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Wednesday, 26 May 2010
Page: 4128


Mr BOWEN (Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services) (10:20 AM) —I move:

That this bill be now read a second time.

Introduction

The Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Bill 2010 continues the legislative amendments made by the government to improve the efficiency and operation of a range of financial sector legislation.

The bill contains amendments to 17 acts and repeals five redundant acts.

Financial sector legislation plays a critical role in protecting the financial wellbeing of the Australian community. The legislation is administered by several regulators including the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, the Reserve Bank of Australia, and the Australian Taxation Office.

The bill is largely the result of a review of the prudential regulatory framework by APRA and the Treasury. This review identified amendments necessary to strengthen APRA’s ability to effectively fulfil its mandate. 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.

APRA is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. These institutions hold approximately $3.6 trillion in assets for 22 million Australian depositors, policyholders and superannuation fund members.

APRA is also responsible for the administration of the Financial Claims Scheme and acts as the national statistical agency for the financial sector.

APRA is funded largely by the industries that it supervises through annual levies imposed on regulated entities.

Outline of measures in the bill

The bill covers five key areas of reform.

Firstly, it amends the prudential regime by strengthening APRA’s powers to prevent prudential regulatory concerns arising and to address them should they arise.

Secondly, it amends the Financial Claims Scheme to facilitate APRA’s administration of the scheme and improve the scheme’s operation.

Thirdly, it amends the Financial Sector (Collection of Data) Act 2001 to promote the harmonisation and flexibility of the data collection and publishing regime, and APRA’s role as the central repository for the collection of financial data.

Fourthly, it amends the financial sector levies framework to improve the methodologies governing the determination of levies.

Finally, the bill repeals five redundant acts as part of the government’s commitment to continuously clean up red tape.

Preventive powers

Powers to engage in early preventive action are essential to maintaining confidence and stability in the financial sector.

This is recognised internationally and by the government.

The ability for APRA to actively supervise financial sector institutions is a critical factor to successfully preventing prudential concerns arising. Likewise, it is crucial that APRA is able to effectively set minimum standards for entry into financial markets and that only fit and proper people fulfil key roles within institutions.

The bill enhances all these aspects of the prudential regime.

The bill ensures that APRA can better supervise financial sector institutions by addressing potential gaps and uncertainty in the present legislation.

These gaps may presently prevent prudential standards from applying to general insurance groups, incorporating documents by reference, and from providing for important matters relating to the protection of depositors and policyholders. They may also prevent regulators from investigating financial institutions during winding up, from being able to access key records held by institutions, and from continuing an authorisation in-effect upon revocation.

These gaps need to be closed in order to ensure that APRA can fulfil its mandate in relation to prudential regulation and financial system stability.

Equally, Australians deserve to be confident that financial institutions have met the minimum standards set by APRA and that they are run by ‘fit and proper’ persons.

At present, APRA may only set minimum criteria for entry into regulated markets by guidelines. The bill will enable APRA to set such standards by legislative instruments, which provide legal certainty.

The bill also assists regulators in ensuring that key persons within financial institutions are fit and proper to hold their positions by responding to the High Court’s decision in Rich v ASIC. The amendments prevent these persons from refusing to provide information to the regulator or court on the grounds that doing so may expose them to disqualification under prudential laws.

Persons subject to disqualification under these laws are in a position of considerable responsibility with respect to the assets of others and the stability of Australia’s financial system. It is therefore appropriate that the court’s decision be responded to in a manner similar to that which has already been enacted in the corporations and trade practices contexts.

It is also appropriate that the regulatory regime applying to auditors and actuaries be harmonised. At present, the regime is unjustifiably inconsistent between APRA administered acts and other laws. The bill addresses these inconsistencies by amending the various laws to adopt a more coherent approach. It also ensures that key provisions relating to interference with audits exist in the prudential context as they presently do under the Corporations Act.

Corrections power

It cannot be assumed, however, that the prudential regime can prevent prudential concerns from ever arising. As such, it is also necessary to ensure that APRA has effective powers to correct concerns should they arise.

Directions powers are a key tool at APRA’s disposal for doing so. They enable APRA to specify how an entity should address prudential concerns where less direct means have failed.

At present, however, there is uncertainty as to several aspects of APRA’s directions powers. For example, it is uncertain whether the powers enable APRA to direct a foreign bank branch to address concerns about inappropriate intra-entity transactions. There is also the possibility that the provision of external support to an authorised deposit-taking institution, such as government assistance, might prevent some direction powers from being able to be used.

The bill addresses these and other uncertainties. By doing so, it strengthens APRA’s ability to act quickly and decisively to protect depositors, policyholders and the financial system.

Failure management powers

Prudential regulation in a market economy cannot have a ‘no failure’ objective. Recognising this, APRA currently has a range of powers to manage and resolve failure should it occur.

The importance of these powers in protecting depositors and policyholders and maintaining confidence in the financial system is self-evident. It is therefore of the utmost importance to ensure that they are effective and sufficient for the task.

To this end, the bill strengthens APRA’s failure management powers.

The amendments increase the effectiveness of the statutory and judicial management regime. In particular, they ensure that APRA can obtain necessary information and assistance from a judicial manager and enhance APRA’s information-gathering powers during statutory management. They also clarify provisions relating to the appointment of statutory and judicial managers and their powers.

The bill also enhances APRA’s compulsory transfer powers. APRA currently has powers to compulsorily transfer any aspect of the business of an ADI and the regulated business of a life insurer in appropriate circumstances. The amendments enable the powers to operate in relation to both life and general insurers in a similar way to which they presently apply to ADIs.

Another important reform ensures that APRA has power to direct a distressed ADI or insurer to recapitalise. It is not currently clear whether a power to require recapitalisation exists outside of statutory or judicial management. The amendments ensure that APRA can issue a recapitalisation direction in circumstances where it is not desirable to first place the entity into statutory or judicial management: for example, where doing so would undermine confidence in the financial system or the ability of the entity to raise the necessary capital.

Financial Claims Scheme

The bill amends the Financial Claims Scheme provided for in the Banking and Insurance acts.

The scheme provides depositors in Australian incorporated ADIs with a guarantee of their deposits to a threshold prescribed by regulations. In addition, it provides compensation to eligible policyholders with claims against a failed general insurer.

It is important that the scheme’s operation is clear, consistent and able to be effectively administered by APRA. This bill ensures this.

The amendments enable APRA to settle claims and issue forms with respect to common administrative matters under the Insurance Act. They also ensure that all relevant policyholders are covered by the scheme and clarify its operation in particular circumstances.

In addition, the amendments ensure that APRA can obtain the information and assistance it requires to administer the scheme from liquidators and judicial managers.

Data collection regime

The bill amends the Financial Sector (Collection of Data) Act to promote the harmonisation and flexibility of the data collection regime and APRA’s role as the central repository for the collection of financial data.

The bill includes five key reforms in this respect.

First, it ensures that APRA can collect data under the act to assist it to administer the Financial Claims Scheme and to assist the minister and other agencies perform their functions.

Second, it enables APRA to collect data from an expanded class of financial sector entities on direction from the minister to ensure all relevant data can be collected.

Third, it ensures that APRA does not have to consult when preparing reporting standards where the resulting delay may have a detrimental effect on financial system stability.

Fourth, it protects confidential information in reporting standards from disclosure in circumstances where disclosure may detrimentally affect the stability of the financial system or institutions, and the requested data is required urgently by APRA.

Finally, it ensures that APRA can require all data collected under the act to be audited.

Amendments to the financial sector levies framework

The bill improves the methodologies governing the determination of financial sector levies.

The 2009 Report of the Review of Financial Sector Levies made several recommendations to improve the levies regime. In particular, it recommended that the regime be amended so that a levies base other than assets may be used in appropriate circumstances. It also recommended that the date for determining the levy payable by a new superannuation entity should be the date it became regulated rather than at 30 June of the previous financial year.

The amendments give effect to these recommendations and related matters.

Repeal of acts

The bill repeals five redundant acts relating to the validation of past financial sector levy determinations.

The government is committed to better regulation and reducing red-tape.

Leaving redundant legislation on the books increases the cost for business by making it harder to identify which rules apply. It also increases the probability of inconsistent or overlapping rules.

Consultation

An exposure draft of the bill was released for public consultation on 19 January 2010. In response, a number of submissions relating to the bill were received. The majority of these submissions either supported or had no major concerns with the bill.

[As required by the Corporations Agreement 2002, the Ministerial Council for Corporations was also consulted on, and has approved the amendments in the bill to the national corporate regulation scheme.]

Conclusion

This bill improves the overall effectiveness of Australia’s prudential regulatory regime. Importantly, it makes amendments to the regime to enhance APRA’s ability to prevent prudential concerns arising and to respond to them should they arise. It provides APRA with the tools it needs to protect the wellbeing of Australians from distress in the financial system.

It also enhances the Financial Claims Scheme and the data collection and financial sector levies regimes.

I commend the bill to the House.

Debate (on motion by Mrs Gash) adjourned.