2016-2017-2018-2019

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

THE SENATE

 

 

 

 

 

 

 

 

BANKING SYSTEM REFORM (SEPARATION OF BANKS) BILL 2019

 

 

 

EXPLANATORY MEMORANDUM

and

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

 

 

 

 

 

 

 

Circulated by authority of

Senator Pauline Hanson

Banking System Reform (Separation of Banks) Bill 2019

 

Table of Contents

 

General Outline……….……………………………………

 

Background to Bill’s provisions…………………………….

 

Regulatory impact statement………………………………..

 

Financial impact statement………………………………….

 

Summary of key provisions of the Bill……………………..

 

 

1.              General Outline

 

This Bill will separate retail commercial banking activities involving the holding of deposits, from wholesale and investment banking involving risky activities. The Bill provides for such a separation to:

 

·          protect deposits;

·          end vertical integration, to protect depositors from banks trying to lure them into buying services from the banks' other business;

·          ensure deposits are only used for normal lending, which will keep more money in the real economy and available for banks to lend to productive enterprises; and

·          stop banks from securitising mortgages—meaning on-selling them to other banks to be bundled into risky derivatives—which will put a brake on mortgage fraud and excessive mortgage lending to risky borrowers.

 

The effect of the Banking System Reform (Separation of Banks) Bill 2019 will be:

 

1.         to re-establish public confidence in the banking system;

2.         to reduce risks to the Australian financial system by limiting the ability of banks to engage in activities other than socially valuable core banking activities;

3.         to limit conflicts of interest that arise from banks engaging in activities from which their profits are earned at the expense of their customers and the national interest;

4.         to remove explicit and implicit government guarantees for high-risk activities outside of the core business of banking;

5.         to regulate Australian Banks;

6.         to strengthen Parliamentary oversight of the activities of the Australian Prudential Regulatory Agency (APRA) as the banking regulator;

7.         to separate retail commercial banking activities involving the holding of deposits, from wholesale and investment banking involving risky activities.

 

2.         Background to Bill’s provisions

The Australian and international media have featured repeated warnings from present and former officials of the Bank for International Settlements, the International Monetary Fund, the Organisation for European Cooperation and Development, and the U.S. Federal Reserve System, as well as former leading bankers and other prominent commentators, that the world is headed towards a far greater financial crash than that of 2007-2008.

 

This prospect has followed the progressive deregulation of the financial system since the breakup of the fixed-exchange-rate Bretton Woods system in 1971. Deregulation led to the financialisation of the economy, a sharp increase in national and household debt, manipulations of fluctuations in currency exchange rates, and the creation of over $US1 quadrillion in speculative instruments known as derivatives, such as those based on the mortgage-backed securities that provoked the 2007-2008 crash and are once again soaring in number.

 

A report from the Australian Securities and Investments Commission (ASIC) released 24 January 2019 confirmed the vertically integrated structure of Australia’s banks, normal banking being combined with financial advice, wealth management, stockbroking and insurance; the Financial Services Royal Commission hearings have further established the extent of that vertical integration. The conflict of interest inherent in vertical integration is evidenced by the fact, noted by ASIC, that nearly 70 per cent of the funds that banks advised their customers to invest went into in-house products sold by the same bank, despite the fact that nearly 80 per cent of the investment products that bank staff were authorised to sell were from other institutions. Bank staff had a clear bias in pushing their bank’s products.

 

For more than a decade, Australia’s banks have had a huge incentive to starve small businesses and family farms of credit, and to foreclose on thousands of those enterprises even when they weren’t in default. APRA provided this incentive through its prudential rules, which lowered the “risk-weighting” of mortgages compared with other types of loans, making home loan mortgages far more profitable for banks than loans to productive business enterprises. It also motivated the banks to commit outright mortgage fraud in their pursuit of increasingly risky borrowers, including over-extended investors and “sub-prime” borrowers who couldn’t afford repayments. Housing loans now make up over 60% of Australian banks’ lending, which, in the words of one financial researcher, has turned the housing market into a $1.7 trillion dollar “house of cards”.

 

The funds for such lending are increasingly sourced from overseas, resulting in Australia’s banks being heavily indebted to overseas interests and markets. Since deregulation, Australia’s banking system has become  highly concentrated, dominated by four, too-big-to-fail banks,  and vulnerable to more than $37 trillion in little understood derivatives and hundreds of billions of dollars of short-term debt.

 

Australia has never had a formal Glass-Steagall-style separation of investment banking from commercial deposit-taking banking, but the Australian domestic banking system was not always exposed to the level of risk it is today, as a structural separation effectively existed until the 1980s due to a system of regulatory controls.

 

The United States introduced bank separation in 1933 through the Glass-Steagall Act, ending vertical integration by separating commercial banks with deposits, from investment banks, insurance companies, and all other financial services. The law was in force for 66 years, until Wall Street banks succeeded in having it repealed in 1999. While Glass-Steagall was in effect, there were no systemic banking crises in the USA; its repeal allowed banks to use deposits to underwrite the massive expansion of financial speculation which caused the global financial crisis just nine years later.

 

Australia needs Glass-Steagall type legislation to separate retail commercial banking activities involving the holding of deposits, from wholesale and investment banking involving risky activities.

 

 

3.                   Regulatory Impact Statement

 

The Bill will have a moderate impact as the regulatory authority and powers already exist in respect of the existing regime of regulation of authorised deposit-taking institutions (ADIs).

 

 

 

4.                   Financial Impact Statement

 

The bill has no significant impact on Commonwealth expenditure or revenue.

 

The Bill is intended to operate within the existing regulatory framework subject to Parliamentary oversight of the regulator, APRA.

 

There will be a transitional cost for banks in the separation of the elements of their businesses and as they adjust to the operation of the new regime as provided for in the Bill.

 

The compliance cost in relation to the new regime will be minimal as the regulatory authority and powers already exist in respect of the existing regime of regulation of ADIs.

 

 

 

 

5.                   Summary Of Key Provisions Of The Bill

The Bill proposes to:

• Prohibit banks from any affiliation with an entity that is not a bank. (Proposed sections 7, 8 and 9)
• Prohibit any entity that is not a bank to engage in the business of receiving deposits. (Proposed subsection 10(1))
• Prohibit banks from investing in structured or synthetic products and products such as derivatives and speculative ventures. (Proposed subsection 10(4))
• Limit the business of banking to retail banking and associated loans and activities. (Proposed section 11)
• Bring APRA, as the licensing and regulatory authority, and its prudential standards and actions and decisions generally, under the oversight of Parliament. (Proposed section 14)
• Limit the Financial Claims Scheme to deposits with banks whose activities do not include any prohibited activities. (Proposed section 13)

 

Explanation of Provisions of the Bill

 

Purposes

 

1.01           Proposed section 2 of the Bill sets out the purposes of the Bill.

 

1.02           The intention of the Bill is to reduce risks to the financial system and to protect deposits and the interests of depositors by limiting the activities of banks and prohibiting the vertical integration of banks with other businesses.

 

1.03           It further intends that the Commonwealth should regulate the financial system and ensure an orderly flow of credit and currency to the Australian economy.

 

1.04           It further intends that the regulator, APRA, and its determinations, be brought under the direct oversight of Parliament.

Application to the Crown

 

1.05           The Bill proposes to bind the Crown.

Regulation

 

1.06           The Bill proposes to provide in section 6 that the Australian Government shall not implement any policy nor propose any legislation which is incompatible with the purposes and provisions of the Bill.

Prohibition of affiliation by banks with non-bank entities

 

1.07           Section 7 of the Bill proposes to prohibit a bank from being or becoming an affiliate of an entity which is not a bank, or being in common ownership or control of an entity which is not a bank.

 

1.08           The intention of the Bill is that a bank should not be associated in any way with an entity which is not a bank. A “bank” is defined by the Bill as an authorised deposit-taking institution in respect of which an authority under section 9(3) of the Banking Act 1959 is in force. Limitations on banking activities are contained in proposed section 10, dealt with below.

 

1.09           Section 7 proposes that a bank shall not issue bonds or securities with attached voting rights the intention being that the creation of such rights should not allow external influences to control the activities of a bank.

Eligibility to serve on boards of banks

 

1.10           Section 8 proposes to prohibit an officer, director, partner or employee of any entity with which a bank is prohibited from being affiliated, from holding such a position with a bank.

 

1.11           The proposed section provides that the Minister, with the consent of the Parliamentary Committee, can determine that the restriction on bank directors shall not apply to a particular individual.

Termination of existing affiliations and activities

 

1.12           It is acknowledged that banks currently have affiliations which are prohibited by the Bill. Proposed section 9 provides that such affiliations shall be terminated as soon as possible and in any event no later than 24 months after the date of commencement of the Bill.

 

1.13           Proposed subsection 9(2) gives APRA the authority to order such termination prior to the expiration of the 24 month period if required to prevent undue concentration of resources, decreased or unfair competition, or conflicts of interest and is in the public interest.

 

1.14           Proposed subsection 9(3) gives APRA the authority to extend the period of 24 months if, in APRA’s opinion, such extension would promote the public interest and would not pose a significant threat to the stability of the banking system or financial markets in Australia, and is approved by the Parliamentary Committee proposed to be created by section 14, below.

 

1.15           Any extensions referred to in proposed subsection 9(3) shall not be for not more than 3 months at a time, and in any event, shall not be for more than 12 months.

Limitation on banking activities

 

1.16           The intention of the Bill is to restrict to banks the business of receiving money on deposit subject to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon request of a depositor.

 

1.17           Paragraph 10(1)(a) proposes that no person or corporation engaged in any business prohibited to banks shall receive money on deposit in the circumstances referred to in paragraph 1.16 above.

 

1.18           Paragraph 10(1)(b) proposes that no person or corporation other than a bank shall receive money on deposit in the circumstances referred to in paragraph 1.16 above.

 

1.19           Subsection 10(2) proposes to create an offence provision relating for failure to comply with subsection 10(1). The penalty is 5 years imprisonment, or 1,190 penalty units, or both.

 

1.20           The intention of the Bill is to prohibit banks from being engaged in risky and speculative activities and transactions such as derivatives. Subsection 190(3) proposes to prohibit banks from investing in synthetic products and financial instruments in which a return is calculated based on the value of, or by reference to the performance of, a security, commodity, swap, other asset, or an entity, or any index or basket composed of securities, commodities, swaps, other assets, or entities, other than customarily determined interest rates. The subsection also proposes to prohibit banks from engaging in the business of receiving deposits or extending credit for transactions involving structured or synthetic products.

 

1.21           Proposed subsection 10(4) sets out prohibited activities of a bank or bank holding company, the intention being to limit the activities of banks to their socially valuable core banking activities and the prohibitions are structured accordingly.

 

1.22           Paragraph 10(4)(a) proposes to prohibit banks from engaging in the business of a ‘securities entity' or a ‘swaps entity’, including dealing or making markets in securities, repurchase agreements, exchange traded and over-the-counter swaps, or structured or synthetic products, or any other over-the-counter securities, swaps, contracts, or any other agreement that derives its value from, or takes on the form of, such securities, derivatives, or contracts.

 

1.23           Paragraph 10(4)(b)proposes to prohibit banks from engaging in proprietary trading.

 

1.24           Paragraph 10(4)(c) proposes to prohibit banks from owning sponsor, or investing in hedge funds, or private equity fund, or any other fund that exhibits the characteristics of a fund that takes on proprietary trading activities or positions.

 

1.25           Paragraph 10(4)(d) proposes to prohibit banks from holding ineligible securities or derivatives.

 

1.26           Paragraph 10(4)(e) proposes to prohibit banks from engaging in market-making.

 

1.27           Paragraph 10(4)(f) proposes to prohibit banks from engaging in prime brokerage activities.

 

1.28           Paragraph 10(4)(g) proposes to prohibit banks from promoting or engaging directly or indirectly in any managed investment scheme, including but not limited to the making of loans or granting of credit to, or in any way supporting, either the trustee or manager of any scheme or the members of any scheme.

 

1.29           Paragraph 10(4)(i) proposes to prohibit banks from making any loan or granting any credit to, or in any way supporting, any person or corporation, where such support or loan or credit is intended to be employed in the undertaking of any investment or activity prohibited to the bank by this Act.

 

1.30           Subsection (5) proposes to prohibit banks from acting as the medium or agent of any non-banking corporation, partnership, association, business trust, or individual in making loans on the security of stocks, bonds, or other investment securities to brokers or dealers in stocks, bonds, and other investment securities or in any dealings whatsoever in respect of stocks, bonds, or other investment securities.

 

1.31           Subsection (10)(6) proposes to prohibits banks from underwriting any issue of stocks, bonds, or other investment securities.

Permitted activities of banks

 

1.32           Consistently with the intention of the Bill to limit the activities of banks to their socially valuable core banking activities proposed section 11 sets out the permitted activities of banks and is structured accordingly.

 

1.33           Proposed subsection 11(1) sets out the permitted core banking services as the business of receiving deposits, the extension of credit to individuals, businesses, not for profit organisations, and other entities, the discount and negotiation of promissory notes, drafts, bills of exchange, and other evidences of debt, and the loan of money on personal security.

 

1.34           Subsection 11(2) proposes to permit banks to participate in payment systems, defined as instruments, banking procedures, and interbank funds transfer systems that ensure the circulation of money.

 

1.35           Subsection 11(3) proposes to permit banks to buy, sell, and exchange coin and bullion.

 

1.36           Subsection 11(4) proposes to permit banks to invest in defined investment securities on the order of customers subject to limitations on volumes which may be held. The subsection proposes to permit banks to invest on their own behalf in securities under such limitations as the APRA with the approval of the committee may prescribe, by regulation.

 

1.37           Subsection 11(5) proposes to provide that in considering the matters referred to in paragraph 1.36 above, APRA and the committee shall give primary consideration the purposes of this Act as set out in Section 2 of the Act and shall not approve any investment security which may directly or indirectly enable any investment or activity prohibited to the bank by this Act.

 

Evasion of Provisions

 

1.38           Section 12 proposes to declare void and impose penalties on attempts to evade the provisions of the Bill by the structuring of transactions. Subsection 12(2) proposes to create an offence for attempting to structure, in any contract, investment or instrument a product to evade the provisions of the Act. The penalty is proposed to be 5 years imprisonment, 1,190 penalty units, or both.

 

Financial Claims Scheme

 

1.39           Section 13 proposes to provide that the Financial Claims Scheme, created by the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008, shall extend to all accounts held with any Australian bank whose banking business does not include any prohibited activities and that the scheme shall not extend to any accounts held with any Australian bank whose banking business includes any prohibited activities in breach of the provisions of this Bill.

Australian Prudential Regulation Authority

 

1.40           The intention of the Bill is that the banks’ regulatory authority should not be independent of the direct oversight and control of the Parliament. Section 14 of the Bill accordingly contains provisions to create a Joint Parliamentary Committee on Prudential Regulation to oversee the authority, and review and limit its decisions and actions.

 

1.41           Subsections 14(1) to (6) propose to create the Parliamentary Joint Committee on Prudential Regulation (the committee), which shall consist of 10 members, of whom 5 shall be senators and 5 shall be members of the House of Representatives appointed by each House.

 

1.42           The appointment and eligibility for membership of the committee, procedures for a member to cease being a member, and the committee’s powers and procedures are provided for in proposed subsections 14(3) to (6).

 

Subsection 14(7) proposes to provide that the committee shall hold public enquiries and report to the Parliament on the activities of, and the operation of any law relating to, APRA. The committee will examine each annual report of APRA and report to the Parliament on matters arising from such report which the committee considers should be brought to the attention of the Parliament.

 

1.43           APRA has issued a series of Prudential Standards, pursuant to the Australian Prudential Regulations Authority Act 1998 . Subsection 14(8) proposes to require copies of the standards, together with accompanying explanatory documents, shall be lodged with the Parliament within 30 days of the passage of the Bill.

 

1.44           Subsection 14(9) proposes to provide for the Minister to give APRA guidelines in relation to the performance of its functions.

 

1.45           Subsection 14(10) proposes to provide that any Prudential Standard proposed by APRA after the commencement of the Bill shall be subject to the approval of the Parliament and shall be void in the absence of such approval.

 

1.46           Subsection 14(11) proposes to provide that either House of the Parliament may pass a resolution disallowing any Prudential Standard. A Prudential Standard disallowed in accordance with proposed subsection 14(11) would cease to have effect from the time of such resolution (proposed subsection 14(12)).

 

1.47           Proposed subsection 14(13) is intended to remove any undue influence which may be exerted on the decisions of the authority by foreign banks or foreign authorities. The proposed subsection provides that the APRA must not consult with, nor accept or implement, the recommendations or decisions of any foreign bank or foreign authority without the consent of the committee. It proposes to require APRA to provide the committee with full details of any request from such foreign authority or bank or the basis upon which APRA seeks to undertake any contact with such institution or bank or to consider any recommendation or decision of such bank or authority and to provide the committee with a copy of all communications with such bodies and a written transcript of any discussions.

 

1.48           Subsection 14(15) proposes to provide for co-operation between APRA and State and Territory Police, and the Australian Federal Police by the provision of information and documents.

 

1.49           Subsection 14(16) proposes to provide for penalties for the evasion or attempted evasion of the provisions of subsection 14(14) and (16).

 

1.50           Subsection 14(17) proposes to provide that in making any determination pursuant to the Bill, APRA and the committee shall give primary consideration to the purposes as set out in section 3 of the Bill.

 

 

 

 

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

 

 

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

 

 

 

Banking System Reform (Separation of Banks) Bill 2019

 

 

This bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

 

 

 

Overview of the bill

 

 

The Bill will:-

·           re-establish public confidence in the banking system;

·          reduce risks to the Australian financial system by limiting the ability of banks to engage in activities other than socially valuable core banking activities;

·          limit conflicts of interest that arise from banks engaging in activities from which their profits are earned at the expense of their customers and the national interest;

·          remove explicit and implicit government guarantees for high-risk activities outside of the core business of banking; to regulate Australian Banks;

·          provide Parliamentary oversight of the activities of the Australian Prudential Regulation Authority (APRA) as the banking regulator;

·          separate retail commercial banking activities involving the holding of deposits, from wholesale and investment banking involving risky activities.

 

 

Human rights implications

 

 

This bill does not engage any of the applicable rights or freedoms.

 

 

Conclusion

 

 

This bill does not raise any human rights issues.

 

 

 

 

Senator Pauline Hanson