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Australian Prudential Regulation Authority Bill 1998
Bills Digest No. 203 1997-98
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official l egal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Australian Prudential Regulation Authority Bill 1998
To establish the Australian Prudential Regulation Authority (APRA).
The Treasurer, the Hon. Peter Costello MP, established the Financial System Inqui ry (referred to as the Wallis Inquiry) in June 1996. It was given a wide brief to:
â¢ ‘stocktake’ the results of the deregulation of the Australian financial system;
â¢ examine the forces driving further change, particularly technological;
â¢ recommend chan ges to the regulatory system to ensure an ‘efficient, responsive, competitive and flexible financial system to underpin stronger economic performance, consistent with financial stability, prudence, integrity and fairness’.(1)
The existing regulation of th e Australian financial system can be summarised as follows:
Financial Services and Markets
Reserve Bank of Australia
â¢ Currency issue
â¢ Foreign exchange dealers
Australian Financial Institutions Com mission
â¢ building societies
â¢ credit unions
â¢ special service providers
Insurance and Superannuation Commission
â¢ life companies
â¢ general insurers
â¢ superannuation (pension)
â¢ insurance agents and brokers
â¢ approved trustees (public offer
Australian Securities Commission
â¢ unit trusts
â¢ merchant banks
â¢ finance companies
â¢ pastoral finance companies
â¢ fund raising by corporation and
â¢ securities, futures and options
â¢ exempt securities and futures
markets (bonds, over the counter derivatives)
â¢ securities dealers and investment
â¢ futures brokers and advisers
â¢ auditors and liquidators
â¢ accounting standards
â¢ Friendly societies
â¢ Trustee companies
â¢ Public trustees
â¢ Cooperative housing
â¢ State government owned
â¢ Consumer protection
â¢ Consumer credit
â¢ Authorised trustee investment
â¢ Insurance (vehicle com pulsory
third-party and workers’ compensation)
Source: Financial System Inquiry Discussion Paper, page 358.
The Wallis Committee recommended a new structure:
â¢ the Reserve Bank of Australia (RBA) to deal with Monetary policy and systemic stability with t he Payments System Board considering payments systems regulation;
â¢ the Australian Prudential Regulation Commission to deal with prudential regulation of:
- Deposit taking institutions
- Life and general insurance
â¢ the Corporations and F inancial Services Commission (a renamed and expanded Australian Securities Commission) to deal with:
- market integrity
- consumer protection
A summary of the Wallis Committee’s report is contained in Parliamentary Library Research Paper No. 16 of 1996-97, entitled The Wallis Report on the Australian Financial System: Summary and Critique , by Phil Hanratty.
The Terms of Reference of this Inquiry required it to consider how regulatory arrangements consistent with prude nce can be designed so as to ‘best promote the most efficient and costs-effective service for users’.(2)
Chapter 8 of the Wallis Report deals with financial safety and the recommended framework for prudential regulation. The Committee made 26 recommendations in the context of this Chapter.
The current framework for prudential regulation is institutionally based, with separate agencies regulating the activities of each class of institution. There are four key regimes for prudential re gulation of financial institutions:
â¢ the RBA for banks, payments settlement and the overall system stability;
â¢ the State-based Financial Institution (FI) Scheme that incorporates the Australian Financial Institutions Commission (AFIC) and associated Stat e Supervisory Authorities (SSAs) for the credit union and building society industries;
â¢ the Insurance and Superannuation Commission (ISC) for life and general insurance and superannuation; and
â¢ although not primarily a prudential regulator, the Australian Securities Commission (ASC) has a prudential role with respect to securities exchanges, securities and futures dealers and managers of collective investments.
The Council of Financial Supervisors (COFS) was established in 1992. It comprises the RBA, AFI C, ISC and ASC and provides high-level coordination of matters affecting the financial system.
Further information about the present arrangements for prudential regulation can be obtained from pages 188 to 198 and Appendix C of the Financial System Inquiry Discussion Paper .(3)
The Inquiry took the view that there were four broad models for the prudential framework:
1. The existing regulatory structure;
2. A single national regulator for deposit-taking institutions (DTIs);
3. Regulation of insurance companies and/or superannuation funds combined with that of DTIs within the one regulatory agency; and
4. Extension of the role of that agency to include prudential regulation of any institution or activities considered to constitute a systemic risk or require safe haven status.
If a single regulator under options 2, 3 or 4 was chosen, a further issue would arise as to where the responsibility for combined prudential regulation should reside. The main options would be to either vest responsibility in the R BA or establish a new stand-alone regulator to absorb the prudential regulatory functions of the existing agencies including the RBA.
Further information about these options can be obtained from pages 203 to 207 of the Financial System Inquiry Discussion Paper .
Recommendation 31 of the Wallis Committee is that a single Commonwealth prudential regulator, the Australian Prudential Regulation Commission (APRC), should be established (option 3, above).(4) A single regulator was thought to provid e the following benefits - it would:
â¢ offer regulatory neutrality and greater efficiency and responsiveness;
â¢ provide a sounder basis for regulating conglomerates;
â¢ offer the prospect of greater resource flexibility and economies of scale in regulation that should enhance the cost effectiv eness of regulation; and
â¢ provide the flexibility and breadth of vision to cope with changes that seem likely to occur in the financial system in coming years.(5)
The Committee further recommended that the APRC should be separate from, but cooperate close ly with, the Reserve Bank of Australia. It considered that the APRC should be separate from the RBA for the following reasons:
â¢ the combination of deposit taking, insurance and superannuation regulation is unlikely to be carried out efficiently and flexi bly by a central bank whose primary operational relationships are with banks alone and whose operational skills and culture have long been focused on banking;
â¢ separation will clarify that, while the central bank may still provide support to maintain financial stability, there is no implied or automatic guarantee of any financial institution or its promises in the event of insolvency; and
â¢ separation will enable both the RBA and the APRC to focus clearly on their primary objectives and will clarify the lines of accountability for the regulatory task.(6)
The Bill is comprised of 7 Parts.
Among other things, this Part contains the definitions of the terms used throughout the Bill ( clause 3 ). Clause 3(2) lists the six types of institutions which are to be regulated by APRA. They are:
â¢ trustees of superannuation funds (within the meaning of the Superannuation Industry (Supervision) Act 1993 )
â¢ retirement savings account providers (within the meaning of the Retirement Savings Accounts Act 1997)
â¢ life companies (registered under the Life Insurance Act 1995)
â¢ insurance companies (authorised to carry on business under the Insurance Act 1973)
â¢ authorised deposit-taking institutions, i.e. a body corporate authorised to carry on banking business (within the meaning of the Banking Act 1959 )
â¢ authorised non-operating holding companies (within the meaning of the Banking Act 1959 - 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).
Clause 7 establishes APRA. Clause 13 clarifies that APRA is a statutory corporation. Clause 14 provides that APRA is not entitled to any immunity or privileges of the Crown except where express provision is made in a law of the Commonwealth, State or Territory.
APRA is established for two purposes:
â¢ to regulate bodies in the financial sector according to the laws of the Commonwealth that provide for prudential regulation or for retirement income standards; and
â¢ to develop policy to be applied in performing that regulatory role ( clause 8 ).
APRA’s functions are not set out in the Bill. Its functions will be conferred by other Commonwealth laws and by laws of the States and Territories under an agreement with the Commonwealth ( clause 9 ).
APRA’s functions will be contained in various Acts. The amendments to those Acts to confer functions on APRA are made by the Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998. A list of some of the functions to be conferred on APRA is contained in the Schedule to this Digest.
APRA is obliged to notify the Treasurer where it considers that a body which is regulated by it is in financial difficulty ( clause 10 ).
The Board of APRA must determine APRA’s policies (as mentioned below). Under clause 12 the Board must regularly inform the Government of those policies. If the Board and the Government disagree on a policy, the Treasurer and the Board must try to reach agreement. If agreement cannot be reached, the Governor-General, acting on the advice of the Federal Executive Council, must determine the policy to be adopted by APRA. The Treasurer is obliged to table certain documents within 5 sitting days of notifying APRA of the Governor-General’s determination. Those documents are:
â¢ a copy of the Governor-General’s order;
â¢ a statement by the Government in relation to the subject of the disagreement; and
â¢ a copy of a statement by the Board about the matter about which it and the Treasurer disagreed.
Clause 16 establishes APRA’s Board of management. Clause 17 provides that it is the function of the Board to determine APRA’s policies and to ensure that its operations are conducted having regard to the purposes set out in clause 8 (mentioned above).
The Board is comprised of:
â¢ a chair;
â¢ the chief executive officer (CEO);
â¢ 2 members, each of whom is either the Governor or the Deputy Governor of the Reserve Bank or an officer of the Reserve Bank Service;
â¢ 1 member who is also a member of the Australian Securities Investment Commission (ASIC) or a staff member of the ASIC; and
â¢ 4 other members.
A person cannot be a Board member if the person is a director, officer or employee of a body regulated by APRA ( clauses 20, 31 and 40 ).
Terms and conditions of Board members (other than the CEO)
A distinction is made between ordinary members and representative members. Representative members are the three Reserve Bank/ASIC officers. Ordinary members are the members who are not the CEO or representative members.
Ordinary members are appointed by the Treasurer for a maximum of five years. The Reserve Bank and ASIC representative members are appointed by the Governor of the Reserve Bank and the Chairperson of ASIC respectively. All members, except the CEO, hold office on a part-time basis ( clause 27 ).
Clause 31(2) empowers the Treasurer to terminate the appointment of ordinary members in certain circumstances. The appointment of the Reserve Bank and ASIC representative members can only be terminated by the Governor of the Reserve Bank and Chairperson of ASIC respectively.
Clause 35 creates the office of the CEO of APRA. The CEO is appointed by the Treasurer for a maximum period of five years. He or she holds office on a full-time basis.
The CEO has the duties that the Board determines ( clause 36 ).
The CEO’s appointment may be terminated in the following circumstances:
â¢ for misbehaviour or physical or mental incapacity;
â¢ if the CEO becomes bankrupt or applies to take the benefit of any law for the relief of bankrupt or insolvent debtors;
â¢ if the CEO is absent from duty, except on leave of absence for 14 consecutive days or for 28 days in any 12 months;
â¢ if the CEO engages, except with the Board’s approval, in paid employment outside the duties of his or her office;
â¢ if the CEO fails to comply with certain requirements under the Commonwealth Authorities and Companies Act 1997 .
Clause 49 provides that APRA will obtain money from two sources:
â¢ a levy is to be imposed on financial institutions under the Financial Institutions Supervisory Levies Collection Act 1998 . From the amount raised by the levy, an amount will be deducted as determined by the Treasurer. The remaining money is to be paid to APRA. The amount determined by the Treasurer is to cover the costs to the Commonwealth of the provision of market integrity and consumer protection functions for prudentially regulated institutions ( clause 50 ).
â¢ clause 51 allows APRA to fix charges payable in exchange for the provision of services and facilities by APRA and in respect of applications and requests made to APRA.
APRA is not subject to Commonwealth, State or Territory taxation. However, regulations may provide that this does not apply in relation to a specified Commonwealth, State or Territory law ( clause 55 ).
Clause 56 sets out the general secrecy obligations. A person who is or has been an officer must not disclose protected information or produce a protected document to any person or to a court unless the disclosure or production is permitted under one of the five exceptions. A contravention of that obligation is subject to a penalty of up to two years imprisonment.
An understanding of this clause requires an explanation of three key terms.
A protected document is one produced under the Act (or certain other Acts) which contains information relating to a body regulated by APRA, a body corporate related to such a body or a person who is or proposes to be a customer of a body regulated by APRA.
Protected information is information disclosed under the Act (or certain other Acts) which relates to a body regulated by APRA, a body corporate related to such a body or a person who is or proposes to be a customer of a body regulated by APRA.
Information and documents that have already been lawfully made available to the public cannot be protected information or documents.
An officer is a board member or staff member of APRA or any person who because of or in the course of his/her employment has obtained protected information or has access to protected documents (other than an employee of the body to which the information or document relates).
Disclosure of protected information or production of protected documents is not an offence if:
â¢ it is for the purposes of the Act (or certain other Acts);
â¢ it is by an employee of the person to whose affairs the information or document relates or occurs with the agreement in writing of that person;
â¢ if the disclosure or production is approved in writing by the APRA Board or if it occurs when the person is satisfied that the disclosure or production will assist a financial sector supervisory agency to perform its functions and the disclosure or production is to that agency;
â¢ it is to a Board member or staff member of APRA for the purposes of the exercise of APRA’s power under a law of the Commonwealth, a State or a Territory; or
â¢ it is in a summary form which does not allow the information relating to any particular person to be found out from it.
Clause 57 contains an even stronger prohibition on disclosure by Board members and staff members of APRA. The persons must not disclose any document which belongs to APRA or is in APRA’s possession to any other person unless directed to do so by APRA or obliged by law to do so or directed to do so by the person to whom the information relates.
The Part contains:
â¢ the entitlement of APRA’s Board members, staff and agents to an indemnity in respect of acts done in good faith in the performance of thei r powers, functions and duties ( clause 58 );
â¢ a requirement that certain additional matters be included in APRA’s annual report ( clause 59 ); and
â¢ the regulation making power of the Governor-General ( clause 60 ).
The Banking Act 1959 will confer on APRA the power to:
â¢ 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 authorised NOHC - or revoke the authorisation or impose conditions on i t;
â¢ make prudential standards with which ADIs and NOHCs are expected to comply;
â¢ investigate ADIs or NOHCs under certain circumstances;
â¢ direct them to comply with a prudential regulation or prudential standard;
â¢ order an audit of the affairs of an AD I or NOHC at that company’s expense;
â¢ ensure a nominated director or secretary, executive officer or employee does not take part in the management or conduct of the company;
â¢ 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
â¢ take control of an ADI, or appoint an administrator to take control under certain circumstances - an administrator who may eve n 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).
Under the Life Insurance Act 1995 , APRA will have the general administration of:
â¢ 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 management of life companies;
â¢ Parts 8, 9 dealing with judicial management and winding up;
â¢ sections 206 -210 dealing with surrender values, paid-up policies and non-forfeiture of policies; and
â¢ Part 12 dealing with companies registered under the earlier Life Insurance Act 1945 .
Under the Retirement Savings Accounts Act 1997 , APRA’s functions will include administering:
â¢ Part 3 - approving Retirement Savings Account (RSA) institutions;
â¢ sections 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);
â¢ Parts 6 - setting out rules about the records, audits and auditors of RSA providers;
â¢ Part 9 - which provides for a facility for the payment of benefits to eligible rollover funds;
â¢ Part 11 - which provides for the quotation and provision of tax file numbers;
â¢ section 183 - dealing with supervising deductions from wages; and
â¢ sections 193 and 194 - which allows for the collection of statistical information about RSAs and RSA providers and its publication, provided that the identities of those involved remain confidential.
APRA will be responsible for administering the following parts and sect ions of the Superannuation Industry (Supervision) Act 1993 :
â¢ Part 2 - approving trustees;
â¢ Part 4 - obliging trustees to lodge annual returns with the regulator;
â¢ Part 5 - giving notices about complying fund status;
â¢ section 60A dealing with dismissing a trustee of a public offer entity;
â¢ most of Part 7 which deals with special rules for regulated superannuation funds;
â¢ Parts 13 to 16 dealing with accounts, statements and audits and other provisions applying to superannuation entities; standards for t rustees, custodians and investment managers of superannuation entities; and rules dealing with actuaries and auditors of superannuation entities;
â¢ Most of Part 17 dealing with the suspension or removal of trustees of superannuation entities;
â¢ Part 21 spe cifying the consequences of contravening a civil penalty provision;
â¢ Parts 23 and 24 making provision for the grant of financial assistance for certain superannuation entities which have suffered loss as a result of fraud or theft; to provide a facility t o pay benefits to eligible rollover funds; and
â¢ 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.
1.The Treasurer (Peter Costello ), ‘Financial System Inquiry: terms of reference and membership’, Press Release , 19 May 1996.
2.Financial System Inquiry, Terms of reference, paragraph 3(a).
3.Financial System Inquiry, Financial System Inquiry Discussion Paper , (Mr Stan Wallis, Inquiry Chairman), Canberra, November 1997.
4.Financial System Inquiry, Financial System Inquiry Final Report , (Mr Stan Wallis, Inquiry Chairman), Canberra, March 1997, 317.
13 May 1998
Bills Digest Service
Info rmation and Research Services
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