Bills Digest no. 97 2007–08
Reserve Bank Amendment (Enhanced Independence) Bill 2008
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
Contact officer & copyright details
Passage history
Reserve
Bank Amendment (Enhanced Independence) Bill 2008
Date introduced: 20
March 2008
House: House
of Representatives
Portfolio: Treasury
Commencement: Day
after Royal Assent
Links: The relevant
links to the Bill, Explanatory Memorandum and second reading speech
can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills
have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.
To amend the Reserve Bank Act 1959 (the Act)
to allow the Governor-General instead of the Treasurer to appoint, suspend
and terminate the Governor and Deputy Governor of the Reserve Bank.
Throughout this digest, reference to the Governor-General means the Governor-General
acting on the advice of Federal Executive Council.
On the 6 December 2007, the Government released a Statement
on the Conduct of Monetary Policy. The Statement set out ‘the common
understanding of the Governor, as Chairman of the Reserve Bank Board,
and the Government on key aspects of Australia's monetary policy framework’.
In both the Statement and the accompanying joint
media release of the Prime Minister the Hon. Kevin Rudd and the Treasurer
the Hon. Wayne Swan, the Government announced that it would make a number
of changes to enhance the independence of the Reserve Bank of Australia
(RBA) and the transparency of certain of its operations. The release
outlined the following elements would be implemented:
- the positions of Governor and Deputy Governor to be raised to the
same level of statutory independence as the Commission of Taxation and
the Australian Statistician
- the appointments of both positions would be made by the Governor-General
in Council, and their terminations will require parliamentary approval
- the Secretary to the Treasury and the Governor of the RBA will maintain
a register of ‘eminent candidates of the highest integrity’ from which
the Treasurer will make appointments to the Board, and
- The new Statement on the Conduct of Monetary Policy included measures
such as the publication of Board minutes, and a statement of reasons
for the decisions of the Board.
The first two dots points are the subject of this Bill.
When in opposition, Mr Swan foreshadowed changes to improve the appointments
process for the RBA Board by stating[1]:
The changes would seek to prevent a re-run of the
Robert Gerard affair where Treasurer Peter Costello intervened in the
short listing process to nominate and eventually select for the Board
an influential Liberal Party donor who was subject to a high profile
tax office investigation that resulted in more than $100 million in
tax and penalties being paid.
This refers to the case of a Board member Mr Robert Gerard AO, who was
appointed by the previous government on 25 March 2003, and who tendered
his resignation on 2 December 2005 after it was revealed that his private
company was involved in Federal court action over a dispute on tax matters
with the Australian tax office.[2]
When the Reserve Bank was first established in 1959, the Governor-General
had the function of appointing and terminating the positions of the Governor
and the Deputy Governor of the RBA. In the Financial Sector Legislation
Amendment Act (No. 1) 2002[3] this state of affairs was changed to give the functions to the
Treasurer. Under those amendments the Treasurer was given the function
of:
- Appointing the members of the RBA Board under section 14 of the Act
- Terminating Board members under section 18 of the Act
- Appointing and terminating the Governor and the Deputy Governor
- Appointing and terminating members of the Payments System Board
The change from the Governor-General to the Treasurer was not opposed
at the time. The then government argued that the amendments would streamline
the appointment and termination process.
Commenting on the 2002 Bill, the Bills Digest said[4]:
Some may argue however that the claimed efficiency
gains in the process of appointment and termination come at the expense
of an important safeguard against capricious action by a future Treasurer.
In November 2002, the then government commissioned John Uhrig, AO, to
review the corporate governance of statutory authorities. In June 2003,
the then Prime Minister was given the Review
of the Corporate Governance of Statutory Authorities and Office Holders,
and it was finally released on 12 August 2004.[5] The Report contained 6 main recommendations:
- the Government should clarify the expectations of statutory authorities
by Ministers issuing Statements of Expectations, authorities responding
with Statements of Intent, and the Minister making both documents public
- the role of portfolio departments as the principal source of advice
to Ministers should be reinforced by requiring statutory authorities
to provide relevant information to departmental secretaries, in parallel
to that information being provided by statutory authorities to Ministers
- boards should be used only when they can be given full power to
act. It is not feasible to have a board in authorities where Ministers
play a key role in the determination of policy. In this case, governance
can best be provided by executive management
- the government should create a centrally located group to advise
on the application of appropriate governance structures when establishing
statutory authorities
- an Inspector-General of Regulation should be created to investigate
procedures used by regulatory authorities, and
- the legislative basis for statutory agencies should be simplified—the
Financial Management and Accountability Act 1997 should be applied
to budget funded statutory authorities; the Commonwealth Authorities
and Companies Act 1997 should be applied to authorities that are
legally and financially separate from the Commonwealth.
In summary, Mr Uhrig recommended more formal reporting requirements for
agencies, two new central agencies to monitor the governance of statutory
authorities, and the application of either an ‘executive management’ or
‘board’ template.[6]
In 2006, Dr Meredith Edwards[7] published results of an Australian Research Council (ARC) empirical
study on corporate governance practices in the Australian public sector.
Dr Edwards outlines the four main stages in selecting and appointing to
a public sector board to achieve better practices. These are:
- Preparation: developing a vacancy profile
- Selecting and locating suitable candidates
- Assessing and vetting potential candidates
- Final selection and appointment[8]
It is noteworthy that the present Bill is silent on the appointment of
the members of the Board other than the Governor and Deputy Governor.
The second reading speech[9]
refers to the register of eminent candidates that will be drawn up by
the Secretary to the Treasury and the Governor of the Reserve Bank and
which will be made available for the Treasurer to select appointees. On
Board appointments Uhrig stated:
In order to get the best from the board, and the entity
itself, it is important to ensure the board has the necessary skills
and experience to carry out its responsibilities. The ability of a board
to provide effective governance will be placed in jeopardy if its members
are inexperienced or inappropriately skilled or the board as a whole
is dysfunctional. To ensure this does not occur, Ministers need to be
well supported in terms of advice in the appointment process.[10]
The other issue on which the Bill is silent is the continued presence
of the Secretary of the Treasury on the Reserve Bank board as an ex officio
member. According to the Bills Digest on the 2002 amendments:
It is worth noting that the position of a representative
of the Treasury on the RBA Board has been a matter of public controversy.
The RBA is the only central bank in the OECD that has a treasury official
on its governing board. Critics have claimed that this undermines perceptions
of the Bank’s independence from government. There is a considerable
body of economic literature which suggests that central bank independence
enhances the effectiveness and credibility of monetary policy. In 2000
the ALP members of the House of Representatives Standing Committee on
Economics, Finance and Public Administration called for the examination
of a proposal to enhance the independence of the Bank by removing the
Secretary to the Treasury from the RBA Board. Supporters of the current
arrangements argue that they assist in the co-ordination of monetary
and fiscal policy. (footnotes omitted)[11].
The Uhrig review discouraged any representational appointments (stakeholders
and government representatives) to boards, and Dr Edwards, commenting
on the issue of a government representative in the survey results, stated:
There were more differences in view as to whether
a departmental representative should be on the board. Uhrig was opposed
to departmental representatives being on boards but kept the door open:
‘Membership of the board by the departmental secretary is unwise unless
there are specific circumstances which require it.’…
Now that the Uhrig recommendations are coming into
force and the relative power of the portfolio secretary vis a vis the
board chair has been enhanced, the case for a departmental representative
on the board could, arguably, be said to be reduced.[12]
As previously mentioned, the Government’s announcement of the new procedures
in relation to the Governor and the Deputy Governor stated that the positions
were being raised to the same level of statutory independence as the Commissioner
for Taxation and the Australian Statistician.
The Commission of Taxation is appointed by the Governor-General under
section 4 of the Taxation Administration Act 1953 (TAA) and suspended,
retired or removed on the grounds set out in section 6C of that Act.
Section 6C of the TAA is set out in full in Appendix A to this Digest.
It is worth noting in particular that the ground of ‘proved misbehaviour’
applies to the Taxation Commissioner but is not an included ground in
this Bill.
In brief, section 6C of the TAA provides that the Taxation Commissioner
can be removed from office by the Governor-General on the grounds of proved
misbehaviour or incapacity at the request of both houses of Parliament
(subsection 6C(1)). The Commissioner can be suspended from office by the
Governor-General on the same grounds without the involvement of Parliament
(subsection 6C(2)).
In the event of suspension for misbehaviour or incapacity, there is a
statement presented to Parliament and if Parliament does not present an
address under subsection (1) to the Governor-General within 15 sitting
days the suspension will terminate (subsection 6C(4)) and the Commissioner
will be reinstated.
The Governor-General must remove the Commissioner on the grounds of bankruptcy,
taking outside unauthorised employment or for absence from duty (paragraphs
6C(6)(a)-(c)). Parliament has no role in the Commissioner’s removal on
these grounds.
The provisions for the removal of the Australian Statistician are similar
to the taxation provisions, but the expression ‘misbehaviour’ is used,
not ‘proved misbehaviour’. [13]
Under the Customs Administration Act 1985 the Chief Executive
Officer (CEO) can be removed or suspended under provisions in the same
terms as the Taxation Administration Act 1953.
The Chair and members of the Australian Prudential Regulation Authority
(APRA) are appointed by the Governor-General.[14] The Minister must be satisfied
a person is qualified for appointment by virtue of his or her knowledge
or experience relevant to APRA’s functions and powers.[15]
The Governor-General can terminate the appointment of a member of the
APRA for misbehaviour, incapacity, bankruptcy and certain insolvency activities,
absence from duty, unapproved outside employment, non-disclosure of conflicts
of interest and other matters.[16]
The members of the Australian Securities and Investment Commission (ASIC)
are appointed by the Governor-General on the nomination of the Minister.[17]
The Australian Securities and Investments Commission Act 2001 requires
the Minister to nominate a person as a member of ASIC to have knowledge
or experience in fields such as business, administration of companies,
financial markets, financial products and financial services, law, economics
or accounting.[18]
The Governor-General can terminate the appointment of a member of the
ASIC for misbehaviour, incapacity, bankruptcy and certain insolvency activities,
absence from duty, unapproved outside employment, non-disclosure of conflicts
of interests and contravention of similar probity requirements.[19]
Members of the National Competition Council are appointed by the Governor-General
and must have knowledge or experience in industry commerce, economics,
law, consumer protection or public administration.[20]
Under the proposed changes in Bill the Governor-General can terminate
or suspend the Governor or the Deputy Governor on the grounds set out
in new subsection 25(8) of the Bill. The grounds (truncated) are:
- incapacity to perform the duties
- taking outside employment, or
- insolvency.
It should be noted that the positions of Governor and Deputy Governor
(and board members) are held subject to ‘good behaviour’[21], and this is discussed below
in the main provisions part of this Digest.
The Bill incorporates similar mechanisms as those applying to the Tax
Commissioner of requiring an address from both Houses of Parliament to
the Governor-General and the role of the Governor-General in suspending
and removing the position holder.
A Working Paper published by the International Monetary Fund surveyed
boards and management structures and practice in Central Banks included
guidelines on central bank autonomy and accountability.[22]
In relation to the position of Governor, the main guideline is that the
entity nominating (selecting) the Governor should be separate from the
entity appointing the position holder:
[t]o provide some measure of balance, bearing in mind
the institutional balance.[23]
In relation to dismissal, the guideline is:
Dismissal should be only for breaches of qualification
requirements, or misconduct: lack of performance could also be grounds
if clearly defined in terms of the primary objective and specific targets.
The latter could be ruled upon according to a suitable and independent
judicial procedure, and perhaps be with the consent of the legislature.[24]
In relation to Boards, similar guidelines on selection and appointment
applied, as well at to dismissal.
On the composition of a Board, there should be a reasonably well informed
(knowledge/ expertise) and a balanced view, but conflicts of interest
are to be avoided. Direct government representatives should be eliminated
from a policy board and also from a monitoring board. However:
If a government representative does participate in
a policy board, it should at least be without the right to vote (though
it might be with a limited, temporary veto power).[25]
The Daily Telegraph[26] has recently published very critical arguments about
the Governor of the RBA. In particular it featured this Bill on 8 April
2008 in an article by Malcolm Farr headed ‘RBA
boss Glenn Stevens is “Mr Unsackable”’. This article refers to concerns
that the reforms are going too far ‘and that a rogue governor whose statements
create turmoil in financial markets could not be removed’. The article
states that the proposed laws have been drawn up ‘as a political response
to claims by the previous Coalition government that Labor would intrude
on the bank’s operation’.
On the same day, 8 April 2008, the Daily Telegraph’s Piers Akerman[27]
also attacked the Bill in similar terms by stating, amongst other things:
Nor is there any provision for terminating an incompetent
or rogue bank governor, and there doesn’t appear to be any way of dismissing
a governor who is convicted of criminality, let alone making a series
of bad decisions.
The Australian criticised the Daily Telegraph for the attack
on the Reserve Bank Governor by reporting:
This economically illiterate piece of populism is
offensive but, fortunately, irrelevant in the broader debate on monetary
policy.
The Age reported on the Bill on 27 March 2008 and gave credit
for improved independence measures, but cautions that the new arrangements
may give too much protection:
Independence needs to be balanced with accountability
for performance, especially in relation to inflation outcomes. Yet the
proposed Reserve Bank Amendment (Enhanced Independence) Bill does not
contain any provision for removing the RBA’s senior officers on the
grounds of poor inflation outcomes.[28]
The Australian Financial Review reported on 10 April 2008 that
the Treasurer, Mr Swan supported the independence of the Reserve Bank:
The Reserve Bank has been under concerted attack in
some section of the media in the past week for being out of touch with
the effect its policies have on households.
The opposition has joined the attack.
Mr Swan last night backed the central bank but refused
to comment on whether it has pushed interest rates up one time too many.
“You either believe in the independence of the Reserve
Bank or you don’t,” he said.
Items 1 and 2 amend section 24 and section 24B of the Act
to delete reference to the Treasurer and substitute it with the Governor-General.
Section 24 currently provides that the Governor and the Deputy Governor
are to be appointed by the Treasurer for a period of 7 years but are eligible
for reappointment. Paragraph 24(1)(c) provides that the Governor and the
Deputy Governor ‘hold office subject to good behaviour’. Members of the
Reserve Bank Board also hold office subject to good behaviour.[29] Section 24B is the resignation
provision.
Item 3 repeals section 25 and substitutes new section 25
to provide for the termination of the appointments of the Governor and
the Deputy Governor. Existing section 25 provides:
(a) becomes permanently incapable
of performing his or her duties; or
(b) engages in any
paid employment outside the duties of his or her office; or
(c) becomes bankrupt,
applies to take the benefit of any law for the relief of bankrupt or
insolvent debtors, compounds with his or her creditors or makes an assignment
of his or her salary for their benefit;
the Treasurer shall terminate
his appointment.
These grounds for termination
are replicated in new subsection 25(8) and therefore are the only
grounds for the termination of the positions. Under the existing arrangements,
paragraph 24(1)(c) may give the Treasurer the discretion to terminate
the Governor on ‘(lack of) good behaviour’ grounds whereas section 25
requires the Treasurer to terminate if one or more of the stated
grounds are met. There is currently no limitation in section 25 as there
is in this Bill and the TAA that there shall be no termination ‘except
as provided by this section’.[30]
New subsection 25(1)
provides that the Governor-General can terminate the appointments
if each House of Parliament presents to the Governor-General an address
praying for the termination of the appointments on a ground specified
in new subsection 25(8). Suspension prior to such
termination is not necessary under this subsection.
The Governor-General can
suspend the Governor or Deputy Governor from office on a ground specified
in subsection 25(8) and the Minister (the Treasurer or Minister
representing the Treasurer) has to table a statement concerning the suspension
in both Houses of Parliament within 7 sitting days. Within 15 sitting
days of the statement, the Houses can then declare by resolution that
the appointment should be terminated (new subsection 25(4)). If
both Houses do not pass such a resolution, the suspension ceases, and
the position holder will continue in office (new subsection 25(6)).
In the event the resolution is passed by each House, the Governor-General
must terminate the appointment under new subsection 25(5).
New subsection 25(9)
provides that the termination of the Governor or the Deputy Governor
can only be terminated on a specified ground and by the means specified
by new section 25. This limits termination to the grounds specified
and in the manner specified by the section. As noted earlier, the Governor
and Deputy Governor hold office ‘subject to good behaviour’ which is an
on-going requirement and a prerequisite for holding office. The Reserve
Bank Act is the only Commonwealth Act which has this particular expression.
Under the changes proposed by the Bill, in the event the position holder
is not of good behaviour there is no mechanism for termination as this
requirement is not specified as a ground under new subsection 25(8).
If a Governor or Deputy Governor did not offer a resignation to the Governor-General
under amended section 24B there is no power to remove the Governor
or Deputy. This can be contrasted to the present position in that although
the grounds of removal from office are the same, there is no strict limitation
on the Treasurer’s current power to terminate an appointment as will the
case under the proposed amendments.
Concluding
comments
The reforms in the Bill achieve an arms length process in the appointment
and termination of the Governor and Deputy Governor by substituting the
Governor-General in place of the Treasurer, and incorporating Parliament
in the suspension and termination of the positions. These changes are
based on the processes that apply to the statutory positions of the Commissioner
for Taxation and the Australian Statistician. However, the Bill does not
follow exactly other aspects of these positions such as the grounds of
termination or suspension.
The Bill does not address the rest of the Board’s appointment and termination
processes, the continuing presence of the departmental representative
on the Board, or the qualifications of members of the Board. In this regard,
it may be useful to reflect on the key points in the previously-mentioned
IMF paper which surveyed Central Bank Boards and Management for best practice
in order to address both transparency and accountability.[31]
Parliament may note that there are disparities and differences existing
in the legislation across the board dealing with statutory authorities,
agencies and Boards depending on the functions and roles of the bodies
in question. A full examination and comparison of these aspects of governance
has not been undertaken in this Digest, due to the minor and technical
changes being made in this Bill.
6C Suspension and removal from office of Commissioner
or Second Commissioner
(1) The Governor-General may remove the Commissioner or
a Second Commissioner from office on an address praying for the removal
of the Commissioner or the Second Commissioner, as the case may be, on
the ground of proved misbehaviour or physical or mental incapacity being
presented to the Governor-General by each House of the Parliament in the
same session of the Parliament.
(2) The Governor-General may suspend the Commissioner
or a Second Commissioner from office on the ground of misbehaviour or
physical or mental incapacity.
(3) Where the Governor-General suspends the Commissioner
or a Second Commissioner, the Minister shall cause a statement of the
grounds of the suspension to be laid before each House of the Parliament
within 7 sitting days of that House after the suspension.
(4) If, at the expiration of 15 sitting days of a House
of the Parliament after the day on which the statement was laid before
that House, an address under subsection (1) has not been presented to
the Governor-General by each House of the Parliament, the suspension terminates
(5) The suspension of the Commissioner or a Second Commissioner
from office under this section does not affect any entitlement of the
Commissioner or Second Commissioner, as the case may be, to be paid remuneration
and allowances.
(6) If:
(a) the Commissioner or a Second Commissioner becomes
bankrupt, applies to take the benefit of any law for the relief of bankrupt
or insolvent debtors, compounds with his or her creditors or makes an
assignment of his or her remuneration for their benefit;
(b) the Commissioner or a Second Commissioner engages,
except with the approval of the Minister, in paid employment outside the
duties of the office of Commissioner or Second Commissioner, as the case
may be; or
(c) the Commissioner or a Second Commissioner is absent
from duty, except on leave of absence, for 14 consecutive days or 28 days
in any 12 months;
the Governor-General shall remove the Commissioner or
Second Commissioner, as the case may be, from office.
(7) The Governor-General may, with the consent of the
Commissioner or a Second Commissioner, retire the Commissioner or Second
Commissioner, as the case may be, from office on the ground of physical
or mental incapacity.
(8) The Commissioner or a Second Commissioner shall not
be suspended, removed or retired from office except as provided by this
section.
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Diane Spooner
29 April 2008
Bills Digest Service
Parliamentary Library
© Commonwealth of Australia
This work is copyright. Except to the extent of uses permitted by the
Copyright Act 1968, no person may reproduce or transmit any part of this
work by any process without the prior written consent of the Parliamentary
Librarian. This requirement does not apply to members of the Parliament
of Australia acting in the course of their official duties.
This work has been prepared to support the work of the Australian Parliament
using information available at the time of production. The views expressed
do not reflect an official position of the Parliamentary Library, nor
do they constitute professional legal opinion.
Feedback is welcome and may be provided to: web.library@aph.gov.au.
Any concerns or complaints should be directed to the Parliamentary Librarian.
Parliamentary Library staff are available to discuss the contents of publications
with Senators and Members and their staff. To access this service, clients
may contact the author or the Library’s Central Entry Point for
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