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Corporations (National Guarantee Fund Levies) Amendment Bill 2007 and related bills

CHAIR —Welcome. We are addressing the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 and the Corporations (National Guarantee Fund Levies) Amendment Bill 2007. These are public proceedings, although the committee may agree to a request to have evidence heard in camera or may determine that certain evidence should be heard in camera.

I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken, and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, of course, also be made at any other time.

I remind senators that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Any claim that it would be contrary to the public interest to answer a question must be made by a minister and should be accompanied by a statement setting out the basis for the claim.

Would someone like to give the committee an overview of the bill before I ask my colleagues whether they have any questions?

Mr Legg —I will make introductory comments and then we will be very happy to answer any questions you may have.

CHAIR —Thank you.

Mr Legg —I suspect that members know that the regulation of discretionary mutual funds and direct offshore foreign insurers arose out of a recommendation and comments in the 2003 HIH Royal Commission report. In response to that, in 2004 the government commissioned a review of DMFs and DOFIs, and in 2005 Treasury released a discussion paper looking at how to implement the outcome of that review. We had further consultation with interested stakeholders, including all the stakeholders who provided submissions to this inquiry, and the government announced its approach to regulating DMFs and DOFIs on 3 May 2007. This bill seeks to implement that announced approach. My comments from here on will focus solely on direct offshore foreign insurers because I do not think any issues have been raised in submissions about DMFs.

In essence, the approach being adopted is seeking to protect Australian consumers and businesses from poorly capitalised DOFIs based in regimes where there may be minimal prudential regulation, but to do that in a way so that, at the same time, it creates a level playing field in the Australian general insurance market, encouraging competition and the development of innovative new insurance products to meet the needs of Australians. The government recognises in this that there will be insurance risks that cannot be appropriately placed with insurers authorised by APRA, and that is why the Minister for Revenue and Assistant Treasurer noted in his announcement that there will be limited exemptions for these insurance risks. The five public submissions received by the inquiry mostly focused on the issue of these exemptions, which is why I say that for the rest of this we will just focus on that. Treasury has been consulting very actively with interested stakeholders—including the stakeholders who have provided submissions—with an eye to developing a discussion paper which would seek stakeholder input into how the mechanism for granting an exemption will operate. Our plan is to release that discussion paper in August, and we will be encouraging all interested stakeholders to respond to the paper.

It is obvious from a look at the submissions that there is an issue of balance to be struck in this exercise. We are trying to ensure the continuing availability and affordability of insurance for Australian consumers and businesses while not crafting an exemption that is so broad that it undermines the government’s announced approach to regulating DOFIs and the intention of that in the first place. We are also trying to seek an exemption mechanism that is practical and takes into consideration how the Australian insurance industry operates. The exemption needs to minimise the costs to Australian insurers in obtaining an exemption and it also needs to minimise the costs to government in administering an exemption. We are looking for a mechanism which will be flexible to operate effectively through the insurance market cycle, which tends to move from being fairly hard at times, when it is hard to get cover, to a softer market, as in current circumstances, when cover is relatively easily accessible at a reasonable cost.

Our intention is to consult further with interested stakeholders once we have had an opportunity to consider their responses to our discussion paper, which we are aiming to get out, as I said, next month. The timetable would be to then release an exposure draft of the insurance regulation, setting out the exemption later this year or early next year, subject to the agreement of the government, so that we can finalise the exemption early next year and give people sufficient time to apply for such an exemption, if it is required, before the proposed commencement of the new regulatory regime on 1 July 2008. That is all I wanted to say in terms of introductory comments. We are very happy to try to answer any questions you have.

Senator BERNARDI —On the DOFIs, the direct offshore foreign insurers, you said that the intention of this bill was to ensure that there is a level playing field in Australia. By that, I presume that you want to ensure that we have an effective and open insurance market as well, whereby those that want insurance can actually get it. Is that correct?

Mr Legg —That is right.

Senator BERNARDI —How do you respond to claims by some submitters, such as the Association of Consulting Engineers Australia, who raise concerns about their ability to obtain adequate levels of professional indemnity insurance?

Mr Lyon —We have been talking closely with the Association of Consulting Engineers Australia. We recognise their predicament. They experienced difficulties obtaining insurance in the wake of the HIH collapse, and they have worked very hard to insure that they have appropriate insurance arrangements in place themselves. Our response to their concerns about their continuing ability to obtain insurance that meets their needs is that we would be willing to work with them to develop arrangements that would allow certainly the larger of the engineering firms to continue to access insurance from foreign insurers if they are unable to obtain appropriate forms of insurance within the Australian market. So we recognise their needs and we have been talking to them and endeavouring to work with them to explore how arrangements might be established that could allow the bulk of the membership of the larger consulting engineering firms to continue to obtain adequate amounts of insurance on the assumption that smaller engineering firms would be able to obtain insurance in Australia. However, if there were special risks that needed to be covered because of the unique nature of the engineering business they conducted, those special risks may, in their own right, be something which would qualify for an exemption, and we would propose to allow that to go offshore. Furthermore, one fundamental element with this regime is to encourage foreign insurers who have been providing insurance into the Australian market to come into the market. We have had some early indications that there are some foreign insurers who are willing to come in.

Senator BERNARDI —Have the insurers who have indicated that they are interested in coming in raised any concerns about additional compliance costs or red tape to their business that may result in an increase in insurance premiums for Australian insurers?

Mr Lyon —The insurers I am thinking of are large, reputable insurers who have a presence in many jurisdictions. Their decisions to enter the Australian market are, of course, commercial decisions that are decisions for them to make. The additional cost to them of entering the Australian market is not insubstantial in nominal terms but, as a proportion of their overall business, it would not be necessarily very large, and if it allowed them to continue to supply insurance to clients who they valued in the Australian market, they may well choose to do that.

Senator BERNARDI —So Treasury does not anticipate that there is going to be any meaningful decrease in competition or additional costs to those people seeking insurance in Australia?

Mr Legg —The intent of the bill is to ensure that differences in regulation do not inhibit competition, or give one particular source of insurance an advantaged position because they are not regulated. At the same time, as I said earlier, we are very focused on the need to ensure that the crafting of the exemption ensures the ability of groups like consulting engineers or other professional groups to be able to get cover offshore if it is not available here and also the right incentive for domestic insurers and others who want to be regulated here to develop the ability to provide cover if they see a commercial incentive to do so. So we are trying to get that balance right. The balance will hinge on the design of the exemption, which is what we have indicated to stakeholders we want to consult very closely with them on.

Senator BERNARDI —Which I applaud you on. I think the exemption is a very important part of the insurance market going forward. Is it the intention of the exemption provisions that if one of the national bodies—not only of engineers, but also, for example, the National Insurance Brokers Association, or one of their members—raised the inability to obtain insurance in the Australian market for a specific instance then it could accommodate that?

Mr Lyon —One of the challenges that we face when we are talking to industry about how the exemption arrangements might be structured is to ensure, as Mr Legg noted earlier, that we have exemption arrangements that meet the needs of how the insurance industry works but minimise compliance costs and the like. We imagine that there might be arrangements that will be enduring, and that might, through regulation, persist and allow people who need the insurance from foreign insurers to go off and get that without having to go to any regulator or administrator. However, in some unique cases it may be necessary for there to be a regulator that has a discretion that can provide an exemption from the arrangements at very short notice, and that is an arrangement that we will be consulting on and that we do recognise might be needed.

However, one of the challenges that the Treasury—and, indeed, all the stakeholders in these discussions—has faced over many years is that, whilst there is a lot of anecdotal discussion about the needs of Australian insureds to obtain insurance from foreign insurers, when people are asked for firm examples, there is limited information being brought forward. As a result of that, one of the things we have built into this regime is that, assuming an exemption is put into place, when insurance is purchased from foreign insurers we will be endeavouring to gather data on that insurance so that we can make transparent, to both the domestic industry and to insurers overseas, what insurance is going offshore, so that over time we can refine the balance and ensure that balance continues to serve the needs of the Australian community.

Senator BERNARDI —Whilst this bill is designed to protect the integrity of the Australian market, is a by-product that it would limit the abuse of offshore captive insurance companies by corporations trying to claim tax deductibility for premiums that, really, there is no meaningful re-insurance provision for?

Mr Lyon —The driving motivation behind the legislation is a prudential one—that is, to protect Australian policyholders and purchasers of insurance. Tax treatment has not been an element that has driven the formation of this.

Senator BERNARDI —But it may be a by-product of it.

Mr Lyon —One of the challenges that we are facing in terms of developing this regime is the question of how we treat captive insurers—corporate captive insurers, in particular—who might be based in a range of jurisdictions around the world such as Singapore, Bermuda or New Zealand. From our perspective, we are not being driven by the tax treatment of those insurers. I would like to clarify, Senator, whether your concern is about the business tax that the companies that own those captives must pay in relation to those insurers or whether you are more concerned about the stamp duty and fire service levy issues that have been raised by some of the submitters to your committee?

Senator BERNARDI —It was a personal inquiry. It was more about the integrity of the taxation implications of it.

Mr Lyon —There is no doubt that, to the extent that we can have more robust prudential regulation and a clearer definition and defining line between those insurers who must be authorised and regulated in the Australian market and those who do not need to do that, we can have greater clarity in terms of the tax consequences that flow from that.

Senator BERNARDI —Thank you very much.

Senator STEPHENS —I want to go back to the genesis of this bill. I understand that it comes, in part, from a regulatory gap identified in the International Monetary Fund’s Financial Sector Assessment Program for Australia in 2006. Has it solely been driven by domestic circumstances, or has there been any kind of request or interest in Australia resolving this from other countries?

Mr Legg —The origin of this issue goes back to the HIH royal commission. It is certainly true that the IMF noted this issue in their financial sector assessment. We felt that, in terms of our compliance with international standards, they may have been overstating the significance of this issue from that point of view. So we were not being driven by international standards in doing this; we were doing this because we felt that the issues raised in the royal commission and, subsequently, in the Potts report were valid interests in terms of the integrity of the domestic market.

Senator STEPHENS —Thank you for that. I was interested in Senator Bernardi’s question about the tax implications of the measure, and that prompted me to think about whether or not this would constitute parts of any bilateral or multilateral agreements or treaties with other countries.

Mr Lyon —Australia is part of the World Trade Organisation and has free trade agreements with a number of jurisdictions. A number of those free trade agreements and our World Trade Organisation obligations cover financial services, and the regulation that the government is proposing here, the changes to legislation, to the best of our understanding, at this time, are compliant with all those obligations. Those international agreements allow jurisdictions to make appropriate laws to ensure appropriate prudential regulation of financial services providers in their jurisdictions.

Senator STEPHENS —What would be the proportion or the value of the sector that is affected by DOFIs and DMFs?

Mr Lyon —That is a very difficult question to answer and is one that has been disputed throughout public debate on this question. The Potts review, which was released in May 2004, estimated that direct offshore foreign insurance consisted of 2.5 per cent of the premium value of the general insurance market in Australia.


Mr Lyon —DMFs consisted of something of the order of 0.5 per cent of the general insurance market.

Mr Legg —As my colleague said, these figures have been disputed. There have also been claims made that since that time those numbers have grown. With regard to discretionary mutual funds, this is the reason that the main thrust of the response is to gather data—more data—which shows just how significant this issue is. Similarly, on the DOFIs we will, as my colleague said, be collecting data here as well. The outcome of this will be that not only will we in the DOFI area improve the integrity of prudential regulation but also there will be more information down the track to give a sense of how significant this issue is.

Senator STEPHENS —You mentioned that consulting engineers were perhaps one group that would be covered by the exemption for risks that cannot be adequately insured domestically and be placed with insurers not authorised in Australia. What other kinds of activities would be exempt?

Mr Lyon —It is a matter for the government as to how any exemption arrangement is established. From the Treasury’s point of view, we think it is preferable to have an exemption that is not group specific, if we can possibly avoid it. However, there is a range of groups who do benefit from foreign insurers in one way or another. Some of the ones that I can think of are: a foreign insurer providing insurance to the Real Estate Institute of New South Wales; some of the law societies in Australia obtaining insurance from foreign insurers; some sporting groups that have obtained insurance from foreign insurers; and, for example, the four major accounting firms all use insurance arrangements that are based offshore.

Senator STEPHENS —Does this in part reflect the global nature of these economic activities?

Mr Lyon —It certainly does when you consider that the larger advisory firms—for example, when you are contemplating lawyers or accountants or other professional groups—usually have an international network and will often meet their insurance needs through specialised insurance arrangements. The other group that might benefit from some kind of an exemption and continuing access to foreign insurers is some of our large multinational businesses—for example, BHP Billiton has a domestic insurer that meets its needs in Australia, but it also obtains insurance from the world market. Companies such as the Foster’s Group have insurers based in foreign jurisdictions that provide insurance cover into Australia.

Senator STEPHENS —Schedule 2 of the bill includes a strict liability offence for breaches of the new section 985D. What are the penalties around that?

Mr Lyon —The penalty is 50 penalty units. One penalty unit is $110, so $5,500 if the maximum fine were applied. It is proposed that the offence be inserted into chapter 7 of the Corporations Act. The Australian Securities and Investments Commission would be the regulator that would investigate and enforce the offence. It would have all of its usual suite of powers to ensure compliance. For example, it could seek an injunction from a court to stop continuing contravening conduct.

Senator STEPHENS —Do you have any comment to make about the Corporations (National Guarantee Fund Levies) Amendment Bill?

Ms Kljakovic —Very briefly, this bill imposes a cap on levies that are payable in any financial year to the National Guarantee Fund. That fund has existed for 20 years. It has always been adequate to meet demands from ASX investors, so there never has been a levy. However, participants do have a potential unlimited liability to levies and the bill aims to cap that potential liability. Each year that would be equal to the minimum amount that must be kept in the fund. That minimum amount is set under the Corporations Act and currently it stands at $76 million. So it is considered that a cap set at that level per year would not unduly restrict the ability to levy.

CHAIR —In relation to that matter, I notice that the ASX submission states:

ASX believes that the imposition of a cap on the levies payable by exchanges and their participants in any one year offers the potential to allow the National Guarantee Fund (NGF) to attract a wider range of, well-capitalised, institutions to consider direct participation in ASX markets and associated clearing facilities.

Its view was that a theoretical unlimited levying power restricted some activity. Would you agree with that comment?

Ms Kljakovic —That is perhaps slightly speculative. I am afraid that we do not have a firm view as to whether or not it would have that effect.

Mr Legg —As I understand it, one of the issues is that Australian banks currently participate as subsidiaries. Because of the uncapped nature of their involvement, APRA will not let them participate in the scheme directly but will allow them to set up a subsidiary who then participates in the scheme. Putting a cap in place removes those sorts of nuisance distortions.

CHAIR —I will rephrase my question. Do I take it that you can see no reason why that commentary would not have the sort of outcome they anticipate?

Ms Kljakovic —That is correct.

CHAIR —Thank you very much for your attendance and for assisting the committee by being available earlier than was originally planned. You are excused. That now completes our inquiry in relation to these bills. I thank all senators who have attended today, particularly Senator Stephens and Senator Bernardi, who have been here for the duration. I thank Hansard and the secretariat. I particularly thank Dr Richard Grant and Dr Andrew Gaczol for their assistance. The committee has had a very significant program this week, for which a significant amount of preparation was undertaken. An enormous amount of work has been put into this inquiry, and I thank you both most sincerely for that.

Committee adjourned at 4.08 pm