Bills Digest No. 168 2001-02
Financial Sector Legislation Amendment Bill (No.1) 2002
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
Main Provisions
Endnotes
Contact Officer & Copyright Details
Passage History
Financial
Sector Legislation Amendment Bill (No.1) 2002
Date Introduced:
21 March 2002
House:
House of Representatives
Portfolio:
Treasury
Commencement:
Most provisions commence on the day after Royal
Assent. Items 1-17 of schedule 4 which amend the Insurance Act 1973
commence on 1 July 2002. Item 18 of schedule 4 is taken to have commenced
on the same day as the General Insurance Reform Act received Royal Assent,
that is, 19 September 2001.
Purpose
To amend nine pieces of legislation
relating to the financial sector.
As this Bill has no central theme the background to the
various measures is included in the discussion of the main provisions.
The Australian Prudential Regulation Authority (APRA)
was established on 1 July 1998 as the prudential regulator of banks and
other authorised deposit-taking institutions, life insurance companies
(including friendly societies), general insurance companies, superannuation
funds and retirement savings accounts.
APRA collects levies from financial institutions that
it prudentially supervises on behalf of the Commonwealth. Under section
50 of the Australian Prudential Regulation Authority Act 1998 (the
APRA Act), APRA is funded by appropriations based on levies from
the institutions it regulates.
APRA is not entitled to the entire amount raised by the
levies. From the funds received, the Treasurer determines
an amount that covers the costs to the Commonwealth for the provision
of market integrity and consumer protection functions for prudentially
regulated institutions. This amount is deducted from the levies collected
and the remaining money is appropriated to APRA.
In 2001, the Australian National Audit Office (ANAO)
issued a qualified audit opinion in relation to APRA’s financial statements.(1)
The ANAO stated that under the heading ‘Revenues from Government’ in its
statement of financial performance, APRA reported an amount equal to the
amount of levies invoiced less the Commonwealth’s costs
of providing market integrity and consumer protection functions. The ANAO
commented that section 50 of the APRA Act only entitles APRA to a Special
Appropriation equal to the amount of levy money received
by the Commonwealth net of the costs of market integrity and consumer
protection. It also commented that:
The policy adopted also represents
a departure from Australian Accounting Standard AAS15 – Revenue, which
requires that revenues be recognised when, and only when, the entity
has gained control of the revenue or the right to receive the revenue.
In the view of the ANAO, the effect of APRA’s reporting
approach was that net operating deficit was understated by $799 000.
Item 1 of Schedule 1 inserts a new section
50 into the APRA Act. Each financial year the Treasurer is required
to make a determination of the ‘retainable amount’. This is the amount
of money that is to be available cover the costs to the Commonwealth of
the provision of market integrity and consumer protection functions for
prudentially regulated institutions.
Retainable amounts may be specified in relation to the
total amount of levy money or in respect of each class of levy. New
subsections 50(2) and (3) state that levy money in excess of
the retainable amount is payable by the Commonwealth to APRA. New subsection
50(5) effects the appropriation of these moneys from the consolidated
revenue fund to APRA. As a result of these amendments APRA will be able
to report amounts payable from Government regardless of whether the levy
money has been received.
The purpose of the Financial Institutions Supervisory
Levies Collection Act 1998 (the Collection Act) is to allow for the
collection of levies on those industries that are prudentially regulated
by APRA.(2)
Section 9 of the Collection Act specifies when the levy
is due for payment. Item 1 of Schedule 2 amends section
9 to ensure that entities have at least 28 days notice before a levy becomes
payable.
Section 10 of the Collection Act provides for late payment
penalties. The penalty rate is set at 20 per cent per annum on the amount
unpaid. At present, the penalty is calculated daily and the Explanatory
Memorandum states that APRA has had difficulty correctly invoicing institutions.(3)
New section 10 inserted by item 3 provides for a penalty
calculation day which deems late payments to have been made on a specified
date. This approach is intended to make it easier for APRA to calculate
the liability of an institution.
Section 13 establishes levies and late payments as debts
due to the Commonwealth. Item 5 amends section 13 to authorise
APRA to bring proceedings on behalf of the Commonwealth to recover these
debts. In the event the Commonwealth is ordered to pay costs, new subsection
13(3) makes clear that APRA is to bear these costs.
The Financial Sector Reform (Transfers of Business)
Act 1999 (the Transfer Act) provides APRA with a prudential tool to
facilitate a transfer of business between institutions where one institution
may be in financial distress. The Act provides for voluntary and compulsory
transfers of business.
In deciding whether to approve an application for a voluntary
transfer of business, section 12 of the Transfer Act requires that APRA
consult with the Australian Competition and Consumer Commission (ACCC)
and the Australian Securities and Investments Commission (ASIC). New
paragraph 12(2)(c) inserted by item 1 of schedule 3
will require APRA to also consult with the Commissioner of Taxation. The
Explanatory Memorandum does not detail what revenue concerns have given
rise to this amendment it merely observes that it has been the practice
to ensure that applicants consult with the Commissioner of Taxation.(4)
The Commissioner of Taxation may notify APRA that he
or she does not wish to be consulted about a particular transfer or a
class of transfers (new subsection 12(5)).
APRA is the prudential regulator of the general insurance
industry. An insurer may carry on general insurance business in Australia
only if authorised by APRA to do so under the Insurance Act 1973
(the Insurance Act). This legislation was substantially amended recently
by the General Insurance Reform Act 2001 (the Reform Act) which
will commence on July 1 2002. Schedule 4 amends some provisions
inserted by the Reform Act which have not yet commenced.
The Reform Act inserted a new section 25 which defined
classes of people who are disqualified from being a director or senior
manager of a general insurer, an authorised non-operating holding company
(NOHC) or a senior manager or agent of a foreign general insurer. Paragraph
25(1)(a) provides that a person is disqualified if they commit an offence
against the Insurance Act or the Financial Sector (Collection of Data)
Act 2001. Item 1 amends section 25 to the effect that people
who are convicted of an offence against Australian or international corporations
legislation are also disqualified persons.
Item 3 inserts new section 25A which empowers
APRA to disqualify a person from being a director or senior manager of
a general insurer if it is satisfied that the person is not a ‘fit and
proper’ person to hold such an office. The meaning of the expression ‘fit
and proper’ is not defined in the legislation. According to the Explanatory
Memorandum APRA will issue a prudential standard to give some guidance
as to how it will interpret the section.(5) A decision by APRA
to disqualify a person or a refusal to revoke a disqualification is subject
to review by the Administrative Appeals Tribunal (AAT) (new subsection
25A(6)).
The Reform Act inserted section 26 which
enables APRA to determine that a person is not a ‘disqualified person’
despite the fact that they fall within the definition of the term under
section 25. APRA may only make such a determination if it is satisfied
that the person is highly unlikely to be a prudential risk to any general
insurer or authorised NOHC. Item 4 amends section 26 to enable
APRA to impose conditions on any determinations that it makes. The provision
is intended to allow APRA greater flexibility.
Section 63 of the Insurance Act deals with review processes
under the Act. Currently subsection 63(12) provides that employees
of insurance companies cannot sit on the AAT if it is reviewing decisions
made by the Treasurer or APRA under the Act. Item 14 amends the
subsection to ensure that the prohibition also covers employees of companies
related to insurance companies.
Schedule 2 of the Reform Act provides for a transitional
period of 2 years from July 1 2002 for insurers to comply with the new
regime. Item 18 will correct a drafting error so as to allow APRA
to determine that all or specified provisions of the Insurance Act
as amended by the Reform Act, do not apply to a person or class of
persons for a specified period during the transition period.
The Insurance Acquisitions and Takeovers Act 1991
(Takeovers Act) establishes a regime requiring the compulsory notification
of proposals relating to:
- the acquisition or leasing of assets of Australian-registered insurance
companies and
- the entering into agreements relating to directors of Australian-registered
insurance companies (proposals subject to the Act).
The legislation empowers the Minister, currently the
Treasurer, to stop a proposal by means of a temporary or permanent restraining
order.
Schedule 5 contains amendments which abolish the
concept of ‘temporary restraining orders’ for the purposes of the Act.
Section 39 of the Takeovers Act effectively gives the
Treasurer 30 days to impose a temporary restraining order to prevent a
transaction involving the acquisition or lease of the assets of an Australian-registered
insurance company. Section 53 likewise gives the Treasurer 30 days to
impose a temporary restraining order on a proposal relating to the directors
of an Australian insurance company.
If the Treasurer takes no action within this timeframe
he or she cannot take any action under the Act to stop the transaction
from proceeding. According to the Explanatory Memorandum this time frame
has proved to be too restrictive in that it usually takes longer than
30 days to obtain all the information necessary to make a decision.(6)
The Bill repeals sections 39 and 53.
Under the new regime introduced by schedule
5 proposals subject to the Act must not be carried out unless the
Minister has given a go-head decision (new sections 40 and 54).
One draw back of these changes may be that decisions on proposals may
be delayed indefinitely. With the passage of these amendments there will
be no legislative impetus to deal with matters expeditiously.
Section 236 of the Life Insurance Act 1995 sets
out the decisions under the Act which may be subject to merits review
by the AAT. Subsection 236(1A) lists a number of ‘prudential decisions’(7)
which, if made within 5 years after 30 June 1997 are immune from review
by the AAT. This period is about to expire. Item 1 of schedule
6 will ensure that these decisions remain beyond the scope of AAT
review. The Government has taken the view that appeal action could delay
APRA in taking action to protect policy holders.
Currently the lack of merits review is balanced by a
requirement that the decision in question be made with the consent of
the Treasurer. Item 2 will remove this institutional safeguard.
The central theme of schedule 7 is the transfer
of powers and responsibilities from the Governor-General to the Treasurer.
Examples of roles to be exercised by the Treasurer under the amendments
to the Reserve Bank Act 1959 (the RBA Act) include the:
- appointment of 6 members of the RBA Board under subsection 14(1)(d)
(item 2)
- termination of such Board members under section 18 (item7)
- appointment of the Governor and Deputy Governor and the determination
of the length of their terms under section 24 (items 9 and 10)
- termination of the Governor or Deputy Governor under section 25 (item
15)
- appointment of up to 5 members of the Payments System Board under
subsection 25B(3) (item 16) and
- termination of such members under subsections 25L(3) and (4) (item
18).
Although these roles are currently assigned to the Governor-General,
in practice decisions are made on the basis of advice from the Treasurer.
The Government has argued that the amendments streamline the appointment
and termination process.(8) As with all significant Government
appointments, Cabinet approval will still be required.(9)
Some may argue however that the claimed efficiency gains
in the process of appointment and termination come at the expense of an
important safeguard against capricious action by a future Treasurer. Defenders
of the Office of the Governor-General have rejected the view that vice
regal approval is a mere ‘rubber stamp’. Sir David Smith, a former secretary
to Governors-General has stated:
It would be very easy to conclude
that a Governor-General who is required to act on the advice of his
Ministers has no power at all, or that Ministers whose advice has
to be taken have no constraints placed on the use of their executive
power, but to do that would be to misunderstand the basic principle
which underlies our system of responsible government.(10)
As Governor-General Sir Paul Hasluck remarked that while
the Governor-General may not reject advice outright he is under no obligation
to accept advice unquestioningly:
He can himself question a conclusion,
seek to know the reason for it, draw attention to relevant considerations
to ensure that they are taken in account, and satisfy himself that
the proposal does express the single mind of his advisers.(11)
The amendments proposed by the Bill will prevent the
Governor-General from exercising this cautionary role in relation to Reserve
Bank appointments and terminations. The approach may be contrasted with
the Australian Competition and Consumer Commission and the Australian
Securities and Investments Commission where members are appointed and
terminated by the Governor-General. The amendments will however bring
the RBA into line with the Australian Prudential Regulation Authority
where the Treasurer may appoint and terminate ordinary board members.
By virtue of section 14 of the RBA Act the Secretary
to the Treasury is an ex officio member of the RBA Board. Section 22 provides
that if the Secretary is unable to attend a Board meeting a Deputy Secretary
of the Department may replace him. Following a restructure at Treasury
the position of Deputy Secretary has been abolished. Item 8 inserts
a new section 22 which will allow the Secretary to Treasury to
nominate an SES employee in the Department to attend an RBA Board meeting
at which the Secretary is not present.
It is worth noting that the position of a representative
of the Treasury on the RBA Board has been a matter of public controversy.
The RBA is the only central bank in the OECD that has a treasury official
on its governing board.(12) Critics have claimed that this
undermines perceptions of the Bank’s independence from government. There
is a considerable body of economic literature which suggests that central
bank independence enhances the effectiveness and credibility of monetary
policy.(13) In 2000 the ALP members of the House of Representatives
Standing Committee on Economics, Finance and Public Administration called
for the examination of a proposal to enhance the independence of the Bank
by removing the Secretary to the Treasury from the RBA Board.(14)
Supporters of the current arrangements argue that they assist in the co-ordination
of monetary and fiscal policy.(15)
Section 70 of the RBA Act requires the Bank to operate
a superannuation fund for its staff. It also requires that the rules for
the fund be subject to approval by the Minister for Finance. Item 19
repeals the section. According to the Explanatory Memorandum the Bank’s
existing superannuation fund will continue to operate(16) but
will be easier to administer because the need to consult the Minister
of Finance on rule changes will be abolished.(17)
If this is the objective of the amendment then it may
be asked why the requirement for Ministerial approval of rule changes
was not simply deleted. The deletion of the section entirely may give
rise to speculation that the Bank’s superannuation fund is to be closed
to new members.
Subsection 74(2) of the RBA Act states that the head
office of the Bank shall not be in the same building as the head office
of any authorised deposit-taking institution.(18) This section
has been in the RBA Act in similar terms since 1959. While the original
intention of the provision is unclear, it is possible that the section
reflected a concern to ensure the security of market sensitive information
and a desire to prevent the RBA from being a tenant of an institution
that it prudentially supervised.
Item 20 repeals the subsection. The Explanatory
Memorandum states that it ‘unnecessarily restricts the ability of the
Reserve Bank, in the event of an unexpected occurrence, to find alternative
short-term accommodation’.(19)
It may be suggested that an additional benefit of the
proposal is that it will maximise the number of potential tenants for
the Bank’s vacant office space at its head office in Martin Place, Sydney.
As a result of technological change, outsourcing and
the transfer of responsibility for bank supervision to the Australian
Prudential Regulation Authority, the number of staff at the RBA’s head
office has fallen to around 715 from a peak of 1500 in the mid 1980s.
In November 2000, the Joint Committee on Public Works(20)
approved a proposal to consolidate the Bank’s head office accommodation
and lease 7000 square metres (5 floors) of surplus office space. The cost
of the proposal was estimated at $21.5 million to be funded from the Bank’s
own resources. The Bank estimated that the lease of surplus office space
could raise $3.5 million per annum.
Amendments
to the Superannuation Industry (Supervision) Act
Subsection 121A(1) of the Superannuation Industry
Supervision Act 1993 (the SIS Act) states that a person must not be,
or act as, a trustee of a superannuation entity that is a superannuation
fund with fewer than 5 members (other than a self managed superannuation
fund) unless the person is an approved trustee.
The Government is concerned that an unintended consequence
of this section is that a fund that does need to have an approved trustee
that is being wound up may drop to fewer than 5 members. At present failure
to appoint a trustee is a strict liability offence carrying a maximum
penalty of 6 months imprisonment.
Item 4 of schedule 8 inserts new subsection
121A(1A) stating that the requirement to be an approved trustee does
not apply if at the relevant time
- the fund is being wound up
- immediately before the commencement of the wind up the fund had at
least 5 members, and
- the fund has not had less than 5 members for more than 1 year (unless
APRA permits a longer period.).
Section 252C deals with the secrecy obligations imposed
by the SIS Act particularly on taxation officers. Unauthorised disclosure
can lead to a penalty of 2 years imprisonment. Item 6 amends section
252C to make clear that it is not an offence for the Commissioner, or
a tax officer to disclose information which is a description of court
proceedings in relation to a breach or suspected breach of the Act or
activity engaged in by the Commission in relation to such matter.
Presumably this amendment is intended to allow the ATO
to give publicity to its enforcement activities. It is possible that some
might suggest that the ATO should take care to ensure that such publicity
does not lead to a ‘trial by media’. Recently the ACCC has been subject
to criticism over its aggressive use of the media in publicising its enforcement
of the Trade Practices Act 1974.(21)
The Superannuation Supervisory Levy Imposition Act
1998 (SSLI Act) imposes the superannuation supervisory levy on superannuation
entities. ‘Superannuation
entity’ is defined under section 10 of the SIS Act as a regulated superannuation
fund(22), or an approved deposit fund, or a pooled superannuation
trust.
Under section 7 of the SSLI Act, the amount of levy payable
by an entity is determined by multiplying the ‘levy percentage’ by the
entity’s asset value on 30 June of the previous financial year. The levy
percentage is currently set at 0.025%. The maximum amount that an entity
can be required to pay is capped at $53 000. Any entity, regardless of
the size of its assets must pay a levy of at least $400.(23)
Items 1 and 2 of schedule 9 seek
to clarify the levy that is payable by an entity, for example a self managed
superannuation fund, that becomes a regulated superannuation entity in
a financial year. At present it is ambiguous as to whether entities that
become ‘regulated entities’ in a given financial year are subject to the
levy in the first year that they have this status. Item 2 inserts
new paragraph 7(1)(a) which makes clear that entities that were
unregulated on 30 June of the previous financial year are nevertheless
subject to the levy based on their asset value on that date. The Explanatory
Memorandum does not state whether any revenue has been lost to the Commonwealth
as a result the existing ambiguity.
Endnotes
- Australian Prudential Regulation Authority, Annual Report 2001, p.
87. See: http://www.apra.gov.au/AboutAPRA/Annual-Report-2001.cfm
- The levies themselves are imposed by a number of industry specific
Acts eg Authorised Deposit-taking Institutions Supervisory Levy Imposition
Act 1998, Superannuation Supervisory Levy Imposition Act 1998 etc.
- p. 7.
- p. 9.
- p. 10. APRA’s power to make prudential standards is set out in section
32. Either house of Parliament may disallow these standards.
- p. 5.
- Such as APRA directions that a company should increase its capital
or remedy a contravention of the Act.
- p. 15.
- See Chapter 6, Department of Prime Minister and Cabinet, Cabinet
Handbook, 5th Ed 2000.
- Sir David Smith, The Role of the Governor-General: Our Australian
Head of State, Australians for Constitutional Monarchy, 1997, p.
11.
- Sir Paul Hasluck, The Office of Governor General (originally
given as the William Quale Memorial Lecture Adelaide 1972), Melbourne
University Press, 1979, p. 20.
- House of Representatives Standing Committee on Economics, Finance
and Public Administration, Review of the Reserve Bank of Australia
Annual Report 1999-00: Interim Report: the Wagga Wagga Hearing,
February 2001, p. 19. See http://www.aph.gov.au/house/committee/efpa/Rba9900/fullreport.pdf
- See for example A. Alesina and L. Summers, ‘Central Bank Independence
and macroeconomic Performance: Some Comparative Evidence’, Journal
of Money, Credit and Banking , Vol 25, No.2 (1993) pp. 151–162.
- House of Representatives Standing Committee on Economics, Finance
and Public Administration, Review of the Reserve Bank of Australia
Annual Report 1998-99: Final Report, June 2000. See:
http://www.aph.gov.au/house/committee/efpa/Rba9899/finalreport.pdf
- R. Maddox, ‘The Government’s stake in Monetary Policy’, BCA papers,
September 2000 pp.81–84.
- The repeal of section 70 removes the requirement for the RBA to operate
a superannuation fund for its staff, it does not prevent the RBA from
running a fund if it decides to do so.
- p. 16.
- Such as a bank, building society or credit union.
- ibid.
- Joint Standing Committee on Public Works, Reserve Bank of Australia
Proposed Head Office Building Works, November 2000. See: http://www.aph.gov.au/house/committee/pwc/Reserve/fullreport.pdf
- See for example R. Webb, ‘The big showdown: ACCC v big business’,
Sunday Age, 12 May 2002 and A. Fels, ‘Its not a trial by media’,
Australian Financial Review, 20 May 2002.
- The term regulated superannuation fund is defined in section 19 of
the SIS Act. To fall within this category, a fund must have a trustee;
the trustee must be a corporation within the meaning of paragraph 51(xx)
of the Constitution or the fund’s governing rules must state that its
sole or primary function is the provision of old- aged pensions; and
the trustee must have elected that the Act apply to the fund.
- These amounts are sets by Ministerial Determination. The levy amount
will increase to 0.03% and the maximum amount payable to $66 000 under
a new determination recently made by the Assistant Treasurer. See: http://assistant.treasurer.gov.au/atr/content/pressreleases/2002/065.asp
Mark Tapley
17 June 2002
Bills Digest Service
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