Bills Digest no. 171 2006–07
Financial Sector Legislation Amendment (Restructures)
Bill 2007
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
Financial implications
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Financial Sector
Legislation Amendment (Restructures) Bill 2007
Date introduced: 24 May 2007
House: House of Representatives
Portfolio: Treasury
Commencement: The
Act commences on Royal Assent. Schedules 1 and 3 (excluding
consequential amendments to the Income Tax Assessment Act
1997 in Schedule 3) commence on Royal Assent. Schedule 2 and
items 10-23 of Schedule 3 commence on 1 July 2007.
The purpose of the Bill is to remove
regulatory impediments to financial conglomerates changing to a
non-operating holding company (NOHC) structure.
Financial conglomerates are a dominant feature
of Australia s financial system.(1) Like other corporate
groups, financial conglomerates operate through certain company
group structures. Corporate group structures give rise to various
regulatory issues such as inter-group liability, or the extent to
which other companies in the group should be liable for the debts
of other companies in the group. The recent controversy surrounding
the James Hardie Group was an example where issues of this kind
were relevant.
For present purposes, corporate groups can be
described as consisting of parent or holding companies and their
subsidiaries.(2) Individual companies in a corporate
group are generally not liable for the debts of other companies in
the group but there are exceptions to this rule. Holding companies
can be liable for the debts of their subsidiaries in the
circumstances outlined in Part 5.7B of the Corporations Act
2001.
Prior to the Wallis review into Australia s
finance system, corporate groups containing banks were required by
the Reserve Bank of Australia to operate with the bank as the
holding company. Many submissions to the Wallis review argued that
financial conglomerates should be allowed to establish
non-operating holding companies, with banks allowed to be
subsidiaries of the holding company. An example is the submission
of the Westpac Banking Corporation, which included:
Banks should be permitted to establish
non-operating holding companies, and to become subsidiaries of the
parent holding company.(3)
One effect of this would be to increase the
degree of separation between banks and other operating companies in
a group, and thereby lessen the risk that the bank would be held
liable for debts of a subsidiary. Another effect might be, as noted
in the Explanatory Memorandum, to relieve other entities in the
group of any formal obligation to support a distressed affiliate
.(4)
The Westpac submission to the Wallis review,
and others, drew upon previous work of the Council of Financial
Supervisors.(5) The Council expressed the view that:
Prudential concerns about contagion, conflicts of
interest and transparency might be alleviated to some extent under
a financial holding company, as opposed to parent/ subsidiary,
structure. This could arise from the perception of greater
separateness of the different activities undertaken by the
conglomerate.(6)
These arguments apparently persuaded the
Wallis Review. Its recommendations included:
Recommendation 49: Non-operating holding companies
should be permitted subject to certain requirements.
Subject to a financial conglomerate meeting
prudential requirements, the APRC should permit adoption of a
non-operating holding company structure. The structure must satisfy
the APRC in the areas of capital, management, adequacy of
firewalls, reporting of intra-group activities and independent
board representation on subsidiary entities.(7)
As part of its response to the Wallis Review,
the Government agreed to facilitate the use of non-operating
holding companies in financial conglomerate structures. As noted in
the Explanatory Memorandum to the Bill, however, no major
Australian financial group containing an ADI (authorised deposit
taking institution) has chosen to adopt a NOHC
structure.(8)
The rationale for the Bill appears to be the
perception that the failure of groups to take up the adoption of
the NOHC structure is due to regulatory impediments, including
requirements of the Corporations Act, and tax consequences. This
Bill attempts to alleviate those impediments.
The Explanatory
Memorandum states that the financial impact will be minimal
.(9) However, it also notes that the amendments made by
Schedule 2 to the capital gains tax provisions in the Income
Tax Assessment Act are designed to remove tax impediments that
prevent financial groups containing ADIs from restructuring. There
is no specific information provided on what the effect might be on
tax revenues if the relevant major Australian financial groups
adopt NOHC structures as a result of such
amendments.(10)
Item 14 inserts new
Part 4A Restructures into the Financial Sector
(Transfers of Business) Act 1999 (FSTBA). The Part deals with
proposals by an ADI, general insurer or life insurer (called the
operating body ) for a restructure arrangement under Part 5.1 of
the Corporations Act 2001, that would make the operating
body a subsidiary of a non-operating holding
company.(11)
Proposed section 36B provides
for the operating body to apply to the Minister for a restructure
approval . These approvals include a restructure instrument . The
instrument gives relief to the operating body, the NOHC and related
bodies corporate, from requirements of the Corporations Act as
specified in the instrument.
Proposed section 36C requires
the Minister to issue a restructure approval if satisfied of
certain things including:
- the restructure arrangement would improve the operating body s
ability to meet its prudential requirements
- the approval would be in the interests of the depositors or
policy owners of the operating body and of the financial sector as
a whole
Proposed section 36D gives
the Minister a discretion to consult, in making a decision on a
restructure approval, with the Australian Prudential Regulation
Authority (APRA), the Australian Securities and Investments
Commission (ASIC), or any other person or body of the Ministers
choosing.
Proposed section 36E allows
the Minister to impose various conditions in a restructure
approval.
Proposed section 36G provides
for restructure instruments . The Minister may specify in the
instrument that certain bodies and persons are given relief from
compliance with the requirements of Division 1 of Part 2J.1 or Part
2J.2, as well as section 254T of the Corporations Act (these relate
to restrictions in share capital; self-acquisition and control of
shares; and the requirement that dividends may only be paid from
profits). Restructure instruments are not legislative instruments
and so will not be subject to the disallowance and other provisions
of the Legislative Instruments Act 2003.
Proposed section 36K allows
the Minister to amend restructure instruments.
Proposed section 36M provides
for internal transfer certificates . Where the Minister has issued
a restructure approval, APRA may issue an internal transfer
certificate if satisfied that the terms of the transfer is
appropriate for giving effect to the restructure arrangement
referred to in the approval. The certificate must clearly outline
the transferring and receiving bodies and identify which assets and
liabilities are being transferred.
Proposed section 36P allows
APRA to amend internal transfer certificates, but only where the
relevant restructure instrument has not yet come into force.
Proposed section 36R provides
that the legal effect of an internal transfer certificate is that
the nominated assets are transferred without the need for any
transfer, conveyance or assignment.
The Explanatory Memorandum summarises the
effect of the amendments this way:
The amendments remove tax impediments that prevent
financial groups containing ADIs from restructuring for prudential
reasons by:
- disregarding certain preference shares issued by an ADI or an
extended licensed entity member, for the purposes of determining
whether the ADI or extended licensed entity member is a
wholly-owned subsidiary of a consolidated group headed by a
non-operating holding company;
- ensuring that certain dividends paid by the non-operating
holding company are frankable if those dividends would have been
frankable had they been paid by the ADI prior to the ADI
restructure; and
- ensuring that shareholders in the original company (either an
ADI or an extended licensed entity member) who exchange their
shares for shares in the non-operating holding company can obtain a
CGT roll-over if certain preference shares remain issued by the ADI
and some foreign holders of shares do not receive shares in the
non-operating holding company.(12)
The Government took the decision, some time
ago, to allow financial conglomerates to operate through a NOHC
structure. This Bill addresses the fact that few conglomerates have
adopted that structure, by removing some of the regulatory
impediments consequent upon choosing that course.
- Commonwealth of
Australia, Financial System Inquiry, Final Report, (Wallis Review),
March 1997, p. 344.
- For some purposes
the definition is broader.
- Westpac submission
to Wallis Review, Executive Summary, p. 10.
- Explanatory
Memorandum, Financial Sector Legislation Amendment (Restructures)
Bill 2007, p. 2
- The Council of
Financial Supervisors was established by the Commonwealth
Government in 1992, following a recommendation of the inquiry into
banking and deregulation by the House of Representatives Standing
Committee on Finance and Public Administration better known as the
Martin Committee after its then-chairman. Its basic rationale was
and remains to improve communication and co-ordination among the
main agencies responsible for regulation and prudential supervision
in the financial system. These are, in no particular order, the
Reserve Bank, the Insurance and Superannuation Commission, the
Australian Financial Institutions Commission and the Australian
Securities Commission.
http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_oct95/bu_1095_4.pdf
accessed 1 June 2007.
- Council of Financial
Supervisors, Annual Report 1995, p. 30.
- Commonwealth of
Australia, Financial System Inquiry, Final Report, (Wallis Review),
March 1997, p. 49.
- Explanatory
Memorandum, p. 3.
- ibid. p. 4.
- ibid., p. 3.
- New section
36A.
- Explanatory
Memorandum, p. 17
Jerome Davidson
7 June 2007
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