Bills Digest No. 171  1999-2000Financial Sector Legislation Amendment Bill (No.1) 2000


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 Legislation Amendment Bill (No.1) 2000

Date Introduced: 13 April 2000

House: House of Representatives

Portfolio: Treasury

Commencement: Item 21 of schedule 1, which allows the Treasurer to delegate his powers in relation to unclaimed moneys commences on Royal Assent. The remaining provisions of the Act commence 28 days after Royal Assent.

Purpose

To amend the Banking Act 1959 to permit the Treasurer to place conditions on the approval of reconstructions and amalgamations of authorised deposit-taking institutions and to allow the Australian Prudential Regulation Authority (APRA) or the Treasurer to seek an injunction if certain sections of the Act are breached.

To strengthen the enforcement provisions of the Superannuation Industry (Supervision) Act 1993 to apply the Criminal Code to certain offences.

To modify the service provisions of the Reserve Bank Act 1959, including the ability of the Bank to lend money to staff members.

Background

As this Bill has no central theme the background to the various measures is included in the discussion of the main provisions.

Main Provisions

Schedule1: Amendments to the Banking Act 1959

The prudential framework that is established by the Banking Act 1959 (the Act) is designed to protect the depositors of authorised deposit-taking institutions (ADIs).(1) For example, section 13(3) of the Act provides that if an ADI becomes unable to meet its obligations, the assets of the ADI in Australia are to be available to meet that ADI's deposit liabilities in Australia in priority to all other liabilities of the ADI.

Section 63 of the Act states that an ADI other than a foreign ADI must seek the approval of the Treasurer before it:
  • enters into an arrangement or agreement for any sale or disposal of its business by amalgamation or otherwise, or for the carrying on of business in partnership with another ADI; or
  • effects a reconstruction of the ADI.
The intent of the section is to prevent the protection given by depositor priority under section 13 from being undermined by the transfer of assets.

At present, the Banking Act 1959 does not allow the Treasurer to place conditions on an approval. This contrasts with the approval process for transactions, including mergers, which come under the Financial Sector (Shareholdings) Act 1998(2) (FSSA) or the Financial Sector (Transfers of Business) Act 1999 (ToBA).(3)

Under the FSSA, where a proposed transaction results in an entity acquiring more than a 15 per cent stake in a financial sector company, the approval of the Treasurer is required. The ToBA is essentially a prudential tool that allows the Treasurer or the Australian Prudential Regulation Authority (APRA) to merge entities that are in financial distress.

While some section 63 proposals may fall within the scope of the FSSA or ToBA and thus allow the Treasurer to impose conditions on a merger or reconstruction, this may not always be the case. For example a bank reconstruction may not result in a person achieving more than a 15 per cent stake in a financial institution. Also as the Explanatory Memorandum notes, FSSA conditions are imposed on the purchaser not the vendor.(4)

To address the policy inflexibility created by the absence of a capacity to impose conditions item 18 inserts a new section 64 which provides that the Treasurer's consent under subsection 63(1) is subject to the conditions (if any) imposed by the Treasurer.

Proposed subsection 64(2) elaborates on the Treasurer's powers in relation to a person who has been given consent. The Treasurer may by written notice:

  • impose conditions, or further conditions on the consent; or
  • revoke or vary any condition imposed on the consent; or
  • revoke the consent if the Treasurer is satisfied that there has been a contravention of a condition to which the consent is subject.
The Treasurer's powers under proposed section 64 may be delegated to APRA, an APRA board member or an APRA staff member; or an officer of Treasury (proposed subsection 63(5)).

Item 19 ensures that the new powers given the Treasurer will not apply to a consent given prior to the commencement of this Bill.

It may be argued that the approvals process under the Act lacks the transparency of the FSSA. Under the FSSA, the Treasurer is subject to certain public notification requirements in relation to the exercise of powers granted by that Act. For example, where the Treasurer:

  • approves an application for a person to hold a stake of greater than 15 per cent in a company under section 14
  • extends the period of the approval under section 15
  • imposes, varies or revokes conditions on an approval under section 16
  • varies the approved percentage stake under section 17, or
  • revokes an approval under section 18.

a copy of the notice of the Treasurer's action must be must be published in the gazette and given to the company concerned.

There is no equivalent requirement for gazettal of approvals in relation to section 63 of the Banking Act or in relation to conditions under the proposed new section 64.

Item 20 inserts a new provision to strengthen the powers of the Australian Prudential Regulation Authority. APRA may seek a Federal Court injunction to stop breaches or compel compliance with :

  • section 7, which requires that a person other than a body corporate must not carry on banking business;
  • section 8, which states that only the Reserve Bank and bodies corporate that are ADIs may carry on banking business;
  • section 66, which restricts the use of words such as 'bank', 'building society' or 'credit union' to APRA approved entities;
  • section 66A, which restricts the use of the phrase 'authorised deposit-taking institution' or ADI;
  • section 67, which prevents a person from establishing or maintaining a representative office of a foreign bank without APRA's consent and
  • conditions imposed under new section 64.

Proposed subsection 65A(6) states that in addition to APRA, the Treasurer may apply for an injunction if conditions imposed under section 64 have been breached. The Australian Securities and Investments Commission (ASIC) or a member of an ADI may seek an injunction if a condition in relation to a demutualisation of an ADI has been breached.

Proposed subsection 65A(8) makes clear that the Court has the power to grant an interim injunction. However neither APRA, ASIC or the Treasurer can be required to pay damages as a condition of obtaining the injunction (proposed subsection 65A(10)).

Item 21 inserts proposed subsection 69(11A) which allows the Treasurer to delegate powers in relation to unclaimed moneys to Treasury agencies or members of such agencies.

Schedule 2: Amendments to the Reserve Bank Act 1959

Item 3 inserts into subsection 5(1) a new definition 'staff member of the Reserve Bank Service' to replace the various definitions of 'officer' repealed by items 1 and 2. A staff member will be either a person appointed under proposed section 67 or consultants appointed under proposed section 68.

The amendments proposed by Schedule 2 will also give the Reserve Bank of Australia (RBA) more flexibility in relation to loans to staff. This matter has recently generated some controversy. The Leader of the Opposition has described the fact that Bank executives sitting on the Board have access to a home loan at a discounted rate of interest as 'extremely insensitive' however the Treasurer has defended as a longstanding practice.(5) It is of note that most banks offer employees discounted loans.(6)

Currently, the RBA's ability to lend to staff members is governed by section 71. Under that provision the Bank may only lend money to officers:

  • for the purchase, erection, alteration, renovation or enlargement of a home in which he or she resides or intends to reside, or
  • to discharge a mortgage or encumbrance on such a home, or
  • in special circumstances, upon such terms and conditions as the Governor thinks fit, providing the loan does not exceed $1000.

Section 71 is repealed by item 10. The effect is that the restrictions on the purposes for which the RBA may lend money to staff will be removed.

Loans will now be governed by proposed section 67 which is inserted by item 8. Proposed subsection 67(2) will allow the terms and conditions of appointment (including as to remuneration) to be determined by the RBA. This will potentially allow the RBA to make loans to staff members for purposes other than the purchase of a residential property such as, for example, the purchase of an investment property or a share portfolio. Such a change could be justified on equity grounds, as the ability to access a benefit of employment (ie a loan at discounted rates) would not be dependent on the intended purpose of the loan.

Schedule 3: Amendments to the Superannuation Industry (Supervision) Act 1993

Three regulatory bodies oversee the superannuation industry. The Australian Securities and Investments Commission (ASIC) is responsible for consumer protection, for example through the enforcement of disclosure requirements. The Australia Prudential Regulation Authority (APRA) is the prudential regulator. Amongst other things it is responsible for ensuring superannuation funds have sound policies in place so that they will be able to honour their commitments. In addition, the Australian Taxation Office (ATO) is responsible for all self-managed superannuation funds.

The regulatory responsibility for enforcing various provisions of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) is allocated by section 6 of the Act.

Item 14 inserts proposed section 120A which introduces a new regulatory power designed to ensure that people who are not judged to be 'fit and proper' or have contravened the SIS Act are unable to operate superannuation funds. Proposed section 120A allows the relevant regulator(7) to disqualify a person from being a trustee, custodian or investment manager of a superannuation fund.

The disqualification power also applies in relation to responsible officers of bodies corporate that are trustees, custodians or investment managers. 'Responsible officer' is defined in section 10 as meaning a director, executive officer or secretary of a body corporate. Under proposed subsection 120A(2) the regulator may disqualify a responsible officer if it is satisfied that:

  • the body corporate has contravened the Act
  • at the time of the breach the person was the responsible officer of the body corporate, and
  • the nature, seriousness or number of contraventions provides grounds for disqualification.

In addition the regulator may also disqualify a person if satisfied that the person is not a fit and proper person to be a trustee, custodian, or investment manager or the responsible officer of the body corporate performing such functions. The criteria to be used in determining whether a person is fit and proper is not contained in the Bill. It appears to be the intention of the Bill to leave the formulation of such criteria to the discretion of individual regulators.

Item 33 inserts a new offence. Under proposed section 131B a penalty of up to $5,500 will apply to persons who falsely hold themselves out to be an auditor or an actuary. The offence is one of strict liability. That is, the prosecution does not need to prove a fault element in the offence such as an intention to breach the section.

Item 36 inserts proposed new division 3A which will allow the relevant regulator to accept and enforce undertakings. This provision is modelled on section 87B of the Trade Practices Act 1974 which was introduced in 1992. ACCC Chairman Alan Fels has strongly supported the provision as a regulatory tool stating that 'legally enforceable undertakings..(have) made the Act both more effective and helped avoid court procedures'.(8)

Proposed section 262A allows a regulator to accept an undertaking in relation to matters where the regulator has a function or powers under the Act. A person may withdraw an undertaking but only with the regulators consent.

If the regulator considers that the undertaking has been breached, the regulator may seek a Federal Court order:

  • directing the person to comply with a term of the undertaking
  • directing the person to pay the Commonwealth an amount up to the total financial benefit that the person obtained as a result of the breach
  • ordering the person to pay compensation to other parties who have suffered loss as a result, or
  • giving any other order that the Court deems appropriate.

Removal of Immunity from Prosecution in Relation to Certain Evidence

At common law a person may refuse to answer a question or produce a document if doing so would have a tendency to expose that person to a criminal conviction or the imposition of penalty. Under the SIS Act the common law privilege is replaced by a statutory obligation to provide information.(9) The Act however provides that if information is given, a record of examination signed or a book produced, it is not admissible in evidence in any subsequent criminal proceedings unless those proceedings relate to the provision of false evidence. This is known as direct use immunity. Items 37 to 40 prevent a person under investigation from claiming privilege in relation to the production of books thereby removing the direct use immunity.
The SIS Act also currently provides for 'derivative use' immunity. Where a statement is made or a record signed, any information, document or other thing obtained as a consequence of the person's action is inadmissible in a criminal proceedings.(10) This immunity is removed by item 41.
Similar changes were made to the Australian and Securities and Investment Commission Act 1992 and the Corporations Law by the Corporations Legislation (Evidence) Amendment Act 1992. At the time doubts were expressed about whether it was necessary or desirable to abolish derivative use immunity.(11) However a review of the legislation in 1997 endorsed the changes and stated that the:

Amendments have greatly assisted the ASC in its enforcement of the national scheme law, primarily by increasing the Commission's ability to more fully and expeditiously utilise its power to conduct compulsory oral examinations.(12)

Based on the experience the ASC, it may be expected that the removal of these immunities should make it easier for APRA to pursue prosecutions under the SIS Act.
 

Part 2: The Criminal Code Amendments

The Commonwealth Criminal Code is contained in the Schedule to the Criminal Code Act 1995. Chapter 2 of the Code sets out the general principles of criminal responsibility, which apply under Commonwealth Law. The Chapter is due to commence on 15 December 2001.

Proposed section 9A applies the Chapter 2 of the Code to the SIS Act with certain listed exceptions. According to the Explanatory Memorandum these offences will be amended at a later date to ensure compliance with the Criminal Code.(13)

Currently most offences in the SIS Act contain what is described in the Criminal Code as a 'fault' element. This means that the prosecution must show intention, knowledge, recklessness or negligence. Items 46, 47, 49, 50, 51, 58, 59, 63, 67, 76 convert these offences into offences of strict liability with a maximum penalty of 50 penalty units ($5,500). Items 48, 52, 53, 54, 55, 60, 61, 65, 66, 68-75 establish 'two-tier' offences which may be prosecuted either as fault based offences or as offences of strict liability. A maximum penalty of 100 penalty units ($11,000) applies if the fault elements of an offence can be made out. A maximum penalty of 50 penalty units applies if the strict liability offence is established.

The policy rationale for the move from a fault based regime to a strict liability scheme is not apparent from the Explanatory Memorandum or the Minister's Second Reading Speech. The Senate Standing Committee for the Scrutiny of Bills has requested that the Treasurer advise the Committee on the reasons for the change.(14)

The amendments in Division 2 are purely technical. All amendments (except items 82, 85 and 90) confirm that a range of existing offences are strict liability offences and direct the reader to the relevant provisions of the Criminal Code.

Sections 123, 163 and 303 of the SIS Act create offences concerning the appointment of custodians, the use of statements by experts and record-keeping respectively. In each case the relevant section provides for a defence. Items 82, 85 and 90 relate to the burden of proof required by a person seeking to invoke a particular defence. These items add 'notes' only. In relation to items 82 and 85 (sections 123 and 163), the defendant bears an evidential burden only, that is, the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist.(15) In contrast, item 90 (section 303) makes it clear that the defendant bears the legal burden, that is, the burden of proving the existence of the matter.

Endnotes

  1. For example a bank, building society or credit union.

  2. Section 16.

  3. Sections 16 and 31.

  4. p. 5.

  5. Chris Griffith, 'Bank's Mates Rates', Daily Telegraph, April 10 2000. See also The Hon. Kim Beazley, Transcript of Doorstop Interview, 10 April 2000 and The Hon. Peter Costello, House of Representatives, Hansard 10 April 2000 p. 14938.

  6. Chris Griffith, 'Bank's Mates Rates', Daily Telegraph, April 10 2000.

  7. 'Regulator' is defined in section 10 of the SIS Act to include, APRA, ASIC and the Commissioner of Taxation.

  8. Speech by Alan Fels to the Australian Institute of Company Directors, 'National Competition Policy and Directors' Duties under the Trade Practices Act 1974', Western Australia, 1 May 1997.

  9. Subsection 287(1).

  10. As with direct use immunity, the evidence may be used where a person is charged with giving false statement.

  11. See Joint Statutory Committee on Corporations and Securities, 'Use Immunity Provisions in the Corporations Law and the Australian Securities Commission Law', November 1991 (Dissenting Report) and Peter Costello, House of Representatives, Debates, 30 March 1992 p. 1367.

  12. John Kluver, Report on the Review of the Derivative Use Immunity Reforms, May 1997

  13. p. 25.

  14. Senate Standing Committee for the Scrutiny of Bills, Alert Digest, No. 6 2000 10 May 2000
    p. 13.

  15. See Section 13.3 of the Criminal Code.

Contact Officer and Copyright Details

Mark Tapley
29 May 2000
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 2000

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Published by the Department of the Parliamentary Library, 2000.

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