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Thursday, 26 March 1998
Page: 1649


Mr COSTELLO (Treasurer) (9:31 AM) —I move:

That the bill be now read a second time.

I rise today to introduce a package of landmark legislation to fundamentally reform the Australian financial sector. The reforms follow the policy announced in response to the 1997 financial systems inquiry chaired by Mr Stan Wallis. This series of bills puts in place a structure designed to improve the efficiency and competitiveness of the Australian financial system while preserving its integrity, security and fairness. Once implemented, Australia will have a stronger regulatory regime designed to better respond to developments in the finance sector, including globalisation and technological change and the needs of businesses and consumers. Once implemented, Australia will be a world leader with best practice, leading edge financial sector regulation.

These reforms to the financial system, together with the wide ranging reform of Australia's corporate laws to be delivered under the corporate law economic reform program, provide a launching pad for this government's drive to make Australia a leading business centre in the Asia-Pacific region. In September last year, the government announced its response to the financial system inquiry which found that Australia's financial system faces rapid change as a result of technological innovation, increasing globalisation and changing business and consumer needs.

To ensure that Australia secures the enormous potential benefits of these changes and keeps up with the continuing rapid pace of financial system innovation, our regulatory arrangements must be modernised. By encouraging our financial system to achieve world best practice in an increasingly competitive international market for financial services, we will see the sector contributing strongly to employment and growth prospects of the entire Australian economy. The changes will help provide not just more jobs but better jobs for Australians.

The government has accepted the inquiry's recommendations that measures consistent with the basic goals of financial system safety and stability be introduced to better focus regulation on its underlying objectives, to ensure that regulatory arrangements minimise restraints on new entry and competition, and to ensure that regulation applies in a competitively neutral way across existing and newly emerging market sectors. A central part of the reform approach is the creation of a new organisational framework for the regulation of the financial system which is objectives based, in place of the current institutionally based structure.

There are three fundamental regulatory objectives for government intervention in the financial system. The first is the maintenance of financial stability, including through ensuring a safe and reliable payments system. This goal, which has close links with the price stability objective of monetary policy, is to be the regulatory focus of the Reserve Bank of Australia. The second goal is the provision of specialised regulation of conduct, disclosure and dispute resolution for financial service providers and financial markets. This regulatory objective will be pursued across the financial system by the Australian Securities and Investments Commission, ASIC, which will be based on the Australian Securities Commission. The third objective is the prudential supervision of those parts of the financial system which require more intense regulation for safety and stability reasons. Australia presently has several agencies providing this form of regulation in a structure that is increasingly outdated and ineffi cient. To provide more efficient and competitively neutral regulation across all of the prudentially regulated sectors, the government will establish a single prudential regulatory authority replacing all of the institutionally based agencies. This bill, the first in a series of financial sector legislative reforms, establishes this single agency, the Australian Prudential Regulation Authority, or APRA.

APRA will be the prudential regulator of banks and other deposit-taking institutions, life and general insurance companies, superannuation funds and retirement income accounts. APRA will have comprehensive powers, including for licensing and regulation of the institutions authorised to provide these financial services. In recognition of likely continuing change in the financial system, provision is made for regulations to accommodate future changes in APRA's regulatory coverage.

In the case of superannuation and retirement savings accounts, APRA will also be responsible for regulation designed to achieve retirement income objectives. This reflects the close association between regulation for that purpose and prudential regulation in these sectors. While APRA will initially take regulatory responsibility for all superannuation funds, it is anticipated that this responsibility in respect of most excluded superannuation funds will later pass to the Australian Taxation Office. Provision is made for APRA to be accountable through an independent board and to operate under a charter that ensures that the safety objectives of prudential regulation are balanced with efficiency, competition, contestability and competitive neutrality considerations. The bill sets out the framework for APRA's operation. This bill establishes the powers and functions of APRA while other legislation in this package of bills will provide for the laws and regulations to be administered by APRA in relation to each sector.

APRA will be an independent regulator, but, like the Reserve Bank, will be subject to an overriding policy determination power of the Treasurer in the very rare event of unreconciled disagreement with the government of the day. As a Commonwealth authority, it will be accountable to the government and the parliament, as provided for under the Commonwealth Authorities and Companies Act 1997. In addition, the bill provides for additional reporting requirements in APRA's annual report, including a report on any investigations on prudential matters under section 61 of the Banking Act 1959. Any reports presented to parliament by APRA may, of course, be referred by parliament to a committee, such as the House of Representatives Standing Committee on Financial Institutions and Public Administration, for detailed examination. APRA will also be expected to appear before parliamentary committees on request.

APRA will be governed by a nine member board, whose terms and conditions of appointment will be subject to determination by the Remuneration Tribunal. To ensure that there is a close relationship between APRA, the Reserve Bank and ASIC, two of APRA's board members will come from the Reserve Bank and one from ASIC.

The bill provides for the duties and statutory appointment of the Chief Executive Officer who will also be an APRA board member. It also provides for the powers of the board to set terms and conditions of APRA staff. It is envisaged that in the first instance the bulk of APRA's staff will come from the Insurance and Superannuation Commission, ISC, and the Reserve Bank supervision area, together with the staff of state based regulatory agencies when they join the regulatory scheme.

Provision is made for the funding of APRA from moneys appropriated following the collection of levies paid by regulated financial institutions, and from charges for certain services. APRA is to have powers to borrow moneys, but these are intended only to facilitate its day-to-day operations. Secrecy provisions in the bill will ensure the protection of information and documentation obtained as part of the regulation process but allow for effective information exchange between the financial sector regulatory bodies, including the Reserve Bank and ASIC.

The government envisages that APRA will become fully operational, at the Common wealth level, on 1 July 1998 or as soon as possible thereafter. In this context, this bill provides for the changeover of responsibilities for prudential supervision of the financial sector at the Commonwealth level. Transfers of staff and responsibilities for state based institutions may require separate legislation at a later date, once final agreement has been reached with the states and territories.

As I announced on 17 March 1998, the headquarters of APRA will be based in Sydney to ensure that a close relationship is maintained with the Reserve Bank, which will continue to have responsibility for the overall stability of the financial system. This will facilitate close communication and operational cooperation between these two bodies. In addition, the government expects a presence to be retained by APRA in the major state capitals and, at least for some considerable time, Canberra, which is the current base of the ISC.

I conclude by noting that this bill provides a centrepiece of the proposed new regulatory structure, a specialised regulatory agency focused on clear regulatory purposes. As the single prudential regulator, APRA will be able to provide flexible, efficient, coordinated and consistent regulation across the financial sector, particularly for financial service conglomerates which now make up the major part of the financial system. It will be in a position to achieve regulatory excellence, provide broader and more enriching career opportunities for its staff, and develop close and comprehensive links with the whole financial system.

Consistent with the need for regulatory flexibility, APRA is provided with comprehensive powers, including over licensing, and generally will develop financial standards based on its own policy making capacities within the framework of laws established for it. This should ensure that APRA is adaptable and responsive to the changes occurring in the financial system, and that its regulatory work always balances the objectives of financial safety, efficiency, competition, contestability and competitive neutrality. I commend the bill to the House and present the explanatory memorandum.

Debate (on motion by Dr Theophanous) adjourned.