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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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Published by the Department of the Parliamentary Library, 2003.
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