Explanatory Memorandum
(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP)Schedule 1 - Trans-Tasman cooperation
Australian Prudential Regulation Authority Act 1998
The Bill inserts several new definitions into subsection 3(1) of the APRA Act to describe key concepts in the provisions relating to trans-Tasman cooperation.
The definitions of an action that is likely to have a detrimental effect on financial system stability in New Zealand , a New Zealand financial institution and an outsourcing arrangement combine to clarify which types of actions APRA should avoid [Schedule 1, items 1-3] . Outsourcing arrangements have been identified as carrying a particular risk to financial system stability in New Zealand.
The definition of a prescribed New Zealand authority describes APRA's New Zealand counterpart(s) with which it is required to cooperate [Schedule 1, item 4] . The definition includes the RBNZ, which is New Zealand's current prudential supervisor. However, other provisions to describe the functions of a relevant New Zealand agency and a regulation making power are provided for flexibility in case any changes are made in the future to responsibilities of the RBNZ with respect to financial system stability or prudential regulation.
Section 8 of the APRA Act outlines the statutory responsibilities of APRA. Under subsection 8(2), APRA is required to balance the objectives of financial safety, efficiency, competition, contestability and competitive neutrality when performing and exercising its functions and powers. While promoting financial system stability in Australia is implied in this objective - especially by financial safety - this Bill makes it explicit. Financial system stability is a high-level objective of financial sector regulation because of the potential implications of instability for the broader economy.
The amendment to subsection 8(2) clarifies that one of the things APRA is required to do in performing and exercising its functions and powers is to promote financial system stability in Australia. [Schedule 1, item 5] .
This amendment also supports the introduction of legislation in New Zealand that would require the RBNZ to consult APRA on the implications of the RBNZ's actions for financial system stability in Australia.
Australia's legislation is being updated to reflect the high level of commercial integration of Australia's and New Zealand's markets for banking services.
Currently, there is no explicit requirement in Australia's legislation to consider New Zealand's interests. While it is unlikely, there is a risk that APRA could be required to take actions that impact the New Zealand operations of a branch or subsidiary of an APRA-regulated institution with potentially adverse consequences for financial system stability in New Zealand. Given the interdependence of Australia's and New Zealand's financial systems it is desirable to limit such risk.
As part of efforts to increase efficiency and reduce costs, financial institutions are increasingly looking to centralise systems and processing, including through outsourcing such functions. In the trans-Tasman context, this has generated particular concerns relating to the impact of APRA's actions on an Australian financial institution which provides services to subsidiaries and branches operating in New Zealand. By addressing these concerns, the measures in this Bill may afford financial institutions, notably banks, greater flexibility in determining how their operations within the trans-Tasman market are structured, bringing compliance cost and efficiency benefits.
Item 6 outlines APRA's obligations in relation to trans-Tasman cooperation [Schedule 1, item 6, section 8A] . Given the interdependence of the Australian and New Zealand financial systems, it is important that APRA considers the implications of its actions for New Zealand.
APRA is to support the RBNZ in the performance of its statutory responsibilities relating to financial system stability and prudential regulation. [Schedule 1, item 6, paragraph 8A(1)(a)] .
APRA is required to avoid taking actions, to the extent reasonably practicable in the circumstances, which could have adverse consequences for financial system stability in New Zealand. [Schedule 1, item 6, paragraph 8A(1)(b)] .
Financial system stability is a high level objective of financial sector regulation in both Australia and New Zealand because of the potential implications of instability for both economies.
APRA's obligations that relate to trans-Tasman cooperation should be balanced by APRA against its other objectives, in performing and exercising its functions and powers. That means that the trans-Tasman cooperation obligations are not intended to override APRA's existing statutory obligations. [Schedule 1, item 6, subsection 8A(2)] .
As APRA cannot always be expected to make a complete assessment of the potential impacts of actions on financial system stability in New Zealand, it is appropriate that this judgement be informed by the RBNZ, which is charged with responsibility for financial system stability in New Zealand. Therefore, APRA is required to consult the RBNZ on proposed actions that could have implications for financial system stability in New Zealand. [Schedule 1, item 6, subsection 8A(3)] .
Some provisions are qualified for reasonableness because there may be circumstances, where an action must be taken by APRA even though it may have adverse implications or unintended consequences for New Zealand [Schedule 1, item 6, paragraph 8A(1)(b) and subsection 8A(3)] . For instance, an urgent decision may not leave APRA with time to consult before it takes an action. However, APRA is expected to advise the RBNZ of this action as soon as possible to meet its broader obligations.
To ensure that a regulated institution cannot avoid adhering to regulatory requirements, this Bill makes it clear that the exercise of a power is still valid, were APRA to not perform an obligation relating to trans-Tasman cooperation because of the circumstances. [Schedule 1, item 6, subsection 8A(4)] .
While these provisions are intended to be of general application, there is a specific reference to the provision of outsourced services from an APRA-regulated institution to a New Zealand bank to provide greater legal certainty that this is covered by the requirement for APRA to avoid detriment to financial system stability in New Zealand. [Schedule 1, items 1-3 and item 6, subsection 3(1) and paragraph 8A(1)(b)] .
Section 46 is amended to clarify that APRA can second staff from the RBNZ and other New Zealand counterpart agencies. This ensures that staff seconded from the RBNZ can perform the same functions as if they were employed by APRA and will contribute to supervisory cooperation by simplifying arrangements for such secondments. [Schedule 1, item 7, section 46] .
The Bill inserts several new definitions into subsection 5(1) of the Banking Act to describe key concepts in the provisions relating to trans-Tasman cooperation.
The definitions of an action that is likely to have a detrimental effect on financial system stability in New Zealand , a New Zealand registered bank and an outsourcing arrangement are inserted for the same purpose as outlined in paragraph 4.2. [Schedule 1, items 8-10] .
A definition of a prescribed New Zealand authority is inserted to describe APRA's New Zealand counterpart(s) with which it is required to cooperate in banking supervision [Schedule 1, item 11] . The definition will be the same as in the APRA Act as outlined in paragraph 4.3.
The definition of prudential matters is amended so that it reflects APRA's new obligations relating to financial system stability in New Zealand and enables APRA to exercise its powers in the Banking Act for the purposes of supporting the RBNZ. The definition of prudential matters is a key element in describing the scope and substance of prudential supervision of authorised deposit-taking institutions (ADIs). [Schedule 1, item 12] .
A regulation that is made under Section 11A is now called a prudential requirement regulation to allow the term prudential regulation to be used in the Banking Act in a manner consistent with its ordinary meaning [Schedule 1, items 13-14] . The amendment to the definition of a prudential regulation in the Banking Act has resulted in some technical amendments to APRA's directions powers. [Schedule 1, items 17 and 19, paragraphs 11CA(1)(a), 11CA(1)(aa) and 11CA(2)(a)] .
The ability of APRA to revoke an authority of an ADI and an authorised non-operating holding company (NOHC) in the Banking Act is related to the contravention of a material prudential requirement(s), or can be considered if allowing the authority to continue would not be consistent with the high level objectives of banking supervision.
This Bill makes it explicit that one of APRA's high level statutory responsibilities relates to financial system stability in Australia, subsections 9A(2) and 11AB(2) of the Banking Act - which relate to the revocation of an ADI authority and a NOHC authority respectively - is updated to reflect this. [Schedule 1, items 15-16, paragraphs 9A(2)(ba) and 11AB(2)(ca)] .
APRA may give directions in certain circumstances
Subsection 11CA(1) of the Banking Act outlines the circumstances under which APRA may issue directions to a bank. These circumstances are linked to the contravention of a material prudential requirement(s) and the high level objectives of banking supervision.
APRA can issue a direction if it considers that the conduct of an ADI or NOHC may be a risk to financial system stability in Australia to reflect the amendment to APRA's statutory responsibilities. [Schedule 1, item 18, paragraph 11CA(1)(da)] .
APRA is required to protect depositors in performing and exercising its powers and functions under Division 2 of the Banking Act. Most of the provisions in this Division relate to distressed ADIs and include the powers and functions of statutory managers and administrators.
The existing provision under Section 12 of the Banking Act is renumbered for the purpose of allowing additional provisions to be inserted. [Schedule 1, item 20]
The potential for problems in a distressed ADI to have flow-on effects in the financial system more broadly, including for depositors in other ADIs, is a risk that prudential regulation aims to address. Section 12 of the Banking Act is amended to clarify that one of APRA's objectives is to contribute to the maintenance of financial system stability in Australia [Schedule 1, item 21, subsection 12(1)] . This also ensures that there is consistency between references to financial system stability in Australia and New Zealand.
It is important that APRA takes into account its trans-Tasman obligations in performing and exercising its powers and functions under Division 2. This item also inserts a provision that ensures it is clear that APRA's new obligations relating to trans-Tasman cooperation apply to the provisions in the Banking Act where depositor protection exists [Schedule 1, item 22, subsection 12(2)] . This provision should be balanced against APRA's other statutory duties under Division 2, but not override them.
Administrator in control - additional duties where action may affect financial system stability in New Zealand
APRA, when acting as a statutory manager, is bound by the amendments to the APRA Act and Section 12 of the Banking Act that encompass its responsibilities to support the RBNZ and avoid taking actions that may have a detrimental impact on financial system stability in New Zealand. This Bill ensures that an administrator (which is a statutory manager that is not APRA) has similar obligations, where an action by the administrator may have implications for financial system stability in New Zealand.
A requirement is inserted for an administrator to advise APRA if they have reasonable cause to believe that the exercise of a function or power by them is likely to have a detrimental effect on financial system stability in New Zealand. [Schedule 1, item 23, subsection 14DA(1)] .
An administrator will not be able to exercise a function or power that may have a detrimental effect without receiving APRA's consent. This consent must be in writing to ensure it is clear whether APRA's consent has been granted. Also, by providing written consent, APRA's obligation to consult with the RBNZ is on the record. [Schedule 1, item 23, paragraph 14DA(1)(b)] .
These additional duties are qualified to take into account circumstances where it may not be reasonably practicable for an administrator to meet its obligations, particularly if a decision needs to made urgently [Schedule 1, item 23, subsection 14DA(2)] . However, an administrator is expected to advise APRA as early as possible of the action.
Consistent with the requirements inserted in the APRA Act regarding trans-Tasman cooperation, APRA is obliged to consult with the RBNZ on advice it receives from an administrator under these provisions before granting written consent to an administrator [Schedule 1, item 23, subsection 14DA(4)] . This obligation is also qualified for reasonableness because there may be circumstances where an action must be taken by APRA, notwithstanding the intention, that may have adverse implications or unintended consequences for New Zealand (such as, for similar reasons as outlined in paragraph 4.16). [Schedule 1, item 23, subsection 14DA(5)] .
Allowing an administrator to consult the RBNZ directly allows it to directly clarify whether a proposed action might have implications for financial system stability in New Zealand and reduces any legal uncertainty over its ability to do so [Schedule 1, item 23, subsection 14DA(7)] . It also provides opportunity for the RBNZ to be advised at an earlier stage than if it had to wait for APRA to formally receive and pass on details from an administrator.
The performance of a function or the exercise of a power by an administrator or APRA is not invalid because of the failure of either to comply with these provisions [Schedule 1, item 23, subsections 3 and 6] . This is to ensure that an action by an administrator cannot be challenged on the basis of the failure of APRA or the administrator to meet its trans-Tasman obligations. Such actions might otherwise hinder the speedy and efficient resolution of problems with an ADI. The provisions also reflect that trans-Tasman obligations are intended to be balanced against other objectives, not override them.
Financial Sector (Transfers of Business) Act 1999
Application of sections 8 and 8A of the APRA Act
This provision ensures that it is clear that APRA's high level objectives, including its new obligations relating to trans-Tasman cooperation, apply to the performance and exercise of functions and powers under FSTOBA. [Schedule 1, item 24, section 7A] .
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