Standing Committee on Economics, Finance and Public
Administration
Review of the 1993-94 annual reports of the Reserve Bank of Australia
and the Insurance and Superannuation Commission
Government response
(Tabled on 22 June 1999)
This document has been scanned from the original government response.
It may contain some errors.
GOVERNMENT RESPONSE TO HOUSE OF REPRESENTATIVES STANDING COMMITTEE ON
BANKING, FINANCE AND PUBLIC ADMINISTRATION REVIEW OF THE 1993-94 ANNUAL
REPORTS OF THE RESERVE BANK OF AUSTRALIA AND THE INSURANCE AND SUPERANNUATION
COMMISSION
Recommendation 1 of the Report recommended that:
"The Treasurer monitor the implementation of the Insurance
and Superannuation Commission's proposals for the use of derivatives by
superannuation funds and report to Parliament on progress at the first
opportunity in 1996."
The Government's response is as follows.
On 23 November 1995, the ISC released three separate circulars on the
prudent use of derivatives by general insurance companies, life offices
and superannuation entities. The circulars were developed in close consultation
with interested parties, including other financial regulators, following
the release of three separate discussion papers on derivatives in March
1995, and were based on Risk Management Guidelines for Derivatives issued
by the Basle Committee on Banking Supervision.
The principal objective of the guidelines contained in the ISC's Superannuation
Circular is to ensure that superannuation entities have proper risk management
practices and procedures in place if they propose to use derivatives.
This will be evidenced by a Risk Management Statement (RMS) covering such
issues as an entity's derivatives policy (including overall investment
objectives), and limits on exposures across physical and derivatives positions.
There will also have to be a system of checks on compliance.
Primary responsibility for risk management lies with superannuation fund
trustees. It is also the role of the external auditor of the superannuation
entity to form an opinion on the entity's compliance with its RMS and
related procedures. Consistent with this, a critical factor in the prudent
use of derivatives is the accountability of trustees for the maintenance
of adequate internal controls. Officers of the Australian Prudential Regulation
Authority (APRA, formerly ISC) will look closely at whether internal controls
are in place and operational on their inspection visits to superannuation
entities.
Superannuation entities should have had a formal RMS in place by 1 July
1996.
Additional guidelines were released in 1996 which covered the practical
implementation issues that were raised by RMS requirements. RMSs confirm
the need for trustees to take both risk and return into account in determining
their investment strategy and properly to consider and manage the risks
associated with derivatives (as well as other) investments.
With regard to the Committee's concerns about the lack of statistical
data on the use of derivatives by superannuation entities, this deficiency
is being addressed on three fronts.
First, the annual return form for non-excluded superannuation funds
(funds with more than four members) now requires funds to report to
the ISC on whether they directly use derivatives. However, the ISC/APRA
also reports that only a very small number of funds, usually large sophisticated
funds with their own in-house treasury operations, use derivatives on
their own behalf. It is probable, therefore, that most funds are exposed
to derivatives only as a consequence of investing in collective investment
vehicles (such as pooled superannuation and other wholesale trusts) or
by engaging the services of one or more external investment managers who,
in turn, use derivative instruments. A full analysis of this information
has been published in the December 1996 edition of the ISC Bulletin.
Secondly, the ISC's Quarterly Survey of Superannuation, which commenced
on 30 June 1995 (in conjunction with the Australian Bureau of Statistics
(ABS)), collects information on direct derivatives exposure by the largest
superannuation funds, which account for the vast bulk of the assets and
members in the industry. Results indicate that only a very small number
of these funds that invest directly employ derivatives, and only a small
number of these have a significant exposure at present.
Finally the ISC completed, in February 1997, a special project to examine
the extent of derivative use by superannuation funds. The key findings
of the project were:
- only two per cent of non-excluded funds directly use derivatives;
- most funds use 'plain vanilla' instruments;
- the use of overseas currency management is increasing;
- trustees' knowledge and control of the use of derivatives vary within
the industry;
- internal controls in some small to medium sized funds using derivatives
need ongoing development; and
- the response to risk management statements prepared by the industry
was mixed.
As a result of the project, the ISC updated its circular on derivatives,
and improved requirements for reporting the use of derivatives to the
ISC and members. A training program is also being developed in conjunction
with the Sydney Futures Exchange to improve superannuation trustees' knowledge
of the derivatives market and appropriate risk management procedures.
In September 1998, final details of the requirements for external audit
sign off for superannuation funds, which had been under consideration
and development since 1995, were released.
Recommendation 2 of the report recommended that:
"The Treasurer provide the Standing Committee on Banking,
Finance and Public Administration with terms of reference for an inquiry
into the effectiveness of alternative dispute resolution in the banking
industry, including the role played by the Australian Banking Industry
Ombudsman."
The Government's response is as follows.
In many ways, the Standing Committee's call for an Inquiry into dispute
resolution schemes in the banking industry has been overtaken by events.
On 2 September 1997 the Treasurer announced the Government's response
to the Australian Financial System Inquiry (the 'Wallis Inquiry'). In
the context of this response the Government announced measures to address,
among other things, the problems small business and consumers face in
accessing the fragmented array of dispute resolution schemes for financial
services. In particular the Treasurer announced that :
- the Australian Corporations and Financial Services Commission (which
has now been renamed the Australian Securities and Investments Commission
- ASIC) would be established and that its responsibilities should include
approving and oversighting codes of conduct and dispute resolution arrangements;
- on 1 July 1998, the new consumer protection and market integrity
regulator, ASIC, commenced operations;
- a central gateway for dispute resolution should be established to
facilitate a single referral point for all consumers of retail financial
products and services;
- the Prime Minister would write to the States and Territories asking
thern to facilitate the establishment of a uniform national dispute
resolution scheme for finance companies.
- the Prime Minister wrote to the States about this matter on 2
September 1997; and
- all dispute resolution schemes should be encouraged to extend their
coverage to small business on a shared cost basis.
On 30 September 1997, the Minister for Workplace Relations and Small
Business, the Hon. Peter Reith, announced the Government's response to
the Fair Trading Inquiry 'New deal: fair deal -giving small business
a fair go' in which the Minister announced the Prime Minister's intention
to write to the banking industry encouraging them to extend their voluntary
dispute resolution schemes to incorporated small business.
On 11 October 1997 the Government wrote to the Banking industry expressing
its view that dispute resolution schemes, such as the Banking Industry
Ombudsman Scheme, should be extended to small business whether incorporated
or unincorporated.
On 2 March 1998, the Chair of the Australian Banking Industry Ombudsman
(ABIO) Scheme, Ms Sue McCarthy, announced that the scheme would be extended
to cover small business. Initial access to the ABIO will be free of charge.
If, after the ABIO has given an initial report, more detailed investigation
is sought by the complainant, then fees will be on a cost sharing basis
and if the Ombudsman finds in favour of the complainant the fees will
be refunded. Extending access to these schemes will provide small business
with quicker, less costly and more efficient remedies than traditional
court litigation. The Australian Bankers' Association also announced the
development of a Charter for Small Business to set down processes
for banks to use in handling their relationship with small business and
to encourage a greater understanding of each of their respective roles.
Recommendation 3 of the Report recommended that:
"The Treasury examine the proposal by the Australian Bankers'
Association for the establishment of Retirement Savings Accounts and provide
a response to the Committee when it reviews the 1994-95 annual report
of the Reserve Bank of Australia."
The Government's response is as follows.
As you would be aware, this recommendation has also be superseded by
events. The Government announced its approach to Retirement Savings Accounts
(RSAs) in the 1996-97 Budget. The necessary legislation to give effect
to the establishment of RSAs by banks, credit unions, building societies,
life offices and other prescribed financial institutions has now been
passed by the Parliament.
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