Bills Digest No. 172 2002-03
Australian
Prudential Regulation Authority Amendment Bill
2003
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
Australian Prudential Regulation
Authority Amendment Bill 2003
Date Introduced:
5 June 2003
House: House of Representatives
Portfolio: Treasury
Commencement:
The main schedules 1 to 3
commence on a day to be fixed by Proclamation.
The main purpose of the Bill is to change the
leadership and governance of the Australian Prudential Regulation
Authority arising from the recommendations contained in the report
of the HIH Royal Commission.
Background
APRA was established on 1 July 1998. APRA is
responsible for the prudential regulation of banks, life insurers,
general insurers, building societies, credit unions, friendly
societies and superannuation. APRA is fully funded by the
industries that it supervises. APRA's responsibilities cover about
85% of the assets in Australia's financial system. APRA sets and
monitors compliance with standards, including capital requirements,
for the prudential management of banks and other deposit takers,
insurance companies and friendly societies. In superannuation
matters, APRA aims to ensure that trustees are aware of their
obligations to members and that the trustees manage the funds
prudently.(1)
The establishment of APRA was one of the
responses to the report(2) of the Financial System
Inquiry (referred to as the Wallis Inquiry) which was
established by the Coalition Government in June 1996. The Wallis
Inquiry recommended a single Commonwealth stand-alone prudential
regulator of the Australian financial sector (Recommendation 31).
The Wallis Inquiry report included the following argument for a
single prudential regulator:
One motivation for recommending a single
prudential regulator is to provide greater flexibility,
responsiveness and efficiency in the face of potentially major
changes in the financial landscape.(3)
On 2 September 1997, the Treasurer, the Hon
Peter Costello MP, made a Ministerial Statement to Parliament about
the reform of the Australian financial system. In that statement,
the Treasurer said of the then proposed APRA:
The operational effectiveness of the depositor
protection provisions will be strengthened, by providing powers for
early intervention in a financially troubled institution and by
making it clear that the regulator can wind up an insolvent entity.
The APRA will also be given enhanced powers to take action in the
case of financial difficulties experienced by life and general
insurance companies, and insurance funds.(4)
When delivering his Second Reading speech on
the APRA Bill 1998, the Treasurer said that the package of Bills
that followed from the Wallis Inquiry would see Australia become a
world leader with best practice and leading edge financial sector
regulation.(5) One important feature of the APRA Bill
1998 was its board structure. In his Second Reading speech, the
Treasurer stated:
APRA will be governed by a nine member board,
whose terms and conditions of appointment will be subject to
determination by the Remuneration Tribunal. To ensure that there is
a close relationship between APRA, the Reserve Bank and ASIC, two
of APRA's board members will come from the Reserve Bank and one
from ASIC.
The bill provides for the duties and statutory
appointment of the Chief Executive Officer who will also be an APRA
board member.(6)
The then Deputy Leader of the Opposition, the
Hon Gareth Evans, MP, speaking in the Second Reading debate of the
APRA Bill 1998 said:
The new model of a single prudential regulator and
a single market regulator, when it is finally fully implemented,
will overcome a couple of fairly obvious weaknesses with the
current arrangements. One is the split between the Commonwealth and
state and territory regulator rules, with the Commonwealth hitherto
being pretty much confined to banks and insurance but with the
state and territory rules applying to building societies and credit
unions, with differing restrictions and differing cost recovery
regimes impacting on the competition potential between these two
various institutions. (7)
Senator Murray of the Australian Democrats, in
the Second Reading debate in the Senate on the APRA Bill 1998 (and
related Bills), said:
Much of the legislation before us is about
reorganising the institutions for regulation so that there is
consistency across organisations providing similar services as the
roles of the different parts of the financial industry merge and
blur. The Australian Democrats do not have major problems with the
model which Wallis legislation puts forward for the newest
institutions and which in large part the government has now
adopted.(8)
Taken overall, there was broad support for the
Wallis Inquiry reforms to the regulation of the Australian
financial sector implemented in 1998.
The major companies in the HIH Insurance Group
(HIH) were placed in provisional liquidation on 15 March 2001. The
collapse of HIH is likely to be the largest corporate failure in
Australia to date. The losses and hardship inflicted on the
Australian community by this corporate failure have been
significant and have been a major contributing factor to the
current insurance crisis. The liquidation process could take up to
ten years and the financial return to creditors is expected to be
negligible.(9)
The Australian community had an expectation
that corporate regulation, audit and good corporate governance
should have triggered early warnings of any looming crisis. Public
confidence has been shaken.
The subsequent suspicions about a serious
level of corporate mismanagement within HIH saw the appointment of
a Royal Commission in August 2001.(10) The Royal
Commission's report was publicly released on 16 April
2003.(11)
The Royal Commission found that although
APRA did not cause or contribute to HIH's collapse, APRA did not
recognise the seriousness of the situation or question the
reliability of the information it was receiving from HIH until too
late.
A significant recommendation of the Royal
Commission was an overhaul of APRA, including the replacement of
its non-executive board with an executive group (Recommendation
18).(12) At present, the board of APRA is comprised of
largely part-time non-executive members appointed by the Treasurer.
These board members have expertise in the various industries
regulated by APRA. The board also includes a representative from
ASIC and two from the Reserve Bank of Australia who are
appointed by their respective agency heads. Taken overall, this is
referred to as a non-executive board. It is also a governing board
which can determine the duties of the CEO of APRA (see section 36
of the APRA Act). The CEO is answerable to both the board
and the Minister. Another option that could have been considered
for APRA was for those persons with industry expertise to be an
advisory group. The Royal Commission's preference was for the
regulatory agency to be the responsibility of a small full-time
executive group directly answerable to the government and with the
power to appoint advisory panels.(13)
Subsequent media commentary included the
comment that the Wallis Inquiry approach of 'light touch'
regulation was wrong.(14) The same commentary supported
the view that APRA has to re-establish public confidence and that
involves a necessary change of guard.(15)
At the Senate Estimates hearing on 4 June
2003, APRA made an opening statement which commented on the
findings of the Royal Commission into the collapse of HIH. Those
comments included the following:
The commission found that APRA was not as quick or
aggressive as it should have been to detect and respond to the
weaknesses of HIH's financial position. Misjudgments were made and
we conceded these points publicly soon after the event.
Significantly, Mr Justice Owen found that APRA did not cause or
contribute to the collapse of HIH, nor could it have taken steps to
prevent the failure of the company. He concluded that APRA's
regulation of HIH from September 2000 was inadequate, but it is now
clear that intervention at that stage would not have prevented the
company from failing.
The commission also acknowledged that, in part,
APRA's shortcomings arose from the fact that the agency was still
in its establishment phase, with relatively inexperienced staff and
underdeveloped internal processes, following implementation of the
Wallis reforms. When the first signs of HIH's problems began to
emerge in mid-2000, APRA was effectively only nine months old. This
does not detract from the report's criticism of APRA but it is
important to recognise that these are mostly historical, relating
to events of more than two years ago. They are not criticisms of
APRA now.(16)
The consequences of the collapse of the HIH
Insurance group will be felt in Australia for many years to come.
It is understandable that APRA has commented that it has evolved
and enhanced its regulatory approach. The overriding priority for
government, however, is to restore public confidence. The
implementation of the Royal Commission's recommendations for a
major overhaul of APRA is preferable to maintaining the existing
governance structure of APRA. If the Bill is not passed, APRA can
continue to function but under a non-executive board structure that
was considered inappropriate by the Royal Commission.
The first of four main objectives of the Bill
is to replace APRA's current board with an executive group. Section
3 of the Australian Prudential Regulation Authority Act
1998 (APRA Act) contains definitions that define
membership of the existing APRA board, including representatives of
ASIC and the Reserve Bank (see also section 19 which specifies the
composition of the board). Items 1 7, 9, 11 and
12 repeal definitions, such as ASIC and Reserve
Bank representative members, and insert changes that reflect the
proposed new executive group for APRA. A Deputy Chair position is
also created.
Items 8 and
10 move two definitions currently within section
56 of Part 6 of the APRA Act to section 3 (general
definitions) to allow additional use throughout the legislation.
'Part 6 Secrecy' of the APRA Act contains sections 56 and
57 and deals with protected documents and protected information.
(See related later items, Items 30-31, as
well).
Items 14 and
15 clarify the conventional distinction that
usually applies in terms of the responsibility for the development
of legislative policy (a Ministerial responsibility) and the
administration of the law (the responsibility of a regulatory
agency, subject to its statutory functions and powers).
Item 16 is an important
amendment. The existing section 10 in the APRA Act simply
obliges APRA to inform the Treasurer as soon as practical that a
body regulated by APRA is in financial difficulty. The new section
10 inserted by Item 16 expands the obligation
considerably to include advising the Minister on a much broader
range of matters, including the Minister's functions and powers.
Item 16 also inserts a new section
10A. This section incorporates recommendations of the
Royal Commission (e.g. Recommendation 39) that promotes the
objective of wider liaison and exchange of information by APRA with
other regulatory agencies, subject to the existing confidentiality
requirements in the APRA Act. Regulations will also be
made to list other relevant agencies that APRA should consult.
[In later items, such as Items
27-29, the title of 'Treasurer' in the APRA Act
is changed to 'Minister'. This is just a drafting update. The new
sections and Parts inserted by this Bill use the reference
'Minister'.]
Item 17 makes a significant
change to the APRA Act. Section 12 of the existing statute
sets out a process to preserve the independence of APRA in terms of
the Government's view as to how APRA may best perform its functions
and powers. Where a disagreement takes place, the matter is
referred to the Governor-General in Council for determination.
Item 17 inserts a new section 12
that centralises directions with the Minister. APRA's independence
is maintained by precluding the Minister from issuing directions to
APRA about a particular case. The Minister must also gazette any
direction and table the direction in Parliament.
Item 20 repeals the existing
'Part 3 APRA's Board' of the APRA Act and inserts a
revised 'Part 3 APRA membership and other corporate matters'. This
is one of the key recommendations of the Royal Commission and it
provides for the replacement of the non-executive board structure
with an executive group. Under the new arrangements, members of
APRA will be appointed by the Governor-General. The
Governor-General will also appoint the Chair and Deputy Chair. The
term of appointment for a member must not exceed 5 years. The
Minister may make acting appointments. Part 3 also specifies the
quorum requirements, voting and the conduct of meetings of
APRA.
Items 21 to 25 amend 'Part 4
The CEO and APRA staff members' of the APRA Act to remove the
statutory office of CEO and to remove references to the board. The
new Part 4 will be headed 'APRA staff members'.
Item 26 inserts a new 'Part
4A Disclosure of interests of APRA members, APRA staff members and
delegates'. The new Part 4A creates a standing obligation on APRA
members, staff and delegates to disclose any matter that could
conflict with the performance of their duties. Disclosure is made
to the Minister.
Item 40 provides an
additional head for disclosure of protected information in 'Part 6
Secrecy' of the APRA Act. The purpose of Part 6 is to
enable APRA to determine whether information provided to it is
protected information and whether that information may be disclosed
to other parties. This amendment enables other agencies that are
provided with information by APRA to further disclose that
information if disclosure is consistent with the same purpose.
Item 44 will enhance APRA's
authority to make public statements about regulatory action.
Items 1 to 23 make
consequential amendments to a range of other Acts to reflect the
significant statutory changes to APRA (e.g. replacement of the
board and statutory CEO).
Items 1 to 8 are necessary
transitional provisions to protect the validity of rights,
liabilities and obligations that have arisen under the corporate
activities of APRA when it had a board and statutory CEO, so that
those matters continue under the new corporate governance structure
contained in this Bill.
The searing financial regulatory lessons
that have been experienced with the HIH Insurance collapse are, at
least, an alert to the importance of APRA's role in the financial
sector. Apart from the problems of the insurance industry, measures
that will improve prudential supervision are also important in the
areas of financial institutions and particularly for the
superannuation sector. Although the Royal Commission found that
APRA was not to blame for the collapse of HIH, a major overhaul of
APRA governance structure is, hopefully, a further step towards
creating a regulatory environment that can monitor the financial
sector more closely and react quickly when there are indications of
concerns about the reliability of information or tardiness in
filing returns.
- Drawn from APRA's information brochure,
APRA: Australia's prudential financial
regulator, available on www.apra.gov.au.
- Stan Wallis, Financial System Inquiry
Final Report, Australian Government Publishing Service, March
1997.
- ibid., p. 318.
- Ministerial Statement, 'Reform of
the Australian Financial System', The Hon Peter Costello MP, the
Treasurer, House of Representatives, Debates, 2 September
1997, p. 7518.
- Australian Prudential Regulation Authority
Bill 1998, Second Reading Speech, The Hon Peter Costello MP,
Treasurer, House of Representatives, Debates, 26 March
1998, p. 1649.
- ibid., p. 1650.
- Australian Prudential Regulation Authority
Bill 1998, Second Reading Speech, The Hon Gareth Evans MP, Deputy
Leader of the Opposition, House of Representatives,
Debates, 8 April 1998, p. 2761.
- Australian Prudential Regulation Authority
Bill 1998, Senator Andrew Murray, Second Reading Speech, Senate,
Debates, 28 May 1998, p. 3332.
- Juan-Carlo Thomas,
'The shattered lives behind an insurance catastrophe', Sydney
Morning Herald, 17 April
2003. One estimate of the
possible recovery is 20 cents in every dollar.
Marcus Priest 'HIH creditors may recover 20pc', Australian
Financial Review, 28 April 2003.
- The Royal Commissioner,
Hon. Justice
Neville
John
Owen, was appointed to inquire into
the reasons for and the circumstances surrounding the failure of
HIH prior to the appointment of the provisional
liquidators.
- 'Report of the HIH Royal
Commission', Media release, The Hon. Peter Costello, MP,
Treasurer, no. 2003/020 of 16 April
2003.
- The HIH Royal Commission, The Failure of
HIH Insurance, Volume 1, April 2003, p. lxix and p. 209. A
very brief summary of the HIH Royal Commission is found in, Brendan
Bailey, 'Report of the Royal Commission into HIH Insurance',
Research
Note No. 32,
2002 03, Department of the Parliamentary Library, 13 May
2003.
- ibid., pp. 208 209.
- Andrew Main, 'Necessary change of guard',
Australian Financial Review, 7 June 2003.
- ibid.
- Consideration of Budget Estimates, Economics
Legislation Committee, Senate, Hansard, 4 June 2003,
pp. E343 E344 (Proof).
Brendan Bailey
13 June 2003
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 2003
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