House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Assistant Treasurer, the Hon Chris Bowen MP)

General outline and financial impact

1. Non-operating holding companies

Schedule 1 of the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009 (the Bill) introduces measures to regulate the non-operating holding companies (NOHCs) of life insurance companies.

This schedule amends the Life Insurance Act 1995 and other Acts to establish a prudential regulation regime for such NOHCs, modelled on the existing prudential regulation regime for authorised deposit-taking institutions (ADIs) and general insurers.

The regulatory regime will be administered by the Australian Prudential Regulation Authority (APRA).

Life insurance NOHCs will be required to be registered under the Life Insurance Act and be subject to APRA's supervision. They will be required to comply with prudential standards, reporting obligations, directions issued by APRA and investigations. APRA will be able to seek the disqualification of persons in specified positions in the body corporate. Registered NOHCs may also be liable to pay a financial institutions levy.

Date of effect: Items in Schedule 1 will apply from the day of proclamation. If any items do not commence within 6 months of the Bill receiving Royal Assent, these items will commence on the first day on or after the 6 month period.

Proposal announced: The measures were announced in the Treasurer's Press Release No. 061 of 2 June 2008 and in the Minister for Superannuation and Corporate Law's Press Release No. 018 of 2 March 2009.

Financial impact: Low. APRA's supervision of life insurance NOHCs is expected to be funded by industry on a user-pays basis. APRA is also expected to incur time and resource costs in developing new standards for life insurance NOHCs, however, these costs are not expected to be significant.

Compliance cost impact: Life insurance NOHCs will be required to become authorised under the Life Insurance Act and comply with Australia's prudential regime if they wish to continue to be NOHCs of registered life insurers in Australia. Such bodies corporate may also be liable to pay a financial institutions levy.

Summary of Regulation Impact Statement

Impact: Life insurance NOHCs will be required to become authorised under the Life Insurance Act and comply with Australia's prudential regime if they wish to continue to be NOHCs of registered life insurers in Australia.

Main points:

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Registration of NOHCs will enable APRA to develop capital requirements for the group on a consolidated basis. For well-run groups, the total capital requirement is expected to be similar to that currently held by the life insurance company. Capital requirements will be higher if the risks of the corporate group are higher.

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APRA may extend its current standard on governance for life companies to apply to NOHCs of life companies. The standard will be similar to that applying to NOHCs of ADIs and general insurers. NOHCs of life companies which are also NOHCs of ADIs and NOHCs of general insurers already meet the requirements for good governance.

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APRA may extend its current standard on fitness and propriety for life companies to apply to NOHCs of life companies. Many directors on the Board of the life company are also likely to be appointed to the Board of the NOHC and therefore already meet fit and proper criteria. Thus, the extra costs involved in meeting the criteria are likely to be low.

2. Injunctions

Schedule 2 of the Bill introduces measures to harmonise court injunction powers across prudential legislation ( Banking Act 1959, Insurance Act 1973 , Life Insurance Act and Superannuation Industry (Supervision) Act 1993 (SIS Act)) so that APRA can seek injunctions for conduct relating to the financial health of an entity.

APRA will be able to seek an injunction where a person engages, or proposes to engage, in contravention of the prudential Acts or breaches a condition on the authorisation or registration of a prudentially regulated entity.

The consistent range of injunctions that APRA will be able to seek are restraining, performance, consent and interim injunctions for conduct relating to breaches of the prudential Acts.

Date of effect: Amendments in Schedule 2 will apply from the day of Royal Assent.

Proposal announced: The measures were announced in the Treasurer's Press Release No. 061 of 2 June 2008 and in the Minister for Superannuation and Corporate Law's Press Release No. 018 of 2 March 2009.

Financial impact: Nil. APRA's supervision of prudentially regulated entities are expected to be funded by industry on a user-pays basis.

Compliance cost impact: Nil. These measures are not expected to increase the volume of injunctions sought by APRA.