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Wednesday, 30 November 1983
Page: 3101

Mr JACOBI(7.12) —The basic thrust of the Insurance Amendment Bill is to increase the minimum paid up share capital of general insurance companies from $ 200,000 to $500,000 and to increase the solvency margin from 15 per cent to 20 per cent, with a minimum net tangible asset of at least $1m compared with the current figure of $100,000. There are other provisions which will strengthen the Act. But the all-important question is: Will it give policy holders, the industry and the community the protection they deserve? The blunt answer is no. The last major review of this legislation was in May 1973, after 24 years of Liberal neglect. Why is it inadequate? Why will it be ineffective? Let me quote from a speech I made dealing with the principal Act in 1973:

Over the preceding 23 years all tory governments have failed to enact appropriate legislation to regulate the insurance industry. The failure to act has had disastrous consequences. We have witnessed over the last three years the collapse of no fewer than 16 companies, involving millions of dollars . . .

Tens of thousands of policy holders have needlessly suffered hardship, anxiety and financial loss because of the failure of previous governments to update the existing Act . . . I am equally conscious of the need for sound legislation directed towards the protection of both policy holder and share holder against unscrupulous predators, the result of which has been the extraordinary number of company crashes which have had such devasting effect on the industry. Above all we must acknowledge that a sound and well regulated insurance industry is an integral part of the national economic structure.

In discussions with Treasury officials in 1973 leading up to that Bill I tried to have incorporated in it provisions which to a large extent would have blocked off the appalling disasters, particularly the recent Bishopsgate Insurance Australia Ltd collapse. They were completely refused by the Treasury, to its eternal discredit, despite my persistent effort time after time. The Notice Paper since 1973 attests to the fact that the Treasury flatly rejected any moves to put in place amendments that would have blocked off the appalling Bishopsgate disaster.

In 1973 I won from Caucus approval for 'a constructive independent inquiry into the general insurance industry' because I was conscious that the industry deserved better legislation. I was right in my assessment that the 1973 legislation would not block the charlatan, the corporate crook, from exploiting gaps in the legislation. Again the Treasury did not want it and successive Treasurers rejected it. The Bishopsgate fraud proved that beyond any doubt.

The Bishopsgate collapse in August of this year was due to fraudulent extraction of funds by its principal. It collapsed with debts of nearly $19m. The Acting Insurance Commissioner has launched an investigation into the implications for the Insurance Act of the collapse of the company. The Treasurer (Mr Keating) said that the collapse of Bishopsgate was 'a case of clear fraud'. It seems to me that Andrew Stathis was the man behind AEK Nominees Pty Ltd, but the fraud squad is finding it difficult to discover details because certain relevant information was never given to the Corporate Affairs Office. In August 1983 sources said that Stathis, understood to have left the country on a Japan Air Lines flight to Tokyo a week before, was arrested in 1979 and charged with conspiring with four other people to grow marihuana near Cowra in New South Wales. He and three others were charged with conspiring to grow marihuana with a street value of $60m and faced a committal hearing of 22 days involving 39 exhibits. Bail for him was opposed and the police said that he had a record of dishonesty. It was also revealed that the same man wanted for questioning under the name of Stathis in connection with the Bishopsgate $18 1/2m collapse was made bankrupt in 1981.

An insurer is a special type of commercial operation. Individuals seek protection against a given contingency. It is the essence of an insurer that he is able to offer secure and sound financial backing for policy holders over a period of years. It is axiomatic that an ordinary Australian has almost no means whereby that financial integrity can be easily judged. Nothing in the legislation gives him that right. It has been considered that the insurance industry must be oversighted in a special way by governments in order that insurance is not sold by persons who are unscrupulous or incompetent. The consequences of an insurance collapse are so profound as to make the task of oversight one of the most important obligations on government. The Deputy Leader of the Opposition (Mr Howard) failed as Treasurer, as did his officers. It is an obligation that ought to have been accepted by all governments. It is taken for granted by the great bulk of policy holding Australians who put their reliance in the legislation to protect them from insurance collapse. In the framing of our Federation there was a provision in the Constitution giving an obligation to do that. The collapse of an insurer ought to be regarded as a major failure by any Federal government. We cannot step away from our responsibilities by leaving it to the market place.

We have failed, and my persistent efforts have failed. This extraordinary admission of failure is bluntly set out in a telling and excellent speech on the 8th of this month to the Australian Insurance Law Association by Mr Peter Duerden of Royal Insurance Australia Ltd. Before I quote that, prior to the 1973 Act and time after time down the years I have tried to have inserted into the Act provisions identical to those in the United Kingdom Act which would have given the Insurance Commissioner power to examine whether a director was a fit and proper person. Time after time since 1973 the Treasury has rejected those provisions. Let me quote from Peter Duerden:

None of these proposed changes-

that is, the Australian Law Reform Commission recommendations-

would have saved Bishopsgate Insurance Australia Ltd . . . nor is it likely that the implementation of the Australian Law Reform Commission recommendations on investment control would have served that purpose either. The basic recommendations were largely concerned with achieving a secure spread of investments. However, under the section headed 'Control over Directors' in report 20 the Commission did explore the possibility of the Insurance Act being amended to include provisions similar to those incorporated in the United Kingdom's Insurance Companies Act 1974. That Act requires insurers to give notice when any person becomes a director, controller or manager. Each of those persons must provide certain particulars. These include details of personal identification, of qualifications and experience, whether convicted of an offence, censured, disciplined, or publicly criticised by any professional body, or adjudged civilly liable for fraud, misfeasance or other misconduct in connection with the management of any corporation.

Such a net would almost certainly have caught Mr Andrew Stathis before he gained effective control of Bishopsgate and thus before he could position himself as Bishopsgate's executive director in charge of finance and investment.

Thus, the United Kingdom legislation followed the disastrous collapse of the Vehicle and General company in 1970. It seems that the Australian Insurance Act has left the problems of fraudulent practices to the powers of the authorities administering the companies legislation in each State. Indeed, the Insurance Commissioner in his 1979-80 report stated:

Similar considerations probably apply to the important area of company law, relating to the fiduciary responsibilities of the directors of companies, which is not specifically dealt with by the Insurance Act.

Bishopsgate therefore gives rise to some fundamental questions about the efficacy and competence of our corporate affairs officers in preventing the kind of basic abuses which led to the Bishopsgate collapse. After all, the Companies Act has been the primary line of defence, and that is a failure. Why do we have laws and expensive government departments if they do not or cannot, for whatever reason, prevent the kind of basic abuses which led to the Bishopsgate collapse? The reason is that the previous Government did not have enough courage to put in place the regulations that would have blocked such practices. It left that for the market-place, for somebody else to pick up. It appears on the face of it that certain responsibilities were not fulfilled long before the Office of the Insurance Commissioner needed to become involved. The first and important line of defence was vulnerability, and vulnerability was obviously exploited.

What prompted the piece of United Kingdom legislation? The answer is simply that after an extensive debate in both the House of Lords and the House of Commons that Parliament made the clear distinction that the insurance industry was different from any other section of the corporate area. Yet, if an insurance company collapsed the downstream effect was devastating. We failed to do anything at all in that area. I have repeatedly called for the legislation. It is long overdue. It would have provided flexibility and powerful sanctions for the Insurance Commissioner in cases where shady directors, in this case Stathis, were the subject of widespread disparagement within the insurance industry. It is the law of the land, strangely enough, in Thatcher's England, but it is not the law in this country. I have never heard from the Treasury a convincing reason as to why we have failed to mimic this protective provision, as we have mimicked the general provisions.

Time after time I have proposed amendments identical to the United Kingdom Act to effect greater control, but without any success at all. Taking the case of Palmdale Insurance Ltd, a single investment in a relatively speculative venture did much to destroy the company. Now, almost a decade later, I understand that employers are still facing claims from injured employees, in some cases representing scores, even hundreds of thousands, of dollars, in potential liability. Those claims, once indemnified under now worthless public risk or employees' indemnity policies, will never be able to be met from the fund left by the liquidator. So the market-place has to pick them up. It is a disaster.

I have repeatedly referred to the need to establish an appropriate arrangement for a principal investment officer. That is long overdue. Such a provision ought to be included in the Insurance Act if it is not available under the provisions of the Companies Act. I have referred before to the existence of the Policy Holder Protection Act of 1975 in the United Kingdom. That matter has been on the Notice Paper since 1975 and has been repeatedly rejected by the Treasury and respective Treasurers. It is very strange that that legislation was bitterly opposed in the United Kingdom in 1975, but it was ultimately accepted as being beneficial. Nothing is in place in the case of Bishopsgate, and my guess is that there will be nothing left for the unsecured creditors when the liquidator comes to disburse. It is an utter disgrace. Again, the Treasury stands condemned.

I want to turn to the last issue that needs to be looked at in some depth and to make some rather blunt observations. How can one legislatively extend protection and security to the community? From what areas of the law, of regulation and of supervision can we expect that protection? If one is to judge from the track record of the past 36 years of Treasury control, in my humble view it has been an utter failure. Two critical areas need to be effective, efficient and enforceable if people are to have any trust in the legislation. Firstly, company law needs to be effective and efficient. It is defective and inefficient. Secondly, people are entitled to adequate consumer protection law. In my humble view, the department best structured to put the appropriate laws in place is not the Treasury, it is the Attorney-General's Department.

If ever a case highlighted the deficiencies in the Insurance Act and on the part of officers responsible for its administration it is Bishopsgate. I repeat that there is no excuse for the Bishopsgate collapse. Had appropriate laws been in place Stathis would never have become a director of Bishopsgate. We can sheet home the blame to only one area, and that is to the Ministers of the Crown who were responsible and who failed to regulate the industry. Let me say that if I do not get adequate and appropriate answers to the 64 questions on the Notice Paper which highlight deficiencies in both the Companies Act and the Insurance Act, and if those laws are not put in place, my advice to the Government is that it should take the legislative responsibility for insurance out of the dead hand of the Treasury and put it into the Attorney-General's Department.

Finally, the Government ought to recognise, as I am sure it has-I agree with the Deputy Leader of the Opposition-that all the regulation in the world will not be a panacea, but certain areas of regulation are. There ought to be and there must be attention by government to ensure that adequate disclosure provisions of the Companies Act and the Insurance Act are constantly monitored and investigated, that offence provisions are pursued rigorously, and that solvency provisions of the Act are maintained and updated. How can Australians put any trust in regulation against the unscrupulous and the incompetent? That trust, we ought to remember, ought to be underwritten by Parliament.

The insurance industry, as everybody agrees, is extremely complex. We have well over 200 non-life companies and, as I recall, something like 120 brokerage firms . Together with the life companies they play a critical and important role throughout this country economically, socially and otherwise. I want to repeat that the general insurance industry is bigger than the vehicle building industry in this country. It warrants a standing committee of the Parliament to enable industry and the public to talk directly to legislators. We need to break the bureaucratic nexus which has dominated this industry for the last 30 to 40 years . For too long much-needed legislative reform has been bottled up in Treasury. It needs to be aired and acted upon if the industry is to operate in a secure framework of legislative protection, yet with the freedom the market demands.

I say to my good friend opposite, the Deputy Leader of the Opposition, for whom I have tremendous respect, that he and I have failed in our battles over the years. We have failed the public in terms of insurance law. We cannot dodge our responsibility. It is not a question of over-regulation. It is a question of appropriate regulation. I do not subscribe to the view of over-regulation in either the company or the insurance area. What I do subscribe to is that a government should put in place sufficient regulation to block the spiv, the charlatan and the corporate crook. When it does that it builds a framework around the industry to give it that protection, to allow the consumer at least the maximum protection. Above all, such regulation would restore to the industry the credibility it deserves. If the Deputy Leader of the Opposition looks back over the last 15 years in which he and I have battled this out, that has been the result of our failure to give the legislation what is needed. We have the position where the general insurance industry has a question mark of credibility against it. Until we get to the stage of bringing in appropriate brokers legislation we will be placing the industry in the same position. We have a national responsibility to bring in national legislation.

Debate interrupted.