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CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details
Financial Sector Reform (Transfers of
Business) Bill 1999
Date Introduced: 11 March 1999
House: House of Representatives
Portfolio: Treasury
Commencement: On the transfer
date for the purposes of the Financial sector Reform
(Amendments and transitional Provisions) Act (No.1) 1999. 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.
To provide for transfers of business between
some kinds of financial institutions and to provide the Australian
Prudential Regulation Authority with an additional prudential tool
in the performance of its duties.
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 financial 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.
In March 1997, the FSI delivered its report
making 115 recommendations for regulatory reform in the Australian
Financial System. A central proposal was that a single commonwealth
agency should be established to carry out prudential regulation of
the financial system, and that the new body should have
comprehensive powers to meet its regulatory objectives.(1) In
response to the report, in 1998 the Government introduced a new
framework for the regulation of the financial system including the
establishment of the Australian Prudential Regulation Authority
(APRA). 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. However the recommendation that APRA
take on the regulation of buildings societies credit unions and
friendly societies which are currently supervised by the States and
Territories was deferred to allow time for negotiation with the
States to gain an agreement to transfer their powers. Commonwealth
legislation to effect the transfer is contained in the
Financial Sector Reform (Amendments and Transitional
Provisions) Bill (No.1) 1999 which was introduced at the same
time as this bill.(2)
At present, building societies, credit unions
and friendly societies are regulated by separate State and
Territory supervisors (State Supervisory Authorities - SSAs). While
actual supervision is carried out at 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). One of the tools available to SSAs in the
performance of their duties to protect members of financial
institutions is the power to approve or direct a 'transfer of
engagements'.(3) Under this process, regulated institutions may
transfer all or part of their business to another regulated
institution.
Although there have been examples of the
Government and the Reserve Bank using mergers as a prudential tool
to deal with banks in financial distress,(4) there has been no
formal power in the hands of regulators to order a merger or
transfer of business between banks or insurance companies.
In his Second Reading Speech, the Minister
expressed a view that this power would be useful to APRA as it will
provide 'an efficient and effective tool for protecting depositors
or policy owner monies where their institution is in severe
financial hardship.'(5) The Bill provides a framework for the
transfer of business between institutions that are regulated by the
Australian Prudential Regulation Authority (APRA).
'Business' is defined in clause
4 as including the assets and liabilities of a body.
Clause 8 states that the Bill
provides two types of 'transfer of business': voluntary and
compulsory. Transfers may be partial or total. For a transfer to be
made under the Bill it must concern some prudentially regulated
business. The Bill does not purport to be the sole means for the
transfer of business between authorised deposit-taking institutions
and life insurance companies (Clause 8(6)).
Part 3 of the Bill deals with
voluntary transfers. Under Clause 10 two
regulatory bodies of the same kind, that is approved deposit taking
institutions or life insurance companies, may apply in writing to
APRA to approve a transfer of business.
Clause 11 establishes the
criteria governing APRA's approval process. APRA must approve a
transfer if considers that:
-
- an application for approval of the transfer has been made in
accordance with clause 10
-
- the transferring body and receiving body are entities of the
same kind
-
- the transfer has been adequately adopted (clause
13)
-
- the Minister has consented to the transfer (the Minister may
determine that consent is not required - see clause
15)
-
- necessary State or Territory legislation to facilitate the
transfer is in place (this legislation must provide that the
receiving body is taken to be the successor in law to the
transferring body - see clause 14), and
-
- the transfer should be approved having regard to the interests
of depositors or policy owners of the receiving and transferring
bodies and the interests of the financial sector as a whole, as
well as any other matter that APRA considers relevant.
In recognition of the fact that a transfer of
business may raise concerns other than prudential matters,
clause 12 provides that in deciding whether to
approve a transfer APRA may (but is not required to) consult with
other regulatory bodies including the Australian Competition and
Consumer Commission, Australian Securities and Investment
Commission and the Reserve Bank.
Pursuant to clause 16 approval
for the transfer can be made subject to conditions.
Part 4 of the Bill provides for
compulsory transfers of business. Under clause 25,
APRA may make a determination that there is to be a transfer of
business between bodies regulated by it.
APRA cannot do so unless it is satisfied
that:
-
- the transferring body has contravened a provision of its
regulatory legislation and/or it is in the interests of policy
owners or depositors
-
- the transferring body and receiving body are entities of the
same kind
-
- the receiving body has consented to the transfer
-
- APRA is satisfied that the transfer is appropriate having
regard to the interests of depositors or policy owners of the
receiving and transferring bodies, and the interests of the
financial sector as a whole, as well as any other matter that APRA
considers relevant
-
- the necessary State or Territory legislation to facilitate the
transfer is in place (this legislation must provide that the
receiving body is taken to be the successor in law to the
transferring body see clause 28), and
-
- the Minister has consented to the transfer (the Minister may
determine that consent in not required - see clause
29).
As with voluntary transfers, APRA may consult
with other regulators (clause 26).
Part 6 deals with miscellaneous
issues. Clause 43(2) is particularly important. It
provides that subject to subsections (4), (5) and
(6) nothing done under the Bill places a receiving body, a
transferring body or another person in breach of any law of the
Commonwealth, State or Territory. That is, the Bill is intended to
operate independently of any other Act. The potential effect of
this provision on the regulation of mergers in the financial system
will be discussed below.
Clause 44 acknowledges that
because the Bill provides a compulsory transfer of business, the
legislation may be characterised as a law with respect the
'acquisition of property' and therefore invoke the constitutional
requirement for just terms. Clause 44 provides
that the body receiving a transfer of business is liable to pay
'just terms' to the transferring body.
A Way Around the ACCC for the Big
Four?
The Bill has been described in the press as a
'new and simplified way' for banks to merge and possibly circumvent
the scrutiny of the Australian Competition and Consumer Commission
(ACCC). (6)An assessment of this proposition necessitates a brief
description of the merger rules that currently apply in the
financial system.
The primary law governing mergers is contained
in the Section 50 of the Trade Practices Act 1974 which
applies on an economy-wide basis. This section prohibits mergers or
acquisitions, which would have the effect, of likely effect, of
substantially lessening competition in a substantial market for
goods and services. The ACCC typically scrutinises any proposal for
mergers that involves one of the four major banks.
In addition, the Treasurer has power over
mergers in the financial system under the Banking Act
1959(7), Financial Sector Shareholdings Act 1998,
Insurance Acquisitions and Takeovers Act 1991 and the
Foreign Acquisitions and Takeovers Act 1975. In exercising
these powers, the Treasurer considers a range of matters including
prudential and competitive issues and is guided by advice from APRA
and the ACCC.(8)
It is currently the Government's policy that
mergers among the four major banks will not be permitted. The
Treasurer has stated that this policy will be reviewed when the
government is satisfied that competition has increased in the
financial industry.(9)
As noted above, Clause 43(2) of
the Bill provides, amongst other things, that nothing done
by or under the Bill places a receiving or transferring body or any
other institution in breach of a law of the Commonwealth. Therefore
a merger which would otherwise breach Section 50 of the Trade
Practices Act 1974, for example, could proceed as a either a
voluntary or compulsory 'transfer of business' under this Bill.
Such a transfer would require the approval of APRA and the Minister
although the Minister can decide that his or her consent is not
required.
Although the transfer of business mechanism is
touted as a prudential tool, there is nothing in the Bill that
restricts its use to transfers involving an institution that is in
financial distress.
Concerns about the Bill being used as a way for
institutions to avoid the scrutiny of the ACCC could be addressed
by way of regulations made under clause 43(4). The
clause provides that the regulations may specify that another Act
continues to apply in relation to the transfer of a business
subject to any modifications. Clause 11(2) states
that APRA must not approve a voluntary transfer of business if
after having regard to law prescribed under clause
43(4), it considers that the transfer should not be
approved.
-
- Financial System Inquiry, Final Report, 1997. Recommendations
31, 33.
- State and Territory legislation has not yet been introduced.
- Part 7 FI Code 1992 and Part 7 of the Friendly Societies Code
1996
- Financial System Inquiry, Discussion Paper, November 1996, p.
281. Examples include the Commonwealth Bank's takeover of the State
Bank of Victoria in 1991 and the Reserve Bank's use of moral
suasion to facilitate the 1979 takeover of the Bank of Adelaide by
ANZ.
- Second Reading Speech, Financial Sector Reform (Transfers of
Business) Bill 1999, House of Representatives Debates, 11 March
1999, p 3286.
- Hans van Leeuwen, 'Federal Legislation makes bank mergers
easier', Australian Financial Review, March 15, 1999, p. 26.
- If the Financial Sector Reform (Amendments and Transitional
Provisions) Bill (No.1) 1999 is passed Section 63 of the Banking
Act 1959 will be amended. In that case the Treasurer's consent to a
restructuring (including a merger) of an Authorised Deposit-Taking
Institution is not required if APRA so determines.
- Costello, P., 'Proposed Merger Between the Westpac Banking
Corporation and the Bank of Melbourne Limited: In-Principle
Approval', Press Release, No. 82 25/7/1997.
- Costello, P., 'Release of the Report of the Financial System
Inquiry and Initial Government response on Mergers Policy', Press
Release, No. 28 9/4/1997.
Mark Tapley
23 March 1999
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 1999
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