House of Representatives Committees

Standing Committee on Economics, Finance and Public Administration

Reports, inquiries and other activities

Review of the 1993-94 annual reports of the Reserve Bank of Australia and the Insurance and Superannuation Commission

Government response

(Tabled on 22 June 1999)

This document has been scanned from the original government response. It may contain some errors.


Recommendation 1 of the Report recommended that:

The Government's response is as follows.

On 23 November 1995, the ISC released three separate circulars on the prudent use of derivatives by general insurance companies, life offices and superannuation entities. The circulars were developed in close consultation with interested parties, including other financial regulators, following the release of three separate discussion papers on derivatives in March 1995, and were based on Risk Management Guidelines for Derivatives issued by the Basle Committee on Banking Supervision.

The principal objective of the guidelines contained in the ISC's Superannuation Circular is to ensure that superannuation entities have proper risk management practices and procedures in place if they propose to use derivatives. This will be evidenced by a Risk Management Statement (RMS) covering such issues as an entity's derivatives policy (including overall investment objectives), and limits on exposures across physical and derivatives positions. There will also have to be a system of checks on compliance.

Primary responsibility for risk management lies with superannuation fund trustees. It is also the role of the external auditor of the superannuation entity to form an opinion on the entity's compliance with its RMS and related procedures. Consistent with this, a critical factor in the prudent use of derivatives is the accountability of trustees for the maintenance of adequate internal controls. Officers of the Australian Prudential Regulation Authority (APRA, formerly ISC) will look closely at whether internal controls are in place and operational on their inspection visits to superannuation entities.

Superannuation entities should have had a formal RMS in place by 1 July 1996.

Additional guidelines were released in 1996 which covered the practical implementation issues that were raised by RMS requirements. RMSs confirm the need for trustees to take both risk and return into account in determining their investment strategy and properly to consider and manage the risks associated with derivatives (as well as other) investments.

With regard to the Committee's concerns about the lack of statistical data on the use of derivatives by superannuation entities, this deficiency is being addressed on three fronts.

First, the annual return form for non-excluded superannuation funds (funds with more than four members) now requires funds to report to the ISC on whether they directly use derivatives. However, the ISC/APRA also reports that only a very small number of funds, usually large sophisticated funds with their own in-house treasury operations, use derivatives on their own behalf. It is probable, therefore, that most funds are exposed to derivatives only as a consequence of investing in collective investment vehicles (such as pooled superannuation and other wholesale trusts) or by engaging the services of one or more external investment managers who, in turn, use derivative instruments. A full analysis of this information has been published in the December 1996 edition of the ISC Bulletin.

Secondly, the ISC's Quarterly Survey of Superannuation, which commenced on 30 June 1995 (in conjunction with the Australian Bureau of Statistics (ABS)), collects information on direct derivatives exposure by the largest superannuation funds, which account for the vast bulk of the assets and members in the industry. Results indicate that only a very small number of these funds that invest directly employ derivatives, and only a small number of these have a significant exposure at present.

Finally the ISC completed, in February 1997, a special project to examine the extent of derivative use by superannuation funds. The key findings of the project were:

As a result of the project, the ISC updated its circular on derivatives, and improved requirements for reporting the use of derivatives to the ISC and members. A training program is also being developed in conjunction with the Sydney Futures Exchange to improve superannuation trustees' knowledge of the derivatives market and appropriate risk management procedures. In September 1998, final details of the requirements for external audit sign off for superannuation funds, which had been under consideration and development since 1995, were released.

Recommendation 2 of the report recommended that:

The Government's response is as follows.

In many ways, the Standing Committee's call for an Inquiry into dispute resolution schemes in the banking industry has been overtaken by events.

On 2 September 1997 the Treasurer announced the Government's response to the Australian Financial System Inquiry (the 'Wallis Inquiry'). In the context of this response the Government announced measures to address, among other things, the problems small business and consumers face in accessing the fragmented array of dispute resolution schemes for financial services. In particular the Treasurer announced that :

On 30 September 1997, the Minister for Workplace Relations and Small Business, the Hon. Peter Reith, announced the Government's response to the Fair Trading Inquiry 'New deal: fair deal -giving small business a fair go' in which the Minister announced the Prime Minister's intention to write to the banking industry encouraging them to extend their voluntary dispute resolution schemes to incorporated small business.

On 11 October 1997 the Government wrote to the Banking industry expressing its view that dispute resolution schemes, such as the Banking Industry Ombudsman Scheme, should be extended to small business whether incorporated or unincorporated.

On 2 March 1998, the Chair of the Australian Banking Industry Ombudsman (ABIO) Scheme, Ms Sue McCarthy, announced that the scheme would be extended to cover small business. Initial access to the ABIO will be free of charge. If, after the ABIO has given an initial report, more detailed investigation is sought by the complainant, then fees will be on a cost sharing basis and if the Ombudsman finds in favour of the complainant the fees will be refunded. Extending access to these schemes will provide small business with quicker, less costly and more efficient remedies than traditional court litigation. The Australian Bankers' Association also announced the development of a Charter for Small Business to set down processes for banks to use in handling their relationship with small business and to encourage a greater understanding of each of their respective roles.

Recommendation 3 of the Report recommended that:

The Government's response is as follows.

As you would be aware, this recommendation has also be superseded by events. The Government announced its approach to Retirement Savings Accounts (RSAs) in the 1996-97 Budget. The necessary legislation to give effect to the establishment of RSAs by banks, credit unions, building societies, life offices and other prescribed financial institutions has now been passed by the Parliament.

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