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Wednesday, 9 February 2005
Page: 44

Senator WATSON (12:30 PM) —I rise this afternoon to address the Superannuation Supervisory Levy Imposition Amendment Bill 2004 and related bills—in fact, a total of seven bills. These bills do achieve the government’s aim of implementing those recommendations made in the report of the Review of Financial Sector Levies. The 2003 Review of Financial Sector Levies was conducted in accordance with the government’s cost recovery policy. The 2003 review considered how the cost burden for providing prudential supervision to the financial services industry should be shared amongst industry participants. The review did not consider the broader issues, such as whether cost recovery funding is appropriate for the financial services sector, whether the current funding arrangements produce the most efficient or effective reforms outcome and whether the level of funding for APRA is set at the appropriate level.

I remind the Senate that the bills do not cover extraordinary items such as the extra costs which were necessary for APRA when it needed a separate allocation to prevent a major collapse such as HIH. Senator Sherry talks about broken promises, but I remind the Senate that adjusting levies, whether they be financial sector levies or agricultural levies, on particular commodities just to meet cost recovery is hardly an increase in taxation for the universal population.

The bills are a response to the Review of Financial Sector Levies that looked at the moneys levied on financial services providers to fund the prudential regulation undertaken by APRA and in part by ASIC and the ATO. Senator Sherry indicated that he believed that there were some problems associated with the levies. I wish to report to the Senate that the government involved itself in very wide consultation with industry, which supports the thrust of the levies. So, while the imputation is there, it has very little basis of support. I think that was thrown in just for the purpose of adding some spice to the debate.

The aim of the bills is to put in place a new levy framework that puts a greater part of the burden of paying for this prudential regulation on the shoulders of the larger financial institutions on the basis that the larger the financial institution the greater the cost of prudential regulation. The government has specifically sought to ensure that the smallest financial institutions do not have to pay more. I wish to remind the Senate that, in terms of the very small SMEs, the levies really do not cover the costs. But I think we have to recognise that, in an environment where reducing numbers of superannuation funds are going to be regulated by APRA because of amalgamations and so on, this levy arrangement will need to be looked at in the future. That is certainly well down the track, so we are putting on our spectacles to see what will happen in the long run. Of course, these levies are set annually.

I remind the Senate that APRA is the prudential regulator for the banks, credit unions, building societies, life and general insurance companies, reinsurance companies, friendly societies and most of the superannuation industry. APRA is funded primarily from levies collected from the financial institutions that it prudentially supervises. A small part of the money raised through these levies is passed on to ASIC and the Australian Taxation Office to fund the specific consumer protection and market integrity functions performed by these regulators.

In his contribution, Senator Sherry also expressed concern about the need for seven bills. He said it would be helpful if the Senate could have one bill to effect such legislation. However, I wish to draw his attention to the Constitution, which states that you need a separate bill for each particular levy or item of taxation. So there is a constitutional hurdle, Senator Sherry, that has to be overcome before we can get to your ideal situation.

The current levy setting arrangements were drawn from recommendations made back in 1997 in the financial system inquiry—that is, the Wallis inquiry. The Wallis inquiry report suggested:

... as a general principle the costs of financial regulation should be borne by those who benefit from it.

The inquiry report also stated:

The most practicable means is for industry to be levied to meet the cost of regulation incurred by regulatory agencies, with each industry levied in proportion to the agency resources expended on it. The arrangements should involve a mix of direct service fees and annual levies and should distinguish, where possible Services provided at the instigation of individual entities, such as authorisation or registrations, for which per-item cost recovery fees are appropriate ...

Under the legislation, levies on financial services institutions are paid on a sectoral basis. The financial services industry is divided into the following sectors: authorised deposit-taking institutions, foreign bank branches, superannuation funds, life insurers, friendly societies, general insurers, retirement savings account providers, and non-operating holding companies. A levy rate per dollar of assets is set for each of the sectors by the Treasurer. The levy rate is reviewed on an annual basis. For example, for the 2004-05 financial year, the levy rate on superannuation funds was 4.2 per cent. In the 2003-04 financial year, the levy rate on superannuation funds was 3.5 per cent.

So the costs of the supervision of these entities, which involve largely consumer protection and ensuring proper practice, are rising. That is an important consumer protection requirement to ensure that there are adequate resources to support the activities of a regulator. I believe that in a deregulated type of environment it is essential to have very strong regulators to ensure that the rules are followed. Therefore it is not surprising that the costs of regulation, as we keep ramping up the additional responsibilities on particular individuals and institutions, continue to be more onerous, so they have to be supervised.

The use of minimum and maximum amounts reflects the view that there are certain minimum costs incurred in regulating even the smallest of institutions, but beyond a certain size there is no extra cost in regulating an institution. Imposing a cap also prevents larger institutions from funding the costs of prudential regulation and supervision to a far greater extent than would be justified by the share of APRA’s expenditure on those institutions. In addition to these levies, APRA also performs certain services for industry and it charges fees that reflect the costs of providing these services. This therefore also implements the Wallis inquiry’s recommendation.

The most comprehensive review of the levy setting arrangements took place in 1999. That review recommended relatively minor changes to the levy setting process, but there was no legislative change following that review. The Productivity Commission also looked at this matter—in fact, it inquired into cost recovery arrangements within government agencies. Its report, Cost recovery by government agencies, was released in March 2002. The Productivity Commission noted:

Notwithstanding its increased significance, cost recovery currently lacks the attributes of good policy—namely, a clear rationale, accountability, transparency, performance assessment and review.

In response to the Productivity Commission’s report, in December 2002 the government announced that it would introduce a formal cost recovery policy for government agencies—a very sensible decision following the Productivity Commission’s analysis. That policy takes the form of departmental financial guidelines, which must be referred to when Commonwealth agencies are reviewing cost recovery arrangements. Therefore we have a very good administrative measure to ensure protection and fairness.

The sectorial basis for imposing the levies should be retained. The review considered that this ensures that the nature and risk differences of financial promises are reflected in the levies charged to the regulated financial institutions. It also considered that the levy should continue to relate to the assets of the organisation. So costs should be the principal but not the sole determinant of the levy amounts; systemic risk and vertical equity considerations should also be taken into account. As a result, there should be two distinct components to financial sector levies: an A component and a B component. The A component relates to the cost of supervision and involves a single levy rate for each of the sectors which will be imposed on the assets of the organisation. The B component relates to the potential system impact and vertical equity considerations. This will be a low-rate levy on assets without any maximum levy amount. This component is to raise between 10 and 30 per cent of APRA’s levy funding in any one year.

It is not envisaged that this legislation would have a financial impact on the operations of government. The legislation will determine only the framework for how the authorised deposit-taking supervisory levy is to be allocated, in terms of a cost recovery basis, to the regulated entities. The total amount of funding required to be raised by the levy is determined in a separate process upon which this legislation does not have a direct impact. Regulated financial sector entities will continue to pay financial sector levies, which in turn will be used essentially to fund the operations of the Australian Prudential Regulation Authority, as well as certain related activities undertaken by the Australian Securities and Investments Commission and, to a lesser extent, the Australian Taxation Office.

There has been wide consultation on the legislation. It is fair and reasonable. As a result, there will be two components to the levy applying to, for example, authorised deposit-taking institutions, an increase in the statutory upper limit for the restricted levy amount applying to the levy set for the 2005-06 financial year and the calculation of a higher indexation factor used to establish the statutory upper limits applying in later years. I use that as one example of the principles that apply to the seven operations. I believe these are good bills. It is encouraging that there is support from the opposition. I commend the bills to the Senate.