House of Representatives

Explanatory Memorandum

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

18 Schedule 14: Amendment of the Reserve Bank Act 1959

Schedule 14 to the Bill proposes a range of amendments to the Reserve Bank Act 1959 (the Act). Included among these are provisions establishing the PSB, which will operate as the policy making board of the RBA in relation to the payments system. In this context, the PSB will develop policy for the payments system consistent with the objectives of promoting competition and efficiency in the payments system while controlling risk and ensuring the stability of the financial system. The establishment of the PSB within the RBA complements proposed legislation presented in the Payment Systems (Regulation) Bill 1998 and will substantially increase the accountability of the RBA in relation to its role in the payments system.

Another significant measure proposed in Schedule 14 is a reduction in the size of the RBA Board from 11 to 9 members (due to a reduction in the number of Deputy Governor positions from 2 to 1, and a reduction in the number of other positions from 7to 6). Schedule 14 also includes a number of miscellaneous amendments to the Act which are largely consequential upon other elements of the financial sector reform package or seek to rationalise or modernise existing provisions that have become dated or obsolete. The diagram below shows the relationship of the RBA with its two Boards.

Items 16, 17, 18, 22, 23, 24, 35, 49, 56, 57, 63, and 64

18.1 Throughout this Bill there are numerous minor amendments that arise due to the establishment of the PSB. There will be two parallel Boards operating under the Act, each with its own specific responsibilities. These items amend the Act to specify the particular Board that is responsible in each instance.

Items 5, 25, 27, 28, 29, 36, 39, 41, 42, 43, 45, 46, 47, 55, 61, and 62.

18.2 These items amend the Act to reduce the number of Deputy Governor positions from 2 to 1.

Items 30, 32, and 40

18.3 In the interests of administrative efficiency, and due to the transfer of some responsibilities to APRA, the size of the Board will be reduced from 11 to 9 members. The reduction will be achieved via the non-renewal of 1 of the 2 Deputy Governor positions and the non-renewal of 1 of the 7 non ex officio positions. As a result, a quorum of the RBA Board will be reduced to 5 members (previously 6 members). These items reflect those changes.

Items 1, 2, 3, 6, 7, 8, and 9

18.4 These items provide a range of new definitions required in the Act consequent upon the creation of APRA and the PSB and their intended functions. Examples include definitions for monetary and banking policy, payment system, and payments system policy.

Item 4

18.5 This item repeals the single definition of the RBA Board. The definitions of the two Boards will be outlined in sections 8A, 10, 10A and 10B of the Act.

Item 10

18.6 This item states that a reference to another Act includes a reference to regulations under that Act.

Items 11, and 12

18.7 These items divide Part II of the Act into two divisions to enhance readability. In addition, they append existing Part II provisions to reflect the creation of the PSB and the enactment of the Commonwealth Authorities and Companies Act 1997. Item 12 provides that, for the purposes of the CAC Act, the RBA Board (rather than the PSB) are the directors of the Bank and as such have responsibilities for, amongst other things, financial reporting and the overall administration of the RBA. The PSB is, however, subject to certain provisions of the CAC Act in respect to conflicts of interest and other disclosures.

Items 13, and 14

18.8 These items amend section 8 (describing the general powers of the RBA) primarily to accommodate the additional powers conferred on the RBA under the Payment Systems (Regulation) Act 1998.

Item 15

18.9 This item distinguishes the responsibilities of the RBA Board and the PSB. The RBA Board will be responsible for monetary and banking policy while the PSB will be responsible for payments system policy.

Item 19

18.10 This item amends subsection 10(2) of the Act, describing the functions of the RBA Board, to accommodate the intended transfer of RBA powers under the Banking Act 1959 to APRA (see Australian Prudential Regulation Authority Bill 1998).

18.11 The item makes clear that the RBA Board will not control the powers of the RBA with respect to the proposed Payment Systems (Regulation) Act 1998 and the proposed Payment Systems and Netting Act 1998; these are the responsibility of the PSB.

Item 20

18.12 This item formally establishes the PSB (proposed section 10A), outlines its intended functions and responsibilities (proposed section 10B), and describes procedures for resolving differences between the RBA Board and the PSB (proposed section 10C).

18.13 The PSB's duties will be the supervision of the payments system in order to minimise risk, promote efficiency and to enhance competition contingent upon maintaining the stability of the financial system.

18.14 Where there is a conflict between the two Boards on a policy issue, the RBA Board will generally prevail to the extent of any inconsistency between the two Boards' objectives. If there is a dispute as to which Board is responsible for determining policy on a particular matter, however, the RBA Governor (who is Chair of both Boards) has responsibility for its resolution.

18.15 The policies of both Boards are subject to procedures for the resolution of disagreements with the Government (section 11 of the Act). Specifically, if the Treasurer and the RBA Board, or the Treasurer and the PSB, are unable to reach agreement on a matter of policy, the relevant Board will submit a statement to the Treasurer on the matter in dispute. The Treasurer may then recommend to the Governor-General that the RBA be directed to comply with a policy. Should the Governor-General in Council agree, the relevant Board would implement the policy of the Treasurer in accordance with the Governor-General's direction. The Treasurer will ensure that copies of the relevant documentation (including the Treasurer's statement of the reason for the disagreement) are tabled in the Senate and the House of Representatives within 15 sitting days.

Item 21

18.16 In the interests of transparency and accountability, this item will amend subsection11(1) of the Act to require the RBA Board and the PSB to periodically report to the Government on their respective policies. Such reports will be provided at least annually.

Item 26

18.17 This item amends a reference regarding the responsibilities of the Governor so that he or she is subject to policy direction by both the RBA Board and the PSB.

Item 31

18.18 This item adds the specification that appointments by the Governor-General are to be made in writing.

Items 33 and 34

18.19 RBA Board members are currently appointed for a period of 5years. Where Board members vacate their position prior to the completion of their five-year term, the Act caps the length of any replacement appointment to the residual duration of the previous Board member's appointment. This arrangement is inflexible and potentially adds unnecessary iterations to the Board appointment process. To enhance flexibility associated with RBA Board appointments, item 33 will amend section 14 of the Act to provide for flexible terms of up to 5years. This flexibility will extend to all Board appointments under the Act. This arrangement is consistent with the proposed Board appointment arrangements for APRA and the PSB.

Item 37

18.20 This item clarifies the issue of the oath and secrecy declaration to be made by the members of the two Boards. If a person is a member of both Boards (for example the RBA Governor), the item will ensure that the person is not required to take the same oath and secrecy declarations twice.

Item 38

18.21 Section 19 of the Act deals with the operation of the RBA Board, and the validity thereof, when there is a vacancy on the Board. This section is now unnecessary because of subsection 33(2B) of the Acts Interpretation Act 1901. The item will repeal the redundant provision.

Item 44

18.22 Item 44 provides additional provisions relating to the conduct of RBA Board. To ensure consistency with provisions drafted for the PSB (see item 48, Division 2), the item will amend section 22 of the Act to provide for similar provisions to apply for the conduct of meetings of the RBA Board. This provision will permit the RBA Board to pass resolutions using a 'flying minute'; that is, without holding a meeting.

Item 48

18.23 This item will provide for the inclusion of Part IIIA of the Act entitled "The Payments System Board". Part IIIA will describe various administrative issues and procedures applicable to the PSB. The item will create three divisions under Part IIIA, the proposed contents of which are discussed below.

Division 1 - The Members of the Payments System Board

18.24 This Division outlines the composition of the PSB, procedures for nominations to the PSB, and governance issues.

18.25 The PSB will number 8 members comprising the RBA Governor, one other representative of the RBA, one representative of APRA, and 5 other members (proposed section 25A). A quorum of the PSB will be 5 members.

18.26 The representative of the RBA is to be appointed by the Governor and must be either a sitting member of the RBA Board and/or a staff member of the RBA (proposed section25B). The representative of APRA will be appointed by the Chief Executive Officer of APRA. The Governor-General in Council will appoint the other 5(independent) members for a period of up to 5 years.

18.27 It is envisaged that the members appointed by the GovernorGeneral will be independent and free of any material direct conflicts of interest. This should not preclude people with substantial past industry experience and expertise in the fields of the payments system and banking regulation. Disclosures of material personal interest will be made in accordance with section21 of the Commonwealth Authorities and Companies Act 1997.

18.28 The Chair of the PSB will be the Governor of the RBA (proposed section 25C). The Deputy Chair is to be the other representative of the RBA (proposed section 25D). The Deputy Chair is to act in place of the Governor when the Governor is unable to attend PSB meetings.

18.29 Some of the deliberations of the PSB will be confidential and may be of commercial value and as such the importance of secrecy is vital. Accordingly, PSB members will be required to make an oath or affirmation of allegiance and a declaration of secrecy (proposed section 25E) in accordance with section 16 of the Act (as for RBA Board members).

Division 2 Meetings

18.30 This Division (proposed sections 25F to 25H) outlines the procedures for PSB meetings, defines a quorum (5 members), defines the rules for voting and gives the Chair both a deliberative and casting vote. The process of passing Board resolutions without meetings is also defined. These provisions are identical to those that apply to the RBA Board under sections 21 (note that amendments to section 21 are proposed in items 40 to 43), 22A and 22B.

18.31 Of note, proposed section 25H (Resolutions without meetings) will permit 'flying minutes' and other forms of resolutions to be passed outside of formal meetings. The provisions are similar to those provided under section 26 of the Air Services Act 1995.

Division 3 - Other administrative provisions.

18.32 The remuneration of the five other members of the PSB is to be determined by the Remuneration Tribunal subject to the Remuneration Tribunal Act 1973 (proposed section 25I). This is equivalent to the conditions applying to the RBA Board. The members that receive full-time salaries from the RBA or APRA are not eligible for additional remuneration as a member of the PSB.

18.33 Leave of absence may be granted to members of the PSB on conditions determined by it (proposed section 25J).

18.34 A member of the PSB may resign by providing a written resignation to the person who appointed that member (proposed section 25K).

18.35 The appointment of the RBA representative (other than the Governor) may be terminated at any time by the RBA Governor; the appointment of the APRA representative may be terminated at any time by the Chief Executive of APRA; and the appointment of the five other members may be terminated by the GovernorGeneral for misbehaviour or mental incapacity (and must be terminated if any of the conditions in proposed section 25L(4) are met). The APRA representative and the RBA representative have their memberships terminated automatically if they cease to be a member/employee of APRA or the RBA respectively.

Item 50

18.36 Section 31 of the RBA Act 1959 requires the RBA to publish sterling exchange rates. This is no longer necessary as a wide range of exchange rates is published daily in the financial press. This item will repeal section 31.

Item 51

18.37 This item corrects the Act in section 37 by changing 'bank' to 'Bank' the correct form for the RBA.

Item 52

18.38 Section 35 of the Act describes the denomination of notes that may be issued in Australia by the RBA. The $100 note is not included at present. This item amends the section to reflect the introduction of the $100 note (which is presently authorised through a notice from the Treasurer in the Gazette).

Item 53

18.39 Section 44 of the Act provides that a person shall not issue a Bill or note for the payment of money to bearer on demand and intended for circulation. The present penalty for an offence against this part is 10 penalty units. This item will upwardly revise this penalty to 50 penalty units.

Item 54

18.40 Section 45 of the Act provides that any reference to Wednesday in Part V of the Act shall be read as a reference to such other day as prescribed. Section 45 is archaic as there is no longer a reference to Wednesday in Part V of the Act. The item accordingly repeals section 45.

Items 58, 59, 60, and 65

18.41 These items will amend the secrecy provision contained in sections 79A(1), (2) and (8). Definitions of "protected document", "protected information" and other points make reference to various other Acts under which the RBA may be privy to confidential information. These items will amend these provisions for completeness with the proposed legislation (and to reflect the intended repeal of another Act the Banks (Shareholdings) Act 1972).

Item 66

18.42 The Act presently provides that the RBA annual report will include a report on any investigations on prudential matters pursuant to section 61 of the Banking Act 1959. With the reallocation of prudential responsibilities, APRA will now assume this role with the result that this part should be repealed. Section 81(2) concerning the disclosure of reports with respect to the affairs of an individual bank or customer, arising from investigations reported under section 81(1), becomes redundant with the repeal of section 81(1). Item 66 will repeal section 81.

Item 67

18.43 Item 67 amends section 85 concerning the affixing of the RBA seal to documentation. The provision enables the RBA seal to be kept in such custody as the RBA Board directs and ensures that the seal is not used except as authorised by the RBA Board. This item will expressly allow the RBA Board to decide how the seal is to be affixed, and to control the circumstances of its use.

Item 68

18.44 This item will provide for a higher penalty for offences against regulations, consistent with standard practice. The GovernorGeneral will be able to prescribe penalties not exceeding 10 penalty units as opposed to the present penalty that must not exceed $100.