Bills Digest No. 144  1998-99 Financial Sector Reform (Amendments and Transitional Provisions) Bill (No.1) 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
Concluding Comments
Endnotes
Contact Officer and Copyright Details

Passage History

Financial Sector Reform (Amendments and Transitional Provisions) Bill (No.1) 1999

Date Introduced: 11 March 1999

House: House of Representatives

Portfolio: Treasury

Commencement: Most provisions commence on Royal Assent. Schedules 4 and Schedule 7 commence on the 'transfer date'. This is the date at which financial institutions and friendly societies will come under Commonwealth jurisdiction. It will be promulgated by the Governor-General in the Gazette.

Purpose

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

Background

This Bill, along with the Financial Sector (Transfers of Business) Bill 1999 and the Income Tax Rates Amendment (RSAs Provided by Registered Organizations) Bill 1999 comprises the second stage of the Government's response to the Report of the Financial System Inquiry.

In May 1996, the Treasurer established a Financial System Inquiry (FSI) headed by Mr Stan Wallis. The terms of reference directed the inquiry to undertake a stocktake of the results arising from the deregulation of the Australian financial system since the early 1980s. Further, it was charged with identifying the forces driving change and recommending changes to regulatory arrangements so as to ensure an efficient, responsive, competitive and flexible financial system consistent with financial stability, prudence, integrity and fairness.(1)

In March 1997, the FSI delivered its report making 115 recommendations for regulatory reform in the Australian Financial System. The most significant recommendations for the purposes of this Digest were:

  • the establishment of a single Commonwealth body to undertake prudential regulation of deposit-taking institutions (banks, building societies and credit unions), life insurance companies, general insurers, friendly societies and superannuation
  • the establishment of a single Commonwealth body to regulate corporations, financial market integrity and consumer protection in the financial sector
  • the introduction of a common licensing regime for deposit-taking institutions
  • the introduction of a single regulatory framework encompassing life insurance companies and friendly societies, and
  • that the corporate regulator and the prudential body should have comprehensive powers to met their regulatory objectives.(2)

In response to the report, in 1998 the Government introduced a new framework for the regulation of the financial system. These 'stage 1' reforms included the establishment of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commision (ASIC). APRA took over responsibility for the prudential regulation of banks from the Reserve Bank and the prudential regulation of insurance companies and superannuation funds from the Insurance and Superannuation Commission (ISC). ASIC became the market integrity and consumer protection regulator for the financial system taking over responsibilities largely exercised by the Australian Securities Commission and the ISC. In introducing these reforms, the Government announced in principle support for APRA and ASIC taking on responsibilities for the regulation of building societies, credit unions and friendly societies. This was based on the idea that financial products that were functionally(3) similar should be regulated in a competitively neutral way regardless of the type of institution offering the product. It was acknowledged however, that time must be allowed for negotiations with the States to gain an agreement to transfer their powers over these institutions.

In addition to this package of Bills, the transfer of regulatory responsibility will be completed by the signing of a Financial Sector Regulation Transfer Agreement between the Commonwealth, States and Territories and legislation in the States and Territories to effect the regulatory transfer.

The Current Regulatory Regime

Building societies, credit unions and friendly societies are not Corporations Law companies but are established under statutes in the States and Territories. At present, these institutions are prudentially regulated by separate State and Territory supervisors (State Supervisory Authorities - SSAs). While actual supervision is carried out a State level, the Australian Financial Institutions Commission (AFIC) promulgates prudential standards for the uniform supervision of institutions covered by the Financial Institutions Code (FI Code) and the Friendly Society Code (FS Code).

Historically, building society and credit unions have not been perceived to be as safe as banks. Undoubtedly, this is because of a number of high profile collapses of building societies in the last 25 years(4), the most recent being Pyramid Building Society in Victoria 1990. These collapses led to the view that the regulation of banks by the Reserve Bank was of a higher calibre than the disparate State regimes that regulated non-banks prior to the establishment of the FI Code and AFIC in 1992.

The perception that non-banks are not as safe as banks does have some legal basis. Under section s13A of the Banking Act 1959 bank depositors have priority over other bank liabilities (in respect of a bank's assets in Australia) in the event that a bank is unable to meet its obligations or suspends payments. Building society and credit union depositors currently do not have the benefit such priority.(5) A key policy objective of the creation of APRA was the establishment of a more neutral regulatory environment that would enhance the ability of non-bank deposit-taking institutions to compete with banks in the retail market. In 1998, the Banking Act 1959 was amended to give all depositors with authorised
deposit-taking institutions priority over the assets of the institution in the event that it fails. This protection will only be available when State/Territory regulated institutions come under the jurisdiction of APRA.

Friendly societies are mutual organisations. Traditionally, they offered sickness and accident assurance products through benefit funds. In the 1980s some expanded to offer investment products such as insurance bonds. Friendly societies are currently subject to a uniform national Friendly Societies Code and are prudentially supervised by State and Territory agencies. Exemptions under the Life Insurance Act 1995 allow friendly societies to conduct certain types of life insurance business. The FSI recommended that 'for reasons of competitive neutrality and to improve consumer understanding, the disclosure and prudential regulation of friendly society life insurance investment products should be on the same basis a similar products offered by life companies'. (6)

State 'fair trading' Acts(7) constitute the primary consumer protection regulation applying to these transferring institutions. Building societies and credit unions are also subject to self-regulation in the form of industry based codes of practice.

Industry views

Transferring institutions are very supportive of the move to the Commonwealth jurisdiction and, in particular, the supervision of APRA. Although the FI code and FS code are considered to have performed well, industry representatives have stated that they believe the transfer will enhance their ability to compete in the retail market.(8)

Main Provisions

Schedule 1 amends the Australian Prudential Regulation Authority Act 1998. It is proposed to insert a new section 9A to allow APRA to exercise functions conferred on it by a State or Territory. APRA may take on functions or powers under State or Territorial law provided those functions are consistent with an agreement between the Commonwealth and the States/Territories or otherwise if the Minister approves. Proposed Section 9A also allows APRA to perform work on a fee for service basis subject to Ministerial approval. The Minister's Second Reading Speech indicates that this power is most likely to be used in the context of the prudential regulation of housing
co-operatives and trustee companies. These entities will remain the responsibility of the States and Territories.

Proposed new section 58 extends the protection from liability for APRA, its board members, agents and staff to cover acts done in good faith in performance of functions conferred under State and Territorial Law or agreements on a fee for service basis.

Schedule 2 amends the Banking Act 1959. The Bill extends the range of prudential tools available to APRA by facilitating the implementation of voluntary industry support contracts. Under these contracts, parties agree to provide financial support if a specified event occurs - for example a run on a bank. Currently, the legislation provides for 'liquidity' contracts however according the explanatory memorandum these have not been used because of definitional problems relating to the meaning of 'liquidity'. Such contracts will only be binding if certified by APRA (section 11CB). APRA can order compliance with such contracts.

Item 51 amends section 63 of the Banking Act 1959 which deals with the restructuring of authorised deposit-taking institutions (ADIs). The section provides that an ADI (except a foreign ADI) needs to seek prior approval from the Treasurer before entering into any agreement, arrangement, partnership or reconstruction of its business. The Bill amends the section so that the Treasurer's consent is not required if APRA makes a determination to that effect. According to the explanatory memorandum, the amendment is a consequence of the Treasurer's consent provisions in the Financial Sector (Transfers of Business) Bill 1999.

Schedule 3 is the central provision in enabling the transfer of regulatory responsibility. It amends the Corporations Law inserting a new schedule to provide for the registration of financial institutions and friendly societies as companies and subjects them to regulation by ASIC. The transferring financial institutions are defined in proposed section 1 of the proposed new Schedule 4 to include:

  • Building societies
  • Credit unions
  • Friendly societies
  • Special services providers,(9) and
  • The Cairns Co-operative Weekly Penny Savings Bank.

Proposed new section 3 provides that these transferring financial institutions are deemed registered as Corporations Law companies at the transfer date. Clause 3(3) provides a tabular explanation of the type of company that each institution may become. The table also highlights default settings and options for alternative company structures. Pursuant to proposed section 24, companies have 18 months after the transfer date to modify their constitutions to reflect their new status. Importantly, the new structure allows institutions to maintain their mutual characteristics. It is expected that there may be some initial problems in bringing these institutions under the Corporations Law umbrella. In order to accommodate these difficulties proposed section 26 gives the ASIC power to make exemption and modification orders for a transitional period.

Offers of benefits in a friendly society benefit fund are currently exempted from the fund raising provisions of the Corporations Law. Part 6 of the proposed new Schedule 4 continues the fund raising provisions that apply to friendly societies under the FS Code. However, where a Friendly Society attempts to raise funds other than benefits in a benefit fund, it will be subject to the Corporations Law fundraising provisions.

Amendments to the Life Insurance Act 1995 are outlined in Schedule 4 of the Bill. The object of these provisions is to ensure that a competitively neutral prudential regime applies to all institutions offering life insurance products. Item 7 deletes a reference to friendly societies in section 11(3)(a) of the Act. This provision currently ensures that the Life Insurance Act 1995 does not apply to friendly societies. Proposed section 12A empowers APRA to declare that insurance or annuity business is life business. While proposed section 12B allows APRA to declare that other financial business is life insurance business. Friendly societies will be 'life companies' for the purposes of the Act if they carry on life insurance business in Australia.

The Bill accommodates differential regulation of friendly societies depending upon the type of business that they undertake. While under Schedule 3 all friendly societies become Corporations Law companies, only those with benefit funds will be prudentially regulated under the Life Insurance Act 1995. Those that are engaged in Health Insurance will be subject to regulation of the National Health Act 1953.

APRA will be given the powers to impose prudential standards and directions on life companies by the insertion of new Part 10A into the Life Insurance Act 1995. These powers are consistent within those bestowed on APRA in relation deposit-taking institutions under the Banking Act 1959.

Proposed section 230A will give APRA the power to make prudential standards specifying requirements to be met by life companies in order to protect the interests of policy owners or prospective policy owners. While breach of these standards will not be an offence, APRA will be given the power to make directions under proposed section 230B and non-compliance with a direction will be an offence (proposed section 230F).

The other miscellaneous amendments to facilitate the transfer of regulatory responsibilities and consequential amendments are well documented in the explanatory memorandum.

Concluding Comments

It is currently planned that the transfer date for financial institutions to come under Commonwealth jurisdiction will be 1 July 1999. As noted above, however, the transfer of regulatory responsibility requires complementary State and Territory legislation. At this point, facilitating legislation has not been introduced in any State or Territory. It is possible that there may be some slippage in the timetable.

Endnotes

  1. Costello, P., 'Financial System Inquiry: terms of reference and membership', Press Release, 19 May 1996.

  2. Financial System Inquiry, Final Report, 1997. Recommendations 1, 2, 31, 33,36, 38, 39,40,41.

  3. For example, deposits with Banks and Building societies are almost identical financial products. For further discussion of the 'functional' approach to regulation see Financial System Inquiry, Final Report, 1997 Chapters 7 and 8.

  4. See Sykes, T., Two Centuries of Panic, Allen and Unwin 1988, p. 467.

  5. Financial System Inquiry, Discussion Paper, 1996, p. 282.

  6. Financial System Inquiry, Final Report, 1997, p. 328.

  7. For example, Fair Trading Act 1987 (NSW), Fair Trading Act 1987 (SA).

  8. Executive Director of the Australian Association of Permanent Building Societies, Jim Larkey, 'Building Societies to come under Federal banking Law', Press Release, March 12 1999. Chief Executive of Credit Unions Services Corporation, Dr Vern Harvey, 'Credit Unions Welcome Wallis Transfer Legislation', Press Release, March 12 1999.

  9. Special services providers (SSPs) are bodies owned or controlled by building societies or credit unions. They are regulated by AFIC. Their functions are limited to the provision of financial and commercial services to services to societies and to assist AFIC with emergency support mechanisms.

Contact Officer and Copyright Details

Mark Tapley
25 March 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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