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 10 - Regulation Impact Statement

Background

Scope of the Regulation Impact Statement

10.1 This Regulation Impact Statement addresses proposed amendments to the Australian Prudential Regulation Authority Act 1998, the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995, the Superannuation Industry (Supervision) Act 1993, the Financial Sector (Business Transfer and Group Restructure) Act 1999, the Financial Sector (Collection of Data) Act 2001 and other Acts, relating to Australia's crisis management and prudential framework. The proposed amendments suggest changes to legislation or regulations affecting business. Hence, the changes are addressed in this Regulation Impact Statement ('RIS').

Prudential regulation and administration of the FCS

10.2 The purpose of the Australian Prudential Regulation Authority (APRA) is to:

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regulate bodies in the financial sector in accordance with laws of the Commonwealth that provide for prudential regulation or for retirement income standards;

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administer the Financial Claims Scheme (FCS) provided for in the Banking Act and Insurance Act; and

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develop the administrative practices and procedures to be applied in performing that regulatory role and administration.

10.3 In performing and exercising its functions and powers, APRA is required to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing those objectives, is to promote financial system stability in Australia.

Prudential regulation

10.4 Prudential regulation aims to ensure that, under all reasonable circumstances, financial promises made by regulated entities are met within stable, efficient and competitive financial markets.

10.5 It is aimed at ensuring that the quality of a financial institution's systems for identifying, measuring and managing the various risks in its business act to reduce the risk of failure and that, where failure does occur, public confidence in the financial system is maintained while the failure is appropriately managed.

10.6 Australia's prudential framework is primarily risk-based, consultative and consistent with international best practice. This risk-based approach recognises that management and Boards of supervised institutions are primarily responsible for the financial soundness of their respective institution.

10.7 Where difficulties arise within a regulated financial institution, intervention by the regulator will be proportionate to the seriousness of the problem and level of risk to depositors, policyholders and industry.

10.8 APRA has a range of supervisory powers which escalate from preventive to corrective and through to failure management.

Preventive powers

Authorisation

10.9 APRA has an authorisation and minimum standard framework that applies to entities seeking to operate in the regulated market. Minimum standards for entry and participation in regulated financial markets give consumers greater confidence, even in the absence of full information, that financial promises will be met. This, in turn, promotes the safety and stability of the financial system as a whole.

Fitness and propriety

10.10 Under the prudential Acts, where APRA is satisfied that a director or senior manager does not meet fit and proper standards, it has the power to seek their disqualification or direct their removal. It can also remove an actuary or auditor or seek their disqualification.

Prudential standards

10.11 Prudential standards help improve the clarity and certainty of prudential regulation and maintain flexibility in the prudential regulation regime. APRA is able to determine standards that apply to authorised deposit-taking institutions (ADIs) and general insurers, as well as subsidiaries and non-operating holding companies (NOHCs) of those entities. APRA is also able to determine prudential standards for life insurance companies.

10.12 These standards are complemented by monitoring of regulated entities and a compliance regime that encourages their continuing adherence to the standards. This ensures that institutional and regulatory arrangements are working as intended and assists in the early detection of problems. Remedial action is taken in circumstances where an entity or individual fails to meet the minimum requirements.

10.13 APRA has powers to require information from regulated entities regarding their operations. This information forms the basis of assessments by APRA of the entity's prudential status and assists in the early detection of any emerging risks.

Correction powers

10.14 Effective enforcement powers ensure that APRA is able to compel compliance with, and rectify breaches of, minimum standards. APRA is equipped with various enforcement powers and sanctions including the power to enter court-enforceable undertakings, issue directions, and seek court injunctions to enable it to respond proportionately to compliance issues.

Court-enforceable undertakings

10.15 This power is intended to enable APRA to formalise and, if necessary, enforce an agreement that is reached with market participants. The Banking, Insurance and Life Insurance Acts enable APRA to accept an enforceable undertaking that relates to a matter regarding which APRA has a function or power under the Act.

Issuing of directions

10.16 In most situations, APRA is able to address prudential concerns by working cooperatively with the Board and management of a supervised entity, thereby allowing the Board and senior management to maintain full responsibility for decisions made by the entity.

10.17 However, there may be times where APRA judges that it is necessary to use more direct tools to rectify or manage prudential concerns. Directions powers enable APRA to specify how an entity should resolve compliance issues and therefore enable APRA to compel an entity to take specific action to address prudential risks that have been identified.

Court injunctions

10.18 The power to seek a court injunction enables APRA to act immediately to protect relevant interests in very serious cases and where other enforcement powers are insufficient. The Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts each contain a power for APRA to seek a court injunction.

Failure management

10.19 Recognising that prudential regulation does not (and, in a market economy, cannot) have a 'no failure' objective, it is important that APRA has effective powers to intervene when regulated financial institutions are at risk of experiencing financial difficulties that threaten their ongoing viability, and to ensure the effective resolution of the situation in a manner which maintains the stability of the financial system and protects depositors and policyholders.

10.20 Key aspects of APRA's failure management powers include the ability to apply for transfer of business of an entity that is in financial distress to a healthy institution; initiate external administration; and initiate wind-up.

Transfer of business

10.21 Transferring the business of an entity in financial distress to a healthy institution may be a less disruptive and costly means of resolving problems in financial institutions than wind-up.

10.22 The compulsory transfer of business powers in relation to ADIs are contained in the Financial Sector (Business Transfer and Group Restructure) Act, and for life insurers are contained in the Financial Sector (Business Transfer and Group Restructure) Act and the Life Insurance Act.

10.23 APRA currently has limited compulsory transfer powers in relation to general insurers under the Insurance Act.

External administration

10.24 Under the Banking Act, APRA can appoint an administrator (known as a statutory manager) if an ADI appears likely to become, or becomes, unable to meet its obligations or suspends payment.

10.25 The Insurance and Life Insurance Acts contain a model of external administration (known as judicial management) which allows APRA to apply to a court for an order that a life insurer or general insurer be placed under judicial management on a number of grounds. These include where the entity indicates that such action is in the interests of policyholders or where the company is, or is likely to become, unable to meet its policy or other liabilities.

10.26 The Banking, Insurance and Life Insurance Acts empower a statutory or judicial manager to recapitalise a financial institution by issuing new shares, selling shares, cancelling existing shares or varying or restricting rights attached to shares. A statutory or judicial manager may also alter the governance arrangements of an ADI or insurer, respectively.

Wind-up

10.27 The exercise of this power varies across each of the prudentially regulated industries. For ADIs, APRA may initiate wind-up where an entity is insolvent, or where a statutory manager is in control of the ADI's business and APRA considers that the ADI could not be restored to solvency within a reasonable period. The wind-up is undertaken under corporations law, with depositors receiving first preference over the assets of the ADI.

10.28 In the case of life insurers APRA may initiate wind-up of an entity where it has conducted an investigation and is satisfied that it is necessary or proper for a wind-up application to be made to the court, or where the court has accepted the recommendation of the judicial manager that the life insurer be wound up. The application for wind-up is made under the Life Insurance Act, with policy owners receiving first preference over the statutory assets of the life insurer.

10.29 APRA may apply for the wind-up of a general insurer under the Insurance Act and the Corporations Act 2001 where the insurer is insolvent, or where an investigation into the insurer has been completed and the company's liabilities exceed its assets. The general insurer's creditors in Australia receive preference over its assets in Australia.

Financial Claims Scheme

10.30 The Financial System Legislation Amendment (FCS and Other Measures) Act 2008 ( FCS Act) introduced the FCS.

10.31 The FCS is administered by APRA and provides depositors in Australian-incorporated ADIs with a guarantee of their deposits to a threshold prescribed by regulations. The threshold is currently set at $1 million per account-holder per ADI.

10.32 In addition, the FCS provides compensation to eligible policyholders with claims against a failed general insurer.

Data collection powers

10.33 The Financial Sector (Collection of Data) Act (FSCODA) aims to ensure that APRA can collect the data it requires for the purposes of its prudential functions. It also aims to harmonise and increase the flexibility of the data collection and publishing regimes and to recognise APRA as the central repository for the collection of financial data.

10.34 The FSCODA covers the following broad areas:

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the entities covered by the Act;

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the registration of certain corporations and the obligations on those corporations;

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the power for APRA to determine reporting standards that will require compliance through the provision of reporting documents by financial sector entities; and

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the application of the Commonwealth's criminal code to certain offences in the Act.

10.35 The FSCODA allows APRA to develop an understanding of the condition of financial institutions and to monitor their compliance with prudential requirements.

10.36 The collection of financial data under the FSCODA also enables general research and analysis to be undertaken into trends and pressures affecting the financial sector and the publication of relevant information.

Levy arrangements

10.37 APRA's capacity to undertake the various elements of its prudential supervision task is funded through industry levies which are determined annually by the Government.

10.38 The levies also cover consumer protection and market integrity functions of the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO) in relation to APRA-regulated institutions.

10.39 The legislative framework for levies is comprised of the following arrangements:

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the Financial Institutions Supervisory Levies Collection Act 1998 which prescribes the timing of payment and the collection of levies; and

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a series of imposition Acts which impose levies on regulated entities and prescribes related matters.

10.40 The imposition Acts are the:

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Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998;

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Authorised Non-operating Holding Companies Supervisory Levy Imposition Act 1998;

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Life Insurance Supervisory Levy Imposition Act 1998;

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General Insurance Supervisory Levy Imposition Act 1998;

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Retirement Savings Account Providers Supervisory Levy Imposition Act 1998;

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Superannuation Supervisory Levy Imposition Act 1998; and

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First Home Saver Account Providers Supervisory Levy Imposition Act 2008.

Assessing the problem

10.41 On 12 October 2008, the Government introduced the FCS Act, which established the FCS and strengthened APRA's powers to manage a financial sector crisis.

10.42 APRA and Treasury have undertaken work to operationalise the FCS and to review Australia's prudential framework to ensure that it provides for the effective supervision of, and where necessary, management of distress at a prudentially regulated institution.

10.43 This is consistent with developments overseas where countries such as the UK and the US have sought to review and strengthen their financial regulatory frameworks.

10.44 The majority of proposals considered by this RIS would address matters identified during the above process. The amendments would address inconsistencies between the laws which APRA administers, and between those and other laws. They are also required to ensure that APRA can take appropriate action to assist in the prevention of, and respond to, institutional distress.

10.45 The importance of consistent prudential regulations was recognised by the 1997 Financial Systems Inquiry (Wallis inquiry). The inquiry found that Australian financial service providers wanting to compete in global markets would be disadvantaged by inconsistencies in the regulatory framework, and that inconsistent regulation may create opportunities for regulatory arbitrage. The Inquiry also found that Australia's financial sector regulatory framework was fragmented and unnecessarily complex, leading to increased compliance costs for financial service providers.

10.46 It was following the inquiry that the government moved to establish APRA, a single regulator for authorised ADIs, insurers and superannuation entities, which was tasked with their prudential regulation.

10.47 Reforms since the Inquiry have continued to harmonise Australia's regulatory framework by removing inconsistencies, unnecessary complexity, and fragmentation. The proposals outlined in this RIS would continue this process to the benefit of business, consumers and the financial system.

10.48 This RIS also considers proposed amendments to the levy arrangements that were recommended by a Government review of the arrangements or which are consequential to making those amendments.

10.49 On 1 July 2008, the then Assistant Treasurer announced an examination of the methodologies governing the determination of the financial sector levies. This was in response to industry views on the methodologies and the fact that the methodologies had not been considered for some time.

10.50 The review of the levy methodologies was undertaken by Treasury and APRA. As a result of this work, the review team recommended the following legislative changes to the Assistant Treasurer:

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that the levy date for new starters should be redefined;

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that the imposition Acts should be amended to provide more flexibility so that a valuation basis other than assets can be used on a case-by-case basis in the annual determinations; and

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that a drafting error in subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act be corrected.

Objectives

10.51 The objective of the proposed amendments is to improve APRA's ability to regulate bodies in the financial sector in accordance with prudential laws and to enhance its ability to administer the FCS. The amendments would achieve this by enhancing APRA's preventive, correction, failure management and data collection powers, and by enhancing the operation of the FCS.

10.52 The proposed amendments also aim to improve the methodologies governing the determination of financial sector levies. The amendments would achieve this by implementing recommendations of the 2009 Report of the Review of Financial Sector Levies and making related amendments.

Analysis of proposed amendments to APRA's preventive powers

Proposal 1 - Incorporation by reference in prudential standards

10.53 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.

10.54 The proposal would harmonise the Acts by inserting a provision in the Banking and Life Insurance Acts which would 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 those Acts.

10.55 The proposal is expected to have low compliance costs. It may result in administrative efficiencies for APRA but would not affect the ambit of prudential standards. Prudential standards are generally legislative instruments which are subject to disallowance and for which APRA must comply with best practice regulation requirements at the time they are made.

Proposal 2 - Prudential standards in respect of corporate groups

10.56 The Insurance Act prescribes that APRA can make prudential standards in respect of a single regulated entity or NOHC. This allows APRA to regulate the head entity of a group and require it to monitor its subsidiaries. However, it does not allow APRA to make prudential standards in respect of corporate groups or parts of groups.

10.57 The Banking Act prescribes that prudential standards may require an ADI or its authorised NOHC to ensure that its subsidiaries, or it and its subsidiaries, collectively satisfy particular requirements in relation to prudential matters. This allows APRA to make prudential standards for groups as a whole under the Banking Act.

10.58 The proposal would harmonise the Insurance Act with the Banking Act by permitting APRA to make prudential standards for corporate groups as a whole under the Insurance Act. It would also permit APRA to make prudential standards with respect to parts of the group.

10.59 The proposal reflects the corporate structures which general insurers may adopt.

10.60 The proposal is expected to have low compliance costs. It may result in administrative efficiencies for APRA but would not materially affect the ambit of prudential standards. In addition, as noted above prudential standards are generally legislative instruments which are subject to disallowance and for which APRA must comply with best practice regulation requirements at the time they are made.

Proposal 3 - Prudential standard to determine assets

10.61 Subsection 13A(4) of the Banking Act 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.

10.62 The proposal would amend subsection 13A(4) to enable APRA to exclude assets or amounts from being assets in Australia for the purposes of that subsection via prudential standards.

10.63 The proposal would also amend the equivalent provision in the Insurance Act, paragraph 28(a), so that APRA can exclude assets, in addition to amounts, from being assets in Australia for the purposes of that provision via prudential standards.

10.64 The proposed amendments would harmonise subsection 13A(4) of the Banking Act and paragraph 28(a) of the Insurance Act, as applicable.

10.65 The proposal would also amend section 116A of the Insurance Act to clarify that the definition of when a liability is taken to be in Australia in that section, applies 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.

10.66 The proposed amendments are expected to have low compliance costs. The amendments to the Insurance Act are not expected to have a material change on the present operation of the law. In regards to the Banking Act amendment, APRA has advised that guidance on the assets which may be excluded can be obtained from examining the relevant prudential standard that presently applies in the context of general insurers, that is, GPS 120. Such a prudential standard would also be a legislative instrument. This being the case, APRA would consult on a draft standard with industry as part of the process of making the standard and its making would be subject to best practice regulation requirements.

Proposal 4 - Minimum criteria for authorisation

10.67 Currently, the Banking, Insurance and Life Insurance Acts permit a body corporate to apply to APRA for authorisation 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.

10.68 The proposal would amend the Banking, Insurance and Life Insurance Acts to permit APRA, by legislative instrument, to set criteria for the granting of such an authorisation.

10.69 The proposed amendments would enhance the authorisation framework by permitting minimum standards for entry and participation in regulated financial markets to be made by legislative instrument. Presently, such criteria are set out in guidelines made by APRA.

10.70 The proposal is expected to have low compliance costs. It will, however, permit APRA to make minimum standards in a manner providing greater certainty as to the regard courts and tribunals must have to them.

Proposal 5 - Continuing an authorisation in-effect upon revocation

10.71 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.

10.72 The proposal would insert an equivalent provision to section 29GB of the Superannuation Industry (Supervision) Act into the Banking, Insurance and Life Insurance Acts. The provisions would provide that a notice to revoke an authorisation may state that the authorisation continues in-effect in relation to a specified matter or specified period, as though the revocation had not happened, for the purposes of a prudential law.

10.73 The proposed amendment would ensure that APRA can continue to appropriately monitor an entity, and act under relevant laws, after the revocation of an authority in circumstances where it is desirable to do so.

10.74 The proposal is expected to have low compliance costs.

Analysis of proposed amendments to APRA's correction powers

Proposal 1 - Triggers for issuing directions

10.75 Under the Banking, Insurance and Life Insurance Acts, triggers must be satisfied prior to APRA issuing a direction.

10.76 The proposal would amend the triggers to:

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clarify the triggers for giving directions under the Banking Act and Insurance Act where there is deterioration in a regulated entity's financial condition;

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At present, the relevant provisions are that APRA may issue a direction if there is 'a sudden material deterioration in the body corporate's financial condition' [emphasis added]. The proposal would remove the word 'sudden' to reflect that it is not the speed but the extent of the deterioration which should be relevant to trigger the directions power.

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ensure APRA can issue a direction under the Banking Act while a regulated entity is receiving external support; and

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At present, it is unclear whether the provision of Government financial support to an ADI would enable an ADI to avoid triggering APRA's directions power. The proposal would clarify that APRA may issue a direction despite external assistance being given.

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amend the grounds for giving directions in the Banking, Insurance and Life Insurance Acts so that they refer to subsidiaries.

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At present, APRA has the power to direct a supervised entity to control the actions of its subsidiaries where a directions trigger is met. The proposal would amend the triggers so that APRA may issue a direction to an ADI, general insurer, life insurer or authorised NOHC as a result of the conduct of a subsidiary, in appropriate circumstances.

10.77 The proposal is not expected to have a significant impact on business. The amended powers would ensure that APRA can use its directions powers in the exceptional circumstances in which they may be required, rather than effecting wider change. APRA would continue to address prudential concerns by working cooperatively with regulated entities where possible.

Proposal 2 - Failure by an authorised NOHC to comply with a direction to remove a director under the Insurance Act

10.78 It is currently an offence under the Insurance Act for general insurers and corporate agents to fail to comply with a direction to remove a director or senior manager. However, it is not an offence for an authorised NOHC to fail to comply with such a direction.

10.79 The proposal would rectify this inconsistency by making it an offence under the Insurance Act for a NOHC to fail to comply with a direction from APRA to remove a director or senior manager.

10.80 The provision would ensure that the existing direction power is effective, rather than affecting the ambit of that power.

Proposal 3 - Directions to a foreign ADI regarding assets and liabilities

10.81 The proposal would amend the Banking Act to clarify that APRA may direct a foreign ADI:

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to act in a way so that: a particular asset or class of assets of the ADI is returned to the control (however described) of the part of the ADI's banking business that is carried on in Australia; or a particular liability or class of liabilities of the ADI ceases to be the responsibility (however described) of the part of the ADI's banking business that is carried on in Australia; or

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to not act in a way that: a particular asset or class of assets of the ADI ceases to be under the control (however described) of the part of the ADI's banking business that is carried on in Australia; or a particular liability or class of liabilities of the ADI becomes the responsibility (however described) of the part of the ADI's banking business that is carried on in Australia.

10.82 The amendment would clarify that APRA may issue a direction to prevent inappropriate intra-entity transactions that may undermine the financial position of the ADI's Australian operations.

10.83 This may be particularly important in a situation where the foreign ADI is in financial distress and to ensure liability holders in Australia are not disadvantaged in the winding up or other resolution of the ADI.

10.84 The proposal is not expected to have a significant impact on business. The proposal would clarify APRA's existing directions powers to ensure that they capture the relevant transactions of a foreign bank branch. Such clarity presently exists in relation to equivalent transactions entered into by Australian subsidiaries of foreign banks and other Australian banks.

Analysis of proposed amendments to APRA's failure management powers

External administration

Proposal 1 - Information about applications to appoint an external administrator to a general insurer

10.85 Currently, where a creditor or another party seeks to apply to the courts to appoint an external administrator to a general insurer or life insurer, the person is required to give APRA notice of the appointment, but is not required to provide details of the application.

10.86 It is important for APRA to receive these details prior to the hearing so as to understand the circumstances giving rise to the application and take appropriate and timely action. For example, APRA may seek to be heard in relation to the proposed external administration of the general insurer or life insurer, or APRA may apply to the Federal Court for the appointment of a judicial manager who would replace any other form of external administration.

10.87 The proposal would require a person who wants to apply to a court for the appointment of an external administrator of a general insurer to first give the following documents to APRA:

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a copy of the application; and

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a copy of all the documents that will be filed in support of the application.

10.88 The cost to the party seeking external administration is expected to be low as the party would only be required to provide existing court documents to APRA. Moreover, this requirement may prevent duplicate external administration processes, and thus may reduce the costs of administration for the insurer, its policyholders and affected third parties.

Proposal 2 - Triggers for appointing a statutory manager

10.89 The statutory preconditions and processes for appointing a statutory manager are an important part of the failure management regime. The statutory preconditions determine when APRA can appoint a statutory manager.

10.90 Currently, the Banking Act may not allow the appointment of a statutory manager to the ADI unless the intervention both is in the depositors' interests and would promote the stability of the financial system.

10.91 In exceptional circumstances, such as in the early stages of sector-wide distress, it may be that APRA can only be satisfied of one of these two factors with the result that it may be unable to appoint a statutory manager until further events have unfolded, even if there is a need for immediate intervention. Such a situation is likely to be detrimental to the depositors of the affected ADI and could reduce confidence in the financial system at a critical time.

10.92 The proposal would clarify that APRA may appoint a statutory manager to an ADI if it is in the interests of depositors or for financial system stability (or both). The proposal is not expected to increase compliance costs.

Proposal 3 - Right to be heard in proceedings to replace a judicial manager

10.93 It is important to ensure that a person appointed as judicial manager under the Insurance or Life Insurance Acts has appropriate expertise and experience.

10.94 Currently, APRA has the right to be heard when the Federal Court of Australia appoints a judicial manager or terminates judicial management. However, when the Federal Court decides to replace one judicial manager with another, it is not clear that APRA has the right to be heard.

10.95 The proposal would clarify that APRA has the right to be heard in proceedings related to the replacement of a judicial manager. This would ensure that APRA's views are taken into account in all circumstances where the Federal Court may issue an order relating to the appointment or termination of judicial management.

10.96 APRA would be required to bear the costs of appearing before the Court, and the impact on other parties and the Court is not expected to be significant.

Proposal 4 - Powers relating to statutory and judicial managers

10.97 It is important that the statutory or judicial manager has the necessary powers to gather the information required to understand the affairs of a distressed ADI, general insurer or life insurer and to implement measures to resolve distress at the institution.

10.98 Under the Banking Act, a statutory manager would require information about the financial condition and operations of the ADI in a timely manner so as to maximise the chances of rehabilitation or crisis resolution. Such information is most likely to be within the knowledge of key personnel within the ADI or with whom the ADI deals. The proposal would enable the statutory manager to question these individuals, to assist in carrying out its duties and functions.

10.99 Under the Insurance and Life Insurance Acts, a judicial manager is vested with the powers of the directors, but not the powers of the Board. There are certain decisions that may only be taken by the Board, which may be required to be made by a judicial manager for the purposes of fulfilling its functions. The proposal would vest the powers of the Board in the judicial manager, thereby aligning its powers with the powers of a statutory manager under the Banking Act.

10.100 The proposal would also enable APRA to require information or assistance from the judicial manager about matters that would enable APRA to perform its functions in relation to the FCS. This would be equivalent to APRA's ability to require information or assistance from a general insurer or a liquidator of a general insurer, and would enhance APRA's capacity to fulfil its duties and functions in relation to the administration of the FCS.

10.101 The proposal is not expected to have a material impact on the cost of an administration. Improving the efficient operation of the relevant powers could, however, result in small administrative cost savings.

Business transfer

10.102 The ability to transfer business from a distressed financial institution to another buyer is an important mechanism for managing some types of distress at financial institutions.

10.103 Part 4 of the Financial Sector (Business Transfer and Group Restructure) Act contains compulsory transfer of business powers that may be used to transfer business from a distressed ADI. This Part also provides for compulsory transfers of business from a distressed life insurer to a healthy life insurer that is willing to receive (purchase) the business. However, it does not currently provide for compulsory transfer of business between general insurers.

10.104 The proposal would enable APRA to require a compulsory transfer of business from one general insurer to another under the Financial Sector (Business Transfer and Group Restructure) Act. This would be equivalent to APRA's ability to require a compulsory transfer of business from one ADI to another, or from one life insurer to another.

10.105 The proposal would also enable APRA to require a compulsory transfer of aspects of a general or life insurer's business to another entity that is not a general or life insurer. This would be equivalent to APRA's present ability to require a transfer of business from an ADI to an unregulated entity, such as an asset management company.

10.106 Existing requirements in relation to compulsory transfers would apply. For example, APRA is required to consider the interests of the policyholders, and the Board of the receiving entity must have consented to the transfer.

10.107 This measure would impose some costs on the affected general insurer at the time of compulsory transfer as it would be required to give APRA information so as to allow the transfer to occur. However, APRA would bear the bulk of the costs of reaching agreement with the receiving general insurer, preparing the transfer documents and drawing up the transfer scheme.

10.108 The equivalent power for ADIs and life insurers has been rarely used as APRA would generally only consider a compulsory transfer if it is necessary to avoid or minimise the high costs of an insurance or ADI failure for the economy and consumers.

Winding up

Proposal 1 - Priority provisions

10.109 Subsection 13A(3) of the Banking Act presently provides that if an ADI becomes unable to meet its obligations or suspends payment, its assets in Australia are to be available to meet its liabilities in the following order:

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first, the ADI's liabilities (if any) to APRA because of the rights APRA has against the ADI because of section 16AI;

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second, the ADI's debts (if any) to APRA under section 16AO;

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third, the ADI's deposit liabilities in Australia (other than any such liabilities covered under paragraph 13A(3)(a));

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fourth, the ADI's other liabilities (in the order of their priority apart from subsection 13A(3)).

10.110 The proposal would amend subsection 13A(3) so that it provides for liabilities to be paid in the following order:

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first, the ADI's liabilities (if any) to APRA because of the rights APRA has against the ADI because of section 16AI;

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second, the ADI's debts (if any) to APRA under section 16AO;

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third, the ADI's liabilities (if any) in Australia in relation to protected accounts that account-holders keep with the ADI;

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fourth, the ADI's debts (if any) to the Reserve Bank;

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fifth, the ADI's liabilities (if any) under an industry support contract that is certified under section 11CB;

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sixth, the ADI's other liabilities (if any) in the order of their priority apart from subsection 13A(3).

10.111 The amended provision would reflect changes made by the FCS Act to the depositor protection and compensation arrangements under the Banking Act. It would also provide appropriate priority for debts owed to the Reserve Bank and liabilities under industry support contracts.

10.112 A related amendment would also be made to section 86 of the Reserve Bank Act 1959. That section presently provides that notwithstanding anything contained in any law relating to the wind-up of companies, but subject to subsection 13A(3) of the Banking Act, debts due to the Bank by an ADI shall, in the wind-up, have priority over all other debts other than debts due to the Commonwealth. The amendment would remove the words 'other than debts due to the Commonwealth' from section 86 to reflect changes in the law regarding the priority of the Commonwealth.

10.113 The amendments are not expected to impose costs on business.

Proposal 2 - Definition of foreign ADI

10.114 Section 11E of the Banking Act provides that Division 2 (Protection of depositors) of the Act does not apply to a foreign ADI. Section 11D defines foreign ADI for the purposes of section 11E as not including the Bank of China.

10.115 The Bank of China was originally subject to the depositor protection provisions of the Banking Act as it accepted retail deposits. However, the Bank of China has now ceased to accept retail deposits and should be treated like all other foreign ADIs for the purposes of the depositor protection provisions of the Act. That is, it should be exempted from those provisions and subject to the remaining provisions of Division 1B (Provisions relating to certain ADIs) of the Banking Act.

10.116 The proposal would repeal section 11D of the Banking Act, so that section 11E (and the remaining provisions of Division 1B) of the Act apply to the Bank of China, as they do to all other foreign ADIs.

10.117 The proposal is not expected to impose compliance costs.

Proposal 3 - Liquidation of an insurer following judicial management

10.118 The proposal would amend the Insurance Act to clarify that, where the Court approves a recommendation by a judicial manager to wind up a general insurer, the winding up would be conducted in accordance with the Corporations Act.

10.119 The amendment is not expected to impose compliance costs. Increased certainty, however, may reduce costs associated with the winding up of a general insurer.

Proposal 4 - Recapitalisation

10.120 The proposal would amend the Banking, Insurance and Life Insurance Acts to enable APRA to direct an ADI, general insurer or life insurer to recapitalise in circumstances equivalent to those which would presently allow APRA to appoint a statutory or judicial manager to them.

10.121 APRA would be able to require the ADI, general insurer or life insurer to increase the capital that it holds to a specified level by issuing equity, or other capital instruments specified by regulations.

10.122 APRA would be required to consult with the Australian Competition and Consumer Commission (ACCC) before issuing a direction that requires an entity to recapitalise. However, the recapitalisation direction would be subject to an exemption from the competition provisions of Part IV of the Trade Practices Act 1974.

10.123 It would be a criminal offence, punishable by a fine of 50 penalty units, for an ADI or insurer to fail to comply with a direction or for a responsible officer to fail to take reasonable steps to ensure compliance. This is the same penalty which applies to APRA's other directions powers. However, the offence provisions do not apply if: the ADI or insurer made reasonable efforts to comply with the recapitalisation direction; and the ADI's or insurer's contravention is due to circumstances beyond its control.

10.124 The proposal is not expected to have material cost implications for business or shareholders.

•

Similar recapitalisation powers can presently be exercised when an ADI or insurer is in statutory or judicial management. The proposal would, however, provide the flexibility of allowing the powers to be used without placing the institution into statutory or judicial management in appropriate circumstances, such as when doing so could adversely affect the ability to recapitalise.

•

As is the case with the recapitalisation powers under statutory or judicial management, APRA must obtain an expert's report on the fair value of any issue prior to the exercise of the recapitalisation power unless it is satisfied that doing so would detrimentally affect the interests of depositors or policyholders, or the stability of the financial system in Australia.

10.125 The proposal is not expected to have a material impact on competition. A recapitalisation direction would only be issued where the benefits of doing so outweighed the costs. The requirement to consult with the ACCC would ensure that competition effects are properly considered as part of this process. In addition, the present recapitalisation power under statutory or judicial management includes an equivalent exemption from the competition provisions of the Trade Practices Act. If the exemption was not included in the present regime, APRA may have to place an institution into statutory or judicial management to obtain the certainty required to recapitalise an institution in circumstances where doing so would not be beneficial to depositors, policyholders, other stakeholders or the financial system.

Analysis of proposed amendments to APRA's and the ATO's investigation powers

Proposal 1 - Investigations during wind-up

10.126 APRA currently has the power to investigate, or appoint an inspector to investigate, the affairs of all APRA-regulated institutions. The ATO has similar powers in relation to the superannuation entities which it regulates. However, there is uncertainty as to whether APRA and the ATO may commence or continue an investigation once such an entity enters external administration.

10.127 This uncertainty is undesirable. Investigation powers are important for gathering information and evidence for the purposes of administering and enforcing relevant laws.

10.128 The proposal would amend the Banking, Insurance, Life Insurance and Superannuation Industry (Supervision) Acts to clarify that APRA (and the ATO as relevant) may commence or continue an investigation after a regulated entity enters external administration or, in the case of a superannuation entity, its trustee enters external administration or becomes insolvent under external administration.

10.129 The proposal would provide certainty to business, APRA and the ATO as to the ability of APRA and the ATO to investigate during liquidation. Only a small number of entities, in particular those in liquidation, would be affected by the proposal. In addition, the statutory requirements for commencing an investigation would still have to be met for APRA or the ATO to commence any investigation.

Proposal 2 - Disqualification

10.130 The proposal would amend the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act and Retirement Savings Accounts Act 1997 to provide that a person is not entitled to fail to comply with a requirement under those respective Acts:

•

to answer a question or give information;

•

to produce books, accounts or other documents; or

•

to do any other act;

on the ground that the answer or information, production of the book or other thing, or doing that other act, as the case may be, might tend to make the person liable to a penalty by way of a disqualification under relevant laws.

10.131 The proposal would also amend the Acts to provide that in any proceeding under, or arising out of, the Acts, a person is not entitled to refuse or fail to comply with a requirement:

•

to answer a question or give information;

•

to produce books, accounts or other documents; or

•

to do any other act;

on the ground that the answer or information, production of the book or other thing, or doing that other act, as the case may be, might tend to make the person liable to a penalty by way of a disqualification under the Acts.

10.132 The proposal responds to the High Court's decision in Rich v Australian Securities and Investments Commission ^[7] which overturned the view that disqualification proceedings were protective and not penal in nature. The amendments would be modelled on the amendments made to the Corporations Act in 2007. Similar amendments have also been made to the Trade Practices Act.

Proposal 3 - Record keeping

10.133 The Insurance, Life Insurance, and Superannuation Industry (Supervision) Acts currently contain provisions with respect to the keeping of records by regulated entities. The Banking Act does not contain such provisions. Entities regulated under the Banking Act are, however, subject to the record keeping requirements in the Corporations Act.

10.134 The proposal would harmonise the record keeping provisions for APRA-regulated entities with respect to their accessibility by APRA. In particular, the proposal would ensure records are kept in Australia; that APRA is notified of their location and any change to that location within a reasonable time; and that the records are kept in English or in a form in which they are readily convertible into English. Each of these requirements, with the exception of the requirement to notify APRA of the location at which records are kept, currently applies to some but not all APRA-regulated entities.

10.135 The proposal would restrict the location at which APRA-regulated entities must keep their records. This could impose costs on entities which would vary depending upon their particular circumstances. It may also restrict the ability of entities to outsource some functions overseas. In addition, it would require an entity to report the location of its records to APRA using a form prescribed by APRA.

10.136 To ensure the proposal does not have unintended consequences on business, APRA would be provided with a discretion to exempt entities from the requirement to keep records in Australia, where appropriate. This discretion would also be extended to those APRA-regulated entities, namely general insurers and superannuation entities, which are presently required to keep their records in Australia.

10.137 Reporting costs are expected to be low.

Proposal 4 - Protection and sharing of information

10.138 Section 56 of the Australian Prudential Regulation Authority Act provides for the protection and sharing of protected information and documents by APRA.

10.139 The proposal would amend the definitions of 'protected information' and 'protected document' in section 56 of the Australian Prudential Regulation Authority Act so that that they include any information or documents obtained or produced under a prudential law which relate to the affairs of a financial sector entity within the meaning of the FSCODA.

10.140 The proposal would ensure that information and documents collected from such financial sector entities are subject to the protection of section 56 and the information sharing regime it contains. At present, some but not all financial sector entities are covered by section 56.

10.141 The proposal is not expected to impose compliance costs on business.

Analysis of proposed amendments relating to auditors and actuaries

Proposal 1 - Appointment and conduct of audits

10.142 Currently, there are various provisions relating to auditors and actuaries under the Banking, Insurance, and Life Insurance Acts. However, the provisions vary across the Acts.

10.143 The proposal would harmonise the obligations of auditors and actuaries under the Acts, where appropriate. In particular, the proposal would:

•

require auditors and actuaries of life insurers to give information to APRA on request that will assist it perform its functions under the Life Insurance Act, the FSCODA, or the First Home Saver Accounts Act 2008. APRA currently has equivalent power in relation to the auditors and actuaries (as relevant) of general insurers and ADIs. The proposal would ensure that the auditors and actuaries of life insurers are treated in a similar manner;

•

provide that prudential standards made under the Banking, Insurance and Life Insurance Acts may set out matters relating to the appointment of auditors or the conduct of audits. This clarifies the existing law;

•

ensure that auditors of an ADI perform the functions and duties of an auditor that are set out in the prudential standards. A similar provision presently exists in the Insurance and Life Insurance Acts;

•

require auditors of ADIs and life insurers to comply with prudential standards in carrying out their duties and functions. Auditors of general insurers are currently subject to an express duty to comply with APRA's prudential standards. The proposal would ensure that auditors of life insurers and ADIs are also subject to this duty;

•

require ADIs and authorised NOHCs of ADIs to facilitate an auditor in the performance of their functions under the Banking Act. Currently, under the Insurance and Life Insurance Acts, an insurer must make arrangements necessary to enable the auditor to perform the functions specified in the Act (for the Insurance Act) or prudential standards and reporting standards made under the FSCODA (for the Life Insurance Act); and

•

permit APRA, by written notice, to require an insurer to appoint a person specified in the notice to be an auditor for a purpose specified in the notice. This would allow APRA to appoint auditors for particular purposes, for example, to conduct a special purpose audit. For ADIs the prudential standards deal with such audits.

10.144 The proposal would also ensure that a reporting standard made by APRA under section 13 of the FSCODA may include matters relating to the auditing of reporting documents in certain circumstances. The proposal would also require that:

•

the auditor perform the functions and duties of an auditor that are set out in the reporting standards;

•

the auditor comply with the reporting standards in performing the functions and duties; and

•

the financial sector entity make any arrangements that are necessary to enable the auditor to perform the functions and duties.

10.145 The amendments would assist in ensuring the accuracy of the data that APRA collects from the financial industry in relevant circumstances.

10.146 The proposal is expected to have low compliance costs.

•

It would only require auditors and actuaries to provide information that they already have. It would not require auditors and actuaries to obtain or prepare additional information.

•

Auditors would already carry out the duties set out in the prudential standards in the usual performance of their duties.

•

ADIs are presently required to appoint an auditor under prudential standards.

•

ADIs and insurers typically already facilitate the work of an auditor or actuary in the performance of their relevant functions, which reflects existing industry practice.

Proposal 2 - Offences relating to auditors

10.147 Currently there are no statutory prohibitions under the Banking Act, Insurance Act, Life Insurance Act, Superannuation Industry (Supervision) Act, Retirement Savings Accounts Act or the FSCODA against misleading or otherwise interfering with an auditor in carrying out their functions. Further, the Acts do not require an auditor to advise APRA or the ATO (as relevant) where a person has sought to interfere with the auditor carrying out their duties and functions.

10.148 However, such provisions presently exist under the Corporations Act for the purposes of that Act. Section 1309 of the Corporations Act makes it an offence for an officer or employee of a corporation to knowingly mislead an auditor of a corporation, or if the corporation is controlled by another corporation an auditor of the other corporation. Section 311 of the Corporations Act makes it an offence for auditors to fail to report to ASIC within 28 days attempts to unduly influence, coerce, manipulate or mislead them; or, attempts to otherwise interfere with the proper conduct of the audit.

10.149 These present offences in the Corporations Act apply when auditors are undertaking functions or exercising duties under the Corporations Act, but not when undertaking similar functions or exercising similar duties under the prudential Acts.

10.150 The proposal would rectify this inconsistency, by applying equivalent provisions to those in the Corporations Act to the above Acts. Auditors would therefore be subject to the same requirements, as relevant, for both Corporations Act and prudential purposes.

10.151 The proposal is expected to have low compliance costs. As noted above, auditors are presently subject to equivalent provisions for Corporations Act purposes. The proposal may require reporting to APRA or the ATO where the auditor is performing functions other than Corporations Act functions. However, additional reporting costs are expected to be low.

Analysis of proposed amendments to the FCS

10.152 The proposal would amend the Banking Act to:

•

enable APRA to determine the rate of interest that applies to protected accounts for the purposes of determining entitlements under the FCS, where APRA considers that the rate of interest is not certain;

•

clarify the operation of the FCS in relation to pooled trust accounts; and

•

clarify that APRA may require a liquidator to assist it in paying account-holders their entitlements under the FCS.

10.153 The proposal would also amend the Insurance Act to:

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ensure APRA can manage claims made under the FCS efficiently and in line with standard industry practice, including by issuing forms, determining policyholder eligibility, negotiating settlement for claims and rationalising third party claims;

•

clarify that the FCS applies to policies that were transferred to the declared general insurer, as well as policies that were issued by the declared general insurer;

•

enable third party claims specified in section 601AG of the Corporations Act to be made to the FCS, in addition to claims specified in section 51 of the Insurance Contracts Act 1984;

•

ensure the efficient use of public revenue by enabling APRA to seek reinsurance recoveries and contributions from a second insurer where a policyholder has double insurance, in line with industry practice; and

•

allow the Minister to declare that the FCS applies to an insolvent insurer under external administration or judicial management. Presently, the FCS may only be declared in relation to an insurer under judicial management.

10.154 These proposals are expected to reduce costs for consumers as they are designed to facilitate the administration of the FCS, ensure timely payment under the FCS, and clarify matters related to the FCS's operation.

10.155 The changes in relation to the Policyholder Compensation Facility ensure that general insurers would deal with the FCS in the same way as with another general insurer. This would allow the FCS to be implemented in respect of a general insurer without any new compliance programs, thereby reducing the upfront cost of complying with the FCS for the insurance industry as a whole.

Analysis of proposed amendments to APRA's data collection powers

Proposal 1 - Reporting standards and entities providing financial services or participating in a payment system

10.156 APRA is the central repository for the collection of financial data. Currently, APRA can collect data under the FSCODA to assist it in the prudential regulation or monitoring of bodies in the financial sector and to facilitate the Reserve Bank's formulation of monetary policy.

10.157 The global financial crisis has highlighted that the Government may require specific data to inform decisions and monitor subsequent outcomes that cannot presently be obtained by APRA under the FSCODA. This includes data from non-prudentially regulated bodies which operate in the financial sector.

10.158 The proposal would expand APRA's powers to collect data under the FSCODA upon receiving a direction from the Minister or their delegate. In particular, APRA would be empowered after receiving such a direction to determine reporting standards for entities (not presently covered by the Act) that provide financial services or participate in a payment system.

10.159 The entities from which the data would be collected would be subject to the same rights and obligations as presently apply to requests under the FSCODA. Similarly, the process which APRA would be required to follow in collecting the data would be the same.

10.160 The proposal would enhance the Government's ability to collect the data it requires to make policy decisions and monitor the outcomes of those decisions across the financial sector. The amendment would also be in line with international developments relating to the collection of data.

10.161 The proposal may, however, impose compliance costs on businesses as it would permit APRA to collect additional data under the FSCODA, including data from businesses that are not presently subject to the Act, upon request from the Government.

10.162 In response to the potential costs, the proposal would be subject to the thresholds discussed above, including that a request be received from Government. This would enable the Government to consider the use of the expanded powers on a case by case basis having regard to all relevant circumstances, including likely costs, and the need for the relevant data.

10.163 In addition, APRA would be required to make a reporting standard under the FSCODA prior to exercising the expanded power. A reporting standard is a disallowable instrument in relation to which best practice rule-making procedures, as overseen by the Office of Best Practice Regulation, apply. Depending on the circumstances of the individual reporting standard, this would require consideration of compliance costs and other impacts on the economy at the time a relevant standard was proposed.

10.164 The proposal would also ensure that data can be collected under the FSCODA for the purposes and functions of ASIC, the RBA or another prescribed financial sector agency where it is cost effective and appropriate to do so.

Proposal 2 - Collection of FCS data

10.165 The proposal would amend the FSCODA to ensure that APRA can collect information it requires to administer the FCS in both the banking and insurance contexts.

10.166 The amendment may reduce compliance costs by clarifying the operation of the Act in this respect. A reporting standard made by APRA for the purposes of collecting such data would be a legislative instrument in relation to which best practice regulation requirements would apply.

Proposal 3 - Reporting standards containing confidential information

10.167 While one-off information collection can be effected as legislative instruments under the FSCODA, it may create problems insofar as it may force APRA to reveal the sensitive information it has sought to collect or which has led it to make the collection.

10.168 Such an outcome may be highly undesirable, especially when the affected institution involved is itself a regulated entity or the disclosure of the information may threaten financial system stability.

10.169 As a result, the proposal would permit APRA to make a reporting standard pertaining to non-ongoing data collections under section 13 of the FSCODA (without the requirement for a legislative instrument) where:

•

APRA considers, on reasonable grounds, that the reporting standard includes confidential information the publication of which is likely to have a detrimental effect on financial system stability or on the stability of one or more financial institutions; and

•

the information to be contained in the reporting documents is required urgently by APRA for any of the following purposes: to determine the financial or prudential condition of financial sector entities; to determine the nature or level of exposure that financial sector entities have to risks, including risks relating to particular transactions, entities, business sectors, asset classes or events; to assess potential threats to financial system stability; to assist APRA, the Minister or the Reserve Bank to respond to any such threats; or to determine what, if any, action should be taken by, or in relation to, one or more financial sector entities.

10.170 APRA will be required to report the use of the power to the Minister as soon as possible and to report its use in its annual report.

10.171 It would be a criminal offence (punishable by imprisonment for two years) for the entity to which one of these special reporting standards is issued to disclose to any person: that the entity has been given a copy of the reporting standard; or any confidential information that is included in the reporting standards. However, the criminal offence would not apply in circumstances where, for example, the disclosure is authorised by law, is made to APRA or an employee or officer of the entity for a relevant purpose, or is to a lawyer for the entity.

Proposal 4 - Urgent reporting standards

10.172 Subsection 13(6) of the FSCODA presently exempts APRA from its obligation to consult with relevant financial sector entities when preparing proposed reporting standards, in circumstances where it is satisfied that the delay that would be involved in holding the consultations would prejudice the interests of depositors, policyholders or members of the financial sector entity or entities concerned.

10.173 The proposal would amend subsection 13(6) so that APRA also does not have to consult where it is satisfied that the delay would have a detrimental effect on financial system stability.

10.174 It would not be appropriate for APRA to consult in such circumstances.

10.175 The costs to business of not consulting are expected to be low and outweighed by the public benefit of urgent collection where financial system stability is at risk.

Proposal 5 - Annual financial statements and annual returns

10.176 Currently, section 124 of the Life Insurance Act provides that an owner of a policy issued by a life insurer is entitled, upon request, to be provided by the insurer with a copy of the latest annual financial statements and returns given by the insurer to APRA under the FSCODA.

10.177 Life insurers are required to give a number of financial documents to APRA under the FSCODA.

10.178 The proposal would enable APRA to specify, in reporting standards made under the FSCODA, which financial statements and returns are required to be provided, upon request, to a policy owner under section 124 of the Life Insurance Act.

10.179 The proposal is not expected to impose compliance costs. However, benefits to life insurers and policy owners are expected to be derived from clarifying the requirements of section 124.

Analysis of proposed amendments to the levy regime

Proposal 1 - Regulated levy component for new starters

10.180 The Superannuation Supervisory Levy Imposition Act 1998 ( the Levy Act) imposes a levy on superannuation entities. Section 5 of the Levy Act defines a 'superannuation entity' to mean a superannuation entity within the meaning of the Superannuation Industry (Supervision) Act, other than a self-managed superannuation fund.

10.181 Under section 7 of the Levy Act, the levy comprises two components: a restricted levy component and an unrestricted levy component. Each component requires the application of a levy percentage to the superannuation entity's asset value.

10.182 Subparagraph 7(1A)(a)(ii) of the Levy Act provides that if the superannuation entity was an unregulated entity on 30 June of the previous financial year then, for the purpose of calculating the restricted levy component, the restricted levy percentage is applied to the entity's asset value on 30 June of the previous financial year.

10.183 This method of calculating the regulated levy component is not appropriate for new starters. For example, under the present arrangements if a fund becomes a regulated superannuation fund on 1 October of a particular financial year, its restricted levy component is to be worked out by applying the restricted levy percentage to its asset value as at 30 June in the previous financial year. However, as the fund is a new starter it is unlikely to have had any assets, or have been in existence, on 30 June of the previous financial year. As a result, the fund is likely to pay only the minimum amount for this component, which could be less than commensurate with the costs of APRA's supervisory resources.

10.184 The proposal would rectify this situation by amending the Levy Act to allow the Minister to specify that the asset value of a new starter be calculated as at the day that the new starter becomes a superannuation entity, when calculating the restricted levy component.

10.185 The proposal would bring the levy arrangements for superannuation entities into line with those applicable to ADIs, general insurers, life insurers, retirement savings account providers and leviable first home saver account providers. The respective levy imposition Acts in relation to those entities presently provide that the valuation day for a new starter is the day that it becomes regulated.

Proposal 2 - Valuation basis for determining levies

10.186 From inception, gross assets have been used as the primary measure for determining levies. This has generally proved to be a reasonable measure, but from time to time it has generated particular anomalies. For example, using assets as a valuation basis may not be appropriate for a financial institution which has a large volume of transactions but holds minimum assets and as a result is subject to the minimum levy, or where a participant otherwise does not conform to the general characteristics of other entities within the industry.

10.187 The proposal would address this by amending the levy imposition Acts to provide flexibility so that a valuation basis other than assets can be used by the Minister in determining levies on a case-by-case basis. This would be effected by changing the applicable reference from 'asset value' to 'levy base'.

10.188 As a consequence of this amendment, the proposal would also repeal subsection 7(4A) of the Life Insurance Supervisory Levy Imposition Act 1998 and subsection 7(4A) of the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998. These provide that the asset value of a life insurance company or ADI must exclude an amount equal to the total balances of all first home saver accounts (within the meaning of the First Home Saver Accounts Act 2008).

10.189 The provisions would not be desirable after references to 'asset value' are replaced with references to 'levy base'. After the change to 'levy base', the relevant adjustments could be done more properly in the ministerial annual determinations.

10.190 The proposal would provide flexibility in determining levies, where it is determined appropriate and equitable to do so. Beyond this, it is not expected to impose costs.

Proposal 3 - Subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act

10.191 Currently subparagraph 9(2)(a)(i) of the Financial Institutions Supervisory Levies Collection Act 1998 establishes that the levy payable for a financial year by a trustee of a superannuation entity is due and payable on a business day that is specified in a notice given by APRA to the Treasurer, if the entity is a superannuation entity on 1 July of the financial year and became a superannuation entity before that day.

10.192 The proposal would amend subparagraph 9(2)(a)(i) of the Act to refer to 'a notice given by APRA to the trustee' instead of 'a notice given by APRA to the Treasurer'.

10.193 The proposal would correct an error in subparagraph 9(2)(a)(i) of the Act. It would not have a material impact on the operation of the Act or on business.

Conclusions and recommendations

10.194 The proposed amendments would improve APRA's ability to regulate bodies in the financial sector in accordance with prudential laws and enhance its ability to administer the FCS. The proposed amendments would also improve methodologies governing the determination of financial sector levies.

10.195 The amendments may impose compliance costs on business. However, these costs are overall expected to be low and outweighed by the benefits of the amendments. In addition, the amendments that may have a material impact on business would only be used in appropriate and exceptional circumstances.

Consultation

10.196 Under the terms of the intergovernmental Corporations Agreement 2002 the Commonwealth is required to consult with the Ministerial Council for Corporations on those amendments which would affect the scope or operation of the Corporations Act, prior to introducing them into Parliament. The Agreement also requires public consultation in certain circumstances.

10.197 In accordance with the requirements of the Agreement, an exposure draft of the Bill was released for public consultation between 19 January 2010 and 16 March 2010.

10.198 Nine submissions were received in response to consultation on the exposure draft of the Bill. There were eight public submissions and one confidential submission.

10.199 The banking and insurance industries raised no major concerns with the proposals contained in the exposure draft of the Bill.

10.200 CPA Australia, the Institute of Charted Accountants in Australia and the National Institute of Accountants (the Joint Accounting Bodies), supported the proposals in the exposure draft relating to auditors.

10.201 The superannuation industry raised concerns about the proposed offences relating to giving false or misleading information to auditors and elements of the proposed harmonised record keeping regime.

10.202 The proposed offences would be consistent with the equivalent offences applicable in the Corporations Act and other contexts and are drafted to enable the Court to take into account all relevant circumstances in determining whether they have been breached, including the circumstances in which the information is communicated to the auditor. In addition, the proposed offence provisions and penalties would apply to all superannuation entities, consistent with the present regime for regulating superannuation entities.

10.203 The record keeping regime would be consistent with that applicable to other industries regulated by APRA. In response to concerns that records may be able to be kept overseas, this would only be approved in appropriate circumstances. As to the requirement to notify APRA of the location of records, the form which APRA would develop for this purpose would specify requirements.

10.204 APRA, ASIC, the RBA and the ATO were also consulted regarding the proposals.

Implementation and review

Changes to the prudential regulation framework laws

10.205 The proposals will need to be implemented by passing amending legislation through the Commonwealth Parliament.

Enforcement

10.206 APRA would have responsibility for enforcing the amended Acts, with the exception of the Reserve Bank Act and certain provisions of the Superannuation Industry (Supervision) Act that are enforced by the Reserve Bank and ATO respectively.

10.207 There would be various penalties ranging from fines to imprisonment for breaching the amended laws.

Review

10.208 The effectiveness of the proposed amendments would be informally reviewed by Treasury after a sufficient period of time had elapsed.

Index

Schedule 1: Amendment of the Banking Act

Schedule 2: Amendment of the Insurance Act 1973

Schedule 3: Amendments of the Life Insurance Act 1995

Schedule 4: Amendment of other Acts

Schedule 5: Amendments relating to levies

Schedule 6: Technical amendments

Schedule 7: Repeal of Acts