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Australian Prudential Regulation Authority Bill 1998

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1998

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY BILL 1998

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

 

 

(Circulated by authority of the Treasurer,

the Honourable Peter Costello MP)

 

 

 

 

 

 

13644



Table of Contents

Outline            1

Financial impact statement     2

Abbreviations  3

Regulation impact statement  4

Proposed legislation    5

Proposed Part 1  - Preliminary            5

Proposed Part 2  - Establishment, functions and powers of APRA   6

Proposed Part 3  APRA's Board     7

Proposed Part 4  - The CEO and APRA staff members        10

Proposed Part 5  - Financial and taxation matters      11

Proposed Part 6  - Secrecy      12

Proposed Part 7  - Miscellaneous        14



Outline

 ·  Australian Prudential Regulation Authority Bill 1998

 

1 Outline

1.1       The Bill gives effect to the Government's response to the recommendations of the Financial System Inquiry concerning the organisational framework for prudential regulation.

 

1.2       The existing framework for prudential regulation in Australia is institutionally based, with separate agencies regulating the activities of each class of institution.  This institutional framework is to be replaced by an "objectives based" model of regulation - with single, separate regulators proposed for each of the three broad objectives of government intervention in financial markets.  Under this model, the Australian Prudential Regulation Authority (APRA) will be responsible for financial safety across all sectors requiring prudential regulation  depositÄtaking, life and general insurance, and superannuation.

 

1.3       APRA will have comprehensive powers, including for the licensing of regulated deposit-taking and insurance institutions.  Given these enhanced powers, it is considered that APRA should be accountable through an independent Board and should operate under a charter that ensures that the financial safety objectives of prudential regulation are balanced with efficiency, competition, contestability and competitive neutrality considerations.

 

1.4       The Bill provides for establishment of APRA and covers the following broad areas:

·           The functions and powers of APRA  APRA will be an independent regulator, but like the Reserve Bank will be subject to policy determination powers of the Treasurer (expected in practice to be used only in rare instances, if at all);

·           APRA's Board  including the composition of the Board, appointment mechanisms, conduct of meetings and remuneration;

·           CEO and APRA staff members  providing for the duties of the CEO and the power of the Board to set terms and conditions of staff;

·           Financial matters  provision is made for the funding of APRA from levies paid by the regulated institutions and for charges to be made for the provision of certain services;

·           Secrecy provisions to ensure protection of information and documentation obtained as part of the regulation process.

 

Financial impact statement

1.5       Over time, the establishment of APRA will have no net effect on Commonwealth expenditure.  The cost of prudential supervision undertaken by APRA and the cost of establishing APRA will be self-funded through levies on industry and fees. 

 

 

2 Abbreviations

The following abbreviations are used in this explanatory memorandum:

            ABS                -           Australian Bureau of Statistics

            ACCC             -           Australian Competition and Consumer Commission

            AFIC               -           Australian Financial Institutions Commission

            APRA             -           Australian Prudential Regulation Authority

            ASC                -           Australian Securities Commission

            ASIC               -           Australian Securities and Investments Commission

            AWA              -           Australian Workplace Agreement

            CEO                -           Chief Executive Officer

            CAC Act         -           Commonwealth Authorities and Companies Act 1997

            CSS                 -           Commonwealth Superannuation Scheme

            PSB                 -           Payments System Board

            PSS                 -           Public Service Superannuation Scheme

            RBA                -           Reserve Bank of Australia

            SIS Act                       -           Superannuation Industry (Supervision) Act 1993

            SES                 -           Senior Executive Service

 

 

3 Regulation impact statement

3.1       This Bill establishes APRA.  While APRA will be given the power to administer regulations that are established under other laws eg. the Banking Act 1959, this Bill does not in itself create any regulations.

 

 

4 Proposed legislation

 

Proposed Part 1  - Preliminary

 

Clause 1  - Short Title

4.1       Upon enactment, the Bill will be known as the Australian Prudential Regulation Authority Act 1998.

 

Clause 2  - Commencement

4.2       The Act will commence on the day it is proclaimed.  However, there will be a limit of six months after receipt of Royal Assent on any delay in proclaiming the Act.

 

Clause 3  - Definitions

4.3       This provides a definition of key terms used in the legislation.  The majority of these items are self-explanatory.

 

4.4       In the case of bodies regulated by APRA, the provision to allow variations by regulation of bodies or entities covered by sub-section (2) is designed to enable APRAs functions to cover any bodies that may be considered to require, or be removed from, prudential regulation and that are not covered by the categories listed in sub-section (2).  This is necessary due to the likely continuing evolution of the financial system. 

 

Clause 4  Act binds the Crown

4.5       This provision is intended to cover a situation where the Minister receives information that would come within the scope of the disclosure provisions of the Bill.

 

Clause 5  External Territories

4.6       This extension of the Act to external territories is designed to ensure that the provision dealing with disclosures of information extends to external Territories.

 

Clause 6  Application of Criminal Code

4.7       The Criminal Code will be applied to this Act.Proposed Part 2  - Establishment, functions and powers of APRA

Proposed Part 2  - Establishment, functions and powers of APRA

 

4.8       APRA, which is established by this Bill (clause 7), is to undertake prudential regulation of institutions regulated under the Banking Act 1959, the Insurance Act 1973, the Life Insurance Act 1995 and the Superannuation Industry (Supervision) Act 1993, namely banks, insurance companies and superannuation funds.  In the event that the State and Territory Governments agree to transfer responsibility for regulating building societies, credit unions and friendly societies to the Commonwealth, APRA's responsibilities will be extended to include these entities.

 

4.9       Prudential regulation will cover both policy development and implementation.  APRA will also be responsible for, in the case of superannuation, ensuring compliance with retirement income standards and related matters (clause 8(1)).

 

4.10     An important consideration in determining the role of APRA is the need to ensure that, in carrying out its function of prudential regulation, it does not unduly hinder other desired objectives of promoting efficiency, competition, contestability and innovation in the financial system (clause 8(2)).  This would be reflected, for example, in account being taken of risk management arrangements that regulated entities are currently using, or propose to use in future.  This flexibility is considered to be of particular importance at a time when the financial system is, and will continue to be, subject to rapid change arising from such factors as globalisation and technological change.

 

4.11     While the Bill provides APRA with the usual administrative powers (clauseÿ11), its main regulatory powers are set out in other legislation (clause 9).  These include the Acts referred to above in para 4.8.  Clause 9(b) is designed to cover possible transitional contingencies that may be required should the States and Territories agree to the transfer of functions, as referred to in para 4.8 above. 

 

4.12     It is intended that APRA will be an authority that will have a high degree of independence and operational autonomy.  This level of independence from executive government is in line with the Basle Committee's Core Principles of Effective Bank Supervision.   This states that supervisory agencies "should possess operational independence and adequate resources (including staffing, funding and technology) to meet the objectives set, provided on terms that do not undermine the autonomy, integrity and independence of the supervisory authority".

 

4.13     Consistent with this objective, APRA is to be a body corporate (clause 13), will not enjoy crown privilege or immunity (clause 14) and its Board will have the authority to delegate any of APRA's powers to a person representing APRA (clauseÿ15).  This independence is further reflected in more specific powers, including the ability to impose charges and receive levy funding from the institutions regulated, set out in other Parts of this Act. APRA will, however, be subject to the provisions of the Commonwealth Authorities and Companies Act 1997 (the 'CAC Act') where no specific overriding provision is contained in this Bill.

 

4.14     With respect to the delegation powers referred to in the previous paragraph, it is not possible at this stage to specify the precise levels to which delegations would be made as the structure of APRA has yet to be determined.  It is envisaged, however, that these delegation powers would not generally go below the equivalent of an SES officer.  It is intended, nevertheless, for delegations to extend to consultants to facilitate interim staffing arrangements in the early stages of APRAs operation. 

 

4.15     The Government does, nevertheless, have a legitimate interest in APRA's operations, its policies and the way they are applied. The possibility of a prudentially regulated institution experiencing financial difficulty is properly a matter of concern to the Government, particularly when the institution is a deposit-taking institution involved in the payments system.  It is appropriate, therefore, that the Treasurer, as the Minister with overall responsibility for the financial system, should be informed when an institution is in financial difficulty.  The Bill, therefore, contains a provision requiring APRA to advise the Treasurer in such situations (clause 10).  (It would be expected that this reporting requirement would be interpreted in conjunction with the requirements set out in the Banking Act 1959.

 

4.16     Similarly, the Board is required to keep the Government informed of APRA's policies (clause 12(1)).  In cases where there is a difference of view between the Treasurer, as the responsible Minister, and the Board over the policies in place or their application, provision is made for resolving these differences (clause 12(3-5)).  If the outcome of these processes is a direction to APRA to change the policy or the way it is applied, the Government will accept responsibility for the change in policy and will take whatever consequential action is required (clause 12(6)). The Board is required to give effect to this direction (clause 12(7)).  Full details of all relevant documentation relating to the dispute and its resolution are to be tabled subsequently in Parliament (clause 12(8)).  This is similar to the provision currently contained in the Reserve Bank Act 1959.

 

Proposed Part 3  APRA's Board

Division 1  Establishment, functions, powers and membership

4.17     Consistent with the intention that APRA should have operational autonomy, the new authority will have a Board of management that has full responsibility for overseeing operational matters and will be free of ministerial direction in this area (clauses 16 & 17).  To enable it to perform this task, it will have all necessary powers (clause 18), including that of delegation (clause 20).  With respect to delegations powers, the same comments made with respect to clause 15 in para 4.14 above are applicable here.

 

4.18     In line with the above, the composition of the Board (clause 19) is designed to achieve two fundamental objectives:

·           independence- the Board will comprise a majority of independent members (ie.ÿmembers who are neither executive members nor ex-officio members of other regulatory agencies) and an independent Chair to enhance the ability of the Board to monitor effectively the performance of APRA and its fulfilment of its legislative mandate (clause 17 (b)&(c)); and

·           a common regulatory approach- there will be strong cross-representation with both the RBA and ASIC being represented on the APRA Board in an attempt to encourage co-operation and foster a common perspective (clauseÿ19(c)&(d)).  This is particularly important with respect to the Reserve Bank; close cooperation between the Bank and APRA is essential, given the latter's responsibility for the overall stability of the financial system.  At least one of the RBA members is also expected to be a member of the PSB.

 

4.19     A person appointed as Chair or as an ordinary member of the APRA Board cannot be a director, officer or employee of a body regulated by APRA (clauseÿ19(2)).  This reflects concerns to avoid any unacceptable and irreconcilable situations of conflict of interest.  In practice, conflict of interest considerations are also likely to exclude any person who has a material personal relationship with a regulated institution eg.ÿconsultants or auditors.  Despite these preconditions, conflicts of interest might still occur, but should be satisfactorily dealt with by the conflict of interest provisions of the CAC Act.

 

Division 2 - Meetings and resolutions without meetings

4.20     The provisions in this Division generally follow a fairly orthodox format and are largely self-explanatory.  There is, nevertheless, an element of flexibility contained in the clauses reflecting the intention that APRA, and the Board as its ruling body, should have operational autonomy.  This is particularly so in relation to such matters as timing and location of meetings (clause 21) and conduct of meetings (clause 25).  With respect to the latter clause, it is of course subject to the provisions of the Acts Interpretation Actÿ1901, as well as the CAC Act.

 

4.21     In view of the nature of APRA's functions, there needs to be scope for Board decisions to be made outside normal Board meetings should a financial crisis, for example, arise (clause 26).  Sufficient qualifications are, however, contained in this clause to ensure that decisions cannot be made by a minority of Board members.

 

Division 3  Terms and conditions of board members (other than the CEO)

4.22     Board appointments (with the exception of the CEO) fall into two categories  ordinary members and representative members.  The provisions contained in this division treat these two categories in different ways.

 

4.23     Ordinary members are appointed by the Treasurer for a period not exceeding five years (clause 27(1&2)).  The flexibility inherent in the period of appointment is designed to assist, inter alia, avoiding a potential situation arising where all current ordinary members retire at the same time, with the loss of corporate memory and experience that this would involve.  The Chair is appointed by the Treasurer rather than being selected by the Board.  This provision is a reflection of the importance attached to this position and the need for greater accountability. 

 

4.24     Along with the power to appoint these members, the Treasurer has the power to terminate such appointments under the basis of specified criteria (clause 31(1)).  The grounds for doing so are the largely standard criteria for dismissal in public sector entities.

 

4.25     Representative members are members that are not appointed in their own right, but because of a position they hold in the bodies concerned, namely the RBA and ASIC.  These appointments are determined by the head of the respective body, namely the Governor of the RBA and the Chairperson of ASIC (clauses 27(3&4)) and may include persons holding those positions.

 

4.26     A similar power exists with respect to the termination of such appointments.  With respect to the representative members, there is much greater discretion in regards to the exercise of that power (clause 31(36)) than exists with respect to ordinary members, to reflect the organisational circumstances of those bodies being represented.

 

4.27     Powers of the same nature to that outlined above exist with respect to acting arrangements (clause 33(1-4)).  These provisions are designed to cover unforeseen contingencies where a vacancy on the Board needs to be filled, but a permanent appointment cannot immediately be made.  It is not envisaged that frequent recourse to this provision would need to be made.

 

4.28     Resignations from all positions must be made in writing to the person who made the appointment (clause 30).

 

4.29     Approval for leave of absence is granted by the Board (clause 29).

 

4.30     Consistent with the normal practice for statutory appointments, the remuneration and allowances for Board members, including that of the Chair, will be determined by the Remuneration Tribunal (clause 28).  Where no determination is in place, remuneration is determined by the Treasurer.  Other terms and conditions are determined by the Treasurer (clause 32).

 

Proposed Part 4  - The CEO and APRA staff members

Division 1  The CEO

4.31     The Act provides for a statutory position of Chief Executive Officer (CEO) (clause 35(1)).

 

4.32     The Treasurer is responsible for appointments to this position (clauseÿ35(2Ä4)), which must be full-time and not exceed a five year term.  The Treasurer is also responsible for accepting resignations (clause 39) and terminating appointments (clause 40) on the specific terms set out in the Bill, which are largely the same as those for ordinary Board members.  Where termination does occur for a person who is a member of the CSS or PSS, there are provisions to protect their superannuation benefits (clause 40(3Ä5)).

 

4.33     As is the case with the other statutory appointments, namely Board members, remuneration and allowances are determined by the Remuneration Tribunal (clauseÿ37).  Inÿthe absence of a Remuneration Tribunal determination the Board may determine the remuneration of the CEO.

 

4.34     In line with the operational autonomy to be granted to APRA, all other specified matters relating to the CEO are determined by the Board in much the same way as would occur with the board of a private sector company.  These include:

·           determining the duties that he or she will be required to perform (clause 36);

·           setting terms and conditions both of a remuneration nature, where these matters are not covered by the Remuneration Tribunal's determination (or where no determination is in place), and of a non-remunerationnature (clause 41);

·           granting leave of absence (clause 38).  (The reference to the Public Service Act in Clause 38(3) protects the leave entitlements of a person appointed to the position from the Commonwealth Public Service);

·           granting the CEO the ability to delegate his or her functions and powers on such terms and conditions as the Board considers appropriate (clause 43).  (Similar comments to those made with respect to clauses 15 and 20 are applicable to this clause); and

·           appointing a person to the position of CEO on an acting basis (clause 42).  This power would be exercised when the CEO is unable to carry out his or her duties because he or she is out of the country on official duties, is on leave or, for some reason, is temporarily unable to perform those duties (eg. sick), or where there is a vacancy pending an appointment by the Treasurer.  Such an appointment would be expected in most circumstances to be made from within the organisation, although the Board would not be prohibited from searching more widely.  Clauseÿ42(2) is designed to avoid a situation where a legitimate act carried out by a person acting as CEO is not treated as null and void because of a technicality or oversight with respect to that acting arrangement.

 

4.35     Where any matter relating to the CEO is not covered by the provisions referred to above or elsewhere in the Act, sections 21  27 of the CAC Act would apply.

 

Division 2  Appointment of APRA Staff Members

4.36     Subject to applicable laws, APRA will have the power to appoint whatever staff, and under such arrangements (eg full time, part-time, casual), as it considers necessary to perform its functions (clauseÿ45(1)).  This would include the engagement of consultants (clause 47(1)) and the appointment of people to perform particular roles under related Acts eg. investigators and administrators under the Banking Act 1959 (clause 48).  The Board may also use staff seconded to it by other Government Departments and Commonwealth authorities (clauseÿ46).

 

4.37     The Board, as the entity responsible for exercising APRA powers, would in most cases be expected to delegate this power to appoint staff to the CEO and senior executive officers of the organisation under clause 15.

 

4.38     The terms and conditions of appointments, including those of consultants, are also a matter for APRA, and hence the Board, to determine (clauses 45(2) & 47(2)).  Although APRA will be a Commonwealth authority, it will not be covered by the Public Service Actÿ1922.  The Board will be expected to set the broad terms and conditions, including approving any Certified Agreement that might be negotiated with staff.  The CEO and senior managers would, however, be expected to be given responsibility for developing, negotiating and interpreting these terms and conditions, including the negotiation of Australian Workplace Agreements (AWAs) with individual staff members.

 

Proposed Part 5  - Financial and taxation matters

4.39     APRA will be funded by the industries it regulates on a full cost recovery basis.  The funding will come from two sources: a share of funds raised by a levy imposed on all institutions that are regulated; and income from fees and charges related to the cost of providing services or processing specific applications (clauseÿ49).

 

4.40     Although APRA will make no net call on the budget, its main source of funding, the levy revenue, will be on-budget.  The levies are technically considered to be taxes and, as such, must be raised by the Commonwealth (but can be collected by APRA) to pay for the cost of regulation.  Separate levy legislation will be considered by Parliament in conjunction with this Bill.

 

4.41     The levies are designed to raise funds to cover the cost of all regulation of prudentially regulated institutions.  The funding available for this purpose (levy money) will be all the funds collected under the Financial Supervision Levies Collection Bill 1998 less funds raised under the Superannuation (Financial Assistance Funding) Levy Act 1993, which is raised for a different purpose (clause 50(5)).

 

4.42     Under the proposed new arrangements, regulation of financial institutions will now be undertaken on a functional not institutional basis.  As a result, the disclosure and consumer protection regulation of these institutions will be undertaken by ASIC, not by APRA.  This necessitates splitting the levy revenue raised between these two institutions.  The Treasurer, who will determine the rate for the levies each year, will also determine the amount, in dollar terms, that will go to ASIC.  The balance will, under this clause, go to APRA (clause 50(1&2)).  This determination will take the form of a disallowable instrument.

 

4.43     There will be a standing appropriation that will ensure that funds raised through the levies and allocated in accordance with the Treasurer's determination to APRA are available for those purposes (clause 50(3)).

 

4.44     In the case of the imposition of fees and charges for services etc. provided by APRA, these are to be based on the cost of providing such services (clause 51).  Details of how the charges will be calculated will be set out in a disallowable instrument to be issued by APRA.  The nature of the services to be covered by such charges include applications for licences, approvals for takeovers/mergers, corporate restructuring and provision of statistics.  Such charges are in line with the practice of the ASC and overseas regulators.

 

4.45     Although APRA will only be able to use its funds to cover expenses associated with carrying out its functions (clause 52) and will be subject to the relevant provisions of the CAC Act (clause 54), it will have considerable financial freedom.  APRA will have its own bank account, into which all funds made available under Clause 50(1) will be immediately transferred;  income from fees and charges will be paid directly into its account; and it will have the power to borrow (clauseÿ53(1)).  Provision is made to allow APRA to obtain from the Treasurer a Commonwealth guarantee for its borrowings (clause 53(2)).

 

4.46     Under its borrowing powers, the Board will have discretion to decide about where it might borrow funds.  In doing so, the Board would take account of any potential conflict of interest that might arise from borrowing from an institution that it regulates.

 

4.47     APRA will not be subject to Commonwealth, State or Territory taxation, although there is provision for this to be varied through regulations in the future (clause 55).  This is designed to obviate the need for frequent consequential legislative amendments if any broader changes in this area affecting Commonwealth authorities are made in the future.

 

Proposed Part 6  - Secrecy

4.48     The prudential regulation of financial institutions involves, inter alia, those institutions providing APRA with detailed information on their operations.  Much of this information will be commercially sensitive.  Therefore, it is necessary that secrecy provisions are in place to ensure that the information is properly protected.

 

4.49     Clauses 56 and 57 protect information and documents given to APRA (apart from those already made public from other sources) from being disclosed without authorisation, while allowing for efficient and effective information exchange between APRA and other regulators such as the RBA, ASIC and foreign regulators.  These information exchange provisions will ensure that regulated entities do not have to provide the same or similar information to several regulators thereby reducing the compliance costs to industry.  APRA will have the ability to control the onÄprovision of this information by placing conditions on its disclosure. 

 

4.50     The information sharing provisions will also allow for APRA to outsource data collection functions to other authorities who have suitable secrecy and confidentiality provisions and a comparative advantage in that area.  For example, APRA may contract the ABS to collect confidential data related to financial institutions on its behalf. 

 

4.51     Clause 56 also prevents APRA officers from being required to produce protected information to a Court or a person except where:

·           that information is produced to meet a requirement under this Bill or the various Acts that APRA will administer (clause 56(3)); or

·           the provider of that information agrees in writing to its disclosure (clause 56(4)); or

·           an officer of APRA is satisfied that the disclosure of information etc. would assist another regulator  RBA, ASIC and PSB or other entity that is normally entitled to such information eg ABS (clause 56(5)(a)).  In providing this information to other regulators, it is necessary to ensure that these bodies follow whatever conditions APRA applies to the disclosure of that information and to make it an offence under this Act should those conditions be breached (clauseÿ56(9&10)); or

·           the Board provides written approval for such a disclosure (clause 56(5)(b)); or

·           the disclosure is to an APRA Board member or staff member for the purpose of carrying out the functions or exercising the powers of APRA (clause 56(6)); or

·           the information forms part of some composite data (eg doubtful loans held by the banks during a particular period) where the information about a particular regulated entity could not be identified (clause 56(7)).

 

4.52     Offences against the secrecy provisions carry a maximum penalty of two years imprisonment.

 

4.53     Protected information or a protected document cannot be released under any freedom of information request.  Such information are to be treated as exempt for the purposes of the Freedom of Information Act 1982 (clause 56(11)).

 

4.54     To cover all potential possibilities of 'disclosure', the prohibition is extended to an outside person having access to, or being given copies of or extracts from a document that belongs to APRA or is in APRA's possession, or is information relating to the business of APRA, even where this does not fall within the definition of protected information or protected document contained in clause 56 (clause 57(1)). 

 

4.55     The only exceptions to this relate to the provision of information where the Board gives its approval; it is required as a consequence of legal proceedings under other legislation eg. criminal cases; or the entity to which the information relates has directed, requested or agreed to the disclosure (clause 57(2)&(3)).

 

Proposed Part 7  - Miscellaneous

4.56     This part covers three unrelated matters, which are largely self-explanatory.

 

4.57     Firstly, there is an indemnity clause (clause 58) covering the institution and its officers, which for the purpose of this clause would include agents of APRA such as consultants.  This provision is consistent with that currently covering bodies such as the Reserve Bank.

 

4.58     Secondly, the annual report which APRA would be required to make under the CAC Act must include a report on prudential matters, including details of persons appointed to investigate and report on such matters, as well as those of statutory managers (clauseÿ59).  It will not, however, refer to individual institutions nor customers of those institutions that are the subject of any investigation.  This is an important requirement as this report, and any subsequent consideration by Parliament, are key mechanisms for ensuring APRA's accountability.  This reporting requirement is in line with that currently contained in the RBA's legislation.

 

4.59     Finally, a standard provision for regulations to be made under this Bill is included (clause 60).