Referral of the inquiry
1.1
The bills were introduced in the House of Representatives and read a first time on 28 October 2021.
1.2
On 25 November 2021 the Senate referred the provisions of the Financial Accountability Regime (FAR bill) Bill 2021, Financial Sector Reform (Hayne Royal Commission Response No. 3) (HRCR bill) Bill 2021, Financial Services Compensation Scheme of Last Resort Levy (CSLR bill) Bill 2021 and Financial Services Compensation Scheme of Last Resort Levy (Collection) (Collection bill) Bill 2021, to the Senate Economics Legislation Committee (the committee) for inquiry and report by 15 February 2022.
Purpose of the Bills
1.3
On 4 February 2019, the government released its response to the Financial Services Royal Commission Final Report entitled Restoring trust in Australia's financial system. The government's response committed to taking action on all the recommendations of the Royal Commission. This package of four bills, will among other things, implement the Royal Commission's recommendation (7.1) to establish the CSLR and seeks to address a suite of recommendations from the Royal Commission to improve consumer protections.
Financial Accountability Regime Bill 2021
1.4
This bill introduces a new financial accountability regime for the banking, insurance and superannuation industries. The new regime will provide for a strengthened accountability framework for financial entities in these industries, and associated measures.
1.5
As part of establishing this regime, the Banking Executive Accountability Regime (BEAR) will be repealed from the Australian Prudential Regulation Authority Act 1998 and the Banking Act 1959 as the obligations under the Financial Accountability Regime (FAR) will apply to the banking industry.
1.6
The single overarching Explanatory Memorandum (EM) to the four bills, states that the 'key objective of the FAR is to improve the operating culture of entities in the banking, insurance and superannuation industries and to increase transparency and accountability across these industries—both in relation to prudential matters and conduct related matters'.
Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021
1.7
Schedules 1 and 2 of this bill make minor and consequential amendments to various Commonwealth laws, to support the new FAR and provide transitional arrangements relating to the repeal of the BEAR under the Banking Act 1959.
1.8
Schedule 3 to the bill establishes a financial Compensation Scheme of Last Resort (CSLR) to compensate consumers where the Australian Financial Complaints Authority (AFCA) has made a determination in their favour that remains unpaid. This bill is part of a package of three bills to establish and fund the CSLR.
Financial Services Compensation Scheme of Last Resort Levy
1.9
This bill is one of two bills that form the levy framework for the financial services CSLR. The framework imposes a levy on relevant industry entities to fund the CSLR on an ongoing basis.
Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2021
1.10
This bill is one of two bills that form the levy framework for the financial services CSLR. The framework imposes a levy on relevant industry entities to fund the CSLR on an ongoing basis.
Background
1.11
The FAR, as outlined in the EM described above is designed to improve the operating culture of entities in the banking, insurance and superannuation industries and to increase transparency and accountability across these industries—both in relation to prudential matters and conduct related matters. The genesis of the FAR, lies in the findings of the 2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission) by Commissioner Kenneth Hayne.
Banking Executive Accountability Regime
1.12
Prior to the Royal Commission, the Turnbull government in 2018, introduced the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2018 which, once enacted, established the BEAR, which commenced on 1 July 2018. The BEAR put in place a strengthened responsibility and accountability framework for directors and senior executives of authorised deposit-taking institutions (entities that carry on banking business) and their subsidiaries.
2019 Financial Services Royal Commission
1.13
The Royal Commission made several recommendations relating to extending the BEAR to other Australian Prudential Regulation Authority (APRA)-regulated industries and to have APRA and Australian Securities and Investments Commission (ASIC) jointly administer the extended regime.
1.14
Commissioner Hayne noted that the provisions modelled on the BEAR should be expanded to all APRA-regulated financial services institutions. He further stated that after these provisions have been applied to the balance of authorised deposit-taking institutions, and to registrable superannuation entity (RSE) licensees, they should be applied to the largest insurers and thereafter, the balance of insurers.
1.15
In his concluding remarks, Hayne made the following observations:
The twin peaks model of regulation has now operated in Australia for many years. It should be maintained and strengthened. But there should be some adjustments made in respect of the regulation of superannuation and the BEAR.
As I said at the start of this chapter, both ASIC and APRA recognise that their approach to enforcement must change. That change cannot be effected by the passing of legislation. It must come from within the agencies. But it is also important to strengthen the accountability of both – internally, by each separately applying principles modelled on the BEAR, and externally, by both being accountable to a new oversight body.
1.16
On 10 September 2021, the Treasurer, the Hon Josh Frydenberg MP announced the appointed of the inaugural members to the Financial Regulator Assessment Authority (FRAA)—the new oversight body.
1.17
The FRAA, was established in response to recommendations 6.13 and 6.14 of the Royal Commission as the oversight body tasked with reviewing and reporting on the effectiveness and capability of ASIC and APRA:
recommendation 6.13—Regular capability reviews; APRA and ASIC should each be subject to at least quadrennial capability reviews; and
recommendation 6.14—A new oversight authority for APRA and ASIC, independent of Government, should be established by legislation to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects.
1.18
The bills' EM notes the recommendations that were responsible for the establishment of the FAR and the CSLR:
As part of the Government's [earlier] response to the Financial Services Royal Commission Final Report on 4 February 2019, the government announced it would implement:
recommendation 3.9—to extend provisions modelled on the Banking Executive Accountability Regime to registrable superannuation entity licensees;
recommendation 4.12—to extend provisions modelled on the Banking Executive Accountability Regime to insurers regulated by APRA;
recommendation 6.6—to have APRA and ASIC jointly administer the Banking Executive Accountability Regime;
recommendation 6.7—to make it clear that authorised deposit-taking institutions and their accountable persons must deal with both APRA and ASIC in an open, constructive and cooperative way; and
recommendation 6.8—to have APRA and ASIC jointly administer the extended regime.
Financial services compensation scheme of last resort
1.19
The EM notes at paragraph 3.2, that the ‘Supplementary Final Report to the Ramsay Review recommended that a CSLR be established in Australia. Haynes, in the Royal Commission's Final Report, recommended that the three principal recommendations made in the Ramsay Review Supplementary Final Report should be carried into effect:
recommendation 7.1— Compensation scheme of last resort, the three principal recommendations to establish a compensation scheme of last resort made by the panel appointed by government to review external dispute and complaints arrangements made in its supplementary final report should be carried into effect.
Provisions of the bills
Overview of the amendments
1.20
The establishment and regulation of the FAR is given effect through two bills, which share an EM:
Financial Accountability Regime Bill 2021 (FAR bill)
Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021 (HRCR bill).
1.21
The bills implement a regime designed to improve the risk and governance cultures of Australia's financial institutions by imposing a strengthened responsibility and accountability framework for those institutions and the directors and the most senior and influential executives (accountable persons) of those institutions.
1.22
The bills contain a number of provisions which will impose four core sets of obligations on accountable entities:
accountability obligations
key personnel obligations
deferred remuneration obligations
notification obligations.
1.23
Schedules 1 and 2 to the HRCR bill make minor and consequential amendments to various Commonwealth laws, including the Australian Prudential Regulation Authority Act 1998, Australian Securities and Investments Commission Act 2001 and other industry Acts administered by APRA, to support the new regime, and provide transitional arrangements relating to the repeal of the BEAR under the Banking Act 1959.
1.24
Schedule 3 to the HRCR bill establishes a financial services compensation of last resort to compensate consumers where AFCA has made a determination in their favour that remains unpaid. The bill is part of a package of three bills to establish and fund the CSLR.
1.25
The establishment and operation of the CSLR is given effect through two bills, which share an EM:
Financial Services Compensation Scheme of Last Resort Levy Bill 2021 (CSLR bill)
Financial Services Compensation Scheme of Last Resort (Collection) Bill 2021 (Collection bill).
1.26
The CSLR bill establishes a CSLR to provide compensation to eligible consumers where they have an AFCA determination in their favour and where the relevant financial firm has not paid the consumer in accordance with the determination.
1.27
The Collection bill implements a levy framework, creating a tax to be levied against relevant entities to fund the CSLR on an ongoing basis. The levies consist of an annual levy, to be collected in advance of the financial year in which claims are to be paid and starting from January 2023, and a one-off levy to be imposed in the 2023-22 financial year. Amounts to be paid under the levy framework will be subject to an overall scheme levy cap of $250 million.
Consultation
1.28
The EM does not reference any consultation activities in relation to the bills.
Commencement
1.29
The FAR bill commences the day after Royal Assent. The regime will apply to the banking industry on 1 July 2022 or six months after Royal Assent, whichever is later. The regime will apply to the insurance and superannuation industries on 1 July 2023 or 18 months after Royal Assent, whichever is later.
1.30
Schedule 1 Part 1 and Schedule 2 to the HRCR bill commence the day after Royal Assent, at the same time as the FAR bill commences. Schedule 1 Part 2 to the bill will commence the date the regime applies to the banking industry. That date will be either 1 July 2022 or six months after the FAR bill receives Royal Assent, whichever is later.
1.31
The CSLR Levy bill, CLSR Collection bill and Schedule 3 to the HRCR bill introduces the CSLR.
1.32
The CSLR and the supporting levy framework commences on the later of 1 January 2022 or the day after Royal Assent. The operator of the scheme can begin to make compensation payments under the scheme from 1 July 2022.
Financial impact
1.33
The EM states that this measure is estimated to have the following impact on underlying cash over the forward estimates period ($m):
Table 1.1: Financial impact of measure
Source: Explanatory Memorandum, p. 4.
Legislative scrutiny
1.34
In its Scrutiny Digest 17 of 2021, the Senate Standing Committee on the Scrutiny of Bills (the Scrutiny Committee) raised concerns with the bills regarding a number of significant matters which are outlined in more detail below
Financial Accountability Regime Bill 2021
Broad discretionary power
1.35
Clause 16 of the bill provides exemptions powers in relation to the obligations under the regime set out in Chapter 2 of the bill. Subclause 16(1) provides that the Minister may, by written notice, exempt an individual accountable entity from obligations under Chapter 2 while subclause 16(2) provides that the Minister may exempt a class of accountable entities by legislative instrument.
1.36
The committee noted that clause 16 would provide the Minister with a broad power to provide an exemption to an accountable entity, which may be exercised arbitrarily or inconsistently and may impact on the predictability and guidance capacity of the law, undermining fundamental rule of law principles. The committee further noted that EM does not provide any explanation for the broad discretionary power and no guidance is included in? the bill as to how the power should be exercised.
1.37
The Scrutiny of Bills Committee is concerned that, without guidance as to how the exemption power may be exercised, it would be possible for broad-ranging exemptions to be made by the Minister, undermining the regime enshrined in primary legislation passed by the Parliament.
The committee requests the Treasurer's advice as to why it is considered necessary and appropriate to provide the Minister with a broad power to provide exemptions to the Financial Accountability Regime under clause 16; and whether the bill can be amended to include guidance on the exercise of the power on the face of the primary legislation, noting the potential for a broad, unconstrained exemption power to undermine the Financial Accountability Regime.
Tabling of documents in Parliament
1.38
Division 1 of Part 2 of Chapter 3 of the bill deals with administrative arrangements. Clause 37 of the bill provides that APRA and ASIC must enter into an arrangement relating to the administration of the bill within 6 months of the commencement. Subclause 37(2) provides that the arrangement must include provisions relating to the matters specified in the Minister's rules. Once entered into, the arrangement must be published online. If no arrangement is entered into within 6 months of commencement, the Minister may determine an arrangement by notifiable instrument. A failure to comply with clause 37 does not invalidate the performance or exercise of a function or power by either APRA or ASIC.
1.39
The Scrutiny Committee considers that it is not clear from the EM why a clause 37 arrangement is not required to be tabled in Parliament, nor why it is necessary and appropriate to leave details relating to provisions that must be included within such an arrangement to Minister rules. The Scrutiny Committee's view is that significant matters, such as the arrangements for the administration of an Act of Parliament, should be included in primary legislation unless a sound justification for the use of delegated legislation is provided:
The committee requests the Treasurer's advice as to whether the bill can be amended to provide that an arrangement entered into under clause 37 of the bill is required to be tabled in each House of the Parliament; and why it is considered necessary and appropriate to leave details relating to provisions that must be included within a clause 37 arrangement to delegated legislation.
No-invalidity clause
1.40
As noted above, Division 1 of Part 2 of Chapter 3 of the bill deals with administrative arrangements. Clause 36 of the bill provides that the FAR will be administered by both APRA and ASIC. Clause 37 of the bill provides that APRA and ASIC must enter into an arrangement relating to administration within 6 months of commencement. Clause 38 of the bill provides that neither APRA nor ASIC may perform a function, or exercise a power, under the bill without the agreement of the other.
1.41
Proposed subclause 36(2) provides that ASIC is only to perform functions and powers in relation to accountable entitles that hold a financial services licence, significant related entities, or accountable persons. However, a failure to do so does not invalidate the performance or exercise of the function or power by ASIC. Similarly, subclause 37(5) provides that a failure to comply with requirements relating to entering into an administrative agreement does not invalidate the performance or exercise of a function or power by either APRA or ASIC. Finally, subclause 38(4) provides that a failure by either APRA or ASIC to receive agreement prior to performing or exercising a function or power does not invalidate the performance or exercise of the function or power.
1.42
A legislative provision that provides that an act done, or decision made in breach of a particular statutory requirement or other administrative law norm does not result in the invalidity of that act or decision, may be described as a ‘no-invalidity' clause. There are significant scrutiny concerns with no-invalidity clauses, as these clauses may limit the practical efficacy of judicial review to provide a remedy for legal errors. For example, as the conclusion that a decision is not invalid means that the decision-maker had the power (i.e. jurisdiction) to make it, review of the decision on the grounds of jurisdictional error is unlikely to be available. The result is that some of the judicial review standard remedies will not be available.
1.43
Consequently, the Scrutiny Committee expects a sound justification for the use of a no-invalidity clause to be provided in the EM to the bill. In this instance, the EM does not contain such a justification:
In light of the above, the committee requests the Treasurer's advice as to why it is considered necessary and appropriate to include no-invalidity clauses in subclauses 36(2), 37(5), and 38(4) of the bill.
Reversal of evidential burden of proof
1.44
The bill seeks to establish several defences which reverse the evidential burden of proof. Clause 68 of the bill makes it an offence for an accountable entity, significant related entity, or accountable person to disclose information that reveals a direction was given by the regulator to an accountable entity under either clause 64 or 65 of the bill in circumstances where the direction is also covered by a determination made under subclause 67(2). Subclause 68(3) provides an exception to this offence whereby the offence does not apply if the disclosure was authorised by clause 69, 70, 71, 72, 73,74 or 75 of the bill, or was required by the order or direction of a court or tribunal.
1.45
The Scrutiny of Bills Committee considers that the rational for evidential burden of proof in relation to the exception set out in subclause 68(3) is not clear from the EM, with the EM merely re-stating the operation of the provision. The committee also observed that the EM does not discuss clause 74, even to re-state the operation of the provision, and that is unclear how the fact that an order or direction that has or has not been given by a court or tribunal could be said to be a matter that is peculiarly within the knowledge of the defendant. As such:
The committee requests the Treasurer's advice as to why it is proposed to use offence-specific defences (which reverse the evidential burden of proof) in this instance. The committee's consideration of the appropriateness of a provision which reverses the burden of proof is assisted if it explicitly addresses relevant principles as set out in the Guide to Framing Commonwealth Offences.
Immunity from liability
1.46
Clause 101 of the bill provides that a person is not subject to any liability to any person in respect of the exercise or performance, in good faith, of powers, functions or duties under the bill. Clause 102 of the bill provides that a criminal or civil action, suit or proceeding does not lie against a person in relation to things done, or omitted to be done, by that person if they are complying with a direction given by the regulator, it is reasonable for them to do the thing, and the person is an accountable entity or a member of the accountable entity's relevant group, or an employee, agent, officer or senior manager of an accountable entity or relevant group.
1.47
The Scrutiny of Bills Committee considers that if a bill seeks to provide immunity from civil or criminal liability, particularly where such immunity could affect individual rights, this should be soundly justified. In this instance, the EM provides no explanation for these provisions, merely restating the terms of the provisions. The committee's concerns are heightened in relation to clause 102 as immunity is provided in relation to criminal as well as civil proceedings.
The committee requests the Treasurer's advice as to why it is considered necessary and appropriate to confer immunity from civil and criminal liability on persons under clauses 101 and 102 of the bill.
Incorporation of external materials existing from time to time
1.48
Subclause 31(5) of the bill provides that the Minister rules that prescribe the circumstances in which an accountable entity meets the enhanced notification threshold may incorporate, by reference, any matter published on a website maintained by the regulator as in force or existing from time to time.
1.49
The Scrutiny of Bills Committee observed that it is not apparent from the EM whether the incorporated materials will be freely ad readily available, nor why it is necessary to allow the rules to incorporate documents as in force or existing from time to time which may change in the circumstances when an accountable entity meets the enhanced notification threshold without any involvement from Parliament.
The committee requests the Treasurer's further advice as to why it is considered necessary and appropriate to incorporate documents as in force or existing from time to time, noting that such an approach may mean that future changes to an incorporated document could operate to change the circumstances when an accountable entity meets the enhanced notification threshold without any involvement from Parliament.
Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021
Reversal of evidential burden of proof
1.50
Proposed subsection 56(7G) seeks to provide that it is a defence to the offence set out under existing subsection 56(2), if the disclosure is to an accountable entity and the information that was disclosed was contained in the register of accountable persons kept under clause 40 of the FAR bill.
1.51
Proposed subsection 57(7H) seeks to provide that it is not an offence if the disclosure is to an individual and the information that was disclosed was personal information about that person that was contained in the register of accountable persons.
1.52
Proposed subsection 56(7J) seeks to provide that it is not an offence if the disclosure is by APRA and the information is about either whether the regulator has disqualified an accountable person under clause 42 of the FAR bill or any other decision made under Division 2 of Part 3 of Chapter 3 of that bill.
1.53
Proposed subsection 56(7K) seeks to provide that it is not an offence if the disclosure is in accordance with clause 39 of the FAR bill, which currently provides for information-sharing arrangements between APRA and ASIC.
1.54
Proposed subsection 56(7L) seeks to provide that it is not an offence if the disclosure is by ASIC for the purposes of the performance or exercise of ASIC's functions or powers, and the information had previously been disclosed to ASIC under clause 39 of the FAR bill.
1.55
Item 17 of Schedule 1 to the bill seeks to insert proposed subsection 127(7) into the Australian Securities and Investments Commission Act 2001 (ASIC Act) to make it an offence if an officer who is, or has been, a member or staff member of ASIC or a Commonwealth officer within the meaning of the Crimes Act 1914 intentionally or recklessly discloses protected information that was acquired in the course of their duties to a person or court and the information was given to ASIC in relation to a function conferred on ASIC under the FAR.
1.56
Proposed subsection 127(7A) provides that it is a defence to this offence if the disclosure was an authorised disclosure for the purposes of subsection 127(1) of the ASIC Act.
1.57
The Scrutiny of Bills Committee observed that it is not apparent that matters such as whether information had been shared between APRA and ASIC, are matters peculiarly within the defendant's knowledge or would be a matter that the prosecution could readily ascertain.
The committee requests the Treasurer's advice as to why it is proposed to use offence specific defences (which reverse the evidential burden of proof) in this instance. The committee's consideration of the appropriateness of a provision which reverses the burden of proof is assisted if it explicitly addresses principles as set out in the Guide to Framing Commonwealth Offences.
Joint Committee on Human Rights
Statement of Compatibility with Human Rights
1.58
As discussed in the EM, the Statement of Compatibility with Human Rights (Compatibility Statement) states that the bills are compatible with the human rights and freedoms recognised in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, and thus do not raise any human rights issues.
1.59
The Joint Committee on Human Rights reported that the bill did not raise any human rights concerns.
Regulatory impact
1.60
The EM notes that there is no Regulation Impact Statement (RIS) to the bill. Instead, the Treasury has indicated that the Financial Services Royal Commission Final Report has been certified as being informed by a process and analysis equivalent to a RIS for the purposes of the Government decision to implement this reform.
1.61
The Financial Services Royal Commission Final Report can be accessed through the Australian Parliament House website.
Conduct of the inquiry
1.62
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 17 December 2021.
1.63
The committee received 33 submissions as well as additional information and answers to questions on notice, which are listed at Appendix 1.
1.64
The committee held one public hearing for the inquiry on 27 January 2022. The names of witnesses who appeared at the hearing can be found at Appendix 2.
Acknowledgements
1.65
The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing.