Bills Digest No. 11 2002-03
Financial Sector Legislation Amendment Bill (No. 2)
2002
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
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Financial
Sector Legislation Amendment Bill (No. 2) 2002
Date Introduced:
26 June 2002
House: House of Representatives
Portfolio: Treasury
Commencement:
The majority of the
amendments commence on either the day of royal assent or the day
after royal assent. The amendments to the Banking Act 1959
commence on the day after royal assent
Purpose
The purpose of
this Bill is to amend seven Acts that affect the operation of the
financial services sector.
As this Bill has no central theme the background
to the various measures is included in the discussion of the main
provisions
Schedule 1 of the Bill contains four minor
technical amendments to the Australian Securities and
Investments Commission Act 2001. These amendments do not raise
any policy issues.
Schedule 2 to the Bill amends the Banking
Act 1959. The Banking Act sets out principles for the
regulation of bodies corporate that carry on banking business in
Australia. The Act was significantly amended with the changes
taking affect in 1998 to implement the recommendations made by the
Wallis Financial System Inquiry. The Act determines that the
Australian Prudential Regulation Authority (APRA) is the prudential
regulatory supervisor for the banks.
Under the post Wallis legislative regime, an
entity may only conduct a banking business if the entity has been
granted an authority by APRA under section 9 of the
Act.(1) The Act also provides for the regulation of
non-operating holding companies (NOHC) that head conglomerate
groups where an Authorised Deposit-Taking Institution
(ADI)(2) is a member. Under section 11AA of the Act, the
NOHC may apply to APRA for "authority" to be a non-operating
holding company. APRA may revoke authority to carry on banking
business (section 9A) or authority to be a NOHC (section 11AB) in
the circumstances set out under the Act.
APRA makes prudential standards to regulate the
conduct of ADI s and NOHC s (Part II Division 1A) and enforces
compliance with the standards and other requirements under the Act
(Part II Divisions 1BA). Failure to comply with the prudential
standard is not an offence, however APRA may issue a direction
under section 11CA of the Act. Failure to comply with the direction
can result in a revocation of the section 9 or section 11AA
authority.
The Act also currently imposes obligations on
auditors of ADI s and NOHC s and their subsidiaries to supply
information to APRA to assist in the performance of its prudential
regulatory function (Part II Division 2A).
In 1997, the Basel Committee on Banking
Supervision issued its Core Principles for Effective Banking
Supervision(3) and in 1999 released the Core
Principles Methodology(4) for use by countries in
assessing compliance with the Core Principles. Following this, APRA
released Core Principles for Effective Banking Supervision -
Self Assessment for Australia - Information
Paper(5) in April 2001 which contained its
assessment of Australia s banking supervisory arrangements,
including the way that it regulates conglomerates and fit and
proper person requirements for bank directors and management.
Whilst it was generally concluded that Australia s system of
banking supervision is strong and ranks well against international
standards, the paper contained some recommendations for change to
bring Australia s banking supervisory arrangements on a par with
the Basel Committee s Principles. APRA has also refined its
approach to the regulation of conglomerate groups containing ADI s
in two policy discussion papers Policy Framework for the
Prudential Supervision of Conglomerate Groups Containing Authorised
Deposit-taking Institutions (April 2000)(6) and
Capital Adequacy and Exposure Limits for Conglomerate Groups
Including ADI s (October 2001).(7)
This Bill gives effect to some of APRA s
recommendations regarding Australia s compliance with the Basel
Committee s principles and it also implements part of APRA s policy
position on the regulation of conglomerates. The changes that are
proposed include:
-
- Extending APRA s supervisory powers over conglomerates that
have an ADI as one of its members,
-
- Increasing the level of auditor reporting to APRA,
-
- Including fit and proper person requirements for ADI and NOHC
directors, and senior managers and fit and proper requirements for
company auditors. This new requirement includes an appeals regime,
and
-
- Placing a requirement on ADI s, NOHC s and their subsidiaries
to notify APRA of a breach of the prudential requirements, the Act,
and other matters that affect its financial stability or that of
the conglomerate group.
This Bill gives effect to the policy of
extending APRA s regulatory powers so that it can monitor and
supervise companies that are associated with ADI s. These measures
will assist in limiting the "contagion effect" where the
circumstances of one company within a conglomerate can adversely
affect other parts of the conglomerate (such as an ADI). This
proposal has been the subject of extensive public comment and will
improve overall oversight of banks.
Item 1 of the Bill amends the
definition of "prudential matters" to include a relevant group of
bodies corporate. Items 2 and 4 of the Bill define
a relevant group of bodies corporate to mean the subsidiaries of
the ADI or NOHC. The effect of this is to extend APRA s regulatory
power to subsidiaries of ADI s and NOHC s.
As noted above, the Act gives APRA power to make
prudential standards for ADI s and NOHC s and it may issue a
direction to an ADI or NOHC to perform a function where for example
it is in breach of the prudential requirements. Item
7 of the Bill gives APRA the power to set standards
imposing prudential requirements upon subsidiaries of the ADI or
NOHC. Item 8 of the Bill gives APRA the power to
direct a subsidiary of an ADI or NOHC to undertake certain
activities to ensure that the subsidiary complies with the
prudential standards or behaves in a way that is in the interest of
depositors. These amendments give effect to the policy of giving
APRA power to regulate companies that are associated with ADI
s.
Item 9 12 ensures that the
associated subsidiary is able to perform that Act as per APRA s
direction despite the subsidiary s constitution or other legal
arrangements.
The Act currently vests APRA with power to
investigate ADI s, NOHC s and their subsidiaries. Item
19 of the Bill extends APRA s powers of investigation so
that where an ADI is a subsidiary of a foreign corporation and that
foreign corporation has other subsidiaries either operating in
Australia (relevant foreign incorporated subsidiary) or
incorporated in Australia (relevant Australian incorporated
subsidiary), APRA may investigate those subsidiaries.
The Act also currently vests APRA with the power
to seek information from ADI s and NOHC s. Item 20
amends the Act so that APRA can seek information from any member of
the conglomerate about the operations of any other member of the
conglomerate. This includes information from relevant foreign
incorporated subsidiaries and relevant Australian incorporated
subsidiaries.
APRA s power to obtain information from company
auditors is extended under items 13-16 of the
Bill.
APRA currently has the power to ask an auditor
of an ADI, NOHC or their subsidiaries to give APRA information
where it would assist APRA in performing its functions under
section 16B of the Act. Under item 13, this power
to obtain information is extended to auditors of relevant
Australian incorporated subsidiaries and relevant foreign
incorporated subsidiaries.
Under the Act, auditors of ADI s, NOHC s and
their subsidiaries are required to give certain information to APRA
in certain situations, such as information that an ADI is insolvent
or is becoming insolvent. Failure to pass this information onto
APRA is an offence. Item 15 of the Bill extends
this power so that auditors of relevant Australian incorporated
subsidiaries and relevant foreign incorporated subsidiaries will be
required to give certain information to APRA, such as that the
subsidiary is insolvent or is becoming insolvent.
The Bill also provides in item
16 that auditors of relevant Australian incorporated
subsidiaries or relevant foreign incorporated subsidiaries may
provide information about the company to APRA if the auditor
considers that it will assist APRA in the performance of its
functions. Where an auditor provides this information, they will
not be liable to any person if this is done in good faith and
without negligence (item 26).
In accordance with the Basel Committee s
principles for effective prudential supervision of banks, this Bill
imposes fit and proper person requirements on directors and senior
managers of ADI s, NOHC s and senior managers of foreign ADIs. It
also places fit and proper person requirements on auditors of ADI
s. Under the Insurance Act 1973 (Insurance Act), general
insurer auditors are required to comply with fit and proper person
requirements (Part IV Division 1). This new obligation for ADI
auditors ensures that they are required to comply with the same
standards as auditors of general insurers.
The Bill contains a new governance regime
putting in place "fit and proper person" requirements for auditors
of ADI s.
Item 17 of the Bill places "fit
and proper" person requirements upon ADI auditors. If an auditor
does not meet these standards, APRA has the power to remove the
auditor. Before the auditor is removed, both the auditor and the
company has the opportunity to make submissions to APRA. APRA is
given the power to discuss these submissions with any person
appropriate to assess the matter. APRA must ensure persons making
the submission know it may discuss the contents of its submission
with another party. APRA is not required to supply the auditor with
a statement of reasons.
APRA s decision to remove an auditor is subject
to internal review and is also appealable to the Administrative
Appeals Tribunal (AAT) (the appeal regime is established by
item 18).
If APRA decides to remove a person, it may refer
details of its action to the Companies Auditors and Liquidators
Disciplinary Board and the appropriate professional association
(item 17).
The Bill contains a new governance regime
putting in place "fit and proper person" requirements for persons
who are directors or who hold senior management positions with ADI
s and NOHC s.
This is facilitated by providing that a person
cannot hold the position of director or senior manager of an ADI,
NOHC or the Australian operations of a foreign ADI if they are a
disqualified person. A person becomes a disqualified person if they
fall within one of the categories under proposed section
20 including:
-
- The person has been convicted of an offence under the
Banking Act 1959 or the Corporations Act
2001
-
- The person has been convicted of an offence under a law in
force in Australia or a foreign country that relates to dishonest
conduct
-
- The person has become a bankrupt
-
- The person has been disqualified under a foreign law from
managing or taking part in the management of a banking, insurance
or other financial business, and
-
- APRA has determined that the person is disqualified under
proposed section 21.
APRA is vested with the power to declare that a
person is not a disqualified person if it considers that the person
is highly unlikely to be a prudential risk to an ADI or authorised
NOHC (proposed section 22).
APRA has the power to remove a director or
senior manager if they are disqualified or they do not meet the
prudential "fit and proper" standards (proposed section
23).
APRA s decision is subject both to internal
review and is appealable to the AAT. APRA is not required to supply
the person with a statement of reasons if they determine that they
are disqualified.
As noted above, APRA s decision to remove
auditors, disqualify directors and senior managers, make a
determination that a person is not a disqualified person and remove
directors or senior managers of ADI s and NOHC s is subject to
internal review by APRA and review by the (AAT). The review regime
is established by item 18.
Under the internal review process, APRA is
required to consider the decision and may confirm, revoke or vary
the decision. If APRA makes this decision within the 21 day time
period they are required to tell the person the result of APRA s
consideration, set out findings on material questions of fact,
refer to the evidence or other material on which the findings were
based and give APRA s reasons for the decision.
If APRA does not do this within 21 days, APRA is
taken to have confirmed the decision. Interestingly, in these
circumstances, APRA is not required to report confirmation of the
matter to the appellant.
The bill also places a new obligation on ADI s,
NOHC s and other members of the conglomerate group to notify APRA
if it or another member of the group is not in a sound financial
position, has breached their legal obligations (such as breached
the Act or regulations) or has breached a prudential standard
item 24.
Item 25 of the Bill seeks to
ensure the constitutional validity of the amendment giving APRA
powers over subsidiaries of foreign corporations by invoking the
corporations power and the banking power.
Items 5 and 6 of the Bill
amends APRA s powers to revoke the authority to carry on banking
business or be a NOHC. This amendment extends APRA s powers so that
it may revoke the authority if the body corporate supplied it with
false or misleading information in the course of applying for the
authority.
Schedule 3 contains amendments
to the Corporations Act 2001. The amendments to the
Corporations Act that are contained within this Bill are minor
technical amendments. They correct drafting errors and clarify
ambiguity in the meaning of two of the provisions in the
Corporations Act as amended by the Corporations Law Economic
Reform Program Act 1999. These amendments do not raise any
policy issues.
The corrections to many of the drafting errors
are self explanatory and the explanatory memorandum offers further
clarification where needed.
The Corporations Act contains the Small Business
Guide which "summarises the main rules in the Corporations Act that
apply to proprietary companies limited by shares the most common
type of company used by small business.
A number of typographical errors in this guide
are amended and the Bill also confirms the legal requirement that a
company, other than a proprietary company must have a company
secretary. A proprietary company may choose to have a company
secretary.
Schedule 4 contains three items
that correct typographical errors in the Corporations (Repeals,
Consequential and Transitionals) Act 2001. The amendments do
not raise any issues.
Schedule 5 amends the Insurance
Act.
General insurers and non operating holding
companies must be bodies corporate under the Insurance Act. The
penalty provisions in the Insurance Act have been specified as if
the person committing the offence was a person rather than a body
corporate. Item 1 10, 12-15, 17-30 amend the
Insurance Act so that the penalty provisions appropriately apply to
bodies corporate rather than persons.
Under the Insurance Act, APRA may remove a
director or senior manager from a general insurer or a non
operating holding company. Submissions from the company or the
affected person may be made to APRA. Item 11 of
the Bill amends the Act to provide that APRA may discuss the
contents of the submission with persons that is considers
appropriate. APRA must make the persons aware that any submission
that are made may be discussed by APRA with other persons.
The Bill, in item 16 of schedule
5 also imposes the requirement on general insurers, NOHC s
and their subsidiaries to notify APRA if there has been a breach of
the prudential standards or a matter affects its financial
position.
Arbitration power consequential
amendments
Schedules 6 and 7 amend the
Superannuation Industry (Supervision) Act 1993 (SISA) and
the Superannuation (Resolution of Complaints) Act 1993
(SRCA).
The Federal Court in Wilkinson and Others v
Clerical Administrative and Related Employees Superannuation Pty
Ltd and Others(8) held that the review powers of
the Superannuation Complaints Tribunal were invalid. As a result of
this decision, the SRCA was amended to give the Tribunal the power
to arbitrate over matters that were previously reviewed by the
Tribunal.
The Commonwealth subsequently appealed the
Federal Court s decision and in Attorney-General of the
Commonwealth v Breckler,(9) the High Court held
that the Tribunal s review powers were valid.
The provisions in the SRCA that gave the
Tribunal its arbitration powers, ceased to have effect by
Proclamation on 13 September 1999.
This Bill amends the SISA to ensure that awards
made by arbitration of the Superannuation Complaints Tribunal
remain in force even though the arbitration powers of the Tribunal
have now been removed.
The SRCA contains a number of references to the
arbitration power of the Tribunal and this Bill removes those
obsolete references.
Proposed item 12 of Schedule 7
of the Bill gives the Tribunal the discretion to hear disability
complaints that would otherwise be precluded from being heard by
the Tribunal because they fall outside the one year time frame for
the hearing of complaints.
Currently the Tribunal has the power to ask a
person to attend a conciliation conference however if the person
does not attend the conference, there is no sanction. This Bill
(in proposed item 13 of Schedule 7) amends the Act
making it an offence if a person does not attend the conference. A
maximum penalty of 30 penalty units or imprisonment for 6 months
will apply to a person who has failed to attend the conference.
The Bill also contains some minor amendments to
give the Tribunal some further flexibility in its day to day
operations.
Concluding
Comments
The substantive amendments made by the Bill are
to the Banking Act 1959. The amendments extend APRA s
regulatory powers and are designed to improve the prudential
regulation of the banks so that they more closely comply with the
Basel Committees Principles.
The other amendments contained within the Bill
are minor amendments that do not raise any significant policy
issues.
-
- Entities that have been granted such authority are referred to
as authorised deposit taking institutions.
- Banks, building societies and credit unions are examples of ADI
s.
- Core Principles for Effective Banking Supervision, Basel
Committee on Banking Supervision, Basel, September 1997
http://www.bis.org/publ.
- Core Principles Methodology, Basel Committee on Banking
Supervision, Basel, October 1999. http://www.bis.org/publ.
- Core Principles for Effective Banking Supervision Self
Assessment for Australia Information Paper, Information Paper April
2001, Australian Prudential Regulation Authority. http://www.apra.gov.au/policy.
- Policy Framework for the Prudential Supervision of
Conglomerate Groups Containing Authorised Deposit Taking
Institutions, Policy Information Paper April 2000, Australian
Prudential Regulation Authority. http://www.apra.gov.au/policy.
- Capital Adequacy and Exposure Limits for Conglomerate
Groups Including ADI s, Discussion Paper October 2001,
Australian Prudential Regulation Authority. http://www.apra.gov.au/policy.
- (1998) 79 FCR 469.
- (1999) 197 CLR 83.
Susan Dudley
21 August 2002
Bills Digest Service
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ISSN 1328-8091
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