Bills Digest no. 171 2006–07
Financial Sector Legislation Amendment (Restructures) Bill 2007
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
Financial implications
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Financial
Sector Legislation Amendment (Restructures) Bill 2007
Date
introduced: 24 May 2007
House:
House of Representatives
Portfolio:
Treasury
Commencement:
The Act commences on Royal Assent. Schedules 1 and 3 (excluding consequential
amendments to the Income Tax Assessment Act 1997 in Schedule 3)
commence on Royal Assent. Schedule 2 and items 10-23 of Schedule 3 commence
on 1 July 2007.
The purpose of the Bill is to remove regulatory impediments
to financial conglomerates changing to a non-operating holding company
(NOHC) structure.
Financial conglomerates are a dominant feature of Australia’s
financial system.(1) Like other corporate groups, financial
conglomerates operate through certain company group structures. Corporate
group structures give rise to various regulatory issues such as inter-group
liability, or the extent to which other companies in the group should
be liable for the debts of other companies in the group. The recent controversy
surrounding the James Hardie Group was an example where issues of this
kind were relevant.
For present purposes, corporate groups can be described
as consisting of parent or holding companies and their subsidiaries.(2)
Individual companies in a corporate group are generally not liable for
the debts of other companies in the group but there are exceptions to
this rule. Holding companies can be liable for the debts of their subsidiaries
in the circumstances outlined in Part 5.7B of the Corporations Act
2001.
Prior to the Wallis review into Australia’s
finance system, corporate groups containing banks were required by the
Reserve Bank of Australia
to operate with the bank as the holding company. Many submissions to the
Wallis review argued that financial conglomerates should be allowed to
establish non-operating holding companies, with banks allowed to be subsidiaries
of the holding company. An example is the submission of the Westpac Banking
Corporation, which included:
Banks should be permitted to establish non-operating
holding companies, and to become subsidiaries of the parent holding
company.(3)
One effect of this would be to increase the degree of
separation between banks and other operating companies in a group, and
thereby lessen the risk that the bank would be held liable for debts of
a subsidiary. Another effect might be, as noted in the Explanatory Memorandum,
to relieve other entities in the group of any formal obligation to support
a ‘distressed affiliate’.(4)
The Westpac submission to the Wallis review, and others,
drew upon previous work of the Council of Financial Supervisors.(5)
The Council expressed the view that:
Prudential concerns about contagion, conflicts of interest
and transparency might be alleviated to some extent under a financial
holding company, as opposed to parent/ subsidiary, structure. This could
arise from the perception of greater ‘separateness’ of the different
activities undertaken by the conglomerate.(6)
These arguments apparently persuaded the Wallis Review.
Its recommendations included:
Recommendation 49: Non-operating holding companies should
be permitted subject to certain requirements.
Subject to a financial conglomerate meeting prudential
requirements, the APRC should permit adoption of a non-operating holding
company structure. The structure must satisfy the APRC in the areas
of capital, management, adequacy of firewalls, reporting of intra-group
activities and independent board representation on subsidiary entities.(7)
As part of its response to the Wallis Review, the Government
agreed to facilitate the use of non-operating holding companies in financial
conglomerate structures. As noted in the Explanatory Memorandum to the
Bill, however, no major Australian financial group containing an ADI (authorised
deposit taking institution) has chosen to adopt a NOHC structure.(8)
The rationale for the Bill appears to be the perception
that the failure of groups to take up the adoption of the NOHC structure
is due to regulatory impediments, including requirements of the Corporations
Act, and tax consequences. This Bill attempts to alleviate those impediments.
The Explanatory Memorandum
states that the financial impact will be ‘minimal’.(9) However,
it also notes that the amendments made by Schedule 2 to the capital gains
tax provisions in the Income Tax Assessment Act are designed
to remove tax impediments that prevent financial groups containing
ADIs from restructuring. There is no specific information provided on
what the effect might be on tax revenues if the relevant major Australian
financial groups adopt NOHC structures as a result of such amendments.(10)
Item 14 inserts new Part 4A–Restructures
into the Financial Sector (Transfers of Business) Act 1999 (FSTBA).
The Part deals with proposals by an ADI, general insurer or life insurer
(called ‘the operating body’) for a restructure arrangement under Part
5.1 of the Corporations Act 2001, that would make the operating
body a subsidiary of a non-operating holding company.(11)
Proposed section 36B provides for the operating
body to apply to the Minister for a ‘restructure approval’. These approvals
include a ‘restructure instrument’. The instrument gives relief to the
operating body, the NOHC and related bodies corporate, from requirements
of the Corporations Act as specified in the instrument.
Proposed section 36C requires the Minister to
issue a restructure approval if satisfied of certain things including:
- the restructure arrangement would improve the operating body’s ability
to meet its prudential requirements
- the approval would be in the interests of the depositors or policy
owners of the operating body and of the financial sector as a whole
Proposed section 36D gives the Minister a discretion
to consult, in making a decision on a restructure approval, with the Australian
Prudential Regulation Authority (APRA), the Australian Securities and
Investments Commission (ASIC), or any other person or body of the Ministers
choosing.
Proposed section 36E allows the Minister to impose
various conditions in a restructure approval.
Proposed section 36G provides for ‘restructure
instruments’. The Minister may specify in the instrument that certain
bodies and persons are given relief from compliance with the requirements
of Division 1 of Part 2J.1 or Part 2J.2, as well as section 254T of the
Corporations Act (these relate to restrictions in share capital; self-acquisition
and control of shares; and the requirement that dividends may only be
paid from profits). Restructure instruments are not ‘legislative instruments’
and so will not be subject to the disallowance and other provisions of
the Legislative Instruments Act 2003.
Proposed section 36K allows the Minister to amend
restructure instruments.
Proposed section 36M provides for ‘internal transfer
certificates’. Where the Minister has issued a restructure approval, APRA
may issue an internal transfer certificate if satisfied that the terms
of the transfer is appropriate for giving effect to the restructure arrangement
referred to in the approval. The certificate must clearly outline the
transferring and receiving bodies and identify which assets and liabilities
are being transferred.
Proposed section 36P allows APRA to amend internal
transfer certificates, but only where the relevant restructure instrument
has not yet come into force.
Proposed section 36R provides that the legal effect
of an internal transfer certificate is that the nominated assets are transferred
without the need for any transfer, conveyance or assignment.
The Explanatory Memorandum summarises the effect of the
amendments this way:
The amendments remove tax impediments that prevent financial
groups containing ADIs from restructuring for prudential reasons by:
- disregarding certain preference shares issued by an ADI or an extended
licensed entity member, for the purposes of determining whether the
ADI or extended licensed entity member is a wholly-owned subsidiary
of a consolidated group headed by a non-operating holding company;
- ensuring that certain dividends paid by the non-operating holding
company are frankable if those dividends would have been frankable had
they been paid by the ADI prior to the ADI restructure; and
- ensuring that shareholders in the original company (either an ADI
or an extended licensed entity member) who exchange their shares for
shares in the non-operating holding company can obtain a CGT roll-over
if certain preference shares remain issued by the ADI and some foreign
holders of shares do not receive shares in the non-operating holding
company.(12)
The Government took the decision, some time ago, to allow
financial conglomerates to operate through a NOHC structure. This Bill
addresses the fact that few conglomerates have adopted that structure,
by removing some of the regulatory impediments consequent upon choosing
that course.
- Commonwealth of Australia,
Financial System Inquiry, Final Report, (Wallis Review), March 1997,
p. 344.
- For some purposes the
definition is broader.
- Westpac submission to
Wallis Review, Executive Summary, p. 10.
- Explanatory Memorandum,
Financial Sector Legislation Amendment (Restructures) Bill 2007, p.
2
- The Council of Financial
Supervisors was established by the Commonwealth Government in 1992,
following a recommendation of the inquiry into banking and deregulation
by the House of Representatives Standing Committee on Finance and Public
Administration – better known as the Martin Committee
after its then-chairman. Its basic rationale was – and remains – to
improve communication and co-ordination among the main agencies responsible
for regulation and prudential supervision in the financial system. These
are, in no particular order, the Reserve Bank, the Insurance and Superannuation
Commission, the Australian Financial Institutions Commission and the
Australian Securities Commission. http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_oct95/bu_1095_4.pdf
accessed 1 June 2007.
- Council of Financial
Supervisors, Annual Report 1995, p. 30.
- Commonwealth of Australia,
Financial System Inquiry, Final Report, (Wallis Review), March 1997,
p. 49.
- Explanatory Memorandum,
p. 3.
- ibid. p. 4.
- ibid., p. 3.
- New section 36A.
- Explanatory Memorandum,
p. 17
Jerome Davidson
7 June 2007
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