Bills Digest No. 7  1999-2000 Financial Sector Reform (Amendments and Transitional Provisions) Bill (No.2) 1999


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details

Passage History

Financial Sector Reform (Amendments and Transitional Provisions) Bill (No.2) 1999

Date Introduced: 30 June 1999

House: House of Representatives

Portfolio: Treasury

Commencement: Upon Royal Assent, however for the most part, after the commencement of several other Acts or relevant parts of Acts that are amended, including the Australian Prudential Regulation Authority Act 1998, the Financial Sector Reform (Consequential Amendments) Act 1998 and the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998.

Purpose

The purpose of the Financial Sector Reform (Amendments and Transitional Provisions) Bill (No.2) 1999 (the Bill), is to further refine the regulatory framework of the Australian financial system. Major reforms have already been introduced in response to numerous government inquiries including, most recently, the Wallis Report.(1) This third stage of amendments continues the reform process.

The amendments:

  • permit the Reserve Bank of Australia (RBA) to delegate certain information collection functions to the Australian Prudential Regulation Authority (APRA) and the Australian Bureau of Statistics (ABS)
  • extend the deadline until 30 June 2000 for foreign banks to obtain a banking authority and therefore avail themselves of certain taxation concessions
  • clarify circumstances in which superannuation funds, which suffer losses due to theft or fraud, will be eligible for grants of financial assistance
  • extend the range of material and information that may be submitted electronically by superannuation funds, and
  • ensure adequate disclosure to members prior to an approved deposit-taking institution (ADI) affecting a demutualisation.

Background

  1. Reforms to the financial sector

    Numerous government inquiries and the political recognition of the value of competition as a rationalisation for economic growth have led to fundamental changes in the Australian financial system since the late 1970's.

    The committees, known by the names of their chairmen, the Manning Committee (1964), the Rae Committee (1974), the Campbell Committee (1981), the Martin Committee (1984) and the Wallis Committee (1997), have produced reports prompting decisions such as those in 1983 and 1985 to allow the foreign exchange rate to be determined by market forces and to permit the entry of foreign banks. The Campbell Committee report was the one that laid the foundation for the deregulation of Australia's financial sector and recommended a financial system marked by efficiency, competitiveness and stability.(2)

  2. The Wallis Committee

In June 1996, the Treasurer, the Hon Peter Costello MP, established the Financial System Inquiry with the following mission:

The Inquiry is charged with providing a stocktake of the results arising from the financial deregulation of the Australian financial system since the early 1980s. The forces driving further change will be analysed, in particular, technological development. Recommendations will be made on the nature of the regulatory arrangements that will best ensure an efficient, responsive, competitive and flexible financial system to underpin stronger economic performance, consistent with financial stability, prudence, integrity and fairness.(3)

The Final Report was released in April 1997 with a number of recommendations including the establishment of:

  • a single regulator for conduct and disclosure for the financial sector, including market integrity, consumer protection and regulation of corporations(4)
  • a new regulatory entity to undertake prudential regulation within the financial system, combining the then existing prudential regulation functions of the RBA, the Financial Institutions (FI) Scheme and the Insurance and Superannuation Commission (ISC)(5)
  • a Payments System Board within the RBA to provide for policy making in relation to the payments system and to increase accountability of the RBA in respect of its role in the payments system,(6) and
  • to achieve national coverage and remove artificial and anti-competitive distinctions in the market-place, all prudentially regulated financial corporations should be brought under the Commonwealth jurisdiction.

In summary the Inquiry proposed that the existing framework based on four institutional regulators be replaced by three agencies based on functional lines. The following is a reproduction of Figure 1: Proposed Regulatory Framework(7) outlining the reforms.

Figure 1: Proposed Regulatory Framework

Figure 1: Proposed Regulatory Framework

Source: Financial System Inquiry, Final Report, AGPS, 1997, p 25.

There have been two stages of reform to implement the recommendations of the Wallis Report.

  • Stage 1
Included the establishment of the Payments System Board (PSB) in the RBA, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC). APRA is the prudential regulator charged with balancing the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and ASIC is the market integrity and consumer protection regulator for the financial system.
  • Stage 2

    Provided for the transfer of regulatory responsibility for building societies, credit unions and friendly societies from the States and Territories to the Commonwealth.

The amendments contained in this Bill comprise Stage 3 of the reform process and although the measures are modest in comparison to those that have gone before. They nonetheless continue the process of reform.

The Wallis Committee noted that its recommendations were based on trends that were already evident but it believed that a more fundamental paradigm shift, should it occur, would bring pressure for further change. The Committee could foresee circumstances in which there would be 'both a philosophical justification and a practical need to wind back the more intense forms of prudential regulation and to shift the focus of regulation more to conduct by market participants and disclosure of information.'(8)

Accordingly, it believed that the framework needed to be flexible enough to cope with more dramatic changes should they occur. This reinforces the need to continually appraise the regulatory framework of the financial system and to be alert to refinements or substantive changes necessary 'to best ensure an efficient, responsive, competitive and flexible financial system to underpin stronger economic performance, consistent with financial stability, prudence, integrity and fairness.'

Main Provisions

1. Schedule 1 Amendment of the Australian Prudential Regulation Authority Act 1998 - Secrecy and Sales Tax

1.1 Sales Tax

Items 1 and 2 insert new subsection 55(1A) which ensures that APRA, or any other person, does not pay sales tax on goods that are for use by APRA. This amendment is linked to the commencement of Australian Prudential Regulation Authority Act 1998 (APRA Act) so that it is clear that APRA was never intended to pay sales tax.

1.2 Secrecy provisions

Items 3 to 13 make amendments to section 56 of the APRA Act, which contains the general secrecy provisions governing APRA. Section 56, subject to some exceptions, prohibits disclosure of protected information or documents. Basically this covers information disclosed or obtained by APRA relating to the affairs of a body regulated by APRA under or for the purposes of a number of Acts including the Banking Act 1959, the Insurance Act 1973 and the Superannuation Industry (Supervision) Act 1993.

1.2.1 Secrecy to extend to bodies which cease to be regulated by APRA

The amendments propose to protect the information of a body that has at any time been a body regulated by APRA. Thus secrecy for documents and information provided to or obtained by APRA is not lost if a company is no longer regulated by APRA. (Item 3)

1.2.2 Exceptions to secrecy provisions extended

The amendments propose to allow APRA to disclose the following information:

  • public contact information relating to the bodies it regulates
  • APRA's opinion as to whether or not bodies that it regulates comply, or complied at a particular time, with provisions of relevant legislation (for example, a list of complying superannuation funds)
  • descriptions of court proceedings against bodies and other persons such as auditors, investment managers and actuaries in relation to a breach or suspected breach of relevant legislation, and
  • descriptions of action taken or proposed to be taken by APRA concerning such a breach including details of any notices or directions issued to a person.

2. Schedule 2 - Amendment of the Banking Act 1959 - ADIs seeking to demutualise to give adequate disclosure to members

Item 2 amends section 63 to ensure that the Treasurer may determine guidelines as to acceptable standards of disclosure of information by an ADI to its members in respect of a proposed demutualisation of the ADI. The Treasurer must consult with APRA and ASIC in the making of such guidelines.

Under section 63 an ADI cannot effect a reconstruction of the ADI without the Treasurer's consent. Reconstruction is proposed to be amended to make sure it includes a demutualisation.

The Treasurer must then consider whether an ADI has complied with the guidelines in deciding whether to give consent to the ADI effecting a demutualisation.

The determination is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901, which means that the determination must be gazetted and tabled before each House of Parliament. Either House may pass a resolution to disallow the determination.

3. Schedule 3 - Amendment of the Financial Corporations Act 1974 - RBA may delegate its information collection functions to APRA or ABS and object of the Act changed

3.1 Object of the Financial Corporations Act 1974 changed

The amendment contained in Item 1 proposes that the object of the Financial Corporations Act 1974 will be to assist the RBA by providing for the collection of information to facilitate formulation of monetary policy. This represents a change from the current position where the object was to assist the Australian Government to manage the economy by examining business activities of financial and trading corporations and regulating those activities for the purpose of contributing to economic stability, the maintenance of full employment, the efficient allocation of productive resources and the economic welfare prosperity and welfare of the people of Australia.

The change appears to reflect the division of functionality between the three agencies envisaged by the Wallis Committee. In particular, it seemingly reinforces the fact that the RBA will be responsible for monetary policy and not the regulation of business activities of certain financial and trading corporations.

3.2 Introduction of standards requiring the provision of information

Item 9 repeals section 11 and inserts new section 11. Currently, section 11 states that the regulations may require a corporation to furnish to the RBA or ABS statements setting out such information relating to the business of the corporation as is specified in the regulations.

New section 11 deletes the reference to regulations and specifies that the RBA may determine standards requiring the provision of information and the manner in which the information is to be provided. The RBA may also vary or revoke any such determination it makes.

A determination must be made in writing and is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901, which means that the determination must be gazetted and tabled before each House of Parliament. Either House may pass a resolution to disallow the determination.

Regulations and determinations are delegated legislation.(9) That is, Parliament can and does empower through its statutes other bodies to make laws known as orders, regulations, rules or by-laws. The overwhelming body of legislation that constitutes Australia's enacted law (as opposed to unenacted case law) is delegated legislation. In relation to the Financial Corporations Act 1974, the Governor-General currently may make the regulations but in reality they are made by the government department or body concerned. Regulations are generally enacted without public debate and are often not tabled in Parliament. To this extent empowering the RBA to make determinations concerning standards by way of disallowable instrument may be an improvement in terms of permitting some debate over content.

3.3 RBA may delegate its information collection functions to APRA or ABS

Item 12 repeals section 22A and inserts new section 22A which permits the delegation of the RBA's functions or powers under the Financial Corporations Act 1974to APRA or ABS.

Currently the regulations made under section 11 may require that corporations provide information to the RBA or ABS. There is some change in emphasis in the proposed amendments because entitlement to the information rests with the RBA who then may delegate its functions and powers to the ABS.

The RBA cannot delegate its functions and powers under new section 11 to make standards.

4. Schedule 4 - Amendment of the Financial Corporations (Transfer of Assets and Liabilities Act) 1993 - extension of time for foreign ADIs to obtain a banking authority

The object of the amendment is to extend the deadline until 30 June 2000 for foreign banks to obtain a banking authority in Australia and still be eligible for tax relief.

The Act provides tax relief in respect of the transfer of assets and liabilities within a foreign group provided that the transfer is reasonably required for the proper organisation of the activities in Australia following the grant of an ADI authority to the receiving organisation.

The amendments to extend the time for the making of an application for an authority to carry on a banking business in Australia are contained in Items 1 to 4 and at first glance are a little confusing. This is because they amend the same paragraphs twice. Items 1and 3 rectify a previous error which shortened the time period originally contemplated from 5 years to 3 years in which to obtain an authority. Items 2 and 4 make the amendment contemplated by the Government now, which is to extend the period until 30 June 2000.

5. Schedule 7 - Amendment of the Reserve Bank Act 1959 - Modification to RBA Board membership

Amendments to section 17 provide that a person who is a director, employee or officer of an ADI is disqualified from being a director of the RBA. Currently disqualification only applies to persons who are directors etc of a bank. With the increase in non-bank deposit-taking institutions and their regulation by APRA it is considered appropriate to extend the disqualification to cover such circumstances.

6. Schedule 9 - Amendment of superannuation legislation relating to financial assistance to funds

The Superannuation (Financial Assistance Funding) Levy Act 1993 imposes levies on superannuation funds and approved deposit funds for the purpose of funding financial assistance under the Superannuation Industry (Supervision) Act 1993 to such funds that have suffered loss as a result of fraudulent conduct or theft.

The amendments proposed clarify the circumstances in which superannuation funds that suffer losses due to theft or fraud will be eligible for grants for financial assistance.

The amendments ensure that a levy is not imposed on self-managed superannuation funds. (Items 1 and 4)

In addition, the amendments provide that a fund must suffer an 'eligible loss' in order to apply to the Minister for a grant of financial assistance. (Item 11)

Item 9 inserts a definition of eligible loss, which depends on whether the fund is a defined benefit fund, or not. (Items 6 to 8 also insert a definition of defined benefit fund).

Where a fund is not a defined benefit fund eligible loss means a loss suffered by the fund as a result of fraud or theft by a person directly or indirectly responsible for the administration of the fund, for example, the trustee or investment manager.

Where a fund is a defined benefit fund a loss suffered in identical circumstances only becomes an eligible loss where the employer-sponsor of the fund is required to pay the fund but cannot pay the fund and remain solvent.

7. Schedule 10 - Amendments of the Superannuation Industry (Supervision) Act 1993 - to permit extended range of electronic lodgement of documents

The object of the Superannuation Industry (Supervision) Act 1993 is to make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts. This obviously necessitates, amongst other things, the provision of certain information by funds to APRA or ASIC. The amendments proposed extend the range of such material and information that may be submitted electronically by superannuation funds.

The definition of 'approved form' is therefore amended to include information that may be required or permitted to be given on a specified kind of data processing device or by specified electronic transmission, in accordance with specified software or other requirements. (Item 5 inserts new section 11A)

It is left to the Regulator (APRA or ASIC) to decide exactly what may be submitted electronically.

8. Technical Amendments and Transitional Provisions - Schedules 5, 6, 8, 11 and 12

8.1 Schedule 5: Correct an error in the definition of 'newly established local bank' in the Financial Corporations (Transfer of Assets and Liabilities) Act 1993

Previous amendments contained in Schedule 4 of the Financial Laws Amendment Act 1997 changed the definition of 'eligible foreign bank' to extend the time for the making of an application for an authority to carry on a banking business in Australia from 3 years to 5 years, the time period originally contemplated. Schedule 4 omitted to also change the definition of 'newly established local bank' along similar lines. Schedule 5 makes this correction.

8.2 Schedule 6: Align requirements for the assignment of an interest in a friendly society benefit fund with the Friendly Society Code

The proposed amendments in Schedule 6 align the requirements in the Life Insurance Act 1995 for the assignment of an interest in a friendly society benefit fund with those in the Friendly Society Code.

8.3 Schedule 8: Repeal of a reference to redundant provision in the Retirement Savings Account Act 1997

The Retirement Savings Account Act 1997 provides for retirement savings accounts or RSAs to be offered by certain financial institutions. RSAs provide benefits upon retirement or death and a limited range of other benefits. RSAs have certain restrictions placed on them to make them similar to superannuation products. The Act provides for approval of the entities that can offer RSAs and provides for the supervision of the RSA business of those entities but not general prudential supervision.

The Act includes rules about records, audits and auditors of the RSA providers.

Pursuant to section 68 of the Act, if APRA is of the view that an auditor has failed to perform properly it may refer details of the matter to the auditor's professional association. Currently section 68 states that APRA must inform the relevant person in the association of the person's obligations under section 191(12) of the Act.

Section 191(12) has been repealed and therefore the proposed amendment omits this requirement. The amendment does, however, insert a note referring to the secrecy obligations under the APRA Act 1998 in lieu.

8.4 Schedule 11: Correction to the names of Acts

Schedule 11 includes changes to references in the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 from Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 1998 to Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 1999.

Similarly, references to the Superannuation Legislation Amendment Act 1998 are changed to Superannuation Legislation Amendment Act 1999.

8.5 Schedule 12: Transitional provisions relating to supervisory levies and the preservation of information collection exemptions and regulations

8.5.1 Supervisory levies - payment date for 1998-99 levy

Part 1 of Schedule 12 contains transitional provisions relating to the validation of determinations relating to financial sector supervisory levies.

There has been some concern that the determinations relating to the amount of the supervisory levy for 1998-99 made under the relevant imposition Acts were unconstitutional. To avoid doubt the determinations are proposed to be validated in legislation (Validation Acts) currently before Parliament.(10)

The transitional provisions in this Bill provide for the due date for payment of the 1998-99 levies. It is 6 weeks after the Validation Acts have received Royal Assent.

8.5.2 Preservation of information collection exemptions and regulations

Part 2 of Schedule 12 contains transitional provisions relating to amendments proposed to the Financial Corporations Act 1974 (FCA).

Schedule 3 contains changes to the FCA including the transfer of certain powers and obligations vested in the Governor-General to the RBA. These include the exemption of corporations from the application of the FCA and the preparation of a register of corporations.

The transitional provisions preserve any exemptions and lists in force immediately prior to the Schedule 3 amendments.

In addition the current regulations will be issued as standards under new section 11, thus preserving current requirements for the provision of information until new standards are issued by the RBA.

8.5.3 Current RBA Board members not disqualified

Part 4 of Schedule 12 provides that current members of the RBA Board will not be disqualified under the new provisions if they are presently a director or officer of a non-bank ADI.

Endnotes

  1. Financial System Inquiry, Final Report, AGPS, 1997.

  2. Australian Financial System, Final Report of the Committee of Inquiry (Campbell Committee), AGPS, 1981.

  3. Financial System Inquiry, Final Report, AGPS, 1997, p vii.

  4. Ibid., principally recommendation 1, p 31.

  5. Ibid., principally recommendation 31, p 42.

  6. Ibid., principally recommendation 61, p 53.

  7. Ibid., p 25.

  8. Ibid., pp 14 and 15.

  9. For a brief summary of sources of law please refer to Latimer P, 1999 Australian Business Law, CCH Australia Limited, 18th Edition, Sources of Law commencing at paragraph 1-180 at p 26.
  10. the Validation Acts are:
  • Authorised Non-operating Holding Companies Supervisory Levy Determination Validation Act 1999
  • General Insurance Supervisory Levy Determination Validation Act 1999
  • Life Insurance Supervisory Levy Determination Validation Act 1999
  • Retirement Savings Account Providers Supervisory Levy Determination Validation Act 1999
  • Superannuation Supervisory Levy Determination Act 1999

Contact Officer and Copyright Details

Lesley Lang
22 July 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

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