House of Representatives

Explanatory Memorandum

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

17 Schedule 13: Amendment of the Life Insurance Act 1995

The purpose of Schedule 13 is to amend the Life Insurance Act 1995 (the Act) so as to separate responsibility for the administration of the Act between ASIC and APRA. All of the functions and powers under the Act were formerly performed and exercised by the Insurance and Superannuation Commissioner. Consistent with the amendments of the Insurance Act 1973, the Superannuation Industry (Supervision) Act 1993 and the Retirement Savings Accounts Act 1997, ASIC will take on responsibility for market integrity and consumer protection functions under the Act, and APRA will have responsibility for the prudential supervision of life insurance businesses.

Commencement

17.1 Parts 1 - 6 of Schedule 13 (comprising items 1 - 187) will commence on the commencement of the proposed Australian Prudential Regulation Authority Act 1998. Part 7 (comprising items 188 - 197) will commence on the day on which the proposed Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (the FSR Act) receives the Royal Assent.

Division of responsibility

Items 2 and 23

17.2 Item 2 of Schedule 13 allocates functions under the Act to ASIC or APRA, or to both ASIC and APRA. Item2 explains which regulator has the general administration of the various provisions of the Act. APRA, for example, has Parts3, Registration of Life Companies, 4,Statutory Funds of Life Companies, 5,Solvency and Capital Adequacy Standards, and 6,Financial Management of Life Companies. These powers relate to the prudential supervision of life companies, and endow APRA with functions and powers to enable it to supervise the financial security of these companies.

17.3 Proposed paragraph 7(1)(a) confers functions and powers on APRA.

17.4 Proposed paragraph 7(1)(b) confers functions and powers on ASIC. ASIC has the general administration of Part 10 (other than sections 206 210), which contains provisions about policies, such as section 211, which deals with when probate is required in order to pay out a life policy after the death of an insured person, and section 226, which requires life companies to maintain registers of their life policies in each State and Territory. These matters relate to market integrity and consumer protection in the life insurance business, and are therefore matters within the responsibility of ASIC.

17.5 Under section 216 of Part 10, ASIC will take responsibility for the administration of unclaimed money. Items 23 and 163-165 amend section 216 to reflect the transfer of this function to ASIC.

17.6 Proposed subsection 7(2) confers powers and duties which will be shared by ASIC and APRA.

17.7 Forexample, Part7 of the Act, which deals with investigatory powers, will be able to be used by both ASIC and APRA, because both regulators will need to have access to a full range of powers in order to conduct their supervisory functions under the Act.

17.8 Close liaison between ASIC and APRA will ensure that the regulators adopt a co-ordinated approach to their dealings with entities in which they both have an interest. The Minister will have the power to give ASIC or APRA directions about the performance or exercise of their functions or powers under the Act (proposed subsection 7(3)). This power is equivalent to subsection 3(3) of the Retirement Savings Accounts Act 1997 and subsection 6(3) of the Superannuation Industry (Supervision) Act 1993, and extends to the actions of ASIC when it is acting under the authority of the Act.

Change of regulator and regulator's name

Items 1, 3 22, 26 28, 30 187

17.9 Until the commencement of the proposed FSR Act, the Insurance and Superannuation Commissioner is responsible for supervising all aspects of compliance with the Act, and conducts both market integrity/consumer protection and prudential regulation. On commencement of Schedule 11 of the proposed FSR Act, the Insurance and Superannuation Commissioner Act 1987 will be repealed and the office of Insurance and Superannuation Commissioner will no longer exist.

17.10 Schedule 13 repeals references in the Act to the Insurance and Superannuation Commissioner and replaces them with references to ASIC or APRA where appropriate. Item 1 of Schedule 13 amends the objects clause of the Act (section 3) to provide that APRA and ASIC will supervise life companies. In the case of other provisions which are referable to both ASIC and APRA, the expression 'the Regulator' replaces references to the Insurance and Superannuation Commissioner. Item34 inserts a definition of 'Regulator' into the dictionary in the Schedule to the Act. Items30 and 31 insert definitions of 'APRA' and 'ASIC' into the Act.

17.11 Because the Act no longer refers to regulation conducted by a natural person (the Insurance and Superannuation Commissioner), but rather to the acts of an agency (ASIC or APRA), the Act no longer uses the expressions 'he or she', 'his or her' or 'him or her' when referring to the Commissioner. Amendments of the Act to refer to 'it', 'ASIC', 'APRA', or 'the Regulator' areinitems 3; 4; 5; 12; 16; 18; 20; 22 and 28.

17.12 Items 7 11, 14, 15, 17 and 19 of Schedule 13 also amend the Act to reflect the fact that regulation under the Act is no longer carried out by a natural person and that the relevant regulator may be either ASIC or APRA, or an authorised person acting on their behalf.

17.13 Item 6 substitutes subsection 127(1) with a provision enabling ASIC or APRA to appoint a member of its own or the other regulator's staff for the purpose of certain investigations under the Act. The expression 'member of staff' is defined in the dictionary in the Schedule to the Act (Item 32). The purpose of this definition is to refer readers to the relevant provisions of the APRA and ASIC Acts in order to interpret the use of those expressions in the Act.

17.14 The items which insert references to APRA in place of references to the Insurance and Superannuation Commissioner are: 35 136.

17.15 The items which insert references to ASIC in place of references to the Insurance and Superannuation Commissioner are: 161 165.

17.16 The items which insert references to the Regulator in place of references to the Insurance and Superannuation Commissioner are: 13; 166 187.

17.17 Items 21, 26 and 27 repeal references in the Act to the 'Australian Securities Commission' and substitute references to ASIC.

17.18 Item 33 inserts into the dictionary in the Schedule to the Act a definition of 'Prudential Rules'. This change enables the renaming of the Commissioner's rules, made under section 252 of the Act. Items 137 160 of Schedule 13 (Part 4 of the Schedule) repeal references in the Act to the 'Commissioner's rules' and substitute references to the 'Prudential Rules'.

Repeal of provisions

Items 24, 25 and 29

17.19 Some of the provisions in the Act deal with general administrative matters which are more appropriately dealt with in the Australian Securities and Investments Commission Act 1989 and the proposed Australian Prudential Authority Act 1998. For example, both these Acts include comprehensive provisions dealing with the delegation of powers by the regulators. For this reason, it is no longer necessary to include in the Act a separate power to delegate functions under the Act. Therefore, the delegation power in section 232 of the Act is repealed.

17.20 Similarly, the annual reporting responsibilities of APRA and ASIC under the Commonwealth Authorities and Companies Act 1997 are dealt with in the Australian Securities and Investments Commission Act 1989 and the proposed Australian Prudential Authority Act 1998. It is therefore no longer necessary to retain section 231 of the Act.

17.21 The secrecy provision in the Act (section 251) deals with the manner in which the ISC was required to treat information gathered by it about life companies in the course of conducting its functions. This provision is broadly consistent with the secrecy provisions administered by the ISC under other legislation for which it had responsibility, eg the Superannuation Industry (Supervision) Act 1993 and Retirement Savings Accounts Act 1997. However, it is different from the secrecy regime under which the ASC operated in relation to its corporate law functions.

17.22 The proposed Australian Prudential Authority Act 1998 contains a secrecy provision governing all of APRA's activities. Section 127 of the Australian Securities Commission Act 1989, which currently relates only to corporate regulatory functions, will be extended to cover ASIC's new functions in insurance and superannuation regulation, so that ASIC will be able to perform all of its functions under the same secrecy regime. Therefore section 251 is also repealed.

17.23 The items which repeal superfluous powers and functions in the Act are: 24, 25 and 29.

Additional amendments

17.24 Part 7 of the Schedule also includes two minor amendments to the Act.

17.25 The first amends sections 22 and 23 of the Act, to ensure that the original intentions of the requirements for minimum shareholders capital are met. The current provisions have been open to differing interpretations by the life industry. The purposes of the amendments are to remove the uncertainty in respect of interpretation and ensure consistency of application of the capital requirements to all companies. The amendment does not take effect until 31 December 1998 or later (depending on the company's financial year) in order to provide sufficient time for compliance.

17.26 The second amends the restriction the Act currently places on life insurers in relation to mortgaging or charging the assets of a statutory fund. The amendment removes the restriction in particular limited circumstances, the intention being to facilitate the internationally accepted practice of lodging cash or securities (as collateral) in association with derivatives transactions entered into via recognised trading exchanges. This amendment will enhance competitive neutrality for life companies in respect of derivative transactions while not diluting the security of policy owner interests.