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Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998



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Bills Digest No.194 1997-98

 

Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does no t have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

 

Contents

 

Passage History

Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998

Date Introduced: 26 March 1998

House: House of Representatives

Portfolio: Treasury

Commencement: See each schedule below for details

Purpose

An omnibus Bill amending a number of Acts to help put in place a new regulatory framework for the financial s ector.

Background

In March 1997, the Financial System Inquiry (also known as the Wallis Inquiry, after its chairman, Stan Wallis) reported to the Federal Government. It had been given a wide brief to:

• ‘stocktake’ the results of the deregulation of the Au stralian financial system;

• examine the forces driving further change, particularly technology; and

• recommend changes to the regulatory system to ensure an ‘efficient, responsive, competitive and flexible financial system to underpin stronger economic p erformance, consistent with financial stability, prudence, integrity and fairness’.

In its final report, the inquiry recommended far-reaching changes to the $40 billion finance sector, most of which were accepted by the Federal Government. (It is recommend ed that this digest be read in conjunction with the DPL Research Paper No. 16 of 1996-97, ‘ The Wallis Report on the Australian Financial System: Summary and Critique’.  The Research Paper provides a summary of the Wallis report and analysis of its recommendations) This Bill, the Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998, is one of a package of eleven Bills implementing the recommendations.(1)

This Bill:

• establishes the Australian Securities and Investment Commission (ASIC) , which absorbs the Australian Securities Commission (ASC) and its responsibility for corporate regulation, plus it takes on the additional functions of consumer protection and market integrity for the whole financial system;

• establishes a single licensing regime for banks and other non-bank deposit-taking institutions to be overseen by a single Commonwealth agency, the Australian Prudential Regulation Authority (APRA), with responsibility for prudential regulation of the whole financial sector- it takes over the prudential functions of the Reserve Bank of Australia (RBA);

• establishes a Payments System Board within the RBA with responsibility for the massive daily transfer of funds between institutions;

• abolishes the requirement for banks to deposit one per cent of their eligible liabilities with the RBA (called non-callable deposits); APRA is to be funded, instead, by fees levied on institutions under its supervision;

• divides the powers of the Insurance and Superannuation Commissioner (ISC), which is to be abolished, between ASIC and APRA;

• leaves the way open for State-regulated institutions like credit unions and building societies to be covered by the Commonwealth scheme if and when the States agree.

Main Provisions

Many of the provisions in the B ill’s 19 schedules simply effect name changes, i.e. references to the soon-to-be-abolished ASC, are deleted, and the name of the appropriate new regulator - either ASIC or APRA - is substituted.

Some schedules repeal Acts in their entirety, for example:

•  schedule 3 repeals the Banks (Shareholdings) Act 1972 - it will be replaced by the proposed Financial Sector (Shareholdings) Act;

• schedule 11 repeals the Insurance and Superannuation Commissioner Act 1983 - the Commissioner’s functions are in future to be performed by APRA and ASIC; and

• schedule 18 (while it amends some other Acts) repeals:

the General Insurance Supervisory Levy Act 1989;

the Insurance Supervisory Levies Collection Act 1989;

- the Life Insurance Supervisory Levy Act 1989; and

- the Retirement Savings Accounts Supervisory Levy Act 1997

Schedule 3 , schedule 11 and most of schedule 18 commence on the commencement of the Australian Prudential Regulation Authority Act 1998. The parts of schedule 18 which amend the Australian Prudential Regulation Authority Act 1998 , commence either on the commencement of the APRA Act if the Public Service Act 1998 has already commenced; or following the commencement of the Public Service Act 1998 .

The major amendments in the remaining 16 schedules are outlined below.

Amendments to the Australian Securities Commission Act 1989

A new super-regulator

Commencement: Schedule 1 commences on the commencement of the Australian Prudential Regulation Authority Act 1998.

Schedule 1 has 35 items amending the Australian Securities Commission Act 1989. The changes establish the ASIC, giving it functions formerly performed by the ASC, with additional responsibility for consumer protection and market integrity for the whole financial sector, including insurance and superannuation.

The expanded role for the new body is spelt out in item 3 . It repeals subsection 1(2) and inserts a new section which makes it clear that the ASIC’s responsibilities extend not just to the performance of companies, and the securities and futures markets, but to the whole financial system. For example, proposed paragraph 1(2)(a) says ASIC, in performing its functions and exercising its powers, must strive to ‘maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy’.

And proposed paragraph 1(2)(b) says ASIC must strive to: ‘promote the confident and informed participation of investors and consumers in the financial system’.

ASIC’s additional functions

ASIC’s additional functions and powers are spelt out in item 10 which inserts proposed section 12A. This item:

• transfers the p rudential functions of the ISC to the ASIC. Proposed section 12A(1) lists the Acts which are to be amended to effect the change. The actual amendments to those Acts are contained in later schedules to this Bill (schedules 9, 10, 12, 13, 15, 16);

• gives the proposed body the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system, including the payments system; proposed subsections 12A(2) and (3); this was previously carried out by the Australian Payments System Council which is to be abolished;

• with regards to the payments system, it also has the function, under proposed subsection 12A(3) of promoting and monitoring the operation of, and compliance with, industry standards and codes of practice (this function was previously carried out by the Australian Payments System Council); proposed section 12A(3);

• gives the ASIC the right to advise the Minister about changes to the laws dealing with its prudential functions, and to make recommendations about any matters relating to monitoring and promoting market integrity, consumer protection and operating standards and codes of practice.

Proposed section 12A is headed ‘non-national scheme laws’ because it relies for its validity on a direct head of Commonwealth Constitutional power. In contrast, the rest of the Australian Securities Commission Act 1989 only has a national reach because of agreement between the Commonwealth, the States and the Territories.(2)

Giving ASIC teeth

Item 11 inserts a proposed section 93A into the part of the Act dealing with investigations and information-gathering. The proposed section would allow ASIC to accept a written undertaking, which may then be enforced by a court, if the court finds the undertaking has been breached. Under proposed section 93A(4), the court has wide powers. It may:

• direct the person to comply with the undertaking;

• order the person to pay the Commonwealth an amount up to the amount of any financial benefit obtained as a result of the breach;

• order the person in breach to compensate anyone else who has suffered loss or damage as a result of the breach; and

• make any other order the court sees fit.

Power to delegate to APRA

Items 13 and 14 insert proposed paragraph 102(2)(d) and proposed subsection 102(2A) which in combination allow ASIC to delegate powers to an APRA official, but only with the agreement in writing of the Chief Executive Officer of APRA.

Disclosing pecuniary interests

Item 16 widens the types of direct or indirect pecuniary interests which the Chairperson must disclose to the Minister to include, not only any interest s/he has in a business or body corporate carrying on a business in Australia, but in a pooled superannuation trust, a superannuation fund, an approved deposit fund or body corporate providing such a fund, a retirement savings account or retirement savings provider, or a body corporate that is a trustee of one of the above funds.

The disclosure must be in writing.

Confidentiality and disclosure of information

Items 17 to 29 deal with the confidentiality and disclosure of information. Presently, subsection 127(1) requires the Commission to take all reasonable measures to protect information given to it in confidence in connection with its performance or functions. That section is to be amended by item 17 to include ‘protected information’, which, under the definition in item 29 , means information disclosed or obtained, or a document given or produced (whether before or after the commencement of the section) in relation to proposed section 12A (see item 10 above) which contains the new functions and powers of ASIC.

Items 18 to 28 then detail what sort of information may be released to other people or entities, and under what conditions. For example, under proposed subsection 127(1A) summaries of information or statistics may be released provided that the summary does not contain information which may be used to identify a particular individual. Under proposed subsection 127(2A) information may be disclosed to:

• the Minister;

• the Secretary of the Department or other authorised officer but only  for the purpose of advising the Minister; and

• APRA.

Under proposed paragraph 127(4)(a) th e chairman may supply information to:

• the Australian Bureau of Criminal Intelligence;

• the Australian Financial Institutions Commission;

• the Superannuation Complaints Tribunals; or

• the Office of Law Enforcement Co-ordination in the Commonwealth Atto rney-General’s Department;

if s/he is satisfied it will assist them in doing their job. This is in addition to bodies already listed in the Act. The chairman may also attach conditions to the supply of the information.

Under proposed section 127(4)(c) info rmation may also be disclosed to a professional disciplinary body performing its functions, but that body must not disclose the information to any other person (proposed subsection 127(4EA)) and must not use that information for any purpose other than disciplinary action. The penalty is two years imprisonment.

Unclaimed superannuation money

Proposed changes to subsection 135(4) would give the Commission the power to spend money on its proposed functions, including administering unclaimed moneys under the Superannuation Industry (Supervision) Act 1993 .

Amendments to the Banking Act 1959

Commencement: Schedule 2, except for item 86, commences on the commencement of the Australian Prudential Regulation Authority Act 1998. Item 86 , which repeals the requirement for banks to deposit non-callable funds with the RBA, commences either on a day to be fixed by proclamation, or if no date is proclaimed, 24 months after this Bill receives Royal Assent.

Major changes at a glance

The Banking Act 1959 contains the scheme for regulating banks. The amendments in schedule 2, extend the scope and reach of the Act to include not just banks, but all deposit-taking institutions. The amendments also strip the RBA of its powers to supervise banks - giving them instead to APRA. (APRA is to be established under the Australian Prudential Regulation Authority Act 1998, which is one of the package of eleven Bills revamping the regulation of the financial system, presently before parliament.)

APRA’s powers include the power to:

• issue a deposit-taking institution or a non-operating holding company (NOHC) with an authority to operate as an Authorised Deposit-taking Institution (ADI) or an NOHC - or revoke the authorisation or impose conditions on it; (an NOHC is a new financial creature designed to allow the formation of financial conglomerates which are to be allowed to hold more than one deposit-taking licence);

• make prudential standards with which ADIs and NOHCs are expected to comply;

• investigate ADIs or NOHCs under certain circum stances;

• direct them to comply with a prudential regulation or prudential standard;

• order an audit of the affairs of an ADI or NOHC at that company’s expense;

• ensure a nominated director or secretary, executive officer or employee does not take part in the management or conduct of the company;

• issue a direction not to borrow money; or issue any other direction as to the way in which the affairs of the company are to be conducted (it is a criminal offence to fail to comply with a direction); and

• take control of an ADI, or appoint an administr ator to take control under certain circumstances - an administrator who may even sell off all or part of the business; (if APRA does appoint an administrator - that administrator takes over control of the business and any existing directors cease to hold office, and the appointment of any external administrator is terminated.

Proposed definitions

The first 25 items of schedule 2 insert proposed definitions in the Banking Act 1959 . These include:

• APRA ( item 4 ) - the Australian Prudential Regulation Authority;

•  an authorised deposit-taking institution ( item 7 ) which is defined as a body corporate to which APRA has granted a written authority to carry on a banking business in Australia ( item 33 , proposed subsection 9(3));

•  bank ( item 5 ) which is defined as a particular sort of ADI - one granted approval, under proposed section 66, to call itself a bank;

•  a non-operating holding company ( item 16 ) which is defined as a company, incorporated in Australia, whose only business consists of owning or controlling other companies; and

•  prudential matters ( item 17 ) which is expanded to include all ADIs (of which, of course banks are a subset) and NOHCs; the obligations remain the same as in the current Act. They are: to conduct its affairs in such a way as: to keep itself in a sound financial position and not to cause or promote instability in the Australian financial system; and to act with integrity, prudence and professional skill.

Authority to be an ADI

Items 33 to 40 detail how a deposit-taking institution may become authorised to carry on a banking business, and set out APRA’s power to grant, revoke, or impose conditions on an authority.

Item 33 says APRA may grant a body corporate authority to carry out a banking business in Australia. If so, it must do so in writing. However, it may decide to refuse an application, and one reason for that could be if the company is a subsidiary of an NOHC that does not hold an NOHC authority. Similarly, under item 36 APRA may make the authority conditional on a company, of which the ADI is a subsidiary, being an authorised NOHC.

If APRA decides to grant an authority to carry on a banking business, or impose vary or revoke conditions attached to it, it must publish the details in the Government Gazette. ( Item 39 ).

Revoking an ADI’s authority

Proposed section 9A, inserted by item 40 lists when APRA must revoke an authority to carry on banking - for example, (subsection 9A(1)) if the body corporate requests the revocation in writing and APRA is satisfied that it is not contrary to the national interest or the interests of depositors.

However, proposed subsection 9A(2) deals with other situations where APRA may revoke an authority and is very broadly drafted. It includes where:

• a company has not complied with a requirement of the Act;

• it would be contrary to the national interest or the interests of the company’s depositors, for the authority to remain in force;

• the body corporate is insolvent and is unlikely to become solvent again within a reasonable time;

• the body corporate h as not paid fees and charges; or

• has ceased to carry on a banking business in Australia.

In these circumstances, generally speaking, APRA must act in accordance with the rules of natural justice, i.e. before revoking an authority, APRA must give the company written notice setting out the possible course of action, and the reasons for it, and allow the company at least 90 days in which to respond.

However, these procedures need not be followed if APRA is satisfied that delay would be contrary to the national interest, or the interests of depositors.

If an authority is revoked, APRA must do so in writing and publish notice of its actions in the Gazette - although failure to publish does not invalidate the order.

Items 41 to 44 change the requirement that a body corporate seeking authority to be an ADI supply certain documents to the Treasurer. Instead, the documents are to be provided to APRA.

Similarly, item 45 gives the power to grant an exemption from provisions of the Act to APRA, instead of the Treasurer. This proposed section is extremely wide and open-ended in its effect. The proposed subsection 11(1) reads: ‘APRA may, by order published in the Gazette , determine that all or specified provisions of this Act do not apply to a person during the period while the order continues in force.’

Authority to be an NOHC

Item 47 inserts proposed sections setting out the process for granting an authority to be an NOHC of an ADI, and empowers APRA to attach conditions, and to vary or revoke them. The scheme is much the same as for ADIs.

Setting prudential standards

Item 49 gives APRA wide-ranging powers to determine prudential standards for both ADIs and NOHCs. Failure to comply with a standard is not a criminal offence, but may lead to a direction being given ( item 53 below). Failure to comply with a direction is a criminal offence (see item 152 which inserts a new table of criminal offences).

Power to issue directions

Item 53 inserts proposed Division 1BA outlining APRA’s powers to issue directions.

Under proposed section 11CA, APRA may issue directions to an ADI or an NOHC  if:

• the company has contravened a prudential regulation or standard;

• in the case of an ADI, it is necessary to protect the interests of depositors; or

• in the case of an NOHC, it is necessary to protect the interests of depositors of any ADI that is a subsidiary of the NOHC.

Types of directions

Directions which may be issued (pr oposed section 11CA(2)) include:

• to comply with all or part of a prudential regulation or prudential standard;

• to audit a body corporate at its expense;

• to ensure a specified director or secretary, executive officer or employee does not take part in the management or conduct of the company except as permitted by APRA;

• to remove an auditor and appoint another;

• not to accept deposits;

• not to borrow money; or

• any other direction as to the way in which the affairs of the company are to be conduct ed.

The amendments give the company the power to comply with a direction despite anything in its constitution or any contract or arrangement to which it is a party (proposed section 11CA(4)).

A direction has effect until APRA revokes it in writing (propos ed section 11CA(5)).

Failing to comply with a direction is a criminal offence.

Comment:

Item 53 inserts a proposed section 11CG(1) which says that an ADI or an authorised NOHC must comply with a direction. A failure to comply is a criminal offence, under item 152 which inserts a proposed table of criminal offences at section 69A. However, it is impossible to tell, simply by looking at proposed section 11CG(1) that failing to comply is a criminal offence. This only becomes clear when the table is examined. It would be preferable to either add another subsection to 11CG, or at least a note, either spelling out the implications of non-compliance, or pointing to the table at section 69A.

Gazettal of directions

APRA may, if it chooses, publish in the Gazette any direction it makes (proposed section 11CE(1)). But if it does publish a direction, it must publish any subsequent revocation. (11CE(2)).

APRA obliged to protect ADI depositors

Items 61 and 62 amend section 12, imposing a duty on APRA to protect depositors of ADIs (and removing that duty from the Reserve Bank.)

What happens if an ADI falls on hard times

Item 63 repeals sections 13, 14, 15 and 16 and substitutes new provisions.

Many of the proposed provisions have no direct counterpart in the current Act. They spell out in much greater detail what is to happen if an ADI runs into financial problems, or looks like it is going to, and give APRA greater and more specific powers than the RBA has under the current scheme. They are aimed at providing better protection for depositors.

Under proposed section 13A, an ADI is required to supply information to APRA relating to its financial stability, if asked in writing to do so. APRA may appoint an investigator if an ADI fails to do this. Furthermore, an ADI must immediately inform APRA if it considers it likely that it will become unable to meet its obligations or is about to suspend payment.

Power to appoint an investigator or administrator

Under proposed section 13A(1) APRA may appoint a person to investigate an ADI, take control of its business, or appoint an administrator, if:

• the ADI informs APRA that the ADI considers that it is likely to become unable to meet its obligations or that it is about to suspend payments -proposed section 13A(1)(a);

• APRA considers the ADI is likely to become unable to meets its obligations or is about to suspend payments - section 13A(1)(b); or

• the ADI is unable to meet its obligations or suspends payments - proposed section 13A(1)(c).

If the ADI becomes unable to meet its obligations or suspends payments its Australian assets are to be available to meet its Australian deposit liabilities ahead of all other liabilities - section 13A(3).

An ADI must hold assets (excluding goodwill) in Australia at least equal to its Australian deposit liabilities, unless authorised by APRA to hold a lesser amount - proposed section 13A(4).

Proposed section 13B obliges an ADI to provide an APRA-appointed investigator with access, facilities, books, documents etc needed for the investigation.

Terminating APRA’s control

Proposed section 13C outlines when APRA, or an administrator appointed by APRA, should cease control, and what should happen then with regards to the appointment/election of proposed directors/liquidators, and how the termination of control should be handled.

Powers of statutory manager

If APRA appoints a statutory manager, s/he has very wide powers including:

• th e powers and functions of the members of the board of directors (collectively and individually), including the power of delegation - proposed section 14A(1);

• the power to compel a person, who has at any time been an officer of the ADI to answer questions relating to the business - penalty for refusing to co-operate 12 months imprisonment - proposed section 14A(2);

• NOTE: [an individual is not excused from answering questions on the grounds of self-incrimination (section 14A(3)) but, if the individual claims, before answering the questions that the answers may tend to incriminate and the information might in fact tend to incriminate, then the information is generally not admissible as evidence against the individual in criminal proceedings - proposed section 14A(4)];

selling off all or part of the business on whatever terms and conditions the manager considers appropriate - proposed section 14A(5); and

Statutory manager’s liabilities

A statutory manager is only liable for losses incurred by an ADI through h is/her fraud, dishonesty or wilful failure to comply with the Act - section 14C.

This contrasts with the position of an administrator under the Corporations Law , who may be personally liable for any debts incurred by a company under his/her control.

What happens to a director if a statutory manager takes over?

A director ceases to hold office once a statutory manager is appointed - proposed section 15(1).

What happens to an external administrator if a statutory manager takes over?

An external administrator is in the same position as a company director if/when a statutory manger is appointed - the administrator’s appointment is terminated - proposed section 15A.

Other ramifications

Proposed section 15B deals with the effect on legal proceedings when a statuto ry manager takes control. Proposed section 15C makes it clear that the appointment of a manager is not grounds for other parties to a contract denying their obligations. Proposed section 16 makes it clear that the cost to APRA of controlling the business, or placing an administrator in control, are payable out of the ADI’s funds, and take priority over all other unsecured debts.

Obligations on auditors or former auditors of ADIs or NOHCs

Under proposed section 16B ( item 65 ) an auditor or former auditor of an ADI, authorised NOHC or the subsidiary of an ADI or authorised NOHC, have additional obligations.

S/he must:

• comply with any written request by APRA to provide information which APRA considers will assist it in performing its functions;

• inform APRA if s/he has reasonable grounds for believing that the ADI/NOHC/subsidiary of an ADI or NOHC is insolvent, or there is a significant risk it will become insolvent; if the company has failed to comply with a prudential standard, a direction from APRA or some other requirement imposed by the Act or regulations;

• inform APRA of an existing or proposed state of affairs which may materially prejudice the interests of depositors.

Failing to comply with any of the above, is a criminal offence and could lead to up to six months in jail.

In addition, there is a catch-a ll clause - proposed section 16C, under which an auditor or former auditor may provide information to APRA if s/he believes the information will assist APRA in performing its functions.

Self-incrimination

The same provisions on self-incrimination apply as in section 14A above, i.e. an individual is not excused from answering questions on the grounds of self-incrimination but, if the individual claims, before answering the questions, that the answers may tend to incriminate and the information might in fact tend to incriminate, then the information is generally speaking not admissible as evidence against the individual in criminal proceedings.

Non-callable funds requirement abolished

Item 86 repeals Division 3 of Part II which contains the requirement that banks hold one per cent of their eligible liabilities with the Reserve Bank. This money had been used to fund the supervisory scheme. In future, supervision by APRA will be funded by fees levied on the institutions under its control. The levies will be imposed by other Acts.

General investigatory power

Item 127 repeals section 61 and inserts a new one which gives APRA general powers to appoint a person to investigate and report on specified prudential matters (it is wider than proposed section 13A discussed earlier). The body under investigation is required to give access to books, accounts and documents, and provide such information and facilities as may be required to complete the investigation.

The proposed section is similar in terms to the one it replaces, but hands the investigatory power to APRA rather than the RBA, and covers all ADIs, NOHCs and their subsidiaries, rather than just banks.

General power to obtain information

Item 128 repeals section 62 and inserts a new one. It gives APRA a general power to require an ADI, NOHC or a subsidiary to provide information. It is similar to the old powers of the RBA, but also includes protection against self-incrimination as in proposed sections 14A(4) and 16B(6) discussed above.

Failure to comply with a request for information is a criminal offence ( item 152 which inserts a new table of criminal offences at section 69A).

Restructuring an ADI

Items 129 to 132 amend section 63 to require an ADI to obtain prior permission from the Treasurer before selling, or otherwise disposing of its business, or going into partnership. The Treasurer may, in writing, delegate any or all of his/her functions to APRA, or a staff or board member of APRA.

Restricted words

Items 143, 144, 145 and 146 restrict the use of certain words to those companies who have been given permission to use them by APRA. Restricted words include bank, banking, banker, building society, credit union or credit society or any word or expression conveying a ‘like import’, or indeed any word which APRA decides should be a restricted word for the purposes of these provisions. (An APRA determination under this provision is a disallowable instrument).

These provisions do not stipulate what conditions must be met before APRA gives consent to the use of a restricted term. The Explanatory Memorandum says:

APRA will take into account current policy with respect to these names. For example, under current policy, a bank is required to possess at least $50 million in capital and an exchange settlement account with the RBA while only mutuals are allowed to be a 'credit union' or 'credit society'.(3)

Where a depositor dies

Item 150 gives an ADI some protection if it releases up to $15,000 from the account of a deceased depositor in certain circumstances before the grant of probate. These circumstances include paying:

for funeral expenses or debts;

• the executor of the will; and

• anyone else who, in the ADI’s opinion, is entitled to the amount, having regard to the laws of probate and accepted practice for the administrat ion of deceased estates.

•  Comment:

These provisions give APRA extraordinarily wide powers in relation to the management of the financial system, but few guidelines as to how those powers should be exercised are spelt out in the Act. There is no appeal mechanism provided for, and in many circumstances APRA may be able to operate in secrecy - for example, it is up to its discretion as to whether it should publish any directions it makes in the Gazette.

Amendments to the Financial Corporations Act 1974

Commencement: Schedule 7 commences on the commencement of the APRA Act.

Schedule 7 amends the Financial Corporations Act 1974 .

Item 2 amends the Act to exclude all ADI’s from its operation. This is necessary because they will be covered by the amendments to the Banking Act 1959 discussed above.

Most of the rest of the 19 amendments take power away from the Treasurer and give it instead to the Governor of the Reserve Bank including the power to exempt corporations from the operation of the Act ( item 3 ).

Amendments to the Insurance Acquisitions and Takeovers Act 1991

Commencement: Schedule 8 commences on the commencement of the APRA Act.

Schedule 8 amends the Insurance Acquisitions and Takeovers Act 1991 . Sections dealing with the acquisition of an insurance company or shares in it are deleted. Under the revamped scheme for the regulation of the financial sector, these matters are in future to be covered in the proposed Financial Sector (Shareholdings) Act 1998, which is one of the package of Bills now before Parliament.

The amendments also transfer regulatory responsibility from the ISC to APRA.

Amendments to the Insurance Act 1973

Commencement: Schedule 9 commences on the commencement of the APRA Act - unless the Insurance Laws Amendment Act 1998 commences on that same day, in which case, schedule 9 will commence on the following day.

Schedule 9 amends the Insurance Act 1973 which regulates the general insurance industry. Under the changes, the soon to be abolished ISC will no longer be the industry regulator. Generally speaking, APRA will. However, ASIC is to be given responsibility for administering section 113 which deals with drawing up codes of practice and ensuring they are complied with. It is a criminal offence to carry on an insurance business, if the company has not agreed to comply with the relevant code.

Item 87 gives ASIC additional powers to ensure compliance including requiring that books be presented for inspection, and extracts or copies taken.

Amendments to the Insurance (Agents and Brokers) Act 1984

Commencement: parts 1 to 3 of Schedule 10 commence on the commencement of the APRA Act. Items in Part 4 commence on the commencement of the APRA Act, provided that items 47, 52, 60 and 66 of Schedule 1 to the proposed Insurance Laws Amendment Act 1998 have commenced - if these proposed ILA Act amendments commence after or at the same time as the APRA Act, Part 4 of Schedule 10 comes into effect immediately after the commencement of those items in the proposed ILA Act.

Schedule 10 amends the Insurance (Agents and Brokers) Act 1984 to transfer regulatory responsibility for it to ASIC, from the ISC which presently has responsibility for it.

Items 2 and 15 also amend the Act to enable ASIC to appoint in writing, not only an ASIC staff member to act as an ‘authorised officer’ for specified purposes, but also an APRA staff member.

Amendments to the Insurance Contracts Act 1984

Commencement: Schedule 12 commences on the commencement of the APRA Act, or if that occurs on the same day as the proposed Insurance Laws Amendment Act 1998 , then the schedule 12 commences the next day.

The amendments in Schedule 12 transfer regulatory responsibility for the Insurance Contracts Act 1984 from the ISC  to ASIC.

Amendments to the Life Insurance Act 1995

Commencement: Parts 1 to 6 of Schedule 13 commence on the commencement of the APRA Act. Part 7 commences on the date of Royal Assent of this Bill (the Financial Sector Reform (Amendment and Transitional Provisions) Bill 1998.

The amendments in Schedule 13 transfer regulatory responsibility for the Life Insurance Act 1995 from the ISC to APRA and ASIC.

Broadly speaking, APRA will be responsible for prudential supervision of life insurance businesses, ASIC will be responsible for market integrity and consumer protection.

Item 2 repeals section 7 and inserts a new section spelling out the sections of the Act to be administered by each of the two regulators.

APRA has the general administration of:

• Parts 3 to 6 of the Act, dealing with the registration of life insurance companies, statutory funds, solvency and capital adequacy standards, and the financial m anagement of life companies;

• Parts 8 and 9 dealing with judicial management and winding up;

• sections 206 to 210 dealing with surrender values, paid-up policies and non-forfeiture of policies; and

• Part 12 dealing with companies registered under the ea rlier Life Insurance Act 1945

ASIC has the general administration of Part 10 (other than sections 206 to 210 dealt with above). Part 10 includes:

• issuing policies;

• protecting the interests of the insured;

• certain circumstances where the policy may be paid out before probate is granted;

• unclaimed money; and

lost or destroyed policy documents.

Proposed section 7(2) says Parts 1, 2, 7 and 11 confer on APRA and ASIC the powers and duties which they require to fulfil their functions under the Act

The Minister may also give APRA or ASIC directions under this Act (proposed subsection 7(3)).

Amendments to the Reserve Bank Act 1959

Commencement: Schedule 14 commences on the commencement of the APRA Act.

Schedule 14 amends the Reserve Bank Act 1959 to set up a separate board within the bank dealing with the payments system - the massive daily transfer of funds between banks. It also reduces the size of the Reserve Bank Board by two, from eleven members to nine. It does this by reducing the number of Deputy Governors from two to one, and the other positions from seven to six.

Items 1, 2 , 3 , 6, 7, 8 and 9 insert new definitions required in the Act because of the creation of APRA and the Payments System Board and their respective functions and duties.

Two boards

It em 15 inserts a new section 8A which spells out the functions of the Reserve Bank Board and the proposed Payments Systems Board.

Proposed section 8A(2) says the Reserve Bank Board is responsible for the Bank’s monetary and banking policy, and on all other matters except for its payments system policy.

Under proposed section 8A(3) the Payments System Board is responsible for the bank’s payments system policy.

Resolving disagreements

Any disagreement between the boards (proposed section 8A(4)) is to be resolv ed in the following way (proposed section 10C):

• if there is an inconsistency, the Reserve Bank Board prevails and the Payments System Board’s policy is modified to remove the inconsistency; but

•  if there is a disagreement as to whether there is an inconsistency, or the extent of the inconsistency, then the RBA’s Governor will make a decision;

•  if there is disagreement as to which board is responsible for determining policy on a particular matter, then that issue too, will be decided by the Governor.

•  Functions of Payments System Board

Item 20 inserts sections formally establishing the Payments Systems Board (proposed section 10A), and spelling out its functions (proposed section 10B) which include:

 

• determining the bank’s payments system policy;

•  ensuring the bank implements that policy;

•  ensuring that the bank’s payments system policy is directed to the greatest advantage of the Australian people, and its powers exercised so as to best contribute to:

(i)   controlling risk in the financial system;

(ii) promoting the efficiency of the payments system and

(iii) promoting competition in the market for payment services consistent with the overall stability of the financial system.

Both Boards are to keep the Government informed about their policies (propos ed section 11(1)).

Cutting Reserve Bank Board numbers

Item 25 amends subsection 12(1) and reduces the number of Deputy Governors from two to one.

Item 30 amends paragraph 14(1)(d) to reduce the number of general board appointments from seven to six.

The Reserve Bank Board will now consist of:

• the Governor;

• the Deputy-Governor;

• the Secretary to the Department of the Treasury; and

• up to six members to be appointed by the Governor-General.

Item 40 amends subsection 21(3) to reduce the number required for a quorum from six to five.

The Explanatory Memo explains the restructuring this way.

In the interests of administrative efficiency, and due to the transfer of some responsibilities to APRA, the size of the Board will be reduced from 11 to 9 members. The reduction will be achieved via the non-renewal of 1 of the 2 Deputy Governor positions and the non-renewal of 1 of the 7 non ex officio positions. As a result, a quorum of the RBA Board will be reduced to 5 members (previously 6 members).(4)

The reductions are not to take place immediately - see schedule 19 , item 39 , below.

Membership of Payments System Board

Item 48 inserts a proposed Part IIIA. Proposed section 25A stipulates the membership of the Payments System Board as:

• the Governor;

• one representative of the Bank (appointed by the G overnor - proposed subsection 25B(1));

• one representative of APRA (appointed by APRA’s CEO - proposed section 25B(2)); and

• up to five other members (appointed by the Governor-General - proposed section 25B(3))

All appointments are to be part-time - pro posed subsection 25B(5).

The Explanatory Memo gives some pointers as to the sorts of people likely to be appointed by the Governor-General:

It is envisaged that the members appointed by the Governor-General will be independent and free of any material direct conflicts of interest. This should not preclude people with substantial past industry experience and expertise in the fields of the payments system and banking regulation. Disclosures of material personal interest will be made in accordance with section 2 of the Commonwealth Authorities and Companies Act 1997.(5)

Proposed sections 25C and 25D stipulate who will be the chair (the Governor) and deputy chair (the other representative of the RBA) and when the deputy chair will act as chair.

Under section 25E , members of the board must make an oath or affirmation of allegiance and make a declaration of secrecy, except for any member who is also a member of the Reserve Bank Board and has already done so in that capacity.

Payments system board meetings

Proposed sections 25F, 25G and 25H deal with the timing and location of meetings and their conduct.

Pay and conditions

Proposed sections 25I, 25J, 25K, 25L deal with the remuneration for members of the Payments System Board, leave of absence and when it may be gra nted, resignations from the board and termination of appointment.

Amendments to the Retirements Savings Accounts Act 1997

Commencement: Schedule 15 commences on the commencement of the APRA Act.

Schedule 15 amends the Retirement Savings Accounts Act 1997.

ASIC and APRA to administer the Act

Under present arrangements contained in section 3, the ISC is responsible for the administration of the Act. Item 1 repeals that section substituting a new one, which divides the ISC's responsibilities between APRA and ASIC. APRA is to be responsible for prudential supervision, ASIC for market integrity and consumer protection functions.

APRA’s functions

Item 3 provides that APRA’s functions include:

• Part 3 - approving Retirement Savings Account (RSA) institutions;

• se ctions 40 to 44 which:  prohibit interest off-set arrangements where one of the accounts involved is an RSA; prohibit benefits provided under an RSA in relation to an RSA from being assigned; (anyone breaching these provisions commits a criminal offence);

• Parts 6 - setting out rules about the records, audits and auditors of RSA providers;

• Part 9 - which provides for a facility for the payment of benefits to eligible rollover funds;

• Part 11 - which provides for the quotation and provision of tax file n umbers;

• section 183 - dealing with supervising deductions from wages; and

• sections 193 and 194  - which allow for the collection of statistical information about RSAs and RSA providers and its publication, provided that the identities of those involved remain confidential.

ASIC’s functions

ASIC’s functions include:

• the general administration of most of Part 5 relating to the duties etc of RSA providers and employers who apply on behalf of employees wishing to become RSA holders, including the duty to establish arrangement s for dealing with inquiries and complaints, to keep minutes and records, and to provide information to prospective RSA holders;

• Part 7 - prohibiting false, improper and misleading conduct in relation to RSAs;

• Part 8 - outlining what happens to unclaim ed money; and

• the general administration of sections 37 to 39 dealing with the operating standards of RSAs to the extent to which they relate to the keeping and retaining of records; disclosing information to holders of RSAs, disclosing information abou t RSAs, including to ASIC;

Minister may give directions

Under proposed section 3(3), the Minister may give directions to either regulator about the performance or exercise of its functions and powers - the Minister has a similar power in the existing Act.

Powers and duties conferred on both APRA and ASIC

Proposed subsection 3(2) confers certain powers and duties on both APRA and ASIC which each will need in order to administer their parts of the Act including:

• Part 10, monitoring and investigating RSA pro viders;

• Part 12, offences relating to statements, records etc including making false or misleading statements to the relevant regulator;

• Part 14 which gives the regulator the power to intervene in court proceedings relating to matters under this Act; and

• Part 15 which empowers the regulator to grant exemptions from, and make modifications of, certain provisions in this Act.

Definitions

Items 2 to 11 change definitions to bring them into line with the proposed scheme, including inserting definitions for APRA, ASIC and regulator (which refers to either APRA or ASIC depending on the circumstances).

Co-operation between ASIC and APRA 

Item 20 amends paragraph 96(1)(b) to allow a regulator to appoint a member of staff of the other regulator as an inspector to investigate the affairs of an RSA provider.

Item 24 enables a regulator to appoint a member of its own staff, or of the other regulator’s staff, to carry out the functions of an ‘authorised person’ (defined in item 4 ).

Item 23 adds a proposed paragraph 114(3)(d) requiring a regulator, who has received a report from an investigator into the affairs of an RSA provider, to provide a copy of the report to the other regulator.

According to the Explanatory Memorandum, ASIC and APRA are expected to enter into a memorandum of understanding setting out how they will co-operate with each other. (6)

Amendments to the Superannuation Industry (Supervision) Act 1993

Commencement: Schedule 16 commences on the commencement of the APRA Act; except for Part 7, which commences on the commencement of the APRA Act, provided that Part 1 of Schedule 2 of the proposed Superannuation Legislation Amendment Act 1998 has commenced - otherwise Part 7 of Schedule 16 commences immediately after the commencement of Part 1 of Schedule 2 of the Superannuation Legislation Amendment Act. Part 8, which has similar provisions in relation to Part 3 of Schedule 5 of the proposed Taxation Laws Amendment Act (No. 3) 1998.

Schedule 16 amends the Superannuation Industry (Supervision) Act 1993, which regulates certain superannuation funds, approved deposit funds and pooled superannuation trusts.

ASIC and APRA to administer the Act

Presently, the ISC supervises the industry. Under the package of reform proposals, the ISC is to be abolished. These am endments hand the ICS's responsibilities under this Act to APRA and ASIC. Item 2 repeals existing section 6 and inserts a new one outlining which regulator is responsible for which sections of the Act. In general terms, APRA will be responsible for prudential supervision of the superannuation industry , ASIC will be responsible for market integrity and consumer protection functions.

APRA’s role

The sections of the Act which APRA will be responsible for administering include:

• Part 2 - approving trustees;

• Part 4 - obliging trustees to lodge annual returns with the regulator;

• Part 5 - giving notices about complying fund status;

• section 60A dealing with dismissing a trustee of a public offer entity;

• most of Part 7 which deals with special rules for regulated superannuation funds;

• Parts 13 to 16 dealing with accounts, sta tements and audits and other provisions applying to superannuation entities; standards for trustees, custodians and investment managers of superannuation entities; and rules dealing with actuaries and auditors of superannuation entities;

• most of Part 17 dealing with the suspension or removal of trustees of superannuation entities;

• Part 21 specifying the consequences of contravening a civil penalty provision;

• Parts 23 and 24 making provision for the grant of financial assistance for certain superannuat ion entities which have suffered loss as a result of fraud or theft; to provide a facility to pay benefits to eligible rollover funds; and

• Division 3 of Part 25, under which a trustee of a superannuation entity may be required to appoint an investigator to look into the financial position of the entity.

ASIC’s role

The sections of the Act which ASIC will be responsible for administering include:

• section 101 and 103 imposing on trustees a duty to establish arrangements for dealing with inquiries or comp laints, and a duty to keep records;

• Parts 18 to 20 prohibiting false or misleading conduct in relation to superannuation interests; ensuring that beneficiaries and standard employer-sponsors of public offer entities are treated fairly, honestly and are adequately informed;

• Part 22 setting out a procedure for dealing with unclaimed money; and

• those sections dealing with the keeping of reports to members of, or beneficiaries in, funds; or disclosure of information to members of, or beneficiaries in, fun ds; or disclosure of information about funds.

Co-operation between ASIC and APRA

These amendments envisage ASIC and APRA co-operating to administer this Act in a similar way to the way they are expected to work together to administer the Retirement Savings Act 1997 discussed above.

Item 20 amends subsection 265(1) to allow a regulator to appoint a member of staff of the other regulator as an inspector to investigate the affairs of a superannuation entity.

Item 22 inserts a proposed section 298A which enables a regulator to authorise a member of its own staff, or of the other regulator’s staff, to carry out the functions of an ‘authorised person’ as defined in item 5 .

Item 21 inserts a proposed subsection 284(4) requiring a regulator, who has received a report from an investigator into the affairs of a superannuation entity, to provide a copy of the report to the other regulator.

Amendments to the Superannuation (Resolution of Complaints) Act 1993

Commencement: Schedule 17 commences on the commencement of the APRA Act.

Schedule 17 amends the Superannuation (Resolution of Complaints) Act 1993 , which establishes the Superannuation Complaints Tribunal.

The amendments are designed to transfer responsibility for administering the Act to ASIC, instead of the soon-to-be-abolished ISC.

Amendments to Acts to smooth the transition

Commencement: Schedule 19 commences on Royal Assent to this Bill.

Schedule 19 amends a number of Acts to provide for a smooth transition from the present regulatory system to the proposed one.

Transitional amendments to the Banking Act 1959 contained in Part 1 include:

•  item 5 which empowers APRA to make a determination allowing a body covered by a Financial Institutions Code (eg building societies and credit unions) to carry on a banking business - providing the Treasurer and the relevant State Minister have agreed that that type of institution should be covered by the amended Act, and have specified a date from which that should happen. The determination may specify conditions and is a disallowable instrument.

•  item 10 obliges the Reserve Bank to repay to an ADI the amount it has in its Non-callable Deposit Account as soon as practicable after Division 3 of Part II of the Banking Act 1959 is repealed. (See Schedule 2, item 86 above).

• Transitional amendments to the Insurance and Superannuation Commissioner Act 1987 include:

• transferring staff from the RBA to APRA; ensuring their terms and conditions of employment at APRA are no less favourable than those under which they were employed at the RBA; and preserving their existing entitlements and benefits ( item 25 , 26 , 27 );

• transferring  certain assets and liabilities from the ISC to APRA and ASIC ( items 28 , 29 - the clauses do not refer to the ISC by name - rather they refer to the Commonwealth; the Explanatory Memorandum on page 116 says this is necessary because the ISC is not a separate legal entity from the Commonwealth).

• ensuring that instruments made by the ISC continue to have effect as if they had been made by the relevant regulator - either APRA or ASIC item 34 , item 35;

• substituting the relevant regulator (APRA or ASIC) for the ISC in any proceedings before a Court or Tribunal.

Part IV amends the Reserve Bank Act 1959 including:

• provisions allowing the two Deputy Governors to continue in their roles until one of them ceases to hold office - when that happens the amendments to the Reserve Bank Act contained in schedule 14, reducing the number of Deputy Governors from two to one, will take effect.

 

Endnotes

1. The names of the other 10 Bills follows:

Authorised deposit-Taking Institutions Supervisory Levy Impositi on Bill 1998

Authorised Non-Operating Holding Companies Supervisory Levy Imposition Bill 1998.

Superannuation Supervisory Levy Imposition Bill 1998.

Retirement Saving Account Provides Supervisory Levy Imposition Bill 1998.

Life Insurance Supervisory Le vy Imposition Bill 1998.

General Insurance Supervisory Levy Imposition Bill 1998.

Financial Institutions Supervisory Levies Collection Bill 1998.

Financial Sector Reform (Amendments and transitional Provisions) Bill 19998.

Payments Systems (regulations) Bill 1998.

Financial Sector (Shareholdings) Bill 1998.

2.  Explanatory Memorandum , Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998, 12.

3. Ibid., 64.

4. Ibid., 91.

5. Ibid., 94.

6. Ibid., 99.

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Contact Officer

Lee Jones

13 May 1998

Bills Digest Service

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