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Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills]



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ISSN 1328-8091

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BILLS DIGEST NO. 102, 2019-20 10 JUNE 2020

Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills] Paula Pyburne Law and Bills Digest Section Contents

Purpose of the package of Bills ........................................ 3

Background ..................................................................... 3

About APRA ................................................................. 3

APRA and supervisory levies ....................................... 4

Levies methodology .................................................. 4

Role of the Levy Imposition Acts ............................... 5

Problem to be addressed ............................................ 5

Committee consideration ................................................ 6

Senate Standing Committee for Selection of Bills ...... 6 Senate Standing Committee for the Scrutiny of Bills .............................................................................. 6

Policy position of non-government parties/independents...................................................... 6

Position of major interest groups..................................... 6

Financial implications ...................................................... 6

Statement of Compatibility with Human Rights................ 6

Parliamentary Joint Committee on Human Rights ..... 6 Key issues and provisions ................................................ 7

Amending the APRA Act .............................................. 7

Table 1: Financial Institutions Supervisory levies funding by agency ($’million) .......................... 7

Determining the amount of levy money ................... 8 Amending the Levy Imposition Acts ............................ 9

Changing the statutory upper limit ........................... 9

Maximum restricted levy amount ............................. 9

Indexation factor ..................................................... 10

The other Levy Imposition Bills ............................... 10

Date introduced: 13 May 2020

House: House of Representatives

Portfolio: Treasury

Commencement: Each of the Bills commences on the day after Royal Assent. Links: The links to the Bills, their Explanatory Memoranda and the second reading speeches can be found on the Bills’ home pages for the Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020; the Authorised Deposit-taking Institutions Supervisory Levy Imposition Amendment Bill 2020; the Authorised Non-operating Holding Companies Supervisory Levy Imposition Amendment Bill 2020; the General Insurance Supervisory Levy Imposition Amendment Bill 2020; the Life Insurance Supervisory Levy Imposition Amendment Bill 2020; the Retirement Savings Account Providers Supervisory Levy Imposition Amendment Bill 2020; and the Superannuation Supervisory Levy Imposition Amendment Bill 2020, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at June 2020.

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Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills] 2

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Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills] 3

Purpose of the package of Bills This Bills Digest relates to a package of Bills being:

• the Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 (APRA Industry Funding Bill)

• the Authorised Deposit-taking Institutions Supervisory Levy Imposition Amendment Bill 2020 (ADI Levy Imposition Bill)

• the Authorised Non-operating Holding Companies Supervisory Levy Imposition Amendment Bill 2020 (NOHC Levy Imposition Bill)

• the General Insurance Supervisory Levy Imposition Amendment Bill 2020 (General Insurance Levy Imposition Bill)

• the Life Insurance Supervisory Levy Imposition Amendment Bill 2020 (Life Insurance Levy Imposition Bill)

• the Retirement Savings Account Providers Supervisory Levy Imposition Amendment Bill 2020 (RSA Levy Imposition Bill) and

• the Superannuation Supervisory Levy Imposition Amendment Bill 2020 (Superannuation Levy Imposition Bill).

The purpose of the APRA Industry Funding Bill is to amend the Australian Prudential Regulation Authority Act 1998 (APRA Act) in order to expand the range of activities that are funded by the Commonwealth and recoverable through the financial institution supervisory levy framework.

The purpose of the Levy Imposition Bills is to amend the following statutes:

• the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998

• the Authorised Non-operating Holding Companies Supervisory Levy Imposition Act 1998

• the General Insurance Supervisory Levy Imposition Act 1998

• the Life Insurance Supervisory Levy Imposition Act 1998

• the Retirement Savings Account Providers Supervisory Levy Imposition Act 1998 and

• the Superannuation Supervisory Levy Imposition Act 1998.

The amendments to each of those Acts are intended to increase the statutory upper limit on the amount of levies the Australian Prudential Regulation Authority (APRA) can collect from the entities that it prudentially regulates.

The Government has not previously announced the measures in the package of Bills.1

Background

About APRA The APRA is an independent statutory authority that supervises institutions across banking, insurance and superannuation, and is accountable to the Australian Parliament.2 It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.

1. Explanatory Memorandum, Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills], p. 2. 2. Australian Prudential Regulation Authority (APRA), About APRA, APRA website.

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Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills] 4

The main purposes for which APRA exists are:

• regulating bodies in the financial sector in accordance with other laws of the Commonwealth that provide for prudential regulation or for retirement income standards

• administering the financial claims schemes provided for in the Banking Act 1959 and the Insurance Act 1973 and

• developing the administrative practices and procedures to be applied in performing that regulatory role and administration.3

APRA and supervisory levies From its inception, APRA has been empowered to impose levies on the institutions which it regulates.4

In 1998, the Government introduced levy setting arrangements to recover the majority of the operational costs of APRA and other specific costs incurred by certain Commonwealth agencies and departments. The Financial Institutions Supervisory Levies Collection Act 1998 provides that certain financial institutions are liable to pay a financial levy5 and when the levy is due for payment.6 The levies are paid to APRA on behalf of the Commonwealth.7

Levies methodology The current levies methodology is based on the time APRA estimates that it spends on supervising each industry sector. The levy has two components:

• a restricted levy component, reflecting the cost of supervision for an industry. This is structured as a percentage rate on assets, subject to minimum and maximum amounts. Activities covered by this component include costs associated with APRA’s onsite and offsite analysis, supervision and risk assessment of individual institutions and its legal and enforcement activities and

• an unrestricted levy component, which covers costs relating to ‘systemic’ regulation, rather than costs that can be allocated to an individual institution or industry. While this is also structured as a percentage rate on assets, the key difference is that there are no minimum or maximum amounts. This aims to ensure that the larger institutions pay more according to their size. Activities covered by this component include costs associated with the development of APRA’s prudential framework for the industries it supervises, as well as its statistical data collection and publications.8

Under the APRA Act, the responsible Minister makes annual determinations specifying the levy to be paid to the Commonwealth to cover the cost of activities.9 Prior to the release of the determinations, a consultation paper on the application of the levies is released in order to seek industry views on the relevant financial year’s levies.10

3. APRA Act, subsection 8(1). 4. L Jones, Australian Prudential Regulation Authority Bill 1998, Bills digest, 203, 1997-98, Department of the Parliamentary Library, Canberra, 1998, p. 8. 5. Financial Institutions Supervisory Levies Collection Act, section 8. 6. Financial Institutions Supervisory Levies Collection Act, section 9. 7. Financial Institutions Supervisory Levies Collection Act, section 11. 8. The Treasury, Financial Institutions Supervisory Levies methodology, Discussion paper, Treasury, Canberra, August 2019, p. 4. 9. The Treasury, The Financial Industry Supervisory Levy Methodology Review, Response paper, Treasury, Canberra,

16 April 2014, p. 1; section 50 of the APRA Act. 10. See for example, The Treasury, Proposed Financial Institutions Supervisory Levies 2019-20, Treasury, Canberra, June 2019.

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Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills] 5

Adjustments to the minimum and maximum parameters for the restricted levy component are made annually by the Treasurer following industry consultation so that there is an equitable sharing of the levy burden within each industry sector.11 The unrestricted levy component is directed towards ‘ensuring that the larger institutions are levied proportionately more in accordance with their size, compared to smaller ones’.12

Role of the Levy Imposition Acts A suite of Levy Imposition Acts impose levies on institutions operating in the APRA-regulated financial services sector.13 These Acts largely set a consumer price indexed (CPI) statutory upper limit and provide for the Minister to make a determination about matters such as the levy percentages for the restricted and unrestricted levy components, the minimum and maximum levy amounts applicable to the restricted levy component, and the date at which a regulated institution’s levy base is to be calculated.14

Problem to be addressed According to the Explanatory Memorandum to the package of Bills:

Since the introduction of the industry funding model, the scope of the activities being industry funded has expanded. With this expansion, the yearly levy on one sector has already hit the statutory upper limit while yearly levies on other sectors continue to increase. 15

On 16 August 2019, the Treasury circulated a discussion paper seeking feedback from stakeholders about changes to the statutory limit. The discussion paper explains the problem to be addressed as follows:

For ADIs, the maximum for the restricted levy component is now set at the statutory cap … [F]ollowing an increase in APRA’s funding, it was necessary to defer $3.1 million in supervisory levies payable by these largest institutions to ensure they continued to pay their share of APRA’s supervisory effort.

Reflecting its role, APRA’s regulatory intensity of the largest institutions has significantly increased over recent years (and therefore its level of funding). To avoid further deferrals of levies payable by these institutions, it is appropriate to reconsider the statutory cap provided for in the legislation. 16

[emphasis

added]

According to Assistant Treasurer, Michael Sukkar:

These Bills will ensure there are no regulatory barriers to all institutions paying their appropriate share and to bearing the costs of regulatory activities undertaken by the Commonwealth agencies in relation to APRA regulated entities, which aim to promote consumer outcomes.

11. The Treasury, Financial Institutions Supervisory Levies methodology, op. cit., p. 8. 12. Ibid. 13. That is, the Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998; the Authorised Non-operating Holding Companies Supervisory Levy Imposition Act 1998; the General Insurance Supervisory Levy Imposition Act 1998; the Life

Insurance Supervisory Levy Imposition Act 1998; the Retirement Savings Account Providers Supervisory Levy Imposition Act 1998 and the Superannuation Supervisory Levy Imposition Act 1998. 14. The Treasury, Financial Institutions Supervisory Levies methodology, op. cit., p. 1. 15. Explanatory Memorandum, Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills], p. 4. 16. The Treasury, Financial Institutions Supervisory Levies methodology, op. cit., p. 8.

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… [they] will ensure the framework of the APRA levies keeps pace with the evolving regulatory environment and the size of the industry. 17

Committee consideration

Senate Standing Committee for Selection of Bills At its meeting of 13 May 2020, the Senate Standing Committee for the Selection of Bills deferred consideration of the package of Bills.18

Senate Standing Committee for the Scrutiny of Bills At the time of writing this Bills Digest the Senate Committee for the Scrutiny of Bills had not made any comments about any of the Bills in the package of Bills.

Policy position of non-government parties/independents At the time of writing this Bills Digest no comments had been made about the package of Bills by non-government parties or independent Members and Senators.

Position of major interest groups At the time of writing this Bills Digest stakeholders had not commented on the package of Bills as introduced into the Parliament. Importantly, although Treasury issued a discussion paper about the proposed financial institutions supervisory levies for 2019-20, no submissions by stakeholders have been published.

Financial implications According to the Explanatory Memorandum which relates to the package of Bills, they will have nil financial impact.19

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.20

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights made no comment on the APRA package of Bills on the basis that they do not ‘engage, or only marginally engages, human rights; promotes human rights; and/or permissibly limits human rights’.21

17. M Sukkar, ‘Second reading speech: Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020’, House of Representatives, Debates, 13 May 2020, p. 3250. 18. Senate Standing Committee for Selection of Bills, Report, 4, 2020, The Senate, Canberra, 14 May 2020. 19. Explanatory Memorandum, Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and

associated Bills], p. 2. 20. The Statement of Compatibility with Human Rights can be found at pages 11-12 of the Explanatory Memorandum to the Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills]. 21. Parliamentary Joint Committee on Human Rights (PJCHR), Report, 6, 2020, 20 May 2020, p. 21.

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Key issues and provisions

Amending the APRA Act Under subsection 50(1) of the APRA Act, APRA is authorised to collect revenue to offset expenses incurred by certain other Commonwealth entities, including the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office (ATO), the Australian Competition and Consumer Commission (ACCC), the Gateway Network Governance Body Ltd (GNGB) and, in 2019-20 only, the Treasury.22

These expenses relate to:

• certain market integrity and consumer protection functions undertaken by ASIC, ACCC and the ATO

• claims for the early release of superannuation benefits on compassionate grounds undertaken by the ATO

• funding for the Superannuation Complaints Tribunal (ASIC) which will cease to operate from 1 July 2023

• establishment of a dedicated analysis and advisory function—the Financial Services Competition Branch (FSCB)—to investigate foreign exchange and specific competition issues in Australia’s financial system (ACCC)

• governing and maintaining the superannuation transaction network (GNGB) and

• in 2019-20 only, a recovery of costs incurred by the Treasury in conducting a Capability Review of APRA in 2018-19.23

Table 1 below sets out the amount of supervisory levies by agency over a seven year period.

Table 1: Financial Institutions Supervisory levies funding by agency ($’million)

Agency FY

13/14

FY 14/15

FY 15/16

FY 16/17

FY 17/18

FY 18/19

FY 19/20

APRA 115.6 116.9 117.5 122.1 136.1 141.6 186.1

ASIC 32.2 28.5 28.2 70.4 49.6 35.5 8.4

ATO 7.3 7.1 17.9 17.8 17.8 31.0 36.3

DHS 4.4 4.5 4.7 4.8 5.1 - -

ACCC - - - - 3.0 3.2 3.5

SuperStream 99.5 71.7 61.8 35.5 35.5 - -

GNGB - - - - - 0.6 0.7

Treasury - - - - - - 1.0

Non-APRA prior year under- collection recouped

- - - - 0.9 1.5 -

22. APRA, Cost recovery implementation statement: prudential regulation of financial institutions, APRA, Sydney, 3 July 2019, p. 7. 23. Ibid., pp. 7-8.

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Agency FY

13/14

FY 14/15

FY 15/16

FY 16/17

FY 17/18

FY 18/19

FY 19/20

Total 259.0 228.7 230.0 250.7 248.0 213.4 236.0

Source: The Treasury, Financial Institutions Supervisory Levies methodology, Discussion paper, Treasury, Canberra, August 2019, p. 2.

Item 2 of the APRA Industry Funding Bill inserts the definition of leviable body into subsection 50(6) of the APRA Act so that it has the same meaning as in the Financial Institutions Supervisory Levies Collection Act, where it is defined as any of the following types of bodies:

• an Authorised Deposit-taking Institution (ADI)

• an authorised Non-operating holding company (NOHC)

• a life insurance company

• a general insurance company

• a private health insurer

• a Retirement Savings Account (RSA) provider

• a superannuation entity.24

Determining the amount of levy money Item 1 of the APRA Industry Funding Bill repeals and replaces subsection 50(1) of the APRA Act which allows the Minister to determine certain Commonwealth costs. Under proposed paragraph 50(1)(a) the Minister is empowered to make written determinations (which are legislative instruments) for each financial year specifying the amount of the levy money25 payable to the Commonwealth, in respect of that financial year, to cover the following costs to the Commonwealth:

(i) costs incurred in connection with supporting the integrity and efficiency of markets in which leviable bodies operate

(ii) costs incurred in connection with promoting the interests of consumers in markets in which leviable bodies operate

(iii) the cost of administering the function of making determinations about the release on compassionate grounds of benefits that are in a superannuation entity or retirement savings account

(iv) the cost of governing and maintaining the superannuation transactions network and

(v) costs relating directly or indirectly to the regulation of leviable bodies.

The costs set out in proposed subparagraph 50(1)(a)(i) expand on those which are expressed in existing subparagraph 50(1)(a)(i) of the APRA Act so that the costs associated with supporting the integrity of financial markets are linked to costs for supporting the efficiency of those markets.

24. Financial Institutions Supervisory Levies Collection Act 1998, section 7. 25. APRA Act, subsection 50(6) defines levy money: (a) in relation to levy, means any amount paid or payable to the Commonwealth in respect of levy; or (b) in relation to a particular class of levy, means any amount paid or payable to the Commonwealth in respect of that class of levy.

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This can include ‘activities such as inquiries or market studies into competition issues in financial markets’.26

The costs set out in proposed subparagraph 50(1)(a)(ii) expand on the existing references to consumer protection in subparagraph 50(1)(a)(i). Under the APRA Industry Funding Bill the reference is broader—to encompass costs incurred in promoting the interests of consumers in financial markets. Such costs ‘can include the costs of consumer advocacy activities to improve consumer outcomes’.27

Proposed subparagraphs 50(1)(a)(iii) and (iv) are in similar terms to existing subparagraphs 50(1)(a)(ii) and (iii) of the APRA Act.

Proposed subparagraph 50(1)(a)(v) specifies that those costs relating directly or indirectly to the cost of regulation of leviable bodies may also be covered by the Ministerial determination. This will give the government scope to determine levies for the widest range of activities.

Under proposed paragraph 50(1)(b) the Minister is empowered to make written determinations (which are legislative instruments) for each financial year in respect of each class of levy, specifying the amount of the levy money payable to the Commonwealth, in respect of that class of levy for that financial year, to cover the costs to the Commonwealth of performing specified prudential regulation functions. Proposed subparagraphs 50(1)(b)(i)-(v) are in equivalent terms to proposed subparagraphs 50(1)(a)(i)-(v) (and so relate to the same functions and costs).

Amending the Levy Imposition Acts

Changing the statutory upper limit Section 5 of the ADI Supervisory Levy Imposition Act defines the statutory upper limit as:

(a) in relation to the financial year commencing on 1 July 2005—$1,500,000 or

(b) in relation to a later financial year—the amount calculated by multiplying the statutory upper limit for the previous financial year by the indexation factor for the later financial year.

Item 1 of the ADI Levy Imposition Bill repeals and replaces paragraph (a) of the definition so that the statutory upper limit for the year commencing on 1 July 2020 is $10,000,000.

Maximum restricted levy amount Existing section 7 of the ADI Supervisory Levy Imposition Act sets out the method by which the levy is to be calculated, including how to work out the restricted levy component (subsection 7(1A)) and the unrestricted levy component (subsection 7(1B)).

Subsection 7(3) requires the Treasurer to determine, by legislative instrument the following amounts:

• the maximum restricted levy amount for each financial year

• the minimum restricted levy amount for each financial year

• the restricted levy percentage for each financial year

26. Explanatory Memorandum, Australian Prudential Regulation Authority Amendment (APRA Industry Funding) Bill 2020 [and associated Bills], p. 9. 27. Ibid.

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• the unrestricted levy percentage for each financial year and

• how an ADI’s levy base is to be worked out.

Item 3 of the ADI Levy Imposition Bill amends subsection 7(4) so that the maximum restricted levy amount for a financial year must not exceed the statutory upper limit for that financial year, rather than the limit that applies at the time the determination is made.

Indexation factor As set out above, paragraph (b) of the definition of the term statutory upper limit makes clear that the amount is subject to indexation.

Section 8 of the ADI Supervisory Levy Imposition Act provides the method for calculating the indexation factor. Item 4 of the ADI Levy Imposition Bill repeals and replaces subsection 8(1) of the Act so that there is a three step process to be followed when working out the indexation factor in a financial year:

• Step 1: this step cannot be taken until the Treasurer has made the first of the required determinations under subsection 7(3) of an amount or a percentage for a financial year. Once that has been done the starting point is to identify the index number for the most recent quarter (called for the purposes of this step the relevant quarter) for which the Australian Statistician has published an index number—as at the day on which the Treasurer has made his, or her, first determination. As set out at section 5 of the ADI Supervisory Levy Imposition Act, the index number for a quarter is the All Groups Consumer Price Index (CPI) number for that quarter 28

• Step 2: divide the index number for the relevant quarter by the index number for the quarter 12 months before the relevant quarter and

• Step 3: add 0.030 to the number worked out in Step 2.

This differs from the current indexation arrangements, which use the index number of the March quarter immediately preceding the current financial year (the first March quarter), divided by the index number for the March quarter that is 12 months before the first March quarter, and then adding 0.030 to that number.

The arrangements proposed by the Bill will allow the indexation figure to be calculated using the most recent CPI figure available, which should better reflect the current economic situation.

The other Levy Imposition Bills Each of the Levy Imposition Bills contains amendments which:

• increase the statutory upper limit to $10,000,000 from 1 July 202029

• specify that the levy amount must not exceed the statutory upper limit for a financial year30 and

28. Australian Bureau of Statistics (ABS), Consumer Price Index, Australia, March 2020, cat. No. 6401.0, ABS, Canberra, 29 April 2020. 29. Authorised Non-operating Holding Companies Supervisory Levy Imposition Act, proposed paragraph (a) of the definition of statutory upper limit in section 5 inserted by item 1 of the NOHC Supervisory Levy Bill; the General Insurance Supervisory Levy

Imposition Act, proposed paragraph (a) of the definition of statutory upper limit in section 6 inserted by item 2 of the General Insurance Supervisory Levy Bill; the Life Insurance Supervisory Levy Imposition Act, proposed paragraph (a) of the definition of statutory upper limit in section 5 inserted by item 1 of the Life Insurance Supervisory Levy Bill; the Retirement Savings Account Providers Supervisory Levy Imposition Act, proposed paragraph (a) of the definition of statutory upper limit in section 5 inserted by item 1 of the RSA Providers Supervisory Levy Bill; and the Superannuation Supervisory Levy Imposition Act, proposed paragraph (a) of the definition of statutory upper limit in section 5 inserted by item 1 of the Superannuation Supervisory Levy Bill.

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• insert the method for working out the indexation factor for a financial year in equivalent terms to that set out in the ADI Levy Imposition Bill.31

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30. Authorised Non-operating Holding Companies Supervisory Levy Imposition Act, subsection 7(1) amended by item 3 of the NOHC Supervisory Levy Bill; the General Insurance Supervisory Levy Imposition Act, subsection 8(4) amended by item 4 of the General Insurance Supervisory Levy Bill; the Life Insurance Supervisory Levy Imposition Act, subsection 7(4) amended by item 3 of the Life Insurance Supervisory Levy Bill; the Retirement Savings Account Providers Supervisory Levy Imposition Act, subsection 7(4) amended by item 3 of the RSA Providers Supervisory Levy Bill; and the Superannuation Supervisory Levy Imposition Act, subsection 7(4) amended by item 3 of the Superannuation Supervisory Levy Bill.

31. Authorised Non-operating Holding Companies Supervisory Levy Imposition Act, proposed subsection 8(1) inserted by item 4 of the NOHC Supervisory Levy Bill; the General Insurance Supervisory Levy Imposition Act, proposed subsection 9(1) inserted by item 6 of the General Insurance Supervisory Levy Bill; the Life Insurance Supervisory Levy Imposition Act, proposed subsection 8(1) inserted by item 4 of the Life Insurance Supervisory Levy Bill; the Retirement Savings Account Providers Supervisory Levy Imposition Act, proposed subsection 8(1) inserted by item 4 of the RSA Providers Supervisory Levy Bill; and the Superannuation Supervisory Levy Imposition Act, proposed subsection 8(1) inserted by item 4 of the Superannuation Supervisory Levy Bill.

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