WARNING:
This Digest was prepared for debate. It reflects the legislation as
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CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details
Financial Sector Reform (Amendments and
Transitional Provisions) Bill (No.1) 1999
Date Introduced: 11 March 1999
House: House of Representatives
Portfolio: Treasury
Commencement: Most provisions commence on
Royal Assent. Schedules 4 and Schedule 7 commence on the 'transfer
date'. 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
the transfer of regulatory responsibility for building societies,
credit unions and friendly societies from the States and
Territories to the Commonwealth.
This Bill, along with the Financial Sector
(Transfers of Business) Bill 1999 and the Income Tax Rates
Amendment (RSAs Provided by Registered Organizations) Bill
1999 comprises the second stage of the Government's response
to the Report of the Financial System Inquiry.
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 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.(1)
In March 1997, the FSI delivered its report
making 115 recommendations for regulatory reform in the Australian
Financial System. The most significant recommendations for the
purposes of this Digest were:
-
- the establishment of a single Commonwealth body to undertake
prudential regulation of deposit-taking institutions (banks,
building societies and credit unions), life insurance companies,
general insurers, friendly societies and superannuation
-
- the establishment of a single Commonwealth body to regulate
corporations, financial market integrity and consumer protection in
the financial sector
-
- the introduction of a common licensing regime for
deposit-taking institutions
-
- the introduction of a single regulatory framework encompassing
life insurance companies and friendly societies, and
-
- that the corporate regulator and the prudential body should
have comprehensive powers to met their regulatory
objectives.(2)
In response to the report, in 1998 the
Government introduced a new framework for the regulation of the
financial system. These 'stage 1' reforms included the
establishment of the Australian Prudential Regulation Authority
(APRA) and the Australian Securities and Investment Commision
(ASIC). 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 (ISC). ASIC became the market integrity
and consumer protection regulator for the financial system taking
over responsibilities largely exercised by the Australian
Securities Commission and the ISC. In introducing these reforms,
the Government announced in principle support for APRA and ASIC
taking on responsibilities for the regulation of building
societies, credit unions and friendly societies. This was based on
the idea that financial products that were functionally(3) similar
should be regulated in a competitively neutral way regardless of
the type of institution offering the product. It was acknowledged
however, that time must be allowed for negotiations with the States
to gain an agreement to transfer their powers over these
institutions.
In addition to this package of Bills, the
transfer of regulatory responsibility will be completed by the
signing of a Financial Sector Regulation Transfer Agreement between
the Commonwealth, States and Territories and legislation in the
States and Territories to effect the regulatory transfer.
The Current Regulatory Regime
Building societies, credit unions and friendly
societies are not Corporations Law companies but are established
under statutes in the States and Territories. At present, these
institutions are prudentially regulated by separate State and
Territory supervisors (State Supervisory Authorities - SSAs). While
actual supervision is carried out 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).
Historically, building society and credit unions
have not been perceived to be as safe as banks. Undoubtedly, this
is because of a number of high profile collapses of building
societies in the last 25 years(4), the most recent being Pyramid
Building Society in Victoria 1990. These collapses led to the view
that the regulation of banks by the Reserve Bank was of a higher
calibre than the disparate State regimes that regulated non-banks
prior to the establishment of the FI Code and AFIC in 1992.
The perception that non-banks are not as safe as
banks does have some legal basis. Under section s13A of the
Banking Act 1959 bank depositors have priority over other
bank liabilities (in respect of a bank's assets in Australia) in
the event that a bank is unable to meet its obligations or suspends
payments. Building society and credit union depositors currently do
not have the benefit such priority.(5) A key policy objective of
the creation of APRA was the establishment of a more neutral
regulatory environment that would enhance the ability of non-bank
deposit-taking institutions to compete with banks in the retail
market. In 1998, the Banking Act 1959 was amended to give
all depositors with authorised
deposit-taking institutions priority over the assets of the
institution in the event that it fails. This protection will only
be available when State/Territory regulated institutions come under
the jurisdiction of APRA.
Friendly societies are mutual organisations.
Traditionally, they offered sickness and accident assurance
products through benefit funds. In the 1980s some expanded to offer
investment products such as insurance bonds. Friendly societies are
currently subject to a uniform national Friendly Societies Code and
are prudentially supervised by State and Territory agencies.
Exemptions under the Life Insurance Act 1995 allow
friendly societies to conduct certain types of life insurance
business. The FSI recommended that 'for reasons of competitive
neutrality and to improve consumer understanding, the disclosure
and prudential regulation of friendly society life insurance
investment products should be on the same basis a similar products
offered by life companies'. (6)
State 'fair trading' Acts(7) constitute the
primary consumer protection regulation applying to these
transferring institutions. Building societies and credit unions are
also subject to self-regulation in the form of industry based codes
of practice.
Industry views
Transferring institutions are very supportive of
the move to the Commonwealth jurisdiction and, in particular, the
supervision of APRA. Although the FI code and FS code are
considered to have performed well, industry representatives have
stated that they believe the transfer will enhance their ability to
compete in the retail market.(8)
Schedule 1 amends the
Australian Prudential Regulation Authority Act 1998. It is
proposed to insert a new section 9A to allow APRA
to exercise functions conferred on it by a State or Territory. APRA
may take on functions or powers under State or Territorial law
provided those functions are consistent with an agreement between
the Commonwealth and the States/Territories or otherwise if the
Minister approves. Proposed Section 9A also allows
APRA to perform work on a fee for service basis subject to
Ministerial approval. The Minister's Second Reading Speech
indicates that this power is most likely to be used in the context
of the prudential regulation of housing
co-operatives and trustee companies. These entities will remain the
responsibility of the States and Territories.
Proposed new section
58 extends the protection from liability for APRA, its
board members, agents and staff to cover acts done in good faith in
performance of functions conferred under State and Territorial Law
or agreements on a fee for service basis.
Schedule 2 amends the
Banking Act 1959. The Bill extends the range of prudential
tools available to APRA by facilitating the implementation of
voluntary industry support contracts. Under these contracts,
parties agree to provide financial support if a specified event
occurs - for example a run on a bank. Currently, the legislation
provides for 'liquidity' contracts however according the
explanatory memorandum these have not been used because of
definitional problems relating to the meaning of 'liquidity'. Such
contracts will only be binding if certified by APRA (section
11CB). APRA can order compliance with such
contracts.
Item 51 amends section 63 of
the Banking Act 1959 which deals with the restructuring of
authorised deposit-taking institutions (ADIs). The section provides
that an ADI (except a foreign ADI) needs to seek prior approval
from the Treasurer before entering into any agreement, arrangement,
partnership or reconstruction of its business. The Bill amends the
section so that the Treasurer's consent is not required if APRA
makes a determination to that effect. According to the explanatory
memorandum, the amendment is a consequence of the Treasurer's
consent provisions in the Financial Sector (Transfers of
Business) Bill 1999.
Schedule 3 is the central
provision in enabling the transfer of regulatory responsibility. It
amends the Corporations Law inserting a new schedule to provide for
the registration of financial institutions and friendly societies
as companies and subjects them to regulation by ASIC. The
transferring financial institutions are defined in
proposed section 1 of the
proposed new Schedule 4 to include:
-
- Building societies
-
- Credit unions
-
- Friendly societies
-
- Special services providers,(9) and
-
- The Cairns Co-operative Weekly Penny Savings Bank.
Proposed new section 3 provides
that these transferring financial institutions are deemed
registered as Corporations Law companies at the transfer date.
Clause 3(3) provides a tabular explanation of the
type of company that each institution may become. The table also
highlights default settings and options for alternative company
structures. Pursuant to proposed section 24,
companies have 18 months after the transfer date to modify their
constitutions to reflect their new status. Importantly, the new
structure allows institutions to maintain their mutual
characteristics. It is expected that there may be some initial
problems in bringing these institutions under the Corporations Law
umbrella. In order to accommodate these difficulties
proposed section 26 gives the ASIC power to make
exemption and modification orders for a transitional period.
Offers of benefits in a friendly society benefit
fund are currently exempted from the fund raising provisions of the
Corporations Law. Part 6 of the proposed
new Schedule 4 continues the fund raising provisions that
apply to friendly societies under the FS Code. However, where a
Friendly Society attempts to raise funds other than benefits in a
benefit fund, it will be subject to the Corporations Law
fundraising provisions.
Amendments to the Life Insurance Act
1995 are outlined in Schedule 4 of the Bill.
The object of these provisions is to ensure that a competitively
neutral prudential regime applies to all institutions offering life
insurance products. Item 7 deletes a reference to
friendly societies in section 11(3)(a) of the Act. This
provision currently ensures that the Life Insurance Act
1995 does not apply to friendly societies. Proposed
section 12A empowers APRA to declare that insurance or
annuity business is life business. While proposed section
12B allows APRA to declare that other financial business
is life insurance business. Friendly societies will be 'life
companies' for the purposes of the Act if they carry on life
insurance business in Australia.
The Bill accommodates differential regulation of
friendly societies depending upon the type of business that they
undertake. While under Schedule 3 all friendly
societies become Corporations Law companies, only those with
benefit funds will be prudentially regulated under the Life
Insurance Act 1995. Those that are engaged in Health
Insurance will be subject to regulation of the National Health
Act 1953.
APRA will be given the powers to impose
prudential standards and directions on life companies by the
insertion of new Part 10A into the Life
Insurance Act 1995. These powers are consistent within those
bestowed on APRA in relation deposit-taking institutions under the
Banking Act 1959.
Proposed section 230A will give
APRA the power to make prudential standards specifying requirements
to be met by life companies in order to protect the interests of
policy owners or prospective policy owners. While breach of these
standards will not be an offence, APRA will be given the power to
make directions under proposed section 230B and
non-compliance with a direction will be an offence
(proposed section 230F).
The other miscellaneous amendments to facilitate
the transfer of regulatory responsibilities and consequential
amendments are well documented in the explanatory memorandum.
It is currently planned that the transfer date
for financial institutions to come under Commonwealth jurisdiction
will be 1 July 1999. As noted above, however, the transfer of
regulatory responsibility requires complementary State and
Territory legislation. At this point, facilitating legislation has
not been introduced in any State or Territory. It is possible that
there may be some slippage in the timetable.
-
- Costello, P., 'Financial System Inquiry: terms of reference and
membership', Press Release, 19 May 1996.
- Financial System Inquiry, Final Report, 1997. Recommendations
1, 2, 31, 33,36, 38, 39,40,41.
- For example, deposits with Banks and Building societies are
almost identical financial products. For further discussion of the
'functional' approach to regulation see Financial System
Inquiry, Final Report, 1997 Chapters 7 and 8.
- See Sykes, T., Two Centuries of Panic, Allen and Unwin
1988, p. 467.
- Financial System Inquiry, Discussion Paper, 1996, p.
282.
- Financial System Inquiry, Final Report, 1997, p. 328.
- For example, Fair Trading Act 1987 (NSW), Fair Trading Act
1987 (SA).
- Executive Director of the Australian Association of Permanent
Building Societies, Jim Larkey, 'Building Societies to come under
Federal banking Law', Press Release, March 12 1999. Chief Executive
of Credit Unions Services Corporation, Dr Vern Harvey, 'Credit
Unions Welcome Wallis Transfer Legislation', Press
Release, March 12 1999.
- Special services providers (SSPs) are bodies owned or
controlled by building societies or credit unions. They are
regulated by AFIC. Their functions are limited to the provision of
financial and commercial services to services to societies and to
assist AFIC with emergency support mechanisms.
Mark Tapley
25 March 1999
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
© Commonwealth of Australia 1999
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