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Corporations (National Guarantee Fund Levies) Amendment Bill 2007

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2004-2005-2006-2007

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

 

SUPPLEMENTARY EXPLANATORY MEMORANDUM

 

Amendments Moved on Behalf of the Government

 

 

(Circulated by authority of the

Minister for Revenue and Assistant Treasurer, the Hon Peter Dutton MP)

 



T able of contents

General outline and financial impact............................................................ 1

Chapter 1           Amendments 1 to 12 to Schedule 2 of the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 ……       3

Chapter 2           Amendment 1 to Schedule 1 of the Corporations (National Guarantee Fund Levies) Amendment Bill 2007 ....................................................... 11



G eneral outline and financial impact

Amendments 1 to 12 to Schedule 2 — Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007

The amendments proposed are consequential amendments that were identified after the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 (DMF and DOFI Bill) was introduced into Parliament on 21 June 2007. The amendments are required to ensure that the reforms being introduced by the DMF and DOFI Bill operate as intended.

Date of effect :  The amendments will commence on 1 July 2008.

Financial impact :  Nil.

Compliance cost impact :   Nil.

Amendment 1 to Schedule 1 — Corporations (National Guarantee Fund Levies) Amendment Bill 2007

The Bill places a cap on the amount the Securities Exchanges Guarantee Corporation (SEGC) can levy in a financial year.  The amendment proposed to be moved by the Government to the Bill will amend the way in which the maximum levy that the SEGC can impose will be calculated.  This will address the prudential concerns around unlimited liability and allow for direct participation by banks on the Australian Securities Exchange (ASX) market.

Date of effect : The amendments will commence on the 28 th day after the day the Act receives Royal Assent.

Financial impact : Nil.

Compliance cost impact : The changes reduce complexity and compliance costs for banks seeking to participate on the ASX market.  Banks are prevented, for prudential reasons, from participating directly on the ASX market and currently must incorporate a subsidiary to participate on the ASX market.



1     C hapter 1  

Amendments 1 to 12 to Schedule 2 — Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007

Outline of chapter

.1       Schedule 2 to the DMF and DOFI Bill amends the Insurance Act 1973 (Insurance Act) to implement the Government’s approach to regulating Direct Offshore Foreign Insurers (DOFIs), announced by the Minister for Revenue and Assistant Treasurer on 3 May 2007.

.2       The following amendments incorporate consequential amendments to Schedule 2 of the DMF and DOFI Bill identified after the DMF and DOFI Bill was introduced into Parliament on 21 June 2007.

Explanation of amendments

.3       Section 118 (agent in Australia) of the Insurance Act details the minimum presence requirement for foreign general insurers seeking to be authorised under the Insurance Act.  Currently, section 118 only allows for a natural person resident to be appointed as a foreign general insurer’s agent.

.4     The Bill amends section 118 to provide DOFIs with greater flexibility in how they set up in Australia, by allowing a DOFI to appoint a body corporate as its agent in Australia.

.5     The proposed amendments to the Bill ensure that all the subsections of section 118 can be read as applying to corporate agents.

.6       In addition, as a corporate agent is entrusted with control of the assets in Australia of a foreign general insurer, it is paramount that certain minimum standards are met as regards the corporate agent’s ability to manage financial affairs, including that the directors and senior managers of a corporate agent are fit and proper persons.

.7       As a result, the current disqualification provisions that apply to a natural person agent will be extended to also apply to corporate agents and the directors and senior manager of those corporate agents.

.8       The amendments are also required to ensure that the reforms being introduced by the DMF and DOFI Bill operate as intended and there is consistency in the treatment of foreign general insurers’ agents, whether they are a natural person or body corporate.

.9       These amendments are necessary to ensure that the regulation of DOFIs, set out in the DMF and DOFI Bill, is effective and to encourage DOFIs to continue carrying on insurance business in Australia.

Amendment 1

.10     Amendment 1 inserts new item 3A into Schedule 2 so that ‘corporate agent’ is defined in section 3(1) of the Insurance Act as a body corporate appointed under section 118 as an agent in Australia for the purpose of that section.  [Amendment 1, item 3A]

Amendment 2

.11     Amendment 2 repeals the existing definition and inserts new item 5A into Schedule 2 to expand the definition of ‘senior manager’ in section 3(1) of the Insurance Act to define who is a senior manager of a corporate agent for the purposes of the Insurance Act.  [Amendment 2, item 5A]

Amendment 3

.12     Amendment 3 inserts new items 9A and 9B into Schedule 2 so that section 24 of the Insurance Act extends to the directors and senior managers of a corporate agent.

.13     Subsection 24(1) of the Insurance Act sets out that a disqualified person must not act as a director or senior manager of a general insurer, or as a senior manager or agent in Australia for a foreign general insurer or a director or senior manager of an authorised non-operating holding company (NOHC).  If they do, the person can either be convicted of a strict liability offence or a fault-based offence.  The strict liability offence carries a maximum penalty of 60 penalty units and the fault-based offence carries a maximum penalty of two years imprisonment.

.14     An agent in Australia under subsection 24(1) includes a corporate agent as the Bill amends section 118 to allow a foreign general insurer to appoint a corporate body as its agent.  As a result, a disqualified corporate agent, which is or acts as a foreign general insurer’s agent in Australia for the purposes of section 118, commits an offence under this subsection.

.15     Subsection 24(4) of the Insurance Act extends the offence in subsection 24(1) to body corporates, such that, it is an offence for the body corporate to have a disqualified person acting as a director or senior manager of a general insurer or senior manager or agent of a foreign general insurer or director or senior manager of an authorised NOHC.  This is either a strict liability offence, carrying a maximum penalty of 60 penalty unit or a fault-based offence, carrying a maximum penalty of 250 penalty units.

.16     An agent in Australia under subsection 24(4) includes a corporate agent.  As a result, a foreign general insurer that appoints a disqualified corporate agent to act as its agent in Australia commits an offence under this subsection.

.17     Item 9A expands the subsection 24(1) offence to include a director or senior manager of a corporate agent (as defined in proposed amendment 1).  That is, a disqualified person must not be or act as a director or senior manager of a corporate agent appointed under section 118 for a foreign general insurer.  If they do, the same penalties as applies to a senior manager or natural person agent in Australia for a foreign general insurer will also apply to the directors and senior managers of the corporate agent.  [Amendment 3, item 9A]

.18     Item 9B expands the subsection 24(4) offence to include a body corporate which is acting as a corporate agent (as defined in proposed amendment 1) in Australia for a foreign general insurer.  The corporate agent commits an offence if they allow a disqualified person to be or act as a director or senior manager of the corporate agent.  If they do, they will be subject to the same penalties that apply to a foreign general insurer which allows a disqualified natural person to be or act as its agent in Australia.  [Amendment 3, item 9B]

Amendment 4

.19     Amendment 4 inserts new item 9C into Schedule 2 which expands section 25 of the Insurance Act to corporate agents and outlines when a corporate agent will be a disqualified person for the purposes of the Insurance Act.  [Amendment 4, item 9C]

.20     Section 25 of the Insurance Act sets out who is a disqualified person for the purposes of the Insurance Act.  Currently, it includes:

·          a person who has been convicted of an offence against or arising out of the Insurance Act, Corporations Act 2001 or involving dishonest conduct relating to a financial sector company;

·          a person the Australian Prudential Regulation Authority (APRA) has disqualified under section 25A of the Insurance Act; or

·          a person who has become bankrupt.

.21     Foreign general insurers are required to hold assets in Australia equal to its Australian liabilities to ensure that Australian policyholders are protected and will have their claims paid, in the event that the foreign general insurer fails.  Like a natural person agent, a corporate agent will be entrusted with the control of those assets.

.22     It is paramount that a certain minimum standard is met as regards a corporate agent’s ability to manage its financial affairs and that there is no possibility of a foreign insurer’s assets falling within the control of a liquidator and subject to dispute in the event of a corporate agent becoming insolvent.

.23     That is why, consistent with the approach to bankrupt individual agents and for the reasons outlined above, item 9C extends section 25, so that a corporate agent which has an external manager appointed will be a disqualified person for the purposes of the Insurance Act.

.24     For the purposes of this section, an external manager is appointed with the appointment of a receiver, administrator, liquidator or the winding up of the body corporate.

Amendment 5

.25     Amendment 5 inserts new items 9D, 9E and 9F into Schedule 2 to expand section 25A of the Insurance Act to also apply to directors and senior managers of corporate agents.

.26     Consistent with APRA’s ability to disqualify a person (including a natural person agent) if it is satisfied that the person is not a fit or proper person to act for a foreign general insurer or authorised NOHC, item 9D and 9E will allow APRA to disqualify a person from being or acting as a director or senior manager of a corporate agent.  [Amendment 5, items 9D and 9E]

.27     The process for disqualifying a person from being or acting as a director or senior manager of a corporate agent will be the same as the process that currently applies to disqualifying a natural person who is being or acting as the agent in Australia for a foreign general insurer.

.28     When disqualifying a natural person agent, APRA is required to give both the person and the foreign general insurer, for which the person acts as an agent, written notice of the disqualification.  Item 9F extends this provision so that, with a director or senior manager of a corporate agent, notice of the disqualification must be given to the director or senior manager of the corporate agent, the corporate agent and any foreign general insurer for which the corporate agent acts as an agent.  [Amendment 5, item 9F]

.29     Moreover, the review provisions contained in Part VI of the Insurance Act will also apply to the disqualification or a refusal to revoke the disqualification of a director or senior manager of a corporate agent.

Amendment 6

.30     Amendment 6 inserts new item 9G into Schedule 2 to expand section 26 of the Insurance Act to require APRA to provide notice of a determination or the revocation of a determination under this section to any affected corporate agent.

.31     Under section 26 of the Insurance Act, APRA may determine that a person is not a disqualified person.  It must as soon as practicable after a determination is made, give written notice of the making of the determination and a copy of the determination to the person concerned and to any affected general insurer or authorised NOHC.

.32     As the sections outlining who is a disqualified person have been expanded to include directors and senior manager of corporate agents, the corporate agent will be affected by any determination to make or revoke a determination that a person is not a disqualified person for the purposes of the Insurance Act. Item 9G expands section 26 so that APRA will be required to notify affected corporate agents of the determination.  [Amendment 6, item 9G]

Amendment 7

.33     Amendment 7 inserts new items 9H to 9V into Schedule 2 to expand section 27 of the Insurance Act to cover the directors and senior managers of corporate agents.

.34     Section 27 of the Insurance Act gives APRA the power to direct a general insurer to remove a director or senior manager of a general insurer or in the case of a foreign general insurer, a senior manager or an agent of a foreign general insurer.

.35     As a result of the Bill amending section 118 to allow a foreign general insurer to appoint a corporate body as its agent, subsection 27(1)(b) also includes a corporate agent and APRA may direct a foreign general insurer to remove a disqualified corporate agent under this section.

.36     Failure to comply with an APRA direction under this section is a strict liability offence with a maximum penalty of 300 penalty units.  An individual can commit a strict liability offence under this section by committing an offence under Part 2.4 of the Criminal Code (for example, aiding and abetting a general insurer to not comply with the APRA direction).  The maximum penalty for an individual for this offence is 60 penalty units.

.37     Consistent with APRA’s power to direct a general insurer to remove a natural person acting as its agent in Australia for the purposes of section 118, items 9H to 9V expand section 27 to allow APRA to direct a body corporate agent, acting as the agent of a foreign general insurer in Australia, to remove a director or senior manager where it is satisfied that the person is a disqualified person or does not meet the fit and proper criteria set out in the prudential standards.

.38     This is a necessary expansion of section 27 because as noted above, a corporate agent is entrusted with the control of the assets in Australia of a foreign insurer and it is critical that certain minimum standards are met as regards the body corporates ability to manage financial affairs, including that the directors and senior managers of a corporate agent are fit and proper persons.  [Amendment 7, items 9H to 9V]

Amendments 8 and 9

.39     Amendments 8 and 9 amend item 49 of Schedule 2 so that subsection 118(4) of the Insurance Act does not extend to an entity specified in regulations.

.40     To ensure consistency with amendments 11 and 12, amendments 8 and 9 are required.  [Amendments 8 and 9]

Amendment 10

.41     Amendment 10 inserts new item 49A into Schedule 2 to expand section 118(4A) to include corporate agents.

.42     To ensure consistency with the rest of section 118, item 49A expands subsection 118(4A) so that, where a foreign general insurer has not notified APRA of a different address for its foreign insurance subsidiary carrying on insurance business in Australia, the subsidiary will be deemed to have the same address for notices as the foreign general insurer’s Australian agent.  [Amendment 10, item 49A]

Amendments 11 and 12

.43     Amendments 11 and 12 amend item 52 of Schedule 2 so that section 118 of the Insurance Act does not extend to an entity specified in regulations. [Amendments 11 and 12]

.44     Item 52 of Schedule 2 of the Bill was included to ensure foreign insurers have maximum flexibility to determine the legal structure of its agent in Australia, so as to encourage foreign insurers to operate in the Australian general insurance market.

.45     However, in further consultation with general insurers, the Government was advised that foreign general insurers would only appoint a natural person or body corporate as its agent in Australia.  As a result, this subsection is no longer required.



 



 

2     C hapter 2  

Amendment 1 to Schedule 1 of the Corporations (National Guarantee Fund Levies) Amendment Bill 2007

Outline of chapter

.1       Schedule 1 to the NGF Bill amends the Corporations (National Guarantee Fund Levies) Act 2001 to impose the cap on levies.

.2       The following amendment will amend the way in which the proposed cap on levies payable for the benefit of the NGF is calculated.

Explanation of amendments

.3       The proposed amendment to the NGF Bill will remove an obstacle to banks participating in their own names on the ASX market, and therefore reduce red tape and compliance costs.

.4       While levies have not been imposed since the inception of the NGF, the ASX and certain market participants are concerned about uncapped liabilities to refill the NGF.  This is a particular issue for the banks as the APRA requires banks to incorporate a subsidiary for the purposes of market participation on the ASX.  This involves ensuring that the subsidiary has sufficient capital to meet participant requirements.

.5       The consequence of potential uncapped liabilities is that banks cannot participate in their own names.  The banks consider that direct participation has resulting commercial benefits including greater capital efficiency, a reduced compliance burden and more efficient business outcomes.

Amendment 1

.6       Amendment 1 amends the way in which the cap imposed on levies that could become payable in a financial year is calculated.  [Amendment 1]

.7       Currently, the SEGC has the discretion to decide who is levied (the ASX and/or market participants) and how the amount of a levy is calculated.

.8       There is no cap on the amount of levies payable for the benefit of the NGF.

.9       The amendment imposes a cap on levies payable in a financial year.  The cap on levies per financial year will be such that the total levy that could be collected in a financial year cannot exceed 1.5 times the ‘minimum amount’, as set under section 889I of the Corporations Act, that is in force as at 1 July in the financial year that the levy is to be imposed.

.10     It is possible that more than one levy determination can be made in a financial year but the total of the levies in a financial year, cannot exceed 1.5 times the minimum amount that is in force at the beginning of the financial year.

.11     The changes do not reduce investors’ ability to claim from the NGF.

.12     As at 30 June 2006 the NGF has assets of $96.8 million.  On current figures, claims of up to $210.8 million could be met from the NGF in one year, if a levy was imposed subject to the maximum cap.  However if there was a serious failure, levies were imposed up to the maximum per year, and the claims could still not be met from the NGF, then investors might need to wait for their claims to be paid in full (that is, until the levies imposed in succeeding years replenished the NGF).  This is also the case under the existing law, which allows for instalment payments if the claim would lead to the NGF being exhausted or substantially depleted.