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Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009

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2008-2009

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Financial Sector legislation amendment (enhancing supervision and enforcement) bill 2009

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Assistant Treasurer, the Hon Chris Bowen MP)



T able of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1            Non-operating holding companies.................................. 7

Chapter 2            Injunctions.......................................................................... 25

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ADI

Authorised deposit-taking institution

APRA

Australian Prudential Regulation Authority

APRA Act

Australian Prudential Regulation Authority Act 1998

Banking Act

Banking Act 1959

Corporations Act

Corporations act 2001

Federal Court

Federal Court of Australia

Government

The Australian Government

Insurance Act

Insurance Act 1973

Life Insurance Act

Life Insurance Act 1995

SIS Act

Superannuation Industry (Supervision) Act 1993

 

 



1.  Non-operating holding companies

Schedule 1 of the Financial Sector Legislation Amendment (Enhancing Supervision and Enforcement) Bill 2009 (the Bill) introduces measures to regulate the non-operating holding companies (NOHCs) of life insurance companies. 

This schedule amends the Life Insurance Act 1995 and other Acts to establish a prudential regulation regime for such NOHCs, modelled on the existing prudential regulation regime for authorised deposit-taking institutions (ADIs) and general insurers. 

The regulatory regime will be administered by the Australian Prudential Regulation Authority (APRA). 

Life insurance NOHCs will be required to be registered under the Life Insurance Act and be subject to APRA’s supervision.  They will be required to comply with prudential standards, reporting obligations, directions issued by APRA and investigations.  APRA will be able to seek the disqualification of persons in specified positions in the body corporate.  Registered NOHCs may also be liable to pay a financial institutions levy. 

Date of effect Items in Schedule 1 will apply from the day of proclamation.  If any items do not commence within 6 months of the Bill receiving Royal Assent, these items will commence on the first day on or after the 6 month period.

Proposal announced The measures were announced in the Treasurer’s Press Release No. 061 of 2 June 2008 and in the Minister for Superannuation and Corporate Law’s Press Release No. 018 of 2 March 2009.

Financial impact Low.  APRA’s supervision of life insurance NOHCs is expected to be funded by industry on a user-pays basis.  APRA is also expected to incur time and resource costs in developing new standards for life insurance NOHCs, however, these costs are not expected to be significant.

Compliance cost impact Life insurance NOHCs will be required to become authorised under the Life Insurance Act and comply with Australia’s prudential regime if they wish to continue to be NOHCs of registered life insurers in Australia.  Such bodies corporate may also be liable to pay a financial institutions levy. 

Summary of Regulation Impact Statement

Impact: Life insurance NOHCs will be required to become authorised under the Life Insurance Act and comply with Australia’s prudential regime if they wish to continue to be NOHCs of registered life insurers in Australia. 

Main points:    

•        Registration of NOHCs will enable APRA to develop capital requirements for the group on a consolidated basis.  For well-run groups, the total capital requirement is expected to be similar to that currently held by the life insurance company.  Capital requirements will be higher if the risks of the corporate group are higher. 

•        APRA may extend its current standard on governance for life companies to apply to NOHCs of life companies.  The standard will be similar to that applying to NOHCs of ADIs and general insurers.  NOHCs of life companies which are also NOHCs of ADIs and NOHCs of general insurers already meet the requirements for good governance.

•        APRA may extend its current standard on fitness and propriety for life companies to apply to NOHCs of life companies.  Many directors on the Board of the life company are also likely to be appointed to the Board of the NOHC and therefore already meet fit and proper criteria.  Thus, the extra costs involved in meeting the criteria are likely to be low.

2.  Injunctions

Schedule 2 of the Bill introduces measures to harmonise court injunction powers across prudential legislation ( Banking Act 1959 , Insurance Act 1973 , Life Insurance Act and Superannuation Industry (Supervision) Act 1993 (SIS Act)) so that APRA can seek injunctions for conduct relating to the financial health of an entity. 

APRA will be able to seek an injunction where a person engages, or proposes to engage, in contravention of the prudential Acts or breaches a condition on the authorisation or registration of a prudentially regulated entity. 

The consistent range of injunctions that APRA will be able to seek are restraining, performance, consent and interim injunctions for conduct relating to breaches of the prudential Acts.

Date of effect Amendments in Schedule 2 will apply from the day of Royal Assent.

Proposal announced The measures were announced in the Treasurer’s Press Release No. 061 of 2 June 2008 and in the Minister for Superannuation and Corporate Law’s Press Release No. 018 of 2 March 2009.

Financial impact Nil.  APRA’s supervision of prudentially regulated entities are expected to be funded by industry on a user-pays basis.

Compliance cost impact Nil.  These measures are not expected to increase the volume of injunctions sought by APRA. 



C hapter 1     

Non-operating holding companies

Outline of chapter

1.1                   Schedule 1 of the Bill amends the Life Insurance Act and related legislation to establish a regulatory regime for NOHCs of registered life insurance companies.

Context of amendments

1.2                   Currently, APRA has the power to regulate a NOHC of an authorised deposit taking institution (ADI) under the Banking Act and of a general insurer under the Insurance Act. 

1.3                   This involves the power to authorise, determine standards and request information from ADIs or general insurers, the authorised NOHCs of those entities and subsidiaries thereof — that is, the ADI or general insurer and the group that it operates within.

1.4                   However, APRA does not have the power to regulate NOHCs of life insurance companies under the Life Insurance Act.

1.5                   Most life companies operate as part of a financial conglomerate or corporate group, with decisions affecting a life company often made at the group level.  Many businesses are structured with an unregulated holding company owning and controlling the life company.  NOHCs’ decisions about the conglomerate can have significant impact on the policyholders of the life company in the conglomerate.  However, under the Life Insurance Act, APRA may only regulate the life company and its subsidiaries. 

1.6                   International experience has demonstrated the interconnection between companies in the conglomerate, including between prudentially regulated entities and unregulated entities. 

1.7                   These amendments will allow APRA to regulate NOHCs of prudentially regulated life insurers, recognising that NOHCs can have a significant impact on the safety and stability of life companies.  Doing so will strengthen the regulatory framework, in line with the regulation of ADIs and general insurers. 

1.8                   In line with the regulatory framework that applies to conglomerates containing an ADI or general insurer, subsidiaries of life insurance NOHCs and life insurers will be brought within APRA’s regulatory scope.  These changes ensure that APRA has access to  relevant information about the conglomerate’s financial health and conduct, where its conduct or activities can impact on the life insurers and their policyholders.

1.9                   This will bring the regulation of life insurance NOHCs into line with the regulation of ADI and general insurance NOHCs. 

Summary of new law

1.10               NOHCs of life companies will be subject to prudential regulation under the Life Insurance Act. 

1.11               NOHCs that own one or more life companies will be required to register with APRA.  APRA will have the power to register a NOHC, impose conditions on the registration, revoke the registration and apply prudential standards in relation to authorised NOHCs and conglomerate groups under that Act.  For example, the responsible persons of a NOHC will need to meet ‘fit and proper’ requirements, and the NOHC will be required to meet governance requirements. 

1.12               A registered NOHC will have to comply with applicable reporting requirements under the Life Insurance Act and the Financial Sector (Collection of Data) Act 2001 .  Specified persons within the NOHC will have reporting obligations.  APRA will also be able to monitor a registered NOHC and investigate its affairs where the NOHC has breached a provision of the Life Insurance Act or other applicable law, or where another specified circumstance exists. 

1.13               These requirements and obligations for registered NOHCs are consistent with the requirements and obligations that currently apply to life companies.

1.14               The conduct of subsidiaries that are relevant to prudential supervision are also brought within the enhanced regulatory framework.  Subsidiaries of a registered NOHC or of the life company will have to comply with applicable prudential and reporting requirements.  These requirements are consistent with the prudential requirements that apply to subsidiaries of ADI and general insurers and their NOHCs.

Detailed explanation of new law

Definition

1.15               A NOHC is defined in the Schedule of the Life Insurance Act.  A registered NOHC is a body corporate that is registered under section 28A of the Life Insurance Act.  [Items 182 to 184, and 186 of Schedule 1 of the Bill, Schedule of the Life Insurance Act]

1.16               A ‘senior manager’ of a NOHC is also defined in the Schedule, and is consistent with the definition of a ‘senior manager’ of a life company.  [Item 187 of Schedule 1 of the Bill, Schedule of the Life Insurance Act]

1.17               A registered NOHC, within the meaning of the Life Insurance Act, is a prudentially regulated entity subject to APRA’s supervision.  [Item 188 of Schedule 1 of the Bill, section 3 of the Australian Prudential Regulation Authority Act 1998]

Registration

1.18               A NOHC will be required to be registered with APRA under section 28A of the Life Insurance Act.  APRA may register an applicant if APRA considers that it is appropriate to do so.  If APRA requires registration then it must be notify the applicant in writing.  [Item 21 of Schedule 1 of the Bill, section 28A of the Life Insurance Act]

1.19               APRA may impose conditions on the NOHC’s registration and APRA may vary or revoke a condition on a NOHC’s registration.  [Item 21 of Schedule 1 of the Bill, section 28B of the Life Insurance Act]

1.20               APRA may revoke a NOHC’s registration if one of the circumstances in subsection 28D(1) exist.  These are broadly consistent with the existing grounds for revoking a life insurer’s registration under the Life Insurance Act. 

1.21               Before revoking a registration, APRA is required to provide written notice to the NOHC and give the NOHC 90 days to make a submission, unless APRA believes that a delay to the revocation would be contrary to the public interest or the interests of policyholders of the subsidiary life company.  In addition, APRA must revoke a NOHC’s registration if the NOHC seeks deregistration, and APRA is satisfied it is in the public interest or the interests of policyholders of the subsidiary life company to do so.  [Items 21 of Schedule 1 of the Bill, sections 28D and 28E of the Life Insurance Act]

1.22               APRA may refuse to register a new life company if its NOHC is not registered.  APRA may also make it a condition of a life company’s registration that its NOHC is a registered.  [Items 12 to 16 of Schedule 1 of the Bill, sections 21 and 22 of the Life Insurance Act]

1.23               The changes to sections 21 and 22 of the Life Insurance Act apply to applications for registration made before, on or after the commencement of the provision.  [Items 14 and 16 of Schedule 1 of the Bill]

1.24               The following decisions relating to registration of NOHCs are subject to merits review:

•        refusal to register a body corporate as a NOHC;

•        a decision to impose conditions or vary conditions on a NOHC’s registration; and

•        a decision to revoke a condition on a NOHC’s registration.  [Item 157 of Schedule 1 of the Bill, section 236 of the Life Insurance Act]

Auditor of registered NOHCs

1.25               Auditors of the NOHC, subsidiaries of the life company and subsidiaries of the NOHC will have reporting obligations consistent with the existing reporting obligations of auditors of a registered life insurer.  The heading of section 88 of the Life Insurance Act is amended accordingly.  [Item 23 of Schedule 1 of the Bill, section 88(1A) of the Life Insurance Act]

1.26               The obligations that apply to auditors of these bodies corporate are in line with the reporting obligations of auditors of life companies, as well as auditors of NOHCs and subsidiaries under the Banking Act and Insurance Act. 

1.27               This amendment ensures that the relevant financial information relating to the life company or NOHC’s prudential compliance are reported to the company, and where appropriate, to APRA.  Information relating to the prudential compliance and financial health of the companies headed by the NOHC may affect the interests of the life company and policyholders of the life companies.  As such, relevant matters and breaches will be brought within the reporting obligations of auditors. 



1.28               The auditor of a registered NOHC or subsidiary of a NOHC or life insurer will be required to draw to the attention of the body corporate, or a director or officer of the body corporate, certain matters that may prejudice the interests of policyholders or be contrary to the public interest.  Where the body corporate does not take action within a reasonable time, the auditor is required to inform APRA of the matter.  [Items 24 to 26 and 36 to 39 of Schedule 1 of the Bill, subsections 88(1) and (3) of the Life Insurance Act]

1.29               The auditor also has duties to report to APRA on contraventions of the Life Insurance Act by the body corporate or its directors that may significantly affect the policyholders’ interests.  The auditor is not required to report the breach if the auditor believes the NOHC has already reported the matter.  [Items 27 to 31 of Schedule 1 of the Bill, subsections 88(2) and (2A) of the Life Insurance Act]

1.30               The obligations to inform APRA remain even if the person ceases to be the auditor of the registered NOHC.  [Items 40 and 41 of Schedule 1 of the Bill, subsection 88(4) of the Life Insurance Act]

1.31               A director or senior manager of the registered NOHC or subsidiary commits an offence if the person misleads the auditor by stating that the company has reported a relevant breach to APRA when it has not done so.  [Items 32 to 35 of Schedule 1 of the Bill, subsection 88(2B)]

1.32               The auditor of a registered NOHC or relevant subsidiary may also provide information to APRA if the auditor believes that the information would assist APRA to perform its functions under the Life Insurance Act or the Financial Sector (Collection of Data) Act 2001 [Items 42 and 43 of Schedule 1 of the Bill, section 88A of the Life Insurance Act]

1.33               The auditor of a registered NOHC or relevant subsidiary enjoys qualified privilege in respect of information provided to APRA, in line with the qualified privilege enjoyed by auditors of life companies.  [Items 40 to 41 of Schedule 1 of the Bill, section 89 of the Life Insurance Act]

1.34               APRA may issue a direction to a registered NOHC to remove the auditor of the NOHC where one of the specified circumstance exist.  These are consistent with the circumstances under which APRA may direct a life company to remove the auditor, namely the person is a disqualified person, is not ‘fit and proper’, or has failed to adequately and properly perform the duties of an auditor under the applicable legislation. 

1.35               APRA must give the NOHC and the affected person notice, and allow at least 7 days for the NOHC or the person to make submissions.  [Items 46 to 50 of Schedule 1 of the Bill, section 125A of the Life Insurance Act]

1.36               A NOHC commits an offence if it fails to comply with a direction to remove the auditor.  This is a strict liability offence carrying a maximum penalty of 60 penalty units.  A strict liability offence does not require proof of the mental element.  The same penalty already applies to a life company that fails to comply with a direction under this section. 

1.37               This strict liability offence has the following features that comply with the Guide to Framing Commonwealth Offences, Civil Penalties and Enforcement Powers :

1.38               The penalty for the offence is a fine not exceeding 60 penalty units and does not include imprisonment. 

1.39               The persons that are liable to a penalty under this provision are regulated NOHCs or life insurers, rather than individuals.  These entities are required to have risk management and other internal systems to ensure compliance with legislative obligations.  As such, they are on notice about the requirement to remove an auditor when so directed by APRA and the attached offence provision.

1.40               Compliance with each corresponding legislative obligation is expected to be greatly enhanced as a result of removing the fault element of the offence.  The fitness and propriety of the auditor of a prudentially regulated entity is one of the basic, essential elements of the prudential regulation framework.  Auditors have responsibility for ensuring the accuracy and integrity of financial and other data provided to APRA.  Where APRA does not have confidence in the auditor’s fitness or propriety, or where the auditor has breached an applicable law, it is important for APRA to have the ability to remove the auditor from the entity so that another auditor may be appointed.  Delay in doing so would impair the effectiveness of APRA’s supervision of the entity. 

1.41               Evidence of whether the NOHC intended to comply with APRA’s direction may be peculiarly within the knowledge of the body corporate.  It could be difficult for the prosecuting authority to establish the mental element, which would lead to delay that could compromise APRA’s ability to deal with an emerging situation in a timely manner. 

Monitoring and investigation of registered NOHCs

1.42               APRA will have powers to monitor and investigate the affairs of a registered NOHC, consistent with its current powers to monitor and investigate the affairs of a registered life company.  The monitoring and investigation powers are central to APRA’s supervisory activities, as it enables APRA to supervise the entity’s compliance with the prudential requirements, and where necessary, deal with any breaches of the prudential requirements in a timely and appropriate way. 

1.43               The heading of Part 7 of the Life Insurance Act is amended to reflect the broadened application of the Part.  [Item 51 of Schedule 1 of the Bill, heading, Part 7 of the Life Insurance Act]

Definitions

1.44               The definitions of ‘officer’, ‘relevant business’ and ‘relevant person’ will refer to the officers, businesses and persons in a registered NOHC as well as in a life company.  Likewise, the definitions of ‘associated company’ and ‘related company’ will include the associated companies and related companies of a registered NOHC.  [Items 52 to 67 of Schedule 1 of the Bill, sections 126, 128 and 129 of the Life Insurance Act]

Monitoring

1.45               APRA’s monitoring powers under Division 2 of Part 7 will apply to registered NOHCs.  The heading of Division 2, Part 7 of the Life Insurance Act is amended to reflect the broadened application of the Division.  [Item 68 of Schedule 1 of the Bill, heading of Division 2 of Part 7 of the Life Insurance Act]

1.46               APRA will be able to seek information and records from a registered NOHC as part of its monitoring activities in the same way it may currently seek information and records from a registered life company.  [Items 69 to 80 of Schedule 1 of the Bill, sections 130 to 132 of the Life Insurance Act]

1.47               These amendments apply to ‘show cause’ notices issued on or after their commencement.  [Item 81 of Schedule 1 of the Bill]

1.48               A registered NOHC will have breach reporting requirements.  All breaches and likely breaches of the Life Insurance Act relating to the entity’s financial obligations or minimum capital standards, which are or will be significant, must be reported to APRA.  The report must be submitted as soon as practicable and within 10 business days.  A registered NOHC that fails to comply with its breach reporting requirements will commit an offence. 

1.49               However, the NOHC is not required to report a relevant breach if the auditor of the NOHC has already reported the breach to APRA.  The reporting obligation and the exemption from double reporting is consistent with existing breach reporting obligations of life companies.  [Items 82 to 87, section 132A of the Life Insurance Act]

1.50               A registered NOHC that fails to report relevant matters or breaches is guilty of an offence that carries a maximum penalty of 200 penalty units. 

1.51               These amendments apply to matters or breaches that a registered NOHC becomes aware of on or after their commencement.  [Item 88 of Schedule 1 of the Bill]

1.52               APRA may access the premises of a registered NOHC for monitoring purposes, with the body corporate’s consent.  [Items 89 and 90 of Schedule 1 of the Bill, section 133 of the Life Insurance Act]

1.53               APRA will also be able to accept enforceable undertakings from a registered NOHC under section 133A of the Life Insurance Act, though no amendments are required for this provision. 

Investigation

1.54               APRA’s investigation powers under Divisions 3 to 5 of Part 7 will apply to registered NOHCs. 

1.55               Before commencing an investigation of the businesses of a registered NOHC, APRA must be satisfied that a specified trigger to investigate exists.  APRA must issue a show cause notice to the registered NOHC and allow up to 14 days for the NOHC to respond.  At the end of the notice period, APRA may make a decision to investigate if it is satisfied that it is in the public interest to do so.  [Items 91 to 108 of Schedule 1 of the Bill, sections 135 to 137 of the Life Insurance Act]

1.56               If APRA has decided to investigate the affairs of a registered NOHC, APRA may also investigate the affairs of an associated company to the NOHC.  [Items 109 to 112 of Schedule 1 of the Bill, section 138 of the Life Insurance Act]

1.57               APRA must follow the investigation procedure that applies during an investigation of a life company.  That is, APRA must give written notice to the company and issue an identity card to an authorised person.  [Items 113 of Schedule 1 of the Bill, section 139 of the Life Insurance Act]

1.58               During an investigation, APRA or the authorised person may access the premises of the registered NOHC or associated company and take copies of records.  APRA or the authorised person may request the production of records, and may require the assistance of relevant persons in the body corporate.  [Items 113 of Schedule 1 of the Bill, sections 140 to 142 of the Life Insurance Act]

1.59               This amendment expands the existing entry and search powers under section 140 of the Life Insurance Act.  Section 140 currently empowers APRA or the authorised person to enter the premises of the life insurer during an investigation without a warrant.  Where the authorised person or APRA believe there are documents that have not been produced, the person or APRA may apply to a magistrate for a warrant.  This provision will now extend to the premises of the registered NOHC and associated companies. 

1.60               The entry provision applies to complex financial entities that are registered by the prudential regulator, APRA, to conduct regulated financial business that can have significant impact for a large number of consumer policyholders.  As part of the prudential regulation framework, this provision is intended to focus on business, rather than residential, premises.  APRA is expected to use the entry and search power in order to respond in a timely way to potential prudential concerns, particularly concerns that may adversely affect the interests of policyholders or the financial system more broadly. 

1.61               Where APRA or the authorised person wishes to obtain documents that have not been produced by the entity or persons in the entity, they would be required to apply for a warrant from a magistrate.

1.62               APRA or the authorised person may apply for a warrant from a magistrate during an investigation of a registered NOHC or associated company if APRA or the authorised person believes that information or documents have not been produced.  If granted, APRA or the authorised person has additional powers to execute warrants and deal with electronic equipment.  [Items 113 to 116 of Schedule 1 of the Bill, sections 143 and 144 and Division 4, Part 7 of the Life Insurance Act]

1.63               A person commits an offence if the person intentionally or recklessly fails to comply with a request by APRA or an authorised person during an investigation.  This offence carries a maximum penalty of 30 penalty units.  [Items 113 of Schedule 1 of the Bill, section 147 of the Life Insurance Act]

1.64               The term ‘company concerned’ is amended to ‘body concerned’ to reflect the broader application of the term to registered NOHCs as well as life insurers.  [Items 114 and 115 of Schedule 1 of the Bill, section 152 of the Life Insurance Act]

1.65               APRA must give the registered NOHC a summary of conclusions after an investigation.  [Items 113, section 149 of the Life Insurance Act]

1.66               These amendments apply to ‘show cause’ notices issued on or after their commencement.  [Item 117 of Schedule 1 of the Bill]

Whistleblowers

1.67               The whistleblower protection provision will apply to registered NOHCs, consistent with the whistleblower protection provision that applies to life companies.  [Items 118 to 125 of Schedule 1 of the Bill, Division 5 of Part 7 of the Life Insurance Act]

1.68               Specified persons in relation to a registered NOHC may make a protected disclosure as a whistleblower.  A person who makes a qualifying disclosure enjoys protection against victimisation, civil and contractual penalties, as well as use immunity, in respect of the disclosure. 

1.69               A person may not victimise, or threaten to victimise, the whistleblower.  A person that does so is guilty of an offence that carries a maximum penalty of 25 penalty units or 6 months imprisonment, or both.

1.70               Officers, employees, contractors, auditors and any appointed actuaries of the NOHC are required to maintain confidentiality of the whistleblower’s identity and the information in the whistleblower report.  There is an exception where these persons communicate such information to APRA, the Australian Federal Police or with the whistleblower’s consent.  A person or NOHC that fails to comply with the confidentiality requirements is guilty of an offence that carries a maximum penalty of 25 penalty units. 

1.71               The appointed actuary of the life company will also be required to comply with the confidentiality requirements under section 156E of the Life Insurance Act, and will also be committing an offence if the appointed actuary breaches these requirements.  This amendment brings the treatment of appointed actuaries into line with the treatment of other persons who are able to receive whistleblower reports under section 156A of the Life Insurance Act.  [Item 124 of Schedule 1 of the Bill, paragraph 156E(1)(c) of the Life Insurance Act]

1.72               These amendments apply to disclosures made on or after their commencement.  [Item 126 of Schedule 1 of the Bill]

Prudential standards and Directions

1.73               APRA will be able to issue prudential standards in respect of registered NOHCs and their subsidiaries to protect the interests of the policyholders and prospective policyholders within the conglomerate.  The scope of this power is consistent with the scope of APRA’s power to issue prudential standards in respect of life companies.  New or amended prudential standards will be made in accordance with existing procedures and with consultation. 

1.74               In addition, APRA will be able to require a group of companies to collectively satisfy a prudential requirement.  This recognises that it may be more appropriate for some prudential requirements, such as risk management, to apply at a group level.  [Items 129 to 132 of Schedule 1 of the Bill, section 230A of the Life Insurance Act]

1.75               APRA must give notice to the NOHCs or the subsidiaries concerned if it varies or revokes a prudential standard that applies to the body corporate.  This is consistent with the current notice requirement for varying or revoking prudential standards for life insurers.  However, if the standard applies to a NOHC or life insurer as well as its subsidiaries, APRA need only give a notice to the NOHC or the life insurer.  [Item 133 of Schedule 1 of the Bill, subsections 230A(7) and (9) of the Life Insurance Act]

1.76               These amendments apply to standards determined on or after their commencement.  [Item 135 of Schedule 1 of the Bill]

1.77               APRA will be able to issue one of the directions listed under subsection 230B(2) to a registered NOHC if one of the circumstances listed under subsection 230B(1) exists.  The scope of this power is consistent with the scope of APRA’s power to issue directions to life companies.  As for directions that may be issued to life insurers, directions issued to registered NOHCs on the triggers under paragraphs 230B(1)(a) to (d) are subject to merits review. 

1.78               Consistent with directions that may be issued to life companies, if a direction requires a registered NOHC to cause its subsidiary to do something or refrain from doing something, the NOHC is taken to have the power to require such conduct from the subsidiary.  [Items 136 to 142 of Schedule 1 of the Bill, section 230B of the Life Insurance Act]

1.79               The definition of ‘senior manager’ is removed from section 230B of the Life Insurance Act because the definition already exists in the Schedule of the Life Insurance Act.  [Item 143 of Schedule 1 of the Bill, subsection 230B(10) of the Life Insurance Act]

1.80               A direction issued by APRA to a registered NOHC is not grounds for denying any obligation under a contract, accelerating any debt under that contract or closing out any transaction relating to that contract.  Again, this is consistent with the treatment of directions that may be issued to life insurers.  [Items 144 of Schedule 1 of the Bill, section 230C of the Life Insurance Act]

1.81               APRA may publish information in the Australian Government Gazette in relation to a direction issued to a registered NOHC or supply information to the Treasurer about such a direction.  If information relating to a direction is not published in the Gazette , it is protected information for the purposes of Part 6 of the Australian Prudential Regulation Authority Act 1998 [Items 146 to 149 of Schedule 1 of the Bill, sections 230D and 230E of the Life Insurance Act]

1.82               These amendments apply in relation to giving directions on or after their commencement.  [Item 145 of Schedule 1 of the Bill]

1.83               If a registered NOHC fails to comply with a direction, it commits an offence.  As for directions that may be issued to life companies, this is a strict liability offence that carries a maximum penalty of 50 penalty units.  An officer of the NOHC who has the function of ensuring the NOHC’s compliance with such a direction, but fails to take reasonable steps to ensure its compliance, is also guilty of a strict liability offence carrying a maximum penalty of 50 penalty units.  Both are continuing offences.  [Items 150 to 156 of Schedule 1 of the Bill, section 230F of the Life Insurance Act]

1.84               A strict liability offence does not require proof of the mental element.  These strict liability offences have the following features that comply with the Guide to Framing Commonwealth Offences, Civil Penalties and Enforcement Powers :

1.85               They are not punishable by imprisonment.  The strict liability offences under subsections 230F(1) and (3) are punishable by a fine not exceeding 60 penalty units. 

1.86               The company officers that are liable to a penalty under this provision have the function of ensuring the NOHC’s compliance with its legislative obligations.  The NOHC is also required to have risk management and other internal systems to ensure its compliance with the same legislative obligations.  As such, they are on notice about the requirement to ensure compliance with a direction issued under section 230B of the Life Insurance Act, and the offence provision that applies to non-compliance. 

1.87               Lastly, compliance with each corresponding legislative obligation is expected to be greatly enhanced as a result of removing the fault element of the offence.  Directions issued under section 230B of the Life Insurance Act are key regulatory tools for enforcing compliance with prudential and financial requirements.  Directions are used to stop conduct that may cause deterioration of the entity’s financial health or adversely affect the policyholders of the life company within the conglomerate.  It is, as such, a basic and essential element of the regulatory framework for entities to comply with directions issued by APRA in a timely way. 

1.88               Evidence as to the mental element of these two offences may be peculiarly within the knowledge of the NOHC or of the officer concerned.  It may be difficult for the prosecuting authority to prove the mental element of the offences and therein undermine the effectiveness of directions as an enforcement tool, such that APRA’s ability to respond to emerging situations quickly and decisively may be compromised. 

Disqualification

1.89               APRA will be able to seek the disqualification of specified persons in relation to registered NOHCs.  This is consistent with its ability to seek the disqualification of specified persons in relation to life companies. 

1.90               The specified persons in relation to a registered NOHC are the director, principal executive officer, appointed actuary or auditor of the body corporate.  The Court may disqualify the person if it is satisfied that the person is not a fit and proper person and the disqualification is justified.  [Items 176 to 179 of Schedule 1 of the Bill, section 245A of the Life Insurance Act]

1.91               As a result of these amendments, a person commits an offence if the person acts as a director, principal executive officer, appointed actuary or auditor of a registered NOHC, and the person is disqualified from acting in one of the above positions, has been convicted of a dishonesty or fraud offence, become bankrupt, applied to take the benefit of a law for the relief of bankrupt or insolvent debtors or compounded with his or her creditors. 

1.92               A NOHC also commits an offence if the NOHC allows a person to act as a director, principal executive officer, appointed actuary or auditor of the NOHC in one of the above circumstances. 

1.93               These are two-tiered offences.  The fault-based offence carries a maximum penalty of two years’ imprisonment for the person and 250 penalty units for a registered NOHC.  The strict liability offence carries a maximum penalty of 60 penalty units.  [Items 162 to 175 of Schedule 1 of the Bill, section 245 of the Life Insurance Act]

1.94               These penalties are consistent with the existing penalties on such persons acting in these positions in a life company. 

1.95               The strict liability offence does not require proof of the mental element.  This strict liability offence has the following features that comply with the Guide to Framing Commonwealth Offences, Civil Penalties and Enforcement Powers :

1.96               The penalty for the offence is a fine not exceeding 60 penalty units and does not include imprisonment. 

1.97               The persons that are liable to a penalty under this provision are themselves required to ensure the entity’s compliance with legislative obligations.  The NOHC is also required to have risk management and other internal systems to ensure its compliance with the same legislative obligations.  As such, they are on notice about the offences that attach to non-compliance with sections 245 of the Life Insurance Act.

1.98               Persons in these positions are responsible for the management and operation of the financial entity and ensure the entity’s compliance with prudential obligations and managing the entity’s human, technical and financial risks.  Where a person is disqualified by the Federal Court under section 245A of the Life Insurance Act from acting in that position, or a circumstance under section 245 has occurred (such as a fraud or dishonesty offence), it is important that the person ceases to hold a responsible person position in the NOHC.

1.99               Moreover, compliance with this legislative obligation to remove specified persons is expected to be greatly enhanced as a result of removing the fault element of the offence.  Evidence of the mental element of such an offence is likely to be peculiarly within the possession of the individual or the entity.  Compliance with this basic, essential element of the prudential regulation framework is likely to be greatly undermined if the prosecution has difficulty enforcing breaches of this provision.

1.100           These amendments apply to applications for disqualification made on or after their commencement.  [Item 180 of Schedule 1 of the Bill]

Review of decisions

1.101           This amendment affects the constitution of the Administrative Appeals Tribunal (AAT).  A person who is a director or employee of a registered NOHC cannot sit as a member of the AAT in relation to a matter that concerns the NOHC.  This is consistent with the limits on directors and employees with a life company sitting as members of the AAT.  [Item 158 of Schedule 1 of the Bill, section 237 of the Life Insurance Act]

Other amendments

Register of NOHCs

1.102           APRA must keep a register of registered NOHCs, consistent with its register of registered life companies.  [items 159 and 161 and item 185 of Schedule 1 of the Bill, section 240 of the Life Insurance Act]

Constitutional validity

1.103           Items 1 to 3 of Schedule 1 of the Bill insert provisions into section 4 of the Life Insurance Act to ensure the constitutional validity of the amendments in this Schedule. 

Supervisory Levies for registered NOHCs

1.104           In line with current funding arrangements for financial sector institutions, APRA’s supervision of registered life insurance NOHCs will be funded on a user-pays basis. 

1.105           Accordingly, the financial institutions levy framework is amended such that the Minister will be able to determine a levy to be paid by registered life insurance NOHCs.  This is in line with the Minister’s current ability to determine a levy to be paid by the registered NOHCs of ADIs and general insurers. 

1.106           The actual rate of levy is not set by legislation, as it will be determined in the annual levy determination process.  [Items 190 to 193, 200 and 201 of Schedule 1 of the Bill, sections 5 and 7 of the Authorised Non-Operating Holding Companies Supervisory Levy Imposition Act 1998 and section 7 of the Financial Institutions Supervisory Levies Collection Act 1998]

1.107           These amendments apply in a financial year if the amendments commence after 1 July of the financial year.  Regulations made under the Authorised Non-Operating Holding Companies Supervisory Levy Imposition Act may amend the application of the amendments.  This provides a degree of flexibility so that regulations may be made to avoid any unintended consequences of these amendments relating to financial institutions levies.  The regulations will not be able to change the application of any penalties under the prudential legislation.  [Item 194 of Schedule 1 of the Bill]

Repeal of inoperative provision

1.108           Item 134 of Schedule 1 of the Bill repeals an inoperative provision, namely subsection 230A(13).  This subsection creates a definition of ‘Territory’, which is not used in the Life Insurance Act.   



Consequential amendments in the Life Insurance Act

1.109           The following items clarify that references to a life insurer registered under the Life Insurance Act are references to a life insurer registered under section 21 of the Act, rather than a NOHC registered under section 28A of the Act:

•        Item 4 of Schedule 1 of the Bill, amending paragraphs 12A(4)(e) and 12B(5)(e);

•        Item 127 of Schedule 1 of the Bill, amending subsection 190(2);

•        Item 128 of Schedule 1 of the Bill, amending subparagraphs 203B(a)(i) and (b)(i);

•        Item 161 of Schedule 1 of the Bill, amending subsection 242(2); and

•        Item 181 of Schedule 1 of the Bill, amending section 254.

1.110           Item 5 of Schedule 1 of the Bill amends references to ‘companies’ in section 16 of the Life Insurance Act, so that they refer to ‘body corporate’.  These changes are consequential upon the new definition of NOHC in the Schedule of the Life Insurance Act.

Consequential amendments in other legislation

1.111           The following items clarify that references to a life insurer registered under the Life Insurance Act are references to a life insurer registered under section 21 of the Act, rather than a NOHC registered under section 28A of the Act:

•        Item 188 of Schedule 1 of the Bill, amending the Australian Prudential Regulation Authority Act 1998 ;

•        Item 195 to 199 of Schedule 1 of the Bill, amending the Corporations Act 2001 ;

•        Item 202 of Schedule 1 of the Bill, amending the Financial Sector (Business Transfer and Group Restructure) Act 1999 ;

•        Item 203 of Schedule 1 of the Bill, amending the Financial Sector (Collection of Data) Act 2001 ;

•        Item 204 of Schedule 1 of the Bill, amending the Financial Sector (Shareholdings) Act 1998 ;

•        Item 205 of Schedule 1 of the Bill, amending the First Home Saver Accounts Act 2008 ;

•        Item 206 and 207 of Schedule 1 of the Bill, amending the Income Tax Assessment Act 1936 ;

•        Item 208 of Schedule 1 of the Bill, amending the Income Tax Assessment Act 1997 ;

•        Items 209 to 214 of Schedule 1 of the Bill, amending the Insurance Acquisitions and Takeovers Act 1991 ;

•        Item 215 of Schedule 1 of the Bill, amending the Insurance Act 1973 ;

•        Items 216 and 217 of Schedule 1 of the Bill, amending the Life Insurance Supervisory Levy Imposition Act 1998 ;

•        Item 218 of Schedule 1 of the Bill, amending the Pooled Development Funds Act 1992 ;

•        Item 219 of Schedule 1 of the Bill, amending the Retirement Savings Accounts Act 1997 ;

•        Item 220 of Schedule 1 of the Bill, amending the Social Security Act 1991 ;

•        Item 221 of Schedule 1 of the Bill, amending the Superannuation Industry (Supervision) Act 1993 ;

•        Item 222 of Schedule 1 of the Bill, amending the Superannuation (Unclaimed Money and Lost Members) Act 1999 ; and

•        Item 223 of Schedule 1 of the Bill, amending the Veterans’ Entitlements Act 1986 .

 



C hapter 2     

Injunctions

Outline of chapter

2.1                   Schedule 2 of the Bill amends the Banking Act, Insurance Act, Life Insurance Act and SIS Act (collectively, the prudential Acts) to provide harmonised powers for APRA to seek court injunctions against breaches or contraventions of a provision of these Acts or breaches of conditions or directions issued under these Acts.

Context of amendments

2.2                   The power to seek a court injunction is a strong enforcement power that enables APRA, with the sanction of the courts, to act immediately to protect relevant interests.  It is expected that this power will only be used in very serious cases and where other enforcement powers are insufficient.

2.3                   An injunctive power is particularly useful as an interim measure, until a final injunction order is made by the Court, to protect relevant interests while an investigation or other formal enforcement action is being undertaken or considered by APRA.

2.4                   The power to take rapid and decisive action to deal with emerging prudential concerns and protect beneficiaries promotes confidence in the effectiveness of prudential supervision and the safety of the regulated sectors.

2.5                   The Banking Act, Insurance Act, Life Insurance Act and SIS Act each contain a power for APRA to seek a court injunction.  However, the circumstances under which an injunction may be sought vary significantly across the prudential Acts.  Harmonising the injunction provisions under the prudential Acts would ensure APRA can respond in a timely and decisive way, where appropriate, to emerging prudential concerns. 

Summary of new law

2.6                   The amendments will harmonise the power to seek a consistent range of court injunctions under each of the prudential Acts, based on the range of injunctions available under the SIS Act.  APRA would be able to seek an injunction where a person has engaged, or proposes to engage, in conduct that constitutes a contravention of the Act, or attempts, assists, induces or is knowingly concerned with a contravention of the relevant Act. 

2.7                   In addition, the harmonised provisions will enable APRA to seek an injunction where an entity has, or proposes to, engage in conduct that breaches the conditions imposed on the licence of an entity or directions given by APRA.

2.8                   The harmonised injunctions provisions under the Banking Act, Insurance Act, Life Insurance Act and SIS Act would enable APRA to seek restraining, performance, consent and interim injunctions for conduct relating to breaches of the relevant Act. 

2.9                   Affected persons may currently seek these injunctions under the SIS Act, and these amendments do not affect their ability to continue to seek such injunctions under this Act. 

2.10               The amendments to the SIS Act will also apply to superannuation trustees that offer First Home Saver Accounts under the First Home Saver Accounts Act 2008

Comparison of key features of new law and current law

New law

Current law

Banking Act, Insurance Act and Life Insurance Act

APRA may seek an injunction where:

•        a person has engaged, or proposes to, engage, in conduct that constitutes a contravention of the Act, or attempts, assists, induces or is knowingly concerned with a contravention of the Act; or

•        an entity has, or proposes to engage in conduct that breaches the conditions imposed on the licence of an entity or directions given by APRA.

Banking Act

APRA may seek an injunction in relation to non-regulated entities who have engaged, or propose to engage, in conduct that constitutes a contravention of certain provisions of the Act, or attempts, assists, induces or is knowingly concerned with such a contravention of those provisions. 

APRA may also seek an injunction in relation to compliance with conditions on demutualisation.

Insurance Act

APRA may seek an injunction where an insurer proposes to, or has, contravened a determination made by the Superannuation Complaints Tribunal. 

L ife Insurance Act

APRA may seek a range of injunctions in relation to a regulated life company, but is not empowered to seek an injunction in relation to other persons, such as NOHCs. 

SIS Act, First Home Saver Accounts Act

APRA or an affected person may seek an injunction where:

•        a person has engaged, or proposes to engage, in conduct that constitutes a contravention of the Act, or attempts, assists, induces or is knowingly concerned with a contravention of the Act; and

•        a person has, or proposes to engage in conduct that breaches the conditions imposed on a licence or an authorisation, or directions given by APRA.

SIS Act, First Home Saver Accounts Act

APRA or an affected person may seek an injunction where a person has engaged, or proposes to engage, in conduct that constitutes a contravention of the Act, or attempts, assists, induces or is knowingly concerned with a contravention of the Act.

Detailed explanation of new law

Banking Act

2.11               The Bill amends the Banking Act by repealing the existing paragraph 65A(1)(a) of the Act and inserting a new paragraph in its place, enabling restraining injunctions (preventing the doing of an act, or engaging in conduct) to be sought in circumstances where there has been a contravention of a provision of the Act, the regulations or the prudential standards, a condition imposed under the Act or a direction by APRA issued pursuant to the Act.  [Item 1, Part 1 of Schedule 2 of the Bill, paragraph 65A(1)(a) of the Banking Act]

2.12               Amendments to paragraphs 65A(1)(b) to (f) of the Act reflect APRA’s ability to apply for an injunction in respect of a breach of a direction.  [Item 2, Part 1 of Schedule 2 of the Bill, subsection 65A(1) of the Banking Act]

2.13               The Bill makes amendments to paragraph 65A(4)(a) of the Banking Act that have the effect of allowing performance injunctions (compelling the performance of an act or thing that a person is required to do) to be sought in a similar set of circumstances as the Bill provides for restraining injunctions.  That is, for circumstances where a person has refused or failed to do an act or thing that is required to be done under the Act, the regulations or the prudential standards.  [Item 3, Part 1 of Schedule 2 of the Bill, paragraph 65A(4)(a) of the Banking Act]

2.14               The amendments to paragraph 65A(4)(b) and subsection 65A(9) reflect the broadened injunctions power, following the above amendments.  [Items 4 to 6, Part 1 of Schedule 2 of the Bill, section 65A of the Banking Act]

Insurance Act

2.15               The changes to the injunctions provisions in the Insurance Act are made by repealing the existing provision in its entirety and substituting a new section 129D.  The new section enables restraining and performance injunctions to be sought by APRA where there has been a contravention of the Act, the regulations or the prudential standards, a condition imposed under the Act, or a direction by APRA under the Act.  In addition, injunctions can be sought to prevent attempts, acts such as aiding, inducing, or being knowingly concerned in a contravention.  The new section also empowers the Federal Court to award damages in addition to ordering an injunction.  [Item 7, Part 2 of Schedule 2 of the Bill, section 129D of the Insurance Act]

Life Insurance Act

2.16               The Bill amends the Life Insurance Act by repealing the existing injunctions provision and inserting the new, harmonised provision.  The new section 235 provided for by the Bill will enable the Federal Court to grant injunctions on terms and in circumstances similar to the new regimes introduced for the Banking and Insurance Acts.  APRA or ASIC may apply to the Court for an injunction under the new section.  [Item 8, Part 3 of Schedule 2 of the Bill, section 235 of the Life Insurance Act]

SIS Act

2.17               Minimal changes are made to the SIS Act, reflecting the fact that the existing injunctions provisions in that Act are taken by the Bill as the model for harmonisation of these provisions throughout the prudential regime.  The Bill does however, extend the circumstances in which an injunction can be sought to include contraventions or failure to fulfil requirements in respect of a condition imposed on a Registrable Superannuation Entity (RSE) licence or a direction given under the Act by APRA or the Regulator.  The Bill also clarifies that the Federal Court’s powers under this provision are in addition to and do not limit its other powers.  [Items 9, 10 and 12, Part 4 of Schedule 2 of the Bill, section 315 of the SIS Act]

2.18               An amendment to subsection 315(6) enables the Court to discharge or vary an injunction granted under section 315.  [Item 11, Part 4 of Schedule 2 of the Bill, section 315 of the SIS Act]

First Home Saver Accounts Act

2.19               The injunctions provisions of the SIS Act are expressly applied to authorised First Home Saver Account providers under the First Home Saver Accounts Act.  The Bill makes an adjustment to that Act that has the effect of ensuring that injunctions can be applied for in respect of breaches of or failures to comply with conditions imposed on authorised FHSA providers that are trustees under the First Home Saver Accounts Act.  [Item 13, Part 5 of Schedule 2 of the Bill, section 120A of the First Home Saver Accounts Act]

Application

2.20               The amendments made by Schedule 2 of the Bill apply to applications in relation to an injunction made on or after the commencement of this Schedule.  The conduct giving rise to the application for an injunction may have occurred before the commencement of this Schedule.  [Item 14 of Schedule 2 of the Bill]