House of Representatives

Explanatory Memorandum

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

Chapter 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APRA's ability to appropriately monitor an entity, or act under relevant laws, after the entity's authorisation has been revoked.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.