Corporations Act functions. However, additional reporting costs are expected to be low.

Analysis of proposed amendments to the FCS

10.152 The proposal would amend the Banking Act to:

•

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

•

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

•

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

10.153 The proposal would also amend the Insurance Act to:

•

ensure APRA can manage claims made under the FCS efficiently and in line with standard industry practice, including by issuing forms, determining policyholder eligibility, negotiating settlement for claims and rationalising third party claims;

•

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

•

enable third party claims specified in section 601AG of the Corporations Act to be made to the FCS, in addition to claims specified in section 51 of the Insurance Contracts Act 1984;

•

ensure the efficient use of public revenue by enabling APRA to seek reinsurance recoveries and contributions from a second insurer where a policyholder has double insurance, in line with industry practice; and

•

allow the Minister to declare that the FCS applies to an insolvent insurer under external administration or judicial management. Presently, the FCS may only be declared in relation to an insurer under judicial management.

10.154 These proposals are expected to reduce costs for consumers as they are designed to facilitate the administration of the FCS, ensure timely payment under the FCS, and clarify matters related to the FCS's operation.

10.155 The changes in relation to the Policyholder Compensation Facility ensure that general insurers would deal with the FCS in the same way as with another general insurer. This would allow the FCS to be implemented in respect of a general insurer without any new compliance programs, thereby reducing the upfront cost of complying with the FCS for the insurance industry as a whole.

Analysis of proposed amendments to APRA's data collection powers

Proposal 1 - Reporting standards and entities providing financial services or participating in a payment system

10.156 APRA is the central repository for the collection of financial data. Currently, APRA can collect data under the FSCODA to assist it in the prudential regulation or monitoring of bodies in the financial sector and to facilitate the Reserve Bank's formulation of monetary policy.

10.157 The global financial crisis has highlighted that the Government may require specific data to inform decisions and monitor subsequent outcomes that cannot presently be obtained by APRA under the FSCODA. This includes data from non-prudentially regulated bodies which operate in the financial sector.

10.158 The proposal would expand APRA's powers to collect data under the FSCODA upon receiving a direction from the Minister or their delegate. In particular, APRA would be empowered after receiving such a direction to determine reporting standards for entities (not presently covered by the Act) that provide financial services or participate in a payment system.

10.159 The entities from which the data would be collected would be subject to the same rights and obligations as presently apply to requests under the FSCODA. Similarly, the process which APRA would be required to follow in collecting the data would be the same.

10.160 The proposal would enhance the Government's ability to collect the data it requires to make policy decisions and monitor the outcomes of those decisions across the financial sector. The amendment would also be in line with international developments relating to the collection of data.

10.161 The proposal may, however, impose compliance costs on businesses as it would permit APRA to collect additional data under the FSCODA, including data from businesses that are not presently subject to the Act, upon request from the Government.

10.162 In response to the potential costs, the proposal would be subject to the thresholds discussed above, including that a request be received from Government. This would enable the Government to consider the use of the expanded powers on a case by case basis having regard to all relevant circumstances, including likely costs, and the need for the relevant data.

10.163 In addition, APRA would be required to make a reporting standard under the FSCODA prior to exercising the expanded power. A reporting standard is a disallowable instrument in relation to which best practice rule-making procedures, as overseen by the Office of Best Practice Regulation, apply. Depending on the circumstances of the individual reporting standard, this would require consideration of compliance costs and other impacts on the economy at the time a relevant standard was proposed.

10.164 The proposal would also ensure that data can be collected under the FSCODA for the purposes and functions of ASIC, the RBA or another prescribed financial sector agency where it is cost effective and appropriate to do so.

Proposal 2 - Collection of FCS data

10.165 The proposal would amend the FSCODA to ensure that APRA can collect information it requires to administer the FCS in both the banking and insurance contexts.

10.166 The amendment may reduce compliance costs by clarifying the operation of the Act in this respect. A reporting standard made by APRA for the purposes of collecting such data would be a legislative instrument in relation to which best practice regulation requirements would apply.

Proposal 3 - Reporting standards containing confidential information

10.167 While one-off information collection can be effected as legislative instruments under the FSCODA, it may create problems insofar as it may force APRA to reveal the sensitive information it has sought to collect or which has led it to make the collection.

10.168 Such an outcome may be highly undesirable, especially when the affected institution involved is itself a regulated entity or the disclosure of the information may threaten financial system stability.

10.169 As a result, the proposal would permit APRA to make a reporting standard pertaining to non-ongoing data collections under section 13 of the FSCODA (without the requirement for a legislative instrument) where:

•

APRA considers, on reasonable grounds, that the reporting standard includes confidential information the publication of which is likely to have a detrimental effect on financial system stability or on the stability of one or more financial institutions; and

•

the information to be contained in the reporting documents is required urgently by APRA for any of the following purposes: to determine the financial or prudential condition of financial sector entities; to determine the nature or level of exposure that financial sector entities have to risks, including risks relating to particular transactions, entities, business sectors, asset classes or events; to assess potential threats to financial system stability; to assist APRA, the Minister or the Reserve Bank to respond to any such threats; or to determine what, if any, action should be taken by, or in relation to, one or more financial sector entities.

10.170 APRA will be required to report the use of the power to the Minister as soon as possible and to report its use in its annual report.

10.171 It would be a criminal offence (punishable by imprisonment for two years) for the entity to which one of these special reporting standards is issued to disclose to any person: that the entity has been given a copy of the reporting standard; or any confidential information that is included in the reporting standards. However, the criminal offence would not apply in circumstances where, for example, the disclosure is authorised by law, is made to APRA or an employee or officer of the entity for a relevant purpose, or is to a lawyer for the entity.

Proposal 4 - Urgent reporting standards

10.172 Subsection 13(6) of the FSCODA presently exempts APRA from its obligation to consult with relevant financial sector entities when preparing proposed reporting standards, in circumstances where it is satisfied that the delay that would be involved in holding the consultations would prejudice the interests of depositors, policyholders or members of the financial sector entity or entities concerned.

10.173 The proposal would amend subsection 13(6) so that APRA also does not have to consult where it is satisfied that the delay would have a detrimental effect on financial system stability.

10.174 It would not be appropriate for APRA to consult in such circumstances.

10.175 The costs to business of not consulting are expected to be low and outweighed by the public benefit of urgent collection where financial system stability is at risk.

Proposal 5 - Annual financial statements and annual returns

10.176 Currently, section 124 of the Life Insurance Act provides that an owner of a policy issued by a life insurer is entitled, upon request, to be provided by the insurer with a copy of the latest annual financial statements and returns given by the insurer to APRA under the FSCODA.

10.177 Life insurers are required to give a number of financial documents to APRA under the FSCODA.

10.178 The proposal would enable APRA to specify, in reporting standards made under the FSCODA, which financial statements and returns are required to be provided, upon request, to a policy owner under section 124 of the Life Insurance Act.

10.179 The proposal is not expected to impose compliance costs. However, benefits to life insurers and policy owners are expected to be derived from clarifying the requirements of section 124.

Analysis of proposed amendments to the levy regime

Proposal 1 - Regulated levy component for new starters

10.180 The Superannuation Supervisory Levy Imposition Act 1998 (the Levy Act) imposes a levy on superannuation entities. Section 5 of the Levy Act defines a 'superannuation entity' to mean a superannuation entity within the meaning of the Superannuation Industry (Supervision) Act, other than a self-managed superannuation fund.

10.181 Under section 7 of the Levy Act, the levy comprises two components: a restricted levy component and an unrestricted levy component. Each component requires the application of a levy percentage to the superannuation entity's asset value.

10.182 Subparagraph 7(1A)(a)(ii) of the Levy Act provides that if the superannuation entity was an unregulated entity on 30 June of the previous financial year then, for the purpose of calculating the restricted levy component, the restricted levy percentage is applied to the entity's asset value on 30 June of the previous financial year.

10.183 This method of calculating the regulated levy component is not appropriate for new starters. For example, under the present arrangements if a fund becomes a regulated superannuation fund on 1 October of a particular financial year, its restricted levy component is to be worked out by applying the restricted levy percentage to its asset value as at 30 June in the previous financial year. However, as the fund is a new starter it is unlikely to have had any assets, or have been in existence, on 30 June of the previous financial year. As a result, the fund is likely to pay only the minimum amount for this component, which could be less than commensurate with the costs of APRA's supervisory resources.

10.184 The proposal would rectify this situation by amending the Levy Act to allow the Minister to specify that the asset value of a new starter be calculated as at the day that the new starter becomes a superannuation entity, when calculating the restricted levy component.

10.185 The proposal would bring the levy arrangements for superannuation entities into line with those applicable to ADIs, general insurers, life insurers, retirement savings account providers and leviable first home saver account providers. The respective levy imposition Acts in relation to those entities presently provide that the valuation day for a new starter is the day that it becomes regulated.

Proposal 2 - Valuation basis for determining levies

10.186 From inception, gross assets have been used as the primary measure for determining levies. This has generally proved to be a reasonable measure, but from time to time it has generated particular anomalies. For example, using assets as a valuation basis may not be appropriate for a financial institution which has a large volume of transactions but holds minimum assets and as a result is subject to the minimum levy, or where a participant otherwise does not conform to the general characteristics of other entities within the industry.

10.187 The proposal would address this by amending the levy imposition Acts to provide flexibility so that a valuation basis other than assets can be used by the Minister in determining levies on a case-by-case basis. This would be effected by changing the applicable reference from 'asset value' to 'levy base'.

10.188 As a consequence of this amendment, the proposal would also repeal subsection 7(4A) of the Life Insurance Supervisory Levy Imposition Act 1998 and subsection 7(4A) of the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998. These provide that the asset value of a life insurance company or ADI must exclude an amount equal to the total balances of all first home saver accounts (within the meaning of the First Home Saver Accounts Act 2008).

10.189 The provisions would not be desirable after references to 'asset value' are replaced with references to 'levy base'. After the change to 'levy base', the relevant adjustments could be done more properly in the ministerial annual determinations.

10.190 The proposal would provide flexibility in determining levies, where it is determined appropriate and equitable to do so. Beyond this, it is not expected to impose costs.

Proposal 3 - Subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act

10.191 Currently subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act 1998 establishes that the levy payable for a financial year by a trustee of a superannuation entity is due and payable on a business day that is specified in a notice given by APRA to the Treasurer, if the entity is a superannuation entity on 1 July of the financial year and became a superannuation entity before that day.

10.192 The proposal would amend subparagraph 9(2)(a)(i) of the Act to refer to 'a notice given by APRA to the trustee' instead of 'a notice given by APRA to the Treasurer'.

10.193 The proposal would correct an error in subparagraph 9(2)(a)(i) of the Act. It would not have a material impact on the operation of the Act or on business.

Conclusions and recommendations

10.194 The proposed amendments would improve APRA's ability to regulate bodies in the financial sector in accordance with prudential laws and enhance its ability to administer the FCS. The proposed amendments would also improve methodologies governing the determination of financial sector levies.

10.195 The amendments may impose compliance costs on business. However, these costs are overall expected to be low and outweighed by the benefits of the amendments. In addition, the amendments that may have a material impact on business would only be used in appropriate and exceptional circumstances.

Consultation

10.196 Under the terms of the intergovernmental Corporations Agreement 2002 the Commonwealth is required to consult with the Ministerial Council for Corporations on those amendments which would affect the scope or operation of the Corporations Act, prior to introducing them into Parliament. The Agreement also requires public consultation in certain circumstances.

10.197 In accordance with the requirements of the Agreement, an exposure draft of the Bill was released for public consultation between 19 January 2010 and 16 March 2010.

10.198 Nine submissions were received in response to consultation on the exposure draft of the Bill. There were eight public submissions and one confidential submission.

10.199 The banking and insurance industries raised no major concerns with the proposals contained in the exposure draft of the Bill.

10.200 CPA Australia, the Institute of Charted Accountants in Australia and the National Institute of Accountants (the Joint Accounting Bodies), supported the proposals in the exposure draft relating to auditors.

10.201 The superannuation industry raised concerns about the proposed offences relating to giving false or misleading information to auditors and elements of the proposed harmonised record keeping regime.

10.202 The proposed offences would be consistent with the equivalent offences applicable in the Corporations Act and other contexts and are drafted to enable the Court to take into account all relevant circumstances in determining whether they have been breached, including the circumstances in which the information is communicated to the auditor. In addition, the proposed offence provisions and penalties would apply to all superannuation entities, consistent with the present regime for regulating superannuation entities.

10.203 The record keeping regime would be consistent with that applicable to other industries regulated by APRA. In response to concerns that records may be able to be kept overseas, this would only be approved in appropriate circumstances. As to the requirement to notify APRA of the location of records, the form which APRA would develop for this purpose would specify requirements.

10.204 APRA, ASIC, the RBA and the ATO were also consulted regarding the proposals.

Implementation and review

Changes to the prudential regulation framework laws

10.205 The proposals will need to be implemented by passing amending legislation through the Commonwealth Parliament.

Enforcement

10.206 APRA would have responsibility for enforcing the amended Acts, with the exception of the Reserve Bank Act and certain provisions of the Superannuation Industry (Supervision) Act that are enforced by the Reserve Bank and ATO respectively.

10.207 There would be various penalties ranging from fines to imprisonment for breaching the amended laws.

Review

10.208 The effectiveness of the proposed amendments would be informally reviewed by Treasury after a sufficient period of time had elapsed.

Index

Schedule 1: Amendment of the Banking Act

Schedule 2: Amendment of the Insurance Act 1973

Schedule 3: Amendments of the Life Insurance Act 1995

Schedule 4: Amendment of other Acts

Schedule 5: Amendments relating to levies

Schedule 6: Technical amendments

Schedule 7: Repeal of Acts